The simplest way to start your
• Whatever type of business you are in, merchandising, manufacturing or
service industry, it is essential that you understand the basics of the
accounting operation. Our organization aims to serve your requirements
in this area and we are hoping that at the end of this chapter you will be
guided and understand the basics of accounting.
• Accounting Procedure
• This refers to the accounting process or various steps in obtaining
information relative to the business that will form part of the financial
statement. This information has to be recorded and summarized
• you an overview of general bookkeeping practices and accounting
terminology it is necessary that you understand the accounting equation
and the relationship of all the accounts in the books of accounts of your
organization as follows:
Assets -refers to the tangible and intangible items owned by
the business as valued
Examples of assets are:
•Furnitures & Fixtures
•Land, Building & Equipment
refers to the short and long term payables
of the company derived from acquisition and/or cash proceeds
received from creditor or from any financial institution.
Owner’s Equity - Components of the owners equity can be
simplified by the following equation where;
• Owner’s Equity = Total Assets
=Capital Investment by owner +
Profits/(Losses) or Retained Earnings
• Total Assets
Capital + Retained
The double entry system is used where transactions are recorded either on a
debit or credit side of the equation as the case may be and the following rules
must be followed.
Left side of the equation
Right side of the equation
Increase in Asset
Decrease in Liability
Decrease in Equity due to
Withdrawals by owners
Dicrease in Income
Increase in Expense
Decrease in Assets
Increase in Liability
Increase in Equity due to
Increase in Income
Decrease in Expense
Total - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - --- -- - -- - xxxxx
The Accounting Cycle
• The personnel in charge of the accounting process complete the steps of
the accounting cycles. The workflow includes the tasks of entering
transactions from documentation up to the preparation of the Financial
Statements. Closing the books at the end of the accounting period and
followed the same steps for the next accounting period.
• The following basic step details the tasks to b e done as you start your
general accounting up to its completion:
Journalizing General Journal,
Preparation of postclosing Trial Balance
Posting - General
posting of adjusting
and closing entries
Preparation of a
Compilation of data
Preparation of Work
In the absence of a worksheet it is necessary that all the necessary adjustments are
journalized and posted to update all the account balances in the general ledger before the
preparation of the financial statements.
THE RECORDING PHASE
• Documentation-This refers to the original documents received
to validate the business transactions. Examples of these
documents are the collection receipts, sales invoices, Official
Receipts, Purchase Invoice, Purchase Order, Debit/Credit
Memoranda, Contracts, etc.
Journalizing The process of which transactions are recorded in the general or special journal otherwise known as
the book of original entry since transactions are recorded the first time bearing in mind the debit and credit rules.
The company may use a special journal where transactions occur frequently such sales journal, purchase journal,
cash receipts journal and cash disbursements journal. On the other hand General Journal is a flexible type of
document where almost all the following standard set of accounts issued by the Bureau of Internal Revenue to
identify all business transactions.
Advertising & Promotion
Communication, Light & Water
Fuel & Oil
Janitorial & Messengerial Services
Management and Consultancy
Repair & Maintenance – Labor
Repair & Maintenance - Materials/supplies
Representation & Entertainment
Salaries & Allowances
SSS, GSIS, Medicare, HDMF, and other
Taxes & Licenses
Trainings & Seminars
Transportation & Travel
Total regular allowable itemized deduction (sum of
items 1 – 35)
(To item 63C/D/E/F/G/H)
This is the process of classifying the effects of transactions on specific Asset, Liability, Equity, Income &
Expense accounts. This ledger is called the Book of final entry wherein the recorded transactions from the
journal are transferred. Depending upon the needs of the company, both general ledger and subsidiary
ledger may be used. The General Ledger contained all the accounts that are reported on the financial
statements, namely assets, liabilities, equity, income and expenses.
It may include contra accounts established to record Accumulated Depreciation to show the book value of
the property, plant & equipment. Discount deducted from sales and purchase discounts deducted from
purchases. Adjunct accounts - are accounts set up to effect addition to related accounts such as freight in
to be added to purchases. The subsidiary ledger on the other hand is being used to determine the
composition of account balances found in the general ledger. To illustrate assuming that balance of the
accounts receivables in the General Ledger totals to P20,500.00. Accounts receivables from the subsidiary
ledger enumerates clients with their corresponding account balances.
This is called the Control Account of the general ledger.
This phase includes the necessary steps for the preparation of the periodic
• Preparation of a Trial Balance A summary is prepared for all the account balances in the General
Ledger to obtain a Trial Balance. This will show the balance of the debit
and credit of the statement but it is not a measure of accuracy of the
account balances. Should there be erroneous entry in recording in the
general ledger it may cause variances or effects in the actual trial balance
accounts. For example a debit to accounts receivable was erroneously
debited to notes receivables, recording the same transaction twice, failure
to record a business transaction, etc., etc.
This process requires adjustments that is normally done in the work
Compilation of Data for Adjustment
This is the process of updating balances of certain accounts in the books of the company.
Adjustments based on compiled data are recorded before the preparation of the Financial
Statements. The necessary adjustments are required so that income and expenses may not be
misstated as to the period they are earned and incurred respectively.
Accrued expenses - expenses incurred but
remain unpaid as of the end of the
Accrued Income – Income earned but not yet
received as of the preparation of the
financial statement. It has to be stated to
match with the expenses of the current
Depreciation of property, plant and
equipment and other cost allocation. It is a
systematic allocation of the depreciable
amount of individual item of property, plant
and equipment over its useful life.
Uncollectible accounts – outstanding
accounts receivables that may no longer be
collected and may be considered as bad
Prepaid Expenses –expenses paid in advance
i.e., prepaid insurance premium and rent.
Unearned Income - income received in
advance but not yet earned as of the
statement of the financial position date.
Examples includes advance collection from
rental, subscription, clients miscellaneous
deposits, etc., Deferred income or deferred
revenue normally used for this account.
Inventory - Adjustments are necessary if the
company is using the periodic inventory
Preparing a Worksheet
An accounting worksheet is large table of data which may be
prepared by accountants as an optional intermediate step in an
accounting cycle. The main purpose of a worksheet is that it reduces
the likelyhood of forgeting an adjustment and it reveals arithmatic
errors. A worksheet acts as a tool for an accountant and it is not usually
intented to be used by third parties. It is an informal document.
A typical worksheet consists of a column on the left showing main
account titles and 10 more columns of debits and credits showing trial
balance, adjustments, adjusted trial balance, incomes statement and