ACCOUNTING PERIOD AND ACCOUNTING CYCLE

Accounting period or fiscal period is each segment of time, usually a year, in which
statements are prepared in order to know the results of the business operation during that
particular period of time. The length of each accounting period depends on the nature of the
business. An accounting period maybe annual, semi-annual, quarterly or monthly. Usually,
most firms use each period of time when the business is slow as the end of their accounting
period and the beginning of the next accounting period.

Accounting cycle consists of successive steps starting with the recording of

transactions in the books of accounts and ending with a post-closing trial balance.

The following successive steps consist one accounting cycle;

1. Journalizing
2. Posting
3. Preparing the Trial Balance
4. Adjusting entries
5. Preparation of the worksheet
6. Preparation of the financial statements
7. Closing entries
8. Reversing entries
Basic Financial Statements

Financial statements are the means by which the information accumulated

and processed in financial accounting is periodically communicated to the users. In
other words, the financial statements are the end product or main output of the
financial accounting process

The basic financial statements are:

1. Statement of Financial Position- a formal statement showing the financial

position of an entity as of a particular date. The balance sheet presents the
three elements of financial position, namely assets, liabilities and equity.

2. Income Statement/ Statement of Recognized and Expenses- a formal

statement showing the performance of the entity for a given period of time.
The performance of the entity is primarily measured in terms of the level of
income earned by the entity through the effective and efficient utilization of
its resources. This income performance used to be known as the results of
operations of the entity. The format of the income statement is as follows:
3.

4. Statement of Changes in Equity- a required basic statement that shows the

movements in the elements or components of the shareholders’ equity

5. Cash Flow Statement -this statement explains the changes of cash and cash
equivalents during an accounting period.

6. Notes to Financial Statements- are used to report information that does not
fit into the body of the statements in order to enhance the understandability

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 of the statements. They provide additional information and help clarify the
items presented in the financial statements.

Elements of Financial Statements

The elements of financial statements refer to the quantitative information

shown in the balance sheet and income statement. They are the means of
identifying or classifying the items affected by transactions and events. The
elements directly related to the measurement of financial position are assets,
liabilities and equity. The elements directly related to the measurement of
performance are revenue and expenses.

1. Assets. Assets are economic resources owned by the business. They include
properties and other things of value the ownership title of which is in the
name of the business. Assets can be grouped into current assets and
noncurrent assets.

a. Current assets are those assets which can be reasonably converted

into cash within a short period of time, usually within one accounting
period or within the regular operation of the business or normal
operating cycle of business. Regular operation of the business or
normal operating cycle of the business is the period between the
render of service, incase of service concern, to the receipt of cash, and
the period between the acquisition of materials to their conversion into
cash, in case of merchandising and manufacturing concern.

b. Noncurrent assets are those assets which are permanent in nature.

Permanent in such a way that their useful life to the business exceeds
beyond one year. These are used in the operation of the business and
not intended for sale. Examples are building, equipment, furniture and
fixtures.

2. Liabilities are debts or obligations of the business to a party other than its
owner. There are two classifications of liabilities: current and noncurrent
liabilities.

a. Current liabilities are those which are due for payment within a short
period of time or within one year from the balance sheet date. These
obligations require a current asset for payment. Included here are
accounts payable, notes payable, accrued expenses and unearned
income.

b. Noncurrent liabilities are those which mature beyond one year from
the balance sheet date. Examples are mortgage payable, bonds
payable and notes payable due beyond one year.

3. Equity is the “residual interest in the assets of the enterprise after deducting
all its liabilities.” Other terms which can be used synonymously are Capital
and Proprietorship.
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 4. Revenue is the “gross inflow of economic benefit during the period arising in
the course of ordinary activities of an enterprise when those inflows result in
increase in equity other than those relating to contributions from owners.”
Simply stated, revenues are inflows of future economic benefits that increase
equity, other than contributions or investments by owners.

5. Expenses are the “gross outflow of economic benefits during the period in the
course of ordinary activities when those outflows result in decreases in
equity, other than those relating to distribution to owners.” Simply stated,
expenses are consumption or outflows of future economic benefits that
decrease equity, other than distributions or dividends paid to owners.

NOTE: For students enrolled in Entrepreneurship, the process will only be SIMPLE
BOOKKEEPING. Journalizing, Posting, Trial Balance and Financial Statements
(Income Statement and Statement of Financial Position only)

JOURNALIZING
Journalizing is the first step in the accounting cycle. It is the process of recording
business transactions in a journal.

A journal is a book of accounts wherein business transactions are recorded for the
first time. It is also called the book of original entry. There are two kinds of journal- the
general journal and the special journals.

The type of journal to be used depends on the size and need of the business.

General journal is the simplest form of journal wherein the two-column form maybe
used.

A journal entry is a record of business transactions in the journal There are two types
of journal entry: the simple journal entry which contains only one debit and one credit
accounts, and the compound journal entry which contains either one debit and two or moiré
credits; or two or more debits and one credit; or two or more debits and two or more credits.

Need for a journal:

1. To provide in one place a complete record of each transaction. Such will link together
the debits and credits of the transactions.
2. The records make it possible to trace the debits and credits of the accounts when
errors are committed.

A SUMMARY OF JOURNAL ENTRIES (a simplified guide)

Transaction Debit Credit

1. Investment Name of Asset A, Capital

2. Withdrawals A, Drawing Name of Asset

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 3. Purchase of Asset

a. Cash Name of the Asset Cash

b. On Credit Name of the Asset Accounts Payable

4. Sale of Asset

a. Cash Cash Name of Asset

b. On Credit Accounts Receivable Name of Asset

5. Rendering of Service

a. Cash Cash Service Income

b. On Credit Accounts Receivable Service Income

6. Incurrence of Expense

a. On cash Name of Expense Cash

b. On credit (bills) Name of Expense Accounts Payable

7. Payment of Previous Accounts Payable Cash

Accounts

8. Collection of previous Cash Accounts Receivable

Accounts

POSTING
Posting is the process of transferring the records from the journal to the ledger. A
ledger constitutes a group of accounts. It is also called the book of final entry

Need for a ledger:

1. Items of similar nature are grouped together.
2. It is easier to locate the item if an information about it is needed.

The simplest form of a ledger is the “T-account” and the standard form of a ledger is
shown below;

Name of the Item Account

No.
Date Explanation F Debit Credit Balance

Procedure in posting

1. Locate the corresponding account title in the ledger.

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 2. Transfer to the ledger the following information from the journal
a. Date
b. Explanation
c. Amount
Debit accounts from the journal are posted on the debit side of the ledger and credit
accounts are posted on the credit side of the ledger.
3. Place the page number of the journal in which the information was taken to the folio
column of the ledger.
4. Place in the folio column of the journal the page number of the ledger in which the
information was posted.

Inserting the account number in the journal folio column serves two purposes;
a. It serves as a cross-reference when it is desired to trace the amount from one
record to another.
b. Writing the account number in the journal indicates the posting is completed.

For an easier posting, the T-accounts will be used.

Account Name

Debit Credit

For an easier comprehension, if the amount in the general journal is on debit, put
the amount in the debit side.

TRIAL BALANCE
A trial balance is a list of accounts with open balances in the general ledger. It proves
the equality of the debits and the credits in the general ledger.

There are two types of trial balance: the trial balance of balances and the trial
balance of totals. The trial balance of balances contains accounts with open balances .
Accounts with open balances either have a debit balance or a credit balance. An account is
said to have a debit balance if the debit total is more than the credit total and is said to have
a credit balance if the credit total is more than the debit total. If the debit side and credit
side are equal, the account is a zero balance or closed account.

Procedure in trial balance preparation

1. Write the heading of the trial balance. The heading of the trial balance includes the
following;
a. The name of the business or the owner.
b. Title of the list or trial balance
c. Date of the trial balance.

2. Provide a column for the accounts and two money columns- a debit and a credit.

3. The accounts should be written in just one column arranged in the following sequence;
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 a. Assets
b. Liabilities
c. Capital
d. Income
e. Drawing
f. Expenses

4. Write the amounts opposite the corresponding accounts under the debit money column if
the account is a debit balance and under the credit money column if the account is a credit
balance.

5. Foot the money columns. Double rule the totals.

FINANCIAL STATEMENTS
INCOME STATEMENT
Income Statement/ Statement of Recognized and Expenses- a formal
statement showing the performance of the entity for a given period of time.
The performance of the entity is primarily measured in terms of the level of
income earned by the entity through the effective and efficient utilization of
its resources. This income performance used to be known as the results of
operations of the entity. The format of the income statement is as follows:

A Company
Income Statement
For the Period Ended December 31, 20xx

Service Income xxx

Interest income xxx
Total Revenues xxx
Less : Expenses
Salaries Expense xx
Rent Expense xx
Supplies Used xx
Taxes xx
Interest Expense xx xxx
Profit (Loss) xxx

BALANCE SHEET
Statement of Financial Position or Balance Sheet is a formal statement
showing the financial position of an entity as of a particular date. The balance
sheet presents the three elements of financial position, namely assets,
liabilities and equity. The next illustration is the format of the balance sheet.

A Company
Balance Sheet
As of December 31, 2015

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 ASSETS
Current Assets:
Cash xx
Notes Receivable xx
Accounts Receivable xx
Supplies on Hand xx
Prepaid Rent xx , xxx
Noncurrent Assets:
Land xx
Buildings xx
Equipments xx , xxx
Total Assets xxx
LIABILITIES AND OWNER’S EQUITY

Current Liabilities:
Accounts payable xx
Notes payable xx, xxx
Noncurrent Liabilities:
Bonds Payable xx
Mortgage Payable xx , xxx
Total Liabilities xxx
Owner’s Equity:
A, Capital xx
Less: A, Drawing xx
Net Capital xx
Add(Less): Profit ( Loss ) xx , xxx
Total Liabilities & Owner’s Equity xxx

ILLUSTRATIVE PROBLEM
Atty. Allison Villanueva, a young lawyer who owns Villanueva Law Firm, completed the
following transactions during October of the current year;

2016
Oct. 1- Began the practice of law by investing P 20,000 cash and a law library having a
fair
value of P30,000
2- Purchased P7,000 office equipment, paying P5,000 down and giving a promissory
note for the balance.
3- Acquired bonds of 50,000 from a credit fund.

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 4- Purchased P1,200 office supplies and P 6,000 office equipment from Alyssa’s
Trading
on credit.
5- Completed legal work and received P4,500 cash.
10- Paid P600 for insurance premium due.
15- Completed legal work for R. Moore on credit and billed him P8,500.
18- Paid Alyssa’s Trading.
25- Received P 5,000 from R. Moore as partial settlement of his account.
28- Atty. Villanueva withdrew P 2,000 cash for personal use.
30- Sent R. Moore a bill for additional legal services rendered, P 3,500.
31- Paid the salary of the secretary, P5,000.
31- Received a bill from DWRV for advertising of her firm, P3,000.
31- Another bill was received from PLDT, P1,500 for telephone use, P1,200 from
NUVELCO for electricity, and P800 from Bayombong Waterworks for water use

Required: Journalize the foregoing transactions in a general journal. Use the following
account titles in your entries.
Villanueva Law Firm
Chart of Accounts
Assets Capital
11 Cash 31 Villanueva, Capital
12 Accounts Receivable 32 Villanueva, Drawing
13 Office Supplies 41 Service, Income
14 Law Library 51 Salaries Expense
15 Office Equipment 52 Insurance Expense
53 Advertising Expense
54 Utilities Expense
Liabilities
21 Accounts Payable
22 Notes Payable
23 Bonds Payable

Date Explanations F Debit Credit

201 Investment. Naginvest yung owner sa

business, so madadagdagan an gating cash,
6
pag nadagdagan ang cash, idebit (refer to
normal balances). How about the capital,
Oct 1 Cash 20,00 nadagdagan (back to Normal balances) pag
0 nadagdagan ang capital, credit.

Law Library 30,00

0

Villanueva , Capital 50,000

2 Office Equipment 7,000 Bought an Asset. Dalawang transaction

yung 5k, cash, nabawasan ngayon yung cash
Cash 5,000 natin, so credit siya. Ngayon, nabayaran ba
lahat? Hindi di ba? Kaya may liability ka na 2k.
Icredit mo ngayon yun kasi nadagdagan ka ng
Notes Payable 2,000 liability. (refer to normal balances)

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 3 Cash 50,00 Acquisition of Asset thru Liability.
Nagkaroon ng utang na pera. So, umutang
0
tayo ng pera, nadagdagan ang cash natin
pero may liability tayo n anoncurrent,
Bonds Payable 50,000 meaning puwedeng umabot ng lagpas isang
taon.

4 Office Supplies 1,200 Bought Assets. Bumili daw tayo ng supplies,

nagbayad na ba? Hindi pa. So magkakaroon
Office Equipment 6,000 tayo ng utang. May promissory note ba? Wala
kaya Accounts Payable lang. Credit kasi
nadagdagan tayo ng utang.
Accounts Payable 7,200

5 Cash 4,500 Rendered Service. Nagserbis ka, dapat lang

bayaran ka. Nagbayad ba? Yes. Nadagdagan
ka ng Cash kaya debit. Ngayon ano ang
normal balance ng revenue? DI ba always
Service Income 4,500 credit, so yun.

10 Insurance Expense 600 Expenses. Pag may expense, wag katakutan,

always debit the expense at sa credit either
Cash 600 cash or accounts payable lang. Nagbayad ba?
Yes, so credit Cash, agad agad! Basic!

15 Accounts Receivable 8,500 Rendered Service. This time, di pa sila

nagbayad, so instead of cash ang debit,
Service Income 8,500 Accounts Receivable muna. May karapatan
tayong mangolekta.

18 Accounts Payable 7,200 Payment of Previous Accounts. Babayaran

na natin, so pag magbabayad, icacancel natin
yung payable, Nakacredit siya dati diba?
Idebit naman natin ngayon. Tapos siyempre
Cash 7,200 nagbayad ka na, so bawas ang cash.

25 Cash 5,000 Collection of Previous Accounts. Yung

karapatang mangolekta tayo, macoconsume
Accounts Receivable 5,000 na. Mangongolekta na tayo, So
madadagdagan yung cash natin at icacancel
natin yung receivable.

28 Villanueva, Drawing 2,000 Withdrawals. Pag nagwithdraw,

nababawasan yung cash, so credit. At always
Cash 2,000 debit moa ng Drawing account.

30 Accounts Receivable 3,500 Rendered Service. Parang sa 15 lang to.

There is a distinction between sendind and
Service Income 3,500 receiving a bill. Pag nagsend ka ng bill, that
means, may kokolektahin ka, pag nakareceive
ka naman may babayaran ka.

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 31 Salaries Expense 5,000 Expenses. Always debit the expense. Ang
sabi, nagbayad ng cash, so credit cash kasi
Cash 5,000 mababawasan ka ng cash.

31 Advertising Expense 3,000 Expense. Nakareceive tayo ng bill, that

means, may babayaran tayo. So always debit
Accounts Payable 3,000 the expense and credit Accounts Payable
(liability).

31 Utilities Expense 3,500 3,500 Expenses. Again, nakatanggap ng bill so

automatic, may liability tayo (Accounts
Accounts Payable Payable), credit agad yan. Tapos debit Utilities
Expenses, ang electricity, water at telephone
usage ay nakacategorized sa Utilities pag
silent ang problem, pero pag may sinabi sa
problem na magkakahiwalay sila for example,
Telephone Expense, Electricity Expense or
Water Expense, use the specific Expense
account.

The answer to the comprehensive illustration of the whole

accounting cycle will be sent separately in an excel format.
(from journalizing up to the preparation of financial
statements)

COMPREHENSIVE PROBLEM.
The following transactions were completed by Hila Towing Services during its first
month of operations.

May 5 – The owner, Hilario Laya, invested P350,000 cash in the towing
business.
6 – Purchased a tow truck for P250,000 paying P100,000 down,
balance in
6 months.
7 – Paid rent for the garage and office space, P6,200.
8 – Paid business licenses and permits, P1,350.
9 – Received P950 cash for towing services for the day.
10- Paid gasoline and oil for the truck, P500.
11- Sent a bill to a client for towing services, P1,200.
12- Received a check for P500 from the client in May 11 in partial
settlement of account.
13- Paid water and electricity bill, P1,400.
14- Borrowed money from the bank issuing a promissory note for
P12,000.
15- Paid the monthly salary of the driver and office assistant, P6,700.

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 16- Purchased papers and business forms to be used in the office,
P900.
17- Returned business forms which were of the wrong specification and
got
a cash refund, P120.
18- Paid the mechanic who did repair work on the tow truck, P1,100.
19- Hilario withdrew P1,000 cash for his personal use.
20- Purchased additional supplies on account, P1,400.

Required:
1. Journalize the transactions using the following accounts;
Cash Service Income
Accounts Receivable Rent Expense
Office Supplies Taxes and Licenses
Equipment Gasoline and Oil Used
Accounts Payable Utilities Expense
Notes payable Salary Expense
Laya, Capital Repair Expense
Laya, Drawing

2. Post them to T-accounts.

3. Prepare Trial balance
4. Prepare Income Statement and Balance Sheet.

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