ACCOUNTING CYCLE APPLIED TO SERVICE BUSINESS

For GAS 11 ONLY

Second Quarter for the First Semester
MAJOR TYPE of business transactions of a service entity.

A. FINANCING TRANSACTIONS
 Investments by owners – accounts affected are CASH and OWNER(s) CAPITAL
 Borrowings (loans) – accounts affected are CASH and NOTE PAYBLE/LOANS PAYABLE
 Payments of Borrowings /loans – accounts affected are CASH and Notes/Loans
PAYABLE
 Withdrawals by Owner(s) – accounts affected are CASH and Drawing/Withdrawal
B. INVESTING TRANSACTIONS
 Purchase of land, building, equipment, tools & other long-terms investments on cash
or credit basis – accounts affected are LAND, BUILDING, EQUIPMENT, CASH,
ACCOUNTS/NOTES PAYABLE
 Sale of land, building, equipment, tools and other long-term investment on cash or
credit basis – accounts affected are CASH, ACCOUNTS RECEIVABLE, LAND, BUILDING,
EQUIPMENT
C. OPERATING TRANSACTIONS
 Revenue from services rendered on cash or credit basis – accounts affected CASH,
ACCOUNTS RECEIVABLE, SERVICE INCOME OR REVENUE
 Purchase/Payment of Expenses (Supplies, Taxes, Telephone, etc.) – accounts affected
are EXPENSES accounts, CASH, ACCOUNTS PAYABLE
 Receipt of interest income – accounts affected are CASH and INTEREST INCOME

Accounting Cycle – are series of steps that the account follows in certain order and are then repeated.
Once one accounting cycle is completed, the accountant begins another.

STEPS IN ACCOUNTING CYCLE

1. Collecting and Verifying Source Documents and Identifying and Analyzing Transactions or Events
to be recorded.
- The source documents are documents being created at the beginning of transaction that
provide evidence or proof of an economic event and may be used to initiate recording into
the journals.
- SOURCE DOCUMENT or ACCOUNTABLE FORM is pre-numbered and normally a custom-
designed from which the business organization uses internally of externally for its business
transactions.
Examples of Source Document:
As basis for recording of payments
 Suppliers invoice and delivery receipts – documents submitted by the supplier for
acknowledgement of the company as proof of delivery of goods or services.
 Suppliers debit or credit memo – as basis for adjustment like discounts, additional
charges, change in price, etc.
  Bank checks and withdrawal slips- the bank checks are either used to pay for
purchases of goods and services or to withdraw funds from the bank. Just like the
check, the withdrawal slip is used in the withdrawal funds from the bank.
 Payroll summary – this contains salaries, wages and allowances of employees
including deducted contributions for remittances to government agencies.
As basis to record revenues
 Sales Invoice – this document serves as proof for sales of goods to customers
 Delivery Receipts – this is also a document that accompanies the sales invoice in the
delivery of goods to customers.
 Billing Invoice- serves as a proof for the sales of services to customers
As basis to record cash receipts
 Official Receipt – document that is issued to customers upon the acceptance of payment
for the sale of goods and services, or for the collection of receivables.
 Deposit Slip – this document serve as proof for the deposit of cash to the bank.
 Customers’ debit and credit memo – as a basis for adjustment of sales like discounts,
change in price, etc.
As basis for Adjustment and Reconciliation
 Bank Statement – this is a source for item reflected by the bank and not recorded in the
organization’s books.
 Statement of Accounts – this document may be coming from supplier or customer
reflecting its records for reconciliation with the organization’s own records.

2. Recording Business Transaction in a Journal

- The source documents/accountable forms will now be recorded in different accounting
journals. These accounting journals are where business transactions make their first entry in
the transaction process.
3. Posting Journal Entries to the General Ledger Accounts
- All transaction being recorded in the journals will now be transferred to the general ledger
to summarize the accounts, per account type. A total for each account will be done on
specific period of report. This is called “FOOTING”.
4. Preparing the Unadjusted Trial Balance
- The Trial Balance is the list of all accounts with their balances that are lifted from the
general ledger. It is prepared to “prove the equality of debits and credits”
- The trial balance is listed in this order
a. ASSETS (arrange according to their liquidity)
b. LIABILITIES
c. CAPITAL
d. DRAWING
e. REVENUE
f. EXPENSES
5. Prepare the Adjusting Entries
- This is done to correct errors and to record unrecorded transactions.
NOTE: Even though the trial balance indicates that the ledger is in balance, the ledger can
still contain errors. For example, if a journal entry was made debiting or crediting the wrong
accounts, or if a n item was posted to the wrong account, the ledger will still be balance. It is
important, therefore, to be very careful in preparing the journal entries and in posting them
to the ledger accounts.
 ADJUSTING ENTRIES- are made in the accounting books at the end of an accounting period.
These are made after a trial balance is prepared. The purpose of adjusting entries is to
adjust revenues and expenses to the accounting period in which they actually occurred.
After adjusting entries are recorded in the accounting journals, they are posted to the
general ledger in the same way as any other accounting journal entries.
ACCOUNTING PERIOD – is the period in which accounting books of the entity/business are
prepared. It is the period for which the books are balanced and the financial statements are
prepared. The accounting period is consists of 12 months. However, the beginning of the
accounting period differs according to the organization’s adaptation or practice. It may be a
calendar period or a fiscal period.

SIX TYPES OF ADJUSTING ENTRIES

1. Accrued revenue
2. Unearned revenue
3. Accrued expenses
4. Prepaid expenses -
5. Depreciation
6. Allowance for uncollectible accounts

6. Prepare the Worksheet

Worksheet – is a multi-columned document to help move data from the trial balance to the
financial statements. It provides an orderly way to summarize the data for the financial
statements.
EDEN LLONZAGA LAW FIRM
Worksheet
For the Month ended December 31, _______

ACCOUNTS TRIAL BALANCE ADJUSTMENTS ADJUSTED INCOME BALANCE SHEET

TRIAL BALANCE STATEMENT
DR CR DR CR DR CR DR CR DR CR

7. Preparing Financial Statements

FINANCIAL STATEMENTS - represent a formal record of financial activities of the business
organization. These are written reports that quantify the financial strength, performance and
liquidity of a company

- The following are the financial statements that will be prepared from the adjusted trial
balance:
a. Statement of Income or Loss or Income Statement also known as the Profit and Loss
Statement, reports the company’s financial performance in terms of net profit or loss over a
specified period. Income statement is composed of Income (what the business has earned
over a period) and Expenses (the cost incurred by the business over a period)
 b. Statement of Financial Position also known as the Balance Sheet, presents the financial
position of an entity as of a given date. It is comprised of the three elements: Assets,
Liabilities and Equity or Capital.
c. Statement of Changes in Owner’s Equity or Capital details the movement in owners’ equity
over a period. The movement in owners’ equity or capital is derived from the following
components:
a. Net Profit or loss during the period as reported in the income statement
b. Owner’s capital investment or additional investment
c. Owner’s Drawings
d. Gain and Losses recognized directly in equity
e. Effect of a change in accounting policy or correction of accounting error.

d. Statement of Cash Flows or Cash Flow Statement presents the movement in Cash and bank
balances over a period. The movement of cash flow is classified in the following segments:
 Operating activities – represent the cash flows from primary activities of a business.
 Investing Activities – represent the cash flows from purchases and sales of assets or
other inventories,
 Financing Activities- represent cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.

8. Journalizing Post Closing Journal Entries

- The accounts that will be closed and will not be carried over to the next accounting period
are:
 Revenues
 Expenses
 Owners drawing
9. Preparing Post Closing Trial Balance
- The contents of the post -closing trial balance are the balance sheet accounts or called real
or permanent accounts which will be carried over to the next accounting period.