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ACCTG 111
FINANCIAL ACCOUNTING & REPORTING

HAND-OUT
(FINAL)
ACCOUNTING CYCLE OF A SERVICE BUSINESS

PREPARED BY
SHERYL MAE Q. DICHOSA, CPA
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FINANCIAL ACCOUNTING AND REPORTING

SHERYL MAE Q. DICHOSA, CPA

HAND-OUT NO.7: ACCOUNTING CYCLE OF A SERVICE BUSINESS

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

Worksheet
 A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the preparation
of financial statements, and closing entries.
 A worksheet is prepared as follows:

Illustration: Worksheet
Mr. Bruno Manly opened up a beauty salon, called “Brunah’s Salon,” on December 1, 20x1. The following were
the 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.
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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.
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

 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
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
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Step 3: Posting
ASSETS
Cash Accounts receivable
(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

INCOME EXPENSES
Service fees Utilities expense

220,000 (6) (3B) 60,000

220,000 Bal. Bal. 60,000

Salaries 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 ₱190,000
Accounts receivable 180,000
Notes payable ₱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 ₱520,000 ₱520,000
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Step 5: Adjusting entries

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

AJE #1: Utilities expense

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
(AJE 1) to accrue utilities expense incurred but not yet paid

AJE #2: Interest expense

Interest expense = (100,000 x 12% x 1/12) = 1,000

The adjusting entry for interest expense is as follows:

Dec.31, Interest expense 1,000
20x1 Interest payable 1,000
(AJE 2) to accrue interest expense incurred but not yet paid

AJE #3: Depreciation expense – Equipment (for 1 month)

Depreciation expense = (180,000 x 1/5 x 1/12) = 3,000

The adjusting entry is as follows:

Dec.31, Depreciation expense 3,000
20x1 Accumulated depreciation 3,000
(AJE 3) to record depreciation expense for the period

AJE #4: Rent expense

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 mo. – Dec. 20x1
(10,000 rent per month x 1 mo.) = P10,000
P60,000
6 months’ rent
prepaid on Dec. 1,
20x1

Unused portion (Prepaid rent):

5 mos. – Jan. 20x2 to May 20x2
(10,000 rent per month x 5 mos.) = P50,000
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Recall that under the expense method, the adjusting entry is to take up the asset (unused or unexpired)
portion. The adjusting entry therefore involves debiting “Prepaid rent” for 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
(AJE 4) 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

Additional information at year-end:

b. The cost of unused supplies is P20,000.

Year-end analysis:

Unused portion (Prepaid supplies):

P20,000 (given)

P50,000
Total supplies
purchased during
the period

Used portion (Supplies expense):

(50,000 total – 20,000 unused) = P30,000

Recall again that under the expense method, the adjusting entry is to take up the asset (unused or unexpired)
portion. The adjusting entry therefore involves debiting “Prepaid supplies” for 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
(AJE 5) to record unused supplies as prepaid asset
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Step 6: Adjusted trial balance (Worksheet)

The worksheet is prepared as follows:

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

Accounts Unadjusted trial balanceAJE #'s Adjustments AJE #'s Adjusted trial balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 190,000 190,000
Equipment 180,000 180,000
Notes payable 100,000 100,000
Owner's equity 200,000 200,000
Owner's drawing 40,000 40,000
Service fees 220,000 220,000
Rent expense 60,000 50,000 4 10,000
Supplies expense 50,000 20,000 5 30,000
Totals 520,000 520,000

Adjustments:
Utilities expense 1 3,000 3,000
Utilities payable 3,000 1 3,000
Interest expense 2 1,000 1,000
Interest payable 1,000 2 1,000
Depreciation expense 3 3,000 3,000
Acc. Depreciation 3,000 3 3,000
Prepaid rent 4 50,000 50,000
Prepaid supplies 5 20,000 20,000
Totals 77,000 77,000 527,000 527,000

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.
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P60,000 (debit balance in the ‘Unadjusted trial

balance’) minus P50,000 (credit adjustment) equals
P10,000 debit balance

These two lines underneath an amount are called

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

No balance (zero) in the ‘Unadjusted trial balance’)

plus P1,000 (credit adjustment) equals P1,000
adjusted credit balance

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.
 The major processes in accounting are summarized below:

We will only prepare the following financial statements:

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1. Statement of financial position (or Balance sheet) – shows information on assets, liabilities and equity.
2. Statement of profit or loss (or Income statement) – shows information on income and expenses, and
consequently, the profit or loss for the period.
Illustration: Preparation of financial statements
Let us prepare the balance sheet and income statement columns of Brunah’s Salon:

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

Unadjusted trial Adjusted trial

Accounts balance Adjustments balance Income statement Balance sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 190,000 190,000 190,000
Equipment 180,000 180,000 180,000
Notes payable 100,000 100,000 100,000
Owner's equity 200,000 200,000 200,000
Owner's drawing 40,000 40,000 40,000
Service fees 220,000 220,000 220,000
Rent expense 60,000 50,000 10,000 10,000
Supplies expense 50,000 20,000 30,000 30,000
Totals 520,000 520,000

Adjustments:
Utilities expense 3,000 3,000 3,000
The adjusted
Utilities payable 3,000 3,000 3,000
balances of
Interest expense income and 1,000 1,000 1,000
Interest payable expense 1,000 1,000 1,000
Depreciation expense accounts are 3,000 3,000 3,000
Acc. Depreciation extended to the 3,000 3,000 3,000
Prepaid rent income 50,000 50,000 50,000
Prepaid supplies statement 20,000 20,000 20,000
columns 527,000
Totals 77,000 77,000 527,000 47,000 220,000 480,000 307,000
The adjusted balances of asset, 173,000 173,000
liability and equity accounts are
220,000 220,000 480,000 480,000
extended to the balance sheet
columns
After amounts are extended to the income statement and balance
sheet columns, the balancing figure is the profit (or loss).

Notes:

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

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

Income
Accounts statement Balance sheet
Dr. Cr. Dr. Cr.
Cash 190,000
Equipment 180,000
Notes payable 100,000
Owner's equity 200,000
Owner's drawing 40,000
Service fees 220,000
Rent expense 10,000
Supplies
expense 30,000
Totals
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Adjustments:
Utilities expense 3,000
Utilities payable 3,000
Interest expense 1,000
Interest payable 1,000
Depreciation
expense 3,000
Acc. Depreciation 3,000
Prepaid rent 50,000
Prepaid supplies 20,000

Totals 47,000 220,000 480,000 307,000

173,000 173,000

220,000 220,000 480,000 480,000

Closing entries:
Dec. 31, Service fees 220,000
20x1 Rent expense 10,000
(CE 1) Supplies expense 30,000
Utilities expense 3,000
Interest expense 1,000
Depreciation expense 3,000
Income summary 173,000

Dec. 31, Income summary 173,000

20x1 Owner’s equity 173,000
(CE 2)
Dec. 31, Owner’s equity 40,000
20x1 Owner’s drawing 40,000
(CE 3)

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 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 placed in the “Post-closing trial balance.”

The amounts in the “Post-closing trial balance” will be the beginning balances of accounts in the next
accounting period.
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Brunah's Salon
Worksheet
The debits and credits in the closing
For the month ended December 31, 20x1 entries are placed here

Accounts Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet Closing entries Post-closing trial balance
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 190,000 190,000 190,000 190,000
Equipment 180,000 180,000 180,000 180,000
Notes payable 100,000 100,000 100,000 100,000
Owner's equity 200,000 200,000 200,000 40,000 173,000 333,000
Owner's drawing 40,000 40,000 40,000 40,000
Service fees 220,000 220,000 220,000 220,000
Rent expense 60,000 50,000 10,000 10,000 10,000
Supplies expense 50,000 20,000 30,000 30,000 30,000
Totals 520,000 520,000

Adjustments:
Utilities expense 3,000 3,000 3,000 3,000
Utilities payable 3,000 3,000 3,000 3,000
Interest expense 1,000 1,000 1,000 1,000
Interest payable 1,000 1,000 1,000 1,000
Depreciation expense 3,000 3,000 3,000 3,000
Acc. Depreciation 3,000 3,000 3,000 3,000
Prepaid rent 50,000 50,000 50,000 50,000
Prepaid supplies 20,000 20,000 20,000 20,000
Totals 77,000 77,000 527,000 527,000 47,000 220,000 480,000 307,000 260,000 260,000 440,000 440,000
173,000 173,000
220,000 220,000 480,000 480,000 Amounts in the balance
sheet and income
statement columns are
combined with the
amounts in the closing
entries. The resulting
amounts are placed here.
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.
 The post-closing trial balance contains only real accounts (asset, liability, and equity accounts).
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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 P190,000
Prepaid rent 50,000
Prepaid supplies 20,000
Equipment 180,000
Accumulated depreciation __(3,000)
TOTAL ASSETS P437,000

LIABILITIES
Notes payable P100,000
Utilities payable 3,000
Interest payable ___1,000
TOTAL LIABILITIES _104,000

EQUITY
Owner’s equity _333,000
TOTAL EQUITY _333,000

TOTAL LIABILITIES AND EQUITY P437,000

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

INCOME
Service fees P220,000

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

PROFIT FOR THE PERIOD P173,000

Reversing Entries
 Reversing entries are entries usually made on the first day of the next accounting period to reverse certain
adjusting entries made in the immediately preceding period. Reversing entries are optional.
 Adjusting entries that may be reversed:
1. Accruals for income or expense
2. Prepayments initially recorded using the expense method
3. Advanced collections initially recorded using the income method
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ACCTG 111
WORKBOOK
(FINAL)

“ACCOUNTING CYCLE OF A SERVICE BUSINESS”

PROBLEM: WORKSHEET
Entity A started operation in 20x1. The following were the transactions for the year ended December 31, 20x1:
1. The owner invested P200,000 cash to the business.
2. The business obtained a 12%, one-year, bank loan of P300,000 on October 1, 20x1. Principal and interest
are due at maturity date.
3. Purchased equipment on November 1, 20x1 for P360,000 cash.
4. Purchased office supplies worth P80,000 for cash (Entity A 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, 20x1 amounted to P5,000.

Requirements: Prepare the following in good form using Microsoft Word. Refer to your hand-out for the example.
1. Unadjusted trial balance
2. Worksheet up to post-closing trial balance.
3. Balance sheet and income statement.