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FINANCIAL ACCOUNTING & REPORTING 3

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Review of the accounting process

Module 004 Week002- FinAcct3 Review of the


Accounting Process
Maintaining a set of accounting records is not optional. Primary users and
regulators require that businesses prepare and retain a set of records and
documents that can be audited. A company that fails to keep an accurate
record of its business transactions may lose revenue and is more likely to
operate inefficiently.
To provide accurate records that is useful to the users in making rational
economic decisions is the primary objective of financial reporting. These
users are vitally interested in receiving summary reports concerning the
enterprise’s financial activities. They are interested in answers to questions
such as:
(a) What are the economic resources being utilized in enterprise normal
course of business?
(b) How efficiently are the economic resources being used in enterprise
activities?
(c) Is the corporation solvent?
(d) Will the enterprise continue to be profitable, pay dividends and remain
solvent?
Financial statements and the accompanying notes are summary reports used
to provide answers to these questions. These statements are the result of a
financial accounting process.

At the end of this module, you will be able to:


1. Define the accounting process
2. Enumerate the steps in the accounting cycle
3. Identify the type of economic event to be recorded
4. Understand how to record transactions in journals
5. Understand how to post to ledger accounts

Course Module
FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

Steps in the accounting cycle

Accounting process is a sequence of interrelated procedures the primary purpose of which


is to produce the entity’s financial statements for a given reporting period.
In today’s technological advances, most companies use computers as an integral part of their
accounting system. Nevertheless, identical accounting steps are followed under both the
manual accounting system and computerized accounting system.
The following are the steps in the accounting cycle, in order:
1. Identify the events to be recorded
2. Journalize transactions and events
3. Post from journal to the ledger
4. Prepare the unadjusted trial balance
5. Journalize and post adjusting entries
6. Prepare the adjusted trial balance
7. Prepare financial statements
8. Journalize post-closing entries
9. Prepare post-closing trial balance
10. Journalize and post reversing entries
A company normally uses these accounting procedures to record transactions and prepare
financial statements.

Identifying and recording transactions and other events

The first step in the accounting cycle is analysis of transactions and selected other events.
The first problem is to determine what to record. Although generally accepted accounting
principles provides guidelines, no simple rules exist that state which events a company
should record. Although changes in a company’s personnel or managerial policies may be
important, the company should no record these items in the accounts. On the other hand, a
company should record all cash sales or purchases – no matter how small.
What to record?
Reportable events – those events that affect the elements of financial statements. They are
classified into external events and internal events.
External events are sub-classified into:
a) Transfers – these are transfer of resources and/ or obligations from or to other
enterprise. They include exchanges (or reciprocal transfers) and non-reciprocal
transfers. They are also called transactions.

Course Module
FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

b) External events other than transfers – examples of these events are change in
interest rates, change in marker values, and other changes in technologies.
Internal events are those that only the entity participates. Examples are depreciation of
property, plant and equipment, consumption of supplies for use in production, and
casualties that affect the entities resources and obligations.
An item should be recognized in the financial statements if it is an element, is measurable, and
is relevant and faithfully represented.

Journalizing business transactions

A company records in accounts those transactions and events that affect its assets,
liabilities, and equities. The general ledger contains all the asset, liability, and shareholders’
equity accounts. An account shows the effect of transactions on particular asset, liability,
equity, revenue, and expense accounts.
Journalization is a process of recording the economic events in the books of original entry
called the journal. These economic events (otherwise known as transactions) are recorded
using the double entry bookkeeping system. Under this system, transactions are recorded
in two-fold effects: the debit and the credit.
In recording the business transactions, the entity may adopt the use of the general journal
only or the special journals.
In its simplest form, a general journal chronologically lists transactions and other events,
expressed in terms of debits and credits to accounts. Each general journal entry consists of
four parts: (1) the accounts and amounts to be debited, (2) the accounts and amounts to be
credited, (3) a date, and (4) an explanation.
In some cases, a company uses special journals in addition to the general journal. Special
journals summarize transactions possessing a common characteristic (e.g. cash receipts,
sales, purchases, cash payments). As a result, using them reduces bookkeeping time.
Special journals normally include the following:
 Sales Journal,
 Cash Receipts Journal,
 Purchases Journal, and
 Cash Payments Journal.

Course Module
FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

Posting to the ledger

Transferring journal entries to the ledger accounts is called posting. Posting involves the
following steps.
1. In the ledger, in the appropriate columns of the account(s) debited, enter the date,
journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the debit
amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date,
journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit
amount was posted.
What is a ledger?
The entries from the journal are then transferred to the books of final entry called ledger.
Ledger is a group of accounts which are systematically categorized into asset, liability,
equity, revenue and expense accounts. It is used to accumulate all the effects of the
transactions during a period in specific accounts.
The numbers in the “Ref.” column of the general journal refer to the ledger accounts to which
a company posts the respective items.
Posting is completed when a company records all of the posting reference numbers opposite
the account titles in the journal. Thus, the number in the posting reference column serves
two purposes. (1) It indicates the ledger account number of the account involved. (2) It
indicates the completion of posting for the particular item.
Types of ledgers
General ledger - serves as the control account in the trial balance.
Subsidiary ledger - provides detail of the balances of the general ledger accounts in the trial
balance.

References and Supplementary Materials

Books and Journals


Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting.;


United States; John Wiley & Sons, Inc.
Course Module
FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

Online Supplementary Reading Materials


A Review of the Acounting Cycle; http://www.clinton.edu/repository/5649.pdf; October
30, 2017

Review of Accounting Cycle;


https://facweb.northseattle.edu/rwoods/ACC251_Folder/Ch02ReviewofAccountingCycle
.htm; October 30, 2017

Course Module
FINANCIAL ACCOUNTING & REPORTING 3
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Review of the accounting process

Online Instructional Videos


The Accounting Cycle;
https://www.bing.com/videos/search?q=review+of+accounting+cycle&&view=detail&mid
=E3695079CD4D48B38840E3695079CD4D48B38840&FORM=VRDGAR; January 10, 2018

Intermediate Accounting I (Review of the Accounting Process 1);


https://www.bing.com/videos/search?q=review+of+accounting+cycle&&view=detail&mid
=305EC4D5EC5D9F95AC6F305EC4D5EC5D9F95AC6F&FORM=VRDGAR; January 10, 2018

Course Module