MODULE 2.

1
REVIEW OF FINANCIAL STATEMENT
PREPARATION, ANALYSIS AND INTERPRETATION

Roselle M. Baltazar, CPA

Instructor
 LEARNING COMPETENCY

The learners should be able to

prepare financial statements
THE ACCOUNTING CYCLE
STEP 1. ANALYSIS OF BUSINESS
TRANSACTIONS
 STEP 1. ANALYSIS OF BUSINESS
TRANSACTIONS
➢Transaction is analyzed to find out if it affects the
company and it needs to be recorded
➢Personal transaction of the owner’s or managers that
do not affect the company should not be recorded
➢Decision may have to be made if transactions need
to be recorded
 STEP 1. ANALYSIS OF BUSINESS
TRANSACTIONS
What you should do:
➢Careful review of the transaction should be made,
whether an asset, liability, equity, revenue and
expense is affected
➢For each account, determine if there is an increase
or decrease
 STEP 1. ANALYSIS OF BUSINESS
TRANSACTIONS
What you should do:
➢Determine if the increase of decrease should be
debited or credited,
➢Follow the rules of debit and credit
Example : Ms. Elna resigned from company
Louie purchased office supplies from NBS
STEP 2. RECORD THIS IN THE
JOURNAL
 STEP 2. RECORD THIS IN THE
JOURNAL
➢USING THE RULES OF DEBIT AND
CREDIT, TRANSACTIONS ARE ENTERED
IN A RECORD CALLED JOURNAL
➢ENTRY MADE IS CALLED JOURNAL
ENTRY
 STEP 2. RECORD THIS IN THE
JOURNAL
➢JOURNAL SERVES AS A RECORD OF WHEN
THE TRANSACTIONS OCCURRED AND WERE
RECORDED
➢SPECIAL JOURNAL WERE MADE FOR
REPETITIVE TRANSACTIONS OR HIGH
VOLUME TRANSACTIONS
 STEP 2. RECORD THIS IN THE
JOURNAL
➢SPECIAL JOURNALS:
o CASH RECEIPTS JOURNAL
o CASH DISBURSEMENTS JOURNAL
o SALES JOURNAL
o PURCHASE JOURNAL
 STEP 2. RECORD THIS IN THE
JOURNAL
➢THE SOURCE DOCUMENT IS THE FILE OR
DOCUMENT (OFFICIAL RECEIPTS, PURCHASE
ORDER, CONTRACT) THAT WILL BE
PROVIDED AS BASIS OR REASON FOR A
JOURNAL ENTRY
 STEP 2. RECORD THIS IN THE
JOURNAL
➢EXAMPLE
➢ MR. J. RESIGNED FROM THE COMPANY
➢ C. DANTO PURCHASED P500 WORTH CASH OF SUPPLIES
FROM ACE HARDWARE
 STEP 3. POST THE TRANSACTION ON
A LEDGER
o A TRANSACTION IS FIRST RECORDED IN
JOURNAL (BOOK OF ORIGINAL ENTRY)
o JOURNAL ENTRIES ARE TRANSFERRED TO
THE ACCOUNTS IN THE LEDGER
o THIS PROCESS IS CALLED “POSTING”
 STEP 3. POST THE TRANSACTION ON
A LEDGER
o LEDGERS PROVIDE CHRONOLOGICAL
DETAILS AS TO HOW TRANSACTIONS
AFFECT INDIVIDUAL ACCOUNTS
o LEDGER HAS 2 TYPES:
o GENERAL LEDGER
o SUBDIDIARY LEDGER
 STEP 3. POST THE TRANSACTION ON
A LEDGER
o GENERAL LEDGER IS THE SUMMARY OF
THE DIFFERENT SUBSIDIARY LEDGERS
o IT SERVES AS CONTROL ACCOUNT
o EXAMPLE: GL FOR A/R SUMMARIZES
BALANCES FOUND IN THE DIFFERENT SL
FOR DIFFERENT CUSTOMERS
 STEP 3. POST THE TRANSACTION ON
A LEDGER
o ILLUSTRATIVE EXAMPLE
J. GAYA, A CPA, IS AN INDEPENDENT AUDITOR WITH ONLY
TWO CLIENTS. THE A/R LEDGER HAS A BALANCE OF P100,000.
HIS TWO CLIENTS ARE A. RANIA AND X CAMPOS. THE SL OF A.
RANIA HAS 25,000. X CAMPOS’ LEDGER BALANCE IS P75,000.
THE SUM OF THE 2 SUBSIDIARY LEDGERS MUST BE EQUAL TO
THE BALANCE IN THE GENERAL LEDGER.
 STEP 4. PREPARE AN UNADJUSTED
TRIAL BALANCE
➢ ERRORS MAY OCCUR IN POSTING DEBITS AND
CREDIT FROM JOURNAL TO LEDGER
➢ ONE WAY TO DETECT IS TO PREPARE A TRIAL
BALANCE
➢ DOUBLE ENTRY BOOKEEPING ALWAYS REQUIRE
THAT DEBIT = CREDIT
➢ THE TRIAL BALANCE VERIFIES EQUALITY
 STEP 4. PREPARE AN UNADJUSTED
TRIAL BALANCE
➢ STEPS IN PREPARING TRIAL BALANCE
➢ INDICATE THE NAME OF THE COMPANY
➢ TITLE OF THE REPORT – TRIAL BALANCE
➢ DATE : AS OF ___________
 STEP 4. PREPARE AN UNADJUSTED
TRIAL BALANCE
➢ LIST THE ACCOUNT IN THE LEFT SIDE AND
INDICATE THE AMOUNT IN THE DEBIT AND
CREDIT COLUMN
➢ TOTAL THE DEBIT AND CREDIT COLUMNS OF
THE TRIAL BALANCE
➢ VERIFY THAT THE TOTAL DEBITS = TOTAL
CREDITS
 STEP 5. MAKE ADJUSTMENTS,
JOURNALIZE ADJUSTING ENTRIES
➢ ADJUSTMENT ON SOME ACCOUNTS ARE NEEDED
IN ORDER TO UPDATE SOME ACCOUNTS DUE TO
THE FOLLOWING REASONS:
o SOME EXPENSES ARE NOT RECORDED DAILY.
EXAMPLE: SUPPLIES ON HAND
o SOME REVENUES AND EXPENSES MAY BE
UNRECORDED
 STEP 5. MAKE ADJUSTMENTS,
JOURNALIZE ADJUSTING ENTRIES
o SOME REVENUE AND EXPENSES ARE EARNED AS
TIME PASSES RATHER THAN AS SEPARATE
TRANSACTIONS. EX. RENT RECEIVED IN ADVANCE
( PORTION MIGHT HAVE BEEN EARNED); PREPAID
EXPENSES: PREPAID INSURANCE, PREPAID RENT
ETC.
 STEP 5. MAKE ADJUSTMENTS,
JOURNALIZE ADJUSTING ENTRIES
o THE JOURNAL ENTRIES THAT BEING THE
ACCOUNTS UP TO DATE ARE CALLED ADJUSTING
ENTRIES;
o THE FOLLOWING ARE NORMALLY ADJUSTED AT
THE END OF A PERIOD:
o ACCRUALS – UNPAID SALARIES, UNPAID
INTEREST EXPENSE, UNPAID UTILITY
EXPENSE, ETC
 STEP 5. MAKE ADJUSTMENTS,
JOURNALIZE ADJUSTING ENTRIES

o PREPAYMENTS – IF THE COMPANY HAS

PREPAID EXPENSES SUCH AS PREPAID RENT,
INSURANCE, THAT CORRECT BALANCE
SHOULD BE ESTABLOSHED AT THE END OF
EACH ACCOUNTING PERIOD
o DEPRECIATION AND AMORTIZATION
o ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNT
STEP 6. PREPARE AN ADJUSTED
TRIAL BALANCE
➢ AN ADJUSTED TRIAL BALANCE IS
PREPARED AFTER TAKING INTO
CONSIDERATION THE EFFECTS OF
THE ADJUSTING ENTRIES.
➢ THIS IS TO ENSURE THAT THE
TOTAL DEBIT BALANCES EQUAL
THE CREDIT BALANCES
 STEP 7. PREPARE THE FINANCIAL
STATEMENTS
o FROM THE ADJUSTED TRIAL BALANCE, THE
FINANCIAL STATEMENTS CAN BE PREPARED.
THESE ARE THE FOLLOWING:
o STATEMENT OF FINANCIAL POSITION
o STATEMENT OF PROFIT AND LOSS
o STATEMENT OF CASH FLOWS
o STATEMENT OF CHANGES IN EQUITY
 STEP 8. MAKE THE CLOSING
ENTRIES
o NOMINAL ACCOUNTS (REVENUE AND EXPENSE
ACCOUNTS) ARE CLOSED TO RETAINED ERNINGS
OR OWNER’S CAPITAL
o THIS IS BECAUSE THEY REFER ON TO A SPECIFIC
PERIOD
o THESE ACCOUNTS ARE ALL INCOME STATEMENT
ACCOUNTS
 STEP 8. MAKE THE CLOSING
ENTRIES
o UPON CLOSING:
o IF THE REVENUE EXCEEDS EXPENSES
DURING AN ACCOUNTING PERIOD,
RETAINED EARNINGS WILL INCREASE
o OTHERWISE, IF EXPENSES EXCEEDS
REVENUE, THE RETAINED EARNINGS WILL
DECREASE
 STEP 8. MAKE THE CLOSING
ENTRIES
o IN CLOSING TEMPORARY ACCOUNTS:
o REVENUE ACCOUNT BALANCES ARE
TRANSFERRED TO AN ACCOUNT, ICMOME
SUMMARY ACCOUNT (PROFIT OR LOSS
SUMMARY)
o EXPENSE ACCOUNT BALANCES ARE ALSO
TRANSFERRED TO INCOME SUMMARY
ACCOUNT
 STEP 8. MAKE THE CLOSING
ENTRIES
o IN CLOSING TEMPORARY ACCOUNTS:
o THE BALANCE OF THE INCOME SUMMARY
(NET INCOME OR NET LOSS IS
TRANSFERRED TO OWNER’S CAPITAL
ACCOUNT
o THE BALANCE OF OWNER’S DRAWRING
ACCOUNT IS TRNASFERRED TO OWNER’S
CAPITAL ACCOUNT
 STEP 9. MAKE A POST CLOSING
TRIAL BALANCE
o A POST CLOSING TRIAL BALANCE SHOWS THE
ACCOUNTS THAT ARE PERMANENT OR REAL.
o THESE ARE THE ACCOUNTS THAT CAN BE
SEEN IN THE BALANCE SHEET
o IT IS PREPARED TO TEST IF THE DR BALANCES
AND CR BALANCES ARE BALANCED AFTER
CLOSING ENTRIES ARE CONSIDERED