Accounting for Service Business

MODULE GOALS/LEARNING OBJECTIVES:

At the end of the session, the learners will be able to:
1. Explain the accounting cycle.
2. Describe the documents supporting business transactions.
3. Define the commonly used accounting terms.
4. State the rules of debit and credit.
5. Analyze transactions in T-accounts using debit and credit.
6. Make journal entries.
7. Post from the journal to the subsidiary and general ledgers.
8. Prepare a trial balance and explain its use.
Accounting Cycle
• First four steps in an Accounting Cycle

Official
Receipts / General General Trial
Vouchers Journal Ledger
Balance
First four steps in an Accounting Cycle
1. The first step is collecting data based on various documents or
business papers.
2. The second step involves analyzing and recording of the documents
in a book called the journal.
3. The third step involves classifying and posting fro the journal to
another book called the ledger.
4. The fourth step is extracting the balances of each of the accounts
found in the general ledger and preparing a trial balance.
Business Papers
A. Invoice is issued when service or merchandise is given to a customer
or client. It has the name of the entity, tax identification number (TIN),
address and phone number, invoice number, date, Customer’s name
and address, description of service or merchandise given, amount, and
signature of employee preparing the document.
B. Official Receipt is issued when cash is received by the entity. It gives
the following information: name of the entity, TIN, address, phone
number, business number, VAT number (if VAT registered), official
receipt number, date, name of the party giving cash, the amount of
cash and reason for giving cash, form of payment and signature of the
cashier.
C. Cash or Check Voucher is a document used when cash is paid or a
check is issued. It contains the name of the entity, its address and
telephone number, voucher number and date, name of the payee,
amount paid, check number if check is issued and description of
payment. It is signed by the employee preparing it and the officer
authorizing the payment. It also signed by the payee or the person who
received the cash payment.
D. Check is a negotiable instrument used as a substitute for cash, the
payment for which is drawn against the entity’s or individual’s current
account.

E. Promissory note is a written promise to pay a certain sum of money

at a future date. The maker is the debtor who makes the promise,
addressing it to the payee or creditor.

F. Statement of account is a bill presented to a customer for service

rendered or merchandise given for which payment is demandable.
The Chart of Accounts
• Account is a device used to record the increase and decreases
affecting each of the different assets, liabilities and owner’s equity.

• The Chart of Accounts is a listing of account titles which guides the

bookkeeper in the recording of the transactions.

• The number and the nature of accounts depend on the type of

business operation.
• The accounts are properly arranged with the assets listed first,
followed by the liabilities and lastly by the owner’s equity.

• Account numbers are assigned for each account for easy reference.
The T Account
• This is the simplest tool used to analyze the effects of the transactions
on each account, hence it has two sides: one side for recording
increases and the other side for recording decreases.
• The left part is the debit side, and the right side is the credit side.
• When an amount is to be recorded on the left side, we simply say,
debit cash, and when it is to be recorded on the right side, we say
credit cash.

• Debit is an accounting term which simply means left side of an

account, while Credit simply means right side of an account.
The Venetian Model
• Every transaction entry must have a debit equal to a credit no matter how
many accounts are affected. This is called the Double Entry Bookkeeping
System or Venetian Model which was introduced by Luca Pacioli.

• The transactions must always affect two accounts (example cash and
capital) and at least one or two accounting elements (example assets only
or assets and owner’s equity).

• The reason is that a transaction is an exchange of value: one value received

and another value parted with.
The Journal
• The transactions are initially recorded in the journal which is called
the book of original entry.
• The debits and credits of each account are recorded chronologically
by day.
• Each journal entry contains the following items: date, the account
title and the amount to be debited, the account title and the amount
to be credited, and explanation
• Sample Journal entry:

2020
The following rules should be observed per page:
1. Enter the column headings: date, accounts and explanation or
description, F or Ref, debit and credit.
2. Enter on the date column the year and the month. The month is written
only once until you move to the next month. Enter the date o a smaller
column beside or below the month.
3. Enter the debit account on the accounts and explanations or description
column and the amount on the debit column.
4. Enter the credit account on the account and explanation or description
column but indent it so it will not fall on the debit account margin. Enter
the amount on the credit money column
5. Enter a brief explanation on the accounts and explanation column.
6. If a complete journal entry cannot be accommodated at the bottom
of the page, then transfer all data to the next page. A journal entry
must be completely recorded in one place for easy reading and
analysis.
7. A line or space id provided in between the entries to clearly
separate one from the other.
8. If an error is committed either in figure or word, cross out the error
with one horizontal line and write the correct figure or word above
it.
Posting to the Ledger
• The journal does not replace the ledger. The journal provides a
complete recording of a transaction in chronological order while a
ledger shows in one page all the changes (increase or decreases) that
took place for a particular account.
• Each ledger carries a particular account, so we have the cash ledger,
accounts receivable ledger, supplies ledger, and so on. These ledger
are filed in a book called general ledger which also called the book of
final entry.
• The process of transferring the debits and credits from the journal to
the ledger is called posting.
Trial Balance
• At this point we should establish again the equality of the debits and
credits by using another tool called trial balance.
• The double entry bookkeeping rule extends to the trial balance –
ensure that the debit is the same as the credit total. A trial balance is
a list of accounts with ledger balances.
Observe the following rules in preparing the trial balance:
✓ Heading consist of three lines: Name of the business, Title of the
report and date.
✓ Account title are arranged in the following order: Assets, Liabilities,
Capital, Revenue and Expenses.
✓ Note that even the accounts payable, although it is zero, still appears
in the trial balance. It may be omitted but the readers may wonder
what happened to this account.
✓ The peso sign is placed only on the first debit amount, first credit
amount and on the totals.

✓The totals are ruled (one horizontal line drawn under the last
amounts of the debit and credit columns) and double ruled (two
horizontal lines are drawn under the total figures).
✓ If the total debit do not equal the total credit, then error(s) must
have been committed which should be located before ruling and
double ruling the total. It is possible that any of the following errors
may have been committed:

1. Posting from the journal to the ledger on the wrong side.

2. Posting a wrong amount.
3. Ledger footing is wrong.
4. Wrong balances were copied from the general ledger.
Locating Errors
If the total debit amount does not tally with the total credit amount,
the difference usually gives a clue to the kind of error committed:

❑ A difference of ten would indicate probably an error in addition. Add

the debit and credit columns of the trial balance again. If the error is
not there, go further and re-add the debit and credit columns of the
ledgers.
❑ If the difference is divisible by two, then the error probably is in
posting to the wrong side, like a debit balance in the ledger is copied
on the credit side of the trial balance or a debit entry in the journal
was posted to the credit side of the ledger.

❑ If the difference is divisible by 9 or a multiple of 9, the error probably

is in transposition, that is the order of the digits are interchanged, say
an amount of P29,560 was copied as P29,650. Or an error in
transplacement, that is the decimal point is misplaced, say an
amount of P290,000 was copied as P29,000.
However, even if the trial balance proves the duality of the totals, it
does not necessarily follows that errors were not committed. The
following errors could have been made which the trial balance would
not be able to identify:

▪ Failure to record a transaction

▪ A transaction is journalized but not posted.
▪ An erroneous amount is debited and credited for an entry, for
example a P2,500 rental payment is debited to rent expense and
credited to cash as P2,000.
▪ A recorded transaction is posted twice.
▪ An amount is posted to the correct side but to the wrong account. For
example, a debit to insurance expense was posted to the debit side of
salary expense.
▪ Wrong account title in recording the transaction. For example, a
purchase on account was credited to notes payable.
You must therefore exercise care in
recording transactions and posting them
to the ledger. There is a waste of time
and effort when you trace back what
you have done to locate the error.
Subsidiary Ledgers and Control Accounts
• A business has a number of account customers and creditors. If an
account is maintained for each, the general ledger would be very
crowded, more postings will be made, the trial balance will be longer,
and it will be more difficult to locate errors.

• The accounts receivable and accounts payable in the general ledger

are called control accounts. An individual record is kept for each one
of them called subsidiary ledger or customer’s card and creditor’s
card, where the details of their accounts are entered.
SOURCE:
• 21st Century Accounting Process; 2015 edition, by Zenaida Vera Cruz-
Manuel
Thank you ☺