ACCOUNTING FOR SERVICE BUSINESS

Accounting Cycle

First Four Steps in an Accounting Cycle

• The first step is collecting data based on various documents or business papers.
• The second step involves analyzing and recording of the documents in a book called the journal.
• The third step involves classifying and posting fro the journal to another book called the ledger.
• 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
entities 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
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 ledgers 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 consists 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 trans placement, 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 several 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.