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• Accounting cycle


  Series of steps in the recording, processing, and communication of financial information of an economic entity
• Phases of accounting


  • Recording
  • Classifying
  • Summarizing
  • Interpreting financial information
• Financial statements


  Summarized and presented financial information
• Generating summarized financial information

  1. Obtain business documents

  2. Verify transactions

  3. Record

  4. Classify

  5. Adjust

  6. Summarize
• Accounting cycle is a cycle, the process does not end with the preparation of financial statements
• Accounting cycle steps


  • Identifying and analyzing business transactions
  • Recording in the journal
  • Posting to the ledger
  • Unadjusted trial balance
  • Adjusting entries
  • Adjusted trial balance
  • Financial statements
  • Closing entries
  • Post-closing trial balance
  • Reversing entries
• Business transactions


  Only business transactions are taken into consideration to be entered into the accounting system
• Identifying and analyzing business transactions

  1. Identify business transactions from business documents

  2. Analyze transactions to determine accounts affected and amounts to be recorded
• Recording in the journal

  1. Prepare journal entries using double-entry bookkeeping

  2. Use special journals for recurring transactions

  3. Record transactions in chronological order
• Ledger


  Collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances
• Posting to the ledger


  1. Transfer journal entries to the ledger and classify transactions according to accounts

  2. Determine the ending balance of each account
• Trial balance


  Report that tests the equality of the debits and credits after considering the ending balances of each account
• Equality of total debits and total credits in a trial balance does not automatically mean it is error-free
• Adjusting entries


  Entries prepared to update the balances of the accounts affected before preparing financial reports
• Adjusting entries are an application of the accrual basis of accounting
• Adjusted trial balance


  Trial balance prepared after adjusting entries are taken into consideration to update the balances of accounts and before the financial statements are prepared
• Basic financial statements


  • Statement of Comprehensive Income (Income Statement)
  • Statement of Changes in Equity (Capital Statement)
  • Statement of Financial Position (Balance Sheet)
  • Statement of Cash Flows
  • Notes to the Financial Statements
• Closing entries


  Entries made to close income statement accounts (temporary or nominal accounts) to prepare the system for the next accounting period
• Post-closing trial balance


  Trial balance prepared to test the equality of debits and credits after closing entries are made (zeroing-out nominal accounts)
• Reversing entries


  Optional entries prepared at the beginning of the new accounting period to facilitate a smoother and more consistent recording process
• Business documents


  • Official receipt
  • Sales invoice
  • Check
  • Cash register slip
  • Bank deposit slip
  • Withdrawal slip
  • Statement of account
  • Promissory note
• Journal entry


  Composed of date, account debited, account credited, amount, posting reference or folio, and explanation
• Simple journal entry


  One account debited and one account credited
• Compound journal entry


  More than one account debited or credited
• Ledger


  Books of final entry, where transactions are classified according to accounts
• Posting process


  1. Transfer journal entries to the respective accounts in the ledger

  2. Debit amounts go to the left side, credit amounts go to the right side
• General ledger


  Contains broad accounts such as Cash, Accounts Receivable, Supplies, etc.
• Subsidiary ledger


  Contains specific accounts that make up a broad account in the general ledger
• Ledger


  A record of all financial transactions of a business, organized by account
• Accounts in the ledger

  • Assets
  • Liabilities
  • Capital
  • Revenues
  • Expenses
• After all accounts are posted, we can now derive the balances of each account
• Cash balance


  $7,480 at the end of December
• Accounts receivable


  Balance can be found in the ledger
• Accounts payable


  Balance can be found in the ledger
• In reality, companies have a lot more than 15 transactions, they may have hundreds or even thousands of transactions in one day
• Most accounting systems today perform automated posting process
• Unadjusted trial balance


  A list of the ledger accounts and the corresponding final balances, used to test the equality between total debits and total credits
• The purpose of the trial balance is to test the equality between total debits and total credits after the posting process
• Adjusted trial balance


  Prepared after adjusting entries are prepared and posted
• Post-closing trial balance


  Prepared after closing entries