Accounting-Cycle-for-Service-Business-Part-1 1 PDF

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Accounting Cycle forService BusinessAsst. Prof. Ronald A. Ricablanca, CPA, MBA, DBA (Candidate)What are business transactions?####### Any occurrences of events or activities undertaken by the entity that affect any of####### the elements of financial statements are business transactions. These occur...

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Accounting Cycle for Service Business Asst. Prof. Ronald A. Ricablanca, CPA, MBA, DBA (Candidate)

What are business transactions? Any occurrences of events or activities undertaken by the entity that affect any of the elements of financial statements are business transactions. These occurrences of events or activities are normally supported by source documents like Official Receipts (OR), Sales Invoices among others. These supporting documents serve as a basis in recording business transactions.

How are business transactions analyzed? A business transaction is recorded, first, by analyzing its effect (increase or decrease) on the elements of financial statements taking into consideration the dual effect of a transaction. Under the double entry bookkeeping system, a business transaction has a dual effect, an increase in one account and a decrease on the other. After analyzing the dual effect of a transaction, the amount of increase or decrease will be assigned to specific account (i.e., cash, accounts receivable, accounts payable etc.) representing the elements of financial statement affected. Eventually, the transaction will be recorded in the books of accounts in a formal manner following the steps in the accounting cycle. (See the succeeding topics for illustration).

What are the elements of financial statements? The elements of financial statements are classified into elements of financial position or elements of performance. The elements of financial position include: (1) Assets; (2) Liabilities; and (3) Equity. On the other hand, the elements of performance are: (1) Revenue; and (2) Expense.

What is an account? An account is a device used to summarize the effect of transaction. Each element of financial statements is represented by a name that specifically pertains to that element called account title. Examples of account titles include cash, an asset account, accounts payable, a liability account, capital, an equity account, service income, a revenue account and salaries expense, an expense account. The account titles to be used can be derived from the list of account titles designed by the business entity as part of its accounting information system. The list of account titles is called chart of accounts.

Transaction Analysis Worksheet Analyzing a transaction involves determining its effects on the elements of financial statements and identifying the specific accounts involve under such elements affected. This can be done by taking into consideration the basic accounting equation (ASSETS = LIABILITIES + OWNER’S EQUITY) and the expanded accounting equation, (ASSETS = LIABILITIES + OWNER’S EQUITY + REVENUES - EXPENSES). It is to be noted that the dual effect of transaction must likewise be considered.

Illustration: The following worksheets illustrate how a transaction is being analyzed. Take note that the transaction worksheet is not the formal way of recording transactions but merely facilitates the analysis.

(a) Mr. Nicanor Velayo put up his accounting office which under a business name, Nicanor Velayo, CPA. On October 1, 2021, he invests P1,000,000 in the firm.

Analysis: Increase in asset in the form of cash with a corresponding increase in owner’s equity in the form of capital.

(b) Computer equipment costing P150,000 was purchased for cash. Analysis: Increase in asset in the form of office equipment with a corresponding decrease in asset in the form of cash.

(c)

Purchased office supplies on account, P50,000.

Analysis: Increase in asset in the form of office supplies with a corresponding increase in liability in the form of accounts payable.

(d) Performed bookkeeping services for cash, P25,000. Analysis: Increase in asset in the form of cash with a corresponding increase in revenue in the form of service revenue.

(e) Paid various utilities, P15,000. Analysis: Increase in expense in the form of utilities expense with a corresponding decrease in asset in the form of cash.

(f) Send billings to clients, P150,000. Analysis: Increase in asset in the form of accounts receivable with a corresponding increase in revenue in the form of service revenue.

(g) Payment for office supplies purchased on account, P10,000. Analysis: Decrease in liability in the form of accounts payable with a corresponding decrease in asset in the form of cash.

(h) Collections from clients previously billed, P100,000. Analysis: Increase in asset in the form of cash with a corresponding decrease in asset in the form of accounts receivable.

(i) Cash withdrawal by Mr. Velayo, P28,000. Analysis: Decrease in owners equity in the form of an increase in owner’s drawing with a corresponding decrease in cash.

(j) Billings were received for the renovation of office building, P200,000. Analysis: Increase in expense in the form of repairs expense with a corresponding increase in liability in the form of accounts payable.

Income Statement

Statement of Changes in Owner’s Equity

Statement of Financial Position

Statement of Cash Flows (Indirect Method)

Statement of Cash Flows (Direct Method)...