Service Business: Trial Balance Preparation

Key Concepts

• This Self-Learning Kit (SLK) focuses on posting and preparing the unadjusted trial balance for service businesses.

Learning Objectives

• Identify transactions specific to service businesses.
• Correctly post transactions in ledgers and prepare a trial balance.
• Understand the significance of rules in posting business transactions and preparing unadjusted trial balances for service businesses.

Learning Competencies

• Post transactions to the ledger using ABM_FABM11- IVa-d -31.
• Prepare a trial balance using ABM_FABM11- IVa-d -32.

Accounting Cycle Review

• Emphasis is placed on the first four steps, including transactions, journal entries, posting, and the trial balance.

Service Businesses

• A service business is a commercial enterprise, that provides expert work by individuals or teams.
• These businesses offer intangible products such as accounting, banking, consulting, cleaning, landscaping, education, insurance, treatment, and transportation.
• Common examples: barbershops, doctors' offices, TV repair shops, auto repair shops, laundry shops, and dressmakers.

Posting Defined

• Posting involves transferring entries from the journal to the accounts in the ledger.
• This is considered the classifying phase of accounting.
• The accounting ledger is a book containing all company accounts with debits, credits, and balances.
• Journals are "Books of Original Entry," while ledgers are "Books of Final Entry."

Posting Process

• Debits are posted to the left side of the ledger account, while credits are posted to the right.
• Posting transfers amounts from the journal to respective ledger accounts.

Example Transactions

Transaction #1: Investment

• December 1, 2019: Donald Gray invested 10,000 to start Gray Electronic Repair Services.
• Journal entry: increases cash and establishes Mr. Gray's capital account.

Transaction #2: Expenses

• December 5: Paid 370 for registration and licensing fees.
• Journal entry: debits expense and credits cash to record payment.

Transaction #3: Acquire Assets

• December 6: Acquired tables, chairs, and shelves for 3,000, paying with cash.
• Journal entry: increase Furniture and Fixtures (asset) and decrease Cash (asset).

Transaction #4: Acquire Equipment

• December 7: Acquired service equipment for 16,000, with a 50% down payment and the balance due in 60 days.
• Journal entry: debits Service Equipment for 16,000, credits Cash for 8,000, and credits Accounts Payable for 8,000.

Transaction #5: Purchase Supplies

• December 7: Purchased service supplies on account for 1,500.
• Journal entry: debit to increase supplies and credit to accounts payable (liability).

Transaction #6: Receive Cash for Services

• December 9: Received 1,900 for services rendered.
• Journal entry: debit the cash account and credit the income account.

Transaction #7:Render Services

• December 12: Rendered services on account for 4,250, due in 10 days on accrual basis.
• Journal entry: increase income and increase receivable accounts.

Transaction #8: Additional Investment

• December 14: Mr. Gray invested an additional 3,200 into the business, increasing cash and the owner's capital account.

Transaction #9: Rendering Services

• December 15: Rendered services to a corporation, with 3,400 due in 30 days.
• Journal entry: Debit Accounts Receivable and Credit Service Revenue.

Transaction #10: Collection

• December 22: Collected payment from a customer - transaction #7.
• Journal entry: increase cash by debiting it and decrease accounts receivable by crediting it

Transaction #11: Liability Payment

• December 23: Paid 500 of the 1,500 payable from transaction #5 by issuing a check.
• Journal entry: decrease Accounts Payable by debiting it and decrease Cash by crediting it.

Transaction #12: Withdrawal

• December 25: Mr. Gray withdrew 7,000 cash for an emergency.
• Journal entry: decreasing Cash and debiting the withdrawal account, "Mr. Gray, Drawings".

Transaction #13: Rent Expense

• December 29: Paid rent for December, 1,500.
• Journal entry: Debit rent expense, credit cash.

Transaction #14: Bank Loans

• December 30: Acquired a 12,000 short-term bank loan with 10% interest payable in 1 year.
• Journal entry: debit Cash while crediting the liability account "Loans Payable".

Transaction #15: Paying Salaries

• December 31: Paid employee salaries, 3,500.
• Journal entry: debit expense and credit cash.

Types of Ledgers

• General ledgers contain broad accounts like Cash, Accounts Receivable, and Supplies.
• Subsidiary ledgers contain accounts, within other accounts (specific accounts that make up a broad account), such as Accounts Receivable for Customer A, Customer B, etc.

Deriving Balances

• To derive balances, understand how much cash is available at the end of the month.
• Find accounts receivable and accounts payable via the ledger.

Trial Balance Defined

• A trial balance is a bookkeeping worksheet where all ledger balances are compiled into equal debit/credit column totals.
• It is prepared periodically, typically at the end of a reporting period, to ensure mathematical correctness.
• The unadjusted trial balance lists general ledger account balances before any adjusting entries.
• It serves as a starting point for analyzing and adjusting account balances.

Preparing an Unadjusted Trial Balance

• Copy ending balances from the general ledger ( assets, liabilities, and owner's equity).
• Consider the normal balance for each account (debit or credit).

Example:

• If cash has an ending balance of 7,480.00 in the ledger, reflect this amount on the debit column of the trial balance, because, typically cash has a normal debit balance
• With service revenue account, it's the opposite: It has a 9,550.00, so reflect in the credit section of the trial balance, because service capital increases capital and Normal Balance for capital is credit.
• These considerations apply to all accounts