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FINANCIAL ACCOUNTING AND REPORTING
ACCOUNTING PROCESS
Steps in the Accounting Cycle – There are 9 basic steps in the accounting cycle, which includes 2 phases known
as recording and summarizing.
RECORDING PHASE
1. Analyzing the transaction (business document)- This is where the accountant gathers information from
source documents and determines the impact of the transaction on the financial position as represented by
the equation “assets equals liabilities plus equity”.
2. Journalizing – This is the process of recording the transactions in the appropriate journals. A journal is a
chronological record of transactions also known as the book of original entry. Although all transactions
could be recorded in the general journal, it is more efficient to use special journals in recording a large
number of like transactions. Special journals that enterprises usually use are:
1. Sales Journal – Only sales of merchandise on account are recorded.
2. Cash receipts journal – All types of cash receipts are recorded.
3. Purchase journal – Used to record all purchases on account (merchandise, equipment and
supplies).
4. Cash disbursement journal – All payments of cash for any purpose are recorded.
Type of journal entries according to form:
1. Simple journal entry – One which contains a single debit and a single credit element.
2. Compound journal entry – One which has two or more elements and often representing two or
more transactions.
Accounts are the storage units of accounting information and used to summarize changes in assets,
liabilities and equity including income and expenses. The following are a broad classification of kinds of
accounts:
1. Real account – Statement of financial position or so called permanent accounts. These accounts are
not closed and carryover to the next accounting period. (ex. Cash, AR and PPE)
2. Nominal account – Income statement or temporary capital accounts. These accounts are closed at
the end of the accounting period. (ex. Sales and expenses)
3. Mixed account – A combination of real and nominal accounts. (ex. Prepaid expenses)
4. Clearing account – Holds temporarily certain information pending transfer to other ledger accounts.
5. Controlling account – The general ledger account that summarizes the detailed information in a
subsidiary ledger.
6. Suspense account – Is an account that holds temporarily certain information pending for disposition.
7. Reciprocal account – Has a counterpart in another book with in the entity or in another ledger or
another entity.
8. Principal account – An account that is independent or can stand alone.
9. Auxiliary account – An account that cannot stand alone and are technically neither assets, liabilities
nor income and expenses.
10. Summary account
3. Posting - It is the process of transferring data from the journal to the appropriate accounts in the general
ledger and subsidiary ledger. This process classifies all accounts that were recorded in the journals.
Kinds of ledgers
1. General ledger – Includes all the accounts appearing on the financial statements.
2.Subsidiary ledgers – Affords additional detail in support of certain general ledger accounts.
SUMMARIZING PHASE
4. Preparing the unadjusted trial balance – A list of general ledger accounts with their respective debit or
credit balance. The purpose of the unadjusted trial balance is to provide evidence that the total debits in
the general ledger equal the total credits and prepares the accounts for adjustments.
5. Preparing adjusting entries – To take up accruals, expiration of prepayments and deferrals, estimations
and other events often not signaled by new source documents. Adjusting entries are made at the end of
