Lesson 10: Business Transactions and Their Analysis As

Applied to the Accounting Cycle of a Service Business

Review of types of businesses
Recall the discussion on types of businesses according to activities (NATURE OF BUSINESS) & differentiate them.
• service business
• merchandising business
• manufacturing business

Examples of Service Businesses

• barbershop • offices of practicing doctors, lawyers and other professionals • repairs of TV and other electrical
equipment • auto repair shop • laundry shop • dressmaker

Review five major accounts

Assets, Liabilities, Equity (capital), Income, Expenses.
• Assets are resources owned by a business.
• Liabilities are claims against the assets of the business.
• Equity (capital) is the claim of the owner or owners.
• Income are increases in the equity or capital resulting from business activities entered into.
• Expenses are decreases in the equity or capital resulting from business activities. It may include assets or
services consumed in the process of earning income.

The nature of a service business

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
centers and services of professionals like lawyers and doctors. The revenue of a service business is
usually realized once the service has been substantially completed. Aside from the minor supplies, the
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 or
checks. The typical financial transactions recorded for a service company include collecting a deposit
from the customer, providing the service and receiving payment.

???What’s happening during the operations of certain business? Example, a repair shop of TVs and other electrical
appliances, what events or transactions usually occur in a repair shop?

The accounting cycle of a service business (TJPTWAFC)

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:
• Receipt of cash from a client as advance payment to repair a computer. In this case (asset) will increase. At
the same time, the advances from client (liability) will also increase. The advances 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 income of
the business at the same time.

Examples of non-financial transactions:

• hiring and termination of employees
• recognition from the government as most outstanding business
• death of owner
The information needed when recording
transactions are taken from forms used to
document these transactions. In a typical service
business, the following are the business
documents used:

1. Official Receipt or Cash Receipt This document is

used when a business receives money or a check. An
Official Receipt or Cash Receipt is a document that
acknowledges that money or a check have been
received.

2. Charge Invoice or Sales Invoice A charge invoice

is a document used when a service has been 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 of account to a customer, with the
charge or sales invoice attached. For example: in a
laundry business, a customer may avail of the services
of the business. However, that customer and the
owner of the 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 is issued on the
day the client availed of the services.

3. Check or Cash Voucher The check voucher is a

document used when a check is issued to pay a certain
supplier or vendor. For example, in a laundry business, for
the payment of monthly electricity bills, the business may
pay either in 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 payment and, at
the same time, as proof that payment has been made by
the company.

Step 2 - Preparation of Journal Entries (journalization)

Through the use of specialized journals (such as those for sales, purchases, cash receipts, and cash disbursements) and the
general journal, transactions and events are entered into the accounting records. These are called the books of original entry.
Debits and Credits are an integral part of the journalizing process. In accounting, debits or credits are abbreviated as DR and
CR respectively.
When to Debit and when to Credit: An increase in an asset account is called a debit and an 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 debit those accounts.
Rules on Debits and Credits
1. 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.
2. The credited account is listed on the second line and is usually indented. The credited amount is recorded on the right
side of the register.
3. The total amount of debit should always equal the total amount of credit.
Recall the discussion on the Chart of Accounts. The Chart of Accounts is a listing of all account titles used in the business to record all the
transactions. It is arranged according to the order of their appearance in the financial statements. Refer to Table X
Melamed: continuation of step 2
Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer repair shop on February
14, 2016, naming it Matapang Computer Repairs. Pedro knows that business transactions should be separated from personal
finances. Thus, he decided to invest PHP200,000 in this business. He deposited the amount with Nation Bank.

February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for the business. He issued check
number 001 amounting to PHP25,000.

February 16, 2016 – Claudio Matapang hired Alicia Magaling, an experienced secretary.
Entry: No entry. This is not a financial transaction.

Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity account.
Compound Journal Entry
What has been discussed in most of the illustrations required the preparation of a simple journal entry. A simple journal entry
has one acct. title on the debit side and one acct. title on the credit side. However, there are instances where in one particular
transaction, two or more accts. on either the debit or credit side are affected. In this case, the business may prepare a
compound journal entry. A compound journal entry combines one or more accts. on the debit side or the credit side. Example:
Learner’s#_____Name:___________________________________ Date:________________ Score:_________
ABM 11, Class ________ Performance Task 20IV.3 Subject:Fund. of Accountancy, Bus., & Mgmt 1.mfbb
LESSON 10: Accounting Cycle
(Bring Journal/Columnar Worksheets)

I. Required Tasks
1. Prepare the general journal entries for the above transactions
(ignore giving explanations after every entry)
2. Post the following transactions to the general ledger.
3. Prepare the unadjusted trial balance as of January 30, 2016
II. Required Tasks
Using the following format, identify the effects of above transactions to the accounting equation: