Accounting Cycle of A Service Business: Chapter 10-11

Accounting Cycle of a Service Business Chapter 10-11 A service business provides a needed service for a fee. In general, service businesses actually have no physical product sold to clients. Their services are designed to facilitate the work of clients and in return are paid. Accounting Cycle of a Service Business The accounting cycle is a continuous process of accumulating, summarizing and reporting financial information.

 STEP 1 - Transactions and/or Events. Analyzing business transactions from source documents. The business renders service to clients or customers to generate revenues/income. RULES IN DIFFERENTIATING BUSINESS AND NONBUSINESS TRANSACTION 1. Only financial transactions are recorded and that the amount can be measured. 2. Transactions that can change the value of an asset, liability, or an owner’s equity.  STEP 2: Preparation of Journal Entries (Journalization). RULES OF DEBIT & CREDIT  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. Effects of Business Transactions to Account Titles Account Titles Debit Balance ASSETS Current Assets    

Supplies/ Unused Supplies

Initial & additional investment Rendered service for cash Payment of Receivables Rendered service to customers on account  Purchase on cash/on account  Adjustment for unused supplies

Prepaid Rent

 Adjustment for unused rent

Non-current Assets Land

 Purchase on cash/on account

Cash Accounts Receivable

Credit Balance

   

Withdrawal for personal use Purchase of Equipment, Land etc on cash Payment of expenses & payables on cash Payment of customers

 Adjustment for used supplies (asset method)

(expense method)

Building  Purchase on cash/on account Accumulated Depereciation – Building (contra-asset account) Equipment  Purchase on cash/on account Accumulated Depereciation – Equipment (contra-asset account) Furniture & Fixtures  Purchase on cash/on account Accumulated Depereciation – Furniture & Fixtures (contra-asset account) LIABILITIES

 Adjustment for used rent

 Adjustment for the Building’s useful life  Adjustment for the Equipment’s useful life  Adjustment for the Furniture and Fixture’s useful life

Current Liabilities Accounts Payable Notes Payable Unearned Service Revenue Rent/Salary/Utilities Payable

 Purchased item on account  Purchased item on account with a promissory note

 Payment of Payable

 Adjustment for earned service

 Cash received for future service

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 Payment of Notes Payable

Accounting Cycle of a Service Business Chapter 10-11 Non-current Liabilities Mortgage Payable

 Purchased item on account with  Payment of Mortgage Payable collateral OWNER’S EQUITY  Initial & additional investment

Owner, Capital Owner, Drawings Service Revenue

Supplies Expense

 Withdrawal for personal use REVENUE  Purchased item on account with a promissory note EXPENSES

 Payment of Notes Payable

 Purchased supplies (expense method)  Adjustment for supplies unused (expense method)

Salaries Expense

 Payment on cash  Adjustment of used rent 

Utilities Expense

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Depreciation Expense

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Rent Expense

 Adjustment of unused rent 

 STEP 6: Adjusting Journal Entries. ADJUSTING ENTRIES At the end of the accounting period, some accounts in the general ledger would require updating. The journal entries that bring the accounts up to date are called ADJUSTING ENTRIES. One purpose of adjusting entries is for income and expenses to be reported in the correct period. Adjusting entries ensure that both the revenue recognition and matching principles are followed. Accounting Principle