MOTIVATION tip

Examples of Service Businesses To illustrate Figure 1, may buy a one-piece

Ask of a service business. Acknowledge all possible answers and correct them if necessary. Get one 12-column worksheet from a local supplies
store. simply copy the column headings in
example of a service business from those enumerated. Ask to imagine the possible transactions that Figure 1 onto the worksheet.
may occur in that particular business.
Relate the answers of the learners to the subject matter of this chapter.

INSTRUCTION
Discuss Steps 5 to 8 of the Accounting Cycle

1
THE ACCOUNTING CYCLE

1. Transactions 2. Journal 3. Posting 4. Trial Balance

Entries tip
Retain the accounting cycle on the board/
wall while each step is being discussed.
6. Adjusting Journal
8. Closing the 7. Financial Entries 5. Worksheet
Books Statements

Step 5 - Worksheet
This step is simply about plotting the items in the unadjusted trial balance on the worksheet.
In a manual accounting system, a worksheet is a large columnar sheet of paper specifically designed to tip
To illustrate Figure 1, may buy a one-piece
conveniently arrange all the accounting information required at the end of a period. The worksheet is 12-column worksheet from a local school
used to check whether ledger accounts are balanced and adjusted. The satisfactory completion of a supplies store. then simply copy the column
worksheet provides assurance that all the details of the end-of-period accounting procedures were headings in Figure 1 onto the worksheet.
properly brought together. The worksheet serves as the source in the preparation of financial
statements and other closing and adjusting entries.
The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown
below:

2
Name of the Company
Worksheet
For the period (monthy/year) ended Unadjusted Trial Adjustments Adjusted Trial Statement of Income Statement of
, 20 Balance Balance Position Financial Position
DR CR DR CR DR CR DR CR DR CR
Statement of Financial Position Accounts
Cash
Accounts Receivable
Inventory
Office Equipment
Accum Deprn - Off Eqpt
Land
Intangible Assets
Accounts Payable
Owner’s, Capital
Owner’s, Withdrawal
Income Statement Accounts
Sales
Sales Returns and Allowances
Sales Discounts
Interest Income
Purchases
Purchase Returns and Allowances
Purchase Discounts
Freight In
Salaries Expense
Supplies Expense
Utilities Expense
Pedro Matapang who started his Matapang Computer Repairs General Journal
business on February 14, 2016. The following transactions transpired Date Account Title and Explanation Ref Debit Credit
in February 2016:
2/14/16 Cash 200,000
1. February 14, 2016 - Pedro Matapang invested PHP200,000 into
Matapang, Capital 200,000
his Matapang Computer Repair business.
To record the initial investment of
2. February 15, 2016 - Pedro purchased one computer unit from owner
XY Computer Store to be used for his business. He issued P. Matapang
check number 001 amounting to PHP25,000.
2/15/16 Office Equipment 25,000
3. February 16, 2016 - Pedro hired Juana Magaling, an
experienced secretary. Cash 25,000
4. February 17, 2016 – Repaired the computer of Jean and To record the purchase of 1
collected PHP10,000. computer unit
5. February 18, 2016 – Repaired the computer of Mike; however,
Mike will pay PHP15,000 only on March 18, 2016. 2/17/16 Cash 10,000
6. February 19, 2016 – Pedro purchased Office Supplies from MM Service Revenue 10,000
Merchandise amounting to PHP5,000 on account. Pedro will
To record receipt of cash from customer
pay this on March 30, 2016.
7. February 25, 2016 – Paid the salary of Juana amounting 2/18/16 Accounts Receivable 15,000
to PHP4,000.
Service Revenue 15,000

The entries to record the above transactions are on the right: To record services rendered to a
customer on account

2/19/16 Supplies Expense 5,000

Accounts Payable 5,000

To record purchase of office supplies on

account

2/25/16 Salaries Expense 4,000

Cash 4,000

To record payment of salary of Juana

Recall that after posting to the general ledger, the unadjusted trial balance was: tip
The business of Pedro Matapang will be
MATAPANG COMPUTER REPAIRS used throughout the discussion of this
Unadjusted Trial Balance subject matter so that you will find it easy
February 29, 2016 to trace the transactions and complete the
accounting cycle of a service business.
Account Title Debit Credit
Balance Sheet Accounts
Cash 181,000
Accounts Receivable 15,000
Office Equipment 25,000
Accounts Payable 5,000
Matapang, Capital 200,000

Income Statement Accounts

Service Revenue 25,000
Supplies Expense 5,000
Salaries Expense 4,000

230,000 230,000
This now represents the first two money columns in the worksheet.

Step 6 – 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.
Prior to your lecture, recall the previous discussion on accounting principles and concepts, specifically
the matching principle.
Revenue Recognition – accounting standards require that revenue is recognized when it is earned and the amount 5. Accrued income or
accrued assets
can be measured reliably. To illustrate:
• Assume that you are preparing the financial statements for Feb 2016. Matapang Computer Repairs rendered
services amounting to PHP25,000 for the repair of the computer units of Mr. Tamad on Feb 26, 2016. However,
the payment for these services of Matapang will be made on Mar 15, 2016.
Question: when should you recognize the PHP25,000 as revenue or income, in February or March?
Applying the revenue recognition principle, it should be reported as revenue for February 2016.
• Assume that you are preparing the financial statements for February 2016. On February 28, 2016, Matapang
Repairs received payment from Mr. Tamad amounting to PHP25,000. This payment is for the repair of the
computer units of Mr. Tamad on March 5, 2016.
Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying
the revenue recognition principle, it should be reported as revenue in March 2016. Take note that since the
service will be rendered in March, the revenue should also be earned in March. What about February 2016?
The amount is recorded as a liability because Matapang Repairs has the obligation to render this service in
the future.
Matching Principle - this principle directs a business to report an expense on its income statement within the same
period as its related income. To illustrate:
• Assume that you are preparing the financial statements for February 2016. The business gives a commission of
10% service income to its employees. The commission is paid the following month. On February 2016, the total
service income for the month is PHP100,000. Thus, the employees are entitled to a commission of PHP10,000.
This amount will be paid on March 12, 2016. Question: when should the commission expense be recorded in the
book of accounts of the business, in March or in February? Applying the matching principle, the answer is in
February.
Adjusting entries are made at the end of each accounting period. Adjusting entries make it possible to report correct
amounts on the statement of financial position and on the income statement. All adjusting entries affect at least one
income statement account and one statement of financial position account. Thus, an adjusting entry will always
involve an income or an expense account and an asset or a liability account. There are five basic sources of adjusting
entries:
1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income
4. Accrued expenses or accrued liabilities
tip
The revenue recognition and matching principle were discussed in ABM 1 Chapter ___ (Accounting Concepts and Principles)
#1 Depreciation. Depreciation is a method of allocating the cost of an asset to an expense over the tip
accounting periods that make up the asset’s useful life. Examples of assets subject to depreciation are: What is the entry to record the acquisition of
Store, Office, Building, and Transportation equipment. These types of assets lose their ability to provide the vehicle.
Answer:
useful service as time passes. Depreciation can also be referred to as the decrease in the usefulness of Transportation Eqpt - 50,000
these types of assets. Take note that Land is not subject to depreciation because the value of land Cash or Accounts Payable - 50,000
mostly increases as time passes.
Exercise on Adjusting entries to record Depreciation
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The tip
cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated There are other methods of depreciation,
but straight line is the simplest and
that after five years, the office equipment can be sold at a scrap value of PHP1,000. The company uses
easiest to apply. the other depreciation
the straight line method of depreciation. methods will be discussed in higher
Depreciation is a means of allocating the cost of an asset to an expense over the accounting period accounting subjects.

that will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang
for five years. Proper accounting procedures dictates that the cost of PHP25,000 should be spread over
five years.
There are several methods or formulas to compute the amount of depreciation. The simplest is the
straight line method. The formula is Annual Depreciation : ( Acquisition Cost – Salvage or Residual
Value) / Useful Life. Applying this formula to the exercise:
Annual Depreciation = (25,000-1,000) / 5
= PHP4,800
If the accounting period being reported by Matapang is for the month ending February 29, 2016,
the adjusting entry to record this depreciation in the books of Matapang is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/16 Depreciation Expense 200
Accumulated Depreciation-Office Eqpt 200
The depreciation expense of PHP200 was derived by computing the monthly depreciation of
PHP400 (Annual Depreciation of PHP4,800/12 months) and multiplying the PHP400 by one-half
since the equipment was acquired in the middle of February.
#2 Deferred Expenses or Prepaid Expenses. These are items that have been initially recorded as
assets but are expected to become expenses over time or through the operations of the business.
Exercise - Adjusting entries to record deferred expenses or prepaid expenses
tip
Recall that on February 19, 2016 Matapang purchased PHP5,000 worth of office supplies on account. In higher accounting subjects, this approach
By the end of the month, PHP2,000 worth of these supplies are still unused. is referred to as the expense method of
recording, where the expense account is
The February 19, 2016 entry to record the purchase on the account of office supplies was already initially used to record the transaction.
posted to the general ledger and included in the balances, as shown in the unadjusted trial balance
above. The entry was shown only for illustration purposes.
General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/16 Supplies Expense 5,000
Accounts Payable 5,000
To record the purchased of office supplies on account

2/29/16 Supplies 2,000

Supplies Expense 2,000

To set-up the value of unused supplies

The “Supplies” account debited on February 29, 2016 above is an asset account and represents the
tip
value of supplies unused as of the end of February 2016. If these journal entries are posted to the In higher accounting subjects, this approach
general ledger, the following should be the balance of each account: is referred to as the asset method of
recording, where the asset account is
Account Title Debit Credit initially used to record the transaction.
Supplies 2,000

Accounts Payable 5,000

Supplies Expense 3,000

The alternative entries to record the above transactions are:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/16 Supplies 5,000
Accounts Payable 5,000
To record the purchased of office supplies

2/29/16 Supplies Expense 3,000

Supplies 3,000

To set up the value of unused supplies

If these entries are posted in the general ledger, the following should be the balances of each account:

Account Title Debit Credit

Supplies 2,000

Accounts Payable 5,000

Supplies Expense 3,000

Notice that even with the different approaches in recording the transactions in the journal entries, the
balances in the general ledger will always be the same whether you used the first approach or the
second approach.
#3 Deferred Income or Unearned Income. These are items that have been initially recorded as tip
liabilities but are expected to become income over time or through the operations of the business. The “Unearned Service Revenue” account
was not included in the Chart of Accounts
Exercise – Adjusting entries to record deferred or unearned income illustrated in ABM1 Chapter ___ (Types of
On February 15, 2016 Matapang entered into a contract with Makisig to maintain the computers of Major Accounts). Additional account titles
maybe added to this chart if the need
Makisig for two months starting on February 15, 2016 up to April 15, 2016. On the same date, Makisig arises. Unearned Service Revenue will fall
paid the total contract amount of PHP40,000 in full. The entries to record and adjust the books are: under the liabilities classification.
In the February 29, 2016 entry above, as of end of February 2016, Matapang has already earned the
service revenue for the first 15 days, thus an adjusting entry is recorded.
General Journal
Date Account Title and Explanation Ref Debit Credit
2/15/16 Cash 40,000
Unearned Service Revenue 40,000
To record receipt of full payment for the two-month
service contract with Makisig

2/29/16 Unearned Service Revenue 10,000

Service Revenue 10,000
To record service income earned from Feb 15-29,
2016; P40,000 x (1/2 month /2 months)
tip
In this case, may emphasize the value of
#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that have been generating accurate information for the
incurred but have not been recorded and paid. users of accounting information. The
Exercise – Adjusting entries to record Accrued expenses or accrued liabilities wrong information may lead to wrong
decisions. Emphasize also that one of the
On February 29, 2016, Matapang received the electric bill for the month of February reasons for adjusting entries is to reflect
amounting to PHP3,800. Matapang will pay this bill on March 2016. the correct information in the financial
statements.
The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill is In higher accounting this is commonly
still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates referred to as the accrual process.
that the same should be recorded in February. Otherwise, your expense will be understated and thus
the company will be reporting an overstated income (or an erroneous income). Needless to say,
erroneous information may lead to wrong decisions.
The entry to record the accrual of this expense is:
General Journal tip
Date Account Title and Explanation Ref Debit Credit In this case, may emphasize the value of
2/29/16 Utilities Expense 3,800 generating accurate information for the
Utilities Payable 3,800 users of accounting information. The
wrong information may lead to wrong
To accrue the cost of electricity incurred for the
decisions. Emphasize also that one of the
month of February.
reasons for adjusting entries is to reflect
the correct information in the financial
statements.
#5 Accrued Income or Accrued Assets
In higher accounting this is commonly
These are income items that have been earned but have not been recorded and paid by the customer. referred to as the accrual process.
In short, these are receivables of the business.
Exercise – Adjusting entries to record accrued income or accrued assets
On February 28, 2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an
out- of-town trip so he could not pay Matapang . He told Matapang that he will pay for their
services on March 1, 2016.
Matapang has already earned the PHP15,000 but was not paid as of the end of February 2016.
Therefore, an income should be properly recognized in February 2016 for this transaction. The entry to
record this is:
General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/16 Accounts Receivable 15,000
Service Income 15,000
To accrue the cost of electricity incurred for the
month of February.
Enter all adjustments to the worksheet:

Matapang Computer Repairs

Worksheet
For the month ending February 29, 2016 Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Position
DR CR DR CR DR CR
Balance Sheet Accounts
Cash 221,000 221,000
Accounts Receivable 15,000 15,000 30,000
Supplies 2,000 2,000
Office Equipment 25,000 25,000
Accum. Deprn-Off Eqpt 200 200
Accounts Payable 5,000 5,000
Utilities Payable 3,800 3,800
Unearned Service Revenue 40,000 10,000 30,000
Matapang, Capital 200,000 200,000

Income Statement Accounts

Service Revenue 25,000 25,000 50,000
Supplies Expense 5,000 2,000 3,000
Salaries Expense 4,000 4,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200
270,000 270,000 31,000 31,000 289,000 289,000
Note: The entry to record the receipt of PHP40,000 from Makisig on February 15, 2016 was reflected in the unadjusted trial balance columns.