FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

QUARTER 4, MODULE 1

Accounting Cycle
What Is the Accounting Cycle?
The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events
of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its
inclusion in the financial statements.
The key steps in the eight-step accounting cycle include recording journal entries, posting to the general
ledger, calculating trial balances, making adjusting entries, and creating financial statements.

Steps of the Accounting Cycle

There are eight steps to the accounting cycle.
1. Identify Transactions: An organization begins its accounting cycle with the identification of those
transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor,
and so on.
2. Record Transactions in a Journal: Next come recording of transactions using journal entries. The
entries are based on the receipt of an invoice, recognition of a sale, or completion of other economic
events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an account in the general
ledger. The general ledger provides a breakdown of all accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual general ledger
accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal the
total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the
cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are
discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result
of corrections made on the worksheet and the results from the passage of time. For example, an
adjusting entry may accrue interest revenue that has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial
balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the
period using closing entries. These closing entries include transferring net income into retained
earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits
match and the cycle can begin anew.

ILLUSTRATIVE PROBLEM
CHART OFACCOUNTS

ASSETS LIABILITIES
Cash 101 Accounts Payable 201
Accounts Receivable 102 Notes Payable 202
Art Supplies 103 Unearned Income 203
Prepaid Rent 104 Utilities Expense Payable 204
Prepaid Insurance 105
Office Equipment 106 OWNER’S EQUITY
Furniture and Fixtures 107 Ong, Capital 301
Ong, Drawing 302
Service Revenue 303
Salaries Expense 304
Utilities Expense 305
 [Link] Investment
May 2 Gisel Ong loves to watch anime. She draws posters of colourful anime characters.
Sometimes she displays them in her office. To her surprise, many anime fans buy her
drawings and paintings and pace special orders for anime characters of their choice. Thus,
Gisel decided to open Anime World Gallery. Gisel invested ₱300,000 in this initial
endeavour.
ANALYSIS Assets increased. Owner’s equity increased.
RULES Debit increases in assets. Credit increases in owner’s equity.

2. Issuance of Note for Cash

May 3 Gisel Ong issued a promissory note for ₱100,000 loan from Allay Bank. The note carries a
12% interest per annum. The interest and the principal are payable after one year.
ANALYSIS Assets increased. Liabilities increased
RULES Debit increases in assets. Credit increases in liabilities.

3. Acquisition of Office Equipment for Cash

May 5 Ms. Ong acquired office equipment to be used for the office paying ₱180,000 in cash.
ANALYSIS Assets increased. Another asset decreased.
RULES Debit increases in assets. Credit decreases in assets.

4. Acquisition of Furniture Paying Down Payment and the Balance on Account

May 5 Ms. Ong acquired furniture from Bloom’s costing ₱40,000 paying ₱12,000 and the balance
at the end of the month. (Compound entry is need in this transaction.)
ANALYSIS Assets increased. Assets decreased. Liabilities increased.
RULES Debit increases in assets. Credit decreases in assets. Credit increases in liabilities.

5. Advance Payment of Rental

May 6 Gisel Ong rented office space and paid two months rent in advance, all costing ₱ 18,000.
ANALYSIS An asset increased. Another asset decreased.
RULES Debit increases in assets. Credit decreases in assets.

6. Payment of Insurance Premiums

May 7 Ms. Ong paid Asia Insurance Co. ₱ 10,800 for one year insurance of the gallery.
ANALYSIS An asset increased. Another asset decreased.
RULES Debit increases in assets. Credit decreases in assets.

7. Events not Affecting the Accounting Equation (no journal entry)

May 7 Hired a part-time student helper with ₱ 4,000 monthly salary. The student helper started
working the following day.
ANALYSIS There is no entry necessary at this point as the hiring of the student helper has no effect on
the assets, liabilities, and owner’s equity.

8. Purchase of Art Supplies on Account

May 8 The ₱7,200 worth of art supplies ordered from National Book Store were delivered on
account.
ANALYSIS Assets increased. Liabilities increased.
RULES Debit increases in assets. Credit increases in liabilities.

9. Income Earned on Account

May 11 An oil painting of Naruto and an acrylic painting of L was delivered to Mr. Ku To. Gisel
Ong billed Mr. Ku To ₱120,000 for the paintings delivered.
ANALYSIS Assets increased. Owner’s equity increased.
RULES Debit increases in assets. Credit increases in owner’s equity.
 10. Partial Settlement of Accounts Payable
May 12 Ms. Ong paid National Book Store ₱3,000 of the amount owed.
ANALYSIS Assets increased. Liabilities increased.
RULES Debit increases in liabilities. Credit decreases in assets.

11. Partial Settlement of Accounts Receivable

May 15 Ms. Ong received ₱50,000 from Mr. Ku To as partial payment for the anime painting
delivered last May 11.
ANALYSIS An asset increased. An asset decreased.
RULES Debit increases in asset. Credit decreases in assets.

12. Cash Withdrawal by Owner for Personal Use

May 18 Gisel Ong withdrew ₱ 18,000 for personal use.
ANALYSIS Assets decreased. Owner’s equity decreased.
RULES Debit decreases in owner’s equity. Credit decreases in assets.

13. Collection of Unearned Income

May 20 Ms. Ong received ₱ 80,000 cash for a contract to paint Lelouch.
ANALYSIS Assets increased. Liabilities increased.
RULES Debit increases in assets. Credit increases in liabilities.

14. Cash Collection from Income Earned

May 23 Gisel Ong received cash from Ms. Uto San, ₱90,000, for a charcoal poster of Kenshin
Himura.
ANALYSIS Assets increased. Owner’s equity increased.
RULES Debit increases in assets. Credit increases in owner’s equity.

15. Payment of Salaries

May 25 Ms. Ong paid helper’s salary for the month, ₱4,000.
ANALYSIS Assets decreased. Owner’s equity decreased.
RULES Debit decreases in owner’s equity. Credit decreases in assets.

16. Payment of Expenses Incurred

May 29 Gisel Ong paid water bill of ₱ 540 for the month.
ANALYSIS Assets decreased. Owner’s equity decreased.
RULES Debit decreases in owner’s equity. Credit decreases in assets.

17. Unpaid Expenses already consumed

May 30 Ms. Ong received bill from Meralco amounting to ₱ 4,500.
ANALYSIS Liabilities increased. Owner’s equity decreased.
RULES Debit decreases in owner’s equity. Credit increases in liabilities.
On your journal/columnar notebooks, journalize the following transactions:
EXERCISE #1
On May 5, 2021, Too Ly San opens Too Ly Security Service. Presented below are the transactions for the
month of May. Journalize the transactions.

2021
May 5 Mr. Too Ly San deposited ₱ 400,000 of personal funds under the bank account of Too Ly
Security Service.
8 Purchased office equipment from National Book Store ₱ 50,000 on account
11 Paid cash for transportation equipment ₱ 250,000 for use in the business
15 Security services rendered to Till A Lok on account, ₱ 45,000
18 Paid ₱ 25,000 as partial payment for the office equipment purchased from National Book
Store
22 Security Services rendered to various clients for cash ₱ 53,500
25 Mr. Too Ly San loaned from Meter Bank amounting to ₱ 350,000
26 Rendered security services to Jab Less Employment Services on account ₱ 55,800
27 Paid water and electricity bill amounting to ₱ 5,880
29 Paid the office equipment purchased from National Book Store in full

EXERCISE #2
Ms. Brooch Hah decided to invest in the salon business and named her salon “The Broohah Luk Salon”. The
following are the salon’s transactions for the month of August. Journalize the transactions.

2021
August 2 Ms. Brooch Hah invested ₱750,000 in the business.
3 Purchased beauty salon supplies from D’Panots for cash, ₱3,830
5 Bought beauty equipment from Dis Gracia’s Beauty Shop for ₱123,750 on account
8 Rendered beauty services to various clients for cash ₱15,800
9 Paid ₱ 35,500 as partial payment for the beauty equipment purchased from Dis Gracia’s
Beauty Shop
11 Rendered services to various clients on account ₱ 23,750
12 Ms. Brooch loaned from Meter Bank amounting to ₱ 150,000
13 Rendered beauty services to various clients for cash ₱ 22,900
17 Collected partial payment ₱10,500 for the services rendered to clients on August 11
19 Paid the beauty equipment purchased from Dis Gracia’s Beauty Shop in full
23 Rendered beauty services to various clients for cash ₱ 28,640
25 Paid beauticians’ salaries, ₱13,650
27 Collected full payment for the services rendered to clients on August 11
29 Paid the electric bill, ₱5,875
30 Paid the telephone bill, ₱1,500

EXERCISE #3
Journalize the following transactions of Till A Lok Consultancy for the month of January:

2022
Jan 1 Mr. Lok deposited ₱880,000 in the account of the company. He also invested a computer
valued at ₱67,000
2 Consultancy services rendered to Mongolia Corp. on account at ₱75,000
3 Bought ₱700,000 worth of transportation equipment from Mitsubishi on account
7 Consultancy services rendered to various clients for cash ₱190,000
15 Consultancy services rendered to Lolak Co. on account, ₱32,000
16 Paid Mitsubishi Motors in full.
18 Collected ₱15,000 from Lolak Co.
26 Paid electricity for the moth ₱2,540