THE

ACCOUNTI
NG CYCLE
Jessa Mae S. Banse, CPA, MBA

Event
Analysis
Reversing
entry

Journalizing

Post Closing
Trial Balance

Posting to
Ledger

Journalizing
and Posting of
CE

Trial Balance

Journalizing
and Posting of
AE

Worksheet
and Adjusting
Entries
Financial
Statements

AE: Adjusting Entries

CE: Closing Entries

A
c
c
o
u
n
t
i
n
g
C
y
c
l
e

formal statements wherein financial information is

periodically communicated to users to help them
make SOUND ECONOMIC DECISIONS

FINANCIAL STATEMENTS
objective: to provide information about:

Financial position
Financial performance
Cash flows

of an entity that is useful to a wide range of users in

making economic decisions

Complete Set of Financial Statements

tatement of Financial Position

lists all assets, liabilities and equity of an entity as

at a specific date
shows a summary of revenues and expenses, as
well as other income items for a specific period

tatement of Financial Performance

tatement of Changes in Equity

Statement of Cash Flows

otes to Financial Statements

presents a summary of changes in capital for a

specific period
reports the amount of cash received and disbursed
during the period
include narrative descriptions or more detailed
analyses of amounts shown in the face of the above
financial statements

STEP 6: PREPARING FINANCIAL

STATEMENTS

NCOME STATEMENT

Profitability:
Assess potential changes in economic resources that is likely to control in the future
Predicting the capacity of the enterprise to generate cash flows from existing resource

STATEMENT OF CHANGES IN EQUITY

Reflects the increase and decrease in net assets

Increases: additional investment and profit during the period
Decreases: Withdrawals and loss during the period

BALANCE SHEET

LIQUIDITY: the availability of cash in the near future to pay for maturing financial
obligations
FINANCIAL FLEXIBILITY: take effective actions to alter amounts and timing of cash
flows; ability to raise new capital or tap into unused lines of credit
SOLVENCY: availability of cash over the longer term to meet financial commitments
as they fall due

STATEMENT OF CASH FLOWS

Cash
CashFlows
Flowsfrom
fromFinancing
Investing Activities:
Operating
Activities:
Obtaining
Include
resources
andcollecting
from
owners
loans;
andacquiring
creditors
and
disposing
longthen
term
DIRECTmaking
METHOD
adding
individual
operating
cash
inflows and
subtracting
Receipt
investments
from
in debt
investment
or equityofsecurities;
owners obtaining and selling PPE
individual
cash
outflows
Receipts
Receipt from
fromsale
obtaining
of PPE
loans
in the form
notes/loans payable
goods
or rendering
ofof
services
Payments
Receipts from
to owners
sale
ofin
long
the
form
term
ofinvestments
dividends/withdrawal
debt revenues
and equity securities
royalties,
fees,
commissions,
andinother
Payment
Receipts
totosettle
collections
notes/loans
note
payable
receivable
Paymentsfrom
suppliers
foron
goods
and
services
Payments to acquire
PPE
employees
Payments
to taxes
acquire long term investments in debt and equity securities
Payment for
Payment to
loans
to others in the form of notes receivable
formake
interest
expense
Payments for other OPERATING activities
INDIRECT METHOD adjusting net profit (loss) for non-cash expenses (example
depreciation and amortization), then deducting increases in current assets and
adding increases in current liabilities

STEP 8: CLOSING ENTRIES ARE JOURNALIZED AND

1. Close
income accounts to income
summary
account
STEP
7:allADJUSTMENTS
ARE
JOURNALIZED
POSTED
Gourmet cooking
revenue
2,256,000
AND POSTED
Income Summary

2,256,000

2. Close all expense accounts against income summary account

Income Summary
1,912,000
Salaries Expense
646, 000
Travel Expense
127, 000
Advertising Expense
215, 000
Insurance Expense
40, 000
Utilities Expense
102, 000
Miscellaneous Expense
46, 000
Rent Expense
72, 000
Supplies Expense
332, 000
Depreciation Expense
80, 000
Interest Expense
252, 000
3. Close the income summary account to the capital account
Income Summary
334, 000
Owner, capital
334, 000
4. Close the drawing account against the capital account
Owner, capital
240, 000
Owner, withdrawal
240, 000

STEP 9: PREPARING THE POST CLOSING TRIAL

Verifies that all debits equal the credit
in the trial balance
BALANCE

The trial balance contains only balance sheet items such as A, L, and E
and all temporary accounts have zero balances

STEP 10: REVERSING ENTRIES (BEGINNING OF THE

NEXT PERIOD)
Journal entry that is the exact opposite of a related adjusting entry
Optional
Done so that the treatment of accounting transaction is simplified in the
next accounting period
All accruals can be reversed
Salaries Payable
27, 000
Salaries expense
27, 000
Interest Payable
Interest Expense

252, 000
252, 000

Only deferrals using the expense method and the income method can be
reversed.

EFFECT OF REVERSING ENTRIES

Adjusting entry
Salaries Expense
Salaries Payable
Closing Entry
Income Summary
Salaries Expense

27, 000
27, 000
27, 000
27, 000

Reversing Entry
Salaries Payable
Salaries expense

27, 000
27, 000

Payment entry
Salaries Expense
Cash

27, 000
27, 000