Financial Accounting and

Reporting 1

THE ACCOUNTING CYCLE

FOR A SERVICE BUSINESS
 Relevance and Faithful Representation
Accrual Accounting Cash Accounting
 Revenue is accounted for  Revenue is reported on
when it is earned the income statement
 Expenses of goods and only when cash is
services are recorded received
despite no cash being paid  Expenses are only
out
recorded when cash is
 most commonly used paid out
method, especially by
publicly-traded companies
 mostly used by small
as it smooths out earnings businesses and for
over time personal finances
 Sample Transaction:
Aug. 19 - Received electricity bill for the period
covered July 16 – August 15, worth P6,400.00

Accrual Accounting Cash Accounting

July No entry
Utilities Expense P3,200.00
Utilities Payable P3,200.00

August No entry
Utilities Expense P3,200.00
Utilities Payable P3,200.00
 Sample Transaction contd.
Sept. 19 Paid electricity bill for the period covered July
16 – August 15

Accrual Accounting Cash Accounting

September 19 September 19
Utilities Payable P6,400.00 Utilities Expense P6,400.00
Cash P6,400.00 Cash P6,400.00
Accounting Cycle
STEP 1. IDENTIFICATION OF EVENTS TO BE RECORDED
It is also important to note that companies require that accounting records
include only transactions that can be expressed in terms of money and that
activities of the entity be kept separate and distinct from that of its owners and
all other economic entities.
Accounting Cycle
STEP 2. TRANSACTIONS ARE RECORDED IN THE JOURNAL
The journal is considered the book of original entry.
Components:
1. Date
2. Account titles and explanation
3. P.R. (posting reference)
4. Debit
5. Credit

*Follow the proper format

 Accounting Cycle
STEP 3. JOURNAL ENTRIES ARE POSTED TO THE LEDGER
Account Cash Account No. 1101
Date Explanation P.R. Debit Credit Balance
1 Initial investment GJ-1 400,000.00 400,000.00
3 Advance Rent GJ-1 50,000.00 350,000.00
4 Purchase of equipment GJ-1 30,000.00 320,000.00
5 Services GJ-1 12,000.00 332,000.00

Cash 1101
400,000.00 50,000.00
12,000.00 30,000.00
412,000.00 80,000.00
- 80,000.00
332,000.00
Accounting Cycle
STEP 4. PREPARATION OF THE TRIAL BALANCE
Accounting Cycle
STEP 5. PREPARATION OF THE WORKSHEET including ADJUSTING
ENTRIES