Accounting Cycle
The first step is collecting data based on various documents or business papers. The second step, involves
analyzing and recording of the documents in a book called the Journal. The third step involves classifying
and posting from the Journal to another book called the Ledger and preparing a Trial Balance. The
remaining steps in the accounting cycle, which are usually done at the end of the year or the end of the
accounting period.
OFFICIAL
RECEIPT
GENERAL GENERAL
TRIAL
JOURNAL LEDGER
CHECK BALANCE
VOUCHER
Business papers - These are source documents evidencing transactions of a business. Some of the typical
business papers (used by practically all businesses) are the following:
INVOICE – is issued when service or merchandise is given to a customer or client. It has the name of the
entity, tax identification number (TIN), address and phone number, invoice number, date, customer’s name
and address, description of service or merchandise given amount, and signature of employee preparing the
document.
OFFICIAL RECEIPT – is issued wen cash is received by the entity. It gives the following information name of
the entity, TIN, address, phone number, business number, VAT number (if VAT registered), official receipt
number, date, name of the party giving cash, the amount of cash and reason for giving cash, form of
payment and signature of the cashier.
CASH OR CHECK VOUCHER – is a document used when cash is paid or a check is issued. It contains the name
of the entity, its address and telephone number, voucher number and date, name of the payee, amount
paid, check number if check is issued and description of payment. It is signed by the employee preparing it
and the officer authorising the payment. It is also signed by the payee or the person who received the cash
payment.
CHECK is a negotiable instrument used as a substitute for cash, the payment for which drawn against the
entity’s or individual’s current account.
PROMISSORY NOTE – is a written promise to pay a certain sum of money at a future date. The maker is the
debtor (GOMEZ) who makes the promise, addressing it to the payee or creditor (Citibank).
STATEMENT OF ACCOUNT – is a bill presented to a customer for service rendered or merchandise given for
which payment is demandable.
1
Journalizing is the process of recording business transactions in the book of original entry called the Journal.
Journal is called the book of original entry because it is where the transactions are first recorded.
Transactions are recorded in the journal in chronological order, that is, according to the transactions date of
occurrence.
General Ledger is generally a file or book used to keep records of all relevant accounts. The Ledger is used
to track up to five relevant accounting items that include expenses, assets, revenues, liabilities and capital or
ledger is a recorded that details all business accounts and account activity during a period.
Trial Balance is a summary of listing of the account titles and the balance of each account. It is prepared to
test the quality of the debit and credit balances of the accounts in the Ledger.
A T-account is a very useful tool that is used for illustrations, analyzing transactions and in problem solving.
It is called T-account because it resembles big letter T. It appears as follows: or is the simplest form of
account
Debit – is the left side of an account Title of the Account Credit- is the right side of account
Debit Credit
DEBITS AND CREDITS – THE DOUBLE ENTRY SYSTEM - Accounting is based on double-entry system which
means that the dual effects of a business transaction is recorded.
• A debit side entry must have a corresponding credit side entry. For every transaction affects at least
two accounts debited and one or more accounts credited. Each transaction affects at least two
accounts. The total debits for a transaction must always equal the total credits.
• An account is debited when an amount is entered on the left side of the account and credited when
an amount is entered on the right side. The abbreviations for debit DR from the latin debere, and
CR from the latin credere.
• The accounts type determines how increases or decreases in it are recorded. Increases in assets are
recorded as debits ( on the left side of the account) while decrease in assets are recorded as credits
(on the right side).
• Conversely,(introducing a statement or idea.) increase in liabilities and owner’s equity are recorded
by credits and decreases are entered as debits.
RULES of DR and CR
Debit Signifies DR Credit Signifies CR
Increase in Assets Decrease in Assets
Decrease in Liabilities Increase in Liabilities
Decrease in Capital Increase in Capital
Increase in Drawing(withdrawal) Decrease in Drawing
Decrease in Revenue Increase in Revenue
Increase in Expense Decrease in Expense
The accounts in the General Ledger are classified into two general groups:
2
1. Balance Sheet or Permanent Accounts ( Assets, Liabilities and Owner’s Equity).
ASSETS LIABILITIES & OWNER’S EQUITY
DR CR DR CR
(+) (-) (-) (+)
Increase Decrease Decrease Increase
Normal Balance Normal Balance
2. INCOME STATEMENT OR TEMPORARY ACCOUNTS ( Income, and Expenses).
Temporary or nominal accounts are used to gather information for a particular accounting
period. At the end of the period, the balances of these accounts are transferred to a
permanent owner’s equity account.
EXPENSES INCOME
DR CR DR CR
(+) (-) (-) (+)
Normal Balance Normal Balance
Account – is a summary device. It is a detailed record of increases, decreases and balances of each element
or An account is a record of each asset, liability, owner’s equity, revenue and expense items in
In which the effects of business transactions are recorded. Each element of the financial
statement is given specific account title.
A C C O U N T S
DEBIT CREDIT
Increase in Increase in
ASSETS LIABILITIES
EXPENSES OWNER’S EQUITY
INCOME
Decrease in Decrease in
LIABILITIES
OWNER’S CAPITAL ASSETS
INCOME EXPENSES
3
CHART OF ACCOUNTS- is a list of all the accounts of the business and their corresponding account numbers.
Assets accounts are usually numbered starting
The following is Chart of Accounts of VC Portrait:
VC PORTRAIT
Chart of Accounts
Acct. No.
ASSETS
Cash 101
Accounts Receivable 102
Photography Supplies 103
Prepaid Rent 104
Photography Equipment 105
Accumulated Depreciation – Photography Equip. 106
Office Equipment 107
Accumulated Depreciation – Office Equip. 108
LIABILITIES
Accounts Payable 201
Wages Payable 202
Utilities Payable 203
Witholding Taxes Payable 204
SSS Contributions payable 205
PhilHealth Contributions payable 206
CAPITAL
Vic Castro, Capital 301
Vic Castro, Drawing 302
REVENUE
Portrait Revenue 401
Interest Income 402
EXPENSES
Wages Expense 501
Utilities Expense 502
Supplies Expense 503
Depreciation Expense – Photography 504
Depreciation Expense – Office Equipment 505
Rent Expense 506
SSS Contribution Expense 507
PhilHealth Expense 508
4
Miscellaneous Expense 509
COMPREHENSIVE EXAMPLE
Journalizing, Posting and Preparing a Trial Balance will be illustrated using the following business
transactions of VC Portrait.
Vic Castro opened Portrait Studio on December 1, 2017. Following were the company transactions during
the month:
Dec. 1. Began business by depositing ₱300.000.00 in the business checking account.
1. Paid two months rent in advance for the studio, ₱ 40,000.00.
2. Bought photography equipment on account, ₱ 100,000.00
5. Purchased office equipment for cash, ₱ 50,000.00.
8. Purchased photography supplies for cash, ₱ 30,000.00
15. Received cash for Portraits, ₱ 70,000.00.
16. Billed Customers for Portraits, ₱ 25,000.00.
21. Paid for one-half of the photography equipment purchased on Dec. 2, ₱ 50,000.00
22. Paid utility bill for the month of December, ₱ 15,000.00
28. Received payment from customers billed on Dec. 16, ₱ 12,000.00
29. Vic Castro withdrew cash for personal use, ₱ 20,000.00
30. Received cash from customers for Portraits, ₱ 22,000.00
30. Paid wages of employees, ₱ 23,000.00. The payroll voucher showed the following information:
Gross Pay ₱ 25,000.00
Less: Deductions:
Withholding tax ₱ 1,200.00
SSS Contributions 600.00
PhilHealth Contributions 200.00 2,000.00
Net Pay---------------------------------------------------------------₱ 23,000.00.
5
The application of the rules of debit and credit in determining the account or accounts to be debited and
credited are illustrated as follows:
Atty. Alex Flores, decided to start his practice of law by establishing his own law office. The following are the
transactions of the law firm during June, its first month of operation. The accounts affected and whether it is
to be debited or credited are as follows:
June 1 – Cash of ₱200,000 was received from Atty. Flores, the owner as his initial investments in his law
Firm.
Debit – Cash
Credit – Alex Flores, Capital
2 – Purchased office supplies for cash, P5,000.
Debit – Office Supplies
Credit – Cash
3 – Purchased office equipment worth P50,000. Paid P 10,000 cash as down payment and signed a
Promissory note for the balance.
Debit – office equipment
Credit – cash and notes payable
4 – Issued check in payment for the promissory note issued, P 40,000
Debit – notes payable
Credit – cash
5- Received P 50,000 cash from clients for services rendered for cash.
Debit – cash
Credit – Professional fees
6- Billed a client for services rendered on account P30,000.
Debit – accounts receivable
Credit – Professional fees
7 – Received payment from the client to whom services were previously rendered on account.
Debit – cash
Credit – accounts receivable
8 – The owner withdrew P 10,000 cash from the business for personal use.
Debit – Alex Flores, Drawing
Credit – cash
9 - Paid office rent for the month, P8,000
Debit – rent expense
Credit – cash
6
June 1 – The receipt of cash by the company will increase its asset cash, therefore cash is to be debited.
Alex Flores, Capital is to be credited to record the increase in the capital account of the business.
2 – The purchase of office supplies will increase the asset office supplies, so it is to be debited.
Cash is to be credited because the payment will cause to decrease.
3. The asset office equipment will increase so it has to be debited.
The office equipment was not paid in full so the company will have liability for the unpaid balance.
Since the liability is supported by a promissory note, the account to be credited is Notes payable.
Cash is also to be credited because the down payment will cause cash decrease.
4. The payment of a liability will cause liability to decrease, so the liability account, Notes payable is
to be debited. Every time the company pay or will disburse cash, the account cash is credited to
reflect the decrease in cash.
5. The receipt of cash by the business is always recorded by debiting the account cash, whereas, the
earning of revenue is always recorded by crediting the revenue account.
6. The company will have a receivable from the client to whom services were rendered on account.
Therefore , account receivable is to be debited. Again, for a service business, revenue is
considered earned or realized once service have been rendered whether for cash or on
account. That’s why, the revenue account professional fees is to be credited.
7. The collection of a receivable will decrease the receivable account, so it is to be credited.
8. Cash taken by the owner for personal use is to be charged to the owners drawing account.
Withdrawal
______________________
Dr Cr
(+) (-)
9. The payment for rental will increase the balance of the Rent Expense account, so it is to be
debited.
In the transaction, purchased office supplies for cash, the value received is office supplies,
so it is the account to be debited. The value given away is cash, so it is the account to be
credited.
7
8
