LESSON 7: BUSINESS TRANSACTIONS AND THEIR ANALYSIS AS APPLIED TO THE

ACCOUNTING CYCLE OF A SERVICE FIRM (Part I)

A service business provides a needed service for a fee. In general, service businesses actually have
no physical product sold to clients. Their services are designed to facilitate the work of clients and in
return are paid. Service businesses include salons or barbershops, laundry services, car repairs, medical
GATEWAY INTEGRATED SCHOOL centers and services of professionals like lawyers and doctors. The revenue of a service business is
OF SCIENCE AND TECHNOLOGY GEN. TRIAS CAMPUS usually realized once the service has been substantially completed. Aside from the minor supplies, the
Sitio Tinungan Brgy. Manggahan Gen. Trias City Cavite service business does not maintain a high level of inventory as compared to merchandising and
manufacturing businesses. In relatively small service businesses, all transactions are on cash payments.
This means sales are collected immediately while most expenses are paid outright in the form of cash

Senior High School Department or checks. The typical financial transactions recorded for a service company include collecting a deposit
from the customer, providing the service and receiving payment. Ask the learners to assist you in
walking through the operations of certain service business. Use a repair shop of TVs and other electrical

Module 7 appliances as an example. Ask the learners what events or transactions usually occur in a repair shop.
Accounting Cycle of a Service Business
FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

The accounting cycle is a continuous process of accumulating, summarizing and reporting

financial information. The steps include:
Step 1 - Transactions and/or Events
Identification and measurement of external transactions and internal events. At this stage, the
documents used by the business are analyzed whether it has financial impact or effect. Recall the rule
that only financial transactions are recorded and that the amount can be measured. These two
conditions must exist in order that a particular transaction is recognized or recorded. As defined,
financial transactions are those activities that change the value of an asset, liability or an equity.
Examples of financial transactions:
Prepared by:
 Receipt of cash from a client as advance payment to repair a computer. In this case (asset) will
MS. SHIRLY S. CAÑETE increase. At the same time, the advances from client (liability) will also increase. The advances
Subject Teacher from client is a liability because the business has the obligation to render future service to the
client.
__________________________________________________________
 Payment of electric bill is a financial transaction. This will decrease the cash (asset) and reduce the
Name of Student
income of the business at the same time.
__________________________________________________________ Examples of non-financial transactions:
Grade Level and Section  hiring and termination of employees
 recognition from the government as most outstanding business
Date: ________________________  death of owner

1|Fundamentals of Accountancy, Business, and Management 1

 The information needed when recording transactions are taken from forms used to document Purchase Returns &
1601 Accum Deprn - Off Eqpt 5101
these transactions. In a typical service business, the following are the business documents used: Allowances
1. Official Receipt or Cash Receipt 1650 Store Equipment 5102 Purchase Discounts
This document is used when a business receives money or a check. An 1651 Accum Deprn - Store Eqpt 5103 Freight In
Official Receipt or Cash Receipt is a document that acknowledges that 1680 Transportation Equipment 6100 Salaries Expense
money or a check have been received.
1681 Accum Deprn - Trans Eqpt 6150 Supplies Expense
2. Charge Invoice or Sales Invoice
1750 Building 6200 Utilities Expense
A charge invoice is a document used when a service has been
1751 Accum Deprn - Building 6220 Communication Expense
rendered, but the client will be billed only after a certain number of
days from the date of service. Often, a company will issue a statement 1800 Land 6250 Travel Expense
of account to a customer, with the charge or sales invoice attached. 1900 Intangible Assets 6300 Rental Expense
For example: in a laundry business, a customer may avail of the 2000 Accounts Payable 6350 Fuel Expenses
services of the business. However, that customer and the owner of the 2100 Notes Payable 6400 Advertising Expense
business had a prior agreement that all services availed by the
customer will be paid only after 30 days. In this case, a charge invoice 2200 Accrued Expenses 6410 Delivery Expense
is issued on the day the client availed of the services. 2201 Salaries Payable 6450 Commission Expense
3. Check or Cash Voucher 2202 2202 Utilities Payable 6500 Depreciation Expense
The check voucher is a document used when a check is issued to pay a 2300 Income Taxes Payable 6600 Taxes and Licenses
certain supplier or vendor. For example, in a laundry business, for the 3000 Owner’s, Capital 6700 Interest Expense
payment of monthly electricity bills, the business may pay either in 3100 Owner’s, Withdrawal
cash or check. But the company must prepare a cash or check voucher
to support this payment. This document will serve as a record of PREPARATION OF JOURNAL ENTRIES (JOURNALIZATION)
payment and, at the same time, as proof that payment has been made Through the use of specialized journals (such as those for sales, purchases, cash receipts, and
by the company. cash disbursements) and the general journal, transactions and events are entered into the accounting
CHART OF ACCOUNTS records. These are called the books of original entry.
The Chart of Accounts is a listing of all account titles used in the business to record all the Debits and Credits are an integral part of the journalization process. In accounting, debits or
transactions. It is arranged according to the order of their appearance in the financial statements. Refer credits are abbreviated as DR and CR respectively.
to Table X. When to Debit and when to Credit: An increase in an asset account is called a debit and an
TABLE X. SAMPLE CHART OF ACCOUNTS increase in a liability or equity account is called a credit. Likewise, if we decrease an asset account we
credit that account. On the other side of the equation, if we decrease a liability or equity account we
ACCOUNT ACCOUNT
ACCOUNT TITLE ACCOUNT TITLE debit those accounts.
CODE CODE
Statement of Financial Position Accounts Income Statement Accounts Rules on Debits and Credits
1000 Cash 4000 Service Revenue  The name of the account to be debited is always listed first. The debited account is listed on
the first line with the amount in the left side of the register.
1200 Accounts Receivable 4100 Sales
 The credited account is listed on the second line and is usually indented. The credited amount
Sales Returns and
1201 Allowance for Bad Debts 4101 is recorded on the right side of the register.
Allowances
 The total amount of debit should always equal the total amount of credit.
1300 Inventory 4102 Sales Discounts
Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer
1400 Prepaid Expenses 4150 Interest Income
repair shop on February 14, 2019, naming it Matapang Computer Repairs. Pedro knows that business
1500 Supplies 5000 Cost of Sales transactions should be separated from personal finances. Thus, he decided to invest PHP200, 000 in
1600 Office Equipment 5100 Purchases this business. He deposited the amount with Nation Bank.

2|Fundamentals of Accountancy, Business, and Management 1

 February 25, 2019 – Paid the salary of Shiela amounting to PHP4, 000.
General Journal
Date Account Title and Explanation Ref Debit Credit General Journal
2/14/19 Cash 200,000 Date Account Title and Explanation Ref Debit Credit
Matapang, Capital 200,000 2/25/19 Salaries Expense 4,000
To record the initial investment of owner P. Accounts Payable 4,000
Matapang
To record payment of salary of Shiela
Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity account.
February 15, 2019 - Pedro purchased one computer unit from XY Computer Store to be used for the The example above assumed that the business is a sole proprietorship.
business. He issued check number 001 amounting to PHP25, 000. Journal Entries in a Corporate Set-up
General Journal How are transactions recorded if the owner of the business is a Corporation? Basically, the same entries
Date Account Title and Explanation Ref Debit Credit are made, except for transactions affecting capital or equity accounts. To illustrate, let us take the
2/15/19 Office Equipment 25,000 following case:
Cash 25,000 Sweeper Corporation was established to provide janitorial services to clients for a fee. The corporation
To record the purchase of one computer unit issued 5,000 shares of common stock, at PHP100 per value to shareholders. The issue price paid by the
Notice that the debit to office equipment increased the asset account and the credit to cash decreased shareholders on January 3, 2019 equal the par value. The entry to record this transaction is:
the asset account.
General Journal
February 16, 2019 - Pedro hired Juana Magaling, an experienced secretary.
No entry. This is not a financial transaction. Date Account Title and Explanation Ref Debit Credit
February 17, 2019 – Repaired the computer of Donna and collected PHP10, 000. 1/3/19 Cash 500,000
General Journal Share Capital - Common 500,000
Date Account Title and Explanation Ref Debit Credit To record issuance of 5,000 shares at par value of
2/17/19 Cash 10,000 Php100
Service Revenue 10,000 In the above example, if the issue price is PHP120 per share, what is the entry?
To record receipt of cash from customer
General Journal
February 18, 2019 – Repaired Mike’s computer. However, Mike will pay PHP15, 000 on March 18, 2019.
Date Account Title and Explanation Ref Debit Credit
General Journal
Date Account Title and Explanation Ref Debit Credit 1/3/19 Cash 600,000
2/18/19 Accounts Receivable 15,000 Share Capital - Common 500,000
Service Revenue 15000
To record services rendered to a customer on Share Premium - Common 100,000
account To record issuance of 5,000 shares at Php120 per
February 19, 2019 – Pedro purchased Office Supplies from MM Merchandise amounting to PHP5, 000 share, Php100 par value
on account. Pedro will pay this on March 30, 2019.

General Journal Step 3 – Posting

Date Account Title and Explanation Ref Debit Credit The summary (in specialized journals) or individual transactions (in the general journal) are then posted
2/19/19 Supplies Expense 5,000 from the journals to the general ledger (and subsidiary ledgers). Nothing should ever get
Accounts Payable 5000
posted to the ledgers without first being entered in a journal.
To record purchase of office supplies on account Recall the lesson on the general ledger. We will now post the previous transactions of Pedro to the
general ledger. For purposes of discussion, we will be using the three-column ledger.

3|Fundamentals of Accountancy, Business, and Management 1

 General Ledger
General Ledger
Account: Salaries Expense Account No.: 6100
Account: Cash Account No.: 1000
Date Item Ref Debit Credit Balance
Date Item Ref Debit Credit Balance
2/2/5/19 Payment of Juana’s salary 4,000 4,000
2/14/2019 Investment of Owner 200,000 200,000
2/15/2019 Purchase of Computer 25,000 175,000
Step 4 - Unadjusted Trial Balance
2/17/2019 Repair Income - Jean 10,000 185,000
At the end of an accounting period (for example, one month or one year) the working trial balance is
2/25/2019 Payment of Juana salary 4,000 181,000
prepared. This involves copying each account name and account balance to a worksheet (working trial
balance). The resulting first two columns of the worksheet are called the unadjusted trial balance.
General Ledger
In the preparation of the unadjusted trial balance, the balances in all the general ledgers at the end of
Account: Accounts Receivable Account No.: 1200
the reporting date are forwarded to the appropriate column. The unadjusted trial balance for the
Date Item Ref Debit Credit Balance
transactions in our example from Step 3 is the following:
2/18/2019 Repair Income - Mike 15,000 15,000
MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance
General Ledger February 29, 2019
Account: Office Equipment Account No.: 1600 Account Title Debit Credit
Date Item Ref Debit Credit Balance Balance Sheet Accounts
2/15/2019 Purchase of Computer 25,000 25,000 Cash 181,000
Accounts Receivable 15,000
General Ledger Office Equipment 25,000
Account: Accounts Payable Account No.: 2000 Accounts Payable 5,000
Date Item Ref Debit Credit Balance Matapang, Capital 200,000
2/19/2019 Purchase - office supplies 5,000 5,000
Income Statement Accounts
Service Revenue 25,000
General Ledger
Supplies Expense 5,000
Account: Matapang Capital Account No.: 3000
Salaries Expense 4,000
Date Item Ref Debit Credit Balance
2/14/2019 Investment of Owner 200,000 200,000
230,000 230,000
Notice that all asset accounts are presented first, followed by liabilities, equity (or capital account),
General Ledger income accounts and lastly, expenses accounts.
Account: Service Revenue Account No.: 4000
Date Item Ref Debit Credit Balance Accounting Equation
2/17/2019 Repair Income - Jean 10,000 10,000 The basic accounting equation is what drives double-entry bookkeeping. The equation reflects the
2/18/2019 Repair Income - Mike 15,000 25,000 accounts reported in the balance sheet. The basic accounting equation is as follows:
ASSETS = LIABILITIES + OWNERS' EQUITY
This is a very simple algebraic equation that reflects how the assets of an entity must be supported by
General Ledger either debt or equity. As in algebra, if we add or subtract something from one side of the equation we
Account: Supplies Expense Account No.: 6150 must add or subtract the same amount from the other side. For example, if we were to increase cash
Date Item Ref Debit Credit Balance (an asset) we might have to increase note payable (a liability account) so that the basic accounting
2/19/2019 Purchase - office supplies 5,000 5,000 equation remains in balance.

4|Fundamentals of Accountancy, Business, and Management 1

 ASSETS = LIABILITIES + OWNERS' EQUITY ACTIVITY 7
PHP 500 = PHP 500 Required task:
Applying, the formula to our transactions in Step 3 above, the effects of these transactions to the 1. Prepare the general journal entries for the above transactions (ignore giving explanations
equation are shown below: after every entry)
DATE TRANSACTIONS ASSETS = LIABILITIES + EQUITY 2. Post the following transactions to the general ledger.
2/14/2019 Investment of Owner, Pedro Matapang +200,000 +200,000 3. Prepare the unadjusted trial balance as of January 30, 2016.
2/15/2019 Purchase of computer +25,000 Mr. Laban Deyro opened his laundry business in Iloilo City on January 2, 2016. The following
-25,000 transactions occurred during the month of January 2016:
2/17/2019 Repair the computer of customer Jean +10,000 +10,000
and collected the payment DATE TRANSACTIONS
2/18/2019 Repair the computer of Mike on +15,000 +15,000 Invested PHP500, 000 to his business. The trade name of the business was “MR.
1/2/16
account LABANDERO”
2/19/2019 Purchase of office supplies on account +5,000 -5,000 1/3/16 Hired Allan and Allie who will manage his business
2/25/2019 Payment of salary of Juana -4,000 -4,000
1/4/16 Collections from various customers for the day - PHP3,000
Notice that at all times, the effects of the transaction to the right and left side of the formula should
be equal. If not, the journal entry is erroneous. 1/5/16 Purchase store supplies from Labada Store - PHP10,000
1/7/16 Collections from various customers for the day - PHP8,000
Compound Journal Entry
A simple journal entry has one account title on the debit side and one account title on the MR. LABANDERO entered into an exclusive contract with Sikat Hotel where the business
1/8/16
credit side. However, there are instances where in one particular transaction, two or more accounts on will do all the laundry of the hotel.
either the debit or credit side are affected. In this case, the business may prepare a compound journal Sikat Hotel availed the services of MR. LABANDERO amounting to PHP15, 000. Payment will
1/9/16
entry. A compound journal entry combines one or more accounts on the debit side or the credit side. be made on January 20, 2016.
1/10/1
To illustrate, assume that Jose Magalang decided to open a barbershop business in Makati City. He Collections from various customers for the day - PHP12,000
6
invested his old computer and PHP25, 000 for this venture with a fair value of PHP15, 000 to start the
1/12/1
business. Notice that two account titles, Office Equipment and Cash, were debited in this entry. Purchase a washing machine amounting to PHP50,000
6
General Journal 1/15/1
Date Account Title and Explanation Ref Debit Credit Collections from various customers for the day - PHP20,000
6
2/17/19 Office Equipment 15,000 1/19/1
Paid electricity bill for the month amounting to PHP18,000
Cash 25,000 6
J. Magalang Capital 40,000 1/20/1
Received payment from Sikat Hotel amounting to PHP15,000
6
On September 7, 2019, Jose purchased various store equipment to be used in the business. The total 1/21/1
cost of the equipment is PHP150, 000. The supplier required Jose to pay 30% as down payment, with Paid salaries of Allan and Allie - PHP15,000
6
the balance payable 30 days after. Notice that you have two account titles, Cash and Accounts Payable, 1/22/1 Mr. Laban Deyro needed money for the hospitalization of his son. He withdrew PHP18, 000
affected on the credit side. 6 from the business.
General Journal 1/25/1 Paid airfare ticket of PHP1,500 for the travel of Mr. Deyro to Manila to negotiate a
Date Account Title and Explanation Ref Debit Credit 6 contract with Sosyal Hotel
2/17/19 Store Equipment 150,000 1/26/1
Paid taxes to the City of Iloilo, PHP4,000
Cash 45,000 6
Accounts Payable 105,000 1/27/1
Purchased office supplies amounting to PHP12,500
6

5|Fundamentals of Accountancy, Business, and Management 1

1/28/1
Collections from various customer for the day - PHP5,000
3. Purchased equipment at a cost of PHP12,000 paying PHP2,000 in cash and the balance on account
6 4. Received PHP1,200 cash for services rendered
1/29/1 Sosyal Hotel availed the services of MR. LABANDERO amounting to PHP15, 000 payable on
6 Feb 25, 2016.
5. Paid PHP500 cash as a salary to a beautician
6. Withdrew PHP400 cash for personal expenses
ASSESSMENT 7 D. TRUE or FALSE: Write TRUE if the statement is correct and FALSE if it is not. Write your answers on
a separate sheet of paper.
A. Write FINANCIAL if the transaction is a financial transaction. Write NON-FINANCIAL if the 1. The business transactions are analyzed using the rules of debit and credit.
transaction is not. Write your answers on a separate sheet of paper. 2. The documents used by the business may not be analyzed if it has financial impact or effect.
1. The owner paid the salaries of the employees. 3. The journal is a chronological record of the entity’s transactions.
2. The owner conducted an orientation to newly hired employees. 4. The journal is the book of final entry.
3. The owner paid electric, water, and telecommunication bills. 5. Journalizing is the recording phase of accounting.
6. The ledger is the book of final entry.
4. The owner received payment from customers.
7. The ledger shows all the movements of transactions (increase and decrease) in each account which
5. The owner post advertisements in the city. were initially reflected in the journal as journal entries.
6. The owner awarded Employee of the Month to a deserving employee. 8. If the journal entry for a particular account is debited, then you have to fill in the credit side of the
7. The owner purchased a furniture and paid it in cash. ledger.
8. The owner received payment from customers on account. 9. The line items in the ledger are called ledger entries.
9. The owner signed the contract to new supplier. 10. The last running balance, after all the transactions have been posted, will be the ending balance.
10. The owner withdrew cash from the business.
B. Indicate whether the account title is an asset, liability, capital, revenue or expense. Tell what book
of account to be used to record the transaction.
Transactions Type of Major Account Type of Book of Account

Collections from various customers

Purchase of Equipment on account
Payment of Salary
Cash Investment of Owner
Owner’s drawings

C. Using the following format, identify the effects of above transactions to the accounting equation:
ASSETS = LIABILITIES + OWNERS' EQUITY
Example:
ASSETS = LIABILITIES + OWNERS' EQUITY
+200 = + 200
On June 1, Maya Cruz opened the Ganda Beauty Salon. During the first month, the following selected
transactions occurred:
1. Deposited PHP5,000 cash in the City Bank in the name of the business
2. Paid PHP800 cash for beauty supplies

6|Fundamentals of Accountancy, Business, and Management 1