1.

Rule of Debit and Credit

2. Chart of Accounts
3. Complete Accounting Cycle of a merchandising Business
4. Financial Statements

RULE OF DEBIT AND CREDIT

DEBIT:

1. The values received by the business (Referring to Assets)

2. What the business paid for (Referring to Expenses; Liabilities; And Drawings)

CREDIT:

1. The values parted with or given up by the business (Referring to Assets)

2. The source of the values received by the business (Referring to Capital; Income;
Liabilities)

CHART OF ACCOUNTS

ASSETS

 CURRENT ASSETS

 CASH- Pure cash that is received or paid by the business.

 CASH EQUIVALENTS- assets that can easily liquidated into cash.
 NOTES RECEIVABLE- a written pledge that a customer will pay the business a
fixed amount of money at a certain date.
 ACCOUNTS RECEIVABLE- claims against customers arising from sale of services
or goods on credit.
 INVENTORIES- Products the business sells.
 PREPAID EXPENSES- expenses that the business paid in advance.
 Others: Allowance for bad debts, unused office supplies, prepaid advertising,
rental receivable…

 NON CURRENT ASSETS

 PROPERTY AND EQUIPMENT- tangible assets that are expected to be used

during more than one period.
 ACCUMULATED DEPRECIATION- it is a contra asset account where It shows how
much of the asset's original value has been used up or depreciate.
 INTANGIBLE ASSETS- assets that you can't physically touch, but that have value.
 Others: tools, furniture's and fixtures, office equipment, repair equipment…
LIABILITIES

 CURRENT LIABILITIES
 ACCOUNTS PAYABLE- It is the money or bills that the business needs to pay to
other business.
 NOTES PAYABLE- It is a short-term or long-term loans that a business has taken
and are usually documented in a promissory note.
 ACCRUED LIABILITIES- expenses that have been incurred but not yet paid.
 UNEARNED REVENUES- income already incurred but not yet earned.
 CURRENT PORTION OF LONG-TERM DEBT- portion of a long-term debt that is
due within the next year.
 Others: light and water payable, interest payable, unearned rental income

 NON CURRENT LIABILITIES

 MORTGAGE PAYABLE- long-term liability that represents the amount owed on a
mortgage loan.
 BONDS PAYABLE- are long-term debt securities issued by a corporation or
government entity to raise funds.

OWNER’S EQUITY

 CAPITAL- is the amount of money invested in a business by its owners

 WITHDRAWALS- are amounts of money that owners take out of a business for
personal use.
 INCOME SUMMARY- a temporary account used to close out revenue and
expense accounts at the end of an accounting period.

 INCOME

 SERVICE INCOME- Revenue earned from providing services

 SALES- Revenue earned from selling products.


 EXPENSES

 COST OF SALES- The direct costs associated with producing or acquiring goods
for sale.
 SALARIES OR WAGES EXPENSE- The cost of employee compensation, including
wages, salaries, and benefits.
 TELECOMMUNICATION, ELECTRICITY, FUEL AND WATER EXPENSES- The costs
of utilities used in the business, such as phone, internet, electricity, fuel, and
water.
 SUPPLIES EXPENSE- cost of materials used in the business operations, but not
directly incorporated into the products sold.
 RENT EXPENSE- cost of renting space for the business.
 INSURANCE EXPENSE- cost of insurance coverage for the business, such as
property insurance, liability insurance, or workers' compensation insurance.
 DEPRECIATION EXPENSE- allocation of the cost of long-term assets over their
useful lives.
 UNCOLLECTIBLE ACCOUNTS EXPENSE- estimated amount of accounts receivable
that will not be collected.
 INTEREST EXPPENSE- cost of borrowing money, such as interest on loans or
bonds.

ACCOUNTING CYCLE

1. Journalizing Transactions
 It is a process of recording the business transaction in the accounting records.
 “Books of original entry”
 Only applies in double-entry bookkeeping system.
 Date, Account title, posting reference/PR, debit, credit
 2 column general journal

2. Posting entries to Ledger

 Ledger
 ”book of final entry”
 “Posting” - process of transferring the entries from journal to the accounts in a
ledger.
 Posting is done at the end of the month, when all journal entries for the month
have been recorded.

3. Preparation of trial balance

 Is a list of all accounts and their balances.
 An account is “open” account if it has a balance. “Closed” account if the debits
equal the credits.
 Every month-end to check the equality of debits and credits.

4. Journalizing and posting of adjusting entries

 Adjusting entries are small updates you make to your accounting records to
make sure everything is accurate before you finalize your financial reports. They
help make sure that the amounts you record for income and expenses are
correct.

5. Preparing of worksheet
 Preparation of financial statements by making it easier to transfer data from the
trial balance to the financial statements.

6. Preparation of financial statements

a. Income statement- shows the company's revenues, expenses, and profits or
losses over a specific period.
b. Balance sheet/ statement of financial position- shows the company’s financial
position at a specific point in time, including assets, liabilities, and equity.
c. Cashflow statement- shows how cash flows in and out of the business during a
period, divided into operating, investing, and financing activities.
a) Operating Activities- daily activities such as producing and selling
products, generating revenues, etc.
b) Investing Activities- purchases of long term assets like equipment,
furniture's and fixtures, etc.
c) Financing Activities- transactions between a business and its lenders
and owners to acquire or return resources.
d. Changes in owner’s equity- shows how factors such as profits, losses,
investments, and withdrawals affect the owner’s equity.

7. Closing entries are journalized and posted- it means you're finalizing your
accounting records at the end of an accounting period to prepare for the next
period. This process involves moving temporary account balances to permanent
accounts, essentially resetting the temporary accounts to zero so they can start fresh
in the new period.

8. Footing and ruling the ledgers- closing the books

a. Footing refers to the process of adding up the amounts in each ledger account
and calculating the totals. This step ensures that all entries in the ledger are
accurate and helps identify any discrepancies.
b. Ruling refers to drawing lines in the ledger to separate the entries and totals.
This helps keep the ledger neat and ensures that it is easy to read and
understand.
c. Closing- final step in the accounting cycle for a period. It involves making closing
entries to prepare the accounts for the next period. This step ensures that all
temporary accounts are reset and all financial information is accurately
reflected.

9. Preparation of a post closing trial balance- an essential step in the accounting

cycle that ensures all temporary accounts have been properly closed and that the
ledger accounts are balanced after closing entries have been made. This trial balance
helps verify the accuracy of your financial records and prepares you for the next
accounting period.

10. Preparing opening and reversing entries on the 1st day of the following month.
1. Preparing opening entries- Set up the new period’s ledger with balances
carried over from the last period.
a. Review the Post-Closing Trial Balance:
b. Journalize Opening Entries:
2. Preparing Reversing Entries- Reverse certain previous period adjustments
to make recording in the new period easier.
PREPAID EXPENSE - expenses paid in ADJUSTING ENTRIES
advance but not yet incurred.
BAD DEBTS
UNEARNED INCOME - income already Bad Debt Expense
collected but not yet earned. Allowances for Bad Debt

ACCRUED INCOME - income already DEPRECIATIONS

earned but not yet receive. Depreciation Expense
Accumulated Depreciation
ACCRUED EXPENSE - expense already
incurred but not yet paid. DEFERRALS OF INCOME
Unearned Income
DEFERRED INCOME - income already Income Account
received but not yet earned.
DEFERRALS OF EXPENSE
DEFERRED EXPENSE - expense already Expense Account
paid but not yet incurred. Prepaid Expense Account

ACCRUALS OF INCOME
Receivable Account
Income Account

ACCRUALS OF EXPENSE
Income Account
Payable Account

CLOSING ENTRIES

1. To close all credits to income summary account. (Incomes to debit)

2. To close all debits to income summary account. (expenses to credit)
3. To close income summary account to capital. (capital to debit)
4. To close withdrawals account to capital. (withdrawal to credit)

REVERSING ENTRIES

 REVERSE ACCRUALS- EXPENSE & INCOME

 STATEMENT OF COMPREHENSIVE INCOME

Sales
Less: Sales Return and Allowance
Sales Discounts Net Sales
Net Sales
Sales
Less: Sales Return and
Purchases Allowances
Less: Purchases Return and Allowance Sales Discounts
Purchase Discounts Net Sales
Net Purchases
Add: Freight-in Cost of Sales
Net Cost of Purchase
Merchandise Inventory,
beginning
Merchandise Inventory, 1/1 Purchases
Net Cost of Purchase Less: Purchase Return and
Goods Available for Sale Allowances
Less: Merchandise Inventory, 12/31 Purchase Discounts
Cost of Sales Net Purchases
Add: Freight-in
Net Cost of Purchases
Sales Goods Available for Sale
Less: Cost of Sales Less: Merchandise Inventory,
Gross Profit ending
Less: Operating Expenses Cost of Sales
Net Profit Gross Profit
Less: Operating Expenses
Selling Expenses;
Administrative Expenses;
Net Income
STATEMENT OF CHANGES IN
EQUITY

Capital, Beginning
Add: Net Income
Less Drawings
Capital, Ending STATEMENT OF FINANCIAL
POSITION

Assets = Liabilities + Owner’s Equity

 STATEMENT OF CASH FLOW

Operating Activities
Cash Receipt from Customers
Cash Paid for Salaries…
Net Cash Flow for Operating Activities

Investing Activities
Cash Paid for Office Equipment
Net Cash Flow for Operating Activities

Financing Activities
Cash for Owner's Capital
Cash for Owner's Withdrawal
Net Cash Flow for Operating Activities

Net Increase in Cash and Cash Equivalent