American Institute of Certified Public Accountants (AICPA):

"Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions (in making reasoned choices among alternative
courses of action).
Service Activity: Accounting performs important tasks of recording daily transactions, classifying recorded data,
summarizing recorded and classified data in order to prepare financial reports and providing Interpretation of the
summarized facts in informing interested people or users about business operation and financial condition.
And then, we have another definition – one which has been in use for a long time already – by the American
Accounting Association (AAA)
"Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment
and decision by users of the information."
Both of the above definitions and the very nature of accounting suggest its basic purpose – to provide information needed by
users in making economic decisions.

Users of financial information • Customers

• Investors (existing and potential) • Governments and their agencies
• Lenders and other creditors • Public
• Employees

The accounting cycle refers to a series of sequential steps or procedures to accomplish the accounting process. Meaning: This
describes a sequence of actions taken in order to complete the accounting process.
This cycle is repeated each accounting period.
(Introduce the 10 steps first)
 The 1-3 steps in the accounting cycle are accomplished during the period.
 The 4- 9 steps generally occur at the end of the period.
 The 10th step or last step occurs at the beginning of the next period.
ACCOUNTING CYCLE- STEP 1. IDENTIFICATION OF EVENTS TO BE RECORDED
Common source documents:
• Official receipts • Sales invoices • Statement of Account
• Bank deposit slips • Delivery receipts
• Checks • Completion Reports

ACCOUNTING CYCLE- STEP 2. TRANSACTIONS ARE RECORDED IN THE JOURNAL

A journal is a daily record of business transactions that shows in one place the complete debit and credit effect of each
transaction on the accounts of the business in chronological order.
The standard contents of the general journal are as follows:
1. Date. The year and month are not rewritten for every entry unless the year or month changes, or a new page is needed.
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.
3. P.R.(Posting Reference).This will be used when the entries are posted, that the amounts are transferred to the related
ledger accounts
4. Debit. The debit amount for each account is entered in this column.
5. Credit. The credit amount for each account is entered in this column.

To understand what journalizing is all about, one must fully appreciate that debits and credits are fundamental in the
bookkeeping procedure; that this is connected to the accounting equation.
ASSETS = LIABILITIES + OWNER’S EQUITY
To Demonstrate, (show next slide journal entry)
ACCOUNTING CYCLE- STEP 3. JOURNAL ENTRIES ARE POSTED TO THE LEDGER
The ledger is also called the book of final entry, where all of the accounts listed in the company’s chart of accounts are
maintained. This book keeps all the information about the changes in every account balance and often very useful for
management.
An account is used as an accounting tool to record increases and decreases to individual accounting record in a specific asset,
liability, or owner's equity item
The accounts in the general ledger are classified into two general groups:
1. Balance sheet or permanent accounts (assets, liabilities and owner's equity)
2. Income statement or temporary accounts (income and expenses)
(Demonstrate Steps in Posting Journal Entries)

ACCOUNTING CYCLE- STEP 4. PREPARATION OF TRIAL BALANCE

The trial balance is a control device that helps minimize accounting errors. When totals are equal, the trial balance is in
balance.
It is prepared to verify the equality of debits and credits in the ledger at the end of each accounting period or at any time the
postings are updated.
This equality provides an interim proof of the accuracy of the records, but it does not signify the absence of errors.
(Demonstrate student’s learning for step 4)

ACCOUNTING CYCLE- STEP 5. PREPARATION ADJUSTING ENTRIES

Many times, companies will find it difficult to determine in what year they should report some of the revenues they earned and
the expenses incurred. Measuring net income or net loss requires proper timing. The need for proper timing is the reason
why accountants thought of a convenient assumption of dividing the economic life of a business into artificial time periods
known as reporting or accounting period.
This is the basic accounting concept of “periodicity” or “time period”. The time period assumption is important in
accomplishing the fifth step of the accounting cycle which is “adjusting the books”. Step 5 is fairly crucial in the preparation of
accurate or fairly valued financial statements.

It is a common practice for an entity to recognize expense before payment, recognize income before receipt, and pay for an
expense before it is incurred, or received payment before it is earned. (ACCRUAL) This means that accounting records are
maintained using the accrual basis. To accrue means to collect and accumulate.
These being the case, adjusting entries are necessary to present the fair valuation of every account in the financial statements
at the end of every reporting period. Adjusting entries are entries required at the end of each accounting period to
recognize on an accrual basis revenues and expenses for the period and to report proper amounts for assets, liabilities
and owner’s equity accounts.
To adjust the book implies that the entity recognizes expenses, income, depreciation and bad debts accounts at the end of the
accounting period to update the books because of the events that has transpired throughout the period.

ACCOUNTING CYCLE- STEP 6. PREPARING THE WORKSHEET

The worksheet is a multicolumn devised used to systematically assemble the accounting data used in the adjustment process,
financial statements preparation and closing entries. A worksheet is just a temporary accounting record. It is not a journal
or a part of the general ledger.
The worksheet is commonly known as the “working paper” of accountants which makes it easier for them to record
adjusting entries, determines the result of the firm’s operation (whether net income or net loss) and is used as a tool in
preparing financial statements and closing entries. Although the use of worksheet is an optional step in the accounting
cycle, it helps facilitate earlier release of financial statements to interested parties. There are two basic forms in preparing a
worksheet. The first is the ten-column worksheet and the second is the eight column worksheet.
ACCOUNTING CYCLE- STEP 7. PREPARING THE FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
A statement that shows the financial position or condition of an entity by listing the assets, liabilities and owner's equity as at
specific date. The information needed for this statement is the net balances at the end of the period. This statement is also
called the balance sheet.
The balance sheet can be presented in either the report format or the account format. The report format simply lists the
assets, followed by the liabilities then by owner's equity in vertical sequence. The account format lists the assets on the left
and the liabilities and owner's equity on the right.
STATEMENT OF COMPREHENSIVE INCOME
An entity shall present all items of income and expense in a period:
a) In a single statement of comprehensive income, or
b) In two statements:
 a statement displaying components of profit and loss (separate income statement) and second statement beginning with
profit or loss and displaying components of other comprehensive income (statement of comprehensive income).

The income statement is statement showing enterprise in a given period of time. It summarizes the revenues earned and
expenses incurred for that period of time.
STATEMENT OF CHANGES IN EQUITY
It summarizes the changes that, In the case of sole proprietorships, increases in owner's equity arise from additional
investments by the owner and profit during the period, Decreases result from withdrawals by the owner and from loss during
the period.
ACCOUNTING CYCLE- STEP 8. CLOSING JOURNAL ENTRIES ARE JOURNALIZE AND POSTED
After producing the required financial reports at year end, the company performs the closing of the books on the last day of
the current accounting period to prepare the accounts for recording transactions for the next accounting period. The term
closing the books simply refers to setting the balances of the income and expense accounts back to zero.
This step is done by journalizing and posting closing entries in order that net income or net loss may be computed on a yearly
basis. Income and expense accounts are also called nominal or temporary accounts. The closing procedure applies only to
nominal accounts. In step 8, the income and expense accounts are closed to a temporary account called Income
Summary account, which collects or summarizes in one account the total debit for the sum of all expenses and the total credit
for the sum of all income for the period.

The Income Summary account can be likened to a “holding vessel” where the amounts of all nominal accounts are transferred
in order to determine the result of the company’s operation. A credit balance in the Income and Expense Summary means net
income and a debit balance implies net loss for the period covered. The Income Summary account balance under the indirect
method of closing the book will then be closed or transferred to the owner’s drawing account for a sole proprietorship form of
business and finally, the owner’s drawing account is closed or transferred to the owner’s capital account. After recording and
posting the closing entries, all nominal accounts will be closed. This means that the balances of all income and expense
accounts will be equal to zero.
STEPS IN PREPARING CLOSING ENTRIES
1. Close the following accounts to Income Summary- Income and Expense
2. Close Income summary to Capital Account
3. Close withdrawals to the Capital Account

ACCOUNTING CYCLE- STEP 9. PREPARATION OF POST-CLOSING TRIAL BALANCE

After closing the books, only assets, liabilities and capital (real) accounts are left open in the general ledger of the company.
These real account ending balances are to be carried forward to the next accounting period. Step 9, which is the preparation of
the post-closing trial balance, will summarize all these accounts. The post-closing trial balance lists all the real accounts’
balances as of the end of the accounting period covered and would be a final check on the equality of total debits and credits of
all existing accounts with balances in the general ledger. This step ensures that the ledger is in balance for the start of the next
accounting period.

The procedures in the preparation of a trial balance follow:

1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter the debit balances in the debit column and the
credit balance in the credit column.
3. Add debit and credit columns.
4. Compare totals

ACCOUNTING CYCLE- STEP 10. REVERSING ENTRIES ARE JOURNALIZED AND POSTED

Reversing entries are special entries recorded at the beginning of every accounting period to reverse some of the adjusting
entries made on the prior period. Although this is another optional step in the accounting cycle, just like worksheet
preparation, this step may be done for the reason of convenience and consistency. Reversing entries are most often used for
accrual adjustments and for deferral but only if the expense and income method were used. A reversing entry switches
the debit and credit of a previous adjusting entry. The reversing entry is the exact opposite of an adjusting entry recorded on
a prior year.