Accounting Cycle: Service Business

- Student Notes
Directions:
Fill in the blanks.

Basic Accounting Segment

1. Accounting
• Is the action or process of keeping _______________ accounts
• Is the systematic _______________, reporting and analysis of financial
transactions of a business

2. Service Business
• Is a business which works for a customer and does not provide
_______________ goods
• Provide _______________ goods such as accounting, banking,
consulting, cleaning, landscaping, insurance, treatments or
transportation
Tangible goods: merchandise which is a physical object such as clothing or
food
Intangible goods: merchandise which is not a physical object such as a
service like dry cleaning, hair styling or insurance

3. Service Business Examples

• Include:
− accounting firms
− dry cleaners
− _______________
− spas
Some businesses may specialize in services and also sell goods. For
example, an airline offers the service of flying but also offers food (tangible
good) for purchase.

4. Merchandise Business
• Is a commercial _______________ which provides tangible goods for
sale
• Purchases _______________ goods and resell the goods for profit
− generally buy their products from a wide range of distributors and
then market their products in consumer shopping facilities

Accompanies:
  Accounting Cycle: Service Business 1
 Accounting Cycle: Service Business
- Student Notes
5. Merchandise Business Examples
• Include:
− grocery store
− clothing boutique
− _______________
− car dealership
Some businesses may specialize in selling goods but also offer services.
For example, a car dealership sells cars, but also has an automotive
service center to do repair work (intangible good).

6. Service Business vs. Merchandise Business

• Both business types use _______________ (GAAP)

7. Accounting Equation
• Provides the _______________ for all accounting events
• Helps determine how all transactions are _______________ in a
business
− each part of the equation involves different accounts
• example: a cash account (asset) only includes transactions
which involve cash
Assets = Liabilities + Stockholders’ Equity
Accounts: a record which collects specific business transactions

8. Assets
• Are owned company resources which have a dollar value
− typical assets in a service business include:
• cash
• _______________
• accounts receivable
• land
• buildings
Inventory is a common asset for a merchandise business.

Accompanies:
  Accounting Cycle: Service Business 2
 Accounting Cycle: Service Business
- Student Notes
9. Assets Example
• Car Wash (service business)
− assets include:
• building structure
• water hoses/automatic washer
• _______________
• area where cars are parked/washed (land)

10. Liabilities
• Are _______________ owed by a company
− typical liability accounts in a service business include:
• accounts payable
• salary payable
• _______________ payable
• unearned service revenue

11. Stockholders’ Equity

• Is the _______________ of the stockholders’ claims to the assets of
business
− typical stockholders’ equity accounts include:
• _______________
• retained earnings
• capital

12. Stockholders’ Equity

• Is also referred to as “_______________” if the business is not a
corporation
• Includes all the money owners have put into the business plus the
_______________ earned by the company
Stockholders are also considered owners in corporations.

Accompanies:
  Accounting Cycle: Service Business 3
 Accounting Cycle: Service Business
- Student Notes
13. Debits & Credits
• Simply mean the left and right of the accounting equation
Assets = Liabilities + Stockholders’ Equity
• Debits
− left side of the accounting equation (assets)
− abbreviated _______________. in accounting
• Credits
− right side of the accounting equation (liabilities + stockholders’
equity)
− abbreviated _______________r. in accounting

14. Chart of Accounts

• Is a __________ of the names of the accounts a company has identified
and made available for recording transactions in its general ledger
− companies can _______________ their chart of accounts to best
suit their needs
• adding accounts as needed
− each main account type is assigned a number

15. Chart of Accounts

• Reflects the _______________ of the business
− a larger business will have more accounts in the chart of accounts

16. Chart of Accounts

• Typically list accounts in the following order:
− _______________ sheet accounts
• assets
• _______________
• owner’s (stockholders’) equity

Accompanies:
  Accounting Cycle: Service Business 4
 Accounting Cycle: Service Business
- Student Notes
17. Chart of Accounts
• Typically list accounts in the following order:
− _______________ statement accounts
• operating revenues
• _______________ expenses
• non-operating revenues & gains
• non-operating expenses & losses
Operating revenues and operating expenses can be further organized by
business function (selling, financing, etc.) and/or company division, product
lines, etc. depending on the company.

18. Chart of Accounts

• Assign numbers to accounts found within the main account
− _______________: assets
• 101: cash (type of asset)
• 102: accounts receivable (type of asset)
− _______________: liabilities
• 201: accounts payable (type of liability)
• 202: taxes payable (type of liability)
Accounting software frequently includes sample charts of accounts for
various types of businesses. Companies can expand or modify these
sample charts of accounts so the specific needs of the company are met.
Once a business is routinely completing and recording transactions, the
company may add more accounts or delete accounts which have not been
used.

19. Revenue
• Is _______________ for work completed or goods delivered
− typical revenue accounts include:
• service revenue
• _______________ revenue
• rent revenue
• Increase owner’s equity
− can increase even if money is not received immediately

Accompanies:
  Accounting Cycle: Service Business 5
 Accounting Cycle: Service Business
- Student Notes
20. Expenses
• Are _______________ made to help the company earn revenue
− common expense accounts include:
• utilities expense
• supplies expense
• _____________ expense
• salary expense
• Decrease owner’s _____________

21. Tips for Debiting & Crediting Accounts

• _______________ accounts are debited and have debit balances
• Revenue accounts are credited and have credit balances
• Asset accounts normally have _______________ balances
− to increase an asset account, debit the account
− to decrease an asset account, credit the account

22. Tips for Debiting & Crediting Accounts

• _______________ accounts normally have credit balances
− to increase a liability account, credit the account
− to decrease a liability account, debit the account

Transactions Segment
1. T- Accounts
• Are a _______________ display of a transaction’s effect on an account
• Are made with a vertical line and a horizontal line resembling the letter T
− account name is written on the _______________ line
− debits are put on the left side; credits are put on the right side
It is important to know the normal balance of accounts when analyzing
transactions.

2. Double-Entry System
• Is used in accounting
− at least two accounts are _______________ by every transaction
• one account has to be on the debit side and one account
has to be on the credit side

Accompanies:
  Accounting Cycle: Service Business 6
 Accounting Cycle: Service Business
- Student Notes
3. Normal Balance
• Is the balance an account type is _______________ expected to have
Think of the normal balance as the side of the accounting equation where
an account is normally found.
Debit as a normal balance (left side): Assets, Dividends, Expenses
Credit as a normal balance (right side): Revenues, Liabilities, Common
Stock

4. Normal Balance
• Means the account is _______________
− an asset has a debit normal balance when it is increasing
• if a store receives cash, this increases their assets (debt)
− a liability has a _______________ normal balance when it is
increasing
• if a store receives a bill for an unpaid expense, this
increases liability (credit)

5. Normal Balance
• Means the account is _______________
− if an account is on the opposite side of its normal balance, it is
decreasing
• to decrease an asset, place it on the credit side
• to decrease a _______________, place it on the debit side

6. Expenses
• Are debits even though they are not _______________
• Decrease owner’s _______________ (which has a normal credit
balance)
Assets = Liabilities + Stockholders’ Equity

7. Revenues
• Are _______________ but are not _______________
• Increase owner’s equity (which has a normal balance of credit)
Assets = Liabilities + Stockholders’ Equity
The balance sheet and income statement are two different types of
financial statements.
Assets/Liabilities/Equity are on the balance sheet.
Revenues and Expenses are found on the income statement.

Accompanies:
  Accounting Cycle: Service Business 7
 Accounting Cycle: Service Business
- Student Notes
8. T-Account Guide
• Remember the accounting _______________ when examining T-
accounts
− left and right

Assets = Liabilities + Stockholders’ Equity

9. T-Chart Example
This company is using T-accounts to record each type of transaction. You
can see they have an _______________ in the asset of cash (debit) of
$15,905. Food inventory is another asset, but it also has a decrease of
$13,800. A decrease in this account is on the credit (right) side. There is
also an increase in the liability of accounts payable (credit) of $500.

Accompanies:
  Accounting Cycle: Service Business 8
 Accounting Cycle: Service Business
- Student Notes
10. Service Business Transaction Example
• Babysitters on Demand received $500 cash from the Knott family after
babysitting for a weekend
• Cash increases the company _______________ (debit)
• Service revenue increases company _______________ (credit)

11. Service Business Transaction Example

• The next week, Babysitters on Demand watched children at the Knott’s
house, but they did not immediately get paid for their service as the
family will be billed later
• Accounts _______________ (asset) indicates the job was performed but
the money has not yet been paid

12. Service Business Transaction Example

• Service _______________ (increase in equity) is the money made from
completing a service (babysitting)

13. Service Business Transaction Example

• A company paid a total of $15,000 in salaries
• The cash account includes all the money the company has
− this will decrease (credit) when _______________ are paid

Accompanies:
  Accounting Cycle: Service Business 9
 Accounting Cycle: Service Business
- Student Notes
Steps of the Cycle Segment
1. Accounting Cycle
• Is the process of _______________ accounting procedures in an
accounting period
• Ends with the _______________ of financial statements for the
accounting period
Accounting Period: time frame when certain accounting transactions occur;
usually a quarter (four months) or a year long

2. Steps in the Accounting Cycle

• Include:
1. analyze transactions
2. record journal entries
3. post ledger account entries
4. arrive at unadjusted trial balance
5. record and post adjusting entries
6. arrive at adjusted trial balance
7. prepare financial statements
8. _______________
9. arrive at post closing trial balance
Occur daily
Occur periodically
Occur at the end of the accounting period

3. Step 1: Analyze Transactions

• Involves:
− a company looking at the source documents for a transaction
• source documents prove a transaction occurred
− checks, _______________, purchase orders
− accountant determines if the transactions are debits or credits to
certain accounts

Accompanies:
  Accounting Cycle: Service Business 10
 Accounting Cycle: Service Business
- Student Notes
4. Step 2: Record Journal Entries
• Involves accountants adding transactions to a journal
− there must be a debit to an account and a credit to an account for
each journal entry
• debits must _______________ credits
− parts of a journal entry include:
• date
• account name
• _______________
• credit
Journal: a form used to record transactions in a chronological order

5. Step 3: Post to the Ledger

• Involves _______________ information from the journal to the ledger
− accounts may increase and decrease daily
• the accountant finds the sum of each account based on
previous journal entries
− ledger contains the __________ amounts of each type of account
Ledger: a collection of all accounts in a business

6. Step 4: Arrive at the Unadjusted Trial Balance

• _______________ the debits equal the credits
− prepared before the _______________ entries
− only used in the company (the public cannot see this)
Trial Balance: a list of all accounts and their balances at a certain point

7. Step 5: Record & Post Adjusting Balances

• Involves _______________ any accounts which need updated
− could need to occur because some expenses/revenue were not
recorded
• example:
− supplies were used but not recorded
− cash was received before a job was completed
− these entries are made at the end of the accounting period
− recorded in the journal then posted to the ledger

Accompanies:
  Accounting Cycle: Service Business 11
 Accounting Cycle: Service Business
- Student Notes
8. Adjusting Entry Example
• Doyle’s Car Wash and Detail bought new washing supplies with cash for
his business; this is the initial journal entry:

9. Adjusting Entry Example

• At the _______________ of the month, $900 worth of supplies was
used; the following adjusting journal entry is made:

The used supplies are no longer assets

10. Step 6: Arrive at the Adjusted Balance

• Verifies the debits equal the credits
− prepared after _______________ entries
− this will be used to develop financial statements

11. Step 7: Prepare Worksheets & Financial Statements

• Involves creating worksheets
− working paper documents used to collect information from
_____________ in one location
− usually are developed on standard _____________ accounting
paper or by using accounting software

Accompanies:
  Accounting Cycle: Service Business 12
 Accounting Cycle: Service Business
- Student Notes
12. Step 7: Prepare Worksheets & Financial Statements
• Involves creating worksheets, a working paper used to collect
information from ledger accounts in one location
• Includes reports of the companies activities which can be seen by the
public
− financial statements are prepared in a specific order
• income statement
• statement of _____________
• balance sheet
• statement of _____________
− the information used in one sheet is used for the next sheet so the
order of completion matters

13. Income Statement

• Shows how _______________ a company is during a certain
accounting period
• Is also called a profit and loss (P&L) statement
• Includes revenue and expenses
− service revenue is found on the _______________ statement of a
service business
Revenues – Expenses = Net Income

14. Income Statement Examples

• Include:
− single-step income statement
• statement which displays _______________ revenue,
expenses and net income
− multiple-step income statement
• statement which provides _______________ about each
revenue and expense type

Accompanies:
  Accounting Cycle: Service Business 13
 Accounting Cycle: Service Business
- Student Notes
15. Income Statement Examples

16. Statement of Retained Earnings

• Is the statement outlining the _______________ in retained earnings for
a certain period
− corporations will also develop a statement of _______________
equity
Retained Earnings: earnings maintained by the company for financial
growth

17. Balance Sheet

• Is an _______________ (public) document showing a company’s
financial position at a certain time
• Are examined by competitors, _______________, suppliers and
customers
• Includes assets, liabilities and stockholders’ (owner’s) equity
− this is based on the accounting equation

Accompanies:
  Accounting Cycle: Service Business 14
 Accounting Cycle: Service Business
- Student Notes
18. Example Balance Sheet

As you can see, this business has tangible assets (_____________), but it
also has intangible assets of goodwill (amount paid over the asking price
when buying another business) and trade name (trademark). Many service
businesses can be in this situation.

19. Statement of Cash Flows

• Reports _______________ generated and used by a company
− a company should strive to generate more cash than it uses
− service companies may receive cash from customers prior to work
being completed, on a monthly basis or in one lump sum which will
impact the company’s cash flow

20. Statement of Cash Flows

• Includes three categories:
− operating activities
• receiving cash from _______________ expenses
− _______________ activities
• using cash for assets
− financing activities
• receiving cash from owners/paying owners

Accompanies:
  Accounting Cycle: Service Business 15
 Accounting Cycle: Service Business
- Student Notes
21. Step 8: Prepare Closing Entries
• Involves transferring _______________ account balances to permanent
accounts to prepare for the new accounting period
− financial statement accounts are temporary accounts such as
revenue, expense and income
Temporary account balances are transferred to retained earnings account
for a corporation.

22. Step 9: Arrive at Post-Closing Trial Balance

• Is an _______________ step
• Shows debit and credit amounts for _______________ accounts only
− the temporary accounts are now zero

Accompanies:
  Accounting Cycle: Service Business 16