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Senior High School

Government Property

NOT FOR SALE

Fundamentals of Accountancy,
Business and Management 1
Module 7
The Accounting Cycle of a Service Business

Department of Education — Republic of the Philippines

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What I Need To Know

For the Learners

This is the introductory course in accounting, business and management
data analysis that will develop your appreciation of accounting as language of
business and an understanding of basic accounting concepts and principles
that will help you analyze business transactions.
“Is accounting important to you?” Accounting delivers financial
information to different users through financial statements. It gives business
owners the chance to analyze the overall efficiency and effectiveness of
their business operations.

Module Content
This module in Fundamentals of Accountancy, Business and Management 1 for the 21 st
century learners is designed to make learning more engaging and meaningful to ABM Senior High
School learners in the flexible and blended learning environments.
The module is aimed at citing specific examples in which accounting is used in making
business decisions. The motivation behind this effort are the examples of service businesses
wherein they provides intangible goods or services to customers. It usually generates profit by
charging for labor or other services rendered to customers.
Meaningful activities are given in the form of worksheets, assignments and online or virtual
activities which allow learners to work at their own pace. As you go along, you will know the
accounting cycle for service business.
Learning is fun! So enjoy your journey as you unfold the most interesting and worthwhile
activities in accounting.

These are the competencies included in this module:

• Describes the nature of transactions in a service business (ABM_FABM11-IVa-d-29);

• records transactions of a service business in the general journal (ABM_FABM11- IVa-d-30);

• posts transactions in the ledger (ABM_FAB M11- IVa-d-31); and

• Prepares a Trial Balance (ABM_FABM11-IVa-d-32).

What Is It
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An accounting cycle is a continuous process of accumulating, summarizing and reporting
financial information. The steps include:

Step 1 - Transactions and/or Events

Identification and measurement of external transactions and internal events. At this stage,
the documents used by the business are analyzed whether it has financial impact or effect. Recall
the rule that only financial transactions are recorded and that the amount can be measured. These
two conditions must exist in order that a particular transaction is recognized or recorded. As
defined, financial transactions are those activities that change the value of an asset, liability or an
equity

Examples of financial transactions:

• Receipt of cash from a client as advance payment to repair a computer. In this case, asset
willincrease. At the same time, the advances from client (liability) will also increase. The advances
from client is a liability because the business has the obligation to render future service to the
client.

• Payment of electric bill is a financial transaction. This will decrease the cash (asset) and
reducethe income of the business at the same time.

Examples of non-financial transactions:

•hiring and termination of employees

•recognition from the government as most outstanding business

•death of owner

Business Name & Business Address

VAT REG TIN: 000-000-000-000

SAMPLE OFFICIAL RECEIPT

Business Name & Business Address

SAMPLE CHECK VOUCHER

SAMPLE SALES INVOICE

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The information needed when recording transactions are taken from forms used to
document these transactions. In a typical service business, the following are the business
documents used:

1. Official Receipt or Cash Receipt

This document is used when a business receives money or a check. An Official Receipt or
Cash Receipt is a document that acknowledges that money or a check have been received.

2. Charge Invoice or Sales Invoice

A charge invoice is a document used when a service has been rendered, but the client will
be billed only after a certain number of days from the date of service. Often, a company will issue
a statement of account to a customer, with the charge or sales invoice attached. For example: in a
laundry business, a customer may avail of the services of the business. However, that customer
and the owner of the business had a prior agreement that all services availed by the customer will
be paid only after 30 days. In this case, a charge invoice is issued on the day the client availed of
the services.

3. Check or Cash Voucher

The check voucher is a document used when a check is issued to pay a certain supplier or
vendor. For example, in a laundry business, for the payment of monthly electricity bills, the
business may pay either in cash or check. But the company must prepare a cash or check
voucher to support this payment. This document will serve as a record of payment and, at the
same time, as proof that payment has been made by the company.

Step 2 - Preparation of Journal Entries (journalization)

Through the use of specialized journals (such as those for sales, purchases, cash receipts,
and cash disbursements) and the general journal, transactions and events are entered into the
accounting records. These are called the books of original entry.

Debits and Credits are an integral part of the journalization process. In accounting, debits or
credits are abbreviated as DR and CR respectively.
When to Debit and when to Credit: An increase in an asset account is called a debit and an
increase in a liability or equity account is called a credit. Likewise, if we decrease an asset account
we credit that account. On the other side of the equation, if we decrease a liability or equity
account we debit those accounts.

Rules on Debits and Credits

• The name of the account to be debited is always listed first. The debited account is listed on
thefirst line with the amount in the left side of the register.
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• The credited account is listed on the second line and is usually indented. The credited amount
isrecorded on the right side of the register.

• The total amount of debit should always equal the total amount of credit.

Chart of Accounts

The Chart of Accounts is a listing of all account titles used in the business to record all the
transactions. It is arranged according to the order of their appearance in the financial statements.
Refer to Table X

TABLE X. SAMPLE CHART OF ACCOUNTS

ACCOUNT ACCOUNT TITLE ACCOUNT ACCOUNT TITLE
CODE CODE

Statement of Financial Position Income Statement Account

Accounts

1000 Cash 4000 Service Revenue

1200 Account Receivable 4100 Sales

1201 Allowance for Bad 4101 Sales Return and

Debts Allowances

1300 Inventory 4102 Sales Discounts

1400 Prepaid Expenses 4150 Interest Income

1500 Supplies 5000 Cost of Sales

1600 Office Equipment 5100 Purchases

1601 Accum Deprn-Off Eqpt 5101 Purchase Returns and

Allowances

1650 Store Equipment 5102 Purchase Discounts

1651 Accum Deprn-Store 5103 Freight In

Eqpt

1680 Transportation 6100 Salaries Expense

Equipment

1681 Accum Deprn-Trans 6150 Supplies Expense

Eqpt

1750 Building 6200 Utilities Expense

1751 Accum Deprn-Building 6220 Communication expense

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1800 Land 6250 Travel Expense

1900 Intangible Assets 6300 Rental Expense

2000 Accounts Payable 6350 Fuel Expense

2100 Notes Payable 6400 Advertising Expense

2200 Accrued Expenses 6410 Delivery Expense

2201 Salaries Payable 6450 Commission Expense

2202 Utilities Payable 6500 Depreciation Expense

2300 Income Taxes Payable 6600 Taxes and Licenses

3000 Owner’s Capital 6700 Interest Expense

3100 Owner’s Withdrawal

Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his
computer repair shop on February 14, 2016,naming it Matapang Computer Repairs. Pedro knows
that business transactions should be separated from personal finances. Thus, he decided to
invest PHP200,000 in this business. He deposited the amount with Nation Bank.

Entry:
General Journal

Date Account Title and Explanation Re Debit Credit

f
2/14/16 Cash 200,000
Matapang, Capital 200,000
To record the initial investment of owner P.
Matapang
Notice that we have debited Cash, an asset account and credited Matapang, Capital, an
equity account.

February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for
the business. He issued check number 001 amounting to PHP25,000.

Entry:
General Journal

Date Account Title and Explanation Ref Debit Credit

2/15/16 Office Equipment 25,000
Cash 25,000
To record the purchase of one computer unit
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Notice that the debit to office equipment increased the asset account and the credit to cash
decreased the asset account.

February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary.

Entry: No entry. This is not a financial transaction.

February 17, 2016 – Repaired the computer of Jean and collected PHP10,000
Entry:

General Journal

Date Account Title and Explanation Ref Debit Credit

2/17/16 Cash 10,000
Service Revenue 10,000
To record receipt of cash from customer
February 18, 2016 – Repaired Mike’s computer. However, Mike will pay PHP15,000 on March 18,
2016
General Journal

Date Account Title and Explanation Ref Debit Credit

2/18/16 Accounts Receivable 15,000
Service Revenue 15,000
To record services rendered to a customer
on account
February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise amounting to
PHP5,000 on account. Pedro will pay this on March 30, 2016.
General Journal

Date Account Title and Explanation Ref Debit Credit

2/19/16 Supplies Expense 5,000
Accounts Payable 5,000
To record purchase of office supplies on
account
February 25, 2016 – Paid the salary of Juana amounting to PHP4,000
General Journal

Date Account Title and Explanation Ref Debit Credit

2/25/16 Salaries Expense 4,000
Cash 4,000
To record payment of salary of Juana
Journal Entries in a Corporate Set-up

The example above assumed that the business is a sole proprietorship. How are
transactions recorded if the owner of the business is a Corporation? Basically, the same entries
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are made, except for transactions affecting capital or equity accounts. To illustrate, let us take the
following case:

Sweeper Corporation was established to provide janitorial services to clients for a fee. The
corporation issued 5,000 shares of common stock, at PHP100 par value to shareholders. The
issue price paid by the shareholders on January 3, 2016 equal the par value. The entry to record
this transaction is:
General Journal

Date Account Title and Explanation Ref Debit Credit

1/3/16 Cash 500,000
Share Capital – Common 500,000
To record issuance of 5,000 shares at par value of
Php100

In the above example, if the issue price is PHP120 per share, what is the entry?
General Journal

Date Account Title and Explanation Ref Debit Credit

1/3/16 Cash 600,000
Share Capital – Common 500,000
Share Premium – Common 100,000

To record issuance of 5,000 shares at Php120 per share,

Php100 par value
Step 3 – Posting

The summary (in specialized journals) or individual transactions (in the general journal) are
then posted from the journals to the general ledger (and subsidiary ledgers). Nothing should ever
get posted to the ledgers without first being entered in a journal.

Recall the lesson on the general ledger. We will now post the previous transactions of
Pedro to the general ledger. For purposes of discussion, we will be using the three-column ledger.
General Ledger
Account: Account No.: 1000
Cash
Date Item R Debit Credit Balance
ef
2/14/2016 Investment of Owner 200,000 200,000

2/15/2016 Purchase of Computer 25,000 175,000

2/17/2016 Repair Income - Jean 10,000 185,000
2/25/2016 Payment of Juana salary 4,000 181,000

General Ledger
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Account: Accounts Receivable Account No.: 1200
Date Item R Debit Credit Balance
ef
2/18/2016 Repair Income - Mike 15,000 15,000

General Ledger
Account: Office Equipment Account No.: 1600
Date Item R Debit Credit Balance
ef
2/15/2016 Purchase of Computer 25,000 25,000

General Ledger
Account: Accounts Payable Account No.: 2000
Date Item R Debit Credit Balance
ef
2/19/2016 Purchase - office supplies 5,000 5,000

General Ledger
Account: Matapang Capital
Service Revenue Account No.:
Account No.: 4000
3000
Date
Date Item Re
R f Debit
Debit Credit
Credit Balance
2/14/2016 Investment of Owner ef 200,00 0 200,00 0
2/17/2016 Repair Income - Jean 10,000 10,000
2/18/2016 Repair Income - Mike 15,000 25,000
General
Ledger
Account: Supplies Expense Account No.: 6150
Date Item R Debit Credit Balance
ef
2/19/2016 Purchase - office 5,000 5,000
supplies
General Led ger
Account: Salaries Expense Account No.: 6100
Date Item R Debit Credit Balance
ef
2/2/5/16 Payment of Juana’s 4,000 4,000
salary

Step 4 - Unadjusted Trial Balance At the end of an accounting period (for example, one month
or one year) the working trial balance is prepared. This involves copying each account name and
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account balance to a worksheet (working trial balance). The resulting first two columns of the
worksheet are called the unadjusted trial balance.

In the preparation of the unadjusted trial balance, the balances in all the general ledgers at
the end of the reporting date are forwarded to the appropriate column. The unadjusted trial
balance for the transactions in our example from Step 3 is the following:
MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance
February 29, 2016
Account Title Debit Credit
Balance Sheet Accounts
Cash 181,000
Accounts Receivable 15,000
Office Equipment 25,000
Accounts Payable 5,000
Matapang, Capital 200,000

Income Statement Accounts

Service Revenue 25,000
Supplies Expense 5,000
Salaries Expense 4,000

230,000 230,000
Notice that all asset accounts are presented first, followed by liabilities, equity (or capital
account), income accounts and lastly, expenses accounts.

Review of the Accounting Equation

The basic accounting equation is what drives double-entry bookkeeping. The equation
reflects the accounts reported in the balance sheet. The basic accounting equation is as follows:

ASSETS = LIABILITIES + OWNERS' EQUITY

This is a very simple algebraic equation that reflects how the assets of an entity must be
supported by either debt or equity. As in algebra, if we add or subtract something from one side of
the equation we must add or subtract the same amount from the other side. For example, if we
were to increase cash (an asset) we might have to increase note payable (a liability account) so
that the basic accounting equation remains in balance.
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ASSETS = LIABILITIES + OWNERS' EQUITY

PHP 500 = PHP 500

Applying, the formula to our transactions in Step 3 above, the effects of these transactions
to the equation are shown below:
DATE TRANSACTIONS ASSETS LIABILITIE +
EQUIT
= S Y
2/14/201 Investment of Owner, Pedro +200,000 +200,00
6 Matapang 0
2/15/201 Purchase of computer +25,00025,000
6
2/17/201 Repair the computer of +10,000 +10,00
6 customer Jean and collected 0
the payment
2/18/201 Repair the computer of Mike on +15,000 +15,00
6 account 0
2/19/201 Purchase of office supplies on +5,000 -5,000
6 account
2/25/2016 Payment of salary of Juana -4,000 -4,000

Notice that at all times, the effects of the transaction to the right and left side of the formula
should be equal. If not, the journal entry is erroneous.

What’s More

Activity 1.

Instructions. 1. Prepare the general journal entries (ignore giving explanations after every entry). 2.
Post the following transactions to the general ledger. 3. Prepare the unadjusted trial balance as of
January 30,2016. Write your answer on the box provided. If your answer will not fit on the space
provided, you can provide your extra sheet of paper and attach it in your module.

Exercises: Mr. Laban Deyro opened his laundry business in Iloilo City on January 2, 2016. The
following transactions occurred during the month of January 2016:
DATE TRANSACTIONS
1/2/16 Invested PHP500,000 to his business. The trade name of the business was “MR.
LABANDERO”
1/3/16 Hired Allan and Allie who will manage his business
1/4/16 Collections from various customers for the day - PHP3,000
1/5/16 Purchase store supplies from Labada Store - PHP10,000
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1/7/16 Collections from various customers for the day - PHP8,000
1/8/16 MR. LABANDERO entered into an exclusive contract with Sikat Hotel where the
business will do all the laundry of the hotel.
1/9/16 Sikat Hotel availed the services of MR. LABANDERO amounting to PHP15,000.
Payment will be made on January 20, 2016.
1/10/16 Collections from various customers for the day - PHP12,000
1/12/16 Purchase a washing machine amounting to PHP50,000
1/15/16 Collections from various customers for the day - PHP20,000
1/19/16 Paid electricity bill for the month amounting to PHP18,000
1/20/16 Received payment from Sikat Hotel amounting to PHP15,000
1/21/16 Paid salaries of Allan and Allie - PHP15,000
1/22/16 Mr. Laban Deyro needed money for the hospitalization of his son. He withdrew
PHP18,000 from the business.
1/25/16 Paid airfare ticket of PHP1,500 for the travel of Mr. Deyro to Manila to negotiate a
contract with Sosyal Hotel
1/26/16 Paid taxes to the City of Iloilo, PHP4,000
1/27/16 Purchased office supplies amounting to PHP12,500
1/28/16 Collections from various customer for the day - PHP5,000
1/29/16 Sosyal Hotel availed the services of MR. LABANDERO amounting to PHP15,000
payable on Feb 25, 2016.
Your Answer here for General Journal Entries:

Note: Refer to Table X for the Charts of Accounts.

1.
General Journal

Date Account Title Ref Debit Credit

2.
General Journal

Date Account Title Ref Debit Credit

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3.
General Journal

Date Account Title Ref Debit Credit

4.
General Journal

Date Account Title Ref Debit Credit

5.
General Journal

Date Account Title Ref Debit Credit

6.
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General Journal

Date Account Title Ref Debit Credit

7.
General Journal

Date Account Title Ref Debit Credit

8.
General Journal

Date Account Title Ref Debit Credit

9.
General Journal

Date Account Title Ref Debit Credit

10.
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General Journal

Date Account Title Ref Debit Credit

11.
General Journal

Date Account Title Ref Debit Credit

12.
General Journal

Date Account Title Ref Debit Credit

13.
General Journal

Date Account Title Ref Debit Credit

14.
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General Journal

Date Account Title Ref Debit Credit

15.
General Journal

Date Account Title Ref Debit Credit

16.
General Journal

Date Account Title Ref Debit Credit

17.
General Journal

Date Account Title Ref Debit Credit

18.
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General Journal

Date Account Title Ref Debit Credit

19.
General Journal

Date Account Title Ref Debit Credit

20.
General Journal

Date Account Title Ref Debit Credit

Your answer here for General Ledger Posting:

General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

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General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

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General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

General Ledger

Account: Account No.:

Date Item Ref Debit Credit Balance

Your answer for Unadjusted Trial Balance as of January

30,2016.
MR. LABANDERO LAUNDRY BUSINESS

Unadjusted Trial Balance

January 30,2016

Account Title Debit Credit

Answer Key
Activity 1.
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General Journal

Date Account Title Ref Debit Credit

1/2/2016 Cash 500,000.00

Laban Deyro, Capital 500,000.00

1/3/2016 No entry

1/4/2016 Cash 3,000.00

Service Revenue 3,000.00

1/5/16 Office Supplies 10,000.00

Cash 10,000.00

1/7/16 Cash 8,000.00

Service Revenue 8,000.00

1/8/16 No entry

1/9/16 Account Payable 15,000.00

Service Revenue 15,000.00

1/10/16 Cash 12,000.00

Service Revenue 12,000.00

1/12/16 Office Equipment 50,000.00

Cash 50,000.00

1/15/16 Cash 20,000.00

Service Revenue 20,000.00

1/19/16 Utilities Expense 18,000.00

Cash 18,000.00

1/20/16 Cash 15,000.00

Account Payable 15,000.00

1/21/16 Salaries expense 15,000.00

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Cash 15,000.00

1/22/16 Laban Deyro, Withdrawal 18,000.00

Cash 18,000.00

1/25/16 Travel expense 1,500.00

Cash 1,500.00

1/26/16 Taxes and Licenses 4,000.00

Cash 4,000.00

1/28/16 Cash 5,000.00

Service Revenue 5,000.00

1/29/16 Account Payable 15,000.00

Service Revenue 15,000.00

General Ledger

Account: Account No.:

Cash
Date Item Ref Debit Credit Balance

1/2/16 Investment of Owner 500,000.00 500,000.00

1/4/16 Service Revenue 3,000.00 503,000.00

1/5/16 Purchase of Store Supplies 10,000.00 493,000.00

1/7/16 Service Revenue 8,000.00 501,000.00

1/10/16 Service Revenue 12,000.00 513,000.00

1/12/16 Purchase of washing 50,000.00 463,000.00

machine

1/15/16 Service Revenue 20,000.00 483,000.00

1/19/16 Payment for Electric Bill 18,000.00 465,000.00

1/20/16 Receive payment from Sikat 15,000.00 480,000.00

Hotel

1/21/16 Salaries of Allan and Allie 15,000.00 465,000.00

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1/22/16 Owner’s, Withdrawal 18,000.00 447,000.00

1/25/16 Paid Airfare Ticket 1,500.00 445,500.00

1/26/16 Paid Taxes on Iloilo City 4,000.00 441,500.00

1/28/16 Service Revenue 5,000.00 446,500.00

General Ledger

Account: Labandero Capital Account No.:

Date Item Ref Debit Credit Balance

1/2/16 Investment of Owner 500,000.00 500,000.00

General Ledger

Account: Service Revenue Account No.:

Date Item Ref Debit Credit Balance

1/4/16 Collection from customer 3,000.00 3,000.00

1/7/16 Collection from customer 8,000.00 11,000.00

1/9/16 Payment from Sikat Hotel 15,000.00 26,000.00

1/10/16 Collection from customer 12,000.00 38,000.00

1/15/16 Collection from customer 20,000.00 58,000.00

1/28/16 Collection from customer 5,000.00 63,000.00

1/29/16 Collection from customer 15,000.00 78,000.00

General Ledger

Account: Account Payable Account No.:

Date Item Ref Debit Credit Balance

1/9/16 Sikat Hotel- Payment on 15,000.00 15,000.00

Jan.20,2016

1/20/16 Sikat Hotel- Payment 15,000.00 0

1/29/16 Sosyal Hotel-Payment on 15,000.00 15,000.00

Feb. 25,2016.

General Ledger
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Office Equipment
Account: Salaries Expense Account No.:

Date
Date Item
Item General
RefLedgerDebit
Debit Credit
Credit Balance
Balance
Account:
1/12/16 Supplies
1/21/16 Purchaseof
Payment Washing machine
Allan’s and 50,000.00
15,000.00 Account No.: 50,000.00
15,000.00
Date Allie’s salaryItem RefLedgerDebit Credit Balance
General
1/5/16
Account: UtilitiesPurchase
Expense of Store Supplies 10,000.00 Account No.: 10,000.00

Date Item Ref Debit Credit Balance

1/19/16 Payment for Electric bill 18,000.00 18,000.00

General Ledger

General Ledger

Account: Laban Deyro, withdrawal Account No.:

Date Item Ref Debit Credit Balance

1/12/16 Cash Withdrawal of Owner’s 18,000.00 18,000.00

General Ledger

Account: Travel Expense Account No.:

Date Item Ref Debit Credit Balance

1/25/16 Payment for Airfare Ticket 1,500.00 1,500.00

General Ledger

Account: Taxes and Licenses Account No.:

Date Item Ref Debit Credit Balance

1/26/16 Payment for taxes in Iloilo 4,000.00 4,000.00

City
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MR. LABANDERO LAUNDRY BUSINESS

Unadjusted Trial Balance

January 30,2016
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Account Title Debit Credit

Balance Sheet Accounts

Cash 446,500.00

Office Equipment 50,000.00

Accounts Payable 15,000.00

Laban Deyro, Capital 500,000.00

Laban Deyro, Withdrawal 18,000.00

Income Statement Accounts

Service Revenue 66,000.00

Supplies Expense 10,000.00

Salaries Expense 15,000.00

Utilities Expense 18,000.00

Travel Expense 1,500.00

Taxes and Licenses 4,000.00

578,000.00 578,000.00