RESEARCH PAPER: ACCOUNTING

Accounting is the systematic and comprehensive recording of financial transactions pertaining to a

business. Accounting also refers to the process of summarizing, analyzing and reporting these
transactions to oversight agencies, regulators and tax collection entities. The financial statements that
summarize a large company's operations, financial position and cash flows over a particular period are a
concise summary of hundreds of thousands of financial transactions it may have entered into over this
period.

ACCOUNTING CYCLE

An accounting cycle is the collective process of identifying, analyzing, and recording the accounting
events of a company. The series of steps begins when a transaction occurs and ends with its inclusion in
the financial statements. Additional accounting records used during the accounting cycle include the
general ledger and trial balance.

STEPS IN THE ACCOUNTING CYCLE

 Transaction

Transactions: Financial transactions start the process. If there are no financial transactions, there would
be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of
assets, sales revenue, or any expenses incurred.

 Journal Entries

Journal Entries: With the transactions set in place, the next step is to record these entries in the
company’s journal in chronological order. In debiting one or more accounts and crediting one or more
accounts, the debits and credits must always balance.

 Posting to the General Ledger (GL)

Posting to the GL: The journal entries are then posted to the general ledger where a summary of all
transactions to individual accounts can be seen.

 Trial Balance

Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or yearly depending
on the company), a total balance is calculated for the accounts.

 Worksheet

Worksheet: When the debits and credits on the trial balance don’t match, the bookkeeper must look for
errors and make corrective adjustments that are tracked on a worksheet.

 Adjusting Entries

Adjusting Entries: At the end of the company’s accounting period, adjusting entries must be posted to
account for accruals and deferrals.
 Financial Statements

Financial Statements: The balance sheet, income statement and cash flow statement can be prepared
using the correct balances.

 Closing

Closing: The revenue and expense accounts are closed and zeroed out for the next accounting cycle.
This is because revenue and expense accounts are income statement accounts, which show
performance for a specific period. Balance sheet accounts are not closed because they show the
company’s financial position at a certain point in time.

BOOKS OF ACCOUNT

WHAT ARE THE BOOKS OF ACCOUNTS?

Books of Accounts are the accounting books where business transactions are recorded. There are
penalties if you don’t record business transaction in your books of accounts.

Recording can be done using three (3) formats of books of accounts.

WHAT ARE THE THREE (3) FORMATS OF BOOKS OF ACCOUNTS?

A. Manual Books of Accounts

This method is done using traditional books you find in a books and office supplies store. Manual Books
of Accounts are mostly used by micro and small businesses because it’s the easiest to register in the
BIR. Recording is hand written.

You are not required to renew and re-stamp your books to BIR annually. They are only renewed if your
books are already exhausted or used.

B. Loose-leaf Books of Accounts

This method is done using spreadsheet like Microsoft Excel. Some companies use simple QuickBooks
for their bookkeeping and just export their reports in Microsoft Excel.

Those who use this method are required to submit permanently bind loose-leaf forms within 15 days
after the end of each taxable year or upon termination of its use.

C. Computerized Books of Accounts

This is mostly used by big companies. This method is done using complex accounting software.
Generation of Invoices and receipts are usually computerized.

Those who use this method are required to submit reports in CD and other requirements within 30 days
after the end of each taxable year or upon termination of its use.
WHAT ARE THE KINDS OF BOOKS OF ACCOUNTS?

Regardless of the method you will choose, the books of accounts are composed of General Journal and
the General Ledger.

1. General Journal
This is called the book of original entry because this is the first book where the business transaction are
recorded. Journalizing is the process of recording in the journal.

2. General Ledger
This is called the book of final entry. In this book, you can see the ending balance of each account you
record in General Journal and Special Journals. Posting is the process of recording in the general
ledger.

WHAT ARE THE SPECIAL JOURNALS?

Aside from General Journal and Ledger, businesses also use Special Journals. These are multi-column
journals that have columns reserved for specific transaction.
These accounting books are prescribed to ease the recording of the business owner or their
bookkeeper. The four (4) common special journals are:

a. Cash Receipts
This is one of the books of accounts you use to record all cash received by the business.

b. Cash Disbursement
This is one of the books of accounts you use to record all cash paid by the business.

c. Sales Journal
This is one of the books of accounts you use to record all sales including sales of merchandise on
account.

d. Purchase Journal
This is one of the books of accounts you use to record all purchases and disbursements
including purchase of merchandise on account.

Transaction which cannot be recorded in the special journal will be recorded in general journal.

ARE BOOKS OF ACCOUNTS IMPORTANT?

1. When you file your Tax Returns, the books of accounts will serve as your basis.
2. When one (1) of your quarterly gross sales/receipts exceed P150,000, you’re required to have your
books of accounts audit by an independent CPA
3. When you’re lucky, the BIR can send you a letter requesting to see and audit you books of accounts.
WHAT ARE THE THREE (3) THINGS TO REMEMBER?

If you want to avoid BIR Audit and Tax Penalties, here are the things you need to remember:
1. Register your books of accounts to the BIR
2. Keep books of accounts at the place of business
3. Update your books of accounts regularly.

In addition to that, you’re required to keep you books of accounts at least 10 years.

AUDITING

Auditing is defined as conducting an examination of a series of events or activities to verify that those
events or activities are being maintained and recorded in accordance with established guidelines,
policies and procedures. The examination should be conducted by an internal auditor on a periodic basis
and by an independent auditor on an annual basis.

The purpose of auditing is to perform an objective examination and evaluation of the financial statements
of an organization or an individual to make sure that their records are a fair and accurate representation
of the transactions they claim to represent. An audit can be conducted internally by employees of a
business or an outside firm. Having audits done by an outside party can be helpful as it removes any
biases when it comes to the state of a company’s financials. Outside auditors can be candid about their
findings without affecting daily work relationships.

In statements on a specific object, audits look for what is called a “material error”.

Audits are performed by the IRS to verify the accuracy of a taxpayer’s returns or other transactions. IRS
audits usually carry a negative connotation and is seen as evidence of that the taxpayer did something
wrong.

Most companies are audited once a year, while larger companies can receive monthly audits. With some
companies, audits are legally required due to the compelling incentives intentionally misstate financial
information in an attempt to commit fraud. For publicly traded companies, audits might be used as a
resource to evaluate internal controls on financial reports.

EXTERNAL AUDITING

An external auditor is a public accountant who conducts audits, reviews, and other work for his or
her clients. An external audit brings in someone who doesn't work for the company. That gives
regulators, banks and even management confidence that the audit is accurate. Unlike internal auditors
who are hired directly by an organization, external auditors are third-party consultants reviewing
company financial records independently. Under the Securities and Exchange Act, publicly traded
companies are required to consult with an outside auditing professional. External auditors are often
preferred since they haven’t formed relationships with employees and won’t be biased in their findings.
What Are Generally Accepted Auditing Standards (GAAS)?
Generally accepted auditing standards (GAAS) are a set of systematic guidelines used by auditors when
conducting audits on companies' financial records, ensuring the accuracy, consistency, and verifiability of
auditors' actions and reports. The Auditing Standards Board (ASB) of the American Institute of Certified
Public Accountants (AICPA) created GAAS.

GAAS Requirements
Generally accepted auditing standards (GAAS) comprises a list of 10 standards, divided into the following
three sections:

General Standards

1. The auditor must have adequate technical training and proficiency to perform the audit.
2. The auditor must maintain independence in mental attitude in all matters relating to the audit.
3. The auditor must exercise due professional care in the performance of the audit and the
preparation of the auditor's report.

Standards of Field Work

1. The auditor must adequately plan the work and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement of the financial statements whether
due to error or fraud, and to design the nature, timing, and extent of further audit procedures.
3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to
afford a reasonable basis for an opinion regarding the financial statements under audit.

Standards of Reporting

1. The auditor must state in the auditor's report whether the financial statements are presented in
accordance with generally accepted accounting principles.
2. The auditor must identify in the auditor's report those circumstances in which such principles
have not been consistently observed in the current period in relation to the preceding period.
3. If the auditor determines that informative disclosures in the financial statements are not
reasonably adequate, the auditor must so state in the auditor's report.
4. The auditor's report must either express an opinion regarding the financial statements, taken as a
whole, or state that an opinion cannot be expressed. When the auditor cannot express an overall
opinion, the auditor should state the reasons in the auditor's report. In all cases where an
auditor's name is associated with financial statements, the auditor should clearly indicate the
character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the
auditor's report.
 TEST OF TRANSACTIONS:

Auditing procedure related to examining specified transactions and supporting documentation. It is part of
the testing process used by the auditor to check internal-controls reliability. It is undertaken to gather
evidence so that an audit opinion can be rendered as to the fairness of financial statement presentation.
Included in such a test is verifying transaction amounts and tracing transactions to accounts in the
financial statements. Transaction tests are of a much more limited scope than analytical review. In
transaction tests, a selected number of specific transactions are tested to see if controls are performing
properly. A resulting error rate for complying with the procedures is established. Based on the rate of
error, auditors determine if they can rely on the information developed from posting or recording
transactions. The test helps auditors determine the scope of audit work.

TEST OF CONTROLS:

A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to
prevent or detect material misstatements. Depending on the results of this test, auditors may choose
to rely upon a client's system of controls as part of their auditing activities. However, if the test
reveals that controls are weak, the auditors will enhance their use of substantive testing, which
usually increases the cost of an audit. The following are general classifications of tests of controls:
 Reperformance. Auditors may initiate a new transaction, to see which controls are used by the client
and the effectiveness of those controls.
 Observation. Auditors may observe a business process in action and in particular the control
elements of the process.
 Inspection. Auditors may examine business documents for approval signatures, stamps, or review
check marks, which indicate that controls have been performed.
If the inspection approach is used, a test of controls is typically conducted for a sample of documents
related to transactions that occurred throughout the year. Doing so provides evidence that the
system of controls has operated in a reliable manner throughout the reporting period.
A test of controls is made irrespective of the dollar amount of the underlying business transaction.
The main point of the test is to see if a control functions properly, so the dollar amount of a
transaction is not of consequence to the goal of the test.
If the auditors encounter an error in a test of controls, they will expand the sample size and conduct
further testing. If additional errors are found, they will consider whether there is a systematic controls
problem that renders the controls ineffective, or if the errors appear to be isolated instances that do
not reflect upon the overall effectiveness of the control in question.

TEST OF DETAILS

Tests of details are used by auditors to collect evidence that the balances, disclosures, and
underlying transactions associated with a client's financial statements are correct. For example, an
auditor could test the expenses asset account by examining each of the prepaid expenses that
comprise the ending prepaid expenses balance.

CLASSES OF TRANSACTIONS

Transactions are day-to-day accounting events that happen within a company. For example, the company
receives a bill from the telephone company and posts it to accounts payable — that’s a transaction. When
the company pays the bill, that’s another transaction. The term classes of transactions refers to the fact
that the company’s various transactions are divided into categories in its financial statements; like
transactions are grouped together.
Six management assertions are related to classes of transactions. Four of them closely mirror the
assertions represented in the financial statement presentation and disclosure (in the prior section).
However, the way the assertions relate to transactions differs slightly from the way they relate to
presentations and disclosure, as delineated in the following list:

 Occurrence: This means that all the transactions in the accounting records actually took place.
No transactions are made up or are duplicates. For example, if the client records its telephone bill
on the day it’s received and then records it again a few days later, that’s a mistake: The
duplication overstates accounts payable and the telephone expense.

 Completeness: All transactions needing entry into the books are recorded. The business
excludes nothing. For example, the accounts payable clerk’s desk drawer doesn’t have a pile of
unpaid bills waiting for entry into the accounting system. This situation would understate accounts
payable and any expenses that relate to the unpaid bills.

 Authorization: All transactions have been approved by the appropriate member of company
management. For example, many companies have restrictions on check-signing authority,
stipulating that any check written in excess of a certain dollar amount requires two signatures.

 Accuracy: The transactions are entered precisely. The right financial statement accounts reflect
the correct dollar amounts. The telephone bill is for $125, and the clerk enters it for $125. If the
clerk inadvertently transposes the numbers and enters the invoice as $215, that’s a failure of the
accuracy assertion.

 Cutoff: You need to keep a close eye on the cutoff assertion. Some clients just love to move
revenue from one period to another and shift expenses from one period to another. Make sure all
transactions go into the correct year. If the company has a year-end date of December 31 and
receives a bill on that date, it can’t move the expense into the subsequent year to increase
income.
 Classification: The Company records all transactions in the right financial statement account.
Say the client has a high-dollar equipment asset purchase. If the clerk assigns that transaction
to repairs and maintenance expense on the income statement instead of the balance sheet asset
account, that action definitely affects the correctness of both the income statement and balance
sheet and misleads users of the financial statements.