Financial Accounting Cycle

Financial accounting
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[FINANCIAL ACCOUNTING CYCLE]
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Financial Accounting Cycle

The Accounting Cycle is a series of steps which are repeated every reporting period. The
process starts with making accounting entries for each transaction and goes through closing
the books.
First. Accounting Cycle Steps during the Accounting Period
These accounting cycle steps occur during the accounting period, as each transaction
occurs:
1st. Identify the transaction through an original source document (such as an invoice,
receipt , cancelled check, time card, deposit slip, purchase order) which provides:
o date
o amount
o description (account or business purpose)
o name and address of other party (if practical)
2nd.Analyze the transaction determine which accounts are affected, how (increase or
decrease), and how much
3rd. Make Journal entries record the transaction in the journal as both a debit and a
credit In a double entry accounting system, a Debit is any entry recorded on the left
and a Credit an entry recorded on the right.
o journals are kept in chronological order
o journals may include sales journal, purchases journal, cash receipts journal,
cash payments journal, and the general journal
Debits and credits do not mean a decrease or increase. Debits and Credits are recorded as
positive numbers. Each account in a company's general ledger (as identified in the chart of
accounts) has two columns one for debits and one for credits. The type of account and
which column the entry is posted in determines if it is a decrease or an increase.
The double entry requires each transaction to affect at least two entries, creating a balance
within the system. Thus if one account is debited then another must be credited, allowing
for a total of all debits and credits to be equal.
Balance Sheet Account quick reference:
Account Type
Debits
The type of account determines whether a debit or a On

credit is a loss or gain.
Left
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Credits
the On the Right
Assets (cash)
gain +
loss -
Liabilities (accounts payable)
loss -
gain +
Owner's Equity (retained earnings)
loss -
gain +
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Income Statement Account quick reference

Revenue Expenses = Income
Account Type
Debits
Credits
The type of account determines whether a debit or a credit is On the Left On

a loss or gain.
Right
Revenue
loss -
gain +
Expenses
gain +
loss -
Income
loss -
gain +
the
4th. Post to ledger transfer the journal entries to ledger accounts

o ledger is kept by account
o ledger accounts may be T-account form or include balances
o (Learn more about the Chart of Accounts.)
The general ledger is where all accounting transactions are posted in a double entry system
using debits (on the left) and credits (on the right) for each transaction. An additional
column to the far right can keep a running total of activity in the account, similar to your
check book.
The debit and credit entries impact at least two ledger accounts and it is usual to capture
enough information in each leg of the entry to be able to identify the other one. To extend
the comparison to your check book, if you also had a register for the types of income and
expenses you receive and pay, you could set up a general ledger for yourself.
The general ledger provides data for the Balance Sheet and either the Single-Step Income
Statement or the Multi-Step Income Statement (depending on which one the company
prepares.) The ledger can be electronic or physical depending on whether you are using
computer software or a manual system. Most companies use a computerized version of the
general ledger, allowing for greater ease of entry and reporting.
All accounts in the chart of accounts are grouped in one of five categories: Assets, Liabilities,
Owner's Equity, Revenue, and Expenses. The general ledger is organized according to the
chart of accounts, with a separate register, file, page, or card for each account.
The accounts are in the shape of a T and thus are often referred to as T-accounts. In this
step we take all the debits and credits (journals) relating to one account lets say bank
and draw up an account for bank that shows all the transactions relating to it.
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Second.
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Accounting Cycle: Steps at the end of the accounting period
These accounting cycle steps occur at the end of the accounting period:
1st.Trial Balance this is a calculation to verify the sum of the debits equals the sum of
the credits. If they dont balance, you have to fix the unbalanced trial balance before
you go on to the rest of the accounting cycle. (If they do balance you could still have
a problem, but at least it balances!)
Preparing the Trial Balance
Preparing the trial balance is the process of totalling the debits and credits in your chart of
accounts, then making sure that the sum of all debits equals the sum of all credits that
the two amounts balance. The trial balance is a vital step in the accounting cycle, being the
first step in the "end of accounting period" process.
Steps to Prepare the Trial Balance
Here are the steps you will undertake to prepare the trial balance:
For each ledger account Cash, Accounts Payable, etc. total your credits and debits.
o If the credit total is larger, subtract the debit total from the credit total to get your
ledger account total which goes in the credit column of the trial balance
o If the debit total is larger, subtract the credit total from the debit total to get your
ledger account total which goes in the debit column of the trial balance
o Put the ledger account total in the credit or debit column of your trial balance (as
identified above).
When you have debit or credit totals for each ledger account, add all of your credit totals
to get a credit grand total.
Add all of your debit totals to get a debit grand total. This is your trial balance.
2nd.
Adjusting entries prepare and post accrued and deferred items to journals
and ledger T-accounts
3rd.
Adjusted trial balance make sure the debits still equal the credits after
making the period end adjustments
Adjusting Entries are journal entries that are made at the end of the accounting period, to
adjust expenses and revenues to the accounting period where they actually occurred.
Generally speaking, they are adjustments based on reality, not on a source document. This
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is in sharp contrast to entries during the accounting period (such as utility bills or fees for
services rendered) that depend on source documents. Preparing adjusting entries is a key
step in the ongoing accounting cycle, coming right after youve completed preparing a trial
balance. There are five basic types of adjusting entries:
Accrued revenues (also called accrued assets) are revenues already earned but not
yet paid or recorded.
Unearned revenues (or deferred revenues) are revenues received in cash and
recorded as liabilities prior to being earned.
Accrued expenses (also called accrued liabilities) are expenses already incurred but
not yet paid or recorded.
Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as
assets prior to being used.
Other adjusting entries include depreciation of fixed assets, allowances for bad
debts, and inventory adjustments.
4th.
Financial Statements prepare income statement, balance sheet, statement
of retained earnings, and statement of cash flows (this can occur at other points in
time with appropriate adjustments)
5th.
Closing entries prepare and post closing entries to transfer the balances
from temporary accounts (such as the revenue and expenses from the income
statement to owners equity on the balance sheet).
6th.
After-Closing trial balance final trial balance after the closing entries to
make sure debits still equal credits.
The following diagram present accounting cycle:
Transactions
(1)
Post Closing
Trial Balance (10)
Closing (9)
(Nominal Accounts)
Financial Statements
Preparation (8)
Income Statement
Balance Sheet
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Analyze and
Classify (2)
Journalize (3)
General Journal
Posting (4)
General Ledger
Adjusted Trail
Balance (7)
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Trial Balance
Preparation (5)
Adjusting Entries (6)
Accruals
Prepayments
Estimated items
The accounting cycle can be summarized and depicted diagrammatically below:
The Accounting Equation

To understand accounting information, we need to know how an accounting system
captures relevant data about transactions, and then classifies records, and reports data.
Accounting Equation
The accounting system reflects two basic aspects of a company: what it owns and what it
owes. Assets are resources with future benefits that are owned or controlled by a company.
Examples are cash, supplies, equipment, and land. The claims on a companys assetswhat
it owesare separated into owner and non-owner claims. Liabilities are what a company
owes its non-owners (creditors) in future payments, products, or services. Equity (also called
owners equity or capital) refers to the claims of its owner(s). Together, liabilities and equity
are the source of funds to acquire assets. The relation of assets, liabilities, and equity is
reflected in the following accounting equation:
Assets = Liabilities + Equity
Liabilities are usually shown before equity in this equation because creditors claims must be
paid before the claims of owners. (The terms in this equation can be rearranged; for
example, Assets - Liabilities = Equity.) The accounting equation applies to all transactions
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and events, to all companies and forms of organization, and to all points in time. For
example, Best Buys assets equal SR13,570, its liabilities equal SR7,369, and its equity equals
SR6,201 (SR in millions).
Lets now look at the accounting equation in more detail.
Assets: Assets are resources owned or controlled by a company. These resources are
expected to yield future benefits. Examples are Web servers for an online services company,
musical instruments for a rock band, and land for a vegetable grower. The term receivable is
used to refer to an asset that promises a future inflow of resources. A company that
provides a service or product on credit is said to have an account receivable from that
customer.
Liabilities: Liabilities are creditors claims on assets. These claims reflect company
obligations to provide assets, products or services to others. The term payable refers to a
liability that promises a future outflow of resources. Examples are wages payable to
workers, accounts payable to suppliers, notes payable to banks, and taxes payable to the
government.
Equity: Equity is the owners claim on assets. Equity is equal to assets minus liabilities.
This is the reason equity is also called net assets or residual equity.
A corporations equityoften called stockholders or shareholders equityhas two parts:
Contributed capital and retained earnings. Contributed capital refers to the amount that
stockholders invest in the companyincluded under the title common stock. Retained
earnings refer to income (revenues less expenses) that is not distributed to its stockholders.
The distribution of assets to stockholders is called dividends, which reduce retained
earnings.
Revenues increase retained earnings and are the assets earned from a companys earnings
activities. Examples are consulting services provided, sales of products, facilities rented to
others, and commissions from services.
Expenses decrease retained earnings and are the cost of assets or services used to earn
revenues. Examples are costs of employee time, use of supplies, and advertising, utilities,
and insurance services from others.
In sum, retained earnings are the accumulated revenues less the accumulated expenses and
dividends since the company began. This breakdown of equity yields the following expanded
accounting equation:
Assets + Expenses = Liabilities + Equity

Retained Earnings) + Revenues
(Capital +
Net income occurs when revenues exceed expenses. Net income increases equity. A net loss
occurs when expenses exceed revenues, which decreases equity.
Example
Omar is the sole stockholder and operator of Dynamic Business Solutions, Inc. a
management consulting firm organized as a professional corporation. At the end of its
accounting period, December 31, 2010, Dynamic Business Solutions has assets of SR100000
and liabilities of SR75,000.
1. What is owner's equity at December 31, 2010?
2. What is owner's equity as of December 31, 2011, assuming that assets increased by
SR25,000 and liabilities increased by SR15,000 during 2011?
3. What is the increase or (decrease) in owner's equity for the year 2011?
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4. What is the net income (or net loss) for the year 2011assuming that there were no
additional investments in 2011 and those dividends of SR15,000 were paid in 2011.
Solution
Owner's Equity = Assets - liabilities
1. Owner's equity as of December 31, 2010 is SR25,000 (100,000 - 75,000 = 25,000)
2. Owner's equity as of December 31, 2011 is SR35,000
December 31, 2010: 100,000 - 75,000 = 25,000
Change during 2011: +25,000 - 15.000 = 10,000
December 31, 2011: 125,000 - 90,000 = 35,000
3. The increase in owner's equity is SR10,000 (35,000 -25,000 = 10,000)
4. Net income for 2011 was SR 25,000.
Increase in Owner's Equity = Net Income Dividends
SR10,000 = Net Income - SR15,000
Net Income = SR25,000
Example
On the basis of the following information, determine the net income (or net loss) for the
year, assuming that additional capital stock of SR25,000 was issued, and that no dividends
were paid.
Total Assets Total Liabilities
Beginning of the year 500,000 SR
End of the year
625,000 SR
SOLUTION
Assets
200,000 SR
250,000 SR
- Liabilities
Beginning of the year

500,000 SR
End of the year
625,000 SR
Increase in Owner' Equity
200,000 SR
250,000 SR
= Owner's Equity
300,000 SR
375,000 SR
75,000
Net Income + Capital Stock Issued Dividends = Increase in Owner's equity

Net Income + SR25,000 0 = SR75,000
Net Income = SR50,000
Example:
On the basis of the following information, determine the net income (or net loss) for the
year, assuming that capital stock of RS.70,000 was issued, and dividends of RS.45,000 were
paid.
Total Assets Total Liabilities
Beginning of the year RS.425,000
End of the year
RS.440,000
RS.165,000
RS.185,000
Solution
Assets
Beginning of the year
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425,000 SR
- Liabilities
165,000 SR
= Owner's Equity
260,000SR

End of the year
440,000 SR
Increase in Owner' Equity
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185,000 SR
255,000SR
(5,000)
Net Income (net loss) + Additional Investment Dividends = change in Owner's equity
Net Income or (net loss) + SR 70,000 45,000 = SR (5,000)
Net Loss = SR 30,000
Rules of Debit and Credit

Every business enterprise enters into a large number of transactions. These transactions are
recorded in the books of accounts as per the rules of the system of double entry. According
to double entry system, every transaction has two aspects. One aspect is the receiving or
incoming aspect, also known as debit aspect. Another aspect is the giving or outgoing
aspect, also known as the credit aspect. The debit and credit aspects form the basis of
double entry system. There are two approaches for deciding when to debit an account and
when to credit it.
English Approach
American Approach.
English Approach
According to this approach there are three types of accounts personal, real and nominal
as discussed before and there are three rules for recording transactions in them. These rules
are as follows.
For Personal Account: debit the receiver and credit the giver.
For Real Account: debit what comes in and credit what goes out.
For Nominal Account: debit all expenses and losses and credit all incomes and gains.
Rule for Personal Accounts: Suppose Omar gives Rs 50,000/- to the business then it is said
that he has some honour or reputation in the eyes of the business. His account, therefore,
will be credited by Rs 50,000/ The word credit has been derived from the Latin word creder
which means to believe. Now suppose Joy received Rs 30,000/- from the business then it is
clear that he owes Rs 30,000/- to the business. Therefore Joys account will be debited by Rs
30,000/-. The word debit has been derived from the Latin word debere which means to
owe. Thus from this example a simple rule can be derived debit that persons account
who received something from the business and credit that persons account who gives
something to the business.
Rule for Real Accounts: Similarly, if the storekeeper of the business has received furniture,
machinery, goods or some other real thing, then, in accordance with the above rule,
storekeeper is the receiver and his account should be debited. But the storekeeper acts on
behalf of the business and does not owe any amount to the business. Therefore, instead of
debiting his personal account the account representing the thing is debited. A simple rule
can thus be derived that in case of real things debit what comes into the business and
credit what goes out of the business.
Rules for Expenses and Incomes: Let us look at one more situation. Suppose the cashier pays
salary to the employee Dima of the enterprise. Then, as per the second rule, the cashier is
not the giver of cash, he paid cash on behalf of the firm, therefore, instead of his account
the cash account of the business will be credited. Further, the account of employee Dima
who has received salary should be debited but this would mean that Dima is a debtor
whereas actually he is not. Thus instead of debiting Dimas account the expense on account
of which cash has been paid will be debited. In this case the salary account will be debited.
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Similarly, when interest is received by the cashier the cash account (instead of cashiers
account) will be debited and interest account will be credited instead of the persons
account who paid it. We can thus derive a simple rule debit all expenses and losses and
credit all incomes and gains.
American Approach
According to this approach, in order to understand the rules of debit and credit, transactions
are divided into the following five categories.
Transactions relating to owner, e.g. capital.
Transactions relating to other liabilities, e.g. supplier of goods, bankers etc.
Transactions relating to assets, e.g. land, building, plant, machinery, cash, goodwill, trade
marks etc.
Transactions relating to expenses, e.g. wages, salaries, commission, discount, purchase of
goods.
Transactions relating to revenues, e.g. sale of goods, interest received, dividend received,
rent received etc.
The rules of debit and credit in relation to these accounts are given below.
For capital account: Debit means decrease and credit means increase. This means that if
by a transaction the capital of the proprietor increases, for e.g., introduction of capital,
profit of the year etc., the capital account will be credited and if the capital decreases, for
e.g., withdrawal of capital, loss of the year on any capital account will be debited.
For any liability account: Increase in liability means credit and decrease in liability means
debit. This means that if because of a transaction there is increase in a liability than
liability account will be credited and if there is decrease in liability than that concerned
liability account will be debited.
For any asset account: Debit means increase and credit means decrease. This means that
if due to a transaction there is increase in the value of an asset than the concerned asset
account will be debited and if there is decrease in the value of an asset than the
concerned asset account will be credited.
For any expense account: Increase means debit and decrease means credit. This means
that if by a transaction there is increase in the account of expense the expense account is
debited and if there is decrease than expense account will be credited.
For any revenue account: Debit means decrease and credit means increase. Thus means
that if by transactions, the total of the revenue decreases then the concerned revenue
account will be debited and if the amount of revenue increases then the concerned
revenue account will be credited.
These rules can be easily understood with the help of the following table.
Name of the Account Debit
Credit
Owner equity
Liability
Assets
Expense
Revenue
20
Decrease
Decrease
Increase
Increase
Decrease
Increase
Increase
Decrease
Decrease
Increase
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It may be noted that both, English and American, approaches give the same conclusion. For
example, if a plant has been purchased by the enterprise the plant account will be debited.
As per the English Approach, plant has been classified as a real thing and the real account
is debited when that thing comes into the business. As per the American Approach, plant
has been classified as an asset and increase in asset is debited.
Example:
In recording the following transactions, what account is debited, what account is credited?
Issuance of common stock to a shareholder for cash.
Payment of rent for the current month.
Purchase of supplies on account.
Payment to a creditor on account.
Fees earned and billed to customers.
Receipt of cash from customers previously billed on account.
Payment of cash dividends to stockholders.
Payment for a 3-year insurance policy.
Incurred utilities expenses.
Receipt of cash for services to be provided in the future.
Solution
Issuance of common stock to a shareholder for cash is:
Cash Debit
Common Stock Credit
Payment of rent for the current month:
Rent Expense Debit
Cash Credit
Purchase of supplies on account:
Supplies Debit
Accounts Payable Credit
Payment to a creditor on account:
Accounts Payable Debit
Cash Credit
Fees earned and billed to customers:
Accounts Receivable Debit
Fees Earned Credit
Receipt of cash from customers previously billed on account:
Cash Debit
Accounts Receivable Credit
Payment of cash dividends to stockholders:
Dividends Debit
Cash Credit
Payment of a 3-year insurance policy.
Prepaid Insurance Debit
Cash Credit
Incurred utilities expenses.
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Utilities Expense Debit

A/P Credit
Receipt of cash for services to be provided in the future.
Cash Debit
Unearned Fees Credit
Recording of transaction
Journal
Journal is the basic book of original entry. Transactions in the journal are recorded in
chronological order, i.e., the transaction which happened first followed by the next
transaction and so on. The journal provides a date-wise record of all the transactions with
details of the amounts debited and credited and the amount of each transaction. The
format of the journal is given below
No. Date
Particulars
L.F. Debit
Credit
Maintenance of the different columns of the journal has been discussed below.
Date: The first column in the journal is the date column. In this column the date on
which the transaction took place is entered. The year and month is written only once till
they change. First the year of the transaction is written followed by the month and lastly the
date of the transaction is entered.
Particular: In the particular column, the particulars of the transactions are
recorded. We know that every transaction affects at least two accounts - one account is
debited and the other account is credited. First the account to be debited is identified and
the name of this account is recorded in the particulars column. After writing the name of
the account to be debited in the first line in the particular column, in the second line we
write the name of the account which is to be credited after its identification. Some space is
to be left before we start writing the second line. This is done just to clearly distinguish
between the account(s) to be debited and the account(s) to be credited. The word To is
prefixed to the name of the account to be credited. After writing the names of the accounts
to be debited and credited a small explanation of the transaction called Narration is
written. Narration explains the reasons for the happening of the transactions. A line is
drawn after the narration which touches both the date column on the one hand and ledger
folio column on the other hand indicating that the recording of the transaction is
completed.
Ledge Folio or L.F.: All entries from the journal are posted in the ledger which
contains different accounts. In the L.F. column the folio number of the ledger where the
posting has been done is recorded. For example, suppose the Machinery Account in ledger
appears at folio number 151, if by a journal entry Machinery Account has been debited than
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151 will be written in the L.F. column against Machinery Account which will indicate that
this transaction has been debited at folio number 151 in the ledger where Machinery
Account exists.
Debit Amount Column: In this column the amount of account being debited is
written.
Credit amount Column: In this column the amount of account being credited is
written.
The process of recording the transactions in the journal is called journalisation and
recording a single transaction is called journal entry. Journal entry is the basic record of a
business transaction. When only two accounts are involved in recording a transaction then
the entry is called a simple journal entry, and when more than two accounts are involved in
recording a transaction than the entry is called a compound journal entry.
Example: Journalise the following transactions in the books of Dima.
2007, April 1. Started business with Cash SR. 7,00,000, Furniture worth SR. 1,00,000 and
Machinery worth SR. 2,00,000.
2. Deposited SR. 3,00,000 in bank.
3. Purchased goods from Omar for SR. 15,000 and from Rodina for SR. 7,500.
4. Goods returned to Rodina worth SR. 1000 since the same were not as per the
sample.
5. Sold goods for cash worth SR. 8,000.
6. Sold goods to Dana worth SR. 8,900.
7. Damaged goods returned by Dana worth SR. 900.
8. Purchased goods at list price for SR. 18,000 from Anne at a trade discount of 10%.
9. Sold goods at list price of SR. 6,000 to Aly at a trade discount of 5%.
10. Received SR. 6,000 from Dana on account.
11. Paid to Omar by cheque SR. 14,900 and he allowed discount of SR. 100.
12. Paid to Rodina SR. 6450 in full settlement of his account.
13. Paid for repair of furniture SR. 700.
14. Paid for insurance of machinery SR.1,000.
15. Sold goods for Cash worth SR. 3,400.
16. Purchased goods from Joy for SR. 13,500.
17. Received from Aly the full amount due to him.
18. Dana became insolvent and a final payment of 50 % in a cash was received from her
official receiver.
19. Paid wages SR. 3,400.
20. Withdrew cash for personal use SR. 5,000.
21. Deposited cash into bank SR. 1,50,000.
22. Paid to Joy SR. 10,000 on account.
23. Paid for petty expenses SR. 200.
24. Paid trade expenses of SR. 800.
25. Paid commission SR. 1,200.
26. Withdrew goods of the cost price of SR. 900 for personal use.
27. Withdrew cash from bank SR. 5,000.
28. Purchased goods for cash SR. 17,000.
29. Sold goods for cash SR. 13,500.
30. Paid rent of SR. 10,000 and salary, SR. 28,000.
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Date
2007
April 1
April 2
April 3
April 4
April 5
April 6
April 7
April 8
April 9
April 10
April 11
April 12
24
DIMA JOURNAL
Particulars.
L.F.
Cash A/c
Furniture A/c
Machinery A/c
Capital A/c
(Started business)
Bank A/
Cash A/c
(Deposited into bank)
Purchases A/c
Omars A/c
Rodinas A/c
(Purchased goods )
Rodinas A/c
Returns Outwards
(Returned goods to Rodina)
Cash A/c
Sales
(Sold goods for cash)
Danas A/c
Sales A/c
Returns Inward A/c
Dana A/c
(Damaged goods returned by Dana)
Purchases A/c
Anne
(Purchased goods from Anne at 10%
trade discount)
Alys A/c
Saless A/c
(Sold goods to Aly at 5% Trade
discount)
Cash A/c
Dana A/c
(Received from Dana on account)
Omars A/c
Bank A/C
discount A/c
(Paid to Omar and he allowed
discount)
Rodinas A/c
Cash
Discount
(Paid to Rodina in full settlement)
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Debit
7,00,000
1,00,000
2,00,000
Credit
10,00,000
3,00,000
3,00,000
22,500
15,000
7,500
1,000
1,000
8,000
8,000
8,900
8,900
900
900
16,200
16,200
5,700
5,700
6,000
6,000
15,000
14,900
100
6,500
6,450
50
April 13
April 14
April 15
April 16
April 17
April 18
April 19
April 20
April 21
April 22
April 23
April 24
April 25
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Repairs. A/c
Cash A/c
(Paid for repair of furniture)
Insurance for Machinery A/c
Cash
(Paid for insurance of machinery)
700
Cash A/c
Sales A/c
Purchases A/c
Joys A/c
(Purchased goods from Joy)
Cash A/c
Alys A/c
(Received the full amount due from
Aly)
Cash A/c
Bad Debts
Dana A/c
(Received 50 % in a cash from the
official receiver of Dana on her
becoming insolvent and the balance
will be bad debts)
Wages A/c
Cash
(Paid wages)
Drawings A/c
Cash
(Withdrew cash for personal use)
Bank A/c
Cash A/c
(Deposited cash into bank)
Joys A/c
Cash A/c
(Paid to Joy on account)
Petty Expenses A/c
Cash A/c
(Paid petty expenses)
Trade Expenses A/c
Cash
(Paid trade expenses)
Commission A/c
Cash
(Paid commission)
3,400
700
1,000
1,000
3,400
13,500
13,500
5,700
5,700
1,000
1,000
2,000
3,400
3,400
5,000
5,000
1,50,000
1,50,000
10000
10000
200
200
800
800
1,200
1,200

April 26
April 27
April 28
April 29
April 30
Total
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Drawings A/c
Purchase A/c
(Withdrew goods for personal use)
900
Cash A/c
Bank
(Withdrew cash from bank)
Purchase A/c
cash 1,700
(Purchased goods)
Cash A/c
sales A/c
(Cash sales)
Rent A/c
Salary A/c
Cash
(Paid Rent and Salary)
5,000
900
5,000
1,700
1,700
13,500
13,500
10,000
28,000
38,000
16,62,500 16,62,500
POSTING
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Posting accounts and the ledger
Next, consider how the details of each specific account can be determined through a
process known as posting. To "post" means to copy the entries listed in the journal into
their respective ledger accounts. In other words, the debits and credits in the journal will be
accumulated ("transferred"/"sorted") into the appropriate debit and credit columns of each
ledger page. The following illustration shows the posting process. Arrows are drawn for the
first journal entry posting. A similar process would occur for each of the other transactions
to produce the resulting ledger pages.
In reviewing the ledger accounts at right, notice that the "description" column includes a
cross-reference back to the journal page in which the transaction was initially recorded. This
reduces the amount of detailed information that must be recorded in the ledger, and
provides an audit trail back to the original transaction in the journal. The check marks in the
journal indicate that a particular transaction has been posted to the ledger. Without these
marks (in a manual system), it would be very easy to fail to post a transaction, or even post
the same transaction twice.
Ledger
Ledger is the principal book of the accounting system. You know that all business
transactions are recorded separately and date-wise in the journal in chronological order.
The transactions pertaining to a particular person asset, expense or income are recorded at
different places in the journal as they occur on different dates. Hence, with the help of
journal, it is not possible to bring the similar transactions together at one place. Thus, to
have a consolidated view of similar transactions pertaining to a particular person asset,
expense or income, a ledger is used. In a ledger different accounts are prepared item-wise.
A ledger account can be defined as a summary statement of all transactions relating to a
person asset, expense or income which have taken place during a given period of time and
shows their net effect.
A ledger may be in the form of a bound register or loose leaf forms printed on paper or
cards. The bound register is inflexible in that new accounts or additional space for old
accounts must be placed where blank pages are available, whereas, loose-leaf ledger is
more flexible in the sense that it permits rearrangement of the accounts and, if required,
new accounts may be placed where desired and additional space may be provided to an
account merely by inserting a new sheet along with the old. For easy posting and location
accounts are opened in the ledger in a certain order. For example, the accounts in the
ledger may be opened in the same order in which they appear in the final accounts. An
index of various accounts opened in the ledger is given in the beginning for the purpose of
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easy reference. For easy identification, each account may also be allotted a code number if
the organisation is big and the number of accounts is large. A ledger is called the principal
book of accounts because it helps in achieving the objectives of accounting by providing the
following types of information:
The total sales to an individual customer
The total purchases from an individual supplier
How much amount is to be paid to others?
How much amount is to be received from others?
What is the position of different assets of the business?
What is the amount of profit earned of loss suffered during a particular period?
Following is the format of a ledger account.
Dr.
NAME OF ACCOUNT
Cr.
Date Particulars
J.F Amount
Date Particulars
J.F. Amount
To Name of Credit
By Name of Debit
Account
Account
As shown above, each account in the ledger is divided into two equal parts by a vertical line.
The left hand side of the account is known as the debit side and the right hand side is
known as the credit side. Each of the two sides is further divided into four columns of date,
particulars, folio and amount. F stands for the folio or page number of the journal from
where posting has been made in the ledger.
The simple format of ledger account can be as the following:
Dr,
NAME OF ACCOUNT
Cr.
Example: Pass journal entries for the following transactions and post them into the
ledger, 2007.
Jan. 1. Omar started business with cash 10,00,000
Jan 3. Purchased furniture for cash 70,000
Jan 4. Purchased goods for cash 30,000
Jan 7. Purchased goods from Joy Traders, 10,000 Raja Bros 18,000
Jan 10. Returned goods to Joy Traders 800
Jan 12. Paid cash to Joy Traders in full settlement of their account and they allowed 10%
discount.
Jan 13. Opened account in State Bank of India 5,00,000
Jan 14. Paid Rodina by cheques in full settlement of 17,800 their account.
Jan 15. Sold goods for cash 19,000
Jan 16. Sold goods to Dima at list price and offered 8000 10% Trade Discount.
Jan 17. Purchased goods from Dana Bros. 3,400
Jan 18. Sold goods to M/s Sama 14,000
Jan 19. Received from Dima by cheques on account 5,000
Jan 20. Paid for furniture repair 500
28
1433
Jan 21. Purchased goods from Adham 900

Jan 22. Sold goods to Nezar 2,050
Jan 25. Sold goods to Marawan 4,000
Jan 31. Paid Rent 5,000 Salary 4,000
OMAR JOURNAL
Date
Jan. 1
Jan. 3
Jan. 4
Jan. 7
Jan. 10
Jan. 12
Jan. 13
Jan. 14
Jan. 15
Jan. 16
Jan. 17
29
Particulars L.F.
Debit
Credit
Cash A/c
10,00,000
Capital A/c
10,00,000
(Started business)
Furniture A/c
70,000
Cash A/c
70,000
(Purchased furniture)
Purchases A/c
30,000
Cash A/c
30,000
(Purchased goods for cash )
Purchases A/c
28,000
Joy Traders A/c
10,000
Rodina
18,000
(Purchased goods from Joy Traders
& Rodina)
Joy Traders A/c
800
Return outwards
800
(Returned goods to Joy Traders)
Joy Traders A/c
9200
Cash
8,280
Discount
920
(Paid cash to Joy Traders in full
settlement of their account and
they allowed 10% discount)
Bank A/c
5,00,000
Cash A/c
5,00,000
(Opened bank account)
Rodina A/c
18,000
Bank
17,800
Discount
200
(Paid to Rodina & discount allowed
by them)
Cash A/c
19,000
Saless A/c
19,000
(Sold goods)
Dima A/c
7,200
Sales A/C
7,200
(Sold goods to Dima)
Purchase A/c
3,400
Jan. 18
Jan. 19
Jan. 20
Jan. 21
Jan. 22
Jan. 25
Jan. 31
Dana Bros.
(Purchased goods from Dana Bros.)
M/s Sama A/c
Sales A/c
(Sold goods to M/s Sama)
Bank A/c
Dima A/C
Received from Dima by cheques
Repair A/c
Cash
(Paid for furniture repair)
Purchase A/c
Adham A/c
(Purchased goods from Adham)
Nezar A/c
Sales A/c
(Sold goods to Nezar)
Marawan A/c
Sales A/c
(Sold goods to Marawan)
Rent A/c
Salary A/c
Cash A/c
(Paid rent and salary)
Dr.
Capital
Sales
1433
Cash account
10,00,000
19,000
30
14,000
5,000
5,000
500
500
9,000
9,000
2,050
2,050
4,000
4,000
5,000
4,000
9,000
Cr.
70,000
30,000
8280
5,00,000
500
5000
4000
Balance
401220
debit
Cash
1000000
credit
14,000
Furniture
Purchases
Joy Traders
Bank
Repair
Rent
Salary
Balance = 1019000 (total debit) 617780 (total credit)

Dr.
capital account
Balance
3,400
Cr.
10,00,000
1433
Balance = 1000000 (total credit) 0 (total debit)

Dr.
furniture account
Cash
Cr.
70,000
Balance
70000
debit

Dr.
Purchases account
Cr.
Cash
30,000
Joy Traders 10000
Rodina 18000
Dana Bros.
3400
Adham
9000
Balance
70400
debit

Dr.
Joy Traders account
Return outwards 800

Cash 8280
discount
920
Cr.
Purchases
10000
Balance

Dr.
Bank
Discount
Rodina account
17800
200
Cr.
Purchases
18000
Balance

Dr.
Return outwards account

Joy Traders
Balance
800
credit
31
Cr.
800

Dr.
1433
discount account
Cr.
Joy Traders
Rodina
Balance
920
200
1120
credit

Dr.
cash
Dima
bank account
5,00,000
5000
Cr.
Rodina
17800
Balance
487200
debit

Dr.
sales account
Cash
Dima
M/s Sama
Nezar
Marawan
Balance
19000
7200
14000
2050
4000
46250
credit

Dr.
Dima account
sales
7200
Cr.
Bank
5000
Balance
2200
debit

Dr.
Dana Bros. account
Purchases
Balance
Cr.
3400
3400
credit

Dr.
M/s Sama account
Sales
Cr.
Cr.
14000
Balance 14000
debit
32
1433

Dr.
Repair account
Cash
Cr.
500
Balance 500
debit

Dr.
Adham account
Purchases
Balance
Cr.
9000
9000
credit

Dr.
Sales
Nezar account
Cr.
2050
Balance 2050
debit

Dr.
Sales
Marawan account
Cr.
4000
Balance 4000
debit

Dr.
rent account
Cash
Cr.
5000
Balance 5000
debit

Dr.
salary account
Cash
33
4000
Balance
Cr.
4000
debit
1433
Trial balance
The accounting process which you have learnt so far is regarding the recording of
transactions on the basis of accounting principles in the journal proper and other subsidiary
books, posting them from the journal to the ledger, and balancing the ledger accounts. You
have also learnt that when a simple transaction is journalised some accounts are debited
and some other accounts are credited and the totals of debits and credits are equal. It
means that when the transactions are posted in the ledger the totals of debts and credits
should also be equal. A balance is the tool to check the arithmetical accuracy of the fact that
the transactions have been correctly recorded in the journal posted in the ledger, and the
ledger balances have also been correctly calculated. In this chapter you will learn the
meaning and preparation of trial balance. You will also learn about the different types of
accounting errors and the method of their rectification.
Meaning of Trial Balance
A balance is a statement which shows the balances, or the totals, of debits and credits of all
ledger accounts prepared for the purpose of verifying the arithmetical accuracy of the
posting of ledger accounts. When all the accounts of an organisation are balanced off and
such balances are put in a columnar statement having debit balances on one side and credit
balances on the other side, such a statement is called a trial balance. The trial balance is
prepared, generally, at the end of the accounting period. However, it can be prepared at the
end of any period of time say monthly, quarterly or half-yearly. It must be kept in mind that
the agreement, or equality, of the two sides of a trial balance is not conclusive proof of the
correctness of the accounts.
The trial balance is an important step in the accounting process and forms the basis of
preparation of the final statements. The balances given in the trial balance are used for the
preparation of profit and loss account and balance sheet of an organisation. Following is the
format of a trial balance.
TRIAL BALANCE OF (NAME OF ORGANISATION)
AS ON (DATE ON WHICH IT PREPARED)
Name of Accounts
L.F Debit Amount Credit Amount
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1433
Total
Income Statement
Financial statements
The first question on everyones mind usually is whether a business made a profit, and, if so,
how much. So, well start with the income statement and then move on to the balance
sheet and statement of cash flows. The income statement summarizes sales revenue and
expenses for a period of time one year. All the money amounts reported in this financial
statement are cumulative totals for the whole period.
Multiple - step INCOME STATEMENT FOR YEAR
Sales Revenue
SR. 52000
Cost of Goods Sold Expense
(33,800)
Gross Margin
Selling, General, and Administrative Expenses
Depreciation Expense
Earnings before Interest and Income Tax
Interest Expense
Earnings before Income Tax
Income Tax Expense
Net Income
18,200
(12,480)
(785)
4,935
(545)
4,390
(1,748)
SR. 2,642
The top line is the total amount of proceeds or gross income from sales to customers, and is
generally called sales revenue. The bottom line is called net income (also net earnings, but
hardly ever profit or net profit). Net income is the final profit after all expenses are
deducted from sales revenue. The business in this example earned SR. 2,642,000 net income
on its sales revenue of SR. 52,000,000 for the year; only 5.1% of its sales revenue remained
as final profit (net income) after deducting all expenses.
The income statement is designed to be read in a step down manner, like walking down
stairs. Each step down is a deduction of one or more expenses. The first step deducts the
cost of goods (products) sold from the sales revenue of goods sold, which gives gross margin
(sometimes called gross profit one of the few instances of using the term profit in income
statements). This measure of profit is called gross because many other expenses are not
yet deducted. Next, the broad category of operating expenses called selling, general, and
administrative expenses and the depreciation expense (a unique expense) are deducted
35
1433
from gross margin, giving earnings before interest and income tax. This measure of profit is
also called operating earnings, or a similar title. Next, interest expense on debt is deducted,
which gives earnings before income tax. The last step is to deduct income tax expense,
which gives net income, the bottom line in the income statement.
Instead of the multiple - step income statement, which has three intermediate measures of
profit, you may see a single - step income statement that reports only the final line of net
income. Publicly owned business corporations are required to report earnings per share
(EPS), which is net income divided by the number of stock shares. Privately owned
businesses dont have to report EPS, but this figure may be useful to their stockholders.
SINGLE-STEPINCOME STATEMENT
Sales Revenue
SR. 52000
Cost of Goods Sold Expense
(33,800)
Selling, General, and Administrative Expenses
Depreciation Expense
Interest Expense
Income Tax Expense
Net Income
(12,480)
(785)
(545)
(1,748)
SR. 2,642
Note that:
1. Revenues are defined as inflows of assets either from the sale of goods or the
performance of services.
2. Expenses are defined as outflows or other uses of assets to produce revenue.
3. Net income is defined as the excess of revenues over expenses (net loss for the period is
defined as the excess of expenses over revenues), and will be transferred to the owners
equity in the balance sheet as either profit or loss.
In our income statement example you see five different expenses. You may find more
expense lines in an income statement, but seldom more than 10 or so as a general rule
(unless the business had a very unusual year). Companies selling products are required to
report their cost of goods sold expense. Some companies do not report depreciation
expense on a separate line in their income statements. However, depreciation is such a
unique expense that I prefer to keep it separate from the other expenses. Other than
depreciation, there is just one broad, all inclusive operating expenses line Selling,
General, and Administrative Expenses. However, a business may report two or more
operating expenses. Marketing, promotional, and selling expenses often are separated from
general and administration expenses. The level of detail for expenses in income statements
is flexible; financial reporting standards are somewhat loose on this point. The sales revenue
and expenses reported in income statements follow generally accepted conventions, which
are briefly summarized here:
Sales Revenue the total amount received or to be received from the sales of
products (and/or services) to customers during the period. Sales revenue is net, which
means that discounts off list prices, prompt payment discounts, sales returns, and any other
36
1433
deductions from original sales prices are deducted to determine the sales revenue amount
for the period. Sales taxes are not included in sales revenue, nor are excise taxes that might
apply. In short, sales revenue is the amount the business should receive to cover its
expenses and to provide profit (bottom - line net income).
Cost of Goods Sold Expense the total cost of goods (products) sold to customers
during the period. This is clear enough. What might not be so clear, however, concerns
goods that were shoplifted or are otherwise missing, as well as write - downs due to
damage and obsolescence. The cost of such inventory shrinkage may be included in cost of
goods sold expense for the year (or, this cost may be put in another expense account
instead).
Selling, General, and Administrative Expenses (Operating Expenses) broadly
speaking, every expense other than cost of goods sold, depreciation, interest, and income
tax. This broad category is a catchall for every expense not reported separately. In our
example, depreciation is broken out as separate expense instead of being included with
other operating expenses. Some companies report advertising and marketing costs
separately from administrative and general costs, and some report research and
development expenses separately. There are hundreds of specific operating expenses, some
rather large and some very small. They range from salaries and wages of employees (large)
to legal fees (small, one hopes).
Depreciation Expense the portion of original costs of long - term assets such as
buildings, machinery, equipment, tools, furniture, computers, and vehicles that is recorded
to expense in one period. Depreciation is the charge for using these assets during the
period. None of this expense amount is a cash outlay in the period recorded, which makes it
a unique expense compared with other operating expenses.
Interest Expense the amount of interest on debt (interest - bearing liabilities) for
the period. Other types of financing charges may also be included, such as loan origination
fees.
Income Tax Expense the total amount due the government (both federal and
state) on the amount of taxable income of the business during the period. Taxable income is
multiplied by the appropriate tax rates. The income tax expense does not include other
types of taxes, such as unemployment and Social Security taxes on the companys payroll.
These other, non - income taxes are included in operating expenses
Note: The income statement can be designed in another form as T-account form. It presents
a summary of an entitys revenues and expenses for a specific period of time, such as a
month, a quarter, or a year. The income statement, also called the statement of earnings, or
statement of operations presents a moving financial picture of business operations during
the period. The heading of the income statement indicates the name of the business, the
name of the statement, and the time period covered by the statement.
Expenses (Dr)
Income Statement
Revenues (Cr)
Inventory 1.1
Purchases
Salaries and Wages
Rent expense
Advertisement expense
Electricity bill
37
Sales
Marketable securities revenues
Rent revenue
Consultation revenues
Other revenues
Inventory 31.12
1433
Fax and post expense

Maintenance expense
Selling expenses
Insurance expense
Bad debts
Office supplies
Other expenses
Balance Sheet
The balance sheet reports the financial position of a business at a specific date, usually the
end of a month or a year. Consequently, it is often called the Statement of Financial
position. Financial position is reflected by the amount of the business assets (resources),
the amount of its liabilities (debts owed), and the amount of its owners equity (assets
minus liabilities).
The balance sheet heading indicates the name of business, the name of the statement, and
the date of the statement. The assets of the business are listed on the left side and the
liabilities and the owners equity are listed on the right side. Note that the totals on each
side of the balance sheet should be equal. This equality must exist because the left side lists
the assets of the business and the right side shows the sources of the assets.
Assets
Current Assets:
Cash
Bank
Inventory (stock)
Accounts Receivable
Notes Receivable
Marketable Securities
Prepaid Expenses
Accrual Revenues
Fixed Assets:
Land
Buildings
Cars
Furniture
Equipment
Machines
Intangible Assets:
Goodwill
Trade Mark
Copyrights
Patent
38
Balance Sheet
Liabilities and Owner's Equity
Short-Term Liabilities:
Accounts Payable
Notes Payable
Short-Term Loans
Pre-collected Revenues
Accrual Expenses
Long-Term Liabilities:
Long-Term Loans
Owner's Equity:
Capital
(+) Net Profit Or (-) Net Loss
1433
The balance sheet shown follows the standardized format regarding the classification and
ordering of assets, liabilities, and ownership interests in the business. Financial institutions,
public utilities, railroads, and some other specialized businesses use different balance sheet
layouts. However, manufacturers and retailers, as well as the large majority of other types
of businesses, follow the format presented. On the left side the balance sheet lists assets.
On the right side the balance sheet first lists the liabilities of the business, which have a
higher - order claim on the assets. The sources of ownership (equity) capital in the business
are presented below the liabilities, to emphasize that the owners or equity holders in a
business (the stockholders of a business corporation) have a secondary and lower order
claim on the assets after its liabilities are satisfied. Each separate asset, liability, and
stockholders equity reported in a balance sheet is called an account. Every account has a
name (title) and a money amount, which is called its balance. For instance, at the end of the
most recent year:
Name of Account
Inventory
Amount (Balance) of Account

SR. 8,450,000
The other money amounts in the balance sheet are either subtotals or totals of account balances. For
example, the $ 17,675,000 amount for Current Assets does not represent an account but
rather the subtotal of the four accounts making up this group of accounts. A line is drawn
above a subtotal or total, indicating account balances are being added. A double underline
(such as for Total Assets) indicates the last amount in a column. Notice also the double
underline below Net Income in the income statement indicating it is the last number in
the column.
A balance sheet is prepared at the close of business on the last day of the income statement
period. For example, if the income statement is for the year ending June 30, 2009, the
balance sheet is prepared at midnight June 30, 2009. The amounts reported in the balance
sheet are the balances of the accounts at that precise moment in time. The financial
condition of the business is frozen for one split second. The balance sheet does not report
the flows of activities in the companys assets, liabilities, and shareowners equity accounts
during the period. Only the ending balances at the moment the balance sheet is prepared
are reported for the accounts. For example, the company reports an ending cash balance of
SR. 3,265,000 at the end of its most recent year. Can you tell the total cash inflows and
outflows for the year? No, not from the balance sheet; you cant even get a clue from the
balance sheet alone.
The accounts reported in the balance sheet are not thrown together haphazardly in no
particular order. According to long -standing rules, balance sheet accounts are subdivided
into the following classes, or basic groups, in the following order of presentation:
Left (or Top) Side
Right (or Bottom) Side
Current assets
Current assets
Long-term operating assets
Long-term liabilities
Other assets
Owners equity
Current assets are cash and other assets that will be converted into cash during one
operating cycle. The operating cycle refers to the sequence of buying or manufacturing
products, holding the products until sale, selling the products, waiting to collect the
receivables from the sales, and finally receiving cash from customers. This sequence is the
most basic rhythm of a company s operations; it is repeated over and over. The operating
39
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cycle may be short, only 60 days or less, or it may be relatively long, taking 180 days or
more. Assets not directly required in the operating cycle, such as marketable securities held
as temporary investments or short - term loans made to employees, are included in the
current assets class if they will be converted into cash during the coming year. A business
pays in advance for some costs of operations that will not be charged to expense until next
period. These prepaid expenses are included in current assets.
The second group of assets is labelled Long - Term Operating Assets in the balance sheet.
These assets are not held for sale to customers; rather, they are used in the operations of
the business. Broadly speaking, these assets fall into two groups: tangible and intangible
assets. Tangible assets have physical existence, such as machines and buildings. Intangible
assets do not have physical existence, but they are legally protected rights (such as patents
and trademarks), or they are such things as secret processes and well - known favourable
reputations that give businesses important competitive advantages.
The tangible assets of the business are reported in the Property, Plant, and Equipment
account. More informally, these assets are called fixed assets, although this term is generally
not used in balance sheets. The word fixed is a little strong; these assets are not really fixed
or permanent, except for the land owned by a business. More accurately, these assets are
the long - term operating resources used over several years such as buildings, machinery,
equipment, trucks, forklifts, furniture, computers, telephones, and so on. The cost of a fixed
asset with the exception of land is gradually charged off over its useful life. Each period
of use thereby bears its share of the total cost of each fixed asset. This apportionment of the
cost of fixed assets over their useful lives is called depreciation. The amount of depreciation
for one year is reported as an expense in the income statement. The cumulative amount
that has been recorded as depreciation expense since the date of acquisition up to the
balance sheet date is reported in the accumulated depreciation account in the balance
sheet. As you see, the balance in the accumulated depreciation account is deducted from
the original cost of the fixed assets.
The business owns various intangible long -term operating assets. These assets are
recorded at the cost of acquisition. The cost of an intangible asset remains on the books
until the business determines that the asset has lost value or no longer has economic
benefit. At that time the business writes down (or writes off) the original cost of the
intangible asset and charges the amount to an expense, usually amortization expense. Until
recently, the general practice was to allocate the cost of intangible assets over arbitrary
time periods. However, many intangible assets have indefinite and indeterminable useful
lives. The conventional wisdom now is that its better to wait until an intangible asset has
lost value, at which time an expense is recorded.
Other assets are a catchall title for those assets that dont fit in the current assets or long term operating assets classes.
The accounts reported in the current liabilities class are short -term liabilities that for the
most part depend on the conversion of current assets into cash for their payment. Also,
other debts (borrowed money) that will come due within one year from the balance sheet
date are put in this group.
Long - term liabilities are those whose maturity dates are more than one year after the
balance sheet date. Theres only one such account in our example. Either in the balance
sheet or in a footnote, the maturity dates, interest rates, and other relevant provisions of
long - term liabilities is disclosed.
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Liabilities are claims on the assets of a business; cash or other assets that will be later
converted into cash will be used to pay the liabilities. (Also, cash generated by future profit
earned by the business will be available to pay its liabilities.) Clearly, all liabilities of a
business must be reported in its balance sheet to give a complete picture of the financial
condition of a business. Liabilities are also sources of assets. For example, cash increases
when a business borrows money. Inventory increases when a business buys products on
credit and incurs a liability that will be paid later. Also, typically a business has liabilities for
unpaid expenses and has not yet used cash to pay these liabilities. Another reason for
reporting liabilities in the balance sheet is to account for the sources of the company s
assets to answer the question: Where did the company s total assets come from?
A complete picture of the financial condition of a business shows where the companys
assets came from. Some part of the total assets of a business comes not from liabilities but
from its owners. The owners invest money in the business and the business retains some of
its profit, which is not distributed to its owners. In this example the business is organized as
a corporation. Its stockholders equity accounts in the balance sheet reveal where the excess
of the companys total assets over its total liabilities came from.
When owners (stockholders of a business corporation) invest capital in the business, the
capital stock account is increased. Net income earned by a business less the amount
distributed to owners increases the retained earnings account. The nature of retained
earnings can be confusing; therefore, I explain this account in depth at the appropriate
places in the book. Just a quick word of advice here: Retained earnings is not I repeat, is
not an asset. Get such a notion out of your head
Example
The following is the Trail Balance of the Red Sea Company as at December 31, 2007
Account Name Dr Cr
Dr
Cr
Cash
20000
Accounts Receivable
60000
Notes Receivable
15000
Merchandise Inventory 1-1-2007
16000
13000
Land
40000
Buildings
90000
Equipment
22000
Accounts Payable
23000
Notes Payable
23000
Long-Term Loan
85000
Owners Capital
121000
Sales
130000
Rent expense
7000
1000
Purchases
80000
Marketable Securities Revenues
2000
Other Revenues
1000
Salaries and Wages
12000
Telephone and Electricity expenses 9000
41

Total
1433
385000 385000
Required
1. Prepare the Income Statement for the Company if you know that the Merchandise
Inventory 31-12-2007 is SR 14000.
2. Prepare the Balance Sheet for the Company as at 31-12-2007.
Solution
The Red Sea Company

Income Statement
For the Period ended December 31, 2007
Expenses (Dr)
Revenues (Cr)
Inventory 1.1
Purchases
Salaries and Wages
Rent expense
Telephone and Electricity expenses
Net Profit
16000
80000
12000
7000
1000
9000
22000
Sales
130000
Marketable securities revenues2000
Other revenues
Inventory 31.12
1000
14000
The Red Sea Company

Balance Sheet as at
December 31, 2007
Assets
Current Assets:
Cash
Inventory (stock)
Accounts Receivable
Notes Receivable
42
Liabilities and Owner's Equity

20000
14000
60000
15000
13000
Short-Term Liabilities:
Accounts Payable
Notes Payable
23000
23000
1433
Fixed Assets:
Land
Buildings
Equipment
40000
90000
22000
Long-Term Liabilities:
Long-Term Loans
Owner's Equity:
Capital
Net Profit
Total
274000
Total
85000
121000
22000
274000
Example for financial accounting cycle:

The following transactions have occurred in Omars Company during the year 2010.
1. January 1. Started business with Cash SR. 700000, Furniture worth SR. 100000 and
Machines worth SR. 200000
2. February 15. Purchased goods for cash worth SR. 15000
3. March 15. Sold goods for cash worth SR. 80000
4. April 15. purchased goods from Rodina on Credit for SR. 50000
5. May 15. purchased goods from Adham and paid him by cheque SR. 10000
6. June 10. Paid for insurance of machinery SR.1000.
7. July 8. Paid SR 30000 for Rodina
8. July 30. Sold goods for Joy worth SR. 134000 on credit.
9. August 15. Purchased goods for cash worth SR. 13000
10. September 15. Paid wages SR. 34000
11. October 15. Deposited cash into bank SR. 150000
12. November 15. Received cash SR 20000 from Joy
13. December 15. Paid rent of SR. 10000 and salaries, SR. 28000
Required
Journalise above transactions in Omars company books.

Posting accounts to ledger
Prepare the trial balance
Prepare income statement and balance sheet
Solution
1- Prepare the general journal
General journal for Omar Company
No. Date
1
Jan. 1
43
Title
Cash
Furniture
Machines
Dr.
700000
100000
200000
Cr.
1433
Capital
2
March 15
April 15
May 15
June 10
July 8
July 30
August 15
10
11
12
44
Feb. 15
Sep. 15
Oct. 15
Nov. 15
1000000
Purchases
Cash
15000
Cash
Sales
80000
Purchases
Accounts payable
50000
Purchases
Bank
10000
15000
80000
50000
10000
Insurance expense 1000

Cash
1000
Accounts payable
Cash
30000
30000
Accounts receivable 134000

Sales
134000
Purchases
Cash
13000
wages
Cash
34000
Bank
Cash
150000
13000
34000
Cash
20000
Accounts receivable
150000
20000
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1433
Dec. 15
Rent
Salaries
Cash
10000
28000
38000
2- Posting accounts to ledger
Dr.
Cash
Cr.
Capital
700000
15000
Sales
80000
1000
20000
30000
accounts payable
13000
purchases
Accounts receivable
insurance expense
34000
Wages
150000
bank
10000
rent
28000
salaries
519000
Dr.
Furniture
Capital
Machines
Capital
45
balance(debit)
Cr.
100000
100000
Dr.
purchases
200000
balance (debit)
Cr.
1433
200000
Dr.
Balance (debit)
Capital
Cr.
700000
cash
100000
furniture
200000
(Credit) Balance
machines
1000000
Dr.
Purchases
Cash
15000
Accounts payable
50000
Bank
10000
Cash
13000
Cr.
88000
Dr.
balance (debit)
Sales
Cr.
80000
134000
(Credit) Balance
Dr.
accounts receivable
214000
Accounts payable
Cash
cash
30000
50000
Cr.
purchases
(Credit) Balance 20000
Dr.
Bank
Cash
150000
Cr.
10000
140000
Dr.
Insurance expense
Cash
46
balance (debit)
Cr.
1000
1000
Dr.
purchases
Accounts receivable
balance (debit)
Cr.

sales
1433
134000
20000
cash
114000 balance (debit)
Dr.
wages
Cash
Cr.
34000
34000
Dr.
balance (debit)
Rent
Cash
Cr.
10000
10000
Dr.
balance (debit)
Salaries
Cash
Cr.
28000
28000
balance (debit)
3- Preparing trial balance

Trial balance for Omar Company
Accounts
Cash
Furniture
Machines
Capital
Purchases
Sales
Accounts payable
Bank
Insurance expense
Accounts receivable
wages
Rent
Salaries
47
Debit
519000
100000
200000
Credit
1000000
88000
214000
20000
140000
1000
114000
34000
10000
28000
1433
1234000 1234000
Total
4- Preparing financial statements
omars Company
Income statement
For the period from 1-1-2010 to 31-12-2010
Expenses
Revenues
Purchases
88000
Insurance expense
1000
Wages
34000
Rent
10000
Salaries
28000
Profit
214000
sales
53000
omars Company
Balance sheet
At 31-12-2010
Assets
liabilities
Fixed assets
Furniture
Machines
owners equity
100000
200000
Current assets
48
Cash
519000
Bank
140000
Accounts receivable
114000
1000000
capital
53000
liabilities
profit
20000
accounts payable
first
1433
QUESTIONS
1. The basic accounting equation is Assets = Liabilities + __________ _______.

For each of the transactions in Questions 2 through 13, indicate the two (or more)
effects on the accounting equation of the business or company.
2. The owner invests personal cash in the business.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or Stockholders') Equity:
Increase
Decrease
No Effect
3. The owner withdraws business assets for personal use.

Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
4. The company receives cash from a bank loan.
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1433
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
5. The company repays the bank that had lent money to the company.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
6. The company purchases equipment with its cash.

Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
7. The owner contributes her personal truck to the business.

Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
8. The company purchases a significant amount of supplies on credit.

Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
9. The company purchases land by paying half in cash and signing a note payable for the
other half.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
Information for Questions 10 through 13:

Company X provides consulting services to Client Q in May. Company X bills Client Q in
May for the agreed upon amount of $5,000. The sales invoice shows that the amount will
be due in June.
10. In May, Company X records the transaction by a debit to Accounts Receivable for
50
1433
$5,000 and a credit to Service Revenues for $5,000. What is the effect of this entry
upon the accounting equation for Company X?
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
In June, Company X receives the $5,000. What is the effect on the accounting
11. equation and which accounts are affected at Company X?
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
What is the effect on Client Q's accounting equation in May when Client Q records the
12. transaction as a debit to Consultant Expense for $5,000 and a credit to Accounts
Payable for $5,000?
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
13. What is the effect on Client Q's accounting equation in June when Client Q remits the
$5,000? Also, which accounts will be involved?
14.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Increase
Decrease
No Effect
Which of the following will cause owner's equity to increase?

expenses
owner draws
revenues
15. Which of the following will cause owner's equity to decrease?

net income
16.
net loss
revenues
The accounting equation should remain in balance because every transaction affects
how many accounts?
only one
only two
two or more
17. A corporation's net income is eventually recorded in the following stockholders'
51
1433
equity account: ___________ ___________.

A corporation's quarterly _______________ will cause a reduction in the
18. corporation's retained earnings, which in turn reduces the corporation's stockholders'
equity. However, this will not reduce the corporation's net income.
19.
The financial statement with a structure that is similar to the accounting equation is
the _____________ _____________.
The financial statement that reports the portion of change in owner's equity resulting
20. from revenues and expenses during a specified time interval is the ____________
_______________.
Second
1. A company receives $500 of cash as an additional investment in the company by its owner,
Mary Smith. The company's Cash account is increased and Mary Smith, Capital is increased.
a. Should the $500 entry to the Cash account be a debit?
Yes
No
b. Should the $500 entry to Mary Smith, Capital be a debit?
Yes
No
2. A company performed services on account in August. The services were for $2,000 and the
company gave the customer credit terms that state the amount is to be paid to the
company in September.
a.
Assuming that the company prepares monthly income statements, what

will be the account debited for $2,000 in August?
Cash
Accounts Receivable
Service Revenue
b. Which account should the company credit for $2,000 in August?

Cash
c.
Accounts Receivable
Service Revenue
In September when the company receives the $2,000 from the customer,
which account should the company credit?
Cash
52
Service Revenue
In September when the company receives the $2,000 from the customer,
which account should the company debit?
Cash
d.
Accounts Receivable
Accounts Receivable
Service Revenue
1433
3. To increase the balance in the following accounts, would you debit the account or would
you credit the account?
a.
Accounts Payable
Debit
Credit
b.
Cash
Debit
Credit
c.
Land
Debit
Credit
d.
Notes Payable
Debit
Credit
e.
Accounts Receivable
Debit
Credit
f.
Mary Smith, Capital
Debit
Credit
g.
Supplies
Debit
Credit
h.
Supplies Expense
Debit
Credit
i.
Prepaid Insurance
Debit
Credit
j.
Service Revenue
Debit
Credit
k.
Mary Smith, Drawing
Debit
Credit
l.
Equipment
Debit
Credit
Debit
Credit
m. Unearned Revenue
4. To decrease the balance in the following accounts, would you debit the account or would
you credit the account?
53
a.
Accounts Payable
Debit
Credit
b.
Cash
Debit
Credit
c.
Land
Debit
Credit
d.
Notes Payable
Debit
Credit
e.
Accounts Receivable
Debit
Credit
f.
Mary Smith, Capital
Debit
Credit
g.
Supplies
Debit
Credit
h.
Supplies Expense
Debit
Credit
i.
Prepaid Insurance
Debit
Credit
1433
j.
Service Revenue
Debit
Credit
k.
Mary Smith, Drawing
Debit
Credit
l.
Equipment
Debit
Credit
Debit
Credit
m. Unearned Revenue
5. What is the normal balance for the following accounts?

a.
Accounts Payable
Debit
Credit
a.
Cash
Debit
Credit
c.
Land
Debit
Credit
d.
Notes Payable
Debit
Credit
e.
Accounts Receivable
Debit
Credit
f.
Mary Smith, Capital
Debit
Credit
g.
Supplies
Debit
Credit
h.
Supplies Expense
Debit
Credit
i.
Prepaid Insurance
Debit
Credit
j.
Service Revenue
Debit
Credit
k.
Mary Smith, Drawing
Debit
Credit
l.
Equipment
Debit
Credit
Debit
Credit
m. Unearned Revenue
54
Generally when an expense is involved in a

6. transaction, an expense will be
Debited
Credited
7. Generally when revenues are involved in a

transaction, a revenue account will be
Debited
Credited
8. The accountant's word to indicate that an entry

will be recorded on the left-side of an account is
Debit
Credit
9. A contra-asset account such as Accumulated

Depreciation will likely have which balance?
Debit
Credit
10. A contra-liability account such as Discount on
Debit
Credit
1433
Notes Payable will likely have which balance?
Third: choose the best answer for the following questions

1. Which of the following appears on the Balance Sheet?
a. Unearned Fees
b. Supplies Expense
c. Service Revenue
d. Fees Earned
2. Which of the following does not appear on the Income Statement?
a. Service Revenue
b. Prepaid Insurance
c. Wages Expenses
d. Rent Income
3. Notes Receivable due in 60 days appears on the:
a. Balance Sheet in the Current Assets section
b. Balance Sheet in the Fixed Asset section
c. Balance Sheet in the Current Liabilities section

d. Income Statement as Revenue
4. Closing entries:
a. Need not be journalized since they appear on the worksheet
b. Need not be posted if the financial statements are prepared from the worksheet
c. Must be journalized and posted
d. Are not needed if adjusting entries are prepared

5. Which of the following accounts should be closed to Income Summary?
a. Accumulated Depreciation
b. Supplies Expense
c. Prepaid Expenses
d. Dividends
6. In the normal manual accounting cycle the:
a. Financial statements are prepared after the adjusting entries are posted
b. Financial statements are prepared after the closing entries are posted
c. Adjusting and closing entries are journalized before financial statements are prepared
d. Post-closing trial balance is prepared before the closing entries are posted
7- Which of the following variations of the fundamental accounting equation is accurate
a. Assets liabilities = owner's equity
b. Assets = liabilities - owner's equity
c. Assets + liabilities = owner's equity
d. Assets + owner's equity = liabilities
55
1433
e. None of these
8- Over a period of time, if total assets increase by 35000 SR and total liabilities increase
by 15000SR, then owner's equity will be increased by
a. 32000 SR
b. 35000 SR
c. 15000 SR
d. 20000 SR
e. None of these
9- Which of the following describes the classification and normal balance of the store
equipment account
a. Capital, debit
b. Revenue, credit
c. Asset, credit
d. Asset, debit
e. Expense, debit
10- A debit may be result in
a. An increase in a liability account
b. An increase in a revenue account
c. A decrease in an asset account
d. An increase in a capital account
e. None of these
11- A person wanting to know the balance of an account would refer to
a. The ledger account
b. The chart of accounts
c. The book of original entry

d. The source document
e. None of these
12- Omar company bought office equipment for 4500 SR. the equipment estimated to
have a useful life of four years and a trade-in value of 1000SR at the end of four years.
Using the straight line method, the amount of one year depreciation of
a. 3500 SR
b. 250 SR
c. 875 SR
d. 4500 SR
e. None of these
13- Using previous data, how much will be the accumulated depreciation after two years
a. 4500 SR
b. 3500 SR
c. 1500 SR
d. 200 SR
56
1433
e. None of these
14- Using previous data, what is the book value of the equipment after the third year of
depreciation ?
a. 2250 SR
b. 3500 SR
c. 1500 SR
d. 2000 SR
e. None of these
15- Examples of current assets are
a. Insurance a company is like to use up within the next twelve months
b. Merchandise inventories that can be turned into cash within twelve months or less
c. Receivables that can be turned into cash within twelve months or less
d. All of these
e. None of these
16- On classified financial statements, prepaid rent is classified as
a. A current asset
b. A general expense
c. Plant and equipment
d. A current liability
e. None of these
17The primary purpose of the balance sheet is to
a. report the financial position of the reporting entity at a particular point in time
b. measure the net income of a business up to a particular point in time
c. determine cash flow for the period
d. report the difference between cash inflows and cash outflows for the period
18An expense is recorded when it is
a. paid
b. incurred
c. 15 days after receipt of invoice

d. earned
19Company XYZ reported the following in 2005; total assets, SR.105,000; total
liabilities, SR.20,000; contributed capital, SR.70,000. Therefore, retained earnings was
a. SR.45,000
b. SR.35,000
c. SR.25,000
d. SR.15,000
20The separate entity assumption states that
a. assets should be recorded at their initial acquisition cost
b. each business is considered to be part of its owners
57
1433
c. the monetary unit should be U.S. dollars
d. for measurement purposes, the resources, debts, and activities of a business should be
kept separate from those of the owners
21A company would report a net loss when
a. retained earnings decreased due to paying dividends to shareholders
b. its assets decreased during an accounting period
c. its liabilities increased during an accounting period
d. its expenses exceeded its revenues for an accounting period

22If Company XYZ owed Company ABC SR.50,000, Company XYZ would reflect this
in its
a. balance sheet
b. income statement
c. statement of cash flows

d. statement of stockholders equity
23Liabilities are defined as
a. possible debts or obligations of an entity as a result of future transactions which will
be paid with assets or services
b. possible debts or obligations of an entity as a result of past transactions which will be

paid with assets or services
c. probable debts or obligations of an entity as a result of future transactions which will

d. probable debts or obligations of an entity as a result of past transactions which will

24Which of the following is not a liability?
a. Accounts payable
b. Accounts receivable
c. Notes payable
d. Income taxes payable
25The principle which holds that all of the expenses incurred in earning revenue
should be identified with the revenue recognized and reported for the same period is
the
a. revenue principle
b. liability principle
c. timing principle
d. matching principle
26An income statement reports
a. revenues, expenses, assets, and liabilities during an accounting period
b. net income of a business for a period of time
c. net income of a business at a point in time
d. resources, liabilities, and stockholders equity of a business at a point in time
58
1433
27A calendar year reporting company preparing its annual financial statements
should use the phrase At December 31, 2005 in the heading of
a. all of the required financial statements it prepares
b. none of the required financial statements it prepares
c. the income statement
d. the balance sheet
28. Omar purchases goods on credit with a list price of SR.100. The supplier gives Omar a
trade discount of 15% and also offers a cash discount of 10% for payment within 30 days.
What is the amount that Omar will debit to his purchases account?
(a) SR.115.00
(b) SR.85.00
(c) SR.76.50
(d) SR.75.00
29. Which of the following is a current liability?

(a) Closing inventory
(b) Opening inventory
(c) Petty cash
(d) Bank overdraft
30. Joy sells the following goods for cash during January:
5 Jan
19 Jan
28 Jan
To Maurice
To Harris
To Merton
Net
SR.
386
715
430
price Sales
SR.
68
125
75
tax
What are the correct entries in Joys general journal?

(a) Dr sales SR.1,799, Dr sales tax SR.268, Cr cash SR.2,067
(b) Dr cash SR.2,067, Cr sales SR.1,799, Cr sales tax SR.268
(c) Dr sales SR.1,531, Dr sales tax SR.268, Cr cash SR.1,799

(d) Dr cash SR.1,779, Cr sales SR.1,531, Cr sales tax SR.268
31. Iwans payables ledger showed that SR .2,300 was owed to suppliers at the start of
the week. During the week Iwan made purchases of SR.3,900 although he paid SR.900 of
59
1433
this in cash. He also paid suppliers SR.1,000 by cheque.

What is the closing balance on his payables ledger?
(a) SR.4,000
(b) SR.4,300
(c) SR.5,200
(d) SR.6,100
32. What business transaction would result in the following double entry being posted?
Dr Cash
Cr Sales
(a) The purchases of goods for resale on credit

(b) The receipt of cash from a credit customer
(c) A cash sale
(d) The banking of petty cash
Second: Fill in the blanks with the word Debit or Credit

A. The right side of an account is the________ side.
B. Asset accounts are increased by a________.
C. Liability accounts are decreased by a________.
D. Expense accounts are increased by a________.
E. The left side of an account is the________ side.
F. Revenue accounts are increased by a ________.
G. Owner's equity is increased by a ________.
H. The normal balance of an asset account is a ________.
I. The normal balance of a liability account is a ________.
J. The normal balance of the common stock account is a ________.
K. The normal balance of the retained earnings account is a ________.
L. The normal balance of revenue account is a ________.
M. The normal balance of an expense account is a ________.
N. The cash account is increased by a ________.
O. The accounts payable account is increased by a ________.
P. The dividend account is increased by a ________.
Q. The accounts receivable account is decreased by a ________.
R. The common stock account is increased by a ________.
S. The retained earnings account is decreased by a ________.
T. The equipment account is increased by a ________.
U. The sum of the debits must be ________ to the sum of the credits
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1433
Fourth:
Which of the following names is NOT associated with the income statement?
P&L
Statement of Financial Position
Statement of Operations
2. The income statement heading will specify which of the following?

a POINT in time
a PERIOD of time
3. Amounts earned by a company in its main operating activities are

revenues
gains
A company disposes of equipment that it no longer uses in its business. The amount
4. received by the company is more than the amount the asset is carried at in the
accounting records. The company will report a(n)
expense
gain
loss
revenue
On December 1 a company borrowed $100,000 at 12% per year. The interest will be
5. paid quarterly, with the first payment due on March 1. What should the company
report on its income statement for December?
nothing
Interest Expense of $1,000
6. Is a retailer's Interest Expense an operating expense or a non-operating expense?

operating expense
non-operating expense
7. The income statement line gross profit will appear on which income statement format?
single-step
8.
The income statement format that segregates the operating revenues and expenses
from the non-operating revenues and expenses is the
single-step
9.
multiple-step
Interest earned on investments would appear in which section of a retailer's multiplestep income statement?
non-operating
10.
multiple-step
operating
Under the accrual basis of accounting, revenues are recognized in the accounting
period in which
cash is received
revenues are earned
11. Net Sales minus the Cost of Goods Sold equals
61
would not appear
gross profit
1433
income from operations
net income
12. The combination of Selling Expenses and Administrative Expenses is referred to as

general expenses
operating expenses
total expenses
13. Which basis of accounting best measures profitability during a short time interval?
accrual basis
cash basis
14. Gross Profit minus Operating Expenses is best defined as

net income
net sales
operating income
15. When an entire division of a company is eliminated, it is referred to as a(n)

discontinued operation
extraordinary item
change in accounting principle
16. A gain or loss that is unusual in nature and infrequent in occurrence is a(n)
17.
extraordinary item
When a company changes its book depreciation from an accelerated method to the
straight-line method, it is considered to be a(n)
extraordinary item
18. If a company's stock is publicly traded, is it a requirement that the

earnings per share appear on the income statement?
Yes
No
19. Are the notes to the financial statements considered to be an integral

part of the financial statements?
Yes
No
20. Is it acceptable that some of the expenses reported on the income

statement be estimates?
Yes
No
Fifth:
1. Another name for the balance sheet is
Statement of Operations
Statement of Financial Position
2. The balance sheet heading will specify a

Period of time
Point in time
3. Which of the following is a category or element of the balance sheet?

Expenses
62
Gains
Liabilities
Losses
1433
V.
4. Which of the following is an asset account?
Accounts Payable
Prepaid Insurance
Unearned Revenue
5. Which of the following is a contra account?

Accumulated Depreciation
Mary Smith, Capital
6. What is the normal balance for an asset account?
Debit
Credit
7. What is the normal balance for liability accounts?
Debit
Credit
8. What is the normal balance for stockholders' equity and owner's

equity accounts?
Debit
Credit
9. What is the normal balance for contra asset accounts?
Debit
Credit
Client Jay pays ABC Co. $1,000 in December 2010 for ABC to perform services for Jay in
February 2011. ABC uses the accrual basis of accounting. In December ABC will debit
Cash for $1,000. What will be the other account involved in the December 2010
10.
accounting entry prepared by ABC (and what type of account is it)?
Accounts Receivable (asset)
Prepaid Services (asset)
Service Revenues (revenue)
Unearned Revenues (liability)
ABC Co. performed services for Client Kay in December 2010 and billed Kay $4,000 with
terms of net 30 days. ABC follows the accrual basis of accounting. In January 2011 ABC
11.
received the $4,000 from Kay. In January 2011 ABC will debit Cash, since cash was
received. What account should ABC credit in the January 2011 entry?
Accounts Receivable
Service Revenue
Owner's Equity
ABC Co. follows the accrual basis of accounting and performs a service on account (on
credit) in December 2010. The service was billed at the agreed upon amount of $3,500.
12. ABC Co. debited Accounts Receivable for $3,500 and credited Service Revenue for
$3,500. The effect of this entry on the balance sheet of ABC is to increase assets by
$3,500 and to
Decrease assets by $3,500
Increase owner's (stockholders') equity by $3,500
13. Which of the following would not be a current asset?

Accounts Receivable
Land
Prepaid Insurance
14. Which of the following would normally be a current liability?

Note Payable due in two years
63
Unearned Revenue
Supplies
1433
When an owner draws $5,000 from a sole proprietorship or when a corporation

15. declares and pays a $5,000 dividend, the asset Cash decreases by $5,000. What is the
other effect on the balance sheet?
Owner's/stockholders' equity decreases
None
ABC Co. incurs cleanup expense of $500 on December 30, 2010. The supplier's invoice
states that the $500 is due by January 10, 2011 and ABC will pay the invoice on January
16. 9. ABC follows the accrual basis of accounting and its accounting year ends on
December 31. What is the effect of the cleanup service on the December balance sheet
of ABC?
Assets decreased
Liabilities increased
No effect on owner's equity
17. Deferred credits will appear on the balance sheet with the
Assets
Liabilities
Owner's/Stockholders' Equity
18. Notes Payable could not appear as a line on the balance sheet in which classification?
Current Assets
Current Liabilities
Long-term Liabilities
On December 15, 2010 ABC Co. hired Juanita Perez to begin working on January 2, 2011
19. at a monthly salary of $4,000. ABC's balance sheet of December 31, 2010 will show a
liability of
$4,000
$48,000
No Liability
ABC Co. has current assets of $50,000 and total assets of $150,000. ABC has current
20. liabilities of $30,000 and total liabilities of $80,000. What is the amount of ABC's
owner's equity?
$20,000
$30,000
$70,000
$120,000
21. The amount reported on the balance sheet for Property, Plant and
Equipment is the company's estimate of the fair market value as of
the balance sheet date.
True
False
22. The total amount reported for stockholders' equity is the approximate
fair value or net worth of the corporation as of the balance sheet date.
True
False
23. The book value of a corporation is the total amount of stockholders'

equity reported on the balance sheet.
True
False
True
False
24. An acceptable heading for the balance sheet is:

ABC Corporation
Balance Sheet
For the Year Ended December 31, 2010
64
65
1433

Financial Accounting Cycle

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Financial Accounting Cycle

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Financial accounting

[FINANCIAL ACCOUNTING CYCLE]

Financial Accounting Cycle

The type of account determines whether a debit or a On

Liabilities (accounts payable)

Owner's Equity (retained earnings)

[FINANCIAL ACCOUNTING CYCLE]

Income Statement Account quick reference

The type of account determines whether a debit or a credit is On the Left On

4th. Post to ledger transfer the journal entries to ledger accounts

[FINANCIAL ACCOUNTING CYCLE]

Accounting Cycle: Steps at the end of the accounting period

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

The accounting cycle can be summarized and depicted diagrammatically below:

The Accounting Equation

Assets = Liabilities + Equity

[FINANCIAL ACCOUNTING CYCLE]

Assets + Expenses = Liabilities + Equity

[FINANCIAL ACCOUNTING CYCLE]

Beginning of the year

Net Income + Capital Stock Issued Dividends = Increase in Owner's equity

[FINANCIAL ACCOUNTING CYCLE]

Rules of Debit and Credit

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

Utilities Expense Debit

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

Posting accounts and the ledger

[FINANCIAL ACCOUNTING CYCLE]

[FINANCIAL ACCOUNTING CYCLE]

Jan 21. Purchased goods from Adham 900

[FINANCIAL ACCOUNTING CYCLE]

Balance = 1019000 (total debit) 617780 (total credit)

[FINANCIAL ACCOUNTING CYCLE]

Balance = 1000000 (total credit) 0 (total debit)

Balance = 70000 (total debit) 0 (total credit)

Balance = 70400 (total debit) 0 (total credit)

Joy Traders account

Return outwards 800

Balance = 10000 (total debit) 10000 (total credit)

Balance = 18000 (total debit) 18000 (total credit)

Return outwards account

Balance = 800 (total credit) 0 (total debit)

[FINANCIAL ACCOUNTING CYCLE]

Balance = 800 (total credit) 0 (total debit)

Balance = 505000 (total debit) 17800 (total credit)

Balance = 46250 (total credit) 0 (total debit)

Balance = 7200 (total debit) 5000 (total credit)

Balance = 3400 (total credit) 0 (total debit)

[FINANCIAL ACCOUNTING CYCLE]

Balance = 14000 (total debit) 14000 (total credit)

Balance = 500 (total debit) 0 (total credit)

Balance = 000 (total credit) 0 (total debit)

1. The basic accounting equation is Assets = Liabilities + ____ _.

equity account: _ _.