Accounting- a systematic and comprehensive recording
of financial transactions pertaining to a business.
Normal Balances of Accounts
Debit Credit
Assets Liabilities
Withdrawals/Drawings Capital
Expenses Revenue
Note: The revenue increases the owner’s equity while
Withdrawals and Expenses decreases the owner’s equity.
- Double Entry Bookkeeping- a system of
recording accountable events by means of debit
& credit with equal or opposite effects.
- Temporary or Nominal Accounts- accounts
(income and expense) that after the end and
start of a new period has zero balance.
- Real or Permanent Accounts- accounts (assets,
liabilities and owner’s equity) that remain open
and active for the life of the enterprise.
The Accounting Cycle
1. Analyze Business Transactions
- A transaction is analyzed to find out if it affects
the company and if it needs to be recorded.
- Determine whether the account increases or
decreases and should be recorded as debit or
credit.
2. Record the Transactions in the Journal
- The Journal Serves as a record of when
transactions occurred and where accounts are
recorded.
- Special Journals are used for repetitive and high
volume transactions.
- The Source Documents provides basis for a
journal entry.
3. Posting to the Ledgers
- Posting is the process of transferring the debits
and credits from journal entries to account.
- The two types of Ledgers: General Ledgers and
Subsidiary Ledgers
4. Preparation of Unadjusted Trial Balance
- The trial balance is one way to detect errors and
verify the equality of debits and credits.
- This minimizes accounting errors but it does not
signify the absence of errors.
5. Making the adjusting Entries
- This is the Process of analysis and updating of
accounts at the end of the period.
- Reasons for updating the balances:
1. Some expenses are not recorded daily.
2. Some revenues and expenses are
earned as time passes.
3. Some revenues and expenses may be
unrecorded.
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements
8. Making the closing entries.
- At the accounting period, temporary
accounts are closed. Revenue and Income
account balances are closed to Income
Summary accounts and Withdrawal
accounts are closed to Capital accounts. The
increase or decrease will affect the retained
earnings.
9. Make a Post-Closing Trial Balance
Financial Statements
- A Summary of all transactions that are carefully
recorded and transformed into meaningful
information.
- According to Philippine Accounting Standard 1
(PAS1) there is a complete set of financial
statements:
a. Statement of Financial Position
b. Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Statement of Cash Flows
e. Notes to Financial Statements
f. A Statement of financial position as at the
beginning of the earliest comparative period
when an entity applies an accounting policy
retrospectively or makes retrospective
restatement of items in its financial statements or
when it reclassifies financial statements.
Note: Letters E & F will be discussed on Higher
Accounting Subjects.
Statement of Comprehensive Income
- Income Statement, Statement of
Profit/Loss, Statement of Income
- A summary of revenues and expenses of a
business entity for a specific period of time.
Statement of Changes in Equity
- Reports the changes in equity
- Serves as a connecting link between Statement
of Comprehensive Income and Statement of
Financial Position.
-
Statement of Financial Position
- Balance Sheet
- Provides Information regarding the liquidity and
capital structure of a company at a given date
- It shows the list of assets, liabilities and equity
of a business entity.
- It can be presented into two forms: Account
Form and Report Form
Statement of Cash Flows
- A statement which reports cash receipts
(inflows) and cash disbursements (outflows) for
a period regarding the operating, investing and
financing activities of a business entity.
- This statement shows the net increase or
decrease during the period and cash balance at
the end of the period.