Chapter 3

CHAPTER 3 (WILLIAMS) Ledger – an accounting record where the entire group
of accounts is kept together

THE ACCOUNTING CYCLE: CAPTURING ECONOMIC
EVENTS Double-entry Accounting – refers to the need for both
debit entries and credit entries, equal in dollar amount,
The Accounting Cycle
to record every transaction
Accounting Cycle – the sequence of accounting
The Journal
procedures used to record, classify, and summarize
accounting information in financial reports at regular Journal – the information about each business
intervals transaction is initially recorded in an accounting record;
is a chronological (day-by-day) record of business
- begins with the initial recording of business
transactions
transactions and concludes with the
preparation of a complete set of formal Journal Entry – is a tool for analyzing and describing the
financial statements impact of various transactions on a business entity
 Cycle – procedures must be repeated
 The ability to describe a transaction in journal
continuously to enable the business to prepare
entry form requires an understanding of the
new, up-to date financial statements at
nature of the transaction and its effect on the
reasonable intervals
financial position of the business
The accounting cycle generally consists of eight specific
Posting Journal Entry to Ledger
steps:
Posting – the process of updating ledger accounts for
1. Journalize (record) transactions
the effects of the transactions recorded in the journal
2. Post each journal entry to the appropriate
ledger accounts - involves copying into the ledger accounts
3. Prepare a trial balance information that already has been recorded in
4. Making end-of-period adjustments the journal
5. Preparing an adjusted trial balance
6. Preparing financial statements WHAT IS NET INCOME?
7. Journalizing and posting closing entries Net Income – is an increase in owners’ equity resulting
8. Preparing an after-closing trial balance from the profitable operation of business
The Role of Accounting Records - is a computation of the overall effects of many
1. Establishing accountability for the assets and/or business transactions on owners’ equity
transactions under an individual’s control Retained Earnings – where owner’s equity reflects from
2. Keeping track of routine business activities— profitable or unprofitable operations
such as the amounts of money in company bank
accounts, amounts due from credit customers, - represents the total net income of the
or amounts owed to suppliers corporation over the entire lifetime of the
3. Obtaining detailed information about a business, less all of the dividends to its
particular transaction stockholders
4. Evaluating the efficiency and performance of  Retained Earnings represent the earnings that
various departments within the organization have been retained by the corporation to
5. Maintaining documentary evidence of the finance growth
company’s business activities Dividends - a policy of distributing to their stockholders
Account/ Ledger Account – the record used to keep some of the resources generated by profitable
track of the increases and decreases in financial operations (for corporations)
statement items Income Statement Preview
Income Statement – summarizes the profitability of a  Accountants require objective evidence that an
business entity for a specified period of time expenditure will produce revenue in future
periods before they will view the expenditure as
 In this statement, net income is determined by
creating an asset
comparing sales prices of goods or services sold
during the period with the costs incurred by the The Accrual Basis of Accounting
business in delivering these goods or services
Accrual Basis of Accounting – to measure the
 We cannot evaluate net income unless it is
profitability of the economic activities conducted during
associated with a specific time period
the accounting period; revenue and matching principle
Accounting periods – the period of time covered by an
Cash Basis Accounting – revenue is recognized when
income statement
cash is collected and expenses is recognized when
Time period principle – is one of the underlying payments of cash is made
accounting principles that guide the interpretation of
- measures the amounts of cash received and
financial events and the preparation of financial
paid out during the period, but it does not
statements
provide a good measure of the profitability of
Fiscal year – 12-month accounting period activities undertaken during the period
Accounting terms: Revenue and Expense Dividends – is a distribution of assets (usually cash) by a
corporation to its stockholders
Revenue – is the price of goods sold and services
rendered during a given accounting period - are not an expense, and they are not deducted
from revenue in the income statement
- is the gross increase in owners’ equity resulting
from operation of the business Trial Balance – proof of the equality of debit and credit
 Realization Principle indicates that revenue balances; a two-column schedule listing the names and
should be recognized at the time goods are sold balances of all the accounts in the order in which they
or services are rendered; kung kalian ka appear in the ledger
nagprovide kahit na hindi pa sila nagbabayad
 Most companies, updates its Retained Earnings
Expenses – are the costs of the goods and services used balance only once each year
up in the process of earning revenue
Uses and Limitations of the Trial Balance
- the cost of the various activities necessary to
The agreement of the debit and credit totals of the trial
carry on a business; “cost of doing business”
balance gives assurance that:
 Matching Principle – the concept of offsetting
expenses against revenue on a basis of cause 1. Equal debits and credits have been recorded for
and effect all transactions
2. The addition of the account balances in the trial
In measuring the net income of a business for a period
balance has been performed correctly
of one year or less, accountants must estimate what
portion of the cost of the building and other long-lived The preparation of a trial balance does not prove that
assets is applicable to the current year transactions have been correctly analyzed and recorded
in the proper accounts.
Since the allocations of these costs are estimates rather
than precise measurements, it follows that income
statements should be regarded as useful
approximations of net income rather than as absolutely
correct measurements
Conservatism – applying the accounting treatment that

results in the lowest (most conservative) estimate of net
income for the current period
CHAPTER 3 (WILD)
ADJUSTING ACCOUNTS AND PREPARING FINANICAL

STATEMENTS
Time period assumption – presumes that an

organization’s activities can be divided into specific time
periods such as a month, a three-month quarter, a six-
month interval, or a year
Annual financial statements – reports covering a one-

year period
Interim financial statements – covering one, three, or

six months of activity
Fiscal year – covers one year of financial statements but

do not end at December 31
Accrual Basis Accounting vs. Cash Basis Accounting
Accrual basis of accounting – uses the adjusting process

to recognize revenues when earned and expenses when
incurred
- increases the comparability of financial

statements from one period to another
Cash basis of accounting – recognizes revenues when

cash is received and records expenses when cash is
paid; not consistent with generally accepted accounting
principles

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CHAPTER 3 (WILLIAMS) Ledger – an accounting record where the entire group

of accounts is kept together

Conservatism – applying the accounting treatment that

ADJUSTING ACCOUNTS AND PREPARING FINANICAL

Time period assumption – presumes that an

Annual financial statements – reports covering a one-

Interim financial statements – covering one, three, or

Fiscal year – covers one year of financial statements but

Accrual Basis Accounting vs. Cash Basis Accounting

Accrual basis of accounting – uses the adjusting process

- increases the comparability of financial

Cash basis of accounting – recognizes revenues when

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