“The accounting cycle refers to a series of sequential steps or pracedures performed to "accomplish the accounting process. The steps in the cycle and their aims follow: ‘Step 1 Identification of Events to be Recorded ‘Aim: To gather information about transactions or events: ‘generally through the source documents. ‘Transactions are Recorded in the Journal ‘Aim: To record the economic impact of transactions on the firm in a journal, which is a form that faci ites transfer to ‘the accounts. Step 3 Journal Entries are Posted to the Ledger ‘Aim: To transfer the information from the journal to the ledger for classification. ee: Preparation ofa Tiel oaian—* Aim: To provide a listing to verify the equality of debits and credits in the ledger. ‘Step5 Preparation of the Worksheet including Adjusting Entries Aim: To aid in the preparation of financial statements. Step 6 Preparation of the Financial Statements ‘Aim: To provide useful information ‘to decision-makers. ‘sc Step7 Adjusting Journal Entries ae Journalized and Posted ‘Aim: To record the accruals, expiration of deferrals, ‘estimations and other events from the worksheet. Step 8 oa Journal Entries are Journalized and Posted To close temporary accounts and transfer profit to ‘owner's equity. ‘Step9 Preparation of a Post-Closing Trial Balance ‘Aim: To check the equality of debits and credits after the closing entries, | Athestat’ Step 10 Reversing Journal Entries are Journalized and Posted ‘Aim: To simplify the recording of certain regular transactions ‘in the next accounting period. ‘eycle Is repeated each accounting period. The first three steps in the accounting. eycle are accomplished during the period. The fourth to the ninth steps generally occur at the end of the period. The last step is optional and occurs at the beginning of the period.‘The discussion in this chapter will focus on the first four steps. The fifth and sixth in Chapters 5 and 6 while the rest will be taken up in Chapter 7. Refer to the follo diagram for steps 2, 3 and 4. ‘The General Journal (the book of original entry) Shows all the effects of a transaction in terms of debits and credits. Office Equipment »« Cash xx ‘Accounts Payable xx ‘The Ledger ‘A grouping of accounts. Listing ofall ledger accounts, in order, with their respective debit or credit balances. Liabilities ‘Owner's Equity Revenues Expenses‘Recording Business Transactions | 119 iE JOURNAL he journal is a chronological record of the entity's transactions. A journal entry shows effects of a business transaction in terms of debits and credits. Each transaction initially recorded in a journal rather than directly in the ledger. A journal is called the k of ‘original entry. The nature and volume of transactions of the business ‘ne the number and type of journals needed. The general journal is the simplest “The standard contents of the general journal are as follows: 41. Date. The year and month are not rewritten for every entry unless the year or month changes or a new page is needed. 2. Account Titles and Explanation. The account to be debited is entered at the ‘extreme left of the firs line while the account to be credited is entered slightly indented on the next line. A brief description of the transaction Is usually made ‘on the line below the credit. Generally, skip a line after each entry. 3k ing reference). This will be used when the entries are posted, that is, until the amounts re transferred to the related ledger accounts. The posting process will be described later. + 4 Debit.” ‘The debit amount for each account is entered in this, column. 5. Credit. The credit amount for each account is entered in this column. "Assume that Marla Concepcion Jenifer Perez Manalo established her own wedting consultancy with an initial investment of P250,000 on May 1. ‘The journal entry is shown below: Journal ‘Account Titles and Explanation is cee gt a a ‘Cash Perez-Manalo, Capital Ina simple entry, only two accounts are affected—one account is debited and the other credited. An examtple of this is the entry to record the initial investment of Perez-Manalo. However, some transactions require the use of more than two BCCOUNS, aAfter the transaction or event has been identified and measured, itis recorded in the. Journal. The process of recording a transaction is called journalizing. The following are the transactions for Weddings “R” Us during the month of May. The double-entry ‘system will be used. q ‘To understand the nature of the affected accounts, the letter A (for asset), L (liability) or (OE (owner's equity) is inserted after each entry. In addition, owner's equity is further Classified into OE:! (income) and OE:E (expenses). 3 Note thatthe rules of double-entry system are observed in each transaction: 1. Two or more accounts are affected by each transaction. 2. The sum of the debits for every transaction equals the sum of the credits. 3. The equality of the accounting equation is. always maintained. So Initial Investment (Source of Assets) May 1 ‘Maria Concepcion Jennifer Perez-Manalo is a social entrepreneur from the South. She is into a lot of interesting causes. Her fine taste is preeminent such that she is considered an authority in planning weddings. Upon the advice and prodding of an esteemed colleague, Bendalyn Landicho, Perez-Manalo decided ‘to organize her wedding consultancy. She invested 250,000 into this entity. Analysis Assets increased. Owner's equity increased. Rules Increases in assets are recorded by debits. increases in owner's ‘equity are recorded by credits. Entry Increase in assets is recorded by a debit to cash. Increase in ‘owner's equity is recorded by a credit to Perez-Manalo, Capital. Dr. cr, Cash (A) 250,000 Perez-Manalo, Capital (OE) 250,000Recording Business Transactions | 121 Paid in Advance (Exchange of Assets) yd Rented office space and paid two months’ rent in advance, 8,000. Assets increased. Assets decreased. Increases in assets are recorded by debits. Decreases in assets are recorded by credits. Increase in assets is recorded by a debit to prepaid rent. Decrease in assets is recorded by a credit to cash. Dr. cr. Prepaid Rent (A) 8,000 Cash (A) 8,000 te Issued for Cash (Source of Assets) 2 Maria Concepcion Jennifer Perez-Manalo issued a promissory note for a P210,000 loan from Metrobank. This availment ‘will be used for the acquisition ofa service vehicle. The note carries a "20% interest per annum. The arrangement with the bank is that both the interest and the principal are payable in full in one year. jis Assets increased. Liabilities increased. Increases in assets are recorded by debits. Increases in liabilities are recorded by credits, Increase in assets Is recorded by a debit to cash, Increase in ‘iabilities is recorded by a credit to notes payable. or. cr. Cash (A) 210,000 Notes Payable (L) 210,000 Hired an office assistant and an account executive each with 2 7,800 monthly salary. Or, each is to receive P300 per day for the 26-day work month, No entry is necessary at this point. They started work immediately.May 4 Analysis Rules Entry May 4 Analysis Rules Entry Office Equipment Acquired on Account (Exchange and Source of Assets) May5, Analysis Rules Service Vehicle Acquired for ash (Exchange of assets) Assets increased. Assets decreased. Insurance Premiums Paid (Exchange of Assets) Acquired service vehicle for 420,000. Increases in assets are recorded by debits. Decreases by credits, Increase in assets is recorded by a debit to service vehicle. Decrease in assets is recorded by a credit to cash. Service Vehicle (A) 420,000 Cash (A) Paid Prudential Guarantee and Assurance, inc. P14,400 for a one- ‘year comprehensive insurance coverage on the service vehicle. ‘An asset increased, Another asset decreased, Increases in assets are recorded by debits. Decreases in assets are recorded by credits, Increase in assets is recorded by a debit to prepaid insurance. Decrease in assets is recorded by a credit to cash, Or. cr. Prepaid Insurance {A) es 14,400 Cash (A) I 14,400 ‘Acquired office equipment from Fair and Square Emporitim for 60,000; paying P15,000 in cash and the balance next month. Note: A compound entry is needed for this transaction. ‘Assets increased. Assets decreased. Liabilities increased, Increases in assets are recorded by debits. Decreases in assets are recorded by credits. Increases in liabilities are recorded by ‘credits,‘Recording Business Transactions |_123 increase in assets is recorded by a debit to office equipment. Decrease in assets is recorded by a credit to cash. Increase in liabilities is recorded by a credit to accounts payable. Dr. cr Office Equipment (A) 60,000 Cash (A) ‘Accounts Payable (L) plies Purchased on Account (Source of Assets) Purchased supplies on credit for P18,000 from San Jose Merchandising. Assets increased. Liabilities increased. Increases in assets are recorded by debits. Increases in ‘are recorded by credits. Increase in assets is recorded by a debit to supplies. Increase in liabilities is recorded by a credit to accounts payable. ‘Supplies (A) 18,000 ‘Accounts Payable (L) {ts Payable Partially Settled (Use of Assets) aid San Jose Merchandising P10,000 of the amount owed. ‘Assets decreased. Liabilities decreased. Decreases in assets are recorded by credits. Decreases in liabilities are recorded by debits. : Decrease in liabilities is recorded by a debit to accounts payable. Decrease in assets is recorded by a credit to cash. or. cr. ‘Accounts Payable (L) 10,000 © Cash (A) : 10,000‘May 10 Analysis Rules Entry Salaries Paid (Use of Assets) May 13 Analysi Rules Entry May 15 Analysis 12a | _wasic rmancial Accounting and Keporting by Prof. WIN waltaga Revenues Earned and Cash Collected (Source of Assets) Unearned Revenues Collected (Source of Assets) Coordinated and finalized simple bridal arrangements for three couples and collected fees of P8,800 per couple. Services include _ Prospecting and selecting the church and reception location, couturier, caterer, car service, flowers, souvenirs and invitations. Assets increased. Owner's equity increased. Increases in assets are recorded by debits. increases in owner's equity are recorded by credits, Increase in assets is recorded by a debit to cash. Increase in ‘owner's equity is recorded by a credit to consulting revenues. Dr. cr. Cash (A) 26,400 Consulting Revenues (OE:!) Paid salaries, P6,600. The entity pays salaries every two ‘Saturdays (refer to the calendar in Chapter 4). ‘Assets decreased. Owner's equity decreased. Decreases in assets are recorded by credits. Decreases in owner's ‘equity are recorded by debits. Decrease in owner's equity is recorded by a debit to salaries expense. Decrease in assets is recorded by a credit to cash. Dr. cr. Salaries Expense (OE:E) 6,600 ‘Cash (A) 6,600 ‘The entity is earning additional revenues by referring consulting clients to friendly hotels, caterers, printers, and couturiers, Received P10,000 advance fees for three clients referred. Assets increased. Liabilities increased.Recording Business Transactions | 125 Increases in assets are recorded by debits. Increases in liabilities are recorded by credits. Increase in assets is recorded by a debit to cash, Increase in liabilities is recorded by a credit to unearned referral revenues. Dr. a. Cash (A) 10,000 Unearned Referral Revenues (L) enues Earned on Account (Source of Assets) May 19 Coordinated and finalized elaborate bridal arrangements for E three couples and billed fees of P12,000 per couple. Additional services'include documents preparation, consultation with a feng shui expert as to the ideal wedding date for prosperity and harmony, provision for limousine service and honeymoon trip. ‘Assets increased. Owner's equity increased. Increases in assets are recorded by debits. Increases in owner's ‘equity are recorded by credits. Increase in assets is recorded by a debit to accounts receivable. Increase in owner's equity is recorded by a credit to consulting revenues. Dr. cr. ‘Accounts Receivable (A) Consulting Revenues ( eee ‘Withdrawal of Cash by Owner (Use of Assets) May 25 Perez-Manalo withdrew P14,000 for personal expenses. ‘Analysis Assets decreased. Owner's equity decreased. Rules Decreases in assets are recorded by credits. Decreases in owner's equity are recorded by debits. Entry Decrease in owner's equity is recorded by a debit to Perez- Manalo, Withdrawals. Decrease in assets is recorded by a credit to cash.