ACCO UNTIN G CYCLE

FO R A SERVICE
BUSINESS PART 1
LESSON 4
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 MOST ESSENTIAL LEARNING
COMPETENCIES
Describes the nature of transactions in a service business
Records transactions of a service business in the general journal

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ACCOUNTING CYCLE
• The accounting cycle refers to a series of sequential steps or procedures performed to
accomplish the accounting process. The steps in the cycle and their aims follow:
Step 1: Identification of events to be recorded.
During the Step 2: Transactions are recorded in the journal.
accounting period
Step 3: Journal entries are posted to the ledger.
Step 4: Preparation of a trial balance.
Step 5: Preparation of the worksheet including adjusting entries.
At the end of the Step 6: Preparation of the financial statements.
accounting period
Step 7: Adjusting journal entries are journalized and posted.
Step 8: Closing journal entries are journalized and posted.
Step 9: Preparation of a post-closing trial balance.
At the start of the Step 10: Reversing journal entries are journalized and posted.
next period

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1. TRANSACTION ANALYSIS

• The analysis of transactions should follow these four basic steps:

1. Identify the transaction 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.

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SOURCE DOCUMENTS

• Transactions and events are the starting points in the accounting cycle. By relying on source
documents, transactions and events can be analyzed as to how they will affect performance and
financial position.
• Source documents identify and describe transactions and events entering the accounting
process. These original written evidences contain information about the nature and the
amounts of the transactions.
• These are the bases for the journal entries; some of the more common source documents are
sales invoices, cash register tapes, official receipts, bank deposit slips, bank statements, checks,
purchase orders, time cards and statements of account.

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2. TRANSACTIONS ARE JOURNALIZED
• After the transaction or event has been identified and measured, it is recorded
in the journal. The process of recording a transaction is called journalizing.
– Simple and compound entry:
– In a simple entry, only two accounts are affected. One account is debited and the other
account credited.
– In a compound entry, three or more accounts are required in a journal entry.
• Note that the rules of double-entry system are observed in each transaction:
– Two or more accounts are affected by each transaction.
– The sum of the debits for every transaction equals the sum of the credits.
– The equality of the accounting equation is always maintained.

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INITIAL INVESTMENT (SOURCE OF
ASSETS)
• January 1. Abby Cedi is a social entrepreneur from the East. Abby decided to organize
her wedding consultancy. She invested P500,000 into this entity.
• Analysis: Assets increased. Owner’s equity increased.
• Rules: Increases in assets are recorded by debits. Increases in owner’s equity are
recorded by credits.
• Entry: Dr. CR.
Cash (A) 500,000
Cedi, Capital (OE) 500,000

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RENT PAID IN ADVANCE (EXCHANGE
OF ASSETS)
• January 1. Rented office space and paid two months’ rent in advance, P10,000.
• Analysis: Assets increased. Assets decreased.
• Rules: Increases in assets are recorded by debits. Decreases in assets are
recorded by credits.
• Entry: Dr. CR.
Prepaid Rent (A) 10,000
Cash (A) 10,000

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NOTE ISSUED FOR CASH (SOURCE OF
ASSET)
• January 2. Abby Cedi issued a promissory note for a P300,000 loan from Metrobank.This
availment will be used for the acquisition of a service vehicle.The note carries a
20% interest per annum. The arrangement with the bank is that both the interest
and the principal are payable in full in one year.
• Analysis: Assets increased. Liabilities increased.
• Rules: Increases in assets are recorded by debits. Increases in liabilities are
recorded by credits.
• Entry: Dr. CR.
Cash (A) 300,000
Notes Payable (L) 300,000

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HIRING OF EMPLOYEE (NO ENTRY)

• January 4. Hired an office assistant and an account executive each with a P10,000 monthly
salary. Workdays are Monday to Friday only.
• Analysis: No entry is necessary at this point. They started work immediately.

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SERVICE VEHICLE ACQUIRED FOR
CASH (EXCHANGE OF ASSETS)
• January 4. Acquired service vehicle for P600,000.
• Analysis: Assets increased. Assets decreased.
• Rules: Increases in assets are recorded by debits. Decreases in assets are
recorded by credits.
• Entry: Dr. CR.
Service Vehicle (A) 600,000
Cash (A) 600,000

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INSURANCE PREMIUMS PAID
(EXCHANGE OF ASSETS)
• January 4. Paid prudential Guarantee and Assurance, Inc. P24,000 for a one-year
comprehensive insurance coverage on the service vehicle.
• Analysis: Assets increased. Assets decreased.
• Rules: Increases in assets are recorded by debits. Decreases in assets are
recorded by credits.
• Entry: Dr. CR.
Prepaid Insurance (A) 24,000
Cash (A) 24,000

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OFFICE EQUIPMENT ACQUIRED ON
ACCOUNT (EXCHANGE AND SOURCE OF
ASSETS)
• January 5. Acquired office equipment from Fair and Squire Emporium for P80,000; paying
P30,000 in cash and the balance next month.
Note: A compound entry is needed for this transaction.
• Analysis: Assets increased. Assets decreased. Liabilities increased.
• Rules: Increases in assets are recorded by debits. Decreases in assets are
recorded by credits. Increases in liabilities are recorded by credits.
• Entry: Dr. CR.
Office Equipment (A) 80,000
Cash (A) 30,000
Accounts Payable (L) 50,000

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SUPPLIES PURCHASED ON ACCOUNT
(SOURCE OF ASSETS)
• January 8. Purchased supplies on credit for P15,000 from Express Merchandising.
• Analysis: Assets increased. Liabilities increased.
• Rules: Increases in assets are recorded by debits. Increases in liabilities are
recorded by credits.
• Entry: Dr. CR.
Supplies (A) 15,000
Accounts Payable (L) 15,000

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ACCOUNTS PAYABLE PARTIALLY
SETTLED (USE OF ASSETS)
• January 9. Paid Express Merchandising P8,000 of the amount owed.
• Analysis: Assets decreased. Liabilities decreased.
• Rules: Decreases in assets are recorded by credits. Decreases in liabilities are
recorded by debits.
• Entry: Dr. CR.
Accounts Payable (L) 8,000
Cash (A) 8,000

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REVENUES EARNED AND CASH
COLLECTED (SOURCE OF ASSETS)
• January 9. Coordinated and finalized simple bridal arrangements for three couples and
collected fees of P50,000 per couple. Service include prospecting and selecting
the church reception location, couturier, caterer, car service, flowers, souvenirs
and invitations.
• Analysis: Assets increased. Owner’s equity increased.
• Rules: Increases in assets are recorded by debits. Increases in owner’s equity are
recorded by credits.
• Entry: Dr. CR.
Cash (A) 150,000
Consulting Revenues (OE:I) 150,000

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SALARIES PAID (USE OF ASSETS)

• January 15. Paid salaries, 10,000. The entity pays salaries every 15th and 30th.
• Analysis: Assets decreased. Owner’s equity decreased.
• Rules: Decreases in assets are recorded by credits. Decreases in owner’s equity are
recorded by debits.
• Entry: Dr. CR.
Salaries Expense (OE:E) 10,000
Cash (A) 10,000

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UNEARNED REVENUES COLLECTED
(SOURCE OF ASSETS)
• January 18. The entity is earning additional revenues by referring consulting clients to
friendly hotels, caterers, printers, and couturiers. Received P30,000 advance
fees for three clients referred.
• Analysis: Assets increased. Liability increased.
• Rules: Increases in assets are recorded by debits. Increases in liability are
recorded by credits.
• Entry: Dr. CR.
Cash (A) 30,000
Unearned Referral Revenues (L) 30,000

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REVENUES EARNED ON ACCOUNT
(SOURCE OF ASSETS)
• January 19. Coordinated and finalized elaborate bridal arrangements for three couples and
billed fees of P40,000 per couple. Additional services include documents
preparation, consultation with a feng shui expert as to the ideal wedding date for
prosperity and harmony, provision for limousine service and honeymoon trip.
• Analysis: Assets increased. Owner’s equity increased.
• Rules: Increases in assets are recorded by debits. Increases in owner’s equity are
recorded by credits.
• Entry: Dr. CR.
Accounts Receivable (A) 120,000
Consulting Revenues (OE:I) 120,000

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WITHDRAWAL OF CASH BY OWNER
(USE OF ASSETS)
• January 25. Cedi withdraw P15,000 for personal expenses.
• Analysis: Assets decreased. Owner’s equity decreased.
• Rules: Decreases in assets are recorded by credits. Decreases in owner’s equity are
recorded by debits.
• Entry: Dr. CR.
Cedi, Withdrawals (OE) 15,000
Cash (A) 15,000

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SALARIES PAID (USE OF ASSETS)

• January 30. Paid salaries, 10,000.

• Analysis: Assets decreased. Owner’s equity decreased.
• Rules: Decreases in assets are recorded by credits. Decreases in owner’s equity are
recorded by debits.
• Entry: Dr. CR.
Salaries Expense (OE:E) 10,000
Cash (A) 10,000

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EXPENSES INCURRED BUT UNPAID
(EXCHANGE OF CLAIMS)
• January 30. Received the ICC-BayanTel telephone bill, P5,000.
• Analysis: Liabilities increased. Owner’s equity decreased.
• Rules: Increases in liabilities are recorded by credits. Decreases in owner’s equity are
recorded by debits.
• Entry: Dr. CR.
Utilities Expense (OE:E) 5,000
Utilities Payable (L) 5,000

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ACCOUNTS RECEIVABLE PARTIALLY
COLLECTED (EXCHANGE OF ASSETS)
• January 30. Received P30,000 from two clients for services billed last January 19.
• Analysis: Asset increased. Another asset decreased.
• Rules: Increases in assets are recorded by debits. Decreases in assets are
recorded by credits.
• Entry: Dr. CR.
Cash (A) 30,000
Accounts Receivable (A) 30,000

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EXPENSES INCURRED AND PAID (USE
OF ASSETS)
• January 30. Settled the electricity bill of P8,000 for the month.
• Analysis: Asset decreased. Owner’s equity decreased.
• Rules: Decreases in assets are recorded by credits. Decreases in owner’s equity are
recorded by debits.
• Entry: Dr. CR.
Utilities Expenses (OE:E) 8,000
Cash (A) 8,000

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REFERENCES AND WEBSITES USED IN
THIS LESSON:
• Special Journals. (2015). Cliffsnotes.com. https://www.cliffsnotes.com/study-
guides/accounting/accounting-principles-i/subsidiary-ledgers-and-special-journals/special-
journals
• Subsidiary Ledgers. (2015). Cliffsnotes.com. https://www.cliffsnotes.com/study-
guides/accounting/accounting-principles-i/subsidiary-ledgers-and-special-journals/subsidiary-
ledgers
• Ballada, Win; Ballada, Susan. (2015). Basic Accounting. Ballada, Win and Ballada, Susan.
• Valenzuela-Manalo, M. (2016). Learning to Succeed in Business with Accounting Vol.1. Quezon: The
Phoenix Publishing House Inc,.

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