Accounting Cycle of a Service Business

Learning Objectives
1. Prepare a worksheet.
2. Prepare closing entries.
3. Prepare a balance sheet and income
statement of a service business.
4. Prepare reversing entries.

Chapter 9: Accounting Cycle of a Service

Business (FAR by: Millan)
 Worksheet
A worksheet is an analytical device used to
facilitate the gathering of data for
adjustments, the preparation of financial
statements, and closing entries.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
 Financial statements
• The financial statements are the end
product of the accounting process.
Information from the journal and the ledger
are meaningless to most users unless they
are summarized and communicated through
the financial statements.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

The major processes in accounting are
summarized below:

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

 Financial Statements
• Statement of financial position (or Balance
sheet) – shows information on assets,
liabilities and equity.
• Statement of profit or loss (or Income
statement) – shows information on income
and expenses, and consequently, the profit
or loss for the period.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

 Closing entries
• Closing entries are entries prepared at the
end of the accounting period to “zero out”
all nominal accounts in the ledger. This is
done so that the transactions during the
period will not commingle with the
transactions in the next period.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

 Closing entries
• Closing entries are prepared as follows:
a. All income accounts are debited and all
expense accounts are credited. The resulting
balance is recorded in a clearing account called
the “Income summary.”
b. The balance of “Income summary” is closed to
the “Owner’s capital” account.
c. Any balance in the “Owner’s drawings” account
is closed to the “Owner’s capital” account.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
 Reversing Entries
• Reversing entries are entries usually made
on the first day of the next accounting
period to reverse certain adjusting entries
made in the immediately preceding period.

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

 Adjusting entries that may be reversed

1. Accruals for income or expense

2. Prepayments initially recorded using the
expense method
3. Advanced collections initially recorded
using the income method

Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)

END

Chapter 9: Accounting Cycle of a Service

Business (FAR by: Millan)