Business Transactions

and Their Analysis

as Applied to the
Accounting Cycle of a
Service Business
Specific Learning Objectives:
At the end of this lesson,
 I will be able to describe the nature of a

service business and give examples

 I will be able to identify the different types of

business documents
 I will be able to prepare journal entries of

business transactions in a service business.

 I will be able to solve problems and exercises

in the analysis of business transactions.

Identify the type of business according to the activity
shown below.
Review of the types of businesses
1. Recall the discussion on types of businesses according to activities
and differentiate the following:
 service business

 merchandising business

 manufacturing business

2. Give examples of service businesses in your community.

3. Review the discussion on five major accounts, namely: assets,
liabilities, equity (capital), income, expenses.
 Assets are resources owned by a business.

 Liabilities are claims against the assets of the business.

 Equity (capital) is the claim of the owner or owners.

 Income are increases in the equity or capital resulting from business

activities entered into.

 Expenses are decreases in the equity or capital resulting from

business activities. It may include assets or services consumed in the

process of earning income
Nature of a Service Business
• A service business provides a needed service for a fee. In general,
service businesses actually have no physical product sold to clients.
•Their services are designed to facilitate the work of clients and in
return are paid.
•Service businesses include salons or barbershops, laundry services, car
repairs, medical centers and services of professionals like lawyers and
doctors.
•The revenue of a service business is usually realized once the service
has been substantially completed.
•Aside from the minor supplies, the service business does not maintain
a high level of inventory as compared to merchandising and
manufacturing businesses.
•In relatively small service businesses, all transactions are on cash
payments. This means sales are collected immediately while most
expenses are paid outright in the form of cash or checks.
•The typical financial transactions recorded for a service company
include collecting a deposit from the customer, providing the service
and receiving payment.
Group Discussion:
 Group into three and think of a service
business. After coming up with a service
business, list down all transactions possible
in your chosen business. Present your output
in the class.
THE ACCOUNTING CYCLE
1. Transactions 2. Journal Entries 3. Posting

6. Adjusting 5. Worksheet 4. Trial Balance

Journal Entries

7. Financial Statements 8. Closing the Books

 The accounting cycle is a continuous process of accumulating,

summarizing and reporting financial information.
 The accounting cycle is started and completed within an 
accounting period, the time in which financial statements are prepared. 
Step 1 - Transactions and/or Events
 Identification and measurement of external transactions and
internal events. At this stage, the documents used by the
business are analyzed whether it has financial impact or effect.
Recall the rule that only financial transactions are recorded and
that the amount can be measured. These two conditions must
exist in order that a particular transaction is recognized or
recorded.
 As defined, financial transactions are those activities that change

the value of an asset, liability or an equity.

 Examples of financial transactions:

• Receipt of cash from a client as advance payment to repair a

computer. In this case (asset) will increase. At the same time, the
advances from client (liability) will also increase. The advances
from client is a liability because the business has the obligation
to render future service to the client.
• Payment of electric bill is a financial transaction. This will
decrease the cash (asset) and reduce the income of the business
at the same time.
Examples of non-financial transactions:
• hiring and termination of employees
• recognition from the government as most outstanding business
• death of owner

The information needed when recording transactions are taken

from forms used to document these transactions. In a typical
service business, the following are the business documents used:
1. Official Receipt or Cash Receipt
 This document is used when a business receives money or a

check. An Official Receipt or Cash Receipt is a document that

acknowledges that money or a check have been received.
2. Charge Invoice or Sales Invoice
 A charge invoice is a document used when a service has been

rendered, but the client will be billed only after a certain

number of days from the date of service. Often, a company
will issue a statement of account to a customer, with the
charge or sales invoice attached. For example: in a laundry
business, a customer may avail of the services of the business.
• However, that customer and the owner of the business had a
prior agreement that all services availed by the customer will
be paid only after 30 days. In this case, a charge invoice is
issued on the day the client availed of the services.

3. Check or Cash Voucher

 The check voucher is a document used when a check is

issued to pay a certain supplier or vendor. For example, in a

laundry business, for the payment of monthly electricity bills,
the business may pay either in cash or check. But the
company must prepare a cash or check voucher to support
this payment. This document will serve as a record of
payment and, at the same time, as proof that payment has
been made by the company.
Step 2 - Preparation of Journal Entries (journalization)
 Through the use of specialized journals (such as those
for sales, purchases, cash receipts, and cash
disbursements) and the general journal, transactions
and events are entered into the accounting records.
These are called the books of original entry.
 Debits and Credits are an integral part of the
journalization process. In accounting, debits or credits
are abbreviated as DR and CR respectively.
 When to Debit and when to Credit: An increase in an
asset account is called a debit and an increase in a
liability or equity account is called a credit. Likewise, if
we decrease an asset account we credit that account.
On the other side of the equation, if we decrease a
liability or equity account we debit those accounts.
Rules on Debits and Credits

 The name of the account to be debited is always listed first.

The debited account is listed on the first line with the amount
in the left side of the register.
 The credited account is listed on the second line and is
usually indented. The credited amount is recorded on the
right side of the register.
 The total amount of debit should always equal the total
amount of credit.
 Recall the discussion on the Chart of Accounts
 The Chart of Accounts is a listing of all account titles used in
the business to record all the transactions.
 It is arranged according to the order of their appearance in
the financial statements. Refer to Table X
 TABLE X. SAMPLE CHART OF ACCOUNTS
Statement of Financial Position Accounts Income Statement Accounts
ACCOUNT CODE ACCOUNT TITLE ACCOUNT CODE ACCOUNT TITLE
1000 Cash 4000 Service Revenue
1200 Accounts Receivable 4100 Sales
1201 Allowance for Bad Debts 4101 Sales Returns and
1300 Inventory Allowances
1400 Prepaid Expenses 4102 Sales Discounts
1500 Supplies 4150 Interest Income
1600 Office Equipment 5000 Cost of Sales
1601 Accum Deprn - Off Eqpt 5100 Purchases
1650 Store Equipment 5101 Purchase Returns & Allowances
1651 Accum Deprn - Store Eqpt 5102 Purchase Discounts
1680 Transportation Equipment 5103 Freight In
1681 Accum Deprn - Trans Eqpt 6100 Salaries Expense
1750 Building 6150 Supplies Expense
1751 Accum Deprn - Building 6200 Utilities Expense
1800 Land 6220 Communication Expense
1900 Intangible Assets 6250 Travel Expense
2000 Accounts Payable 6300 Rental Expense
2100 Notes Payable 6350 Fuel Expenses
2200 Accrued Expenses 6400 Advertising Expense
2201 Salaries Payable 6410 Delivery Expense
2202 Utilities Payable 6450 Commission Expense
2300 Income Taxes Payable 6500 Depreciation
3000 Owner’s, Capital Expense
3100 Owner’s, Withdrawal 6600 Taxes and Licenses
6700 Interest Expense
SAMPLE OFFICIAL RECEIPT SAMPLE SALES INVOICE

SAMPLE CHECK VOUCHER

Let us take the case of Pedro Matapang, a computer technician. Pedro
decided to open his computer repair shop on February 14, 2016, naming
it Matapang Computer Repairs. Pedro knows that business transactions
should be separated from personal finances. Thus, he decided to invest
PHP200,000 in this business. He deposited the amount with Nation Bank.
Entry: General Journal
Date Account Title and Explanation Ref Debit Credit
2/14/2016 Cash 200,000
Matapang, Capital 200,000
To record the initial investment of owner P. Matapang

Notice that we have debited Cash, an asset account and credited

Matapang, Capital, an equity account.

February 15, 2016 - Pedro purchased one computer unit from XY

Computer Store to be used for the business. He issued check number
001 amounting to PHP25,000.
Entry: General Journal
Date Account Title and Explanation Ref Debit Credit
2/15/2016 Office Equipment 25,000
Cash 25,000
To record the purchase of one computer unit
Notice that the debit to office equipment increased the asset account and
the credit to cash decreased the asset account.

February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary.

Entry: No entry. This is not a financial transaction.

February 17, 2016 – Repaired the computer of Jean and collected PHP10,000
General Journal
Date Account Title and Explanation Ref Debit Credit
2/17/2016 Cash 10,000
Service Revenue 10,000
To record receipt of cash from customer

February 18, 2016 – Repaired Mike’s computer. However, Mike will pay
PHP15,000 on March 18, 2016
General Journal
Date Account Title and Explanation Ref Debit Credit
2/18/2016 Accounts Receivable 15,000
Service Revenue 15,000
To record services rendered to a customer on account
February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise
amounting to PHP5,000 on account. Pedro will pay this on March 30, 2016.
General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/2016 Supplies Expense 5,000
Accounts Payable 5,000
To record purchase of office supplies on account

February 25, 2016 – Paid the salary of Juana amounting to PHP4,000

General Journal
Date Account Title and Explanation Ref Debit Credit
2/25/2016 Salaries Expense 4,000
Cash 4,000
To record payment of salary of Juana