Part II

ACCOUNTING FOR A SERVICE BUSINESS

Chapter 4: Recording Business Transactions

Objectives
 list and explain in brief the sequential steps in accounting cycle
 give the different books of accounts
 name the source documents
 journalize transactions in proper form
 post entries the general journal to the general ledger
 prepare and explain the use of trial balance
 prepare financial statements (Income Statement, Balance Sheet, Statement of Changes in Owner’s Equity and
Statement of Cash Flows) of a service business

Accounting Cycle: Sequential Steps and Aims

 The accounting cycle refers to a series of sequential steps or procedures performed to accomplish the accounting
process.

Steps in the Accounting Cycle

Period Sequence Steps Aims
Step 1 I Identifying transactions to be recorded To gather information about transactions or
events generally through the source docs
Step 2 J Journalizing or recording of business To record the economic impact of
During the
transactions transactions on the firm in a journal, which
accounting
is a form that facilitates transfer to the
period
accounts
Step 3 P Posting to the ledger To transfer the information from the journal
to the ledger for classification
Step 4 T Trial balance preparation To provide a listing to verify the equality of
debits and credits in the ledger
Step 5 A Adjusting entry preparation with To aid in the preparation of financial
worksheet statements
Step 6 F Financial Statement preparation To provide useful information to decision-
At end of
makers
the
Step 7 P Posting adjusting entries made To account for the accruals, expiration of
accounting
deferrals, estimation and other events from
period
the worksheet
Step 8 C Closing entry preparation and posting To close temporary accounts and transfer
profit to owner’s equity
Step 9 P Post-closing trial balance preparation To check the equality of debits and credits
after the closing entries
At start of Step 10 R Reversing entry preparation and posting To simplify the recording of certain regular
the next transactions in the next accounting period
period

Source Documents
 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 common source documents are:
 Official Receipts  Deposit Slips  Promissory Notes  Authority to Pay
 Sales Invoice  Order Forms  Bill of Lading Form
 Checks  Delivery Receipts  Debit And Credit  Inventory Log Form
 Bank Statements  Purchase Invoices Memo
 Withdrawal Slips  Vouchers  Contracts

Books of Accounts
1. Journal
 “Book of Original Entry”
 Is a chronological record of the entity’s transactions
 Shows all the effects of a business transaction in terms of debits and credits
 General journal is the simplest journal

2. Ledger
 “Book of Final Entry” or “Reference Book”
 Used to classify and summarize transactions, and to prepare data for basic financial statements
 The accounts is the general ledger are classified into two general groups:
a) Balance sheet or permanent/ real accounts (assets, liabilities and owner’s equity)
b) Income statement or temporary/ nominal accounts (income and expenses)

Chart of Accounts
 A listing of all the accounts and their account numbers in the ledger. It is arranged in the financial statement order,
that is, assets first, followed by liabilities, owner’s equity, income and expenses. The accounts should be numbered in
a flexible manner to permit indexing and cross-referencing.
Sample:
Journal
Write the name of the business
here.
Write the page number here.

Write “DATE” and the year of

the accounting period here.
Write “CREDIT” here.

Write “DEBIT” here.

Write “P.R” here. (Post
Reference)
Write “ACCOUNT TITLES AND
EXPLANATION” here.
Write the account no. for the
corresponding account title here
Write the journal entries here.

Write the day of the transactions

here.
Write the month of the
transactions here.
Write the amount to be debited
here.
Write the amount to be credited
here.
How to write: P9,876,543.21

9 8 7 6 5 4 3 21

Ledger
Write the account title here.
Write the account no. here.
Write “DATE” and the year of
the accounting period here.
Write “EXPLANATION” here.
Write “J.R” here. (Journal
Reference)
Write “CREDIT” here.
Write “DEBIT” here.
Write the page number of the
journal reference here.
Write the day of the transaction
here.
Write the month of the
transaction here.
Write brief description of the
transactions here.
Write the amount to be credited
here.
Write the amount to be debited
here.

How to write: P9,876,543.21

9 8 7 6 5 4 3 21
ILLUSTRATIVE PROBLEM (Accounting Cycle)

Required:
1. Prepare journal entries for the month of June2020 for TBA ACCOUNTING.
2. Refer to the given chart of accounts to set up the ledger accounts and post the entries to the ledger accounts. Make
the appropriate posting references in the journal and ledger.
3. Prepare a Trial Balance dated June 30, 2020.
4. Prepare an Income Statement for the month ended June 30, 2020.
5. Prepare Statement of Changes in Owner’s Equity for the month ended June 30, 2020.
6. Prepare a Statement of Financial Position as of June 30, 2020.
7. Prepare Statement of Cash Flows for the month ended June 30, 2020.

Tehillah Babe Alera, a CPA, recently established her own accounting/auditing firm that offers tax compliance,
bookkeeping, auditing and consultancy services which she called TBA Accounting. The business operations commenced
on June 1, 2020. Following are the details of the business and the transactions that were completed on its first month.

TBA Accounting
Chart of Accounts
Balance Sheet Accounts Income Statement Accounts
Account Account
Account Title Account Title
Number Number
Assets Income
110 Cash 410 Professional Service Revenue
120 Accounts Receivable Expenses
130 Office Supplies 510 Salaries Expense
140 Prepaid Insurance 520 Rent Expense
150 Office Equipment 530 Telephone and Internet Expense
160 Service Vehicle 540 Electricity and Water Expense
Liabilities 550 Fuel and Oil Expense
210 Accounts Payable 560 Miscellaneous Expense
220 Notes Payable
Owner’s Equity
310 Alera, Capital
320 Alera, Withdrawals

Transactions for the month of June 2020:

1 Alera invested cash in the business, P200,000.
3 Bought office supplies for cash, P9,750.
5 Acquired a brand new service vehicle costing P800,000 for the business, paying P50,000 cash, and financing
the remaining P750,000 by issuing a 5-year note payable.
6 Acquired office equipment on account amounting to P28,250.
9 Paid rent on office space for the month, P5,000.
11 Paid for the insurance of the service vehicle for the next three months, P1,500.
13 Paid cash for fuel and oil of the service vehicle, P4,200.
15 Received P35,700 cash for professional services rendered.
15 Paid employee salaries for June 1-15, P25,000.
19 Paid amount due on the note payable for service vehicle, P6,250.
20 Paid P11,300 on account for office equipment acquired on June 6.
22 Received and paid electricity and water bills, P3,000.
23 Acquired additional office supplies on account, 10,250.
25 Received and paid telephone and internet bills, P2,500.
27 Charged P900 cash to miscellaneous expenses paid for the maintenance of the office equipment.
28 Paid cash for fuel and oil of the service vehicle, P1,300.
29 Collected P5,000 cash for the preparation and filing of tax returns for a client’s tax clearance application.
30 Paid employee salaries for June 16-30, P25,000.
30 Billed clients P35,900 for professional services rendered.
30 Alera withdrew cash for personal use, P15,000.

Requirement 1.
Journalizing Service Business Transactions
 The standard contents of the general journal are as follows:
a) Date – the year and month are not rewritten for every entry unless the year or month changes or a new page is
needed.
b) 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. A brief description of the transaction is usually
made on the line below the credit. Generally, skip a line after each entry.
c) P.R. (posting reference)–this will be used when the entries are posted, that is until the amounts are transferred to
the related ledger accounts. The posting process will be described later.
d) Debit – the debit amount for each account is entered in this column.
e) Credit – the debit amount for each account is entered in this column.

 Simple and Compound Entry:

a) Simple Entry –only two accounts are affected – one account is debited and the other account is credited.
b) Compound Entry –when three or more accounts are required in a journal entry.
 TBA ACCOUNTING J1
DATE
ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
2020
June 1 Cash 110 2 0 0 0 0 0
Alera, Capital 310 2 0 0 0 0 0
Initial investment.

3 Office Supplies 130 9 7 5 0

Cash 110 9 7 5 0
Bought office supplies.

5 Service Vehicle 160 8 0 0 0 0 0

Cash 110 5 0 0 0 0
Notes Payable 220 7 5 0 0 0 0
Acquired service vehicle.

6 Office Equipment 150 2 8 2 5 0

Accounts Payable 210 2 8 2 5 0
Acquired office equipment.

9 Rent Expense 520 5 0 0 0

Cash 110 5 0 0 0
Paid rent.

11 Prepaid Insurance 140 1 5 0 0

Cash 110 1 5 0 0
Advance payment of insurance.

13 Fuel and Oil Expense 550 4 2 0 0

Cash 110 4 2 0 0
Paid fuel and oil.

15 Cash 110 3 5 7 0 0
Professional Services Revenue 410 3 5 7 0 0
Rendered professional services.

15 Salaries Expense 510 2 5 0 0 0

Cash 110 2 5 0 0 0
Paid salaries.

19 Notes Payable 220 6 2 5 0

Cash 110 6 2 5 0
Paid notes payable.

20 Accounts Payable 210 1 1 3 0 0

Cash 110 1 1 3 0 0
Paid account.

22 Electricity and Water Expense 540 3 0 0 0

Cash 110 3 0 0 0
Paid electricity and water bills.

23 Office Supplies 130 1 0 2 5 0

Accounts Payable 210 1 0 2 5 0
Acquired office supplies.

25 Telephone and Internet Expense 530 2 5 0 0

Cash 110 2 5 0 0
Paid telephone and internet bill.

27 Miscellaneous Expense 560 9 0 0

Cash 110 9 0 0
Paid maintenance.

Page | 15
 TBA ACCOUNTING J2
DATE
ACCOUNT TITLES AND EXPLANATION P.R. DEBIT CREDIT
2020
June 28 Fuel and Oil Expense 550 1 3 0 0
Cash 110 1 3 0 0
Paid fuel and oil.

29 Cash 110 5 0 0 0
Professional Services Revenue 410 5 0 0 0
Rendered professional services.

30 Salaries Expense 510 2 5 0 0 0

Cash 110 2 5 0 0 0
Paid salaries.

30 Accounts Receivable 120 3 5 9 0 0

Professional Services Revenue 410 3 5 9 0 0
Rendered professional services.

30 Alera, Withdrawals 320 1 5 0 0 0

Cash 110 1 5 0 0 0
For personal use.

Analysis of the Transactions using the Rules of Debit and Credit:

+ DEBIT / - CREDIT + CREDIT / - DEBIT
A Asset L Liability
D Drawing / Withdrawal I Income / Revenue
E Expense C Capital
C Cost C Contra-Asset (Accumulated Depreciation
and Allowance for Uncollectible Accounts)

Date Account Title Account Type Effect Dr./ Cr.

June 1 Cash Asset + Debit
Alera, Capital Capital + Credit
June 3 Office Supplies Asset + Debit
Cash Asset - Credit
June 5 Service Vehicle Asset + Debit
Cash Asset - Credit
Notes Payable Liability + Credit
June 6 Office Equipment Asset + Debit
Accounts Payable Liability + Credit
June 9 Rent Expense Expense + Debit
Cash Asset - Credit
June 11 Prepaid Insurance Asset + Debit
Cash Asset - Credit
June 13 & 28 Fuel and Oil Expense Expense + Debit
Cash Asset - Credit
June 15& 29 Cash Asset + Debit
Professional Services Revenue Income + Credit
June 15 & 30 Salaries Expense Expense + Debit
Cash Asset - Credit
June 19 Notes Payable Liability - Debit
Cash Asset - Credit
June 20 Accounts Payable Liability - Debit
Cash Asset - Credit
June 22 Electricity and Water Expense Expense + Debit
Cash Asset - Credit
June 23 Office Supplies Asset + Debit
Accounts Payable Liability + Credit
June 25 Telephone and Internet Expense Expense + Debit
Cash Asset - Credit
June 27 Miscellaneous Expense Expense + Debit
Cash Asset - Credit
June 30 Accounts Receivable Asset + Debit
Professional Services Revenue Income + Credit
June 30 Alera, Withdrawals Drawing / Withdrawal + Debit
Cash Asset - Credit

Page | 16
 Requirement 2.
Posting to the Ledger
 Posting mean transferring the amounts from the journal to the appropriate accounts in the ledger. The following are
the steps in posting:
a) Transfer the date of the transaction from the journal to the ledger.
b) Transfer the page number from the journal to the journal reference (J.R.) column of the ledger.
c) Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the journal as a
credit figure in the ledger.
d) Put a brief description of the transaction in the explanation column of the ledger.
e) Enter the account number in the posting reference column of the journal once the figure has been posted to the
ledger.

 At the end of an accounting period, the debit or credit balance of each account must be determined to enable us to
come up with a trial balance.
a) Each account balance is determined by footing (adding) all the debits and credits.
b) If the sum of an account’s debits is greater than the sum of its credits, that account has a debit balance
(Dr.>Cr=Dr.).
c) If the sum of an account’s credits is greater than the sum of its debits, that account has a credit balance
(Cr.>Dr=Cr.).

CASH ACCOUNT NO. 110

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 1 Initial investment J1 2 0 0 0 0 0 June 3 Paid office supplies J1 9 7 5 0
15 Rendered services J1 3 5 7 0 0 5 Down payment vehicle J1 5 0 0 0 0
29 Rendered services J1 5 0 0 0 9 Paid rent J1 5 0 0 0
11 Paid insurance J1 1 5 0 0
13 Paid fuel & oil J1 4 2 0 0
15 Paid salaries J1 2 5 0 0 0
19 Paid notes payable J1 6 2 5 0
20 Paid accounts payable J1 1 1 3 0 0
22 Paid electricity & water J1 3 0 0 0
25 Paid phone & internet J1 2 5 0 0
27 Paid maintenance J1 9 0 0
28 Paid fuel and oil J2 1 3 0 0
30 Paid salaries J2 2 5 0 0 0
30 Personal use J2 1 5 0 0 0
TOTAL 2 4 0 7 0 0 TOTAL 1 6 0 7 0 0
30 BALANCE 8 0 0 0 0

ACCOUNTS RECEIVABLE ACCOUNT NO. 120

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 30 Revenue on account J2 3 5 9 0 0
30 BALANCE 3 5 9 0 0

OFFICE SUPPLIES ACCOUNT NO. 130

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 3 Bought supplies J1 9 7 5 0
23 Bought supplies J1 1 0 2 5 0
30 BALANCE 2 0 0 0 0

PREPAID INSURANCE ACCOUNT NO. 140

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 11 Paid insurance J1 1 5 0 0
30 BALANCE 1 5 0 0

Page | 17
 OFFICE EQUIPMENT ACCOUNT NO. 150
DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 6 Acquired equipment J1 2 8 2 5 0
30 BALANCE 2 8 2 5 0

SERVICE VEHICLE ACCOUNT NO. 160

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 5 Acquired vehicle J1 8 0 0 0 0 0
30 BALANCE 8 0 0 0 0 0

ACCOUNTS PAYABLE ACCOUNT NO. 210

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 20 Paid account J1 1 1 3 0 0 June 6 Acquired equipment J1 2 8 2 5 0
23 Acquired supplies J1 1 0 2 5 0
TOTAL 1 1 3 0 0 TOTAL 3 8 5 0 0
30 BALANCE 2 7 2 0 0

NOTES PAYABLE ACCOUNT NO. 220

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 19 Paid notes J1 6 2 5 0 June 5 Acquired vehicle J1 7 5 0 0 0 0
30 BALANCE 7 4 3 7 5 0

ALERA, CAPITAL ACCOUNT NO. 310

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 1 Initial investment J1 2 0 0 0 0 0
30 BALANCE 2 0 0 0 0 0

ALERA, WITHDRAWALS ACCOUNT NO. 320

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 30 Personal use J2 1 5 0 0 0
30 BALANCE 1 5 0 0 0

PROFESSIONAL SERVICES REVENUE ACCOUNT NO. 410

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 15 Rendered services J1 3 5 7 0 0
29 Rendered services J2 5 0 0 0
30 Rendered services J2 3 5 9 0 0
30 BALANCE 7 6 6 0 0

Page | 18
 SALARIES EXPENSE ACCOUNT NO. 510
DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 15 Paid salaries 1-15 J1 2 5 0 0 0
30 Paid salaries 16-30 J2 2 5 0 0 0
30 BALANCE 5 0 0 0 0

RENT EXPENSE ACCOUNT NO. 520

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 9 Paid rent J1 5 0 0 0
30 BALANCE 5 0 0 0

TELEPHONE AND INTERNET EXPENSE ACCOUNT NO. 530

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 25 Paid bills J1 2 5 0 0
30 BALANCE 2 5 0 0

ELECTRICITY AND WATER EXPENSE ACCOUNT NO. 540

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 22 Paid bills J1 3 0 0 0
30 BALANCE 3 0 0 0

FUEL AND OIL EXPENSE ACCOUNT NO. 550

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 13 Paid fuel and oil J1 4 2 0 0
28 Paid fuel and oil J2 1 3 0 0
30 BALANCE 5 5 0 0

MISCELLANEOUS EXPENSE ACCOUNT NO. 560

DATE DATE
2020 EXPLANATION J.R. DEBIT 2020 EXPLANATION J.R. CREDIT
June 27 Paid maintenance J1 9 0 0
30 BALANCE 9 0 0

Requirement 3.
Trial Balance Preparation
 The trial balance is a list of all accounts with their respective debit or credit balances. 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. The procedures in the preparation of a trial balance follow:
a) List the account titles in numerical order.
b) Obtain the account balance of each account from the ledger and enter the debit balances in the debit column and
the credit balances in the credit column.
c) Add the debit and credit columns.
d) Compare the totals.

 The trial balance is a control device that helps minimize accounting errors. When the totals are equal, the trial balance
is in balance. This equality provides an interim proof of the accuracy of the records but it does not signify the absence
of errors. The trial balance for the illustration follows:

Page | 19
 TBA Accounting
Trial Balance
June 30, 2020

Account Title Debit Credit

Cash P 80,000
Accounts Receivable 35,900
Office Supplies 20,000
Prepaid Insurance 1,500
Office Equipment 28,250
Service Vehicle 800,000
Accounts Payable P 27,200
Notes Payable 743,750
Alera, Capital 200,000
Alera, Withdrawals 15,000
Professional Service Revenue 76,600
Salaries Expense 50,000
Rent Expense 5,000
Telephone and Internet Expense 2,500
Electricity and Water Expense 3,000
Fuel and Oil Expense 5,500
Miscellaneous Expense 900
TOTALS P 1,047,550 P 1,047,550

Requirement 4 – 7.
Preparation of Financial Statements of a Service Business
 The financial statements are the means by which the information accumulated and processed in financial accounting
id periodically communicated to the users. The objective of financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making
economic decisions.

A. Income Statement
 An entity shall present all items of income an expense recognized in a period:
a) In a single statement of comprehensive income, or
b) In two statements: a statement displaying components of profit or loss (separate income statement) and a
second statement beginning with profit or loss and displaying components of other comprehensive income
(statement of comprehensive income)

TBA Accounting
Income Statement
For the Month Ended June 30, 2020

Revenues
Professional Service Revenue P 76,600

Expenses
Salaries Expense P 50,000
Rent Expense 5,000
Telephone and Internet Expense 2,500
Electricity and Water Expense 3,000
Fuel and Oil Expense 5,500
Miscellaneous Expense 900
Total 66,900
PROFIT P 9,700

B. Statement of Changes in Owner’s Equity

TBA Accounting
Statement of Changes in Owner’s Equity
For the Month Ended June 30, 2020

Alera, Capital – 06/01/2020 P 200,000

Add: Additional Investments by Alera P –0–
Profit 9,700 9,700
Total P 209,700
Less: Withdrawals 15,000
Alera, Capital – 06/30/2020 P 194,700
 In the case of sole proprietorships, increases in owner’s equity arise form additional investments by the owner and
profit during the period. Decreases result from withdrawals by the owner and from loss for the period. The beginning
balance and additional investments are taken from the owner’s capital account in the ledger. The profit or loss figure
comes directly from the income statement.

C. Statement of Financial Position (Balance Sheet)

 The balance sheet can be presented in either the report format or the account format. Either balance sheet format is
acceptable.
a) Report format– simply lists the assets, followed by the liabilities then the owner’s equity in vertical sequence.
b) Account format– lists the assets on the left and the liabilities and owner’s equity on the right.

 Assets are sub-classified as current assets and non-current assets; while liabilities as current liabilities and non-
current liabilities. To make accounting information useful to decision-makers, the items in the balance sheet may be
grouped and arranged in accordance with the following guideline:
a) Assets are classified and presented in decreasing order of liquidity. Cash is the most liquid. Assets that are least
likely to be converted to cash are listed last.
b) Liabilities are generally classified and presented based on time of maturity such that obligations which are
currently due are listed first.

Report Format:

TBA Accounting
Statement of Financial Position
As of June 30, 2020

Assets
Current Assets
Cash P 80,000
Accounts Receivable 35,900
Office Supplies 20,000
Prepaid Insurance 1,500
Total Current Assets P 137,400
Non-Current Assets
Property and Equipment:
Office Equipment P 28,250
Service Vehicle 800,000
Total Non-Current Assets P 828,250
TOTAL ASSETS P 965,650

Liabilities
Current Liabilities
Accounts Payable P 27,200
Non-Current Liabilities
Notes Payable P 743,750
Total Liabilities P 770,950

Owner’s Equity
Alera, Capital – 06/30/2020 P 194,700
TOTAL LIABILITIES AND OWNER’S EQUITY P 965,650

Account Format:

TBA Accounting
Statement of Financial Position
As of June 30, 2020

Assets Liabilities
Current Assets Current Liabilities
Cash P 80,000 Accounts Payable P 27,200
Accounts Receivable 35,900 Non-Current Liabilities
Office Supplies 20,000 Notes Payable P 743,750
Prepaid Insurance 1,500 Total Liabilities P 770,950
Total Current Assets P 137,400
Non-Current Assets Owner’s Equity
Property and Equipment: Alera, Capital – 06/30/2020 P 194,700
Office Equipment P 28,250
Service Vehicle 800,000
Total Non-Current Assets P 828,250TOTAL LIABILITIES AND
TOTAL ASSETS P 965,650OWNER’S EQUITY P 965,650
D. Statement of Cash Flows
 Cash flow can be presented using either the direct or the indirect method:
a) Direct method – the entity’s net cash provided (used in) operating activities is obtained by adding the individual
operating cash inflows and then subtracting the individual operating cash outflows.
b) Indirect method– derives the net cash provided (used in) operating activities by adjustingprofit for income and
expense items not resulting from cash transactions.

 Enterprises are encouraged to report cash flows from operating activities using the direct method but the indirect
method is acceptable. Only the direct method is illustrated here. The following are the major classes of operating cash
flows using the direct method:
1. Cash Flows from Operating Activities
 Generally involve providing services, and producing and delivering goods. Generally the cash effects of transactions
and other events that enter into the determination of profit or loss.
a) Cash Inflows
 receipts from sale of goods and performance of services
 receipts from royalties, fees, commissions, and other revenues
b) Cash Outflows
 payments to suppliers of goods and services
 payments to employees
 payments for taxes
 payments for interest expense
 payments for other operating expenses
2. Cash Flows from Investing Activities
 Include making and collecting loans; acquiring and disposing of investments in debt or equity securities; and
obtaining or selling of property and equipment and other productive assets.
a) Cash Inflows
 receipts from sale of property and equipment
 receipts from sale of investments in debt or equity securities
 receipts from collection on notes receivable
b) Cash Outflows
 payments to acquire property and equipment
 payments to acquire debt or equity securities
 payments to make loans to others generally in the form of notes receivable
3. Cash Flows from Financing Activities
 Include obtaining resources from owners and creditors.
a) Cash Inflows
 receipts from investment by owners
 receipts from issuance of notes payable
b) Cash Outflows
 payments to owners in the form of withdrawals
 payments to settle notes payable

Direct Method:

TBA Accounting
Statement of Cash Flows
For the Month Ended June 30, 2020

Cash Flows from Operating Activities:

Cash received from clients P 40,700
Payment for office supplies (9,750)
Payment for insurance (1,500)
Payment to employees (50,000)
Payment for office rent (5,000)
Payment for telephone and internet (2,500)
Payment for electricity and water (3,000)
Payment for fuel and oil (5,500)
Other operating expenses (900)
Net cash provided by (used in) operating activities P (37,450)
Cash Flows from Investing Activities:
Payments to acquire office equipment P (11,300)
Payments to acquire service vehicle (50,000 + 6,250) (56,250)
Net cash provided by (used in) investing activities (67,550)
Cash Flows from Financing Activities:
Cash received as investments by owner P 200,000
Payments for withdrawals by owner (15,000)
Net cash provided by (used in) financing activities 185,000
Net Increase (Decrease) in Cash P 80,000
Cash balance at the beginningof the period –
Cash balance at the end of the period P 80,000

Cash balance at the end of the period should be equal to the Cash presented in the Statement of Financial
Position.