Financial Accounting and Reporting Accounting Cycle of a Service Business

Module 9: Accounting Cycle of a Service Business

Introduction

In this unit, we will discuss the accounting cycle of a service business. Again, a service business
is one that offers services as its main product rather than physical goods.

We have already discussed the first five steps in the accounting cycle in the previous units. In
this unit, we will be discussing the remaining steps.

Learning Objectives
At the end of the unit, students will be able to:
 Prepare a worksheet.
 Prepare closing entries.
 Prepare a balance sheet and income statement of a service business.
 Prepare reversing entries.

Activating Prior Learning

Have you ever tried to prepare a trial balance in a worksheet? Can you recall what your
challenges in balancing the worksheet are? Discuss in a brief paragraph.

Presentation of Content

The Worksheet

A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries.

Although optional and not part of the formal accounting records, worksheets are usually prepared
because they greatly facilitate the orderly preparation of the financial statements. In practice,
worksheets are most commonly prepared using spreadsheet application (e.g., Microsoft Excel).
But you, my friend, will be using a "yellow thingy worksheet" and... this will give you
nightmares.. ...so good luck!

A worksheet is prepared as follows:

Financial Accounting and Reporting Accounting Cycle of a Service Business

Illustration: Worksheet

Mr. Bruno Manly opened up a beauty salon, called “Brunah’s Salon’ on December 1, 20x1. The
following were transactions during the month:
1. The owner provided P200,000 cash as initial investment to the business on December 1,
20x1.
2. Obtained a 12%, one-year, bank loan for P100,000 on December 1, 20x1. Principal and
interest are due at maturity date.
3. Paid six months' rent in advance of P60,000 on December 1, 20x1. Rent per month is
P10,000.
4. Acquired equipment for P180,000 cash on December 1, 20x1. The equipment has a useful
life of 5 years.
Financial Accounting and Reporting Accounting Cycle of a Service Business

5. Purchased supplies for P50,000 cash during the period.

6. Rendered services worth P220,000 for cash during the period.
7. The owner withdrew a total of P40,000 cash from the business during the period.

Requirement: Prepare the worksheet on December 31, 20x1.

Solutions:

STEPS 1 & 2: IDENTIFYING AND ANALYZING & JOURNALIZING

The transactions are recorded in the journal as follows:

(1) Cash 200,000

Owner’s equity 200,000
to record the owner’s investment to the business.
(2) Cash 100,000
Notes payable 100,000
to record the bank loan

 If Brunah uses the asset method, the prepayment of rent is recorded as follows:

(3A) Prepaid rent 60,000

Cash 60,000
to record the payment of rent.

 If Brunah uses the expense method, the prepayment of rent is recorded as follows:

(3B) Rent expense 60,000

Cash 60,000
to record the payment of rent.

Both entries (3A) and (3B) above are acceptable. However, Brunah should only choose one
method as its accounting policy (either asset method or expense method) and apply that policy
consistently in the current and succeeding accounting periods (Consistency concept).

We will assume that Brunah chose to use the expense method (journal entry “3B”).

(4) Equipment 180,000

Cash 180,000
to record the acquisition of equipment for cash.

 If Brunah uses the asset method, the purchase of supplies is recorded as follows:

(5A) Prepaid supplies 50,000

Cash 50,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

to record the purchase of supplies.

 If Brunah uses the expense method, the purchase of supplies is recorded as follows:

(5B) Supplies expense 50,000

Cash 50,000
to record the purchase of supplies.

Again, we will assume that Brunah chose to use the expense method (journal entry “5B”).

(6) Cash 220,000

Service fees 220,000
to record service fees.

(7) Owner’s drawings 40,000

Cash 40,000
to record the withdrawal of the owner.

STEP 3: POSTING

The journal entries are posted to the ledger as follows

ASSETS
Cash Equipment
(1) 200,000 (4) 180,000  
(2) 100,000 60,000 (3B)  
  180,000 (4)  
(6) 220,000 50,000 (5B)  
  40,000 (7)    
Bal. 190,000 Bal. 180,000

LIABILITIES
Notes payable
  100,000 (2)
100,000 Bal

EQUITY
Owner's equity Owner's drawings
  200,000 (1) (7) 40,000  
200,000 Bal. Bal. 40,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

INCOME   EXPENSE
Service fees Rent Expense
  220,000 (6) (3B) 60,000  
220,000 Bal. Bal. 60,000

Supplies Expense
(5B) 50,000  
Bal. 50,000

STEP 4: UNADJUSTED TRIAL BALANCE

The unadjusted trial balance on December 31,20x1 is prepared as follows:

         
  Brunah's Salon  
  Unadjusted Trial Balance  
  December 31, 20x1  
   
  Accounts Debits Credits  
  Cash P 190,000  
  Equipment 180,000  
  Notes payable   P 100,000  
  Owner's equity   200,000  
  Owner's drawings 40,000  
  Service fees   220,000  
  Rent expense 60,000  
  Supplies expense 50,000    
  Totals P 520,000 P 520,000  
         

STEP 5: ADJUSTING ENTRIES

Additional information:
The following information was identified on December 31, 20x1:
1. The water and electricity bills in December amounting to P3,000 are not yet paid.
2. The cost of unused supplied is P20,000.

AJE #1: Utilities expense

Financial Accounting and Reporting Accounting Cycle of a Service Business

The unpaid water and electricity bills in December totaling P3,000 are accrued as follows:

Dec. 31, Utilities expense 3,000

20x1 Utilities payable 3,000
to accrue utilities expense incurred but not yet paid.

AJE #2: Interest expense

Interest = Principal x rate x term

1 month passed from Dec 1 to Dec
i = P100,000 x 12% x 1/12
31, 20x1 over 12 months in a year.
i = P1,000

The adjusting entry for interest expense is as follows:

Dec. 31, Interest expense 1,000

20x1 Interest payable 1,000
to accrue interest expense incurred but not yet paid.

AJE #3: Depreciation expense

The annual depreciation expense is computed as follows:
Cost of equipment P180,000
Divide: Useful life 5
Annual depreciation expense P 36,000

However, because the equipment has only been used for 1monthin 20x1 (Dec 20x1), only 1-
month depreciation expense shall be recognized. This is computed as follows:
Annual depreciation P36,000
Multiply by 1/12
Depreciation expense –Dec, 20x1 P 3,000

The adjusting entry is as follows:

Dec. 31, Depreciation expense 3,000

20x1 Accumulated depreciation 3,000
to record depreciation expense for the period..

The carrying amount of the equipment as of December 31, 20x1 is determined as follows:
Equipment P180,000
Accumulated depreciation ( 3,000)
Equipment –net P177,000

AJE #4: Rent expense

Financial Accounting and Reporting Accounting Cycle of a Service Business

Previous transaction:
3. Paid six months’ rent in advance of P60,000 on December 1, 20x1. Rent per month is P10,000.

Initial recording: (Expense method assumed)

(3B) Rent expense 60,000

Cash 60,000
to record the payment of rent.

Year-end analysis:
Used portion (Rent expense)
1 month – Dec. 20x1
P60,000 (10,000 per month x1 month) = P10,000
6 months' rent prepaid
on Dec. 1, 20x1 Unused portion (Prepaid rent)
5 months – Jan. to May 20x2
(10,000 per month x5 months) = P50,000

Recall that under the expense method, the adjusting entry is to take up the asset (unused or
unexpired) portion (i.e., the opposite). The adjusting entry therefore involves debiting "Prepaid
rent" for the unexpired portion of P50,000 and crediting rent expense for the same amount. The
adjusting entry is as follows:

Dec. 31, Prepaid rent 50,000

20x1 Rent expense 50,000
to record the unused portion of the rent paid in
advance as prepaid asset.

AJE #5: Supplies expense

Previous transaction:
5. Purchased supplies for P50,000 cash during the period.
.

Initial recording: (Expense method assumed)

(5B) Supplies expense 50,000

Cash 50,000
to record the purchase of supplies.

Year-end analysis:
Unused portion (Prepaid supplies)
P50,000 P20,000 (given)
total supplies
purchased during the
Used portion (Supplies expense)
period
(50,000 total – 20,000 unused) = P30,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

Recall again that under the expense method, the adjusting entry is to take up the asset (unused or
unexpired) portion (i.e., the opposite). The adjusting entry therefore involves debiting "Prepaid
supplies" for the unexpired portion of P20,000 and crediting supplies expense for the same
amount. The adjusting entry is as follows:

Dec. 31, Prepaid supplies 20,000

20x1 Supplies expense 20,000
to record unused supplies as prepaid supplies

STEP 6: ADJUSTED TRIAL BALANCE (WORKSHEET)

The worksheet is prepared as follows:

Financial Accounting and Reporting Accounting Cycle of a Service Business

The adjusting entries are re-provided below to facilitate your understanding of the partial
worksheet above:

AJE #1 Utilities expense 3,000

Utilities payable 3,000
AJE #2 Interest expense 1,000
Interest payable 1,000
AJE #3 Depreciation expense 3,000
Accumulated depreciation 3,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

AJE #4 Prepaid rent 50,000

Rent expense 50,000
AJE #5 Prepaid supplies 20,000
Supplies expense 20,000

Notes: Preparing the Worksheet

1) Account titles used in the adjusting entries but were not previously included in the unadjusted
trial balance are placed at the bottom part of the "Accounts" column of the worksheet.

2) The debits and credits of the adjusting entries are then placed on the "Adjustments" column
of the worksheet.

3) Amounts in the "Unadjusted trial balance" and "Adjustments" columns are combined to
come up with the adjusted balances of the accounts. The adjusted balances are placed on the
"Adjusted trial balance" columns.

 To combine amounts, we observe the following rules of debits and credits:

a. Debit and debit means you add.
b. Credit and credit means you add.
c. Debit and credit, or vice versa, means you subtract.

P60,000 (debit balance in the “Unadjusted trial balance”

minus P50,000 (credit adjustments) equals P10,000
adjusted debit balance.

No balance (zero) in the “Unadjusted trial balance” plus

P1,000 (credit adjustments) equals P1,000 adjusted debit
balance.
Financial Accounting and Reporting Accounting Cycle of a Service Business

The procedure to compute for the adjusted balances of accounts in the adjusted trial balance is
called “cross-footing.” “Cross-footing ” involves adding (or subtracting) amounts horizontally.

 Observe that the total debits and credits in the columns of the worksheet are equal

The procedure to compute for the “totals” of the columns is called “footing.” Footing involves
adding (or subtracting) amounts vertically

These two lines underneath an amount are called “double rule.” In

accounting, “double rule” are used to connote total or the end of a
computation. It is like placing a period after a sentence or the
phrase “the end” aster a story.

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.

1. Statement of financial position (or Balance sheet) — shows information on assets,

liabilities and equity.
Financial Accounting and Reporting Accounting Cycle of a Service Business

2. Statement of profit or loss (or Income statement) — shows information on income and
expenses, and consequently, the profit or loss for the period.

The preparation of the balance sheet and the income statement is greatly facilitated by the
worksheet. In the worksheet, all income and expenses accounts in the adjusted trial balance are
simply extended to the "income statement columns," while all asset, liability and equity accounts
are extended to the "balance sheet columns."

Illustration: Preparation of financial statements

Let us prepare the balance sheet and income statement columns of Brunah's Salon:

The adjusted
balances of income
and expense
accounts are
extended to the
income statement
columns.

The adjusted balances of asset, liability and equity

accounts are extended to the balance sheet columns.

After amounts are extended to the income statement and balance sheet
Notes: columns, the balancing figure is the profit or loss.

Concept: Income minus expenses equals profit or loss. If income exceeds expenses, there is
profit. If income is less than expenses, there is loss. 

Thus, in the income statement columns of the worksheet:

 If total credits exceed total debits, there is profit. This is because total credits in the income
statement columns pertain to income, while total debits pertain to expenses.
Financial Accounting and Reporting Accounting Cycle of a Service Business

 Therefore, if total credits exceed total debits in the income statement columns, the
balancing figure is on the debit side. This balancing figure is the profit. (See 'P173,000' in
the worksheet above)

 If total debits exceed total credits, there is loss. In this case, income is less than expenses.
The balancing figure is the loss and it is placed on the credit side of the income statement
columns.

Concept: Profit or loss is closed to the “Owner’s capital” account at the end of each period.
Profit increases equity, while loss decreases equity. 

Thus, in the balance sheet columns of the worksheet:

 If total debits exceed total credits, there is profit. This is because the balancing figure on the
credit side will be added to equity when closing entries are made. (See 'P173,000' in the
worksheet above)

 If total debits are less than total credits, there is loss. The balancing figure on the debit side
will be deducted from equity when closing entries are made.

Closing entries

Before we present the balance sheet and income statement in formal reports, let us prepare first
the closing entries and post-closing trial balance.

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.

The preparation of closing entries is also referred to as "closing the books. " This is an
application of the time period concept.

Closing entries are prepared as follows:

1. All income accounts are debited and all expense accounts are credited. The resulting
balance is recorded in a clearing account called the "Income summary."
2. The balance of "Income summary" is closed to the "Owner's capital" account.
3. Any balance in the "Owner's drawings" account is closed to the "Owner's capital" account.

Illustration: Preparation of closing entries

Let us prepare the closing entries of Brunah's Salon. The income Statement and balance sheets
columns are re-provided below to aid us in determining the accounts to be closed (all nominal
accounts were encircled):
Financial Accounting and Reporting Accounting Cycle of a Service Business

Closing entry #1: Income summary

Income and expense accounts are closed to the "Income summary” account as follows:

Dec. 31, 20x1 Service fees 220,000

Rent expense 10,000
Supplies expense 30,000
Utilities expense 3,000
Interest expense 1,000
Depreciation expense 3,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

Income summary 173,000

to close income and expense accounts to
income summary

The amount in the income summary account (i.e., P173,000) is the balancing figure in the
closing entry. This amount represents the profit (or loss) for the period. Notice that this is the
same amount of balancing figure in the worksheet.

Notes:
 If the "Income summary" account has a credit balance, there is profit (like in the closing
entry above).
 If the "Income summary" account has a debit balance, there is a loss.

Closing entry #2: Income summary closed to Equity

The income summary is closed to the "Owner's capital" account as

Dec. 31, 20x1 Income summary 173,000

Owner’s equity 173,000
to close the income summary to equity

If the "Income summary" is debited when closing to equity, there is profit (like in the entry
above). If the "Income summary" is credited when closing to equity, there is loss. These are
because profit increases equity, while loss decreases equity.

Closing entry #3: Drawings account closed to Equity

The “Owner's drawings" account is closed to the "Owner's equity" account as follows:

Dec. 31, 20x1 Owner’s equity 40,000

Owner’s drawing 40,000
to close the drawings account

Notice that the drawings account is closed directly to the "Owner's equity" account rather than
through the income summary account. This is because the drawings account is neither an income
nor an expense account but rather a contra equity account. As such, owner's drawings do not
enter into the computation of profit or loss.

Post-closing trial balance

The columns in the "worksheet" can be extended by adding columns for the following:

1. Closing entries - the debits and credits in the closing entries are placed here.

2. Post-closing trial balance - the amounts in the "Adjusted trial balance" (or the "Income
statement" and "Balance sheet" columns) are cross-footed with the amounts in the "Closing
entries" columns. 'The resulting amounts are then placed in the "Post-closing trial balance."
Financial Accounting and Reporting Accounting Cycle of a Service Business

The amounts in the "Post-closing trial balance" will the beginning balances of accounts in
the next accounting period.

Let us complete the worksheet of Brunah’s Salon. The Closing entries are provided to facilitate
your understanding of the completed worksheet below:

Dec. 31, 20x1 Service fees 220,000

(CLE 1) Rent expense 10,000
Supplies expense 30,000
Utilities expense 3,000
Interest expense 1,000
Depreciation expense 3,000
Income summary 173,000
Dec. 31, 20x1 Income summary 173,000
(CLE 2) Owner’s equity 173,000
Dec. 31, 20x1 Owner’s equity 40,000
(CLE 3) Owner’s drawings 40,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

The debits and credits in the closing entries are

placed here

Amounts in the balance sheet and income

statement columns are combined with the
amounts in the closing entries. The
resulting amounts are placed here.
Financial Accounting and Reporting Accounting Cycle of a Service Business

Notes:

 After closing entries are posted, the nominal accounts (income, expense, and drawings
accounts) have zero balances. At this point, these accounts are referred to as closed
accounts.
 Closed account - an account that has no balance.
 Open account - an account that has a balance.

 The post-closing trial balance contains only real accounts (asset, liability, and equity
accounts). The post-closing trial balance is similar to the "balance sheet" columns in the
worksheet except that the balance of the "Owner's capital" account in the post-closing trial
balance is the updated amount after closing profit or loss and drawings.

Columns in the Type of accounnts

Equality of debits and credits
worksheet contained in the columns
Unadjusted trial Real, nominal & mixed
Debits and credits are equal.
balance accounts.
Adjusted trial balance Real & nominal accounts. Debits and credits are equal.
The difference between debits and
Income statement Nominal accounts only.
credits represents profit or loss.
The difference between debits and
Balance sheet Real accounts only.
credits represents profit or loss.
Post-closing trial
Real accounts only. Debits and credits are ec ual.
balance

 The income statement is usually prepared first before the balance sheet. This is because the
balance sheet cannot be finalized until after profit or loss is determined and closed to equity.
Thus, in the worksheet, the "income statement" columns precede the "balance sheet" and
"post-closing trial balance" columns.

We can now present the balance sheet and income statement in formal reports.

Brunah's Salon
Balance Sheet
As of December 31, 20x1

ASSETS
Cash P 190,000
Prepaid rent 50,000
Prepaid supplies 20,000
Equipment 180,000
Accumulated depreciation (3,000)
TOTAL ASSETS P 437,000
Financial Accounting and Reporting Accounting Cycle of a Service Business

LIABILITIES
Notes payable P 100,000
Utilities payable 3,000
Interest payable 1,000
TOTAL LIABILITIES   104,000

EQUITY
Owner's Equity 333,000
TOTAL EQUITY   333,000
OTAL LIABILITIES & EQUITY P 437,000

Brunah's Salon
Income Statement
For the month ended December 31, 20x1

INCOME
Service Fees P 220,000

EXPENSES
Rent expense (10,000)
Supplies expense (30,000)
Utilities expense (3,000)
Interest expense (1,000)
Depreciation expense (3,000)
TOTAL EXPENSES P (47,000)

PROFIT FOR THE PERIOD P 173,000

Notes:
 The headings of the financial statements show the following:
1. Name of the business ( 'Who?’)
2. Title of the financial statement ('What?')
3. Reporting period ('When? ')

 The balance sheet is dated as of the end of the reporting period (also referred to as the
'balance sheet date"). This is because the balance sheet contains only real accounts (assets,
liabilities & equity). These accounts are not closed at the end of each reporting period but
rather carried over to the next period. Thus, the balances of these accounts represent
cumulative amounts.

 The income statement is dated covering the reporting period (i.e., ‘For the period ended....').
This is because the income statement contains only nominal accounts (income & expenses,
except drawings). These accounts are closed are the end of each reporting period and are not
Financial Accounting and Reporting Accounting Cycle of a Service Business

carried over to the next period. Thus, the balances of these accounts pertain only to the
current period

Reversing Entries

Reversing entries are entries usually made on the first day of the next accounting period to
reverse certain adjusting entries in the immediately preceding period.

As mentioned earlier, reversing entries are optional, meaning they are not required in the
preparation of the financial statements. However, businesses often use reversing entries to
simplify the recording process in the next accounting period.

The following are the purposes of reversing entries:

1. To facilitate the recording of cash receipts and disbursements in the next accounting period;
2. To promote convenience in recording the next period's yearend adjustments for accruals; and
3. To promote consistency of accounting procedure.

Adjusting entries that may be reversed

Not all adjusting entries may be reversed. Only the adjusting entries made for the following 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.

Let's continue the accounting cycle of Brunah's Salon. The adjusting entries are re-provided
below:
  
AJE #1 Utilities expense 3,000
Utilities payable 3,000
AJE #2 Interest expense 1,000
Interest payable 1,000
AJE #3 Depreciation expense 3,000
Accumulated depreciation 3,000
AJE #4 Prepaid rent 50,000
Rent expense 50,000
AJE #5 Prepaid supplies 20,000
Supplies expense 20,000

Using the guide above, the adjusting entries that may be reversed are identified as follows:
Guide AJE’s that may be reversed
I. Accruals for income or expense 1. AJE #1 (unpaid utilities)
2. AJE #2 (unpaid interest)
II. Prepayments (expense method) 3. AJE #4 (prepaid rent)
4. AJE #5 (prepaid supplies)
III. Advanced collections (income method) None in this illustration.
Hints:
Financial Accounting and Reporting Accounting Cycle of a Service Business

 AJE’s involving “receivables” and “payables” are normally reversible.

 AJE’s involving “depreciation” and “bad debts” are not reversible.

RE #1 Utilities payable 3,000

Utilities expense 3,000
RE #2 Interest payable 1,000
Interest expense 1,000
RE #3 Accumulated depreciation 3,000
Depreciation expense 3,000
RE #4 Prepaid rent 50,000
Rent expense 50,000
RE #5 Supplies expense 20,000
Prepaid supplies 20,000

 Notice that the reversing are the exact opposites of the adjusting entries.

Now let us see how reversing entries simplify the recording in the next accounting period.

Utilities:

With reversing entries No reversing entries

1/1/2/x2 Utilities payable 3,000 None
(RE #1) Utilities expense 3,000
to record the reversing entry
20x2 Utilities expense 3,000 Utilities payable 3,000
Cash 3,000 Cash 3,000
to record the payment of unpaid to record the payment of
utilities of the previous period unpaid utilities of the previous
period

Businesses customarily record disbursements for item of expense by debiting an expense account
(expense method) and collections of items of income by crediting an income account (income
method).

The reversing entry simplifies the recording in the next accounting period (i.e., 20x2) by
permitting the business to record the cash payment for the utilities in the customary way (i.e., a
debit to an expense account).

If no reversing entry is made, the bookkeeper needs to go back to the records to identify the
balance of the "utilities payable" account, which is the account to be debited. This can be
cumbersome when there are many transactions to be recorded in the period.

The "UtiIities expense" account has a beginning balance (January l, 20x2) of zero. This is
because utilities expense is a nominal account and nominal accounts are closed at the end of each
period (i.e., December 31, 20x1).
Financial Accounting and Reporting Accounting Cycle of a Service Business

The net effect of the entries above in the utilities expense in 20x2 is zero. This is because the
utilities were used in 20x1, and therefore, recognized as expense in 20x1 (i.e., accrued as
adjusting entry on December 31, 20x1). This is an application of the concepts of time period and
accrual basis.

Utilities:

With reversing entries No reversing entries

1/1/2/x2 Interest payable 1,000 None
(RE #2) Interest expense 1,000
to record the reversing entry
20x2 Interest expense 1,000 Interest payable 3,000
Cash 1,000 Cash 3,000
to record the payment of unpaid to record the payment of unpaid
interest incurred in the previous period interest incurred in the previous period

Rent:

With reversing entries No reversing entries

1/1/2/x2 Rent expense 50,000 None
(RE #3) Prepaid rent 50,000
to record the reversing entry
AJE on None Rent expense 50,000
Dec 31, Prepaid rent 50,000
20x2 to record the used portion of the
prepaid rent as expense

Supplies:

With reversing entries No reversing entries

1/1/2/x2 Supplies expense 50,000 None
(RE #4) Prepaid supplies 50,000
to record the reversing entry
AJE on None Supplies expense 50,000
Dec 31, Prepaid supplies 50,000
20x2 to record the used portion of the
prepaid supplies as expense

Application

Problem drill.

Rightnav, Inc. started operations in 2019. The following were the transactions for the year ended
December 31, 2019:

1. The owner invested P300,000 cash to the business.

Financial Accounting and Reporting Accounting Cycle of a Service Business

2. The business obtained a 12%, one-year, bank loan of P200,000 on October 1, 2019. Principal
and interest are due at maturity date.
3. Purchased equipment on November 1, 2019 for P360,000 cash.
4. Purchased office supplies worth P80,000 for cash (Rightnav uses the Asset method).
5. Rendered services worth P180,000 for cash.
6. Rendered services worth P420,000 on account.
7. Collected P370,000 accounts receivable.
8. Paid utilities expense of P16,000.
9. Paid salaries expense P140,000.
10. The owner withdrew P100,000 cash from the business.

Additional information:
 The equipment has a useful life of 5 years.
 6% of accounts receivable are doubtful of collection.
 Unused office supplies on December 31, 2019 amounted to P5,000.

Requirements:
a. Provide the journal entries.
b. Post the entries to the ledger.
c. Prepare the unadjusted trial balance.
d. Provide the adjusting entries.
e. Complete the worksheet up to post-closing trial balance.
f. Prepare the closing entries.
g. Prepare the balance sheet and income statement.
h. Prepare reversing entry on January 1, 2020.

Feedback

Comprehensive Problem

Dr, Rey Layus, upon completing a residency program at Harvard Medical Center, established a
medical practice in Sanchez Mira, Cagayan. During October 2019, the first month of operations,
the following transactions occurred:

Oct. 1 Dr. Layus transferred P250,000 from his personal checking account to a bank
account, Layus Clinic.
1 A medical clinic, and land, P250,000 were acquired by paying P50,000 in cash and
issuing a 5-year, 20% note payable (interest is payable every 6 months) for the
P1,200,000 balance.
1 Acquired medical equipment costing P420,000 and medical supplies amounting to
P39,000 by paying P59,000 cash and issuing a 24% note payable, maturing in 6
months, for the P400,000 balance.
2 Acquired "all-in-one" insurance for a year, P20,000.
4 Received cash from patients amounting to P117,000.
Financial Accounting and Reporting Accounting Cycle of a Service Business

7 Bought medical supplies on account from Pamplona Supply, P17,000.

10 Paid salaries of nurses and office staff, P73,000.
12 Received P90,000 from the Claveria Experimental Drug Center for research to be
conducted by Dr. Layus over the next 3 months.
18 Billed patients P317,000 for services rendered.
21 Paid P23,000 for repairs to the medical equipment.
23 Paid the telephone bill, P3,000.
24 Bought medical equipment on account from Dr. De Leon, P45,000.
25 Collected PI 13,000 from patients billed on the 18th.
27 Paid P13,000 on account to Pamplona Supply.
30 Withdrew P200,000 in cash from the medical practice.
30 Paid P15,000 dues to the Cagayan Medical Association.

Required:

l. Establish the following accounts and account numbers in a ledger.

Account No. Account No.

Cash 110 Layus, Capital 310
Accounts Receivable 120 Layus, Withdrawals  320
Medical Supplies 130 Income Summary 330
Prepaid Insurance 140 Medical Revenues 410
Land 150 Research Revenues 420
Medical Building 160 Salaries Expense 510
Accum. Depreciation- Insurance Expense 520
Medical Building 165 Repairs Expense 530
Medical Equipment 170 Supplies Expense 540
Accum. Depreciation- Association Dues Expense 550
Medical Equipment 175 Telephone Expense 560
24% Notes Payable 210 Depreciation Expense-Bldg. 570
20% Notes Payable 220 Depreciation Expense-Equipt. 580
Accounts Payable 230 Interest Expense 590
Salaries Payable 240
Interest Payable 250
Unearned Research Revenues260
 
2. Record the transactions for the month of October in a journal (page 1) and post the entries to
the ledger. Use balance sheet accounts to record those transactions that will later require
adjustments.

3. Prepare a trial balance on a worksheet and record the following adjustments on the
worksheet.
a. Insurance for one month has expired.
b. Medical supplies on hand at month-end amounted to P21,000.
c. Depreciation on the medical building and on the medical equipment is P5,000 and
P9,000, respectively.
Financial Accounting and Reporting Accounting Cycle of a Service Business

d. Unearned research revenues in the amount of P30,000 have been earned.

e. Salaries of P51,000 have accrued.
f. Interest on the 20% and 24% notes are P20,000 and P8,000, respectively.

4. Complete the worksheet and prepare an income statement and a balance sheet.

5. Record the adjusting and closing entries in the journal and post the entries to the ledger.

6. Prepare a post-closing trial balance.

7. Prepare the salaries and interest reversing entries in the journal and post them to the ledger.

Student Reflection on Learning

1. How much did you know about the subject before we started?

2. What did you learn about this topic that surprised you?

Unit Summary

 A worksheet is an analytical device used to facilitate the gathering of data for adjustments,
the preparation of financial statements, and closing entries.
 The financial statements are the means by which information accumulated and processed in
financial accounting is periodically communicated to the users. The financial statements are
the end products of the accounting process.
 The balance sheet shows the assets, liabilities and equity of a business.
 The income statement shows the income and expenses, and consequently, the profit or loss,
of a business.
 Closing entries are entries prepared at the end of the accounting period to "zero out" all
nominal accounts in the ledger.
 The post-closing trial balance is prepared to check the equality of debits and credits, in the
general ledger after closing entries are made. The post-closing trial balance contains only real
accounts. These accounts and their balances appear on the balance sheet.
 Reversing entries are entries usually made on the first day of the next accounting period to
reverse certain adjusting entries in the immediately preceding period.
 Only the adjusting entries made for the following may be reversed: (1) Accruals for income
or expense; (2) Prepayments recorded using the expense method; (3) Advance collections
recorded using the income method.

References
Financial Accounting and Reporting Accounting Cycle of a Service Business

Books:
Millan, Z.V (2019), Financial Accounting and Reporting (2019-2020 ed.). Bandolin Enterprise.
Ballada, W (2019), Basic Financial Accounting and Reporting (22nd ed.). Domedane Publishers