ACCOUNTING CYCLE: Service Business

STEP NO.1
OBJECTIVES:

1) define service business;

2) learn the steps in analysis of transactions;

3) know the rules of debit and credit and apply this in the recording of business transactions;

4) analyze business transactions involving in a service business; and

5) participate actively in class discussion and activities.

SHORT REVIEW:
1) What did we discuss last meeting?

2) Enumerate the steps in an accounting cycle in correct order.

TODAY’S TOPIC:

We will discuss the first step in accounting cycle specifically of a SERVICE BUSINESS which is
………

Step 1: ANALYZING THE BUSINESS

TRANSACTION
Can you still remember what is a SERVICE BUSINESS?

 It is a type of business that sells intangible products (products with no physical form) by providing
services to customers.

 It is the most simple to account of the three types of business organizations because it only revolves
around the generation of service income/revenues and payment of expenses; no complicated processes and
does not maintain huge inventories.
STEPS IN TRANSACTION ANALYSIS:
1) Identify the transaction from the source documents.

2) Indicate the accounts – either assets, liabilities, equity, income or expenses affected by the transaction.
3) Ascertain whether each account is increased or decreased by the transaction.
4) Using the rules of debit and credit, determine whether to debit or credit the account to record its increase or
decrease.
RULES OF DEBIT AND CREDIT:
1) ASSET ACCOUNTS

NORMAL BALANCE: Debit

RULE: An increase is recorded on the debit side and a decrease is recorded on the credit side of all
asset accounts.

2) LIABILITY ACCOUNTS

NORMAL BALANCE: Credit

RULE: An increase is recorded on the credit side and a decrease is recorded on the debit side of all
liability accounts.
RULES OF DEBIT AND CREDIT:
3) CAPITAL / EQUITY ACCOUNTS

NORMAL BALANCE: Credit

RULE: An increase is recorded on the credit side and a decrease is recorded on
the debit side of all capital/equity accounts.

4) DRAWING ACCOUNT

NORMAL BALANCE: Debit

RULE: An increase is recorded on the debit side and a decrease is recorded on
the credit side of all liability accounts.
RULES OF DEBIT AND CREDIT:
5) REVENUE / INCOME ACCOUNTS

NORMAL BALANCE: Credit

RULE: An increase is recorded on the credit side and a
decrease is recorded on the debit side of all revenue / income accounts.

6) EXPENSE ACCOUNTS

NORMAL BALANCE: Debit

RULE: An increase is recorded on the debit side and a
decrease is recorded on the credit side of all expense accounts.
NOTE:

The debit and credit can be associated in simple terms as:

“Value Received” for debit

“Value Parted With” for credit

 LET’S DO THESE!
Instruction: Analyze the ff. business transactions.

Transaction No.1
 The owner invested cash to an internet business.
Value Received: Money
Value Parted With: Payable to the owner

Journal Entry:
Debit: CASH
Credit: CAPITAL
Transaction No.2
 The business purchased internet equipment in cash.
Value Received: Internet Equipment
Value Parted With: Money

Journal Entry:
Debit: OFFICE EQUIPMENT
Credit: CASH
Transaction No.3
 The business purchased computer printers on account
/ credit.
Value Received: Computer Printers
Value Parted With: Payable to supplier

Journal Entry:
Debit: OFFICE EQUIPMENT
Credit: ACCOUNTS PAYABLE
Transaction No.4

 The business purchased supplies in cash.

Value Received: Supplies
Value Parted With: Money

Journal Entry:
Debit: SUPPLIES
Credit: CASH
Transaction No.5
 The business collected cash from the internet gamers
and users.
Value Received: Money
Value Parted With: Service Fee from the gamers

Journal Entry:
Debit: CASH
Credit: SERVICE REVENUE
Transaction No.6

 The business paid salaries to employees.

Value Received: Employees Services
Value Parted With: Money

Journal Entry:
Debit: SALARIES EXPENSE
Credit: CASH
Transaction No.7

 The business paid telephone expenses.

Value Received: Telephone bills
Value Parted With: Money

Journal Entry:
Debit: COMMUNICATION EXPENSE
Credit: CASH
Transaction No.8

 The business paid electricity bills.

Value Received: Electricity bills
Value Parted With: Money

Journal Entry:
Debit: LIGHT & WATER EXPENSE / ELECTRICITY EXPENSE
Credit: CASH
Transaction No.9

 The owner withdraw cash.

Value Received: Payment of payable to owner
Value Parted With: Money

Journal Entry:
Debit: DRAWINGS
Credit: CASH
Transaction No.10
 The business paid the payable incurred in the
purchase of computer printers.
Value Received: Payment of payable to supplier
Value Parted With: Money

Journal Entry:
Debit: ACCOUNTS PAYABLE
Credit: CASH
 YOU CAN DO THESE!
Instruction: Using the answer sheet below, write the accounts and amounts to be
debited and credited in the following transactions.

Transactions:
1) BAA opened a computer repair shop by investing P200, 000 to the business.
2) Paid rent for the month on the shop space for P15, 000.
3) Purchase shop supplies in cash for P10, 000.
4) Purchased additional supplies on credit from Grace’s Trading for P16, 500.
5) Rendered computer repairs and collected cash for P55, 000.
6) Paid Grace’s Trading for the amount owed from the store.
7) Rendered computer repairs to J. Lumaban on credit for P40, 000.
8) Paid salaries to the shop staffs for P20, 000.
9) Paid electricity bills for P5, 600.
10) Collected from J. Lumaban for repairs extended on credit.
 YOU CAN DO THESE!
Answer Sheet:
GENERALIZATION:

1) What have you learned from our lesson today?

2) Define a service business.

3) Enumerate the steps in analyzing transactions in correct order.

4) Discuss the rule of debit and credit in different types of major accounts.
SELF CHECK:
Instruction: Choose the letter of the correct answer.
1) Cecille Yu invested P250, 000 in an employment agency.
a. Debit cash, credit accounts payable
b. Debit cash, credit C. Yu Capital
c. Debit C. Yu Capital, credit cash
d. None of the above.

2) Pays monthly rental for the office for P15, 000.

a. Debit cash, credit C. Yu Capital
b. Debit rent expense, credit cash
c. Debit prepaid rent, credit cash
d. None of the above.
3) Purchased service equipment for P30, 000.
a. Debit cash, credit accounts payable
b. Debit transportation expense, credit cash
c. Debit service equipment, credit accounts payable
d. Debit service equipment, credit cash
4) Purchase office equipment on credit for P45, 000.
a. Debit office equipment, credit cash
b. Debit office equipment, credit C. Yu capital
c. Debit office equipment, credit accounts payable
d. Debit office equipment, credit notes payable
5) Purchase supplies for P10, 000 paying P5, 000 cash and the
balance on credit.
a. Debit supplies expense, credit cash
b. Debit supplies, credit accounts payable
c. Debit supplies expense, credit cash and accounts payable
d. Debit supplies, credit cash and accounts payable
6) Paid the office equipment previously purchased on credit.
a. Debit cash, credit accounts payable
b. Debit accounts payable, credit cash
c. Debit notes payable, credit cash
d. Debit office equipment, credit cash

7) Billed customers on account for janitorial services for P75, 000.

a. Debit cash, credit service revenue
b. Debit accounts receivable, credit service revenue
c. Debit accounts receivable, credit cash
d. Debit salaries, credit cash

8) Paid salaries to employees for P35, 000.

a. Debit salaries and wages payable, credit cash
b. Debit salaries, wages and benefits, credit cash
c. Debit accounts payable, credit cash
d. Debit cash, credit salaries and wages payable
9) Billed to customers for cash on messengerial services P50, 000.
a. Debit accounts receivable, credit service revenue
b. Debit cash, credit service revenue
c. Debit cash and accounts receivable, credit service revenue
d. Debit notes receivable, credit service revenue

10) Withdraw cash for personal use for P5, 000.

a. Debit cash, credit C. Yu capital
b. Debit C. Yu capital, credit cash
c. Debit C. Yu drawings, credit cash
d. Debit cash, credit C. Yu drawings

11) Paid telephone bills for P5, 600.

a. Debit C. Yu capital, credit cash
b. Debit communication expense, credit cash
c. Debit light and water, credit cash
d. Debit communication expense, credit accounts payable
12) Collected the accounts from customer previously billed on
credit.
a. Debit accounts receivable, credit cash
b. Debit accounts receivable, credit service revenue
c. Debit cash, credit accounts receivable
d. Debit cash, credit service revenue
13) Paid the half payable on supplies.
a. Debit accounts payable, credit cash
b. Debit supplies, credit cash
c. Debit supplies expense, credit cash
d. Debit supplies, credit accounts payable

14) Billed customer for P50, 000 receiving P10, 000 cash and the
balance with a promissory note.
a. Debit cash, credit service revenue
b. Debit notes receivable, credit service revenue
c. Debit cash and notes receivable, credit service revenue
d. Debit cash and accounts receivable, credit service revenue
15) Recorded used supplies for the month P1, 500.
a. Debit supplies, credit supplies expense
b. Debit supplies expense, credit cash
c. Debit supplies expense, credit supplies
d. Debit C. Yu capital, credit supplies