CHAPTER 3 (WILLIAMS) Double-entry Accounting – refers to the need for both

debit entries and credit entries, equal in dollar amount,

THE ACCOUNTING CYCLE: CAPTURING ECONOMIC
to record every transaction
EVENTS
The Journal
The Accounting Cycle
Journal – the information about each business
Accounting Cycle – the sequence of accounting
transaction is initially recorded in an accounting record;
procedures used to record, classify, and summarize
is a chronological (day-by-day) record of business
accounting information in financial reports at regular
transactions
intervals
Journal Entry – is a tool for analyzing and describing the
- begins with the initial recording of business
impact of various transactions on a business entity
transactions and concludes with the preparation
of a complete set of formal financial statements ● The ability to describe a transaction in journal
● Cycle – procedures must be repeated entry form requires an understanding of the
continuously to enable the business to prepare nature of the transaction and its effect on the
new, up-to date financial statements at financial position of the business
reasonable intervals
Posting Journal Entry to Ledger
The accounting cycle generally consists of eight specific
Posting – the process of updating ledger accounts for
steps:
the effects of the transactions recorded in the journal
1. Journalize (record) transactions
- involves copying into the ledger accounts
2. Post each journal entry to the appropriate
information that already has been recorded in
ledger accounts
the journal
3. Prepare a trial balance
4. Making end-of-period adjustments WHAT IS NET INCOME?
5. Preparing an adjusted trial balance
6. Preparing financial statements Net Income – is an increase in owners’ equity resulting
7. Journalizing and posting closing entries from the profitable operation of business
8. Preparing an after-closing trial balance - is a computation of the overall effects of many
The Role of Accounting Records business transactions on owners’ equity

1. Establishing accountability for the assets and/or Retained Earnings – where owner’s equity reflects from
transactions under an individual’s control profitable or unprofitable operations
2. Keeping track of routine business - represents the total net income of the
activities—such as the amounts of money in corporation over the entire lifetime of the
company bank accounts, amounts due from business, less all of the dividends to its
credit customers, or amounts owed to suppliers stockholders
3. Obtaining detailed information about a ● Retained Earnings represent the earnings that
particular transaction have been retained by the corporation to
4. Evaluating the efficiency and performance of finance growth
various departments within the organization
5. Maintaining documentary evidence of the Dividends - a policy of distributing to their stockholders
company’s business activities some of the resources generated by profitable
operations (for corporations)
Account/ Ledger Account – the record used to keep
track of the increases and decreases in financial Income Statement Preview
statement items Income Statement – summarizes the profitability of a
Ledger – an accounting record where the entire group of business entity for a specified period of time
accounts is kept together
 ● In this statement, net income is determined by periods before they will view the expenditure as
comparing sales prices of goods or services sold creating an asset
during the period with the costs incurred by the
The Accrual Basis of Accounting
business in delivering these goods or services
● We cannot evaluate net income unless it is Accrual Basis of Accounting – to measure the
associated with a specific time period profitability of the economic activities conducted during
the accounting period; revenue and matching principle
Accounting periods – the period of time covered by an
income statement Cash Basis Accounting – revenue is recognized when
cash is collected and expenses is recognized when
Time period principle – is one of the underlying
payments of cash is made
accounting principles that guide the interpretation of
financial events and the preparation of financial - measures the amounts of cash received and
statements paid out during the period, but it does not
provide a good measure of the profitability of
Fiscal year – 12-month accounting period
activities undertaken during the period
Accounting terms: Revenue and Expense
Dividends – is a distribution of assets (usually cash) by a
Revenue – is the price of goods sold and services corporation to its stockholders
rendered during a given accounting period
- are not an expense, and they are not deducted
- is the gross increase in owners’ equity resulting from revenue in the income statement
from operation of the business
Trial Balance – proof of the equality of debit and credit
● Realization Principle indicates that revenue
balances; a two-column schedule listing the names and
should be recognized at the time goods are sold
balances of all the accounts in the order in which they
or services are rendered; kung kalian ka
appear in the ledger
nagprovide kahit na hindi pa sila nagbabayad
● Most companies, updates its Retained Earnings
Expenses – are the costs of the goods and services used
balance only once each year
up in the process of earning revenue
Uses and Limitations of the Trial Balance
- the cost of the various activities necessary to
carry on a business; “cost of doing business” The agreement of the debit and credit totals of the trial
● Matching Principle – the concept of offsetting balance gives assurance that:
expenses against revenue on a basis of cause
and effect 1. Equal debits and credits have been recorded for
all transactions
In measuring the net income of a business for a period 2. The addition of the account balances in the trial
of one year or less, accountants must estimate what balance has been performed correctly
portion of the cost of the building and other long-lived
assets is applicable to the current year The preparation of a trial balance does not prove that
transactions have been correctly analyzed and recorded
Since the allocations of these costs are estimates rather in the proper accounts.
than precise measurements, it follows that income
statements should be regarded as useful
approximations of net income rather than as absolutely
correct measurements

Conservatism – applying the accounting treatment that

results in the lowest (most conservative) estimate of net
income for the current period

● Accountants require objective evidence that an CHAPTER 3 (WILD)

expenditure will produce revenue in future
ADJUSTING ACCOUNTS AND PREPARING FINANICAL
STATEMENTS

Time period assumption – presumes that an

organization’s activities can be divided into specific time
periods such as a month, a three-month quarter, a
six-month interval, or a year

Annual financial statements – reports covering a

one-year period

Interim financial statements – covering one, three, or six

months of activity

Fiscal year – covers one year of financial statements but

do not end at December 31

Accrual Basis Accounting vs. Cash Basis Accounting

Accrual basis of accounting – uses the adjusting process

to recognize revenues when earned and expenses when
incurred

- increases the comparability of financial

statements from one period to another

Cash basis of accounting – recognizes revenues when

cash is received and records expenses when cash is
paid; not consistent with generally accepted accounting
principles