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Chapter-3-Accounting for Service Business, general journal,

trial balance and adjusting entries
Accountancy (President Ramon Magsaysay State University)

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Republic of the Philippines

President Ramon Magsaysay State University
College of Accountancy and Business Administration
(Formerly Ramon Magsaysay Technological University)
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

College/Department College of Accountancy and Business Administration

Course Code Fun Acc

Course Title Fundamentals of Accounting

Place of the Course in the Program Minor Subject

Semester & Academic Year Second Semester AY 2020-2021

CHAPTER 3
ACCOUNTING FOR A SERVICE BUSINESS

INTRODUCTION
Transactions and events are the starting points in the accounting cycle. By relaying on source
documents, transactions and events can be analyzed as to how they will affect performance and financial
positions. It can identify and describe transactions and events entering the accounting process. The
original written evidence contain information about the nature and the amounts of transactions.

INTENDED LEARNING OUTCOMES

1. Describe the nature of transactions in a service business.
2. Record transactions of a service business in the general journal.
3. Post transactions in the ledger.
4. Prepare a trial balance.
5. Prepare adjusting entries.
6. Complete the account cycle.

DISCUSSION

Accounting Cycle
The accounting cycle refers to a series of sequential steps or procedures performed to
accomplish the accounting process. The steps in the cycle and their aims follow:

Step 1 Identification of events to be recorded. (Identifying and analyzing)

Step 2 Transaction are recorded in the journal. (Journalizing)
Step 3 Journal entries are posted to the ledger. (Posting)
Step 4 Preparation of trial balance. (Unadjusted trial balance)
Step 5 Preparation of the worksheet including adjusting entries
Step 6 Preparation of the financial statement

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Step 7 Adjusting journal entries are journalized and posted.

Step 8 Closing journal entries are journalized and posted.
Step 9 Reversing journal entries are journalized and posted.

This cycle is repeated each accounting period. The first three steps in the accounting
cycle are accomplished during the period. The fourth to the ninth steps generally occur at the end
of the period. The last step is optional and occurs at the beginning of the next period.

Identifying and analyzing

This is the first step in the accounting cycle. It involves identifying a business transaction
and analyzing whether or not that transaction affects the assets, liability, equity, income or
expenses of the business.
A transaction that has an effect on the accounts is an accountable event, which needs to
be recorded in the books of accounts. On the other hand, a transaction that has no effect on the
account is a non-accountable event which is not recorded in the books of accounts.

3.1 Journalizing
After an accountable event is identified and analyzed, the second step is to record it in the
journal by means of journal entry. This recording process is called journalizing.
The journal is a chronological record of the entity‟s transactions. A journal entry shows
all the effects of a business transaction in terms of debits and credits. Each transaction is initially
recorded in a journal rather than directly in the ledger. A journal is called the book of original
entry.

A journal entry has the following format:

1. Date. The year and month are not rewritten for every entry unless the year or month
changes a new page is needed.
2. Account Titles and Explanation. The account to be debited is entered at the extreme left
of the first line while the account to be credited is entered slightly indented on the next
line. Generally, skip a line after each entry.
3. P.R. (posting reference). This will be used when the entries are posted, that is, until the
amounts are transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered this column.
5. Credit. The credit amount for each account is entered in this column.

Assume that Eliza Diaz established her own weeding consultancy with an initial investment of
P250,000 on May 1.

The journal entry is shown below:

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Journal page 1
Date Account Title and Explanation P.R. Debit Credit
2014
1 May 1 Cash 250,000
2 Diaz, Capital 250,000
4 Initial investment
5

Simple and Compound journal entries

A journal entry may have one of the following formats:
a. Simple journal entry – one which contains a single debit and a single credit element. The
illustrated journal entry above is an example of a simple journal entry.
b. Compound journal entry - one which contain two or more debits and credits.

Illustration 1: Journal entries

You opened a barbecue stand on January 1, 2018. The following were the business
transactions on the date.

Transaction #1 : Initial Investment

You provided P800 cash initial investment to your business.

Step 1: Transaction analysis

 Accounts affected: „Cash” (asset) and “Owner‟s capital” (equity)
 Effect on accounts: Cash is increased; Owner‟s capital is increased.
 Debit/Credit Asset is increased through debit. Equity is increased
through credit.

Step# 2 Journal Entry

Your initial investment is recorded in the journal as follows:
JOURNAL
Date Account titles Debit Credit
2018
Jan. 1 Cash 800
Owner's equity 800
to record the owner's initial
investment to the business

Transaction #2: Journal entry

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The business loan is recorded as follows

JOURNAL
Date Account titles Debit Credit
2018
Jan. 1 Cash 1,200
Notes payable 1,200
to record the loan obtained

Both the journal entries above are examples of simple journal entries because they have
single debits and credits.

Transaction #3: Capital expenditures

The business acquired the following for cash:

Item description Cost

Barbeque grill P1,000
Cooking accessories 120
Beach umbrella 400

Step #1: Transaction Analysis

 Accounts affected: “Equipment” (asset) and „Cash” (asset)
 Effect on accounts Equipment is increased; Cash is decreased
 Debit / Credit Asset is increased through debit and decreased
through credit.

Step #2: Journal entry

The acquisition of equipment is recorded as follows:
JOURNAL
Date Account titles Debit Credit
2018
Jan. 1 Equioment - Barbeque grill 1,000
Equioment - Cooking accessories 120
Equipment - Beach umbrella 400
Cash (1,000 + 120 + 400) 1,520
to record the acquisition of
Equipment

The journal entry above is example of a compound journal entry because it has more than
one debit.
Transaction #4: Acquisition of inventory
The business purchased inventory for P480 cash.

Step #1: Transaction analysis

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 Accounts affected: “Inventory” (asset) and “Cash” (asset)

 Effect on accounts Inventory is increased; Cash is decreased.
 Debit / Credit Asset is increased through debit and decreased
through credit.

Step #2: Journal entry

The purchase of inventory is recorded as follows:
JOURNAL
Date Account titles Debit Credit
2018
Jan. 1 Inventory 480
Cash 480
to record the acquisition of inventory

Illustration 2: Journal entries – Operations

Your barbecue operations started on January 2, 2018. The following were the business
transactions on this date:

Transaction #5: Sale

Total cash sales of barbecue amounted to P700. The total cost of the barbecues sold in P280.

Step #1: Transaction analysis

 Accounts affected:  “Cash” (asset) and ”Sales” (income);
 “Cost of sales” (expense) and
“Inventory” (asset)
 Effect on accounts  Cash is increased; Sales is increased.
 Cost of sales is increased; Inventory is
decreased.
 Debit / Credit  Asset is increased through debit and
decreased through credit.
 Income is increased through credit.
 Expense is increased through debit.

Step #2: Journal entry

The sales are recorded as follows:

JOURNAL
Date Account titles Debit Credit
2018
Jan. 2 Cash 700
Sales 700
to record total sales of barbecue
The cost of sales is recorded as follows:

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JOURNAL
Date Account titles Debit Credit
2018
Jan. 2 Cost of goods sold 280
Inventory 280
to record the cost of the barbecue
sold as expense

The entry above to record the cost of goods sold is an application of the matching
concept. This concept costs that are directly associated with the earning of revenue are
recognized as expenses in the same period where the related revenue is recognized.
Transaction #6: Expense
The business paid P20 for supplies expense.

Step #1: Transaction analysis

 Accounts affected: “Supplies expense” (expense) and “Cash” (asset)
 Effect on accounts Cash is decreased; Supplies expense is
increased.
 Debit / Credit Expense is increased through debit. Asset is
decreased through credit.

Step #2: Journal entry

The supplies expense is recorded as follows:

JOURNAL
Date Account titles Debit Credit
2018
Jan. 2 Supplies expense 20
Cash 20
to record the supplies expense

Illustration 3: Non-accountable events

A. You are planning to purchase new equipment in the future. You have not yet placed an
order for the new equipment because you don‟t have the money yet.
Step #1: Transaction analysis
 Accounts affected: None. A mere plan to purchase does not affect
the accounts of the business.
 Effect on accounts None
 Debit / Credit None

Step #2: Journal entry

No journal entry shall be made because the transaction is non-accountable.

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B. Your dog “Buloy” died because he ate a barbecue stick.

Step #1: Transaction analysis
 Accounts affected: None. The event does not affect any of the
accounts of the business.
 Effect on accounts None
 Debit / Credit None

Step #2: Journal entry

No journal entry shall be made because the transaction is non-accountable.
Recording drills:
Let us have the following recording drills:
Case #1.1 Initial investment in cash
On January 1, 201, the owner invests P100,000 cash to the business.

The journal entry to record the transaction is as follows:

JOURNAL
Date Account titles Debit Credit
2019
Jan. 1 Cash 100,000
Owner's capital 100,000
to record the owner's initial investment
to the business

Case #1.2: Initial investment in non-cash assets

On January 20, 2019, the owner provides a building valued at P1,000,000 and an automobile
valued at P500,000 to the business.

Step #1: Transaction analysis

 Accounts affected: “Building” (asset), “Transportation equipment”
(asset), and “Owner‟s capita” (equity)
 Effect on accounts Building and Transportation equipment are
increased; Owner‟s capital is increased.
 Debit / Credit Asset is increased through debit. Equity is
increased through credit.

Step #2: Journal entry

The compound journal entry to record the transaction is as follows:

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JOURNAL
Date Account titles Debit Credit
2019
Jan. 20 Building 1,000,000
Transportation equipment 500,000
Owner's capital 1,500,000
to record the owner's non-cash
investment to the business

Alternatively, the transaction above can be recorded through simple journal entries as
follows:

JOURNAL
Date Account titles Debit Credit
2019
Jan. 20 Building 1,000,000
Owner's capital 1,000,000
to record the owner's non-cash
investment to the business

Jan. 20 Transportation equipment 500,000

Owner's capital 500,000
to record the owner's non-cash
investment to the business

Both entries above – compound and simple, are acceptable.

Case #2.1: Acquisition of asset – Equipment
On January 25, 2019, the business acquires a machine for P20,000.

The journal entry to record the transaction is as follows:

JOURNAL
Date Account titles Debit Credit
2019
Jan. 20 Machinery 20,000
Cash 20,000
to record the acquisition
of machine

Case #2.2 : Acquisition of asset – Inventory (Cash basis)

On January 26, 2019, the business acquires inventories for P50,000 cash.

The journal entry to record the transaction is as follows:

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JOURNAL
Date Account titles Debit Credit
2019
Jan. 26 Inventory 50,000
Cash 50,000
to record the acquisition
of inventory on cash basis

Case #2.3A: Acquisition of asset – Inventory (On account/Credit)

On January 27, 2019, the business purchases inventories worth P70,000 on account.

Step #1: Transaction analysis

 Accounts affected: “Inventory” (asset) and “Accounts payable”
(liability)
 Effect on accounts Inventory is increased. Accounts payable is
increased.
 Debit / Credit Asset is increased through debit. Liability is
increased through credit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:
JOURNAL
Date Account titles Debit Credit
2019
Jan. 27 Inventory 70,000
Accounts payable 70,000
to record the acquisition
of inventory on account

Case #2.3B: Payment of accounts payable

On January 31, 2019, the business settles the P70,000 account payable from the January 27,
purchase.

Step #1: Transaction analysis

 Accounts affected: “Accounts payable” (liability) and “Cash”
(asset)
 Effect on accounts Accounts payable is decreased through debit.
Asset is decreased through credit.
 Debit / Credit Liability is decreased through debit. Asset is
decreased through credit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:

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JOURNAL
Date Account titles Debit Credit
2019
Jan. 26 Accounts payable 70,000
Cash 70,000
to record the settlement
of accounts payable

Case #3.1: Liability

On February 1, 2019, the business obtains a bank loan of P80,000.

The journal entry to record the transaction is as follows:

JOURNAL
Date Account titles Debit Credit
2019
Feb. 1 Cash 800
Notes payable 800,000
to record the loan taken from
a bank

Case #3.2: Payment of liability

On March 1, 2019, the business makes a partial payment of P400,000 on the bank loan.

Step #1: Transaction analysis

 Accounts affected: „Notes payable” (liability) and “Cash” (asset)
 Effect on accounts Notes payable is decreased. Cash is decreased
 Debit / Credit Liability is decreased through debit. Asset is
decreased through credit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:
JOURNAL
Date Account titles Debit Credit
2019
Mar.1 Notes payable 400,000
Cash 400,000
to record the partial payment
of notes payable

Case #4.1: Income – Cash sale

On March 2, 2019, the business makes a cash sale of P100,000. The cost of inventories sold is
P30,000.

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The journal entries to record the transaction are as follows:

JOURNAL
Date Account titles Debit Credit
2019
Mar.2 Cash 100,000
Sales 100,000
to record the cash sale

Mar. 2 Cost of sale 30,000

Inventory 30,000
to charge the cost of inventories
sold as expense

Case #4.2A: Income – Credit sales (Sales on account)

On March 4, 2019, the business makes a sales on account of P800,000. The sales price is
collectible on March 8, 2019. The cost of the inventories sold is P20,000.

Step #1: Transaction analysis

 Accounts affected:  “Accounts receivable” (asset) and
“Sales” (income);
 “Cost of Sales” (expense) and “Inventory
(asset)
 Effect on accounts  Account receivable is increased; Sales is
increased.
 “Cost of Sales is increased; Inventory is
decreased.
 Debit / Credit  Asset is increased through debit and
decreased through credit.
 Income is increased through credit.
 Expense is increased through debit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:
JOURNAL
Date Account titles Debit Credit
2019
Mar.4 Accounts receivable 80,000
Sales 80,000
to record the sales on account

Mar. 4 Cost of sale 20,000

Inventory 20,000
to charge the cost of inventories

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sold as expense

Case #4.2B: Collection of accounts receivable

On March 8, 2019, the business collects P80,000 accounts receivable.

Step #1: Transaction analysis

 Accounts affected: “Cash” (asset) and “Accounts receivable” (asset)
 Effect on accounts Cash is increased. Accounts receivable is
decreased
 Debit / Credit Asset is increased through debit and decreased
through credit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:
JOURNAL
Date Account titles Debit Credit
2019
Mar.8 Cash 80,000
Accounts receivable 80,000
to record the collection of
accounts receivable

Case #5 – Expense –Paid in cash

On March 20, 2019, the business pays P5,000 an advertisement that was aired on the radio.

The journal entry to record the transaction is as follows:

JOURNAL
Date Account titles Debit Credit
2019
Mar.8 Advertising expense 5,000
Cash 5,000
to record the cost of advertisement
as expense

Case #6 – Owner’s drawings

On April 7, 2019, the owner makes temporary withdrawal of P10,000 cash from the business.

Step #1: Transaction analysis

 Accounts affected: “Owner‟s drawings” (contra-equity) and “Cash”
(asset)
 Effect on accounts Owner‟s drawings is increased. Cash is
decreased
 Debit / Credit Contra-equity is increased through debit. Asset

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is decreased through credit.

Step #2: Journal entry

The journal entry to record the transaction is as follows:
JOURNAL
Date Account titles Debit Credit
2019
April. 7 Owner's drawings 10,000
Cash 10,000
to record the owner's drawings

3.2 Posting
The third step in the accounting cycle, is the process of transferring data from the journal
to the appropriate accounts in the ledger. More specifically, posting is done by transferring the
amounts of debits and credits in a recorded journal entry to the ledger account.
The purpose of posting is to classify the effects of transactions on specific assets,
liability, equity, income and expense accounts in order to provide more meaningful information.

Illustration 1: Posting
A business had the following transactions during the second week of January.
Date Transactions
Jan.8 Services woth P30,000 were rendered for cash.

Jan.9 Services worth P50,000 was disbursed for supplies expense

Jan.10 Cash amounting to P5,000 was disbursed for supplies expense.

Jan.11 Accounts recivable of P40,000 was collected

The transactions are recorded in the journal as follows:

JOURNAL
Date Account titles Debit Credit
2019
Jan.8 Cash 30,000
Service fees 30,000
to record service fees in cash
Jan. 9 Accounts receivable 50,000
Service fees 50,000
to record service fees on account
Jan.10 Supplies expense 5,000
Cash 5,000
to record cash disbursement for
Supplies expense

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Jan.11 Cash 40,000

Accounts receivable 40,000
to record the collection of accounts
Receivable

1. The Jan.8 transactions is posted as follows:

FROM:
JOURNAL
Date Account titles Debit Credit
2019
Jan.8 Cash 30,000
Service fees 30,000
to record service fees in cash

TO:
GENERAL LEDGER

Cash Service fees

Date Dr Cr Dr Cr Date
Beg.Bal. 40,000
Jan.8 30,000 30,000 Jan.8

2. The Jan. 9 transaction is posted as follows

FROM:
JOURNAL
Date Account titles Debit Credit
2019
Jan. 9 Accounts receivable 50,000

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Service fees 50,000

to record service fees on account

TO:
GENERAL LEDGER

Accounts receivable Service fees

Date Dr Cr Dr Cr Date
Jan.9 50,000 30,000 Jan.8
50,000 Jan.9

3. The Jan.10 transaction is posted as follows:

FROM:
JOURNAL
Date Account titles Debit Credit
2019
Jan.10 Supplies expense 5,000
Cash 5,000
to record cash disbursement for
Supplies expense

TO:
GENERAL LEDGER

Supplies expense Cash

Date Dr Cr Dr Cr Date
Jan.10 5,000 Beg.Bal 40,000
Jan.8 30,000 5,000 Jan.10

4. The Jan.11 transaction is posted as follows:

FROM:
JOURNAL
Date Account titles Debit Credit
2019
Jan.11 Cash 40,000

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Accounts receivable 40,000

to record the collection of accounts
Receivable

TO:

GENERAL LEDGER

Cash Accounts receivable

Date Dr Cr Dr Cr Date
Beg.Bal 40,000 Jan.9 50,000
Jan. 8 30,000 40,000 Jan.11
5,000 Jan.10
Jan.11 40,000

The ending balances of the accounts are determined as follows:

GENERAL LEDGER

Accounts
Cash receivable
Date Dr Cr Dr Cr Date
Beg.Bal 40,000 Jan.9 50,000
Jan. 8 30,000 40,000 Jan.11
5,000 Jan.10
Jan.11 40,000
End.Bal
. 105,000 End.Bal. 10,000
INCOME EXPENSES
Dr Cr Dr Cr
30,000 Jan.8 Jan.10 5,000
50,000 Jan.9
80,000 End.Bal. End.Bal. 5,000

3.3. Preparation of a Trial Balance

A trial balance is a list of general ledger accounts and their balances. It is prepared to check the
equality of total debits and total credits in the ledger. The preparation of the trial balance creates
a starting point for the preparation of the financial statements.

Types of Trial Balance

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a. Unadjusted trial balance – this is prepared before adjusting entries are made. Adjusting
entries, and consequently financial statements, cannot be prepared unless the total debits
and credits in the unadjusted trial balance are equal.

b. Adjusted trial balance – this is prepared after adjusting entries but before the financial
statements are prepared.

c. Post-closing trial balance – this is prepared after the closing process.

Errors revealed by a trial balance

The trial can reveal errors that caused the total debits and total credits to be unequal.
Examples:
1. Journalizing, or posting one-half of an entry, i.e., a debit without a credit, or vice versa.
2. Recording the part of an entry for a different amount than the other part.
3. Errors of Transplacement (slide error) on one side of an entry.
4. Error of Transposition on one side of an entry.

 Transplacement error is committed when the number of digits in an amount is incorrectly

increased or decreased, for example, a P1,000 amount is recorded as P100 or P10,000.
 Transposition error is committed when digits in an amount are interchanged, for
example, a P15,652 amount is recorded as P15,625 or P15,265.

Errors not revealed by a trial balance

The trial balance cannot reveal errors that do not cause the total debits and total credits to
be unequal. Examples:
1. Omitting entirely the entry for a transaction.
2. Journalizing or posting an entry twice.
3. Using wrong account with the same normal balance as the correct account.
4. Wrong computation with the same erroneous amount posted to debit and credit sides.

Illustration 1: Unadjusted Trial Balance Preparation

Mr. Tiger Astig started a laundry business called “Tiga Laba Laundry Shop” on January 1, 2019.
The following were the transactions during the first week of operations:
Jan. Transactions
1 Provided P500,000 cash as initial investment to the business.
2 Acquired washing machine for P200,000 cash.
3 Acquired dryer machine for P100,000 cash.
4 Purchased supplies for P20,000 cash.
5 Rendered laundry services worth P15,000 on cash basis.
6 Rendered laundry services worth P10,000 on account.
7 Paid P2,500 to an employee representing her week‟s salary.

The journal entries for the above transactions are as follows:

Jan. 1 Cash 500,000
Astig, Capital 500,000
to record the owner's contribution

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2 Equipment - Washing machine 200,000

Cash 200,000
to record the acquisition of
equipment
3 Equipment - Dryer 100,000
Cash 100,000
to record the acquisition of
equipment
4 Prepaid supplies 20,000
Cash 20,000
to record the purchase of supplies
5 Cash 15,000
Service fees 15,000
to record service fees in cash
6 Accounts receivable 10,000
Service fees 10,000
to record service fees on account
7 Salaries expense 2,500
Cash 2,500
to record salaries expense

The journal entries are posted to the ledger as follows:

ASSETS
Cash Accounts receivable
Jan. 1 500,000 Jan. 6 10,000
200,000 Jan. 2
100,000 3
5 15,000 20,000 4
2,500 7
515,000 322,500 Bal. 10,000
Bal. 192,500
515,000 515,000

Equipment -Washing Equipment - Dryer

Jan. 2 200,000 Jan. 3 100,000
Bal. 200,000 Bal. 100,000

Prepaid supplies
Jan. 4 20,000
Bal. 20,000

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EQUITY
Astig, Capital
500,000 Jan.1
500,000 Bal.

INCOME EXPENSES
Service fees Salaries expense
15,000 Jan. 5 Jan. 7 2,500
10,000 6
25,000 Bal. Bal. 2,500

The unadjusted trial balance is prepared as follows:

Tiga Laba Laundry Shop
Unadjusted Trial Balance
January 7, 2019

Accounts Debit Credit

Cash P 192,500
Accounts receivable 10,000
Prepaid supplies 20,000
Equipment- Washing 200,000
Equipment - Dryer 100,000
Astig, Capital P500,000
Servie fees 25,000
Salaries expense 2,500
Totals P525,000 P525,000

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ASSESSMENT
You may encode the link to the quiz here.
You may also include the cut-off date of the assessment to students may know when they need to be online

SUGGESTED READINGS

Ballada Win and Ballada, Susan. Basic Accounting.

Ferrer, Rodiel and Millan, Zeus Vernon. Fundamentals of Accountancy, Business and
Management, Volume One & Two.

Aliling, Leonardo E. Fundamentals of Basic Accounting.

Valix, Conrado t., Peralta, Jose F., VAlix,Christian Aris M. Financial Accounting, Volume One.

RESOURCE AND ADDITIONAL RESOURCES

http://www.accountingverse.com/accounting-basics/fundamental-accounting-concepts-summary.html

http://www.accountingcoach.com/accounting-basics/explanation

http://bizfluemt.com/about-4739712-what-fundamentals-accounting-principles.html

http://www.accountingcerritos.edu/dlijohnson/_includes/docs/ACCT_101_Chapter_1_Handout.pdf

http://www.edupristine,com/basic-accounting

Prepared by:

MARILOU A. ENCINARES
Instructor

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