Accounting Cycle for Service Company

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Question

ABC Company is Service Company. Below are accounting transactions of ABC Company for closing monthly financial statements.




Please read them carefully.

Date of November	Financial Transactions	Amount ($)
1	ABC commenced business with cash…………………	100,000
4	ABC bought furniture paid by cash……………….	36,000
6	ABC provides service on credit to CBB, Customer………	10,000
7	ABC Deposited Cash into bank………………………….	5,000
9	ABC provides service to customer for cash……………	2,000
12	ABC deposited cash into bank…………………………	10,000
14	ABC paid advertisement by cheque…………………	7,800
16	ABC received cash from CBB, Customer…………..	7,000
	Discount allowed to CBB, Customer……………….	3,000
17	ABC received interest through bank…………….	10
18	Cash taken by owners for own use………………..	12,000
30	ABC paid salary expenses as cash for employees….	20,000
30	ABC paid for rent expense………………………………	11,000

 

We assume that fixed asset (furniture) bought at1 November has useful life 3 years.

Utilities expenses are estimated $500 even if invoice will be issued next month (December).

Required:

1. Prepare General Journal
2. Prepare General Ledger
3. Prepare Trial Balance
4. Make Adjusting Entry
5. Prepare Adjusted Trial Balance
6. Prepare income statement
7. Statement of Change in Equity
8. Prepare balance sheet
9. Make closing entry
10. Prepare Post (After) Closing Trial Balance

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Solution

1.Prepare General Journal

Below is general journal for transactions above.

Date	Explanation		Debit			Credit
1-Nov	Cash on hand		100,000
		Capital					100,000
	Capital investment
1-Nov	Fixed asset, Furniture		36,000
		Cash on hand					36,000
	Buy fixed asset
6-Nov	Account Receivable		10,000
		Service Revenue					10,000
	Provide service on credit
7-Nov	Cash at Bank		5,000
		Cash on hand					5,000
	Deposit cash at bank
9-Nov	Cash on hand		2,000
		Service Revenue					2,000
	Provide service for cash
12-Nov	Cash at Bank		10,000
		Cash on hand					10,000
	Deposit cash at bank
14-Nov	Advertising Expense		7,800
		Cash at bank					7,800
	Advertising for Company
16-Nov	Cash on hand			7,000
	Discount Allowed			3,000
		Account Receivable					10,000
	Received cash & Discount for			CBB
17-Nov	Cash at Bank			10
		Interest Revenue					10
	Received interest from bank
18-Nov	Drawing			12,000
		Cash on hand					12,000
	Owner withdraw for personal			use
30-Nov	Salary expense			20,000
		Cash on hand					20,000
	Salary for November
30-Nov	Rental Expense		11,000
		Cash on hand					11,000

2.Prepare General Ledger

Below is general ledger after we prepared general journal above.

3.Trial Balance 

Below is trial balance after preparing general ledger, so data and information we toke from general ledger.

ABC Company
Adjusted Trial Balance
30-Nov-15
	Debit	Credit
Cash on hand	15,000
Capital		100,000
Fixed asset, Furniture	36,000
Service Revenue		12,000
Cash at Bank	7,210
Advertising Expense	7,800
Discount Allowed	3,000
Interest Revenue		10
Drawing	12,000
Salary expense	20,000
Rental Expense	11,000
Total	112,010	112,010

4. Adjusting Entry 

Below is adjusting entry, so after we prepared trial balance, next step we will prepare adjusting entries for depreciation expense, accrual expense etc.

1. Depreciation Expense on Fixed asset
	Furniture	36,000
	Useful Life ( 3 year=36 months)	36
	Depreciation Expense	1,000	36,000/36
Dr. Depreciation Expense		1,000
	Cr. Accumulated Depreciation		1,000
2. Accrued Expense
Dr. Utilities expenses		500
	Cr. Accrued expense, utilities		500

5. Adjusted Trial Balance 

Below is adjusted trial balance after we prepared adjusting entry, we will take data and information from Trial Balance and adjusting entry to prepare adjusted trial balance.

ABC Company
Adjusted Trial Balance
30-Nov-15
	Debit	Credit
Cash on hand	15,000
Capital		100,000
Fixed asset, Furniture	36,000
Service Revenue		12,000
Cash at Bank	7,210
Advertising Expense	7,800
Discount Allowed	3,000
Interest Revenue		10
Drawing	12,000
Salary expense	20,000
Rental Expense	11,000
Depreciation Expense	1,000
Accumulated Depreciation		1,000
Utilities expenses	500
Accrued expense, utilities		500
Total	113,510	113,510

6. Income Statement 

This is income statement that we will prepare after preparing adjusted trial balance, so we cannot prepare financial statements without adjusted trial balance.

		ABC Company
		Income Statement
		30-Nov-15
Revenue
	Service Revenue	12,000
	Interest Revenue	10
Total revenue			12,010
Expense :
	Advertising Expense	7,800
	Discount Allowed	3,000
	Salary expense	20,000
	Rental Expense	11,000
	Depreciation Expense	1,000
	Utilities expenses	500
Total Expense			43,300
Net profit (loss)			(31,290)

7. Statement of Change in Equity

This is statement of Change in Equity that we will prepare after preparing adjusted trial balance and income statement, so we cannot prepare Statement of Change in Equity without adjusted trial balance and Income Statement.

		ABC Company
		Statement of Change in Capital
		30-Nov-15
Beginning Capital			100,000
Drawing			(12,000)
Net Loss			(31,290)
Ending Capital			56,710

8. Balance Sheet

This is balance sheet ( statement of financial position) that we will prepare after preparing adjusted trial balance, income statement and statement of change in equity, so we cannot prepare balance sheet without adjusted trial balance and Income Statement.

		ABC Company
		Balance Sheet
		30-Nov-15
Non Current Asset
	Furniture	36,000
	Accumulated depreciation	(1,000)
			35,000
Current Asset
	Cash on Hand	15,000
	Cash at Bank	7,210
			22,210
Total Asset			57,210
Capital			56,710
Liability
	Accrued Expense		500
Total Capital and Liability			57,210

9. Closing Entry

below is closing entry that we will prepare after we prepared financial statements ( income statement, balance sheet, statement of change in equity, balance sheet etc.), so we will close temporary accounts such as income , expense etc. We will close account types such as revenues, expenses, profit/loss (income summary) and drawing.

Revenue:
	Dr. service revenue		12,000
	Cr. Income Summary			12,000
	Dr. Interest revenue		10
	Cr. Income Summary			10
Expenses:
	Dr. Income Summary		7,800
	Cr. Advertising Expense			7,800
	Dr. Income summary		3,000
	Cr. Discount allowed			3,000
	Dr. Income summary		20,000
	Cr. Salary expense			20,000
	Dr. Income Summary		11,000
	Cr. Rental Expense			11,000
	Dr. Income summary		1,000
	Cr. Depreciation Expense			1,000
	Dr. Income summary		500
	Cr. Utilities Expense			500
Net Loss/Income Summary
	Dr. Capital		31,290
	Cr. Income summary			31,290
Drawing
	Dr. Capital		12,000
	Cr. Drawing			12,000

10. Post (After) Closing Trial Balance

Below is closing trial balance that we will prepare after closing entry and financial statements , so we will use these accounts ( permanent accounts) for next accounting period. In sort, closing Trial Balance token from Balance Sheet Accounts.

	ABC Company
	Post (After) Closing Trial Balance
	30-Nov-15
	Debit	Credit
Cash on hand	15,000
Capital		56,710
Fixed asset, Furniture	36,000
Cash at Bank	7,210
Accumulated Depreciation		1,000
Accrued expense, utilities		500
Total	58,210	58,210

We keep only account types such as assets, liabilities and capital for using next period.