ACCOUNTING CYCLE for SERVICE BUSINESS

ACCOUNTING CYCLE Series of steps followed in recording business transactions every accounting period. ACCOUNTING PERIOD Length of time within which transactions are recorded and reported upon. Depending on the nature of the business, an accounting period may be annual, semi-annual, quarterly or monthly STEPS IN THE ACCOUNTING CYCLE 1. Journalizing 2. Posting 3. Preparation of Trial Balance 4. Preparation of Worksheet 5. Preparation of financial statements 6. Journalizing and posting of Adjusting entries 7. Journalizing and posting of closing journal entries 8. Ruling of nominal accounts 9. Ruling and balancing of real accounts 10. Preparation of post closing trial balance BOOKS OF ACCOUNTS 1. JOURNAL book of account used in recording business transactions for the first time. Also known as book of original entries 2. LEDGER Book of account where all transactions recorded in the journal are transferred in order to classify or group similar items. Also known as the book of final or secondary entries.

LESSON 5

KINDS OF JOURNAL 1. General journal (2-column journal) The simplest and most flexible type of journal 2. Special journal Used to record specific type of transactions Types of special journal: a. Sales journal - used to record sales of merchandise on account b. Purchase journal - used to record purchase of merchandise on account c. Cash payment journal - used to record payment of cash d. Cash receipt journal - used to record receipts of cash

JOURNALIZING Process of recording transactions in the journal

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PROCEDURES 1. Record the date under the date column The year is written once on each page on the first line The month is written on the next line on each page, except when the month changes The day is written on the right sub-column of the date column. It is recorded once for each transaction, regardless of the number of transaction 2. Record the debit. Write the account title to be debited in the Account Titles and Explanations column on the same line as the date. Record the amount in the debit column. All debits are written first before credits Record the credit. On the next line following the last debit item, write the account title to be credited with an indention of at least inch from the left margin. Record the amount in the credit column Write the explanation Write a short explanation on the next line following the last credit item with an indention of at least one inch from the left margin. If more than one line is needed, the second line should have the same indention as the first line Leave one space after every transaction. This is done to set each journal entry apart from all others.

3.

4.

5.

JOURNAL ENTRY Actual record of every transaction or event in the journal book. A complete journal entry must have the following parts: a. date of the transaction b. proper account titles affected by the transaction c. correct DR and CR amounts d. brief explanation or description of the transaction TYPES OF JOURNAL ENTRY A. Simple journal entry With only one debit and one credit B. Compound journal entry One debit and two or more credits Two or more debits and one credit Two or more debits and two or more credits

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ILLUSTRATIONS: The transactions of JAM Travel Agency, analyzed in Lesson 3, will be journalized as follows: (Assume that the transactions happened on January 1-10, 2009)

JAM TRAVEL & TOURS

GENERAL JOURNAL

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CHART OF ACCOUNTS List of account titles used in recording business transactions. Arranged in the ALPIE (for service business) and ALPICE order (for merchandising business) Example: Chart of Accounts for a Service Business JAM Travel & Tours Chart of Accounts Acct . No. 11 12 12A 13 14 15 16 16A 17 17A 21 22 23 24 31 32 33 41 42 51 52 53 54 55 55 56 57 Account Titles Cash Accounts Receivable Allowance for Bad Debts Notes Receivable Interest Receivable Office Supplies Office Equipment Accumulated Depreciation Office Equipment Office Furniture & Fixtures Accumulated Depreciation Office Furniture & Fixture Accounts Payable Notes Payable Precollected Income Interest Payable J. A. Mendoza, Capital J. A. Mendoza, Drawing Revenue and Expense Summary Fees Income Interest Income Rent Expense Salary Expense Supplies Expense Utilities Expense Bad Debts Expense Depreciation Expense Office Equipment Depreciation Expense Office Furniture & Fixtures Interest Expense

SERVICE BUSINESS Business organization that is engaged in rendering services to earn income JOURNAL ENTRIES FOR A SERVICE BUSINESS Typical transactions for a service business may be classified as follows: a. Owners transactions include investment and withdrawal for personal use b. Acquiring properties on cash basis and/or on account c. Payment of liabilities d. Earning income - on cash basis and/or on account e. Incurring expenses f. Collection of receivable

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ILLUSTRATION: Journalize the following are the transactions of M.A. Reyes Catering Services for the month of January, 2009. Refer to the Chart of Accounts for the account titles to be used. M.A. REYES CATERING SERVICES CHART OF ACCOUNTS Account Numbers 11 12 13 14 15 16 21 22 31 32 41 51 52 53 54 Account Titles Cash Accounts Receivable Supplies on Hand Furniture Office Equipment Catering Equipment Accounts Payable Notes Payable M. A. Reyes, Capital M.A. Reyes, Drawing Catering Income Salary Expense Utilities Expense Rent Expense Supplies Expense

A. OWNERS TRANSACTIONS 1. Investment On January 5, 2009 May Anne Reyes invested P150,000 cash and one computer worth P50,000 in a catering business. 2. Withdrawal On January 7, 2009 She withdrew P 8,000 cash for her personal expenses

DATE 2009 January 5

ACCOUNT TITLES & EXPLANATIONS Cash Office Equipment M.A. Reyes, Capital Initial investment M.A. Reyes, Drawing Cash Withdrawal of the owner

DR 150,000 50,000

CR

200,000

8,000 8,000

B.

ACQUIRING PROPERTIES 1. On cash basis January 8, 2009 M.A. Reyes bought office tables and chairs worth P25,000, and office supplies worth P4,000 paying cash

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2. On account January 9, 2009 M.A. Reyes bought one fax machine worth P21,000 from Electroworld Co. She signed a promissory note for the total amount due in 10 days. Partly on cash and partly on account January 12, 2009 M.A. Reyes bought one catering equipment worth P52,000 from Triple X Co. She paid downpayment of P10,000 and the balance payable within 30 days. ACCOUNT TITLES & EXPLANATIONS Furniture Supplies Cash Purchase of office tables and chairs Office Equipment Notes Payable Purchase of one fax machine Catering Equipment Cash Accounts Payable Purchase of one catering equipment F DR 25,000 4,000 29,000 CR

3.

DATE 2009 January 8

21,000 21,000

12

52,000 10,000 42,000

C.

PAYMENT OF LIABILITIES January 18, 2009 M.A. Reyes paid the amount due to Electroworld Co. January 20, 2009 Made a partial payment to Triple X Co., P20,000 DATE 2009 January 18 ACCOUNT TITLES & EXPLANATIONS Notes Payable Cash Payment of amount due to Electroworld Co. Accounts Payable Cash Partial payment of amount due to Triple X Co, F DR 21,000 21,000 CR

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20,000 20,000

D. EARNING INCOME January 21, 2009 Received P15,000 for catering services. January 24, 2009 - Rendered catering service to Miss Cruz for P50,000. Miss Cruz paid P25,000 and promised to pay the balance at the end of the month

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DATE 2009 January 21 ACCOUNT TITLES & EXPLANATIONS Cash Catering Income Income from catering service Cash Accounts Receivable Catering Income Amount due from Miss Cruz for catering service F DR 15,000 15,000 CR

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25,000 25,000 50,000

E.

INCURRING EXPENSES January 25, 2009 Paid the following expenses: salary of employees P24,000; telephone, light and water P3,500; office rental P5,000. January 25, 2009 Determined that the supplies consumed for the month amount to P2,000.

DATE 2009 January 25

ACCOUNT TITLES & EXPLANATIONS Salary Expense Utilities Expense Rent Expense Cash Payment of various expenses Supplies Expense Supplies on Hand Consumed supplies for the month

DR 24,000 3,500 5,000

CR

2,000

25

2,000 2,000

F.

COLLECTION OF RECEIVABLE January 22, 2005 Received full payment of Miss Cruz (see Jan. 24 transaction). DATE 2009 January 31 ACCOUNT TITLES & EXPLANATIONS Cash Accounts Receivable Collection of amount due from Miss Cruz F DR 25,000 25,000 CR