Learning Module 1 Review of The Accounting Cycle of A Service Business MARCH 2022

Unit 1
Review of the Accounting Cycle of a

Sole Proprietorship Form of Business
Overview
The work for each accounting period follows a cycle, which is called the accounting cycle. This
refers to a series of sequential steps or procedures performed to accomplish the accounting process.
Accounting performs important tasks of recording daily transactions, classifying recorded data,
summarizing recorded and classified data in order to prepare financial reports and providing
interpretation of the summarized facts in informing interested people about business operation and
financial condition. Accounting information is summarized in at least four basic financial reports,
namely, (1) Statement of Comprehensive Income (SCI) or simply Income Statement; (2) Statement
of Changes in Equity (SCE); (3) Statement of Financial Position (SFP); and (4) Cash Flows Statement
(CFS) together with its accompanying notes to the financial statements.
The following are the basic steps in the accounting cycle. Worksheet preparation and journalizing
and posting reversing entries are optional steps.
Learning Objectives
After studying this chapter, the learner should be able to acquire the following competencies:
1
Copyright © 2022 Marivic Valenzuela-Manalo. All rights reserved.
No part of this learning module may be used, reproduced, stored, or transmitted in any form or by any means without the written
consent of the author.
1. Practice recording business transactions and applying the rules of debits and credits.
2. Do the step posting in the general ledger using T-accounts.
3. Prepare and understand the importance of the different trial balances.
4. Prepare the natural form of Income Statement for a single proprietorship.
5. Prepare the Statement of Changes in Owner’s Equity.
6. Prepare the Statement of Financial Position of a single proprietorship.
7. Prepare Cash Flows Statement using the direct method.
8. Perform the rest of the steps in completing the accounting cycle.
Business Case to Review the Accounting Cycle of a Sole

Proprietorship Form of Business
Charito Couturier Shop
How time flies so fast! It seems just like yesterday when Charito started a small couturier shop out of
her dress making and designing hobby. Look where her favorite pastime brought her! She is now
considered by many to be a successful entrepreneur after putting Charito Couturier Shop (CCS) two
years ago!
Charito more than ever is really so concerned with the progress of her business operations on its third
year of operation. She never forgets that the business to operate successfully must embody the
principles of earning profits with outmost concern for the welfare of people and planet!
She reviewed the lessons on the different steps of the accounting cycle which she tried to learn when
she was starting her small business. She started with the chart of accounts of the business as follows
and proceeds with the journalizing of the various transactions for the month of December which is
the end of the shop’s reporting period for its third year of operation.
2
CHART OF ACCOUNTS
Account Number Account Title
ASSETS
101 Cash in Bank
102 Petty Cash Fund
103 Accounts Receivable
103-A Allowance for Bad Debts
104 Notes Receivable
105 Advances to Employees
106 Interest Receivable
107 Sewing Supplies on Hand
201 Land
202 Buildings
202-A Accumulated Depreciation - Building
203 Shop Equipment
203-A Accumulated Depreciation - Shop Equipment
204 Furniture and Fixture
204-A Accumulated Depreciation – Furniture and Fixture
LIABILITIES
301 Accounts Payable
302 Notes Payable
303 Withholding Taxes Payable
304 Utilities Payable
305 Interest Payable
306 Unearned Service Income
309 Income Tax Payable
310 Mortgage Payable
OWNER'S EQUITY
401 Charito, Capital
401-A Charito, Drawing
REVENUES
501 Service Income
502 Interest Income
EXPENSES
610 Salaries and Wages Expense
611 Depreciation Expense
612 Utilities Expense
613 Insurance Expense
614 Sewing Supplies Expense
615 Transportation Expense
616 Repairs and Maintenance Expense
617 SSS, Philhealth, and Pag-ibig Expense
618 Bad Debts Expense
619 Miscellaneous Expense
630 Interest Expense
3
The following is the trial balance prepared for Charito Couturier Shop as of November 30, 2020.

Trial Balance
November 30, 2020
Account Title Debit Credit

Cash in Bank ₱ 182,000
Petty Cash Fund 10,000
Accounts Receivable 123,000
Allowance for Bad Debts ₱ 9,500
Sewing Supplies on Hand 72,500
Land 700,000
Buildings 800,000
Accumulated Depreciation-Building 100,000
Shop Equipment 480,000
Accumulated Depreciation-Shop Equipment 112,500
Furniture and Fixture 150,000
Accumulated Depreciation – Furniture and Fixture 52,000
Accounts Payable 18,000
Notes Payable 20,000
Withholding Taxes Payable 7,200
Mortgage Payable 100,000
Charito, Capital 1,284,300
Charito, Drawing 70,000
Service Income 2,250,000
Salaries and Wages Expense 1,121,250
Insurance Expense 68,450
Utilities Expense 85,200
Repairs and Maintenance Expense 18,500
Transportation Expense 8,250
SSS, Philhealth, and Pag-ibig Expense 41,550
Miscellaneous Expense 18,400
Interest Expense 4,400
Total ₱ 3,953,500 ₱ 3,953,500
4
Charito is so convinced on the concept that accounting is the language of business. This is the reason
why she always require her accountant to prepare an interim financial statements for her business so
that she knows what is the financial condition and performance of the company. The following are
the interim financial statements of Charito Couturier Shop for the eleven months of operation of the
business:

Income Statement
For the period ended November 30, 2020
Service Income ₱ 2,250,000

Less: Total Expenses
Salaries and wages Expense ₱ 1,121,250
Utilities Expense 85,200
Interest Expense 4,400 1,366,000
Net income ₱ 884,000

Statement of Changes in Owner's Equity
For the period ended November 30, 2020
Charito, Capital ₱ 1,284,300

Add: Net Income 884,000
Sub-total ₱ 2,168,300
Less: Charito, Drawing 70,000
Charito, Capital ₱ 2,098,300
5
Statement of Financial Position
November 30, 2020
ASSETS
Current Assets
Cash (Note 1) ₱ 192,000
Trade receivables ( Note 2 ) 113,500
Sewing Supplies on Hand 72,500 ₱ 378,000
Non-Current Assets
Property, Plant and Equipment ( Note 3) 1,865,500
Total Assets ₱ 2,243,500
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Trade and other payables ( Note 4 ) ₱ 45,200
Non-Current Liabilities
Total Liabilities ₱ 145,200
Owner's Equity
Total Liabilities and Owner's Equity ₱ 2,243,500
Computational Notes to the Financial Statement

Note 1: Cash
Total Cash ₱ 192,000
Note 2: Trade and Other Receivables

Accounts Receivable ₱ 123,000
Allowance for Doubtful Accounts 9,500
Total Trade Receivables ₱ 113,500
6
Note 3: Property, Plant and Equipment
Land ₱ 700,000
₱
Building
800,000
Less: Accumulated Depreciation 100,000 700,000
₱
Shop Equipment
480,000
₱
Furniture and Fixture
150,000
Total Carrying Value ₱ 1,865,500
Note 4: Trade and Other Payables

Accounts Payable ₱ 18,000
Total Trade and Other Payables ₱ 45,200
Charito after analyzing the interim financial reports was happy to note that the company produced a
net income of P884,000 for the eleven months of operation for the year 2020. She is now ready to
proceed reviewing the different steps of the accounting cycle using the shop’s December transactions
and be able to come up with the 2020 year-end financial reports for her couturier shop.
Step 1: Analyzing Business Transactions and Journalizing in the General

Journal
Charito reviews the first step which is journalizing business transaction, now that all the business
documents of his business for the month of December were properly sorted and filed. She recalled
the definition that journalizing is the chronological recording of the business transactions in the book
called the general journal. A journal is a daily record of business transactions that shows in one
place the complete debit and credit effect of each transaction on the accounts of the business in
chronological order.
She also remembered that in journalizing transactions it is not only important to know the form of
business organization according to ownership (i.e., sole proprietorship, partnership, corporation, or
cooperative) but to also know the form of business organization according to activity (i.e., service,
merchandising, or manufacturing). Service business activity is rendering service, for example,
7
designing and sewing clothing apparels similar to her own shop. Merchandising or trading business
activity means the company is engaged in the buying and selling of finished goods or merchandise,
for example drug store. Manufacturing business activity on the other hand is a business engaged in
the processing of products or the conversion of raw materials into finished goods that are then sold
like the furniture factory.
To understand what journalizing is all about, one must fully appreciate that debits and credits are
fundamental in the bookkeeping procedure and that this is connected to the accounting equation.
ASSETS = LIABILITIES + OWNER’S

EQUITY
Debit and Credit can be literally translated as LEFT for debit (i.e., LEFT hand column of an account)
and as RIGHT for credit (i.e., RIGHT hand side of an account).
Assets Liabilities Owner’s Equity

Normal balance Debit Credit Credit
Increased by Debit Credit Credit
Decreased by Credit Debit Debit
Expense Income Owner’s Equity

Normal balance Debit Credit Credit
Increased by Debit Credit Credit
Decreased by Credit Debit Debit
8
Activity 1.1 to DEMONSTRATE student’s learning in step 1: Journalizing
The following is the list summarizing the various transactions of CCS for the month of
December, 2020 which you are asked to record.
Dec. 1 Received 5%, 3-month, P30,000 note from Maffy for the party gown that CCS
designed and delivered for the former today.
2 CCS purchased buttons, threads, and ribbons from Luz Sewing Supplies Store
amounting to P 14,800 paying 50% down and the balance on account.
3 Romy, the master cutter in the shop made salary advances amounting to P3,000.
4 Michelle, a frequent customer of CCS paid P52,000 for the balance of the gown she
requested Charito to specially design for her two months ago.
5 Charito withdrew buttons, ribbons, and threads amounting to P500 for her personal
use at home.
6 Paid Efren Repair Service Center P1,500 for the repair of one of the sewing machines.
7 Delivered the debut gown of Rose and collected P25,000.
8 Paid the transportation fare of Rene, the liaison officer of CCS amounting to P750.
9 Paid the P18,000 accounts payable to Jose Building Maintenance Company.
10 Charito withdrew P20,000 cash permanently from the business fund.
18 CCS entered into a P350,000 contract of designing all the gowns for the wedding
entourage of Joy and Rafael on June, 2021. The couple paid 20% down payment.
20 Paid the internet and telephone December bill received from GlobeSmart Telecom
amounting to P1,200.
27 Billed Mary Renee Dance Company for P75,000 for the costumes designed and sewed
for their theater actors and actresses.
31 CCS paid December salaries of its employees amounting to P89,700.
Note: SSS, Philhealth, Pag-ibig, and withholding tax deductions were not included in this transaction to simplify reviewing
Step 1 – Journalizing of the accounting cycle.
Required:
Using the following General Journal activity sheets, record the above transaction of CCS for the
month of December, 2020. December 1 transaction was done for your example on how to record
business transactions using the general journal.
9
A C T I V I T Y S H E E T No. 1.1
P a g e 7
DATE PARTICULARS P/R D E B I T C R E D I T
Dec. 1 Notes Receivable 3 0 0 0 0
Service Income 3 0 0 0 0
Received 5%, 3-month promisory note.
Activity Sheet No. 1.1 Page 1 of 2
10
P a g e 8
Dec. 8
10
18
20
27
31
11
Step 2: Posting to the General Ledger
After recording the above transactions, let us recall the lessons in posting to the general ledger.
Posting is the process of transferring journal entries to the ledger accounts. The ledger is also called
the book of final entry. It is in this book where all of the accounts listed in the company’s chart of
accounts are maintained. This book keeps all the information about the changes in every account
balance and often very useful for management. An account is used as an accounting tool to record
increases and decreases to individual accounting record in a specific asset, liability, or owner's equity
item. An open account in the general ledger means that there is an amount posted in the ledger and
has an existing balance. There are two possible forms of general ledger, namely: (1) running balance
form and (2) standard form.
In lieu of the actual general ledger accounts, accountants use T-accounts to analyze business
transactions. As the term implies, a T-account really looks like a capital letter T which consists of a
horizontal and a vertical line. To make use of this tool of analysis for accounting, the account title is
written just above the horizontal line. The vertical line provides an imaginary left and right side of
the account where increases or decreases will be recorded similar to the standard form of general
ledger.
Activity 1.2 to DEMONSTRATE student’s learning in Step 2: Posting to the Ledger

• Using the following activity sheets with T-accounts, post the journal entries recorded for the
December transactions of CCS. The first transaction was posted for your sample.
• After posting the journal entries, compute for the December 31 balance of all the accounts that
were affected by the December business transactions of CCS.
EXAMPLE of posting using T-accounts
On December 1, received 5%, 3-month, P30,000 note from Maffy for the party gown that CCS
designed and delivered for the former today. The journal entry for this transaction follows:
Dec. 1 Notes Receivable 3 0 0 0 0

Service Income 3 0 0 0 0
Received 5%, 3-month promisory note.
This is how December 1 journal entry will be posted using T-accounts. Example of computing the
balance as required by this activity was also shown for the Notes Receivable account.
12
Notes Receivable Service Income

Nov. 30 balance - 2,250,000 Nov. 30 balance
30,000 30,000
Dec. 31 balance 30,000

30,000
Cash Charito, Capital
Accounts Receivable Charito, Drawing
13
Sewing Supplies on Hand Advances to Employees
Accounts Payable Unearned Service

Income
Salaries and Wages Expense Utilities Expense
Repairs and Maintenance Expense Transportation Expense

14
Step 3: Trial Balance preparation
The trial balance is a list of schedule of open accounts in the general ledger with their corresponding
account balances, i.e., the difference between the total debits and total credits of an account in the
ledger. It is prepared to verify the equality of debits and credits in the ledger at the end of each
accounting period or at any time the postings are updated.
The previous section has shown journalizing and posting business transactions, at this point in the
sequence, it is advisable to check the work for arithmetic accuracy. Preparing the trial balance does
this. The trial balance summarizes all the accounts in the general ledger and thus, provides a check on
the equality of the debits and credit entries in the ledger. This schedule has the following
characteristics:
1. It is a list of accounts.
2. The list of accounts is unclassified; it does not attempt to state whether accounts listed are
assets or liabilities, current or long term.
3. The accounts listed are normally those with open balances, that is, they have peso amount
balances.
4. The accounts are listed in ledger orders.
If the accounts have been debited and credited with equal amounts for each transaction during the
accounting period, and if the balances of all accounts have been accurately calculated, the sum of the
debit balance accounts (the assets and the expenses) will equal the sum of the credit balance accounts
(contra asset accounts, the liabilities, proprietor’s capital and revenues).
It is important to note that the trial balance is a list prepared for all accounts with open (debit or credit)
balances. Accounts with zero balances are excluded. The trial balance is not a complete proof of the
correctness of the accounting entries recorded.
Activity 1.3 to DEMONSTRATE student’s learning for Step 3: Trial balance preparation
Using the following activity sheet, complete the trial balance of Charito Couturier Shop as of
December 31, 2020 using the amounts of the 14 transactions that you posted and computed the
balances in the T-accounts in Activity No. 2.
15
Trial Balance
December 31, 2020

Cash in Bank ₱
Accounts Receivable
Allowance for Bad Debts ₱ 9,500
Notes Receivable
Advances to Employees
Sewing Supplies on Hand
Land 700,000
Buildings 800,000
Accumulated Depreciation-Building 100,000
Accumulated Depreciation-Shop Equipment 112,500
Accumulated Depreciation – Furniture and Fixture 52,000
Accounts Payable
Unearned Service Income
Charito, Capital
Charito, Drawing
Service Income
Salaries and Wages Expense
Utilities Expense
Repairs and Maintenance Expense
Transportation Expense
Total ₱ ₱
16
Step 4: Worksheet Preparation
The worksheet is a multicolumn devised used to systematically assemble the accounting data used in
the adjustment process, financial statements preparation and closing entries. A worksheet is just a
temporary accounting record. It is not a journal or a part of the general ledger. The worksheet is
commonly known as the “working paper” of accountants which makes it easier for them to record
adjusting entries, determines the result of the firm’s operation (whether net income or net loss) and
is used as a tool in preparing financial statements and closing entries. Although the use of worksheet
is an optional step in the accounting cycle, it helps facilitate earlier release of financial statements to
interested parties.
There are two basic forms in preparing a worksheet. The first is the ten-column worksheet and the
second is the eight column worksheet.
Important: Fully accomplished worksheet can be found in Appendix 1.
Step 5: Journalizing and Posting Adjusting Entries
Many times, companies will find it difficult to determine in what year they should report some of the
revenues they earned and the expenses incurred. Measuring net income or net loss requires proper
timing. The need for proper timing is the reason why accountants thought of a convenient assumption
of dividing the economic life of a business into artificial time periods known as reporting or
accounting period. This is the basic accounting concept of “periodicity” or “time period”. The time
period assumption is important in accomplishing the fifth step of the accounting cycle which is
“adjusting the books”. Step 5 is fairly crucial in the preparation of accurate or fairly valued financial
statements. It is a common practice for an entity to recognize expense before payment, recognize
income before receipt, and pay for an expense before it is incurred, or received payment before it is
earned. This means that accounting records are maintained using the accrual basis. To accrue means
to collect and accumulate. These being the case, adjusting entries are necessary to present the fair
valuation of every account in the financial statements at the end of every reporting period.
Adjusting entries are entries required at the end of each accounting period to recognize on an accrual
basis revenues and expenses for the period and to report proper amounts for assets, liabilities and
owner’s equity accounts. To adjust the book implies that the entity recognizes expenses, income,
depreciation and bad debts accounts at the end of the accounting period to update the books because
of the events that has transpired throughout the period.
Activity 1.4 to DEMONSTRATE student’s learning for Step 5: Journalizing and Posting
Adjusting Entries, the following are required to be done:
1. Journalize the following adjustments in the books of Charito Couturier Shop using the general
journal activity sheet provided.
2. Post using activity sheet for T-accounts the adjusting entries recorded and compute the
balances of the accounts adjusted.
3. Complete the adjusted trial balance of Charito Couturier Shop as of December 31, 2020.
17
December 31 Summary of Adjustments to be recorded in the books of CCS
Accrued Income is a revenue item that have not been collected or recorded but was earned during
the accounting period covered. Even though cash payments have not been received, the revenues
are considered earned and should be reported as income for the period.
a) Interest for one month amounting to P125 from the 5%, 3-month, P30,000 promissory note
received from Maffy on December 1 is considered accrued and must be recorded as an
adjustment (i.e., P30,000 x 5% x 3 ÷ 12 ÷ 3 = P125).
Accrued Expense is an expense incurred in a particular period but not recorded/paid during that
same period.
b) Received electricity bill from Meco Electric Company for the month of December but has not
been paid by the shop amounting to P6,800.
Prepaid Expense is an expense that is paid, but not yet incurred.

c) Sewing supplies consumed during the year amounted to P81,500.
Bad Debts Expense

Under the “allowance method’, estimating and recording bad debts or doubtful accounts expense is
required when it is deemed to be material in amount. In this method, expense for the uncollectible
accounts is properly matched against revenues in the same accounting period in which the income
was generated.
d) The shop management decided that the allowance for doubtful accounts be increased to 8%
of the outstanding Accounts Receivable balance as of December 31, which is equivalent to
P2,180 (i.e., P146,000 x 8% = P11,680 – 9,500 = P2,180).
Depreciation Expense
Depreciation expense is recorded at the end of every accounting period in order to recognize that
the usefulness of any plant asset, except land may decline because of wear and tear or obsolescence
or inadequacy.
e) The store uses the straight-line method in recognizing depreciation for all its fixed asset
accounts. Depreciation expense for the current year has not been recorded yet. Details of the
depreciable assets are given below.
Date of Estimated Salvage Depreciabl Depreciation

Descriptio Purchase Useful Life Cost Value e Cost Expense
n
Building 2 years ago 15 years P 800,000 P 50,000 P 750,000 P 50,000
Equipment 2 years ago 8 years P 480,000 P 30,000 P 450,000 P 56,250
Furniture 2 years ago 5 years P 150,000 P 20,000 P 130,000 P 26,000
18
Journalizing Adjusting Entries
P a g e 9
DATE P A RTI C UL A RS P/R D E B I T C R E D I T
Dec. 31 Interest Receivable 1 2 5
a. Interest Income 1 2 5
Interest earned but not yet recorded.
31
b.
31
c.
31
d.
31
e.
19
Posting Adjusting Entries Using T-accounts
Interest Receivable Interest Income

Dec.3 1 balance - - Dec. 31 balance
125 125
Dec. 31 balance 125

125 Dec. 31 balance
Utilities Expense Utilities Payable

Dec.3 1 balance 86,400 - Dec. 31 balance
Dec. 31 balance
Dec. 31 balance
Sewing Supplies on Hand Sewing Supplies

Expense
Dec.3 1 balance 86,800 - Dec. 31 balance
Dec. 31 balance Dec. 31 balance
20
Bad Debts Expense Allowance for Bad
Debts
Dec.3 1 balance - 9,500 Dec. 31 balance
Dec. 31 balance
Dec. 31 balance
Depreciation Expense Accumulated Depreciation-Building

Dec.3 1 balance - 100,000 Dec. 31
balance
Dec. 31 balance
Dec. 31 balance
Accumulated Depreciation – Shop Equipment Accumulated Depreciation-Furniture
112,500 Dec.3 1 balance 52,000 Dec. 31

balance
Dec. 31 Dec. 31 balance

balance
21
Adjusted Trial Balance
December 31, 2020
Accounts Receivable 146,000
Allowance for Bad Debts
Notes Receivable 30,000
Advances to Employees 3,000
Interest Receivable
Land 700,000
Buildings 800,000
Accumulated Depreciation-Building
Accumulated Depreciation-Shop Equipment
Accumulated Depreciation – Furniture and Fixture
Accounts Payable ₱ 7,400
Unearned Service Income 70,000
Utilities Payable
Charito, Drawing 70,500
Service Income 2,380,000
Interest Income
Salaries and Wages Expense 1,210,950
Sewing Supplies Expense
Utilities Expense
Bad Debts Expense
Total ₱ ₱
22
Step 6: Financial Statements Preparation
Accounting being the language of business summarizes the recorded and classified data in the four
basic financial reports namely, (1) Statement of Comprehensive Income, also known as Income
Statement; (2) Statement of Changes in Equity, (3) Statement of Financial Position, and (4) Statement
of Cash Flows together with the computational notes to the financial statements. These financial
statements are used in informing interested people about business operations and financial condition
of the company.
The Statement of Comprehensive income (SCI) or Income Statement or Statement of Profit is the
report where the results of business operations are summarized and reported whether it earned profits
or incurred losses on a specific time period, e.g., month or a year. The Statement of Changes in
Equity (SCE) is the report that presents a summary of the changes that occurred in the owner’s capital
during a specific time period. The Statement of Financial Position (SFP) is the report that shows
what the business is worth in terms of the properties it owns (i.e., the assets), the debts it owes (i.e.,
the liabilities), and the investment of its owner/s (i.e., the proprietorship) as of a specific date. The
Statement of Cash Flows (SCF) is the statement that reports the firm’s receipt and disbursement of
cash which are classified according to the company’s major activities, namely: operating, investing,
and financing.
Activity 1.5 to DEMONSTRATE student’s learning for Step 6: Financial Statements Preparation
Required: Using the provided information, help Charito in preparing the following financial
statements CCS for her to know whether the business is indeed doing well on its third year of
operation.
1) Using the completed adjusted trial balance in Activity 4 (Activity Sheet No. 4 of 4) prepare the
following financial statements of Charito Couturier Shop for the year ended December 31, 2020:
a) Income Statement
b) Statement of Changes in Equity
c) Statement of Financial Position
d) Computational Notes to the Financial Statements
2) Using the following additional information, prepare using the direct method the Statement of
Cash Flows of Charito Couturier Shop for the year ended December 31, 2020.
Summary of cash inflows and outflows
Cash received from designing and sewing services ₱ 2,204,000
Collections on accounts receivable 52,000
Cash advance from customer 70,000
Payment of accounts purchases of sewing supplies 685,275
Payment for various operating expenses 1,459,150
Payment of interest expense 4,400
Cash advances given to employee 3,000
Cash withdrawal of Charito 20,000
Partial payment of bank loan (part of mortgage payable) 50,000
Additional data:
Cash in Bank balance, January 1, 2020 amounted to P 83,275
23
ACTIVITY S H E E T No. 1.5
Income Statement
For the year ended December 31, 2020
Service Income ₱ 2,380,000

Add: Interest Income
Total Income ₱
Less: Operating Expenses
Salaries and wages Expense ₱ 1,210,950
Sewing Supplies Expense
Utilities Expense
Insurance Expense
SSS, Philhealth, and Pag-ibig Expense
Repairs and Maintenance Expense
Transportation Expense
Bad Debts Expense
Miscellaneous Expense
Net income ₱

Statement of Changes in Owner's Equity
Charito, Capital ₱ 264,300
Add: Net Income
Sub-total ₱
Less: Charito, Drawing
Charito, Capital ₱
24
ACTIVITY S H E E T No. 1.5

Statement of Financial Position
December 31, 2020
ASSETS
Current Assets
Cash (Note 1) ₱
Trade and other receivables ( Note 2 )
Sewing Supplies on Hand 5,300 ₱
Non-Current Assets
Property, Plant and Equipment ( Note 3)
Total Assets ₱
LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Trade and other payables ( Note 4 ) ₱
Non-Current Liabilities
Total Liabilities ₱
Owner's Equity
Charito, Capital
Total Liabilities and Owner's Equity ₱
25
Notes to the Financial Statement
Note 1: Cash
Cash in Bank ₱
Total Cash ₱
Note 2: Trade and Other Receivables

Accounts Receivable ₱ 146,000
Allowance for Bad Debts ₱
Notes Receivable
Interest Receivable
Total Trade and Other Receivables ₱
Note 3: Property, Plant and Equipment

Land ₱ 700,000
Building ₱ 800,000
Less: Accumulated Depreciation
Shop Equipment ₱ 480,000
Furniture and Fixture ₱ 150,000
Total Carrying Value ₱
Note 4: Trade and Other Payables

Accounts Payable ₱
Notes Payable
Withholding Taxes Payable
Utilities Payable
Total Trade and Other Payables ₱
26

Statement of Cash Flows
Cash flows from operating activities

Inflow
Cash service fees from designing and sewing ₱ 2,204,000
Collections on accounts receivable
Cash advance from customer ₱
Outflow
Payment of account purchases of sewing supplies 685,275
Payment of various operating expenses
Cash advance given to an employee
Interest Expense
Net cash from operating activities ₱
Cash flows from financing activities

Outflow
Cash withdrawal of Charito
Partial payment of bank loan (part of mortgage payable) 50,000
Net increase in Cash in Bank ₱
Add: Cash in Bank, January 1 83,275
Cash in Bank, December 31 ₱
27
Supplementary Exercises on Preparation of Statement of Cash Flow
Learning Exercise 1
Write after each transaction whether cash flow is an operating activity, investing activity, or
financing activity (indicate whether cash inflow or outflow).
1. Payment of salaries of employees. ________________________
2. Purchased of office computers. ________________________
3. Collection from customers for services rendered. ________________________
4. Payment of municipal taxes and licenses. ________________________
5. Purchase of various office supplies. ________________________
6. Proceeds of loan made from the bank. ________________________
7. Additional cash investment from the owner. ________________________
8. Interest earned from money deposited in the bank. ________________________
9. Payment of principal of bank loan. ________________________
10. Collection of outstanding accounts of customer. ________________________
11. Payment of interest expense on the bank loan. ________________________
12. Payment of outstanding account to supplier. ________________________
13. Sale of used office tables and chairs. ________________________
14. Payment of rental of office space. ________________________
15. Cash dividend received. ________________________
28
Learning Exercise 2
RGM Science and Math Tutoring Center, owned and managed by Argem Galang was
established in 2019 to cater for the needs of grade school and high school students for online tutoring
in Science and Mathematics subjects during the time of COVID19 pandemic.
During 2020, Argem wants to know whether the center has sufficient cash to continue
operating the center. She was able to collect the following transactions. The center’s cash account
was affected by receipts collected from tutees, P370,000; proceeds from sale of old computer, P8,000;
the loan granted by CITIBANK to the tutoring center, P150,000; and additional investment from
Argem, P50,000.
On the other hand, cash was used to buy writing tablets, P15,000; to pay the bank interest of
P7,500 and principal of P30,000; and to pay operating expenses of P185,000. Argem also made cash
withdrawal of P20,000 during the year.
The balance of the account “Cash” as of January 1, 2020 amounted to P 195,000.
Required: Prepare the Statement of Cash Flows and answer the following:
1. How much is the net cash provided by operating activities?
2. How much is the net cash used for investing activities?
3. How much is the net cash provided by financing activities?
4. How much is the net increase/(decrease) in cash?
5. What is the ending cash balance?
29
Step 7: Journalizing and Posting Closing Entries
After producing the required financial reports at year end, the company performs the closing of the
books on the last day of the current accounting period to prepare the accounts for recording
transactions for the next accounting period. The term closing the books simply refers to setting the
balances of the income and expense accounts back to zero.
This step is done by journalizing and posting closing entries in order that net income or net loss may
be computed on a yearly basis. Income and expense accounts are also called nominal or temporary
accounts. The closing procedure applies only to nominal accounts. In step 7, the income and expense
accounts are closed to a temporary account called Income Summary account, which collects or
summarizes in one account the total debit for the sum of all expenses and the total credit for the sum
of all income for the period.
The Income Summary account can be likened to a “holding vessel” where the amounts of all nominal
accounts are transferred in order to determine the result of the company’s operation. A credit balance
in the Income and Expense Summary means net income and a debit balance implies net loss for the
period covered. The Income Summary account balance under the indirect method of closing the book
will then be closed or transferred to the owner’s drawing account for a sole proprietorship form of
business and finally, the owner’s drawing account is closed or transferred to the owner’s capital
account.
After recording and posting the closing entries, all nominal accounts will be closed. This means that
the balances of all income and expense accounts will be equal to zero. The following is an illustration
using T-accounts on what happened after closing entries were posted.
Salaries and Wages Expense Service Income
Dec. 31 balance 1, 210, 950 1, 210, 950 2, 380, 000 2, 380, 000 Dec. 31 balance
Dec. 31 balance 0 0 Dec. 31 balance

030,000
Activity 1.6 to DEMONSTRATE student’s learning for Step 7: Closing Entries
Required: Using the Income Statement prepared in Activity Sheet No. 5, record the closing entries
required at year end to close the books of Charito Couturier Shop.
30
Journalizing Closing Entries
P a g e 10
Dec. 31 Service Income 2 3 8 0 0 0 0

Interest Income 1 2 5
Income Summary 2 3 8 0 1 2 5
Close nominal accounts with normal CREDIT balances.
31
31
31
Step 8: Preparing Post-Closing Trial Balance
After closing the books, only assets, liabilities and capital (real) accounts are left open in the general
ledger of the company. These real account ending balances are to be carried forward to the next
accounting period. Step eight, which is the preparation of the post-closing trial balance, will
summarize all these accounts.
The post-closing trial balance lists all the real accounts’ balances as of the end of the accounting
period covered and would be a final check on the equality of total debits and credits of all existing
accounts with balances in the general ledger. This step ensures that the ledger is in balance for the
start of the next accounting period.
31
Activity 7 to DEMONSTRATE student’s learning for step 8: Preparing Post Closing Trial Balance
Required: Using the Statement of Financial Position together with the notes to the financial statement
prepared in Activity Sheet No. 5, prepare the post-closing trial balance of Charito Couturier Shop.
Post-Closing Trial Balance
December 31, 2020
Petty Cash Fund
Accounts Receivable
Allowance for Bad Debts ₱
Notes Receivable
Interest Receivable
Land
Buildings
Accumulated Depreciation-Building
Shop Equipment
Accumulated Depreciation-Shop Equipment
Furniture and Fixture
Accumulated Depreciation – Furniture and Fixture
Accounts Payable
Notes Payable
Utilities Payable
Withholding Taxes Payable
Mortgage Payable
Total ₱ ₱
32
Step 9: Journalizing and Posting Reversing Entries
Reversing entries are special entries recorded at the beginning of every accounting period to reverse
some of the adjusting entries made on the prior period. Although this is another optional step in the
accounting cycle, just like worksheet preparation, this step may be done for the reason of convenience
and consistency.
Reversing entries are most often used for accrual adjustments and for deferral but only if the expense
and income method were used. A reversing entry switches the debit and credit of a previous adjusting
entry. The reversing entry is the exact opposite of an adjusting entry recorded on a prior year.
Activity 8 to DEMONSTRATE student’s learning for Step 9: Reversing Entries
Review the different adjusting entries recorded in Step 5 and check whether you can understand the
following reversing entries recorded in the books of CCS as of January 1, 2021.
P a g e 10
2021
Jan. 1 Interest Income 1 2 5
Interest Receivable 1 2 5
Interest earned but not yet recorded
1 Utilities Payable 6 8 0 0
Utilities Expense 6 8 0 0
Electricity bill for the month of December
Charito was glad that she can still remember how to proceed with the different steps in the accounting
cycle! Her desire to further understand the accounting cycle made her check the following financial
reports prepared by the business of her friend Jose who owns a small convenience store to see how a
service busines is different from a merchandising busines.
Supplementary Reading: Income Statement Prepared by a Merchandising

Business
Service and merchandising businesses although different in the activities they perform will prepare
financial statements which are basically the same except for the income statement. The statements of
financial position, statement of changes in owner’s equity, statement of cash flows prepared by
service and merchandising business are very similar. Take for example in the statement of financial
position of a merchandising business, the only difference is the inclusion of the account Merchandise
Inventory in the current asset section of the report compared to a service business. But the statement
33
which is really different is the income statement. Why? Because a service business prepares a natural
or single step income statement while a merchandising business prepares a functional or multiple-
step income statement.
The functional income statement contains several sections, subsections and subtotals. The amount
of the details presented in this section, e.g., the distribution or selling expenses, general and
administrative expenses, etc., varies from company to company.
Let us take a look at the example of an income statement of a merchandising business of Jose
Convenience Store.
Jose Convenience Store

Income Statement
Net Sales Revenue (Note 1) ₱ 561,000

Less: Cost of Sales ( Note 2) 192,000
Gross Profit ₱ 369,000
Add: Other Income (Note 3) 4,000
Total Income ₱ 373,000
Less : Operating Expenses:
Distribution Expense (Note 4) ₱ 200,000
Administrative Expense (Note 5) 70,000
Interest Expense 1,000 271,000
Net Income ₱ 102,000
Below are the terms used in the functional income statement:
• Revenue from Sales. The total amount charged to customers for merchandise sold, for cash and
on account, is reported in this section. Sales returns and allowances and Sales discounts are
deducted from this to yield Net Sales (see note 1 below for illustration).
Note 1 - Net Sales Revenue

Sales ₱ 588,000
Less: Sales Returns and Allowances ₱ 15,000
Sales Discount 12,000 27,000
Net Sales Revenue ₱ 561,000
34
• Cost of Goods (Merchandise) Sold. The cost of merchandise sold during the period may also be
called Cost of Goods Sold or the Cost of Sales. It is computed by adding to the beginning inventory
the net cost of purchases to yield Total Goods Available for Sale. The ending inventory is deducted
from the Total Goods Available for Sales to yield the Cost of Goods (Merchandise) Sold. The net
purchases amount is computed by deducting purchase discount and purchase returns and
allowances from purchases. Net cost of purchases is computed by adding freight-in to the net
purchases amount (see notes to the financial statement number 2 below for illustration).
Note 2 - Cost of Sales
Merchandise Inventory, January 1 ₱ 15,000
Add: Net cost of purchases
Purchases ₱ 218,000
Less: Purchase Returns and Allowances 7,000
Purchase Discount 8,000
Net purchases ₱ 203,000
Add: Freight-in 2,500 205,500
Cost of goods available for sale ₱ 220,500
Less: Merchandise Inventory, December 31 28,500
Cost of Sales or Cost of Goods Sold ₱ 192,000
• Gross Profit. The excess of net sales over the cost of goods sold is called gross profit. It is
sometimes called gross profit on sales or gross margin (see income statement of Jose Convenience
Store for illustration).
• Operating Expenses. Most merchandising businesses classify operating expenses as either

selling/distribution expenses or administrative expenses. However, depending on the decision-
making needs of managers and other users of the financial statements, other classifications could
be used.
Expenses that are incurred directly in the selling of merchandise are distribution or selling
expenses. They include such expenses as salespersons’ salaries, store supplies used, depreciation
of store equipment, and advertising (see notes to the financial statement number 4 below for
illustration).
Note 4 - Distribution Expenses
Store Salaries Expense ₱ 152,100
Depreciation Expense - Store Furniture and Equipment 23,000
Store Supplies Expense 16,900
Freight-out 3,200
Representation and Entertainment Expense 2,800
Advertising Expense 2,000
Total distribution expenses ₱ 200,000
35
Expenses incurred in the administration or general operations of the business are general and
administrative expenses. Examples of these expenses are office salaries, depreciation of office
equipment, and office supplies used.
Expenses that are related to both administrative and selling functions may be divided into the two
classifications. In small businesses, however, such expenses as rent, insurance, and taxes are
commonly reported as administrative expenses. Transactions for small, infrequent expenses are
often reported as Miscellaneous Selling Expense or Miscellaneous Administrative Expense (see
notes to the financial statement number 5 below for illustration).
Note 5 - Administrative Expenses

Utilities Expense ₱ 38,400
SSS and Philhealth Contribution Expense 15,000
Donation and Contribution Expense 3,400
Taxes and Licenses Expense 3,000
Bad Debts Expense 1,925
Total administrative expenses ₱ 70,000
• Income from Operations. The excess of gross profit over the operating expenses is called income
from operations or operating income. The relationships of income from operations to total assets
and to net sales are important factors in judging the efficiency and profitability of operations. If
operating expenses are greater than the gross profit, the excess is called a loss from operations (see
income statement of Jose Convenience Store for illustration).
• Other Income and Other Expense. Revenues from sources other than the primary operating
activity of a business are classified as other income or non-operating income. In a merchandising
business, these items include income from interest, rent, and gains resulting from the sale of plant
and other assets (see notes to the financial statement number 3 below for illustration).
Note 3 - Other Income

Interest Income ₱ 2,600
Dividend Income 1,400
Total other income ₱ 4,000
Expenses that cannot be traced directly to operations are identified as other expenses or non-operating
expense. Interest expense that results from financing activities and losses incurred in the disposal of
plant and other assets are examples of these items (see notes to the financial statement number 5
below for illustration).
36
Other income and other expenses could be offset against each other on the income statement. If the
total of the other income exceeds the total other expense, the difference is added to income from
operations. If the reverse is true, the difference is subtracted from income from operations.
• Net Income. The final figure on the income statement is called the net income (or net loss). It is
the net increase (or net decrease) in the owner’s equity as a result of the period’s profit-making
activities.
Well done! You have finished

reviewing the accounting cycle
involving a sole proprietorship
form of business.
Reference:
Manalo, M., and Rapatan, M. (2016). Learning to Succeed in Business with Accounting. Phoenix
Publishing House, Inc.
37

Learning Module 1 Review of The Accounting Cycle of A Service Business MARCH 2022

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Learning Module 1 Review of The Accounting Cycle of A Service Business MARCH 2022

Uploaded by

Copyright:

Available Formats

Unit 1

Review of the Accounting Cycle of a

Business Case to Review the Accounting Cycle of a Sole

Charito Couturier Shop

Charito Couturier Shop

Account Title Debit Credit

Charito Couturier Shop

Service Income ₱ 2,250,000

Charito Couturier Shop

Charito, Capital ₱ 1,284,300

Computational Notes to the Financial Statement

Note 2: Trade and Other Receivables

Note 4: Trade and Other Payables

Step 1: Analyzing Business Transactions and Journalizing in the General

ASSETS = LIABILITIES + OWNER’S

Assets Liabilities Owner’s Equity

Expense Income Owner’s Equity

DATE PARTICULARS P/R D E B I T C R E D I T

Dec. 1 Notes Receivable 3 0 0 0 0

Received 5%, 3-month promisory note.

Activity Sheet No. 1.1 Page 1 of 2

DATE PARTICULARS P/R D E B I T C R E D I T

Activity Sheet No. 1.1 Page 2 of 2

Activity 1.2 to DEMONSTRATE student’s learning in Step 2: Posting to the Ledger

EXAMPLE of posting using T-accounts

DATE PARTICULARS P/R D E B I T C R E D I T

Dec. 1 Notes Receivable 3 0 0 0 0

Notes Receivable Service Income

Dec. 31 balance 30,000

Cash Charito, Capital

Accounts Receivable Charito, Drawing

Activity Sheet No. 1.2 Page 1 of 2

Accounts Payable Unearned Service

Salaries and Wages Expense Utilities Expense

Repairs and Maintenance Expense Transportation Expense

Activity Sheet No. 1.2 Page 2 of 2

Account Title Debit Credit

Step 5: Journalizing and Posting Adjusting Entries

Prepaid Expense is an expense that is paid, but not yet incurred.

Bad Debts Expense

Date of Estimated Salvage Depreciabl Depreciation

Journalizing Adjusting Entries

DATE P A RTI C UL A RS P/R D E B I T C R E D I T

Dec. 31 Interest Receivable 1 2 5

Interest earned but not yet recorded.

Activity Sheet No. 1.4 Page 1 of 4

Posting Adjusting Entries Using T-accounts

Interest Receivable Interest Income

Dec. 31 balance 125

Utilities Expense Utilities Payable

Sewing Supplies on Hand Sewing Supplies

Dec. 31 balance Dec. 31 balance

Activity Sheet No. 1.4 Page 2 of 4

Depreciation Expense Accumulated Depreciation-Building

Accumulated Depreciation – Shop Equipment Accumulated Depreciation-Furniture

112,500 Dec.3 1 balance 52,000 Dec. 31

Dec. 31 Dec. 31 balance

Activity Sheet No. 1.4 Page 3 of 4

Activity Sheet No. 1.4 Page 4 of 4

Service Income ₱ 2,380,000

Charito Couturier Shop

Activity Sheet No. 1.5 Page 1 of 4

Charito Couturier Shop