Accounting

for
Service Business
Learning Outcomes
• At the end of the session, the learners will be able to:
1. Explain the accounting cycle.
2. Describe the documents supporting business transactions.
3. Define the commonly used accounting terms.
4. State the rules of debit and credit.
5. Analyze transactions in T-accounts using debit and credit.
6. Make journal entries.
7. Post from the journal to the subsidiary and general ledgers.
8. Prepare a trial balance and explain its use.

FOR INSTRUCTIONAL MATERIALS ONLY

The Accounting Cycle

The accounting cycle refers to a series of sequential steps or

procedures performed to accomplish the accounting process.
Accounting for Business Transactions
A business transaction is the occurrence of an event or a condition that
affects financial position and can be reliably recorded.
1. Identifying of Events to be Recorded.
2. Journalization
3. Posting
4. Trial Balance
5. Preparation of the Worksheet including Adjusting Entries
6. Preparation of the Financial Statements
7. Adjusting Journal Entries are Journalized and Posted
8. Closing Entries are Journalized and Posted
9. Preparation of a Post Closing Trial Balance
10.Reversing Journal Entries are Journalized and Posted.
Financial Transaction Worksheet
Every financial transaction can be analyzed or expressed in terms of its
effects on the accounting equation.

The financial transactions will be analyzed by means of a financial

transaction worksheet which is a form used to analyzed increases and
decreases in the assets, liabilities or owner’s equity of a business
entity.
Source Documents
Transactions and events are the starting points in the accounting cycle.
These are the bases for the journal entries some of the more common
sources are sales invoices, cash register tapes, official receipts, bank
deposit slips, bank statements, checks, purchase orders, time cards
and statement of accounts.
Sale invoice
• An invoice, bill or tab is a commercial document issued by a seller to a
buyer, relating to a sale transaction and indicating the products,
quantities, and agreed prices for products or services the seller had
provided the buyer. Payment terms are usually stated on the invoice.
Cash Register
Tapes
 Official
Receipts
Bank deposit slips
A deposit slip is a form supplied by
a bank for a depositor to fill out,
designed to document in categories the
items included in the deposit
transaction.
Bank
Statements
• a printed record of the
balance in a bank account
and the amounts that
have been paid into it and
withdrawn from it, issued
periodically to the
holder of the account.
Checks

A cheque (or check in American English)

is a document that orders
a bank to pay a specific amount of money
from a person's account
to the person in whose name the cheque
has been issued.
Purchase
Requisition
Purchase Request is a precise document
generated by an internal or external
organization to notify
the purchasing department of items it
needs to order, their quantity, and the
time frame that will be given in the
future.
Purchase Orders
A purchase order (PO) is a commercial
document and first official offer issued
by a buyer to a seller, indicating types,
quantities, and agreed prices for
products or services.
Receiving Report
A receiving report is an internal
document used to record what
materials and inventory were received
by the company.
Credit
Memorandum
• A credit note or credit
memorandum (memo) is a
commercial document issued by a
seller to a buyer. The seller usually
issues ac redit memo for the same or
lower amount than the invoice, and
then repays the money to the buyer or
sets it off against a balance due from
other transactions.
TRANSACTION ANALYSIS
The analysis of transaction should follow these four basic steps
1. Identify the transactions from source documents.
2. Indicate the accounts-either assets, liabilities, equity, income or expenses-affected by
the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit and credit, determine whether to debit or credit the account
to record its increase or decrease.
JOURNALIZATION
The journal is one of the books of accounts. It is also known as the book of
original entry as the company records all the transactions in chronological
order in this book.
A company may have various kinds of journals, but most companies will
most likely have a general journal. This is the most basic form of journal. Its
functions are:
1. To disclose the complete effects of a transaction.
2. To provide a chronological record of the transactions.
3. To assist in the prevention or location of errors which may have been
omitted.
A sample of a journal is illustrated below:

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Breaking down the general journal:
• The first column of the general ledger is reserved for the row
numbers. Usually there is a lightly darker line after every 5 rows for
the convenience of the bookkeeper.
• The second column is reserved for the date, which is divided further
into two sub-columns. The first sub-column is for the abbreviated
month and the second is for the day of the month the transaction
being recorded occurred. The month need not be written again if the
transaction occurred in the same month as the previous transaction
already recorded.

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• The third main column is dedicated to the particulars. This is where
the account titles are written and the explanation for the transaction
that occurred is provided. Items written in this column are recorded
in three levels of indention. The loses to the left border is for the
accounts which are to be debited. Items recorded as the indent
(approximately half an inch) are for the accounts to be credited. And
one more indent after that is reserved for a brief explanation of the
transaction.
• The next column title “Ref.” or “P.R.” stands for the account numbers
of the account titles. Sometimes, “Ref.” is replaced with “P.R.” which
stands for posting reference, since it si trying to link the journal to the
ledger, where entries are posted.

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• The last two main columns are for the peso amounts of each account.
It is commonly divided into 8 sub-columns with the first reserved for
the millions, the next three for the thousands, the next three are for
the ones, and the last sub-column for the centavos. A dash is usually
placed on the last sub-column if the transaction did not involve any
centavo amount. Sometimes, debit is abbreviated as Dr. and credit as
Cr.

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The Account
The general journal is the simplest journal.
Format
1. Date
2. Account Titles and Explanation
3. P.R. (posting reference)
4. Debit
5. Credit

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Simple journal entry – which involves only of two accounts – one deit
and one credit.

Compound journal entry – a transaction will involve more than two

accounts.

Memorandum entry – (memo entry) is a narrative entry with the

purpose of simply reminding or explaining an event that has occurred
in the company, but did not affect the company’s financial position.

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Problem 1
Debits and Credits
The following accounts are used by MBM Services:
1. Cash 8. Buenviaje Capital
2. Accounts Receivable 9. Buenviaje, Withdrawal
3. Supplies 10. Service Revenues
4. Prepaid Insurance 11. Rent Expense
5. Equipment 12. Repairs Expense
6. Notes Payable
7. Accounts Payable

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BMB Services complete the following transactions
Debit Credit
a. Paid for supplies purchased on account last month
b. Billed customers for services performed
c. Paid the current month’s rent.
d. Purchased supplies on credit
e. Received cash from customers for services performed
f. Acquired equipment on account
g. Received a bill for repairs
h. Returned part of the equipment purchased in (f) for credit.
i. Received cash from customer previously billed.
j. Paid the bill received in (g)
k. Booked an appointment for services
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Required:
Analyze each transaction and show the accounted affected by entering
the corresponding numbers in the appropriate debit or credit column.
Indicate no entry, if appropriate.

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Problem 2
Debits and Credits
Innovative Designs, owned by Edman Flores, has been operating for
two years. Below is a series of transactions. For each transaction,
indicate the accounts that should be debited and credited. If no journal
entry is required, write “n/a” in the columns. Use the following account
titles: Cash; Accounts Receivable; Supplies; Prepaid Expenses;
Equipment; Patents; Accounts Payable; Notes Payable; Salaries Payable;
Flores, Capital; Flores, Withdrawals; Service Revenues and Operating
Expenses

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 Transactions Debit Credit
a. Purchased equipment for use in the business; paid one-third cash and
gave a note payable for the balance
b. Paid cash for salaries
c. Collected cash for services performed this period
d. Collected cash for services performed last period
e. Performed services this period on credit
f. Paid operating expenses incurred this period.
g. Paid cash for operating expenses incurred last period
h. Incurred operating expenses this period to be paid next period.
i. Purchased supplies for inventory to be used later; paid cash
j. Used some of the supplies from inventory for operations
k. Purchased a patent (an intangible); paid cash
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 Transactions Debit Credit
l. Made a payment on the equipment note in (a); the payment was
part principal and part interest expense.
m. Collected cash on accounts receivable for services previously
performed.
n. Paid cash on accounts payable for expenses previously incurred
o. On the last day of current period, paid cash for an insurance
policy covering the next twelve months

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Problem 3
In each of the preceding five situations, determine the amount of the
missing element of performance
a.A small accounting firm has income of P325,000 and expenses of P237,000
b.An advertising agency has expenses of P163,000 and profit of P42,000
c.A computer training outfit has expenses of P153,000 and loss of P27,500
d.A medical practitioner has income of P737,000 and profit of P168,000
e.An environment consultant has income of P362,000 and loss of P20,000
JOURNALIZING TRANSACTIONS
Benjamin Benjamin Review School entered into the following
transactions during September 2023:
Date Transactions
September 1 Benjamin made investments of P50,000 cash in the business.
2 Bought a liability insurance for one year, P14,500.
3 Received a bill for advertising from Beinte Singko Oras, P3,200.
4 Paid rent for the month, P8,900.
7 Received a bill for equipment repair from E Kayang I-Irepair Shop, P2,880.
10 Received and deposited tuition fees from students. P62,500.
11 Received and paid the telephone bill, P2,300.
 Date Transactions
September 15 Bought chairs from E. Aesthetics Furntirue, P18,800 paying P8,800 in cash and the balance
on account.
18 Paid accounts to Beinte Singko Oras, P3,200.
21 Benjamin withdrew P8,000 for personal use.
24 Received a bill for gas and oil from Gasoline, Inc., P1,800.
25 Received and deposited tuition from students, P61,400.
27 Paid salaries of office assistants, P12,000.
28 Bought a photocopier on account from Makina Machines, P7,500.00
29 Received P7,000 tuition from a student who had charged the tuition on account last month.
30 Received and paid the water utilities bill, P3,600
31 Paid for the flower arrangements for front office, P620.
31 Benjamin invested personal computer with a fair market value of P12,300, in the business.
Required:
Prepare the journal entries Benjamin Review School. Use the following
accounts: Cash; Accounts Receivable; Prepaid Insurance, Equipment;
Furniture; Accounts Payable; Benjamin, Capital; Benjamin,
Withdrawals; School Fees; Salaries Expense, Rent Expense, Gas and Oil
Expense, Advertising Expense; Repair Expense; Supplies Expense,
Utilities Expense; Telecommunications Expense and Miscellaneous
Expense.
Assignment . Journalizing Transactions.
The chart of accounts for Idedeliver Ko Lahat Service is as follows:
Assets
110 Cash
120 Accounts Receivable
130 Prepaid Insurance
140 Service Vehicle
150 Office Equipment
Liabilities
210 Accounts Payable
Owner’s Equity
310 Santos, Capital
320 Santos, Withdrawals
Income
410 Delivery Revenues

Expenses
510 Salaries Expense
520 Gas ad Oil Expense
530 Repair Expense
540 Advertising Expense
550 Supplies Expense
590 Miscellaneous Expense
The entity completed the following transactions in August of 2023:
Date Transactions

August 3 Placed four week-end advertisements in the MayDyaryoPaBa for P18,500; the amount
due in 30 days
6 Bought supplies on account from Supplies, Inc, P8,800.

15 M. Santos invested in the business own office equipment with a fair market value of
P52,500.
17 Received P61,800 from charge customers to apply on their accounts

22 Received a bill from Mark Trucking for repair services performed, P8,500

26 Paid Supplies, Inc., P8,800 in full payment of account.

29 Paid salaries to employees, P21,000.

 Date Transactions

August 30 Received P39,000 for services performed.

31 Received and paid gasoline and oil bill relating to the service vehicle, P12,500.

31 Billed Lazada Shoppe for services performed, P45,000.

31 M. Santos withdrew cash for personal use P14,500

Required:
Prepare the journal entries for the August transactions
THE LEDGER

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The other books of accounts is known as the ledger.

The purpose of the ledger is to summarize the effects of all business

transactions of the company on a specific account. For this reason, the
ledger is also known as the book of final entry.

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A sample of a ledger is presented below:

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The columns of the ledger are almost similar to that of the journal. One
minor difference is that the posting reference is now replaced by the
journal reference, since it is now trying to link the ledger to the journal.
The journal reference will indicate which page of the general journal
the particular posting was recorded.

Posting is a ledger most closely resembles using a T-account. The

account title is filled at the top mot part, with the account number
beside it for reference. The ledge side of the ledger is reserved for the
amounts debits to that account, accompanied by the date it incurred
and its journal reference. The right side is reserved for the amounts
credited to that account, the date it occurred and its journal reference.
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• The final step in posting is to offset the debits and the credit in order
to arrive at the ending balance of the account.

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THE TRIAL BALANCE

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The Trial Balance
After obtaining the ending balances of all accounts from posting in the
ledger, the next step in the accounting cyle is to prepare the trial
balance.
In a trial balances, all open accounts are summarized.
An account is considered open if it has a balance (either debit or
credit), and an account is considered closed if it has a zero balance
(debit is equal to credit).

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The goal of the trial balance is to ensure that all debits are equal to all
credits after journalizing and posting. This is based on the concept of
double entry bookkeeping where debit must always equal credits.

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• Notice that the accounts are presented with the following order:
assets, liabilities, equity, income, expense. After footing the balances,
the total debit should be equal to the total credit.
• Also notice that not all accounts in the chart of accounts appear in
the trial balance. Again, this is because only open accounts appear in
the trial balance.

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If the total debit is not equal to total credit, then an error has most
likely been committed somewhere in the recording phase.
✓ Some possible areas where these had occurred can be in
journaling the transaction where debits should always equal to credit.
Another set of possibilities is
✓transferring a wrong amount from the journal to the ledger,
✓posting to the wrong account,
✓posting to the debits instead of the credits or vice versa, or
✓simply omitting an entry when posting.
Lastly, an error may also occur when footing all the balances.

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Common types of errors committed are transplacement errors and
transposition errors.
Transplacement errors – occur when the decimal point is erroneously
placed to the left or right of the correct placement. This is sometimes
known as a slide error since the decimal point slides form its correct
placement.
Transposition errors - on the other hand, occurs when an amount is
recorded incorrectly as the result of switching the positions of two or
more digits.

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