MARY THE QUEEN COLLEGE OF PAMPANGA INC.

Gapan-Olongapo Road, Guagua, Pampanga 2003

MODULE NO – TITLE: M09 – ACCOUNTING PROCESS OF A SERVICE BUSINESS

1. DESIRED LEARNING OUTCOMES

 Prepare a worksheet.
 Prepare the Financial Statements of a Service Business
 Complete the Accounting Cycle for a Service Business

2. CONTENT/DISCUSSION

WORKSHEET
The worksheet is an analytics device used to facilitate the gather of data for adjustments, the preparation of financial statements, and closign entries.
Although optional and not part of the formal accounting records, worksheets are usually prepared because they greatly facilitate the orderly
prepartion of the financial statements. In practice, worksheets are most commonly prepared using spreadsheet applications.

Example

ABC Co.
Worksheet
December 31, 2020
Accounts Unadjusted TB Adjustments Adjusted TB Income Statement Balance sheet

Worksheet columns:
 Accounts – the accounts in the general ledger are listed here
 Unadjusted TB – the ending balances of the accounts in the general ledger are listed here
 Adjustments – the debits and credits of the adjusting entries are listed here
 Adjusted TB – the adjusted balances are placed here (by combining the unadjusted TB balances with the adjustment amounts)
 Income statement – the adjusted amounts of income and expense accounts are extended here
 Balance sheet – the adjusted amounts of assets, liabilities and equity accounts are extended here

Illustration

Financial Accounting and Reporting Page 1 of 9

Institute of Accountancy
 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

ABC Corporation has the following balances in its unadjusted TB as of December 31, 2020. There were no additional owner’s investments during the
year.

Accounts Debits Credits

Cash 190,000
Equipment 180,000
Notes payable 100,000
Owner’s equity 200,000
Owner’s drawings 40,000
Service fees 220,000
Rent expense 60,000
Supplies expense 50,000
Totals 520,000 520,000

Financial Accounting and Reporting Page 2 of 9

Institute of Accountancy
 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

The following information was identified on December 31, 2020:

 The water and electricity bills in December amounting to 3,000 are not yet paid.
 Interest expense is recognized at year-end. The notes payable balance at 12/31/2020 was initially recognized on 12/1/2020, and carries 12%
interest rate.
 Depreciation is recognized at year-end. The company equipment has 5 yars useful life, and was only recognized on 12/1/2020.
 Previous transaction on the rent expense recognized pertains to rent paid in advance of 60,000 on December 1, 2020. Rent per month is
10,000.
 Previous transaction on supplies expense pertains to supplies purchased for 50,000 cash during the period. The cost of unused supplies is
20,000.

The adjusting entries are as follows:

AJE # 1
Utilities expenses 3,000
Utilities payable 3,000

AJE # 2
Interest Expense 1,000
Interest payable 1,000
(100,000 x 12% x 1/12)

AJE # 3
Depreciation expense 3,000
Accumulated depreciation 3,000

AJE # 4
Prepaid rent 50,000
Rent expense 50,000

AJE # 5
Prepaid supplies 20,000
Supplies expense 20,000

Financial Accounting and Reporting Page 3 of 9

Institute of Accountancy
 MARY THE QUEEN COLLGE OF PAMPANGA INC.
The worksheet is prepared, up to the adjusted TB columns as follows:

ABC Co.
Worksheet
For the period ended December 31, 2020

Accounts Unadjusted TB AJE # Adjustments AJE # Adjusted TB Income Statement Balance sheet
Cash P 190,000 190,000
Equipment 180,000 180,000
Notes payable 100,000 100,000
Owner’s equity 200,000 200,000
Owner’s drawings 40,000 40,000
Service fees 220,000 220,000
Rent expense 60,000 50,000 (4) 10,000
Supplies expense 50,000 20,000 (5) 30,000
Totals 520,000 520,000

Adjustments:
Utilities expense (1) 3,000 3,000
Utilities payable 3,000 (1) 3,000
Interest expense (2) 1,000 1,000
Interest payable 1,000 (2) 1,000
Dep’n Expense (3) 3,000 3,000
Accum. Dep’n 3,000 (3) 3,000
Prepaid rent (4) 50,000 50,000
Prepaid supplies (5) 20,000 20,000
Totals P 77,000 P 77,000 P 527,000 P 527,000

Notes: Preparing the Worksheet

1. Account titles used in the adjusting entries but were not previously included in the unadjusted trial balance are placed at the
bottom part of the “Accounts” column of the worksheet.

2. The debits and credits of the adjusting entries are then placed on the “adjustments” column of the worksheet.

3. The amounts in the “Unadjusted trial balance” and “Adjustments” columns are combined to come up with the adjusted
balances of the accounts. The adjusted balances are placed on the “Adjusted trial balance” columns.

4. The procedure in computing the adjusted balances of accounts in the adjusted TB is called “cross-footing” which involves
adding (or subtracting) amounts horizontally.

5. The total debits and total credits should be equal. The procedure to compute for the totals of each individual column is
called “footing” which inolves adding (or subtracting) vertically.

6. Notice the two lines underneath the total amounts, this is referred to as “double rule”. In accounting, “double rules” are used
to connote a total or the end of a computation.

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 MARY THE QUEEN COLLGE OF PAMPANGA INC.
Let us now continue to prepare and complete the worksheet:

ABC Co.
Worksheet
For the period ended December 31, 2020

Accounts Unadjusted TB AJE # Adjustments AJE # Adjusted TB Income Statement Balance sheet
Cash P 190,000 P 190,000 P 190,000
Equipment 180,000 180,000 180,000
Notes payable P 100,000 100,000 P 100,000
Owner’s equity 200,000 200,000 200,000
Owner’s drawings 40,000 40,000 40,000
Service fees 220,000 220,000 P 220,000
Rent expense 60,000 50,000 (4) 10,000 P 10,000
Supplies expense 50,000 20,000 (5) 30,000 30,000
Totals P 520,000 P 520,000

Adjustments:
Utilities expense (1) 3,000 3,000 3,000
Utilities payable 3,000 (1) 3,000 3,000
Interest expense (2) 1,000 1,000 1,000
Interest payable 1,000 (2) 1,000 1,000
Dep’n Expense (3) 3,000 3,000 3,000
Accum. Dep’n 3,000 (3) 3,000 3,000
Prepaid rent (4) 50,000 50,000 50,000
Prepaid supplies (5) 20,000 20,000 20,000
Totals P 77,000 P 77,000 P 527,000 P 527,000 47,000 220,000 480,000 307,000
Profit or loss 173,000 173,000
P 220,000 P 220,000 P 480,000 P 480,000

Notes:
 In the income statement columns of the worksheet:
o If total credits exceed total debits, there is a profit. This is because total credits in the income statement
columns pertain to income, while total debits pertain to expenses.
o Therefore, if total credits exceed total debits in the income statement columns, the balancing figure is on the
debit side. This balancing figure is the profit.
o If total debits exceed to tal credits, there is a loss. In this case, income is less than expenses. The balancing
figure is the loss and it is placed on the credit side of the income statement columns

 In the balance sheet columns of the worksheet:

o If total debits exceed total credits, there is profit. This is because the balancing figure on the credit side will
be added to equity when closing entries are made.
o If total debits are less than total credits, there is a loss. The balancing figure on the debit side will be deducted
form equity when closing entries are made.
o Conceptually, profit or loss is “closed” to the “Owner’s capital” account at the end of each period, and profit
Increases equity (credit), while loss decreases equity (debit).

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 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

Preparation of the financial statements

The complete set of financial statements is discussed in Intermediate Accounting topics. For this module we will prepare the following financial
statements:

1. Statement of Financial Position (or Balance Sheet) – shows information on assets, liabilities and equity

2. Statement of Profit or Loss (or Income Statement) – shows information on income and expenses, and consequently, the profit or loss for the period.

3. Statement of Changes in Equity – shows information on capital activities during the period (additional investments, owner’s withdrawals, profit or
loss)

The preparation of the balance sheet, income statement and statement of changes in equity is greatly facilitated by the worksheet.

ABC Co.
Income Statement
For the month ended December 31, 2020

INCOME
Service Fees P 220,000

EXPENSES
Rent expense (10,000)
Supplies expense (30,000)
Utilities expense (3,000)
Interest expense (1,000)
Depreciation expense (3,000)
TOTAL EXPENSES (47,000)

PROFIT FOR THE PERIOD P 173,000

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 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

ABC Co.
Statement of Changes in Equity ABC Co.
As of December 31, 2020 Balance Sheet
As of December 31, 2020
Owner’s Equity, beginning P200,000
Add: Profit (Loss) 173,000 ASSETS
Add: Additional investments — Cash P190,000
Less: Owner’s withdrawals (40,000) Prepaid rent 50,000
Owner’s Equity, ending P 333,000 Prepaid supplies 20,000
Equipment 180,000
Accumulated Depreciation (3,000)
TOTAL ASSETS P 437,000

LIABILITIES
Notes payable 100,000
Utilities payable 3,000
Interest payable 1,000
TOTAL LIABILITIES 104,000

EQUITY
Owner’s equity 333,000
TOTAL EXPENSES 333,000

TOTAL LIABILITIES & EQUITY P 473,000

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 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

SUMMARY
 A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the preparation of financial statements and
closing entries.
 The worksheet is an optional step but facilitates the accounting process.
 The financial statements are the means by which information accumulated and processed in financial accounting is periodically
communicated to the users. The financial statements are the end products of the financial accounting process.
 The balance sheet shows assets, liabilities and equity of a business
 The income statement shows the income and expenses, and consequently, the profit or loss, of a business.

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 MARY THE QUEEN COLLEGE OF PAMPANGA INC.
Gapan-Olongapo Road, Guagua, Pampanga 2003

REFERENCES

Zeus Vernon B. Millan (2018), Financial Accounting & Reporting. Baguio City, Philippines. Bandollin Enterprises

Win Ballada, Susan Ballada (2019) Fundamentals of Accounting, Manila Philippines, DomDane Publisher and Made Easy Books

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