THE ACCOUNTING PROCESS

Notes and Quizzers: Theories of Accounts (IFRS Based) Empleo, 2016

ACCOUNTING PROCESS is a sequence of ● INCREASE in liability, DECREASE in

interrelated procedures the primary purpose is equity
to produce the entity’s financial statements ● INCREASE in liability, DECREASE in
for a given reporting period. another liability
● DECREASE in liability, INCREASE in
STEPS IN THE ACCOUNTING PROCESS equity
A. IDENTIFY THE EVENTS TO BE ● INCREASE in equity, DECREASE in
RECORDED equity
B. JOURNALIZE TRANSACTIONS AND
EVENTS JOURNALIZATION is the process of
C. POST FROM JOURNAL TO THE LEDGER recording the economic events in the books
D. PREPARE THE UNADJUSTED TRIAL of original entry called the journal.
BALANCE - These economic events (otherwise
E. JOURNALIZE THE POST ADJUSTING known as transactions) are recorded
ENTRIES using the double entry bookkeeping
F. PREPARE ADJUSTED TRIAL BALANCE system.
G. PREPARE FINANCIAL STATEMENTS - Under this system, transactions are
H. JOURNALIZE AND POST CLOSING recorded in two-fold effects: debit and
ENTRIES credit
I. PREPARE POST-CLOSING TRIAL
BALANCE TYPES OF SPECIAL JOURNALS
J. JOURNALIZE AND POST REVERSING
UNDER THE NON-VOUCHER SYSTEM
ENTRIES.
JOURNAL USUAL
REPORTABLE EVENTS are those that affect
TRANSACTIONS
the elements of financial statements.
RECORDED
EXTERNAL EVENTS INTERNAL EVENTS
Sales Journal Sale of Merchandise on
TRANSFERS are ONLY THE ENTITY Account
transfers of resources PARTICIPATES
and/or obligations Cash Receipts Journal Receipt of Cash
from or to other
enterprises. They Purchase Journal Purchase of
include exchanges (or merchandise on
reciprocal transfers) account
and non-reciprocal Depreciation of
transfers Property, Plant and Cash Disbursements Payment of cash
Equipment, Journal
EXTERNAL EVENTS Consumption of
OTHER THAN Supplies for use in General Journal All other transaction
TRANSFERS are production, and
change in interest rates, Casualties that affect
change in market the entity's resources UNDER THE VOUCHER SYSTEM
values, and changes in and obligations.
technologies.
JOURNAL USUAL
TRANSACTIONS
POSSIBLE EFFECTS OF REPORTABLE RECORDED
EFFECTS
● INCREASE in asset, DECREASE in Sales Journal Sale of Merchandise on
another asset Account
● INCREASE in an asset, INCREASE in
Liability Cash Receipts Journal Receipt of Cash
● INCREASE in an asset, INCREASE in
Voucher Register All potential payments
Equity
● DECREASE in asset, DECREASE in
Check Register Issuance of checks
Liability
● DECREASE in asset, DECREASE in General Journal All other transaction
equity
POSTING is the process of transferring the case of single proprietorship and
entries from the journal to the ledgers. partnership).
REAL ACCOUNT is one whose balance is
TYPES OF LEDGERS brought forward to the next accounting
period.
GENERAL LEDGER SUBSIDIARY
- These are the accounts reported in the
serves as the control LEDGER provides the
account in the trial statement of financial position (asset,
details of the balances
balance of the general ledger liability, and equity accounts).
accounts in the trial
balance ADJUSTED TRIAL BALANCE lists the
adjusted balances of all general ledger
accounts that are to be presented on the
TRIAL BALANCE is a proof of the equality of company’s financial statements.
the debits and credits in the general ledger. - With the use of the worksheet, this
- The totals in the trial balance serve no step may be omitted in the accounting
meaningful purpose. The equality of cycle.
the debits and credits in the trial
balance is not an assurance that the FINANCIAL STATEMENTS are the finished
trial balance is free of any accounting products of the accounting process. They are
errors. the means by which financial information
about an enterprise is communicated to the
ADJUSTING ENTRIES are those that are users
prepared and dated at the last day of the
reporting period to bring the accounts in the CLOSING ENTRIES are those that are
trial balance to their updated balances, so that prepared at the end of the accounting period,
they will be fairly stated in the financial after journalizing and posting the adjusting
statements. entries, to bring nominal accounts to zero
- The adjusting entries are based on the balances, so that they will accumulate again
accrual basis of accounting that is the effects of the transactions in the next
applied in the presentation of financial accounting period.
statements.
- Under the accrual basis of accounting,
POST-CLOSING TRIAL BALANCE is a third
revenues and expenses are
trial balance that is prepared after bringing
recognized in the accounting period in
the nominal accounts to zero balances, so
which they are considered earned and
that the only real accounts are listed. The
incurred, regardless of the inflow or
balances listed are the opening balances of the
outflow of cash.
accounts for the next reporting period.
- The preparation of a post-closing trial
TYPES OF ADJUSTING ENTRIES
balance is an optional step in the
ENDING INVENTORY ACCRUALS which accounting process.
under the periodic include accrual of
inventory system expense and accrual of REVERSING ENTRIES are those that, at the
income option of the entity, are prepared on the first
day of the new reporting period, so that there
DEFERRALS which DEPRECIATION of may be no need to monitor the effects of
include prepaid property, plant and
certain adjustments in the account balances.
expenses and unearned equipment and
income amortization of - Reversing entries are prepared for
intangibles. adjustments involving accruals and
deferrals that were originally recorded
IMPAIRMENT of assets in nominal accounts.

ADJUSTING ENTRIES THAT ARE SUBJECT TO

NOMINAL ACCOUNT is one whose balance REVERSAL ARE
is brought to zero at the end of the reporting
ACCRUED EXPENSE ACCRUED INCOME
period.
- They include income accounts, expense
PREPAID EXPENSE UNEARNED INCOME
accounts, dividends, and drawings (in