FINANCIAL ACCOUNTING & REPORTING (FUNDAMENTALS)

CHAPTER 1 INTRODUCTION TO ACCOUNTING

DEFINITION OF ACCOUNTING
 Accounting. Is a process of identifying, recording, and communicating economic information that is
useful in making economic decisions.
 As per Accounting Standards Council (ASC). Accounting is a service activity. Its
function is to provide quantitative information primarily financial in nature about economic entities, that is
intended to be useful in making economic decisions.
 As per Accounting Institute of Certified Public Accountant (PICPA).
Accounting is the art of recording, classifying, summarizing in a significant manner and in terms of money,
transactions and events, which are in part at least of a financial character an interpreting the result thereof.
 As per American Accounting Association (AAA). Accounting is the process of
identifying, measuring and communicating economic information to permit informed judgment and
decision by users of the information.

ELEMENTS OF THE DEFINITION OF ACCOUNTING

 Identifying – The accountant analyzes each business transaction and identifies whether the transaction
is an “accountable event” or “non-accountable event.” This is because only “accountable events” are
recorded in the books of accounts. “Non-accountable events” are not recorded in the books of accounts.
 Recording – The accountant recognizes (i.e., records) the “accountable events” he has identified. This
process is called “journalizing.” After journalizing, the accountant then classifies the effects of the event on
the “accounts.” This process is called “posting.”
 Communicating – At the end of each accounting period, the accountant summarizes the information
processed in the accounting system in order to produce meaningful reports. Accounting information is
communicated to interested users through accounting reports, the most common form of which is the
financial statements.

FUNCTIONS OF ACCOUNTING
 Recording is a role of accounting involved with the writing of business transactions on the book of the
company.
 Classifying is a function of accounting involved with the sorting or grouping of similar items under one
name or caption.
 Summarizing is a function of accounting involved with the preparation of financial reports (Financial
Statements).
 Interpreting is a function of accounting involved with the analysis of financial statements.
Republic Act No. 9298 (Philippine Accountancy Act of 2004) is the law regulating the practice of accountancy in
the Philippines.

Board of Accountancy (BOA) is the body authorized by law to promulgate rules and regulations affecting the
practice of accountancy profession in the Philippines.

Continuing professional development (CPD) - created by Republic Act No. 10912.

For the accreditation of a CPA by BOA - need 120 CPD units.

Renewal of license by PRC - needs 15 CPD units.

Exempted from CPD - a CPA who reached 65 years of age.

Luca Pacioli is a Franciscan monk considered as the father of modern accounting.

Department of Trade and Industry is the government agency in charge of approving business names.

NATURE OF ACCOUNTING
Accounting is a process with the basic purpose of providing information about economic activities intended
to be useful in making economic decisions.

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship is a business organization owned by one person called Proprietor.
2. Partnership is a business organization owned by two or more persons called Partners.
3. Corporation is a business organization owned by 5 or more persons called Stockholders.

FORM OF OWNERSHIP FORMATION/REGISTRATION

BUSINESS
ORGANIZATION
Sole Proprietor  One individual  Registered with the DTI.
(i.e., sole
proprietor)
Partnership  More than one  Formed by contractual agreement.
(i.e., partners)  Registered with the SEC.
Corporation  More than one  Formed by operation of law
(i.e.,  Registered with the SEC.
stockholders)
Cooperative  More than one  Formed in accordance with the
(i.e., members) Cooperative Code.
 Registered with the CDA.

FORMS ADVANTAGES DIADVANTAGES

Sole  You are the boss and you keep all  You assume all the risk of loss.
the profit.  You take all responsibility and
Proprietorship  Decision making is simple because rely mostly on yourself in making
you have complete control over the decisions.
business.  It is more difficult to raise capital
 Relatively easier and less costly to because you rely mostly on your
form because there are fewer personal assets and loans to
formal business requirements. initially finance the business.
 Lower extent of government  You are personally liable for the
regulation and relatively lower debts and obligations of the
taxes. business.
Partnership  Better business decisions can be  Making business decisions may
made because “two heads are give rise to conflict among the
better than one.” partner.
 You share the business risk and the  You don’t keep all the profits
responsibility of running the because you need to share them
business with your partners. with your partner.
 Compared to corporations and  Limited life, in the sense that a
cooperatives, a partnership is easier partnership can be easily dissolved
to form because only a contractual by the withdrawal, retirement,
agreement between the partners is death or insanity of one of the
needed. partners.
 Greater capital compared to a sole  Lesser capital compared to a
proprietorship. corporation.
 Relatively lower extent of  A partnership (other than a
government regulation compared general professional partnership)
to corporations. is taxed like a corporation.
 unlimited liability. the partners
can be held liable for partnership
debts up to their personal assets.
Corporation  A stockholder who is not a member  Your “say” on corporate affairs
of the corporation’s board of depends on the number of shares
directors is relieved from you own. Those who own more
managerial responsibilities. Only shares are the bosses and enjoy a
the stockholders that are elected as larger share of the corporation’s
members of the board of directors profits.
and those they hire or appoint are  A corporation is more difficult
tasked with managerial and more costly to form because
responsibilities. This can be an there are more formal business
advantage because a regular requirements.
investor does not need to work for  Greater extent of government
the corporation to earn income. regulation and higher taxes.
 Limited liability of the owners  Unlike for a sole proprietorship or
because stockholders are liable for a partnership where business
corporate debts only up to the profits are easily distributed to the
amount they have invested. owner(s), in a corporation, you
 Greater capital and ease in raising have to wait for the board of
additional funds because a directors to declare dividend
corporation can issue shares to a before you get your share in the
wider extent of investors. profits of the corporation.
 If the corporation is listed, you can
easily transfer your shares to other
investors by selling them in the
stock market. Many investors earn
profits this way – by buying shares
at a cheap price, wait for prices to
go up, and then sell them. This
 activity is referred to as stock
trading.
 Unlimited life, in the sense that the
withdrawal, retirement, death or
insanity of one of the stockholders
does not dissolve the corporation.

Although a corporation has a legal

life of 50 years, this can be
renewed for an indefinite number
of renewals.
Cooperative  Unlike in a corporation, your “say”  A cooperative is prone to poor
on cooperative affairs is not management. Cooperatives are,
affected by the number of shares more often than not, managed by
you own. This is because, in a members who were elected as
cooperative, each member is board of directors rather than by
entitled to one vote regardless of employed professional managers.
his or her shareholdings. However, Since there is a ‘one-member,
members with larger shareholdings one-vote’ policy in a cooperative,
are entitled to larger amount of influential members tend to
profit (net surplus). dominate the election process. The
 A cooperative is generally exempt result is that those who get elected
from paying taxes. This is the main may not be the ones who are most
advantage of a cooperative and the qualified for the task.
most common reason why  A cooperative is susceptible to
cooperatives are organized. corruption. Due to its management
Moreover, a cooperative may structure and lack of profit motive,
receive assistance from the the elected officers may be
government. inclined to act on their personal
 Compared to a corporation, a interests.
cooperative is easier and less costly  The Cooperative Code places
to form because there are fewer some restrictions on the
formal business requirements. distribution of a cooperative’s
 Limited liability – the members are profit to its members. More
liable for cooperative debts only up specifically, the Code required a
to the amount they have invested. cooperative to appropriate a
 Unlimited life, in the sense that the portion of its annual profit to some
withdrawal, retirement, death or funds. Only the remaining portion
insanity of one of the members can be distributed to the members.
does not dissolve the cooperative.
Furthermore, when the
Although a cooperative has a legal cooperative is dissolved, the
life of 50 years, this can be amount accumulated in a fund
renewed for an indefinite number called the “reserve fund” shall not
of renewals. be returned to the members, but
rather donated to another
cooperative or to the community.

 Compared to a corporation, it is
more difficult for a cooperative to
sustain growth. This is in part
because of the lack of profit
motive and lack of management
expertise. Moreover, a
cooperative’s success strongly
 depends on the members’
cooperation and members are not
always willing to cooperate. The
success of a business depends on
continuing effort. Sadly, many
cooperatives are zealous at the
start but fail to sustain continuing
effort resulting to the waning
down of their activities. This does
not mean though that all
cooperatives are small businesses.
There are many multi-billionaire
cooperatives in our country. Some
might be located in your
community.
 Unlike in a corporation where the
stockholder can freely transfer his
shares, in a cooperative, there are
restrictions on the transfer of a
member’s shares. For example,
the approval of the board of
directors must first be obtained
before a member can transfer his
or her shares.

TYPES OF BUSINESS ACCORDING TO ACTIVITIES

ADVANTAGES DISADVANTAGES
Service Business  You don’t need to worry  You may not have a
about inventory costs, flexible personal time
warehousing and because you need to be
distribution costs because directly involved in
you don’t have any providing a service to a
inventory. You only have customer. You can stock
some minimal supplies inventory but not service.
necessary in providing
your services. Until your business is big
 You may only need a enough to be able to hire
small capital because what other professionals to do
you are selling is your skill the work for you, you will
set and you only need need to render the services
yourself to render a yourself.
service. If you are a  Service businesses
manufacturer, you need to normally suffer first from
but raw materials and decline in demand during
machinery to produce your times of economic
product. difficulty. This is because
 You are perceived as an most services are
expert in your chosen perceived as luxuries
field. rather than necessities for
survival.
 Your business’ success
depends on your
credibility.
  Since a service business is
founded on good
reputation, it is more
costly to commit an error
in a service business
compared to a
merchandising business.
Merchandising Business  Compared to a  You need to have a retail
manufacturing firm, you store to display your goods
may need a much lower and the store must be in a
start-up capital because strategic location for it to
you don’t need to acquire attract more customers.
machineries to produce  Less flexibility in
your goods. managing costs. This is
 You can take advantage of because the cost of your
price fluctuations. For good is based primarily on
example, when goods are their purchase price, which
on sale, you can acquire you do not control.
them at a discounted price  Keeping track of inventory
and resell them at a much is tedious, most especially
higher price. You can’t do when you are selling
this in a service business. numerous and varies items
 Lower cost of quality. This with fast turnover rate.
is because “what you buy Also, you can incur
is what you sell”. additional costs due to
 It is much easier to start a spoilages, theft, breakages,
merchandising business damages, and
because you don’t need to obsolescence.
have an expertise or a  Self-satisfaction is low
special skill (service because you did not
business) and you don’t produce the products you
need to have invented a sold.
new product or have
conceptualized an
innovative idea for an
existing product
(manufacturing business).
Manufacturing Business  You have a high growth  You need a high start-up
potential. capital.
 You have the opportunity  Conceptualizing a viable
to establish a brand that manufacturing business is
could last longer than your difficult.
lifetime.  You need to be
 Self-satisfaction is high. continuously innovative
 You may not need to have and abreast of changes in
a strategically located technology.
retail store to display your  Warehousing and logistics
products. costs can be high.
 You can have a better  You rely on raw materials.
pricing policy because  Managing a manufacturing
mass production can business can be difficult
decrease your unit cost because production
(often called ‘economies processes are often
of scale’). complicated and there is
 Greater flexibility in always some room for
 managing costs. improvement.

TYPES OF BUSINESS
1. Service Business is a type of business which sells services.
2. Merchandising Business is a type of business that buys goods and later sells it for a profit.
3. Manufacturing Business is a type of business that buys raw materials needed to produce a certain
product.

BOOKKEEPING METHODS
1. Single entry bookkeeping method is a method of bookkeeping which records only one effect
of a transaction.
2. Double entry bookkeeping method is a bookkeeping method which recognizes the two effects
in a transaction.

UNDERLYING ASSUMPTIONS
These are basic notions or fundamental premises on which the accounting process is based.

1. Going concern - the accounting entity is viewed as continuing in operation indefinitely.

2. Accounting entity - the business is separate from the owners.
3. Time period - The indefinite life of an entity is subdivided into accounting periods which are usually
of equal length for the purpose of preparing financial reports on financial position, performance and cash
flows.
4. Monetary unit –
Quantifiability aspect - means that assets, liabilities, equity, income and expenses should be stated
in PESO.
Stability of the peso - means that the purchasing power of the peso is stable.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative Information
2. Qualitative Information
3. Financial Information
 FUNCTIONS OF ACCOUNTING IN BUSINESS
1. To provide external users with information that is useful in making investment and credit decisions.
2. To provide internal users with information that is useful in managing the business.

USERS OF ACCOUNTING INFORMATION

1. Internal users – those who are directly involved in managing the business.
Examples:
 Business owners who are directly involved in managing the business
 Board of directors
 Managerial personnel
2. External users – those who are not directly involved in managing the business.
Examples:
 Existing and potential investors (e.g., stockholders who are not directly involved in
managing the business)
 Lenders (e.g., banks) and Creditors (e.g., suppliers)
 Non-managerial employees
 Public

ACCOUNTING PRINCIPLES
1. Comparability. An accounting principle that enables the users to identify and understand similarities
and dissimilarities among items.
2. Consistency. Is an accounting principle which states that accounting methods used should be the same
from year to year.
3. Objectivity. Accounting records should be based on reliable documents.
4. Historical cost. Is an accounting principle which states that property and equipment should be
recorded at acquisition cost.
5. Materiality. Dictates that strict adherence to GAAP is not required when the items are not significant
enough to affect the evaluation, decision and fairness of the financial statements.
6. Faithful representation. Means that the actual effects of the transactions shall be properly
accounted for and reported in the financial statements.
7. Neutrality. The financial information should not favor one party to the detriment of another party.
8. Understandability. Requires that financial information must be comprehensible or intelligible if it is
to be most useful.
9. Timeliness. Financial information must be available or communicated early enough when a decision is
to be made.
 BRIEF HISTORY OF ACCOUNTING
 Accounting can be traced as far back as the prehistoric times, perhaps more than 10,000 years ago.
 Archeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which were usually cones, disks,
spheres, and pellets. These tokens correspond to commodities like sheep, clothing or bread. They were used
in the Middle West in keeping records. After some time, the tokens were replaced by wet clay tablets.
During such time, experts concluded this to be the start of the art of writing.
 Double entry records first came out during 1340 A.D. in Genoa.
 In 1494, the first systematic record keeping dealing with the “double entry recording system” was
formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The “double entry recording
system” was included in Pacioli’s book titled “Summa di Arithmetica Geometria Proportioni and
Proportionista,” published on November 10, 1494 in Venice.
 The concept of “double entry recording” is being used to this day. Thus, Fra Luca Pacioli is considered as
the father of modern accounting.

COMMON BRANCHES OF ACCOUNTING

BRANCH OF TYPE OF USERS OF SERVICE
ACCOUNTING ACCOUNTING
SERVICE PROVIDED
Financial Accounting  General record-keeping,  All businesses use
i.e., maintenance of financial accounting in
Journals and Ledgers. their record-keeping.
 Preparation of general These records provide
purpose financial information that is also
statements (FS). used in the other branches
of accounting.
 Businesses prepare general
purpose FS at Least
annually for the use of
lenders, investors, or
government regulatory
bodies.
Management Accounting  Preparation of specifically  Required by management
tailored management to aid them in performing
reports. their management
functions.
Government Accounting  General record-keeping  Required by the
and preparation of government and its
financial reports for the agencies.
government and its
agencies. It also includes
the preparation of budgets
and accountability reports.
Auditing  Expression of an opinion  Businesses with gross
on the correspondence quarterly revenue of
between management ₱150,000 are required to
assertions and established have their financial
criteria. statements audited by an
  The most common form of independent Certified
such opinion is the Public Accountant (CPA).
Independent Auditors’
Report which is attached
to audited financial
statements.
Tax Accounting  Preparation of tax returns.  All businesses are required
 Providing tax advice. to file tax returns.
 Some taxpayers may
require the professional
advice of a tax practitioner
regarding the management
of taxes.
Cost Accounting  Analyses of costs of  Businesses use cost
products or services. accounting to analyze the
cost of their products or
services and the effects of
those costs in, among
others, earnings and
pricing policies.
Accounting Education  Teaching of accounting  Required by business
and related subjects. students, business owners,
accounting practitioners in
their Continuing
Professional Development
(CPD), and other
interested parties.
Accounting Research  Accounting research  Required by business
papers, article and similar owners, professional
publications. organizations, and other
interested parties.

FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION (BALANCE SHEET)
Is a financial statement which shows the financial position of a business as of a given period of time.

Composition:

Assets - are economic resources, referring to property or right on property owned by the
business.

Cash

Short term investments like Trading securities

Receivables - includes accounts receivable, notes receivable, installment receivable,

other receivables

Inventories - includes merchandise inventory, raw materials inventory, work in

process inventory, finished goods inventory and manufacturing supplies
 Prepaid expenses - includes prepaid rent, prepaid insurance, prepaid advertising
and Supplies

Liabilities - are economic obligations, referring to debt of the business.

Accounts payable Accrued expenses like:

Notes payable Salaries payable

Unearned Revenues Interest payable

Capital - interest of the owner in the business. It is composed of:

Original investment

Additional investment

Net income: Revenues

Expenses

Owner's Withdrawal/Drawing/Personal

INCOME STATEMENT
Is a financial statement which shows the result of operation of a business for a given period of time.

Composition:

Revenue: Sales

Service Income

Interest Income

Rent Income

Gain on sale

Expenses: Salaries Expense Insurance expense

Rent expense Advertising expense

Supplies expense Utilities expense

STATEMENT OF CASH FLOWS

 Is a financial statement which shows the sources and uses of cash.

Composition:

Operating activities

Investing activities

Financing activities

Bookkeeping is the chronological recording of business transactions and events.

Value is anything susceptible of pecuniary estimation.

Transaction is the exchange of goods or services for a certain sum of money.

Debit is the left side of an account.

Credit is the right side of an account.

Journalizing is a process of recording transactions on the company's book of accounts.

Journal entry is the record of business transactions and events in the book.

Journal is the book where business transactions are recorded for the first time.

A journal is also known as the book of Original entry.

Chart of accounts is a classified list of account titles.

Ledger is a group of accounts.

A ledger is also known as the book of Final Entry.

Posting is the process of transferring the same information from the journal to the ledger.

T Account is an accounting device used to summarize addition and subtraction by position.

Trial Balance is a proof of the equality of debits and credits.

CHAPTER 2 ACCOUNTING CONCEPTS AND PRINCIPLES

 BASIC ACCOUNTING CONCEPTS
 Separate entity concept. The business is viewed as a separate entity, distinct from its owner(s).
only the transactions of the business are recorded in the books of accounts. The personal transactions of the
business owner(s) are not recorded.
 Historical cost concept (Cost principle). Assets are initially recorded at their acquisition
cost.
 Going concern assumption. The business is assumed to continue to exist for an indefinite period
of time.
 Matching. Some costs are initially recognized as assets and charged as expenses only when the related
revenue is recognized.
 Accrual Basis of accounting. Income is recorded in the period when it is earned rather than when
it is collected, while expense is recorded in the period when it is incurred rather than when it is paid.
 Prudence (or Conservatism). The observance of some degree of caution when exercising
judgements under conditions of uncertainty. Such that, if there is a choice between a potentially
unfavorable outcome and a potentially favorable outcome, the unfavorable one is chosen. This is necessary
so that assets or income are not overstated and liabilities or expenses are not understated.
 Time Period (Reporting Period). The life of the business is divided into series of reporting
periods.
 Stable monetary unit. Assets, liabilities, equity, income and expenses are stated in terms of a
common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of the peso
is regarded as stable. Therefore, changes in the purchasing power of the peso due to inflation are ignored.
 Materiality concept. An item is considered material if its omission or misstatement could
influence economic decisions. Materiality is a matter of professional judgement and is based on the size
and nature of an item being judged.
 Cost-benefit. The costs of processing and communicating information should not exceed the benefits
to be derived from the information’s use.
 Full disclosure principle. Information communicated to users reflect a balance between detail and
conciseness, keeping in mind the cost-benefit principle.
 Consistency concept. Like transactions are accounted for in like manner from period to period.

PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)

The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of the following:
 Philippine Financial Reporting Standards (PFRSs);
 Philippine Accounting Standards (PASs); and
 Interpretations

QUALITATIVE CHARACTERISTICS
I. Fundamental Qualitative Characteristics
 a. Relevance (Predictive Value, Confirmatory Value, Materiality)
b. Faithful Representation (Completeness, Neutrality, Free from error)
II. Enhancing Qualitative Characteristics
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

FUNDAMENTAL VC. ENHANCING

 The fundamental qualitative characteristics are the characteristics that make information useful to users.
 The enhancing qualitative characteristics are the characteristics that enhance the usefulness of information.

RELEVANCE
 Information is relevant if it can affect the decisions of users.
 Relevant information has the following:
 Predictive value. The information can be used in making predictions.
 Confirmatory value. The information can be used in confirming past predictions.
 Materiality is an ‘entity-specific’ aspect of relevance.

FAITHFUL REPRESENTATION
 Faithful representation means the information provides a true, correct and complete depiction of what it
purports to represent.
 Faithfully represented information has the following:
 Completeness – all information necessary for users to understand the phenomenon being
depicted is provided.
 Neutrality – information is selected or presented without bias.
 Free from error – there are no errors in the description and in the process by which the
information is selected and applied.

ENHANCING QUALITATIVE CHARACTERISTICS

 Comparability. The information helps users in identifying similarities and differences between
different sets of information.
 Verifiability. Different users could reach consensus as to what the information purports to represent.
 Timeliness. The information is available to users in time to be able to influence their decisions.
  Understandability. Users are expected to have:
 Reasonable knowledge of business activities; and
 Willingness to analyze the information diligently.

CHAPTER 3 THE ACCOUNTING EQUATION

Assets = Liabilities + Equity

DEFINITIONS
 Assets are the economic resources you control that have resulted from past events and can provide you
with economic benefits.
 Liabilities are your present obligations that have resulted from past events and can require you to give
up economic resources when settling them.
 Equity is assets minus liabilities.

THE EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Equity + Income – Expenses
Assets – Liabilities = Equity + Income – Expenses
Assets – Equity = Liabilities + Income – Expenses
Assets – Income = Liabilities + Equity – Expenses
Assets + Expenses = Liabilities + Equity + Income

DEFINITIONS
Income is increases in economic benefits during the period in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding those relating to investments by the business owner.

Expenses are decreases in economic benefits during the period in the form of decreases in assets, or increases in
liabilities, that result in decreases in equity, excluding those relating to distributions to the business owner.

The difference between income and expenses represents profit or loss.

 CHAPTER 4 TYPES OF MAJOR ACCOUNTS

THE ACCOUNT
An account is the basic storage of information in accounting. It is a record of the increases and decreases in
a specific item of asset, liability, equity, income or expense.

THE T-ACCOUNT

THE FIVE MAJOR ACCOUNTS

 Assets – are the resources you control that have resulted from past events and can provide you with
economic benefits.
 Liabilities – are your present obligations that have resulted from past events and can require you to
give up economic resources when settling them.
 Equity – is assets minus liabilities.
 Income – are increases in economic benefits during the period in the form of inflows or enhancements
of assets or decreases of liabilities that result in increases in equity, other than those relating to investments
by the business owners.
 Expenses – are decreases in economic benefits during the period in the form of outflows or depletions
of assets or increases of liabilities that result in decreases in equity, other than those relating to distributions
to the business owners.
 CLASSIFICATION OF THE FIVE MAJOR ACCOUNTS
BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS
Assets Income
Liabilities Expenses
Equity

CHART OF ACCOUNTS
A chart of accounts is a list of all the accounts used by a business.

COMMON ACCOUNT TITLES

Balance Sheet Accounts

Assets

 Cash
 Accounts receivable
 Allowance for bad debts
 Notes receivable
 Prepaid supplies
 Prepaid rent
 Prepaid insurance
 Land
 Building
 Accumulated depreciation – Building
 Equipment
 Accumulated depreciation – equipment

Liabilities

 Accounts payable
 Notes payable
 Interest payable
 Salaries payable
 Utilities payable
 Unearned

Equity

 Owner’s capital (or Owner’s equity)

 Owner’s drawings

Income Statement Accounts

Income
  Service fees
 Sales
 Interest income
 Gains

Expenses

 Cost of sales (or Cost of goods sold)

 Freight-out
 Salaries expense
 Rent expense
 Utilities expense
 Supplies expense
 Bad debt expense
 Depreciation expense
 Advertising expense
 Insurance expense
 Taxes and licenses
 Transportation and travel expense
 Interest expense
 Miscellaneous expense
 Losses

CHAPTER 7 POSTING TO THE LEDGER

POSTING
The third step in the accounting cycle, is the process of transferring data from the journal to the appropriate
accounts in the ledger.

TRIAL BALANCE
A list of general ledger accounts and their balances. It is prepared to check the equality of total debits and
total credits in the ledger.

TYPES OF TRIAL BALANCE

 Unadjusted trial balance – this is prepared before adjusting entries are made.
 Adjusted trial balance – this is prepared after adjusting entries but before the financial statements
are prepared.
 Post-closing trial balance – this is prepared after the closing process.

ERRORS REVEALED BY A TRIAL BALANCE

  Journalizing or posting one-half of an entry, i.e., a debit without a credit, or vice versa.
 Recording one part of an entry for a different amount than the other part.
 Errors of Transplacement (Slide error) on one side of an entry.
 Error of Transposition on one side of an entry.

ERRORS NOT REVEALED BY A TRIAL BALANCE

 Omitting entirely the entry for a transaction
 Journalizing or posting an entry twice
 Using wrong account with the same normal balance as the correct account
 Wrong computation with the erroneous amount posted to debit and credit sides

LOCATION OF ERRORS IN THE TRIAL BALANCE

Transposition error – error in writing the amount.

Transplacement error slide – error in moving the decimal point.