Business Transactions and the Accounting Cycle of a Service Business

The Accounting Cycle

• The Accounting Cycle is defined as the sequence of operations that is used to record business transactions during a given period of time.

Steps in the Accounting Cycle

1. Analysis of business transactions.
2. Recording of transactions in the journal.
3. Posting of journal entries from the journal to the ledger.
4. Preparation of trial balance.
5. Recording and posting of adjusting entries.
6. Preparation of adjusted trial balance.
7. Preparation of financial statements.
8. Preparation of closing entries.
9. Preparation of post-closing trial balance.

The Journal

• A journal is an accounting book where transactions are first recorded.
• General journal: This is the simplest form of journal used to record business transactions in chronological order.
• Journalizing: The process of recording transactions in the journal.
• Journal entry: The actual record of the transaction or event.

Mechanics of Journalizing

• Debit: The account title is written on the leftmost part of the column.
• Credit: The account title is written indented from the leftmost part of the column.
• Explanation: A brief explanation of the transaction is provided below the entries.

Types of Journal Entries

• Simple entry: Consists of exactly one debit and one credit.
  • Example:
  • Accounts payable $xxx$
  • Cash $xxx$
• Compound entry: This may consist of several combinations:
  • One debit and two credits.
  • Two or more debits and one credit.
  • Two or more debits and two or more credits.
  • Example 1 (Purchase of equipment with cash and credit):
  • Delivery Equipment $xxx$
  • Cash $xxx$
  • Notes payable $xxx$
  • Example 2 (Sale on account and cash):
  • Cash $xxx$
  • Accounts receivable $xxx$
  • Sales $xxx$

The Ledger

• Transactions in the journal are recorded on the date of their occurrence, meaning items of a similar nature are not grouped together initially.
• The ledger is a book used to summarize the data appearing in the journal, wherein each item is represented by an individual account.
• Posting: The process of transferring data from the journal to the ledger.
  • Debit entries in the journal are posted to the debit columns in the ledger.
  • Credit entries in the journal are posted to the credit columns of the ledger.

The Trial Balance

• A trial balance is a list of all accounts with open balances in the general ledger.
• Purpose: It proves the equality of the debit and credit balances in the general ledger.
• Limitation: It does not check the overall accuracy of the report, only the mathematical equality of debits and credits.

Illustrative Problem: Pure Janitorial Services

• Listed business transactions for Pure Janitorial Services during its first month of operations (May 2022):
  • May 2: Pure X, invested cash, $\text{₱250,000}$.
  • May 5: Paid cash for the business permit, $\text{₱9,000}$.
  • May 7: Purchased cleaning equipment in cash, $\text{₱50,000}$.
  • May 10: Purchased cleaning supplies from Supplier A on credit, $\text{₱55,000}$.
  • May 15: Rendered janitorial services to client X on account, $\text{₱30,000}$.
  • May 22: Received $\text{₱27,000}$ for janitorial services rendered to Client Z in cash.
  • May 23: Partial payment of accounts payable in May 10 transaction, $\text{₱45,000}$.
  • May 25: Collected partial payment from customers on May 15 transaction, $\text{₱15,500}$.
  • May 30: Paid employee salaries of $\text{₱12,000}$.

General Journal: Pure Janitorial Services

• 5/2: Cash (Debit: $250,000$) | Pure Capital (Credit: $250,000$)
  • Initial cash investment of Pure X.
• 5/5: Permits and licenses (Debit: $9,000$) | Cash (Credit: $9,000$)
  • Payment of business permit.
• 5/7: Cleaning Equipment (Debit: $50,000$) | Cash (Credit: $50,000$)
  • Cash purchase of cleaning equipment.
• 5/10: Cleaning supplies (Debit: $55,000$) | Accounts payable (Credit: $55,000$)
  • Purchased cleaning supplies on account from supplier A.
• 5/15: Accounts receivable (Debit: $30,000$) | Janitorial income (Credit: $30,000$)
  • Rendered services on account to client X.
• 5/22: Cash (Debit: $27,000$) | Janitorial income (Credit: $27,000$)
  • Rendered services on cash to client Z.
• 5/23: Accounts payable (Debit: $45,000$) | Cash (Credit: $45,000$)
  • Partial payment of account – Supplier A.
• 5/25: Cash (Debit: $15,500$) | Accounts receivable (Credit: $15,500$)
  • Collection of receivable - Client X.
• 5/30: Salaries expense (Debit: $12,000$) | Cash (Credit: $12,000$)
  • Payment of salaries.
• Journal Totals: Debit $493,500$ | Credit $493,500$

General Ledger: Pure Janitorial Services

• Account: CASH

  • 5/2 Initial investment: Debit $250,000$ | Balance $250,000$
  • 5/5 Payment bus. Permit: Credit $9,000$ | Balance $241,000$
  • 5/7 Purchase of equipment: Credit $50,000$ | Balance $191,000$
  • 5/22 Janitorial income: Debit $27,000$ | Balance $218,000$
  • 5/23 Payment to Supplier A: Credit $45,000$ | Balance $173,000$
  • 5/25 Collection from Client X: Debit $15,500$ | Balance $188,500$
  • 5/30 Payment of salaries: Credit $12,000$ | Balance $176,500$

• Account: ACCOUNTS RECEIVABLE

  • 5/15 Janitorial services to Client X: Debit $30,000$ | Balance $30,000$
  • 5/25 Collection from Client X: Credit $15,500$ | Balance $14,500$

• Account: CLEANING SUPPLIES

  • 5/10 Purchase – Supplier A: Debit $55,000$ | Balance $55,000$

• Account: CLEANING EQUIPMENT

  • 5/7 Purchase: Debit $50,000$ | Balance $50,000$

• Account: ACCOUNTS PAYABLE

  • 5/10 Purchase of supplies – Supplier A: Credit $55,000$ | Balance $55,000$
  • 5/23 Payment of account – Supplier A: Debit $45,000$ | Balance $10,000$

• Account: PURE CAPITAL

  • 5/2 Initial investment: Credit $250,000$ | Balance $250,000$

• Account: JANITORIAL INCOME

  • 5/15 Janitorial services to Client X: Credit $30,000$ | Balance $30,000$
  • 5/22 Janitorial services to Client Z: Credit $27,000$ | Balance $57,000$

• Account: PERMIT AND LICENSES

  • 5/5 Payment of business permit: Debit $9,000$ | Balance $9,000$

• Account: SALARIES EXPENSE

  • 5/30 Payment of salaries: Debit $12,000$ | Balance $12,000$

Trial Balance: Pure Janitorial Services (May 31, 2022)

| Account Title | Debit ($) | Credit ($) | | :--- | :--- | :--- | | Cash | $176,500$ | | | Accounts Receivable | $14,500$ | | | Cleaning Supplies | $55,000$ | | | Cleaning Equipment | $50,000$ | | | Accounts Payable | | $10,000$ | | Pure, Capital | | $250,000$ | | Janitorial Income | | $57,000$ | | Permits and Licenses | $9,000$ | | | Salaries Expense | $12,000$ | | | Total | $317,000$ | $317,000$ |

Practice Problems

• Problem 1: Miley Fashion (July 2022)

  • July 3: Owner invested cash, $\text{₱250,000}$.
  • July 7: Purchased 3 units sewing machine and issued promissory note, $\text{₱150,000}$.
  • July 10: Purchased sewing supplies on cash, $\text{₱55,000}$.
  • July 12: Rendered services on account, $\text{₱30,000}$.
  • July 15: Rendered services to various customers in cash, $\text{₱35,000}$.
  • July 20: Partial payment of promissory note issued July 7, $\text{₱50,000}$.
  • July 25: Collected partial payment from customers on July 12 transaction, $\text{₱17,500}$.
  • July 27: Paid employee salaries of $\text{₱12,000}$.
  • July 29: Paid utilities expense in cash, $\text{₱10,500}$.
  • Requirements: Record in general journal, post to ledger, and prepare Trial Balance as of July 31, 2022.
  • Account titles to use: Cash, Accounts Receivable, Sewing Supplies, Sewing Machine, Notes Payable, Miley Capital, Service Income, Utility Expense, and Salaries Expense.

• Problem 2: Fast Delivery Services - Billy Sy (July 2022)

  • July 1: Billy Sy invested $\text{₱600,000}$ cash to start the delivery business.
  • July 3: Purchased used delivery van on cash, $\text{₱300,000}$.
  • July 5: Purchased office equipment from MN Marketing on account, $\text{₱40,000}$.
  • July 6: Purchased office supplies on cash, $\text{₱8,500}$.
  • July 13: Rendered delivery services to Client ABC on account, $\text{₱15,750}$.
  • July 20: Paid account with MN Marketing, $\text{₱28,500}$.
  • July 22: Collected partial payment of Client ABC, $\text{₱10,500}$.
  • July 25: Paid $\text{₱8,500}$ for gasoline expenses.
  • July 27: Paid electricity bill for the month, $\text{₱8,800}$.
  • Requirements: Record in general journal, post to ledger, and prepare Trial Balance as of July 31, 2022.
  • Account titles to use: Cash, Accounts Receivable, Office Supplies, Office Equipment, Delivery Van, Accounts Payable, Sy Capital, Delivery Income, Gasoline Expense, and Utility Expense.