LESSON 8: BUSINESS TRANSACTIONS AND THEIR ANALYSIS AS APPLIED TO THE

ACCOUNTING CYCLE OF A SERVICE FIRM (Part 2)

GATEWAY INTEGRATED SCHOOL

OF SCIENCE AND TECHNOLOGY GEN. TRIAS CAMPUS
Sitio Tinungan Brgy. Manggahan Gen. Trias City Cavite

Senior High School Department Step 1- Transactions and/or Events: Identification and measurement of external transactions and
internal events

Module 8 Step 2 - Preparation of Journal Entries (Journalization): Business transactions are recorded in the
journals using debits and credits.

FUNDAMENTALS OF ACCOUNTANCY, Step 3 – Posting: Posting of journal entries to general ledgers.

Step 4 - Unadjusted Trial Balance: Preparation of unadjusted trial balance

BUSINESS, AND MANAGEMENT 1 Step 5 - Worksheet

This step is simply about plotting the items in the unadjusted trial balance on the worksheet.
In a manual accounting system, a worksheet is a large columnar sheet of paper specifically designed to
conveniently arrange all the accounting information required at the end of a period. The worksheet is
used to check whether ledger accounts are balanced and adjusted. The satisfactory completion of a
worksheet provides assurance that all the details of the end-of-period accounting procedures were
properly brought together. The worksheet serves as the source in the preparation of financial
statements and other closing and adjusting entries.
The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown
below:

Prepared by:
MS. SHIRLY S. CAÑETE
Subject Teacher
__________________________________________________________
Name of Student
__________________________________________________________
Grade Level and Section

Date: ________________________

1|Fundamentals of Accountancy, Business, and Management 1

 2/18/19 Accounts Receivable 15,000
Service Revenue 15,000
To record services rendered to a customer on
account
2/19/19 Supplies Expense 5,000
Accounts Payable 5,000
To record purchase of office supplies on account
2/25/19 Salaries Expense 4,000
Cash 4,000
To record payment of salary of Juana
Recall that after posting to the general ledger, the unadjusted trial balance was:
MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance February 29, 2019
Recall the example in previous module (Module 7), about Pedro Matapang who started his Matapang Account Title Debit Credit
Computer Repairs business on February 14, 2019. The following transactions transpired in February Balance Sheet Accounts
2019: Cash 181,000
1. February 14, 2019 - Pedro Matapang invested PHP200,000 into his Matapang Computer Repair Accounts Receivable 15,000
business. Office Equipment 25,000
2. February 15, 2019 - Pedro purchased one computer unit from XY Computer Store to be used for Accounts Payable 5,000
his business. He issued check number 001 amounting to PHP25,000. Matapang, Capital 200,000
3. February 16, 2019 - Pedro hired Juana Magaling, an experienced secretary.
4. February 17, 2019 – Repaired the computer of Jean and collected PHP10,000. Income Statement Accounts
5. February 18, 2019 – Repaired the computer of Mike; however, Mike will pay PHP15,000 only on Service Revenue 25,000
March 18, 2019. Supplies Expense 5,000
6. February 19, 2019 – Pedro purchased Office Supplies from MM Merchandise amounting to Salaries Expense 4,000
PHP5,000 on account. Pedro will pay this on March 30, 2019.
7. February 25, 2019 – Paid the salary of Juana amounting to PHP4,000. 230,000 230,000
This now represents the first two money columns in the worksheet.
Below are the recorded entries of the above transactions:
General Journal Step 6 – Adjusting Entries
Date Account Title and Explanation Ref Debit Credit At the end of the accounting period, some accounts in the general ledger would require updating. The
2/14/19 Cash 200,000 journal entries that bring the accounts up to date are called adjusting entries. One purpose of adjusting
Matapang, Capital 200,000 entries is for income and expenses to be reported in the correct period.
To record the initial investment of owner
Adjusting entries ensure that both the revenue recognition and matching principles are followed.
P. Matapang
2/15/19 Office Equipment 25,000 Prior to your lecture, recall the previous discussion on accounting principles and concepts, specifically
Cash 25,000 the matching principle.
To record the purchase of 1 computer unit
2/17/19 Cash 10,000 Revenue Recognition – accounting standards require that revenue is recognized when it is earned and
Service Revenue 10,000 the amount can be measured reliably. To illustrate:
To record receipt of cash from customer

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  Assume that you are preparing the financial statements for Feb 2019. Matapang Computer Exercise on Adjusting entries to record Depreciation
Repairs rendered services amounting to PHP25,000 for the repair of the computer units of Mr.
Recall that Matapang acquired office equipment on February 15, 2019 for his repair shop business. The
Tamad on Feb 26, 2019. However, the payment for these services of Matapang will be made
cost of the equipment is PHP25, 000. It was estimated to have a useful life of five years. It is estimated
on Mar 15, 2019.
that after five years, the office equipment can be sold at a scrap value of PHP1, 000. The company uses
Question: When should you recognize the PHP25,000 as revenue or income, in February or the straight line method of depreciation.
March? Applying the revenue recognition principle, it should be reported as revenue for
Depreciation is a means of allocating the cost of an asset to an expense over the accounting period that
February 2019.
will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang for
 Assume that you are preparing the financial statements for February 2019. On February 28, five years. Proper accounting procedures dictate that the cost of PHP25, 000 should be spread over five
2019, Matapang Repairs received payment from Mr. Tamad amounting to PHP25,000. This years.
payment is for the repair of the computer units of Mr. Tamad on March 5, 2019. There are several methods or formulas to compute the amount of depreciation. The simplest is the
Question: when should you recognize the PHP25,000 as revenue or income, in February or straight line method. The formula is:
March? Applying the revenue recognition principle, it should be reported as revenue in Annual Depreciation: (Acquisition Cost – Salvage or Residual Value) / Useful Life
March 2019. Take note that since the service will be rendered in March, the revenue should
also be earned in March. What about February 2019? The amount is recorded as a liability Applying this formula to the exercise:
because Matapang Repairs has the obligation to render this service in the future. Annual Depreciation = (25,000 – 1,000) / 5
Matching Principle - this principle directs a business to report an expense on its income statement = PHP4, 800
within the same period as its related income. To illustrate:
If the accounting period being reported by Matapang is for the month ending February 29, 2019, the
 Assume that you are preparing the financial statements for February 2019. The business gives adjusting entry to record this depreciation in the books of Matapang is:
a commission of 10% service income to its employees. The commission is paid the following
General Journal
month. On February 2019, the total service income for the month is PHP100,000. Thus, the
employees are entitled to a commission of PHP10,000. This amount will be paid on March 12, Date Account Title and Explanation Ref Debit Credit
2019. Question: when should the commission expense be recorded in the book of accounts of 2/29/19 Depreciation Expense 200
the business, in March or in February? Applying the matching principle, the answer is in Accumulated Depreciation-Office Eqpt. 200
February. The depreciation expense of PHP200 was derived by computing the monthly depreciation of PHP400
Adjusting entries are made at the end of each accounting period. Adjusting entries make it possible to (Annual Depreciation of PHP4, 800 / 12 months) and multiplying the PHP400 by one-half since the
report correct amounts on the statement of financial position and on the income statement. All equipment was acquired in the middle of February.
adjusting entries affect at least one income statement account and one statement of financial position #2 Deferred Expenses or Prepaid Expenses.
account. Thus, an adjusting entry will always involve an income or an expense account and an asset or
a liability account. There are five basic sources of adjusting entries: These are items that have been initially recorded as assets but are expected to become expenses over
time or through the operations of the business.
1. Depreciation expense
Exercise - Adjusting entries to record deferred expenses or prepaid expenses
2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income Recall that on February 19, 2019 Matapang purchased PHP5, 000 worth of office supplies on account.
By the end of the month, PHP2, 000 worth of these supplies are still unused.
4. Accrued expenses or accrued liabilities
The February 19, 2019 entry to record the purchase on the account of office supplies was already
5. Accrued income or accrued assets
posted to the general ledger and included in the balances, as shown in the unadjusted trial balance
#1 Depreciation. above. The entry was shown only for illustration purposes.
Depreciation is a method of allocating the cost of an asset to an expense over the accounting General Journal
periods that make up the asset’s useful life. Examples of assets subject to depreciation are: Store, Date Account Title and Explanation Ref Debit Credit
Office, Building, and Transportation equipment. These types of assets lose their ability to provide useful
2/19/19 Supplies Expense 5,000
service as time passes. Depreciation can also be referred to as the decrease in the usefulness of these
Accounts Payable 5,000
types of assets. Take note that Land is not subject to depreciation because the value of land mostly
To record the purchased of office supplies
increases as time passes.

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 on account General Journal
2/29/19 Supplies 2,000 Date Account Title and Explanation Ref Debit Credit
Supplies Expense 2,000 2/15/19 Cash 40,000
To set-up the value of unused supplies Unearned Service Revenue 40,000
The “Supplies” account debited on February 29, 2019 above is an asset account and represents the To record receipt of full payment for the
value of supplies unused as of the end of February 2019. If these journal entries are posted to the two-monthservice contract with Makisig
general ledger, the following should be the balance of each account:
Account Title Debit Credit 2/29/19 Unearned Service Revenue 10,000
Service Revenue 10,000
Supplies 2,000
To record service income earned from
Accounts Payable 5,000 Feb 15-29,2016; P40,000 x (1/2 month /2 months)
Supplies Expense 3,000
The alternative entries to record the above transactions are: #4 Accrued Expenses or Accrued Liabilities.
General Journal These are items of expenses that have been incurred but have not been recorded and paid.
Date Account Title and Explanation Ref Debit Credit
Exercise – Adjusting entries to record Accrued expenses or accrued liabilities
2/19/19 Supplies 5,000
Accounts Payable 5,000 On February 29, 2019, Matapang received the electric bill for the month of February amounting to
To record the purchased of office supplies PHP3,800. Matapang will pay this bill on March 2019.
2/29/19 Supplies Expense 3,000 The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill
Supplies 3,000 is still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates
To set up the value of unused supplies that the same should be recorded in February. Otherwise, your expense will be understated and thus
the company will be reporting an overstated income (or an erroneous income). Needless to say,
If these entries are posted in the general ledger, the following should be the balances of each
erroneous information may lead to wrong decisions.
account:
The entry to record the accrual of this expense is:
Account Title Debit Credit
Supplies 2,000 General Journal
Accounts Payable 5,000 Date Account Title and Explanation Ref Debit Credit
2/29/19 Utilities Expense 3,800
Supplies Expense 3,000
Utilities Payable 3,800
Notice that even with the different approaches in recording the transactions in the journal entries, the To accrue the cost of electricity incurred for the
balances in the general ledger will always be the same whether you used the first approach or the month of February.
second approach.
#5 Accrued Income or Accrued Assets
#3 Deferred Income or Unearned Income.
These are income items that have been earned but have not been recorded and paid by the customer.
These are items that have been initially recorded as liabilities but are expected to become income
In short, these are receivables of the business.
over time or through the operations of the business.
Exercise – Adjusting entries to record accrued income or accrued assets
Exercise – Adjusting entries to record deferred or unearned income On February 28, 2019, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an out-
On February 15, 2019 Matapang entered into a contract with Makisig to maintain the computers of of-town trip so he could not pay Matapang . He told Matapang that he will pay for their services on
Makisig for two months starting on February 15, 2019 up to April 15, 2019. On the same date, Makisig March 1, 2019.
paid the total contract amount of PHP40,000 in full. The entries to record and adjust the books are: Matapang has already earned the PHP15,000 but was not paid as of the end of February 2019.
In the February 29, 2019 entry above, as of end of February 2019, Matapang has already earned the Therefore, an income should be properly recognized in February 2019 for this transaction. The entry to
service revenue for the first 15 days, thus an adjusting entry is recorded. record this is:

4|Fundamentals of Accountancy, Business, and Management 1

 General Journal the SFP. All changes, whether increases or decreases to the owner’s interest on the company
Date Account Title and Explanation Ref Debit Credit during the period, are reported here.
2/29/19 Accounts Receivable 15,000 4. Cash Flow Statement - Provides an analysis of inflows and/or outflows of cash from/to operating,
Service Income 15,000 investing and financing activities.
To accrue the cost of electricity incurred for the The income statement is prepared first so that net income can then be recorded in the statement
month of February. of changes in equity. The statement of changes in equity is then prepared to determine the ending
Enter all adjustments to the worksheet: balance of equity or capital account. Once the ending balance is determined, the statement of financial
position is prepared. The cash flow statement is prepared last. Based on the worksheet below, the
Unadjusted Trial Adjusted Trial
For the month ending February 29, 2019 Adjustments income statement of Matapang for February 2019 should appear as follows:
Balance Balance Position
DR CR DR CR DR CR For the month ending February 29, 2019 Adjusted Trial Balance Income Statement
Balance Sheet Accounts DR CR DR CR
Cash 221,000 221,000 Balance Sheet Accounts
Accounts Receivable 15,000 15,000 30,000 Cash 221,000
Supplies 2,000 2,000 Accounts Receivable 30,000
Office Equipment 25,000 25,000 Supplies 2,000
Accum. Deprn-Off Eqpt 200 200 Office Equipment 25,000
Accounts Payable 5,000 5,000
Accum. Deprn-Off Eqpt 200
Utilities Payable 3,800 3,800
Unearned Service Revenue 40,000 10,000 30,000 Accounts Payable 5,000
Matapang, Capital 200,000 200,000 Utilities Payable 3,800
Unearned Service Revenue 30,000
Income Statement Accounts Matapang, Capital 200,000
Service Revenue 25,000 25,000 50,000
Supplies Expense 5,000 2,000 3,000 Income Statement Accounts
Salaries Expense 4,000 4,000
Service Revenue 50,000 50,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200 Supplies Expense 3,000 3,000
270,000 270,000 31,000 31,000 289,000 289,000 Salaries Expense 4,000 4,000
Note: The entry to record the receipt of PHP40,000 from Makisig on February 15, 2019 was reflected Utilities Expense 3,800 3,800
in the unadjusted trial balance columns. Depreciation Expense 200 200
Step 7 - Preparation of the Financial Statements. 11,000 50,000
Net Income 39,000
Using the information from the worksheet, the financial statements are prepared.
The following are the financial statements to be prepared:
1. Statement of Financial Position (SFP) - Also known as the balance sheet. This statement includes Matapang Computer Repairs
the amounts of the company’s total assets, liabilities and owner’s equity which in totality Statement of Comprehensive Income
provides the financial position of the company on a specific date. For the month ended February 29, 2019
2. Statement of Comprehensive Income (SCI) – Also known as the income statement. Contains the SERVICE REVENUE 50,000
results of the company’s operations for a specific period of time. This can be prepared on a LESS: EXPENSES
monthly, quarterly or yearly basis. Supplies Expense 3,000
3. Statement of Changes in Equity (SCE) - This statement is prepared prior to preparation of the
Salaries Expense 4,000
Statement of Financial Position in order to obtain the ending balance of the equity to be used in
Utilities Expense 3,800

5|Fundamentals of Accountancy, Business, and Management 1

Depreciation Expense 200 After the above entries, the balance for these accounts are:
Total Expenses 11,000
NET INCOME 39,000
Step 8 - Journalize the Closing Journal Entries
The income, expense, withdrawal (equity) accounts are called temporary accounts or nominal Notice that the ending balance of the Income Summary Account amounting to PHP39,000 credit
accounts. They are called temporary because they accumulate the transactions of only one accounting represents the net income for the period of Matapang. The balance of the Income Summary Account
period. At the end of this accounting period, the changes in owner’s equity accumulated in these is then closed to the Capital Account by this entry:
temporary accounts are transferred into the owner’s capital account. This process serves two purposes: General Journal
(1) to update the balance of the owner’s capital; and (2) it returns the balance of the temporary Date Account Title and Explanation Ref Debit Credit
accounts to zero, so that they are ready to measure the income, expenses and drawings of the next
Income Summary 39,000
accounting period again. The owner’s capital account and other statement of financial position
accounts are referred to as permanent or real accounts because their balances continue to exist beyond Matapang, Capital 39,000
the current accounting period. Closing the books is the process of transferring the balances of the
temporary accounts to the owner’s permanent capital account.
The closing journal entries should consist of the following:
ACTIVITY 8
 All of the nominal revenue accounts should be closed to the income summary account by a
Debit to revenue and a Credit to income summary. Direction: Do the following.
 All of the nominal expense accounts should be closed to the income summary by a Credit to A. Spencer Company has a fiscal year-end of June 30th. The following adjusting journal entries must
expense and a Debit to income summary. be prepared in order to bring the accounting records up to date for the preparation of year-end
 The balance in the income summary account should now reflect the net income for the financial statements.
accounting period. The next journal entry should close the income summary account to the  Interest on notes payable of PHP400 is accrued. Fees earned but unbilled total PHP1,400.
equity or capital account. If there is a net profit this entry will be a Debit to income summary  Salaries earned by employees of PHP700 have not been recorded.
and a Credit to owner’s capital account.  Bad debt expense for year is PHP900.
 Once the closing journal entries have been entered into the general journal, the information Each adjustment can be journalized (using general journal format) as follows:
should be posted to the general ledger. When this is accomplished, all of the nominal accounts
General
in the general ledger should have zero balances. To double check on this, we should prepare
Journal
another trial balance based on the new balances in the general ledger. If we have any nominal
Date Account Title and Explanation Debit Credit
accounts with positive balances, a mistake was made along the way and will need to be
corrected before proceeding to the next accounting period.
To illustrate:
General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/19 Service Revenue 50,000
Income Summary 50,000 B. (Depreciation) Compute the depreciation expense for the following independent cases. Use the
To close nominal revenue accounts straight line method of depreciation.
1. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is
Income Summary 11,000 estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the
Supplies Expense 3,000 end of its useful life. If the accounting period being reported by Pedro is one (1) year from January
Salaries Expense 4,000 – December 2016, how much is the depreciation expense?
Utilities Expense 3,800 2. Pedro Reyes purchased a delivery vehicle on April 1, 2016 amounting to PHP250,000. It is
Depreciation Expense 200 estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the

6|Fundamentals of Accountancy, Business, and Management 1

 end of its useful life. If the accounting period being reported by Pedro is one (1) year from January- ASSESSMENT 8
December 2016, how much is the depreciation expense?
3. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is Kay Travel was organized on September 1, 2016. Assume that the accounts are closed and financial
estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the statements are prepared each month. The company occupies rented office space but owns office
end of its useful life. If the accounting period being reported by Pedro is one (1) month (January equipment estimated to have a useful life of 10 years from date of acquisition, September 1, 2016. The
2016), how much is the depreciation expense for the month? unadjusted trial balance for Kay at November 30, 2016 is shown below:

C. For each of the following items, write the journal entry first (if one is needed) to record the Unadjusted Trial Balance
transactions; and then the adjusting entry, if any is required, for the end of the accounting year of Account Title and Explanation Debit Credit
Ron Car Rental Company on December 31, 2016.
Cash 1,750
1. On December 1, borrowed PHP300,000 cash from Nation Bank by issuing a promissory note with Accounts Receivable 1,210
an interest of 12% per annum payable in three months.
Office Equipment 4,800
Journal Entry Adjusting Entry
Accum. Deprn-Off Eqpt 80
Accounts Payable 1,640
Kay, Capital 7,490
Hint: when a promissory note is Hint: the formula to compute interest is Principal x Interest Rate x
Kay, Withdrawal 500
issued to support a borrowing, Time
the note payable account is Service Revenue 4,220
used. Advertising Expense 800
In the above situation, the amount of interest to be accrued on December 31 is good for one month
Salaries Expense 3,600
only (covering Dec 1 to Dec 31, 2016)
Rent Expense 770
2. On December 1, paid rental for six months beginning December 1, 2016 to May 31, 2017, at 13,430 13,430
PHP3,000 per month.
Journal Entry Adjusting Entry Additional Information:
The rent expense amounting to PHP770 covers rental for the month of November and December 2016
Instructions:
1. Prepare the adjusting entries necessary for the above problem
Hint: the amount of advance Hint: the amount of prepaid expenses is the 5 month rental 2. Prepare an adjusted trial balance
rental paid was for six month 3. Prepare an income statement ending November 30, 2016
(P3,000/month x 6 months) after December 31, 2016 (that is from January 2017 to May
2017), thus P3,000 per month x 5 months is P15,000. The 4. Prepare closing entries
PHP15,000 becomes an asset of the company as of December
31, 2016 but will be expensed the following accounting year. Adjusting Entries:
General Journal
3. On December 31, 2016, received telephone bills for the month December amounting to Date Account Title and Explanation Ref Debit Credit
PHP5,600. The bill will be paid on January 2017. Prepaid Expenses
Adjusting Entry Rental Expense
Depreciation Expense
Accumulated Deprn – Office Eqpt

7|Fundamentals of Accountancy, Business, and Management 1

Adjusted Trial Balance: Closing Entries:
Adjusted Trial Balance General Journal
Account Title Debit Credit Date Account Title and Explanation Ref Debit Credit
Cash Service Revenue
Accounts Receivable Income Summary
Prepaid Expenses To close nominal revenue accounts
Office Equipment
Accum. Deprn-Off Eqpt Income Summary
Accounts Payable Advertising Expense
Kay, Capital Salaries Expense
Kay, Withdrawal Rental Expense
Service Revenue Depreciation Expense
Advertising Expense To close the expense accounts
Salaries Expense Kay, Capital
Rent Expense Kay, Withdrawal
Depreciation Expense To close the withdrawal account

Kay, Capital
Income Summary
Statement of Comprehensive Income:
To close the income summary account
KAY TRAVEL
Statement of Comprehensive Income
For the month ended November 30, 2016
SERVICE REVENUE
LESS: EXPENSES
Advertising Expense
Salaries Expense
Rental Expense
Depreciation Expense
Total Expenses
NET LOSS

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