L2: The Accounting Cycle (AJPUAFCPR)

Accounting for Service and

Merchandising Entities
ACC11

PREPARED BY:
[LEANDRO ADOR DIZON, CPA]
 LEARNING OBJECTIVES

⚫ Review of the Elements of the Financial Statements

(ALPIE)
⚫ Overview of the accounting cycle
⚫ Analyzing of economic transactions for Service
concern business
⚫ Recording of the initial journal entries in the
General Journal
⚫ Transaction analysis
 Review of the Elements of the Financial
Statements (ALPIE)

Assets = Liabilities + [Proprietorship + (Income – Expenses)]

Remember:
1. Assets are received generally coming from creditors and
owners.
2. Whenever a company renders service, an income should be
recorded. And expenses are recognized when it is incurred.
3. Both income and expense will eventually be transferred to the
Proprietorship account.
4. At the end of every accounting period, only Assets, Liabilities
and Proprietorship will remain in the records of the company.
 Overview of the Accounting Cycle
(AJPUAFCPR)
The accounting process can be summarized into AJPUAFCPR:

1. Analyze economic events

2. Journalize economic transactions to the General Journal

3. Post the account balances to the General Ledger

4. Unadjusted trial balance preparation

5. Adjustments for the end of the period

(a)Recording of adjusting journal entries to the General journal

(b) Posting of adjusting journal entries to the General Ledger
(c) Preparation of the Adjusted Trial Balance

Module No. 1 Title of Your Presentation

 Overview of the Accounting Cycle
(AJPUAFCPR)
6. Financial statements preparation
(a) Statement of Financial Performance (in higher accounting, this would become
Statement of Comprehensive Income)
(b) Statement of Changes in Owner’s equity
(c) Statement of Financial Position
(d) Statement of Cash flows
(e) Notes to Financial Statements (summary of significant accounting policies and
other explanatory information)

7. Closing of temporary accounts (income, expense , and drawing accounts) to the

Capital account

8. Posting of closing journal entries and preparation of Post-closing trial balance

preparation

9. Reversing journal entries (optional)

Step 1: Analyzing of Economic Transactions

Any transaction that affects the Elements of the

Financial Statements (ALPIE) should be recorded.

Economic transactions should be measurable.

Step 2 - Journalize economic transactions to
the General Journal
⚫ Journalizing is synonymous to recording or recognition of accounts.

⚫ Journalizing of entries is the recording of accounts to be entered in the General

Journal, also known as book of original entries. Every economic transaction is
entered in the General Journal which includes: initial transactions, adjustments,
correcting journal entries, and closing journal entries.

⚫ Journal transactions should be recorded chronologically or according to the date

of occurrence.

⚫ A journal entry could either be a simple journal entry or a compound journal entry.
Simple journal entry consist of one debit and one credit while a compound
journal entry consist of more than one debit and/or more than one credit.

⚫ General Journal has page number usually at the upper right hand corner as a
reference to posting of the accounts to the General Ledger.
The General Journal
F CURRENT ASSETS (1-29) F PROPRIETORSHIP/ CAPITAL (70-79)
1 Cash 70 Carreon, Capital
2 Notes receivable 71 Carreon, Drawings
3 Interest receivable
4 Accounts receivable  
5 Allowance for Doubtful Accounts F INCOME (80-99)
6 Supplies 80 Service Revenue - A
7 Prepaid rent 81 Service Revenue - B
8 Prepaid insurance 82 Service Revenue - C
9 Prepaid advertising 83 Service Revenue - D
  84 Service Revenue - E
F NONCURRENT ASSETS (30-49) 85 Interest Income
30 Land 86 Gain on sale of asset
31 Building 87 Other Income
32 Accumulated depreciation - Bldg.
33 Equipment  
34 Accumulated depreciation - Equipment F EXPENSES (100 -150)
35 Machineries 100 Salaries expense
36 Accumulated depreciation - Machinery 101 Utilities expense
37 Service Vehicle 102 Transportation expense
38 Accumulated depreciation - Service Vehicle 103 Communication expense
39 Furniture and Fixtures 104 Permits and licenses
40 Accumulated depreciation - Furniture & Fixtures 105 Professional fees
41 Goodwill 106 Taxes
42 Copyright 107 Food allowances
43 Trademark 108 Commissions and bonuses
44 Patent 109 Claims and damages
  110 Repairs and maintenance
F CURRENT LIABILITIES (49-59) 111 Fuel Expense
49 Accounts payable 112 Security expense
50 Unearned service revenue 113 Rent expense
51 Salaries payable 114 Supplies expense
52 Rent payable 115 Advertising expense
  116 Insurance expense
F NONCURRENT LIABILITIES (60-69) 117 Interest expense
60 Notes payable 118 Doubtful accounts
61 Loans payable 119 Depreciation expense
62 Mortgage payable 120 Loss on sale of asset
63 Interest payable   121 Miscellaneous expense
         
      F Summary account
      200 Income and expense summary
Step 2: Journalizing – Illustrative problem
Mr. Dingdong Higantes, an experienced mechanic, opened his vulcanizing shop on January 1, 2020. He named his
business “Bull Kit Vulcanizing Shop”. The company offers three basic services: vulcanizing, tire rotation and tire
pressure adjustments. Presented below are the economic transactions of Bull Kit Vulcanizing services for its first
month of operation:

January 1 Mr. Higantes invested cash in the business worth P80,000.

4 The company purchased equipment on account worth P25,000 from Max Hardware. The
equipment is expected to be used in 3 years with an estimated salvage value of P7,000.
7 Supplies worth P20,000 was purchased in cash.
9 Performed vulcanizing services and received P18,000 in cash.
12 Billed Summit Tours for a completed service worth P12,000.
14 Partially paid accounts payable to Max Hardware amounting P10,000.
15Collected payment from Summit Tours, P5,000.
18 Paid salaries expense – P5,000; Permits and licenses – P3,000; Utilities expense – P2,000.
23 Received P15,000 from Green UV Express as advance payment for services to be rendered
within one month.
25 Paid rent expense for the month of January amounting P7,500.
27 Completed P7,000 worth of services requested by Green UV Express last January 23.
29 Received a call from a customer inquiring for vulcanizing services worth P17,500.
31 Mr. Dingdong Higantes withdrew P3,500 in cash from the business for his personal use.
31 At the end of the month, the company has the following necessary adjustments before
preparing financial statements:
(a) P1,400 of accounts receivable are doubtful of collection
(b) Remaining supplies is worth P12,000 only.
(c) Monthly depreciation of equipment is P500.
 The General Journal

Page No. 001

Bull Kit Vulcanizing Shop
General Journal
Date Account titles F Debit Credit 15 Cash 5,000  
Jan.
2020           Accounts receivable-Summit   5,000
2 Cash 80,000            
  Higantes, Capital   80,000 18 Salaries expense 5,000  
            Permits and licenses 3,000  
4 Equipment 25,000     Utilities expense 2,000  
  Accounts payable-Max   25,000   Cash   10,000
                   
7 Supplies 20,000   23 Cash 15,000  
  Cash   20,000   Unearned service revenue   15,000
                   
9 Cash 18,000   25 Rent expense 7,500  
  Service revenue   18,000   Cash   7,500
                   
12 Accounts receivable-Summit 12,000   27 Unearned service revenue 7,000  
  Service revenue   12,000   Service revenue   7,000
                   
14 Accounts payable-Max 10,000   31 Higantes, Drawings 3,500  
  Cash   10,000   Cash   3,500
 Transaction Analysis

Summary of Effects of each transaction to the Elements of the Financial Statements:

 
Debit Credit Net Effect
Jan. 2 Increase in Asset Increase in Capital
4 Increase in Asset Increase in Liability
7 Increase in Asset Decrease in Asset No Effect
9 Increase in Asset Increase in Income
12 Increase in Asset Increase in Income
14 Decrease in Liability Decrease in Asset
15 Increase in Asset Decrease in Asset No Effect
18 Increase in Expense Decrease in Asset
23 Increase in Asset Increase in Liability
25 Increase in Expense Decrease in Asset
27 Decrease in Liability Increase in Income
31 Increase in Drawings Decrease in Asset