CFAS - AE 14 [ Lecture 1 ]
4. Prepare an Unadjusted Trial Balance
A trial balance is prepared to test the equality of the debits
and credits. All account balances are extracted from the
ledger and arranged in one report. Afterwards, all debit
balances are added. All credit balances are also added. Total
debits should be equal to total credits.
When errors are discovered, correcting entries are made to
rectify them or reverse their effect. Take note however that
the purpose of a trial balance is only test the equality of total
debits and total credits. It does not provide complete
assurance that the accounting records are correct and
accurate.
5. Adjusting Entries
Adjusting entries are prepared as an application of the
What is Accounting Cycle? accrual concept of accounting. At the end of the accounting
The accounting cycle, also commonly referred to as accounting period, some expenses may have been incurred but not yet
process, is a series of procedures in the collection, processing, recorded in the journals. Some income may have been
and communication of financial information. It involves earned but not entered in the books.
specific steps in recording, classifying, summarizing, and
interpreting transactions and events of a business entity. Adjusting entries are prepared to update the accounts
before they are summarized in the financial statements.
ACCOUNTING CYCLE Adjusting entries are made for accrual of income, accrual of
expenses, deferrals (income method or liability method),
1. Identify and Analyze Business Transactions prepayments (asset method or expense method),
The accounting process starts with identifying and analyzing depreciation, and allowances.
business transactions and events. Not all transactions and
events are entered into the accounting system. Only those that 6. Adjusted Trial Balance
pertain to the business entity are recorded. An adjusted trial balance may be prepared after adjusting
entries are made and before the financial statements are
For example, a personal loan made by a business owner that prepared. This is to test if the debits are equal to credits
does not have anything to do with the business shall not be after adjusting entries are made.
recorded in the books of the business. When the owner buy a
personal car, it should also not be recorded as an asset of the 7. Financial Statements
business. Always watch for the separation of personal and When the accounts are already up-to-date and equality
business transactions. between the debits and credits have been tested, the
financial statements can now be prepared. The financial
2. Record in the Journal statements are the end-products of an accounting system.
A journal is a book paper or electronic wherein transactions are
recorded. Journals are also known as Books of Original Entry. A complete set of financial statements is made up of:
(1) Statement of Comprehensive Income (Income
Business transactions are usually recorded using the double- Statement and Other Comprehensive Income),
entry bookkeeping system. They are recorded in journal entries (2) Statement of Changes in Equity,
under at least two accounts (at least one debited and at least (3) Statement of Financial Position or Balance Sheet,
one credited). Transactions are recorded chronologically, as (4) Statement of Cash Flows, and
they occur. (5) Notes to Financial Statements.
To simplify the recording process, special journals are often 8. Closing Entries
used for transactions that recur frequently, such as sales, Temporary or nominal accounts, i.e. income statement
purchases, cash receipts, and cash disbursements. And, a accounts, are closed to prepare the system for the next
general journal is used to record all those that do not fit in the accounting period. Temporary accounts include income,
special journals. expense, and withdrawal accounts. These items are
measured periodically, hence need to be closed to have a
3. Post to the Ledger "fresh slate" for the next accounting period.
Also known as Books of Final Entry, the ledger is a collection of
accounts and shows the changes made to each account from The accounts are closed to a summary account (usually,
past transactions recorded. It also shows their current balances. Income Summary) and then closed further to the capital
Simply put, the ledger collates all records made to specific account. Again, take note that closing entries are made only
accounts. for temporary accounts. Real or permanent accounts, i.e.
balance sheet accounts, are not closed.
For example, all journal entry records made to "Cash" are
posted into the Cash account in the ledger. After posting is
complete, we will be able to see all increases and decreases in
Cash; and from that, we can determine the remaining balance.
9. Post-Closing Trial Balance
In the accounting cycle, the last step is to prepare a post-
closing trial balance. It is prepared to test the equality of debits
and credits after closing entries are made. Since temporary
accounts are already closed at this point, the post-closing trial
balance contains real accounts only.
Basic Phases of Accounting
There are four basic phases of accounting: recording,
classifying, summarizing and interpreting financial data.
Communication may not be formally considered one of the
accounting phases, but it is a crucial step as well.
All accounting information should be communicated properly
to the appropriate parties after analyzing.
Accounting reports must be prepared and distributed, and
should include the basic income statement and balance sheet,
as well as additional information including accounting ratios,
diagrams, graphs and funds flow statements.
1) Recording
Recording is a basic phase of accounting that is also known as
bookkeeping.
In this phase, all financial transactions are recorded In a
systematical and chronological manner in the appropriate
books or databases.
Accounting recorders are the documents and books involved in
preparing financial statements. Accounting recorders include
records of assets, liabilities, ledgers, journals and other
supporting documents such as invoices and checks.
2) Classifying
The classifying phase of accounting involves sorting and
grouping similar items under the designated name, category or
account. This phase uses systematic analysis of recorded data
in which all transactions are grouped in one place. "or example,
travel expenses might be a category that accountants use to
classify expenses relating to company travel. The term ledger
refers to the book in which classifications are recorded.
3) Summarizing
The summarizing phase of accounting involves summarizing the
data after each accounting period, such as a month, quarter or
year. The data must be presented in a manner which is easy to
understand and use by both external and internal users of the
accounting statements graphs and other visual elements are
often used to complement the text data
4) Interpreting
The interpreting phase of the accounting process in concerned
with analyzing financial data, and is a critical tool for decision
making. This final function interprets the recorded data in a
manner which allows endusers to make meaningful judgments
regarding the financial conditions of a business or personal
account, as well as the profitability of business operations. This
data is then used to prepare future plans and frame policies to
execute financial plans.
