ACCOUNTING ~ Is the recording of financial transactions of a business or organization, It also includes the process of summarizing, analyzing and reporting these transactions in financial statements. ACCOUNTING CYCLE ~ is a step-by-step process of recording, classification and summarization of economic transactions of a business. It generates useful financial information in the form of financial statements including statement of financial performance, statement of balance sheet, cash flow statement and statement of changes in equity. = the time petiod principles requires that a business should prepare its financial statement on periodic basis. Therefore accounting cydle is followed once during each accounting period. Accounting cycle starts from the recording of individual transactions and ends on the preparation of financial statement and closing entries. MAJOR STEPS IN ACCOUNTING CYCLE = The following are the major steps involved in the accounting cycle, we will use a simple example to explain each step: 1. Analyzing and recording transactions via journal entries; 2. Posting journal entries to ledger accounts; 3. Preparing unadjusted trial balance; 4. Preparing adjusting entries at the end of the ‘period; 5. Preparing adjusted trial balance; 6. Preparing financial statements; 7. Closing temporary accounts via closing entries; and 8. Preparing post-closing trial balance. 1. Journal Entries ~ Analyzing transactions and recording them as journal entries isthe first step in the accounting cyde. Tt begins at the start of an accounting period and continues during the whole period. Transaction analysis is a process which determines whether a particular business event has an economic effect on the assets, liabilities or equity of the business. It also involves ascertaining the magnitude of the transaction ie, its currency value. = After analyzing transactions, accountants classify and record the events having economic effect via Journal entries according to debit-credit rules. Frequent journal entries are usually recorded in specialized Journals, for example, sales journal and purchases journal. The rest are recorded in a general journal. The following exemple illustrates how to record journal entries: Example Mr. Handsome started his business on January 1, 2016 with an initial capital of P500,000.00. During the first month of operation, Mr. Handsome engaged in following transactions: Date Transaction Jan 02 An amount of 36,000 was paid as advance rent for three months, Jan 03 Paid 60,000 cash on the purchase of equipment. Jan 04 Purchased office supplies costing 17,600 on account. Jan 12 Bought merchandise P40,000.00 cash as per CV # 104 Jan 12 Purchased merchandise from Kulapipit on account, 29,500.00 terms 2/15; n/30 per invoice #767 Jan 13 Paid the accounts payable on the office supplies purchased on January 4, Jan 13. Retumed defective merchandise to Kulapipit worth 500 debit memo #7 was received to this effect Jan 14 Paid wages to its employees for first two weeks of January, aggregating 19,100. Jan 18 Sold merchandise to Ms, Tina Pah as per charge invoice #301 P50,000 terms 2/10; n/15. Jan 23 Miss Tina Pah returned defective merchandise P1,200.00 and a credit memo #1 was issued to this effect. Jan 25 Paid the account to Kulapipit in full dated January 12 as per CV # 108 Jan 26 Purchased office supplies costing 5,200 on account. Jan 28 Paid wages to its employees for the third and fourth week of January: 19,100. Jan 28 Received cash from Ms. Tina Pah in full settlement of her account dated Jan 18, offical receipts #02 was issued Jan 31 Received electricity bill of 2,470. Jan 31 Received telephone bill of 1,494. Jan 31 Miscellaneous expenses paid during the month totaled 3,470 Jan 31 Mr. Handsome withdrew 10,000 cash for personal useMr. Handsome uses the following account tities in recording the above transactions: ‘Account Code ‘Account Titles UL ‘Cash rT ‘Merchandising Inventory 2 ‘Account Receivable. 134 Prepaid Rent a4 Office Supplies 151 Equipment 161 ‘Accumulated Depreciation - Equipment 2it ‘Account Payable 228 Utilities payable 31 ‘Me. Handsome, Capital 3a ‘Mr. Handsome, Drawings 10 ‘Sales ait ‘Sales discount 412 ‘Sales return and allowance 510, Purchase Sit Purchase return and allowance: 52, ‘Purchase discount 520, ‘Salaries Expense 530, ‘Office Supplies Expense: 540. Electricity Expense 550. “Telephone Expense: 560. Rent Bepense 570. ‘Depreciation Expense 580, ‘Miscellaneous Expense 600 ‘Income and expense summary ‘The following table shows the journal entries for the above events, assuming Mr. Handsome uses periodic inventory system in recording merchandise account. Date. ‘Account Debit. Credit Jan (Cash 500,000 Mr, Handsome Capital 500,000 Jan2 Prepaid Rent 36,000 Cash 36,000 Jan 3 Equipment 160,000 Cash 160,000 Jan 4 Office Supplies 17,600 ‘Accounts Payable 17,600 Jan 12 Purchases 40,000 Gash 40,000 Jan 12 Purchases 29,500 ‘Accounts Payable 29,500 Jan 13 ‘Accounts Payable 47,600 Cash 417,600 Jan 13 Accounts Payable 500 Purchase retum & allowance 500 Jan 14 Salaries Expense 19,100 Cash 19,100 Jan 18 ‘Accounts Receivable 50,000 Sales 50,000 Jan 23 Sales return and allowance 4,200 ‘Accounts Receivable 1,200 Jan 25 ‘Accounts payable 29,000 Purchase discount 580 Gash 28,420 Jan 26 Office Supplies 5,200 ‘Accounts Payable 5,200 Jan 28 Salaries Expense 19,100 Cash 19,100 Jan 28 ash 49,000 Sales discount 41,000 ‘Accounts Receivable 49,000 san 31 Hlectricty Expense 2,470 Utlities Payable 2,470 Jan 31 ‘Telephone Expense 1494 Uslities Payable 1494 Jan 31 Miscellaneous Expense 3470 Cash 3,470 Jan 31 Mr. Handsome Drawings 410,000 Gsh 10,0002, Posting Journal Entries to Ledger Accounts ‘The second step of accounting cycle is to post the journal entries to the ledger accounts. ‘The journal entries recorded during the first step provide information about which accounts are to be debited and which to be credited and also the magnitude of the debit or credit (see debit-credit-rules). The debit and credit values of journal entries are transferred to ledger accounts one by one in such a way that debit amount of a journal entry is transferred to the debit side of the relevant ledger account and the credit, ‘amount is transferred to the credit side of the relevant ledger account. ‘After posting all the journal entries, the balance of each account is calculated. The balance of an asset, expense, contra-liability and contra-equity account is calculated by subtracting the sum of its credit side from the sum of its debit side. The balance of a liability, equity and contra-asset account is calculated the ‘opposite way i.e. by subtracting the sum of its debit side from the sum of its credit side. ‘The ledger accounts shown below are derived from the journal entries of Mr. Handsome. Asset Accounts ‘Acct Tite: Cash Aot#: LL Debit Credit Balance "500,000 '500,000, 36,000 464,000 {60,000 404,000, 40,000 364,000, 17,600 346,400. 19,100 327,300 28,420 298,880 19,100 279,780, 47,824 327,604 3,470 324,134 10,000 314,134 Prepaid ‘AcctTitie: Rent ‘AcctTitle: Office Supplies Acct #: 131 Acct #: 1a Date Debit Credit Balance, Date Debit ‘Credit Balance Jan. 02 36,000 36,000 Jan. 04 17,600, 17,600 Jan. 31 12,000 24,000 Jan. 26 5,200 22,800 Jan. 31 18,480, 4,320 ‘Acct Tite: Equipment ‘AcctTitle: Accumulated Depreciation ~ Equip. Acct #: 181 Acct #: 161 Date Debit Credit Balance, Date Debit Credit Balance Jan. 03 60,000 60,000) Jan. 31 1,000. 1,000) ‘AcctTitle: Utilities Payable Acct#: 221 Credit Balance Date’ Debit Credit Balance 17,600 17,600 Jon. 31 2,470 2,470 29,500 47,100 Jon. 31 1,494 3,964 Jan. 13 17,600 29,500 Jan. 13. 500) 29,000. Jan. 25, 23,000. 0 “en. 25 5,200 5,200