Financial Statements of a service business.

Difference between a trading and service business

A trading business makes profit from buying and selling goods.

Its income statement has a trading section. Its purpose is to determine_______ profit,
which measures how successful it has been in its ___________ function (before
considering all other expenses in running the business.)
This is the difference between _________ and ______________.
Net Profit is ______________ add ____________ less____________.
A service business makes a profit from providing services, for example repairs, delivery,
cleaning, car rental, advertising and hair dressing.
Its income statement will not have a trading section. They do not deal in goods and hence
do not buy inventory for resale at a profit.
Some services require supplies to be used in the provision of services, for
example_____________________________________________________.
Inventory of supplies are adjusted to determine supplies used.
Supplies consumed in providing services are an expense. They must not be confused with
cost of goods sold
Example.
A cleaning business provided the following information:
Cleaning supplies purchased during the year $200.
Opening Inventory of supplies $60
Closing inventory of supplies $40.
a. Show the supplies expense account for the yea, after making adjustments.
b. Show the effect of this adjustment on the income statement and balance sheet at
the end of the accounting period?

Format of an income statement for a service business

Johnson Decorating Service

Income Statement as 31 December 2008
Revenue
Service Fees xx
Interest revenue xx
Commission revenue xx
xx
Less
Expenses
Rent xx
Wages xx
Depreciation xx
Decorating supplies xx
Insurance xx
xx
Net profit xx

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 Review Questions: Balance day adjustments

1. After graduating from medical school in 2007, Dr. R. Rogers established his family
practice. A summarized income statement for the current period is presented below:

DR. R. ROGERS, FAMILY MEDICAL PRACTICE

INCOME STATEMENT
For the year ended 31 December 2009
$
Fees revenue 190 000
Less: Expenses 115 000
Net Profit 75 000

Additional data:
1. Services performed in 2008 for $6 000 were collected in 2009 and are included in the
2009 revenue figure.
2. Services performed in 2009 for $8 000 are expected to be collected in 2010 and were
not included in 2009 revenues.
3. Depreciation expense of $16 000 is not included in the expenses.
4. Accrued salaries at the end of 2008 and 2009 were $4 000 and $5 000, respectively.
The salaries had been recorded when cash payment was made.

Required
a. Using the above information, prepare a summarized income statement on the
accrual basis.
b. Briefly explain why the statement you have prepared is considered a better
measure of net profit.
c. Dr. Rogers withdrew $1 000 per week as a salary to cover his personal living
expenses. The drawings were not included with the expenses. Is this correct
accounting procedure? Explain.

2. Calculate the amounts indicated by the question marks.

A B C D
Opening Prepaid Rent $450 $300 $150 $250
Payment of rent during the year 550 ? 350 ?
Total amount to account for 1000 750 500 ?
Ending Prepaid Rent ? 250 100 400
Rent Expense 800 1000 ? 150

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3. Summarised financial statements for Ace Car Rental before adjusting entries were
made are shown in the first column of the schedule presented below. The following
items were not reflected in the statements:
1. Wages of employees not paid at year end, $620.
2. Depreciation on vehicles not recorded, $8 000.
3. Rental revenue not collected or recorded $720.
4. The company requires first day rental in advance as a deposit for making a
reservation. The deposit is deducted from the total rental charges or is
forfeited. During the last week of December, deposits earned, not
recorded as revenue, were $480

ACE CAR RENTAL

Financial Statements for the year ending December
Unadjusted Adjustments Adjusted
balances balances
Income Statement
Rental revenue $142 000

Expenses:
Depreciation -
Insurance 26 000
Wages 78 000
General expenses 12 000
Net profit 26 000

Balance Sheet

Cash at bank 26 000

Accounts Receivable 6 000
Vehicles 68 000
Accumulated Depreciation (32 000)
68 000
Wages payable -
Unearned rental revenue 4 000
Accounts Payable 28 000
Jim Dalton, Capital 36 000
68 000
Statement of owner’s equity
Opening Capital 50 000
Add: Net profit 26 000
Less: Drawings (40 000)
Ending Capital 36 000
Required:
Determine the effect of the adjustments on the financial statements by completing the
schedule. Did net profit decrease or decrease? By how much?
What was the effect on total assets? total liabilities? total equity?