THE

ACCOUNTING
CYCLE
(STEPS 1 AND 2)
 STEP 1:
TRANSACTION
ANALYSIS
 BASIC STEPS IN
ANALYZING
TRANSACTIONS:

1. Identify the transactions from source

documents.
- bases for journal entries.
Source documents are the original records of
business transactions. They are important
because they prove, first, that a transaction
occurred, and they also serve as evidence of the
details of that transaction should there ever be a
discrepancy or dispute.
Examples:
1. Sales Invoice
- A sales invoice is an accounting
document sent by a provider of
goods/services to a purchaser. It records
services rendered, items provided, the
amount owed by the customer, and how
they can make payment.
Examples:
2. Bill of Lading
- Document issued by the carrier that
specifies contractual conditions and
terms of delivery such as freight terms,
time, place, and the person named to
receive the goods.
Examples:
3. Statement of Account
- A formal notice to the debtor
detailing the accounts already due.
4. Receipts
- evidences the receipt of cash by the
seller. It notes the invoices paid and other
details of payment.
Examples:
5. Deposit Slips
- are printed forms with depositor's
name, account number and space for
details of the deposit. A validated deposit
slip indicates that cash and checks with
the supplied details were actually
deposited or credited to the account
holder.
Examples:
6. Checks
- a written order to a bank by a
depositor to pay the amount specified in
the check from his checking account to
the person named in the check. The
entity issuing the check is the payor while
the receiver is the payee.
Examples:

7. Purchase Requisition
- is a written request to the purchaser
of an entity from an employee or user
department of the same entity that goods
be purchased.
Examples:

8. Purchase Order
- is an authorization made by the
buyer to the seller to deliver the
merchandise as detailed in the form.
Examples:

9. Receiving Report
- is a document containing information
about goods received from a vendor. It
formally records the quantities and
description of the goods delivered.
Examples:

10. Credit Memorandum

- is a form used by the seller to notify
the buyer that his account is being
decreased due to errors or other factors
requiring adjustments.
Steps in a Purchase
Transaction: When certain items
are needed, the user
Purchase department fills in a
Requisition
purchase requisition
form and sends it to
the purchasing
department.
Steps in a Purchase
Transaction: The purchasing department then
prepares a purchase order after
checking with the price lists, quotations,
Purchase or catalogs of approved vendors. The
Order purchase order, addressed to the
selected vendor, indicates the quantity,
description, and price of the
merchandise ordered. It also indicates
expected payment terms and
transportation arrangements.
Steps in a Purchase
Transaction: After receiving the
purchase order, the seller
Invoice forwards an invoice to the
• Sales Invoice purchaser upon shipment of
• Purchase
Invoice
the merchandise. The
invoice defines the terms of
the transaction.
Steps in a Purchase
Transaction: Upon receiving the
shipment of merchandise, the
Receiving
purchaser's receiving
Report
department sees to it that the
terms in the purchase order
are complied with, and
prepares a receiving report.
Steps in a Purchase Transaction:
Before approving the invoice for
payment, the accounts payable
department compares copies of the
purchase requisition, purchase order,
receiving report and invoice to ensure that
quantities, descriptions, and prices agree.
Purchase Purchase Receiving
Requisition Order Invoice Report
 BASIC STEPS IN
ANALYZING
TRANSACTIONS:
2. Indicate the accounts (Asset,
Liabilities, Equity, Income or
Expense) affected by the
transaction.
 BASIC STEPS IN
ANALYZING
TRANSACTIONS:

3. Ascertain whether each

account is increased or
decreased by the transaction.
 BASIC STEPS IN
ANALYZING
TRANSACTIONS:
4. Using the rules of debit and credit,
determine whether to debit or credit the
account to record its increase or
decrease.
 BOOKS OF ACCOUNTS
Books of Accounts
include documents and
books used in the
preparation of financial
statements. It includes
journals, ledger, cash book
and subsidiary books.
1. General Journal
- Called the “Book of Original Entry”
- A book of account where all
transactions are recorded in
chronological order.
- In the journal, two aspects of every
transaction are recorded, following the
double-entry system of accounting.
2. General Ledger
- Called the “Book of Final Entry”
- A book of account where all
transactions are classified based on
their account titles
3. Special Journals
- Journals designed for transactions that
are repetitive and recurring, in which
the use of the General Journal would
be inefficient. • Sales Journal
• Cash Receipts Journal
• Purchases Journal
• Cash Disbursement Journal
• Sales Journal
- The sales journal is used to
record all sales on credit. This
means the customer has not paid
but we will receive payment in
the future.
• Cash Receipts Journal
- The cash receipt journal is used
to record all transactions that
increase cash for a firm. It also
include those sales on cash.
• Purchases Journal
- A purchases journal is a
specialized type of accounting
log that keeps track of orders
made by a business on credit or
on account.
• Cash Disbursement Journal
- A cash disbursement journal
records all cash outflows for your
business. It also includes those
purchases that are paid on cash.
3. Special Ledgers
- Ledgers that support the main General
Ledger account.
 CHART OF ACCOUNTS
- A listing of all the accounts
and their account numbers.
- The chart is arranged in the
financial statement order.
- If an appropriate account is
not listed in the chart, an
additional account may be
added.
 STEP 2:
TRANSACTIONS ARE
RECORDED IN THE
JOURNAL
 THE JOURNAL
- A chronological record of the entity’s
transaction.
- A journal entry shows all the effects
of a business transaction in terms of
debits and credits.
Format:
1. Date.
- The year and month are not
rewritten for every entry unless the
year or month changes or a new page
is needed.
Format:
2. Account Titles and Explanation.
- The account to be debited is
entered at the extreme left of the first
line while the account to be credited is
entered slightly indented on the next
line. A brief description of the
transaction is usually made on the line
below the credit.
Format:
3. P. R. (posting reference).
-This will be used when the entries
are posted, that is, until the amounts
are transferred to the related ledger
accounts. The posting process will be
described later.
Format:

4. Debit.
- The debit amount for each
account is entered in this column.
Format:

5. Credit.
- The credit amount for each
account is entered in this column.
Illustration:

Assume that Jennifer Perez-

Manalo established her own
wedding consultancy with an
initial investment of P250,000
on May 1.
Simple Entry
- only two accounts are
affected

Example:
The business acquired
equipment on cash for P100,000.
Compound Entry
- three or more accounts are
required in a journal entry.
Example: The business acquired
an equipment for P100,000, 50%
is paid by cash and the balance is
payable within 30 days.
TRANSACTIONS ARE
JOURNALIZED
Initial Investment:
May 1 Jennifer Perez-Manalo
decided to organize her
wedding consultancy. She
invested P250,000 into this
entity.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May P250,00
2 Cash
1 0
Perez-Manalo,
3 P250,000
Capital
To record initial
4
investment.
Rent Paid in Advance

May 1 Rented office space and

paid two months’ rent in
advance, P8,000
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Prepaid Rent P8,000
1
3 Cash P8,000
To record advance
4
payment on rent.
Note Issued for Cash

May 2 Perez-Manalo issued a

promissory note for a P210,000
loan from Metrobank.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May P210,00
2 Cash
2 0
3 Notes Payable P210,000
To record loan on
4
promissory note.
Service Vehicle Acquired for Cash

May 4 Acquired service vehicle

for P420,000
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May P420,00
2 Service Vehicle
4 0
3 Cash P420,000
To record
4 acquisition of
service vehicle.
Insurance Premiums Paid

May 4 Paid Moonlife, Inc.

P14,400 for a one-year
comprehensive insurance
coverage on the service
vehicle.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Prepaid Insurance P14,400
4
3 Cash P14,400
To record payment
4 of insurance good
for one year.
Office Equipment Acquired
on Cash and on Account
May 5 The entity acquired
office equipment for P60,000;
paying P15,000 in cash and
the balance next month.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Office Equipment P60,000
5
3 Cash P15,000
4 Accounts Payable 45,000
To record
acquisition of
5
equipment on cash
Supplies Purchased on Account

May 8 Purchased supplies on

credit for P18,000 from San
Jose Merchandising.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Supplies P18,000
8
3 Accounts Payable P18,000
To record
purchased of
4
supplies on
account.
Accounts Payable Partially
Settled
May 9 Paid San Jose
Merchandising P10,000 of the
amount owed.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Accounts Payable P10,000
9
3 Cash P10,000
To record partial
payment for
4
supplies
purchased.
Revenues Earned

May 10 Rendered simple bridal

arrangements for three couples
and collected P8,800 per
couple
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Cash P26,400
10
3 Consulting Revenue P26,400
To record revenue
earned computed
4
as follows:
P8,800x3=26,400
Salaries Paid

May 13 Paid salaries to

employees in the amount of
P6,600
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Salaries Expense P6,600
13
3 Cash P6,600
To record payment
4
of salaries.
Unearned Revenues

May 15 Received P10,000

advance fees for three clients
referred.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Cash P10,000
15
3 Unearned Revenue P10,000
To record liability
4 from receipt of
advance payments
Revenues Earned on Account

May 19 Rendered elaborate

bridal arrangements for three
couples and billed fees of
P12,000 per couple.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Accounts Receivable P36,000
19
3 Consulting Revenue P36,000
To record services
4 rendered on
account.
Withdrawal of Cash

May 25 Perez-Manalo
withdrew P14,000 for personal
expenses.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May Perez-Manalo,
2 P14,000
25 Withdrawals
3 Cash P14,000
To record owner’s
4
withdrawal.
Salaries Paid

May 27 Paid salaries P7,200

 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Salaries Expense P7,200
27
3 Cash P7,200
To record payment
4
of salaries.
Expenses Incurred but Unpaid

May 30 Received the TDLP

telephone bill, P1,400.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Utilities Expense P1,400
30
3 Utilities Payable P1,400
To record liability
4 from telephone
usage.
Accounts Receivable Partially Collected

May 30 Received P24,000

from two clients for services
billed last May 19.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Cash P24,000
30
3 Accounts Receivable P24,000
To record receipt
of payment from
4
billing to
customers.
Expenses Incurred and Paid

May 31 Settled the electricity

bill of P3,000 for the month.
 Journal page 1
Account Titles and P.
Date Debit Credit
Explanation R.
1 2018
May
2 Utilities Expense P3,000
31
3 Cash P3,000
To record payment
4
of expenses.
THANK YOU