CHAPTER 1

THE ACCOUNTING PROCESS

Accounting is the process of identifying, measuring, and communicating economic information to

permit informed judgements and decisions by users of the information.

Accounting information system is the system of collecting and processing transaction data and
disseminating financial information to interested parties.

Management information system is a set of data gathering, analyzing, and reporting functions
designed to provide management with the information it needs to carry out its functions.

*Components of accounting information system

1. Personnel directly involved in accounting work.

2. Accounting polices and standards.

3. Procedures or set of interrelated activities involving the originating, processing and reporting of
financial and related information.

4. Equipment and devices used in the system to expedite work, to provide controls , and prevent fraud
and errors.

5. Records and reports necessary to gather, process, store and transmit financial and other information.

THE ACCOUNTING CYCLE

-Represents the steps or procedures used to record transactions and prepare financial statements.

Steps in the accounting cycle

1. Identifying and analyzing business documents or transactions- the accountant gathers

information from source documents and determines the effect of the transactions on the
accounts.
2. Journalizing- the identifies accountable events are recorded in the journals.
3. Posting- information from the journal are transferred to the ledger.
4. Preparing the unadjusted trial balance- the balances of the general ledger accounts are proved
ad to the equality of debits and credits. The unadjusted trial balance serves as basis for adjusting
entries.
5. Preparing the adjusting entries- the accounts are updated as of the reporting date on an accrual
basis by recording accruals, expirations of deferrals, estimations, and other events often not
signaled by new source documents.
6. Preparing the adjusted trial balance(worksheet preparation)- the equality or debits and credits
are rechecked after adjustments are made.
7. Preparing the financial statements- these are the means by which the information processed is
communicated to users.
8. Closing the books- this involves journalizing and posting closing entries and ruling the ledger.
 9. Preparing the post-closing trial balance- the equality of debits and cresits are again rechecked
after the closing process.
10. Recording of reversing entries- reversing entries are usually made at the beginning of the next
accounting period to simplify the recording of certain transactions in the next accounting period.

Accounting records of a business entity

1. Business or source documents- these are the original source materials evidencing a transaction.
2. Books of accounts
A. Journal
B. Ledger

Systems of recording transactions

1. Double-entry system- each transaction is recorded in two parts- debit and credit.
A. Duality- this concept views each transaction as having a two-fold effect on values- a
value received and a value parted with, and each transaction is recorded using at least
two accounts.
B. Equilibrium- this concept requires each transaction to be recorded in terms of equal
debits and credits.

The accounts recognized under the double-entry system are : assets, liabilities, equity ,income and
expenses.

The books of accounts used under the double- entry system are: journal, special journal, ledger
subsidiary ledger and other important books.

2. Single-entry system- each transaction is recorded through simple narrative.

The accounts recognized under the single-entry system include; cash, accounts receivable, accounts
payable and equity.

The books of accounts used under the single-entry system include: cash books and subsidiary
ledgers.

*JOURNAL

Journalizing is the process of recording transactions in the journal by means of journal.entries.

The journal (book of original entry) is a formal record where transactions are initially recorded
chronologically through journal entries.

*TYPES OF JOURNAL

1. GENERAL JOURNAL- a book of original entry used to record transactions other than those thata re
recorded in the special journals. If special journals are not utilized, all transactions are recorded in the
general journal.

2. SPECIAL JOURNAL- a book of original entry used to record transactions of a similar nature.
A. Sales journal- used to record sales on account

B. Purchases journal- used to record purchases of inventory on account.

C. Cash receipts journal- used to record all transactions involving receipts of cash.

D. Cash disbursement journal- used to record all transactions involving payment of cash.

TYPES OF JOURNAL ENTRIES

1. Simple journal entry- one which contains a single debit and a single credit element.
2. Compound journal entry- one which contains two or more debits or credits.
3. Adjusting entries- entries made prior to the preparation of financial statements to update
certain accounts so that they reflect correct balances at the designated time.
4. Closing entries- entries made at the end of accounting period
5. Reversing entries- entries made on the first day of the accounting period
6. Correcting entries- entries made to correct accounting errors.
7. Reclassification entries- entries made to transfer an amount from an account to another
account

*LEDGER

Posting is the process of transferring data from the journal to the appropriate accounts in the ledger.

The LEDGER( book of s3condary entries or book of final entries) is a systematic compilation of a group
of accounts.

KINDS OF LEDGERS

A. GENERAL LEDGER- contains all the accounts appearing in the trial balance.
B. SUBSIDIARY LEDGER- provides a breakdown of the balances of controlling accounts.

A controlling account is one which consists of a group of accounts with similar nature.

ACCOUNT is the basic storage of information in accounting, eg., cash, accounts receivable, land, etc

CHART OF ACCOUNTS is a list of all the accounts used by the entity.

TYPES OF ACCOUNTS

1. Real accounts- that are not closed at the end of the accounting period.
2. Nominal accounts- that are closed at the end of the accounting period.
3. Mixed accounts- that are both real and nominal account components.
4. Contra accounts- that are deducted from a related account.
5. Adjusted accounts- are accounts that are added to a related account.

*TRIAL BALANCE

- is a list of general ledger accounts and their balances.

Types of Trial Balance

A. Unadjusted trial balance- prepared before adjusting entries.

B. Adjusted trial balance- prepared after adjusting entries.
C. Post-closing trial balance- this is prepared after the closing process.

ERRORS REVEALED BY A TRIAL BALANCE

>Transplacement error- is committed when the number of digits in an amount is incorrectly increased
or decreased.

>Transposition error- is committed when the digits in an amount are interchanged.

ADJUSTING ENTRIES

are entries made prior to the preparation of financial statements to update certain accounts so that
they reflect correct balances as of thee designated time.

Methods of initial recording of income and expenses

1. Liability method- advanced collections of income are initially credited to a liability account.
2. Income method- advanced collections of income are initially credited to an income account.

*WORKSHEET

- Is an analytical device used to facilitate the gathering of data for adjustments and the preparation
foe financial statements and closing entries.

Financial statements are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.

*CLOSING ENTRIES

Is the process of preparing closing entries for nominal accounts and ruling and balancing real
accounts.

Notes:

-Only income statement accounts, those that enter into the determination of profit and loss, are
closed to the Income summary.

-Income accounts are closed by debiting them.

- The dividends account is directly closed to retained earnings.

REVERSING ENTRIES

Are entries usually made on the first day of the accounting period to reverse certain adjusting entries
immediately preceding period.

Adjusting entries that may be reversed

1. Accruals for income or expenses

2. Prepayments initially recorded using the expense method
3. Advanced collections initially recorded using the income method.