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Accounting for Service Business Transactions

This document provides an overview of Module 3 which covers accounting for service concerns. [1] It defines key terms like transactions, accounting elements/values, and classifications of assets and liabilities. [2] The module also explains how to use the accounting equation to illustrate the effects of business transactions and the rules for debit and credit entries. [3] At the end, exercises are provided to help students apply the concepts through analyzing sample business transactions.

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ABM-5 Lance Angelo Suganob
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22 views13 pages

Accounting for Service Business Transactions

This document provides an overview of Module 3 which covers accounting for service concerns. [1] It defines key terms like transactions, accounting elements/values, and classifications of assets and liabilities. [2] The module also explains how to use the accounting equation to illustrate the effects of business transactions and the rules for debit and credit entries. [3] At the end, exercises are provided to help students apply the concepts through analyzing sample business transactions.

Uploaded by

ABM-5 Lance Angelo Suganob
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

MODULE 3

ACCOUNTING FOR SERVICE CONCERN

I. INTRODUCTION

A. OVERVIEW
Entity Principle, as mentioned in the previous module considers the
business as distinct and separate from its owner/s. Therefore, our concern in
accounting is the business, and not of the owner. In this module, we are going to
take up business transactions and its two-fold effects. Also discussed in this
module is the accounting values or elements: assets, liabilities, and capital which
are briefly defined in the previous module. In this module, they are defined,
classified, and examples of each classification are given. The module also shows
the effects of business transactions using the accounting equation. Finally, the
two-fold effects of business, that is, the debit and the credit will be discussed and
illustrated.

B. LEARNING OUTCOMES

At the end of the lesson, you should be able to:

1. Define business transactions


2. Identify the three accounting elements or values
3. Give examples of the three accounting elements or values
4. Discuss the classifications of assets and liabilities
5. Discuss the effects of business transactions using accounting equation
6. Illustrate each accounting equation by giving example
7. State the rules on debit and credit
8. Illustrate debit and credit by giving sample transactions

C. REQUIREMENTS

1|Page
After reading and studying the lessons, please answer the
questions/exercises at the end of the lesson.

D. PRE-ASSESSMENT

Problem-solving/Quiz

II. CONTENTS

A. LESSON

1. BUSINESS TRANSACTIONS

The data recorded in the accounting books are called transactions. Transactions
are the economic activities of the firm. Activities that involve one enterprise and
another are called external transactions. Activities within the enterprise are called
internal transactions. When there is a transaction there is an exchange of values;
that is, there is always a value received and a value parted with. These values
received and parted with may either be money, property, or services.
Transactions also affect the accounting elements or values.

2|Page
2. THREE ACCOUNTING ELEMENTS OR VALUES

3|Page
4|Page
3. ACCOUNTING EQUATION

5|Page
6|Page
7|Page
4. DEBIT AND CREDIT

8|Page
9|Page
B. ADDITIONAL READINGS

1. Fundamentals of Accounting by Amelia M. Arganda


2. Conceptual Framework and Accounting Standards by Zeus Millan
3. Financial Accounting and Reporting For Services and Merchandisers by
Zenaida Manuel
4. Fundamentals of Accountancy, Business and Management by Rodiel C.
Ferrer

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C. EXERCISES

Direction: Answer the following exercises using yellow papers, then submit
your answers on our next face to face meeting.

1. Write down at least five (5) daily transactions of your family and give the

value received and value parted with. Use the form below:

TRANSACTION VALUE RECEIVED VALUE PARTED WITH

A.

B.

C.

D.

E.

2. Think of a service business, and then write the transactions of the


business you think of to prove the given equations below. Give your
analysis after each equation.

a. Assets = Liabilities + Capital


b. Increase in Assets = Increase in Capital
c. Increase in Assets = Increase in Capital
d. Decrease in Assets = Decrease in
Liabilities
e. Decrease in Assets = Decrease in Capital
f. Increase in one form of asset = Decrease
in another form of asset
g. Decrease in one form of liability =

Increase in another form of liability

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3. The following are the transactions of Mang Mando owner of
”Mando’s Motor Repair Shop”. Using the form below, state the
accounts and the amounts to be debited and credited for each
transaction.

3.1. Mang Mando invested Php450,000 cash to start his business


3.2. Purchased from MBB Motors repair equipment for Php80,000 on
Credit.
3.3. Purchased repair supplies for Php25,500 cash
3.4. Completed repair work to Dencio on account Php55,000 3.5.
Completed repair work to a client and collected Php22,000
3.6. Paid one-half of the account due to MBB Motors.
3.7. Received from Dencio Php15,000 as partial payment of his

account
3.8. Paid for gas and oil used for the service car Php2000
3.9. Paid for the following: rent of the shop space Php13,000;

utilities Php7,200

3.10. Salary of the helper Php8000


3.11. Received from Dencio the remaining balance of his account
DEBIT CREDIT

ACCOUNT AMOUNT ACCOUNT AMOUNT

1.

2.

3.

4.

5.

6.

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7.

8.

9.

10.

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Common questions

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The two primary types of transactions in accounting are external and internal transactions. External transactions involve interactions between the enterprise and other entities, such as buying goods or services. Internal transactions occur within the enterprise, such as depreciation of equipment. They differ essentially by whether they involve parties outside of the business or activities conducted within the business .

An example of such a transaction is selling inventory for cash. Here, cash (asset) increases while inventory (another asset) decreases. This kind of transaction is typical in businesses where items are sold regularly for income .

Operational business transactions impact a business’s equity through retained earnings, which are affected by revenues, expenses, and dividends. For example, earned revenues increase equity, while incurred expenses decrease it. The balance of these affects the overall retained earnings, impacting the owner’s equity at the end of the financial period .

A decrease in liabilities can lead to an equivalent decrease in assets, such as when a loan is paid off using cash, reducing both the liability (loan) and an asset (cash). Alternatively, it might result in an increase in equity if paid off from retained earnings, but this analysis is more complex as it integrates aspects of retained profits or additional capital contributed .

Internal transactions, such as depreciating equipment, impact a business economically by adjusting asset values and affecting net income. Depreciation expense is recognized as an operational cost, which reduces net income and consequently impacts retained earnings and the overall equity in the business. This also aligns asset book values with actual utility over time .

The entity principle in accounting views a business as distinct and separate from its owner(s). This principle ensures that the business's financial transactions are recorded independently of the personal financial activities of the owner(s). This affects the treatment of transactions by ensuring that only the transactions related to the business are recorded in the business's accounting records, irrespective of any personal financial activities of the owner .

The fundamental accounting equation is: Assets = Liabilities + Capital. It represents the relationship between a company’s resources (assets) and the claims on those resources by creditors (liabilities) and the owners (capital). This equation is significant as it provides a clear framework for recording and analyzing business transactions, ensuring that each entry is balanced to maintain the integrity of financial statements .

Increases in one form of asset typically result in a decrease in another form of asset or an increase in liabilities or equity. For example, purchasing equipment with cash increases equipment (asset) while decreasing cash (another asset). Alternatively, taking a loan to increase cash increases liabilities (the loan) which balances the increase in assets (cash).

Debits and credits are the fundamental tools of double-entry bookkeeping. A debit entry will increase asset accounts or decrease liability and equity accounts, while a credit entry will do the opposite. To balance the accounting equation, each transaction must be recorded with equal debits and credits, ensuring that the total amount debited equals the total amount credited in the financial records .

Classifications of assets and liabilities help in organizing financial information into current and non-current categories, facilitating better assessment and management of a company’s financial health. Common examples of assets include cash, accounts receivable, equipment, and vehicles. Liabilities often include accounts payable, loans, and mortgages .

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