ACCOUNTING CYCLE: Service Business

STEP NO. 2
OBJECTIVES:

1) define journal and journalizing;

2) illustrate the format of general journal;

3) learn the steps in journalizing;

4) record business transactions involving in a service business in a general journal; and

5) participate actively in class discussion and activities.

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

2) Define service business.

3) What are business transactions?

4) How do we analyze business transactions?

TODAY’S TOPIC:

After the transaction or event has been analyzed, it is now time for us to discuss the step 2 of the
accounting cycle which is …

Step 2: PREPARING JOURNAL ENTRIES

Can you still define JOURNAL?

 The journal is referred to as the book of original entry.

It records business transactions in chronological order or order of date using the principle of “debit
and credit”.

The process of recording the business transactions to the general journal is called Journalizing.
FORMAT OF A GENERAL JOURNAL
The standard content of a general journal are as follows:
1) DATE
 The year and month in which the transactions occurred.
Note: The year and month are not rewritten for every entry unless the year or month changes or new page is needed.
2) ACCOUNT TITLES AND EXPLAINATION
 The account to be debited is entered at the extreme left of the first line while the account to be credited is slightly indented on the next line. A brief description of
the transaction is usually made on the line inline with the debit. 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 related ledger accounts.
4) DEBIT
 The debit amount for each account is entered in this column.
5) CREDIT
 The credit amount for each account is entered in this column.
 FORMAT OF A GENERAL JOURNAL
4. ) Explanation or
Description giving the
5. ) Posting Reference
details of the transactions

1.) Date of 2. ) Account Title 3. ) Account Title

Transaction Debited and the Credited and the
(Year, Month, Day) amount amount
STEPS IN JOURNALIZING:
Step 1:
 Analyze business transactions.
Step 2:
 Record transactions in the general journal using journal entries:
• The date of the transaction which is entered in the Date column.
• The debit account title (that is, the account to be debited) which is entered first at the extreme left margin of the column headed “Account Titles and Explanation,”
and the amount of the debit is recorded in the Debit column.
• The credit account title (that is, the account to be credited) which is indented and entered on the next line in the column headed “Account Titles and Explanation,” and
the amount of the credit is recorded in the Credit column.
• A brief explanation of the transaction which appears on the line below the credit account title. A space is left between journal entries. The blank space separates
individual journal entries and makes the entire journal easier to read.
• The column titled P.R. (which stands for Posting Reference)which is left blank when the journal entry is made. This column is used later when the journal entries
are transferred to the ledger accounts.
 LET’S DO THESE!
Instruction: Digao Wedding Services shows the ff. transactions for the month of May 2018. Prepare journal entries.

Transaction No. 1 – Initial Investment

 May 1: Victoria Digao invested P250, 000 cash in the business.
ANALYSIS: Assets increased. Owners’s Equity increased.

RULES: Increases in assets are recorded by debits. Increases in owner’s equity

are recorded by credits.

ENTRY: Increases in assets is recorded by a debit to Cash. Increase in owner’s

equity is recorded by a credit to Digao, Capital.
 LET’S DO THESE!
Transaction No. 2 – Paid rent in advance
 May 2: Rented office space and paid two months’ rent in advance, P8, 000.

ANALYSIS: Assets increased. Assets decreased.

RULES: Increases in assets are recorded by debits. Decreases in assets are recorded by credits.

ENTRY: Increases in assets is recorded by a debit to Prepaid Rent. Decrease in assets is recorded by a
credit to Cash.
 LET’S DO THESE!
Transaction No. 3 – Note issued for cash
 May 2: Victoria Digao issued a promissory note for a P210, 000 loan from ABC Bank
with a 20% interest per annum, payable within one year.

ANALYSIS: Assets increased. Liabilities increased.

RULES: Increases in assets are recorded by debits. Increases in liabilities are recorded by credits.

ENTRY: Increases in assets is recorded by a debit to Cash. Increase in liabilities is recorded by a

credit to Notes Payable.
 LET’S DO THESE!
Transaction No. 4 – Service vehicle acquired for cash
 May 4: Acquired service vehicle for P420, 000.

ANALYSIS: Assets increased. Assets decreased.

RULES: Increases in assets are recorded by debits. Decreases in assets are recorded by credits.
ENTRY: Increase in assets is recorded by a debit to Service Vehicle. Decrease in assets is recorded by
a credit to Cash.
 LET’S DO THESE!
Transaction No. 5 – Insurance premiums paid
 May 4: Paid P14, 400 for a one-year insurance for a service vehicle.

ANALYSIS: Assets increased. Assets decreased.

RULES: Increases in assets are recorded by debits. Decreases in assets are recorded by credits.
ENTRY: Increase in assets is recorded by a debit to Prepaid Insurance. Decrease in assets is recorded
by a credit to Cash.
 LET’S DO THESE!
Transaction No. 6 – Office equipment acquired on account
 May 5: Acquired office equipment from SJA Mercahndising for P60, 000;
paying P15, 000 in cash and the balance next month.
Note: A compound entry is needed for this transaction.
ANALYSIS: Assets increased. Assets decreased. Liabilities increased.

RULES: Increases in assets are recorded by debits. Decreases in assets are recorded by credits.
Increases in liabilities are recorded by credits.

ENTRY: Increase in assets is recorded by a debit to Office Equipment. Decrease in assets is recorded
by a credit to Cash. Increase in liabilities is recorded by a credit to Accounts Payable.
 LET’S DO THESE!
Transaction No. 7 – Supplies purchased on account
 May 8: Purchased supplies on credit for P18, 000.

ANALYSIS: Assets increased. Liabilities increased.

RULES: Increases in assets are recorded by debits. Increases in liabilities are recorded by credits.

ENTRY: Increase in assets is recorded by a debit to Supplies. Increase in liabilities is recorded by a

credit to Accounts Payable.
 LET’S DO THESE!
Transaction No. 8 – Accounts Payable partially settled
 May 9: Paid SJA Merchandising P10, 000 for the amount owed.

ANALYSIS: Assets decreased. Liabilities decreased.

RULES: Decreases in assets are recorded by credits. Decreases in liabilities are recorded by debits.

ENTRY: Decrease in liabilities is recorded by a debit to Accounts Payable. Decrease in assets is

recorded by a credit to Cash.
 LET’S DO THESE!
Transaction No. 9 – Revenues earned and cash collected.
 May 10: Collected P8, 800 for consulting services rendered.

ANALYSIS: Assets increased. Owner’s Equity increased.

RULES: Increases in assets are recorded by debits. Increases in owner’s equity are recorded by credits.

ENTRY: Increase in assets is recorded by a debit to Cash. Increase in owner’s equity is recorded
by a credit to Consulting Revenues.
 LET’S DO THESE!
Transaction No. 10 – Salaries paid.
 May 13: Paid salaries, P6, 600.

ANALYSIS: Assets decreased. Owner’s Equity decreased.

RULES: Decreases in assets are recorded by credits. Increases in owner’s equity are recorded by
debits.

ENTRY: Decrease in owner’s equity is recorded by a debit to Salaries Expense. Decrease in assets is
recorded by a credit to Cash.
 LET’S DO THESE!
Transaction No. 11 – Unearned revenue collected.
 May 15: Received P10, 000 advance payment for three clients reffered.

ANALYSIS: Assets increased. Liabilities increased.

RULES: Increases in assets are recorded by debits. Increases in liabilities are recorded by credits.

ENTRY: Increase in assets is recorded by a debit to Cash. Increase in liabilities is recorded by a credit
to Unearned Referral Revenue.
 LET’S DO THESE!
Transaction No. 12 – Revenues earned on account.
 May 19: Billed customer for consulting services rendered for P12, 000.

ANALYSIS: Assets increased. Owner’s Equity increased.

RULES: Increases in assets are recorded by debits. Increases in Owner’s Equity are recorded by
credits.

ENTRY: Increase in assets is recorded by a debit to Accounts Receivable. Increase in owner’s equity is
recorded by a credit to Consulting Revenues.
 LET’S DO THESE!
Transaction No. 13 – Withdrawal of cash by Owner
 May 25: Digao withdrew P14, 000 for personal expenses.

ANALYSIS: Assets decreased. Owner’s Equity decreased.

RULES: Decreases in assets are recorded by credits. Decreases in Owner’s Equity are recorded by
debits.

ENTRY: Decrease in owner’s equity is recorded by a debit to Digao, Withdrawals. Decrease in assets
is recorded by a credit to Cash.
 LET’S DO THESE!
Transaction No. 14 – Accounts Receivable collected
 May 30: Received P12, 000 from customer for services billed last May
19.

ANALYSIS: Asset increased. Another asset decreased.

RULES: Increases in assets are recorded by debits. Decreases as credits.

ENTRY: Increase in assets is recorded by a debit to Cash. Decrease in assets is recorded by a credit to
Accounts Receivable.
 LET’S DO THESE!
Transaction No. 15 – Expenses incurred and paid
 May 31: Settled an electricity bill of P 3, 000 for the month.

ANALYSIS: Asset decreased. Owner’s Equity decreased.

RULES: Decreases in assets are recorded by credits. Decreases in owner’s equity are recorded by
credits.

ENTRY: Decrease in owner’s equity is recorded by a debit to Utilities Expense. Decrease in assets is
recorded by a credit to Cash.
GENERALIZATION:

1) What have you learned from our lesson today?

2) Define journal and journalizing.

3) illustrate the format of general journal.

4) Discuss the steps in recording business transactions in the general journal.

 YOU CAN DO THESE!
Instruction: Analyze and record the ff. business transactions of Visperas Computer Shop for the month of July, 2015. Use the chart of accounts below. Write your
answer on your columnar notebook.

R. VISPERAS COMPUTER SHOP

Chart of Accounts
Account Name Account No.

Cash ---------------------- 101

Accounts Receivable ---------------------- 102
Office Equipment ---------------------- 103
Furniture and Fixtures ---------------------- 104
Accounts Payable ---------------------- 201
Loans Payable ---------------------- 202
R. Visperas, Capital ---------------------- 301
R. Visperas, Darwings ---------------------- 302
Service Revenue ---------------------- 303
Salaries, wages & benefits ---------------------- 401
Communication Expense ---------------------- 402
Rent Expense ---------------------- 403
Light and water expense ---------------------- 404
 YOU CAN DO THESE!
DATE TRANSACTIONS
July 1 R. Visperas invested to the computer shop in cash for P100, 000
July 2 Purchased computers on credit - P12, 000
July 3 Purchased additional computer for cash – P6, 000
July 6 Purchased airconditioning unit on credit – P10, 000
July 7 R. Visperas invested computer equipment for the computer shop – P50,
000
July 10 Borrowed money from the bank payable in 2 years – P40, 000
July 15 R. Visperas made additional investment in cash – P75, 000
July 16 Paid salaries to employees – P15, 000
July 17 Made partial payment to the bank loan – P20, 000
July 20 Purchased new furniture on credit – P10, 000
 YOU CAN DO THESE!
DATE TRANSACTIONS

July 21 Billed customers for services rendered on account – P30, 000

July 25 Collected from the customers billed on account – P10, 000
July 27 Rendered services for cash to customers –P45, 000
July 28 Paid telephone bills – P5, 000
July 28 Paid rental of the computer shop – P10, 000
July 29 Paid electricity bill – P3, 000
July 30 R. Visperas withdraws cash – P15, 000
July 31 Paid water bill – P2, 000
July 31 Paid salaries to employees
 SELF CHECK:
Instruction: Choose the letter of the correct answer.
1) Transactions are recorded chronologically in the ________________.
a. journal
b. T-account
c. daybook
d. ledger

2) The first step in recording a transaction in a journal is to _________.

a. Write an explanation
b. Record the debit
c. Record the date
d. Record the credit
3) An account has two sided called the _____________
a. Debit and Credit
b. Asset and Liability
c. Income and Expense
d. Journal and Ledger
4) Payment of insurance premiums in advance gives rise to ___________.
a. Unearned income
b. Prepaid expense
c. Accrued income
d. Accrued expense

5) Credit to cash results to _____________.

a. An increase in owner’s equity
b. A decrease in assets
c. An increase in liabilities
d. An increase in income

6) Debits to expense accounts signify

a. Increases in capital
b. Increases in assets
c. Decreases in capital
d. Increases in liabilities
7) When an asset is purchased on account, the credit is to ___________.
a. A capital account
b. A liability account
c. An income account
d. An expense account

8) All of the following are assets except

a. Unearned revenue
b. Cash
c. Equipment
d. Inventory

9) Credits are used to record

a. Decreases in liabilities
b. Decreases in owner’s equity
c. Increases in expenses
d. Increases in income
10) Which of the following events would not be considered an accounting transaction?
a. Payment of fees to a tax consultant
b. Purchase of print advertising space for a new service
c. Tabulation of the result of a customer satisfaction survey
d. Sales of a new product during the first month of operations