Fundamentals of Accountancy, Business and Management 1

Name of Learner: _________________________________ Grade Level: __________

Section: _________________________________________ Date: ________________
The Accounting Cycle of a Service Business:
Identifying and Transactions and/or Events
Background Information:
Nature of Transactions in a Service Business
A service business provides a needed service for a fee. In general, service businesses have
no physical product sold to clients. Their services are designed to facilitate the work of clients and in
return are paid. Service businesses includes car wash, computer shops, laundry chops, barbershops,
salons, spa, and services of professionals such as lawyers, accountants and doctors. The revenue of
a service business is usually recorded once the service has been rendered.

The Accounting Cycle

The accounting cycle is a continuous process of accumulating, summarizing and reporting
financial information. The going concern principle is the assumption that an entity will remain in
business for the foreseeable future. Conversely, this means the entity will not be forced to halt
operations and liquidate its assets in the near term at what may be very low fire-sale prices. (S. Bragg
2018). In layman’s term, the business is assumed to continue indefinitely. Therefore, every accounting
period is expected to be followed by another accounting period. In each accounting period, the
accounting cycle must be done.
2. Preparation 4. Preparation
1. Transactions 3. Posting to
of Journal of Trial
and/or Events Ledgers
Entries Balance

7. Preparation 6. Adjusting
8. Closing the 5. Preparation
of Financial Journal
Books of Worksheet
Statements Entries

Step 1: Transactions and/or Events

The first step of the accounting cycle is identifying the transaction. At this stage, the documents
used by the business are analyzed whether it has financial impact or not. In the previous lesson, it
has been discussed that transactions can either be business or non-business. Transactions involved
in the accounting cycle are business transactions or transactions involving monetary amount.
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. Note that official receipts issued in the
Philippines shall adhere to the Requirements for Official
Receipts imposed by the Bureau of Internal Revenue.
On this document, the following necessary details are
written:
• Date of Transaction
• Name and Address of Customer
• Amount paid Example of an Official Receipt
• Nature of payment (partial/full) Flickr Commons. Accessed August 23, 2020.
• Signature of Customer https://www.flickr.com/photos/lady_gyd/20327
704783/

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2. Charge Invoice or Sales Invoice
A charge invoice or sales 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.
A valid sales invoice used in the
Philippines shall adhere to the
Example of a Sales Invoice
requirements of set by the Bureau of Flickr Commons. Accessed August 23, 2020.
Internal Revenues. https://www.flickr.com/photos/videostorage/14302711608/

3. Check Voucher 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. Example of Check Voucher
Flickr Commons. Accessed August 23, 2020.
https://www.flickr.com/photos/158192495@N08/43994453012/

Step 2: Preparation of Journal Entries

The second step in the cycle is the creation of journal entries for each transaction. After
identifying the transaction, it should be given that the accounts affected has been identified. Recall
the rules of debit and credit. The amount on the left side of the accounting equation increase with a
debit entry and decreases with a credit entry. On the other hand, the amount on the right side of the
accounting equation increases with a credit entry and decreases with a debit entry. 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.

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 This process has been introduced in previous lessons. Recall the example on the analysis of
business transactions.

Transaction: Bought supplies worth PhP 10,000, paying 50% down payment.
STEP Answer with Explanation
1. Determine if the event is a This is an accounting transaction since the transaction involves
business transaction. monetary amount of PhP 10,000
Since the business bought supplies, the account supplies is
2. Identify what accounts it involved. Also, the business paid 50% down payment, meaning,
affects. cash account is involved and the remaining 50% will be paid in the
future, so the accounts payable account is involved.
3. Determine what type of Supplies is an asset account. Cash is an asset account. Accounts
accounts these are. Payable is an account under liabilities.
Since the business bought supplies, this account increases. 50%
4. Determine which accounts cash payment has been made making a deduction to the cash
increased and/or decreased. account. The remaining 50% is owed by the business, meaning
there is an increase in the accounts payable.
Supplies is an Asset account which is on the left side of the equation.
Since there is an increase, Supplies account must be debited. Cash
is also an Asset account. Since there is a decrease in cash, it should
5. Apply rules of debit and credit.
be credited. Accounts Payable is an account under the Liabilities
which is on the right side of the accounting equation. Since there is
an increase in this account, this should be credited.
6. Find the transaction amount
In this certain transaction, the document containing the amount is
to be entered into each account
the sales invoice issued by the supplier, which is PhP 10,000
involved.

In steps 5 and 6 of the analysis of business transactions, the amount and the accounts affected
has been determined. Now, we enter these on the general journal. Suppose the transaction happened
on June 1, 2020. The journal entry would be:
Date Account Title and Explanation Ref Debit Credit
06/01/2020 Supplies 10 000
Cash 5 000
Accounts Payable 5 000
To record the purchase of supplies, paying
50% down payment

The total amount of supplies is 10,000. Since the business paid 50% down payment, the
deduction in cash is 50% of 10,000 which is 5,000 and the remaining will be treated as accounts
payable.

Learning Competency with Code:

• The learner describes the nature of transactions in a service business. (ABM_FABM11-IVa-
d-29)
• The learner records transaction of a service business in the general journal. (ABM_FABM11-
IVa-d-30)
Directions/Instructions: Read the instructions carefully in answering the given activities.
Activity 1: Write B if the given transaction is a business transaction and write N if not.
___ 1. Hired an office secretary ___ 6. Signed an agreement of a bank loan
___ 2. Purchase of equipment for cash ___ 7. Entered a contract with an agency
___ 3. Signed a contract with a supplier ___ 8. Issued a check for supplies on account
___ 4. Purchased office supplies on account ___ 9. Paid electricity bill
___ 5. Paid salaries of secretary ___ 10.Owner invested land

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Activity 2: Using the following format, identify the effects of above transactions to the accounting
equation: ASSETS = LIABILITIES + OWNERS' EQUITY
Example:
ASSETS = LIABILITIES + OWNERS' EQUITY
Cash = Account Payable
+20000 = + 20000
1. Deposited PHP 250,000 cash in the City Bank in the name of the business

2. Paid PHP5000 cash as a salary to a beautician

3. Received PHP1,200 cash for services rendered

4. Paid PHP800 cash for beauty supplies

5. Purchased equipment at a cost of PHP12,000 paying PHP2,000 in cash and the balance on
account

Activity 3: Prepare journal entries of the following independent transactions.

1. On January 3, 2020, bought computer worth 20,000.
Date Account Title and Explanation Ref Debit Credit

2. On February 8, 2020, Maria De Jesus invested 100,000 cash on the business.

Date Account Title and Explanation Ref Debit Credit

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 3. Paid the salary of the office secretary on January 15, 2020 worth 8,000.
Date Account Title and Explanation Ref Debit Credit

4. On May 25, 2020, entered a contract with XYZ Supplies to be the business’ supplier.
Date Account Title and Explanation Ref Debit Credit

5. Hired Juan Pablo as janitor.

Date Account Title and Explanation Ref Debit Credit

Guide Questions:
1. Think of a service business of your own. Fill out the following

Name of Business:

Services offered:

1.

2.
Example of business
transactions that may be 3.
involved on your
business: 4.
5.

1.

2.
Example of non-
business transactions 3.
that may be involved on
your business: 4.
5.

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Reflection:
1. Why are business documents needed in the process of recording business transaction? Is
it necessary to have this?

Rubric for Reflection:

Above Meets Approaching Did Not Meet
Expectations Expectations Expectations Expectations
(4) (3) (2) (1)
Reflective The reflection The reflection The reflection The reflection does
Thinking explains the explains the attempts to not address the
student’s own student’s thinking demonstrate student’s thinking
thinking and learning about his/her own thinking about and/or learning.
processes, as well learning processes. learning but is
as implications for vague and/or
future learning. unclear about the
personal learning
process.
Analysis The reflection is an The reflection is an The reflection The reflection does
in-depth analysis of analysis of the attempts to analyze not move beyond a
the learning learning the learning description of the
experience, the experience and the experience but the learning
value of the derived value of the derived value of the experience.
learning to self or learning to self or learning to the
others, and the others student or others is
enhancement of the vague and/or
student’s unclear.
appreciation for the
discipline.
Making The reflection The reflection The reflection The reflection does
Connections Articulates multiple Articulates attempts to articulate not articulate any
connections connections connections connection to other
between this between this between this learning or
learning learning experience learning experience experiences.
experience and and content from and content from
content from other other courses, past other courses, past
courses, past learning Learning
learning, life experiences, and/or experiences, or
experiences and/or future goals. personal goals, but
future goals. the connection is
vague and/or
unclear.

References
Bragg, Steven M. 2019. "Accounting Transaction Definition." AccountingTools. Centennial, Colorado,
July 13. Accessed August 22, 2020. https://www.accountingtools.com/articles/what-is-an-
accounting-transaction.html.
Bragg, Steven. 2018. The Going Concern Principle. Centennial, Colorado, December 29. Accessed
August 23, 2020. https://www.accountingtools.com/articles/2017/5/14/the-going-concern-
principle?rq=going%20concern.

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Lutwidge, Charles. 2019. "Accounting Transaction Analysis." BooksTime. Newton Center,
Massachusetts, December 12. Accessed August 22, 2020.
https://www.bookstime.com/articles/accounting-transaction-analysis.
Price, John Ellis, David Haddock, and Horace Brock. 2015. College Accounting: A Contemporary
Approach. 3rd. New York: Mc-Graw Hill Education.
Tarver, Evan. 2019. "The 8 Important Steps in the Accounting Cycle." Investopia. New York, New
York, September 19. Accessed August 23, 2020.
https://www.investopedia.com/ask/answers/050815/what-are-most-important-steps-
accounting-cycle.asp.
Tugas, Florenz C., Herminigilda E. Salendrez, and Joy S. Rabo. 2016. Fundamentals of Accountancy,
Business and Management 1. Edited by Ma. Gina T. Manaligod. Quezon City: Vibal Group
Inc.
Valencia, E.G.& Roxas, G.F. 2010. Basic Accounting. 3rd. Mandaluyong City: Valencia Educational
Supply.
Weygandt, Jerry J., Donald Kieso, and Paul D. Kimmel. 2016. Accounting Principles. 12th. Hoboken,
New Jersey: John Wiley and Sons Inc.

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 8
Special Science Teacher I
Joshea D. Facun
Prepared by:
Answer Key:
Activity 1:
1. N 6. N
2. B 7. N
3. N 8. B
4. B 9. B
5. B 10. B
Activity 2:
1. ASSETS = LIABILITIES + OWNERS' EQUITY
Cash = Capital
+250,000 = +250,000
2. ASSETS = LIABILITIES + OWNERS' EQUITY
Cash = Expenses
+5,000 = +5,000
3. ASSETS = LIABILITIES + OWNERS' EQUITY
Cash = Income
+1,200 = +1,200
4. ASSETS = LIABILITIES + OWNERS' EQUITY
SUPPLIES+CASH=0
0=0
5. ASSETS = LIABILITIES + OWNERS' EQUITY
Cash + Equipment = Accounts Payable
-2,000 + 12,000 = 10,000
+10,000 = +10,000
Activity 3
1.
Date Account Title and Explanation Ref Debit Credit
01/03/2020 Equipment 20 000
Cash 20 000
To record purchase of equipment for cash
2.
Date Account Title and Explanation Ref Debit Credit
02/08/2020 Cash 100 000
Maria De Jesus, Capital 100 000
To record cash investment of Maria De
Jesus
3.
Date Account Title and Explanation Ref Debit Credit
01/15/2020 Salaries Expense 8 000
Cash 8 000
To record payment for salaries
4. NO ENTRY
5.NO ENTRY