Name: Grade/Section:

Name of Teacher:
Module Code: Pasay-FABM1-Q3-WK5-M17

DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF PASAY CITY

MODULE IN FABM 1
Second Semester / Week 5 / Day 1

Objective: Define the accounting cycle and transaction analysis

YOUR LESSON FOR TODAY: Accounting Cycle 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.

Introduce the accounting cycle of a service business.

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

financial information. It is a series of recurring accounting steps or processes within one span of
accounting period. The accounting cycle is composed of the following steps:
1. Analyzing business transactions from source documents
2. Journalizing the business transactions
3. Posting journal entries to the ledger
4. Preparing trial balance
5. Journalizing and posting adjusting journal entries
6. Preparing adjusted trial balance
7. Preparing financial statements
8. Journalizing and posting closing journal entries
9. Preparing and post-closing trial balance
10. Journalizing and posting reversing journal entries

Steps 1 to 3 are done regularly during the accounting period. Steps 4 to 9 are done at the end od
accounting period. Step 10 is done at the beginning of the nest accounting period.

Step 1 : Identify accounting transactions to be recorded.

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, or accounting 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 are 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

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 1

Analyzing business transactions from source documents requires familiarity with business
documents. Common business documents are official receipts (usually for service business),
sales invoices (usually for merchandising business), statements of account or billing statements
(an example is an electricity bill), deposit slips and withdrawal slips (for banks), payroll sheets (for
salaries and wages), debit memoranda, and credit memoranda, among others. 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.

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 2

The process of analyzing transaction comprises the determining of accounting elements
affected and their effects in the accounting equation, choosing the account title to be debited or
credited, and the computation of the correct amount to be recorded in the books of accounts.

One approach in transaction analysis is that accountants mentally answer the following
questions:
1. What is the value received?
2. What is the value parted with?
3. What accounting elements are affected?
4. What are their effects to the affected accounting elements?
5. What appropriate account title will describe the effect of transaction?
6. How much is the amount to be recorded for a particular account title?

To analyze the effect to transaction, always be guided by the basic rules of debit and credit as
follows:

Debit Credit
+Asset -Asset
+Expense -Expense
-Liabilities +Liabilities
-Owner’s Equity +Owner’s Equity
-Revenue +Revenue

To illustrate, assume that ABC Company bought on account a computer to be used in the
business for ₱40,000. The mental analysis that an accountant can make would be:
Particulars Debit Credit
Value received Computer
Value parted with Obligation to pay
Accounting elements are Asset Liability
affected
Effects to the affected Increase Increase
accounting elements
Appropriate account title Equipment Accounts payable
Amount to be recorded ₱40,000 ₱40,000

Mastering the mental analysis, transaction analysis only involves three simple steps:
1. Classify whether the business is a business or non-business transaction. If the
transaction is non-business, then there is no need to proceed to step 2.
2. Identify the major account/s and the account title/s affected and the movements with
respect to its/their normal balance/s.
3. Determine the amount/s to be credited or debited.

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 3

ILLUSTRATIONS:
Transaction 1-Mr. Mercado invested cash of ₱30,000 in his business to be known as JM
Photocopying Center.
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets and owner’s equity. More specifically, the account
titles affected are Cash (increase through a debit) and Mercado, Capital (increase through
credit).
3. The amount to be debited is ₱30,000 for Cash (accounts with normal debit balances are
increased through a debit) and the amount to be credited is ₱30,000 for Mercado, Capital
(accounts with normal credit balances are increased through a credit.
Transaction 2-Mr. Mercado invested a photocopying machine amounting to ₱30,000 (with sales
invoice) in his business to be known as JM Photocopying Center.
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets and owner’s equity. More specifically, the account
titles affected are Photocopying Equipment (increase through debit) and Mercado, Capital
(increase through credit).
3. The amount to be debited is ₱30,000 for Photocopying Equipment (accounts with normal
debit balances are increased through a debit) and the amount to be credited is ₱30,000
for Mercado, Capital (accounts with normal credit balances are increased through a
credit).

Transaction 3-Mr. Mercado invested the following in his business to be known as JM

Photocopying Center: Cash, ₱30,000; and Photocopying Equipment, ₱30,000 (sales invoice). In
addition, his Loan Payable of ₱50,000 would be assumed by the business.
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets, liabilities, and owner’s equity. More specifically,
the account titles affected are Cash (increase through a debit), Photocopying Equipment
(increase through a debit), Loan Payable (increase through a credit), and Mercado, Capital
(increase through a credit).
3. The amounts to be debited are ₱30,000 for Cash and ₱30,000 for Photocopying
Equipment and the amounts to be credited are ₱50,000 for Loan Payable and ₱10,000
for Mercado, Capital.

Transaction 4-JM Photocopying Center paid ₱10,000 for the purchase of bond papers (with sales
invoice).
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. Assets are affected by this transaction. More specifically, the account titles affected are
Unused Supplies (increase through a debit) and Cash (decreased through a credit).
3. The amount to be debited is ₱10,000 for Unused Supplies and the amount to be credited
is ₱10,000 for Cash (accounts with normal debit balances are decreased through a credit).

Transaction 5-Mr. Mercado hired one personnel with a weekly salary of ₱1,000 to look after the
business (with employment contract).
Analysis:
- The transaction is a non-business transaction since it does not affect the accounting equation.
Mr. Mercado hired personnel with an agreed weekly salary of ₱1,000 but did not pay the employee
nor did the employee render service.

Transaction 6-JM Photocopying Center paid salary of the personnel for the week, ₱1,000 (with
payroll sheet).
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are expenses and assets. More specifically, the account
titles affected are Salaries Expense (increase through a debit) and Cash (decrease
through a credit).
3. The amount to be debited is ₱1,000 for Salaries Expense and the amount to be credited is
₱1,000 for Cash (accounts with normal debit balance are decreased through a credit).

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 4

Transaction 7
JM Photocopying Center received ₱8,000 cash for services rendered (with official receipt).
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets and revenues. More specifically, the account
titles affected are Cash (increase through a debit) and Photocopying Revenues
(increase through a credit).
3. The amount to be debited is ₱8,000 for Cash and the amount to be credited is ₱8,000
for Photocopying Revenues.

Transaction 8
JM Photocopying Center billed a customer for services rendered during the week,
₱2,000 (with billing statement)

Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets and revenues. More specifically, the
account titles affected are Accounts Receivable (increase through a debit) and
Photocopying Revenues (increase through a credit).
3. The amount to be debited is ₱2,000 for Accounts Receivable and the amount to
be credited is ₱2,000 for Photocopying Revenues.

Transaction 9
Mr. Mercado made a ₱500 cash withdrawal for personal use.
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are owner’s equity and assets. More specifically,
the account titles affected are Mercado, Drawing (increased through a debit) and Cash
(decrease through a credit).
3. The amount to be debited is ₱500 for Mercado, Drawing and the amount to be
credited is ₱500 for Cash.

Transaction 10
JM Photocopying Center collected the amount billed to a customer, ₱2,000 (with official
receipt).
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. Assets are affected by this transaction. More specifically, the account titles
affected are Cash (increase through a debit) and Accounts Receivable (decrease
through a credit).
3. The amount to be debited is ₱2,000 for Cash and the amount to be credited is
₱2,000 for Accounts Receivable.

Transaction 11
JM Photocopying Center paid rent for two months amounting to ₱10,000 (with
statement of account).
Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major accounts affected are assets and expenses. More specifically, the
account titles affected are Rent Expense (increase through a debit) and Cash
(decrease through a credit).
3. The amount to be debited is ₱10,000 for Rent Expense and the amount to be
credited is ₱10,000 for Cash.

Transaction 12
JM Photocopying Center received a bill from an electric company, ₱2,500 (with
statement of account).

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 5

Analysis:
1. It is a business transaction since it affects the accounting equation.
2. The major affected are expenses and liabilities. The account titles affected are
Utilities Expense (increase through a debit) and Accounts Payable (increase
through a credit). The receipt of the statement of account means recognition of
an expense and a liability. The business is obliged to pay for this bill.
3. The amount to be debited is ₱2,500 for Utilities Expense and the amount to be
credited is ₱2,500 for Accounts Payable.

To summarize, the aforementioned 12 transactions have the following effects on the

major accounts and account titles:
Tran
Owner’s Equity
sacti Assets Liabilities
on (+C+R-E-W)

1 Increase of ₱30,000 (Cash) No effect Increase of ₱30,000

(Mercado, Capital)
2 Increase of ₱30,000 No effect Increase of ₱30,000
(Photocopying Equipment) (Mercado, Capital)
3 Increase of ₱60,000 (Cash, Increase of ₱50,000 Increase of ₱10,000
₱30,000 and Photocopying (Loan Payable) (Mercado, Capital)
Equipment, ₱30,000)
4 Increase of ₱10,000 (Unused No effect No effect
Supplies) and Decrease in
another asset of ₱10,000 (Cash)
5 No effect No effect No effect

6 Decrease of ₱1,000 (Cash) No effect Decrease of ₱1,000

(Mercado, Capital
7 Increase of ₱8,000 (Cash) No effect Increase of ₱8,000
(Photocopying Revenues)
8 Increase of ₱2,000 (Accounts No effect Increase of ₱2,000
Receivable) (Photocopying Revenues)
9 Decrease of ₱500 (Cash) No effect Decrease of ₱500
(Mercado, Capital)
10 Increase of ₱2,000 Cash and No effect No effect
Decrease in another asset of
₱2,000 (Accounts Receivable)
11 Decrease of ₱10,000 (Cash) No effect Decrease of ₱10,000
(Rent Expense)
12 No effect Increase of ₱2,500 Decrease of ₱2,500
(Accounts Payable) (Utilities Expense)

EVALUATION: On a separate sheet of paper, enumerate the 10 steps in

accounting cycle

References for further Enhancement: Commission on Higher Education with PNU, Teaching guide for
SHS FABM1
Tugas, F. et. al., FABM1 SHS Textbook, DepEd
Ferrer, R. & Millan, Z.2017. Senior High School Fundamentals of Accountancy, Business and
Management 1, Bandolin Enterprise.
Valencia, E. G. & Roxas, G.F. 2006. Basic Accounting

Prepared by JOSIE A. DE LA PENA of PCSHS FABM1 M17 JAD Page 6