‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬

‫א‬‫א‬‫א‬ ‫א‬ 



Content

Part one
Introduction – flowchart – analyzes transactions
– classifies accounts
– Journalize – Post – Trial balance

Part two
Adjusting entries – Adjusted trial balance
– Financial statements – Closing entries
– Post closing trial balance
– Sample of accounting voucher

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‫א‬‫א‬‫א‬ ‫א‬ 


Part one
Introduction:
Accounting is the art of recording, summarizing, classifying and reporting financial
transactions and other events of an enterprise.

The following flowchart shows the steps in the accounting cycle. These are the
accounting procedures normally used by enterprises to record transactions and prepare
financial statements

Transactions (١)

Analyze and
Post Closing
Classify (٢)
Trial Balance
(١٠)

Journalize (٣)

Closing (٩) General Journal

THE
ACCOUNTING
(Nominal
CYCLE
Accounts) Posting (٤)

General Ledger

Financial Trial Balance

Statement Preparation
Preparation (٥)
(٨)
Income Adjusting Entries (٦)
Statement Accruals
Prepayments
Estimated items

Adjusted trial balance (٧)

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‫א‬‫א‬‫א‬ ‫א‬ 
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Below, the flowchart steps have been explained in detail:

١. Transaction:
The processing of accounting data begins with an economic transaction, where two
or more parties engage in an exchange of goods or services for some form of
consideration. Evidence of this happening is the receipt of some form of a source
document. Common examples of such a source document include:

• A sales receipt - this can be in a variety of forms.

• A purchase invoice.
• A debit/credit memorandum.
• A copy of a contract entered into.
• A billing statement.
• A remittance statement.

There are a multitude of source documents, in type, shapes, and format used to record
the significant data. It is these documents, which become the basis for data input to the
accounting processing. But, prior to the actual data entry, the documents must be
subjected to a series of analysis and classification.

٢. Analyze and classify:

٢٫١. Analyze:
This phase of the accounting process includes the application of several of the
accounting principles, namely:

The Entity Concept - This is probably the most basic of all concepts in accounting.
As applied here in this phase of the accounting process, the analysis must determine
that the transaction in question, first relates to the entity in question. If not it must be
rejected and not allowed to continue through the process.

Monetary Concept - In addition the analysis must determine that the transaction can
be measured in terms of a monetary basis. Those transactions, which cannot be
measured in terms of amount (for e.g., Saudi Riyals), are eliminated from further
consideration for inclusion in the accounting process.

Cost Principle - All transactions are recorded at cost and not at current market value.
Cost is determined from the source documents used as evidence of the transaction.

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

٢٫٢. Classify:
Once past the analysis phase, the transaction is then properly classified in
preparation for entry into the accounting database, commonly using a Chart of
Accounts.

Chart of Accounts - The design of a good accounting system begins with the Chart
of Accounts. This is a list of the accounts, which comprise the particular accounting
system (it is designed with the particular company and its needs for information).
Accounts are grouped according to their relationship in the accounting equation
(i.e., assets, liabilities, owner's equity, revenues and expenses). The numberings
scheme assigns a block of numbers to the respective groups. A typical assignment
of numbers might be as follows:

Assets ١٠٠-١٩٩
Liabilities ٢٠٠-٢٩٩
Owner’s Equity ٣٠٠-٣٩٩
Revenues ٤٠٠-٤٩٩
Expenses ٥٠٠-٥٩٩

The numbering blocks should provide a convenient manner for adding new
accounts without having to renumber the accounts. Sometimes the account numbers
are designed to provide additional information as to location, cost codes, etc. In any
event they assist in arranging the accounts for convenience of financial statement
preparation, account location, and category identification.

The next consideration is that of determining whether this transaction when

recorded in the account will cause the balance of that account to be increased or
decreased. Depending upon the type of account and what side of the accounting
equation it appears, this means it must be reported as a debit or a credit. Of course
the basic rule of having debits and credits equal must be followed. That means each
transaction will require at lease one debit and one credit identity to be recorded
correctly. Finally, a transaction can affect multiple accounts, requiring more than
one debit and/or one credit in order to properly record it in the accounting process.

٣. Journalize:
This step in the accounting cycle represents the first time that the transaction enters
the accounting database. It is the data entry phase. Here the transaction, having been
analyzed and classified, is recorded in the Accounting Voucher.

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In entering the transaction, various types of vouchers depending on the type of

organization are used. However, the most commonly used format of an accounting
voucher is attached in Appendix.

Sometimes, accounting vouchers are not prepared and transactions are directly entered
into Journals and this is for this reason that the journal is referred to as the "book of
original entry." The journal can be likened to a diary in which events are recorded in
chronological order of their occurrence. In the accounting process, two types of
journals are used:

٣٫١. General Journal

In the General Journal, transactions are recorded as they were analyzed and
classified. First the event is dated as to when it actually happened. Then the debit
side of the transaction is recorded first by itemizing the account(s) that must be
debited. The amount(s) to be debited are then entered in the column to the left. This
process is continued until all of the debits have been recorded. The recording shifts
to the account(s) to be credited. The recording(s) for the credits are indented to
offset them from the debit recording(s). After recording the account(s) to be
credited, the amounts are then entered into the column to the left of that of the
debits.

If the transaction required only one debit and one credit, this is referred to as a
simple entry. On the other hand, it is requires more than one debit and/or credit; it is
referred to as a compound entry.

٣٫٢. Special Journals

As their name implies, these journals are used to record uniquely classified
types of transactions by use of specially designed journals. They are designed to
meet the needs of the specific entity, which uses them. There is no common format
for their design, as this is determined by the individual entities. However, the most
commonly used special journals are as follows:

• Sales Journals - generally used to record all credit sales of merchandise

inventory items.
• Purchases Journals - generally used to record all credit purchases of
merchandise inventory items.
• Cash Receipts Journals - generally used to record all inflows of cash.
• Cash Payments (Disbursement) Journals - generally used to record all
outflows of cash.
• NOTE: The check register is sometimes used in place of the Cash Receipts
and Cash Payments Journals.

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٤. Post:
Posting refers to the process of transferring or transcribing the information
contained in the journal entries to the appropriate accounts in the general ledger.
During this process debits in the journal entry are posted as debits in the ledger, and
credits in the journal entry are posted as credits in the ledger. Along with the debits and
credits, the information transferred includes the date of the journal entry and the
voucher reference. This cross-reference is the audit trail by which a transaction can be
traced from its entrance into the system via the journal/voucher to the final destination
in the general ledger. This is an important part of the processing of accounting data.

General Ledger
The general ledger is the heart of any accounting system. It is the permanent record
of the consequences resulting from the accumulation of transaction throughout the life
of the entity. Each account in the accounting system has its separate page in the general
ledger. In addition each account has its unique identification in the form of an account
number as specified in the Chart of Accounts.

Subsidiary Ledger
An enterprise constantly needs detailed information about its dealings with
individual customers and creditors. To provide this information, companies with
several thousand customers and creditors, use a subsidiary ledger to keep track of
individual balances. Thus a typical merchandising enterprise has subsidiary ledgers
containing accounts with customers (customers’ ledger) and creditors (creditors’
ledger). An account in the general ledger is maintained that summarizes the details in
the accounts receivable and accounts payable ledgers. This summary account in the
general ledger is called a control account, because the summary account controls the
subsidiary ledger.

٥. Trial balance:
Simply defined, a Trial Balance is a list of all of the general ledger accounts having
a balance amount as of that date. It contains the following columns:
• Account Number (from chart of accounts)
• Account Title(s).
• Applicable debit amounts.
• Applicable credit balance.

A trial balance provides a check on the accuracy of the postings, which occurred during
the period by showing that the total debits posted equals the total credits posted. It is
prepared at any time, following the posting of all journal entries. However, it is
routinely prepared at the end of the accounting period, prior to making any adjustments
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to the books. Thus, the trial balance is a test of the mathematical equality of debits and
credits after all postings have been completed. Its preparation is essential to the
processing events leading up to the preparation of the financial statements.

٦. Adjusting entries:
Throughout an accounting period, an entity will continue to be engaged in a variety
of economic transactions. Some of those will affect the current period, while some of
them will affect future periods throughout the life of the entity. At the time that they
occur, each of these transactions, are supported by a source document (see step ١
above). If they are applicable to the current period, their flow through the accounting
system is straight forward and without the need for any special handling or
considerations.

However, those transactions, which effect the present and future accounting periods,
will at some future date require special considerations and handling. The special
considerations are caused by absence of a source document, which gives cause to their
existence. Keep in minds that these transaction either happened in a prior period or
have not yet happened The special handling is a continuation of the special
consideration, in that these transaction must be dealt with in a manner which adjusts
their effects in the current period, by means of special journal entries. Many have
already been recorded in the accounting system. What is needed then is to ensure that
their consequences are applied to the proper accounting period. Some of the examples
of adjusting entries are:

• Accruals
• Amortization of prepayments and intangibles
• Deferred revenues and expenses

Also some, balances have to be reclassified from one account to another for the
purpose of proper presentation in the financial statements. Some of the examples of
such transactions are as follows:

• Reclassification of current portion of long-term loan from long term liability

to current liability
• Reclassification of debit balances in creditors account
• Reclassification of credit balances in debtors account

This, then, is accomplished through the use of Adjusting Entries and Reclassifying
entries.

-٩-
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
‫א‬‫א‬‫א‬ ‫א‬ 


٧. Adjusted trial balance:

After all Adjusting Entries and Reclassifying Entries have been journalized and
posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. It
shows the balance of all accounts, including those that have been adjusted, at the end of
the accounting period. The purpose of an adjusted trial balance is to show the effects
of all financial events that have occurred during the accounting period. The financial
statements are usually prepared from this trial balance.

٨. Financial statements:
The following are the basic financial statements, which are prepared at the end of
each accounting period. Each portrays a different representation of the entities financial
status and results of activities. All of them are linked together in a manner, which
presents the financial position and results of economic activities, and therefore all three
must always be presented together.

Income Statement

Income statement:
• Presents the results of economic activities, which occurred during the
specific accounting period.
• Bridges the balance sheet of the previous accounting period with that
of the current accounting period. Therefore, it covers a period of time.
• Develops the net income for the current accounting period. This is used
to reflect the profitability of that period.
• is linked to the balance sheet via the net income amount, which appears
in both of those statements.

Statement of Changes in Owners’ Equity

Presents the changes that have occurred in the owner's equity as a result of the
current period's activities. Therefore its results represent what occurred within a period
of time. It is linked to the balance sheet via the capital account, retained earnings, and
any reserves.

Balance Sheet
Sometimes referred to as the statement of financial position, reports the assets,
liabilities, and owner’s equity of an enterprise at a specific date.

- ١٠ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
‫א‬‫א‬‫א‬ ‫א‬ 


Statement of Cash Flows

The basic purpose of a statement of cash flows is to provide relevant information
about the cash receipts and cash payments of an enterprise during a period. To achieve
this purpose, the statement of cash flows reports the cash effects of:
• Operations during a period
• Investing transactions
• Financing transactions; and
• Net increase or decrease in cash during the period

٩. Closing entries
Closing an account means to "bring the balance to zero". We close what we call
the temporary (or nominal) accounts. In the closing process all of the revenue and
expense account balances (income statement items) are transferred to a clearing or
suspense account called Income Summary (or Income for the year), which is used only
at the end of each accounting period (yearly). Revenues and Expenses are matched in
the Income Summary account and the net result of this matching, which represents the
net income or net loss for the period, is then transferred to an owners’ equity account
i.e., retained earnings. All closing entries are posted to the appropriate general ledger
accounts.

١٠. Post closing trial balance

A trial balance is prepared after all temporary accounts have been closed. The
accounts, which remain open are called real accounts and include: Asset accounts,
Liability accounts and the Capital account. In other words, the balance sheet accounts
remain open.

Practical Session:
Although, an attempt has been made above to explain how an accounting cycle
works, but in order to make the students understand the whole process of flow of
transactions from beginning till the financial statements are produced, a practical session
including the following steps is recommended:

• A chart of accounts should be created keeping in view requirements of a

service enterprise.
• Accounting vouchers must be prepared for transactions affecting all aspects
of the financial statements using the form in Appendix ١.
• Vouchers must be posted to their individual General Ledger Accounts using
the form in Appendix ٢.
• A trial balance should be prepared using the final balances in general ledger.

- ١١ -
‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
‫א‬‫א‬‫א‬ ‫א‬ 


• Adjusting and reclassifying entries must be prepared and then posted to

general ledger.
• Adjusted trial balance should be prepared.
• Financial statements should be prepared from the adjusted trial balance.
• Closing process should be performed.
• A post closing trial balance should be prepared.
• Opening of a new accounting period in the books should be demonstrated
using the post closing trial balance.

- ١٢ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
‫א‬‫א‬‫א‬ ‫א‬ 


Appendix 2
XYZ COMPANY
GENERAL LEDGER

Account No.______________ Account Description____________________________

Voucher Balance
Date Description Debit Credit
No. Debit/(Credit)

- ١٣ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 



‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬
 W‫א‬‫א‬‫א‬
KFlow chart ‫א‬‫א‬ K١
K‫א‬‫א‬‫א‬‫א‬‫ א‬K٢
 K‫א‬‫ א‬K٣
 K‫א‬‫א‬‫א‬‫א‬ K٤

 Journalize‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬
 Ledger‫א‬ post ‫א‬Journal ‫א‬
‫א‬ ‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬
 K‫א‬‫א‬

‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬
 W‫א‬‫א‬
Classification of accounts‫א‬J
Accounting equation  ‫א‬‫ א‬J 
 Debits & Credits ‫א‬‫א‬‫א‬‫א‬‫א‬J
Double entry ‫א‬‫א‬J

- ١٤ -
‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Contents

Part one
Classification of accounts - Debits & Credits

Part two
General Journal - Journalizing

Part three
General ledger - posting to the accounts - Preparation of trail balance

- ١٧ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Part one

Classification of accounts
Two types of accounts:

First: Accounts belong to the Balance Sheet and represent the basic accounting equation.
These accounts are:

١. Assets ٢. Liabilities ٣.Owners Equity

(Assets must be equal to the sum of Liabilities and Owners equity)

- ١٨ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


١. Assets
Assets are the cash and non cash resources owned by a business and have economic
value, and used in carrying out future services or benefits to the entity using them.

Classification of assets:
- Current assets
Current assets are cash and other types of assets that are reasonably expected
to be converted into cash, sold, or used up during the normal operating year.

Examples of current assets include:

Cash, Bank, Goods, Accounts Receivable, Prepaid expenses, Inventory and
Marketable securities etc.

- Fixed assets
Fixed assets are those assets that are used in the normal operations of the
entity to produce and sell goods or perform services for customers. Fixed assets
are expected to service for a number of years are not for re-sell.

Examples of fixed assets include:

Lands, cars, buildings, equipments, and furniture etc.

- Intangible assets
Intangible assets are those assets that have no physical substance but they
are expected to provide benefits to the entity for several years.

Examples of intangible assets include:

Patents, trade marks, copyrights, goodwill, franchise fees, and trade name.

٢. Liabilities
Liabilities are claims against assets.

Classification of Liabilities:
- Short-term Liabilities

- ١٩ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Short-term liabilities are obligations of the entity that are reasonably

expected to be paid or settled in the next year or the normal operating cycle.

Examples of short-term liabilities include:

Short-term notes payable, accounts payable, salaries and wages payable and
other types of accrued liabilities for services received but not yet paid for.

- Long-term Liabilities
Long-term liabilities are those obligations that do not require payment within
the next year or the normal operating cycle. In other words, liabilities not classified
as short-term are reported in the Long-term liabilities section of the balance sheet.

Examples of long-term liabilities include:

Loan, bonds, and any other obligation that mature in a period more than one
year beyond the balance sheet date is reported as long-term.

٣. Owner’s Equity
Owner’s equity represents the owner’s interest in the assets of the entity. It is
equal to total assets minus total liabilities.

There are two main sources of owner’s equity:

(١) Amounts contributed by the owner (Capital) and (٢) Amount earned by the entity
but not yet taken by the owner.

Second. Accounts belong to the Income Statement and involve in the determination of
net income or net loss of a business entity for a specific period of time. These accounts
are:
١. Expenses ٢. Revenues

١. Expenses
Expenses are the cost of assets consumed or services used in the process of earning
revenue in other words; expenses are outflows or other uses of assets resulting from the
sale or delivery of goods or the provision of services by the entity during specific time
period.

Examples of expenses include:

Utility expenses (electric and water), telephone bill expense, rent expense, wages and
salaries expense and depreciation expense etc.

- ٢٠ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


٢. Revenues
Revenues are cash in-flow result from the sale of goods or the rendered of services.

To illustrate the affect (increase & decrease) of a financial transaction on the above
classified accounts, study the following chart:

Basic Accounting Equation

Basic Equation Assets = Liabilities + Owner equity

Expanded
Basic Equation Assets + Expenses= Capital Revenue Liabilities
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Debit / Credit + ─_ + ─ ─ + ─ + ─ +
Effects

You have already learned the basic accounting equation. However, in the above
illustration note the expansion of the basic accounting equation to show the accounts that
comprise owner’s equity besides expenses and revenues with their effect (increase,
decrease) of the debit /credit rules on each type of account.

To student

Please study the above diagram carefully; it will help you understand the
fundamentals of the double-entry system.

To trainer (instructor)

Please give the student example of transaction analysis for a service entity to
illustrate the effect of the financial transaction on the expanded basic equation. For
example:

Transaction (١) Investment by owner. December ١٠, ٢٠٠٢. Saleh started his
workshop by investing SR ١٠٠،٠٠٠/-, he deposited it in the bank as a capital.
- ٢١ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Assets + Expenses = Liabilities + Revenue + Owner’s equity

Bank Capital
(١) +١٠٠،٠٠٠ + ٠ = ٠ + ٠ + ١٠٠،٠٠٠

Transaction (٢) purchase of equipment for cheque. at December ١٥, ٢٠٠٢. Saleh
purchased a computer for SR ٢٠،٠٠٠ paid by cheque.

Assets + Expenses = Liabilities + Revenue + Owner’s equity

Bank + Computer = ٠ + ٠ + Capital

١٠٠،٠٠٠ (Old balance) ١٠٠،٠٠٠

(٢) -٢٠،٠٠٠ + ٢٠،٠٠٠

New balance
٨٠،٠٠٠ + ٢٠،٠٠٠ = _______
١٠٠،٠٠٠ ١٠٠،٠٠٠

Debits and Credits

The terms debit and credit mean left and right, respectively, the abbreviation of
these two words as follows:

* Debit Dr. * Credit Cr.

* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).

A ┬ Account has a left side and a right side, thus, an account is debited when an amount is
entered on the left side and credited when an amount is entered on the right side. Whether
a debit or credit is an increase or decrease to the account balance depends on the account
classification as illustrated below:

- ٢٢ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Assets Liabilities
Example: Cash Example: Accounts payable
Dr. Cr. Dr. Cr.

Debit to Credit to Debit to Credit to

increase decrease decrease increase

+ ─ ─ +

Expenses Revenues
Example: Salaries Example: Sales of goods
Dr. Cr. Dr. Cr.

Debit to Credit to Debit to Credit to

increase decrease decrease increase

+ ─ ─ +

Owner’s equity
Example: Capital
Dr. Cr.
Debit to Credit to

decrease increase

─ +

- ٢٣ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


General Journal

Double Entry System

As you have learned, every recorded transaction affects at least two accounts. This
dual effect is known as double-entry accounting. Note, however, that the term “double
entry” does not mean that a transaction must affect each side of the transaction, it may
effects one.

Example:

Transaction (٢) – illustrated earlier – purchase of equipment for cheque – Saleh

purchased a computer for ٢٠،٠٠٠ SR paid by cheque. This transaction results in an
equal increase and decrease in total assets, though the composition of assets is changed:
Bank is decreased by ٢٠،٠٠٠ SR and the assets Equipment is increased by ٢٠،٠٠٠ SR

Before You Go on

Review it

١. What are the classifications of accounts?

٢. Give an example for each classified account?
٣. What are the accounts that belong to the income statement, and what are those
belong to the Balance sheet?
٤. What do the term debit and credit mean?
٥. What are the debit and credit effects on assets, liabilities, owner’s equity, expenses
and revenues?
٦. What does double entry mean?

Do it

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‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


I. Place the missing items in the following statements:

١. the accounting equation is _________ = ________ + _______

٢. the accounting elements are documents ________ , ________

٣. Items required by an entity that have monitory value are known as

_____________.

٤. _________ is the interest of the owners in Business.

٥. Financial events that occur in an entity are termed ________.

٦. An investment in the entity increase ________ and _______.

٧. To purchase “on account” is to create a _________.

٨. When the words “paid on account” occur, it means a reduction of the assets
_________ and reduction of the liability ________.

٩. The left side of the account is known as the ________, where as the right side
is the ___________.

١٠. The balance sheet contains ____________, __________, and __________.

Answers: ١. assets, liabilities, owner’s equity; ٢. accounting records, financial report; ٣. assets;
٤. owner’s equity; ٥. transactions; ٦. assets, owner’s equity; ٧. liability; ٨. cash or
bank, accounts payable; ٩. the debit side, the credit side; ١٠. assets, liabilities and
owner’s equity.

- ٢٥ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


II. Transactions completed by Saleh work shop, appear below. Indicate increase
(+), decrease (─), or no change (٠) in.

Owner’s
Expenses Revenues Assets Liabilities
Equity
a. Invested ١٠٠،٠٠٠ SR, and
deposit it in a bank
b. Paid rent expense for the
month
c. Transfer money from the
bank to the cash
d. Cash collected for the
week revenue
e. Bought mechanic
equipment paying cash
f. Bought equipment on
account
g. Paid a creditor (liability)
money owned

Solution Owner’s
Expenses Revenues Assets Liabilities
Equity
a. Increase of bank and ٠ ٠ + ٠ +
capital
b. Reduction of bank and
+ ٠ ─ ٠ ٠
increase expenses
c. Increase of cash and
٠ ٠ ± ٠ ٠
decrease of bank
d. Increase of cash and
٠ + + ٠ ٠
revenues
e. Increase of equipment and
٠ ٠ ± ٠ ٠
decrease of cash
f. Increase of equipment and
٠ ٠ + + ٠
in accounts payable
g. Decrease in cash and
٠ ٠ ─ ─ ٠
accounts payable
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 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Part Two

General Journal
- It is the first book to record financial transaction in chronological order.
- It has spaces for date, accounts titles & explanations, references, and two money
columns, as illustrated below:

General Journal J١
Title & explanation Ref. Debit Credit
٢٠٠٢
Dec ١
٠
١
٥
١
٦

Journalizing
Entering transaction data into Journal is known as Journalizing.

Steps for journalizing a transaction

- Analyze the transaction to determine which accounts are affected.
- Analyze the accounts to determine which account is the debit part and which one is
the credit part.
- Record the transaction following the example illustrated below.

General Journal J١
Date Title & Explanation Ref. Debit Credit
٢٠٠٢
Nov. ٢٥ Bank ١٠٠،٠٠٠
Capital ١٠٠،٠٠٠
Investment in workshop business
Dec. ٠١ Rent expense ١٠،٠٠٠
Bank ١٠،٠٠٠
Payment of office rent cheque
No.٢

Note: The date should be entered in the date column.

- The year and the month are not repeated until the start of a new page or a new
month.
- ٢٧ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


- The title of the account to be debited is entered against the left margin of the title &
explanation column.
- The amount to be debited to each account is entered in the debit column on the same
line as the account title.
- The account to be credited follows the same steps except being in the credit side.
- An explanation of the transaction may be entered on the next line below the journal
entry.
- The posting reference column is left blank till the transaction is being posted.

Example:
During the month of January, Mr. Al-rashed, lawyer.
١. Invested SR٥٠, ٠٠٠ to open his law practice.
٢. Bought supplies (stationery, forms, pencils, etc) for cash, SR٣, ٠٠٠.
٣. Bought office equipment from Al-aamer Furniture Company on account, SR٢٥, ٠٠٠.
٤. Received SR٢٠, ٠٠٠ in fees earned during the month.
٥. Paid office rent for January, SR٥, ٠٠٠.
٦. Paid salary for part-time help, SR٢, ٠٠٠.
٧. Completed a consultation to one of his friends for SR١٥, ٠٠٠ cash.
٨. Paid SR١٠،٠٠٠ to Al-aamer Furniture Company on account.

These transactions might be analyzed and recorded as follows in next

pages:

- ٢٨ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Transaction (١) Mr. AL-rashed invested SR ٥٠،٠٠٠ to open his law practice. There
are two accounts that are affected: the asset Cash is increased, and the capital of the
firm is increased by the same amount.

Ass & Expenses = Liabilities & Revenues &

ets Owner’s Equity

Cash + ٠ = ٠ + ٠ + Capital
+ +SR٥٠،٠٠٠
SR٥٠،٠٠٠

Transaction (٢) Bought supplies for cash, SR٣, ٠٠٠. In this case, Mr. AL-rashed is
substituting one asset for another: He is receiving (+) the asset Supplies and paying
out () the asset Cash. Note that the capital of SR٥٠, ٠٠٠ remains unchanged, but
there is still equality.

Assets & Expenses = Liabilities & Revenues & Owner’s Equity

Cash + Supplies ٠ + ٠ + Capital

SR٥٠،٠٠٠ SR٥٠،٠٠٠
 ٣،٠٠٠ + +SR٣،٠٠٠ = _______
SR٤٧،٠٠٠ SR٣،٠٠٠ SR٥٠،٠٠٠

Transaction (٣) Bought office equipment from Al-aamer Furniture Company on

account, SR٢٥, ٠٠٠. He is receiving the asset Equipment but is not paying for it
with the asset Cash. Instead, he will owe the money to the Al-aamer Furniture
Company. Therefore, he is liable for this amount in the future, thus creating the
liability Accounts Payable.

- ٢٩ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Assets & Expenses = Liabilities & Revenues & Owner’s

Equity

Cash + Supplies + Equipment Accounts AL-rashed, Capital

Payable SR٥٠،٠٠٠
SR٤٧،٠٠٠ SR٣،٠٠٠ __________
_________ + ________ + +SR٢٥،٠٠٠ = + ٠ + SR٥٠،٠٠٠
SR٤٧،٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ +SR٢٥،٠٠٠
SR٢٥،٠٠٠

Transaction (٤) Received SR٢٠, ٠٠٠ in fees earned during the month. Because he
received SR٢٠, ٠٠٠, the asset Cash increased and also his capital increased. It is
important to note that he labels the SR٢٠, ٠٠٠ Fees Income to show its origin. This
is known as Revenue or Income.

Assets & Expenses = Liabilities & Revenues & Owner’s

Equity

Cash + Supplies + Equipment Accounts Payable Fees Capital

SR٤٧،٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR٢٥،٠٠٠ Income SR٥٠،٠٠٠
+ ٢٠, ٠٠٠ + _______ + ________ = _________ + SR ٢٠, ٠٠٠ + ________
SR٦٧،٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR٢٥،٠٠٠ _________ SR٥٠،٠٠٠
SR ٢٠, ٠٠٠

Transaction (٥) Paid office rent for January, SR٥, ٠٠٠. When the word “paid” is
stated, you know that it means a deduction from Cash, since he is paying out his
asset Cash. Payment of expense is a reduction of capital. It is termed Rent Expense.

Assets & Expenses = Liabilities & Revenues & Owner’s

Equity
Office rent = Fees Income Fees Income
Cash + Supplies + Equipment + SR ٥،٠٠٠ Accounts SR ٢٠،٠٠٠ SR ٢٠،٠٠٠ Capital
+SR٦٧،٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ _________ Payable ________ ________ SR ٥٠،٠٠٠
 ٥،٠٠٠ + ________ + __________ + SR ٥،٠٠٠ SR٢٥،٠٠٠ + SR ٢٠،٠٠٠ + SR ٢٠،٠٠٠ + ________
SR ٦٢،٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ _________ SR ٥٠،٠٠٠
SR٢٥،٠٠٠

Transaction (٦) Paid salary for part-time help, SR٢, ٠٠٠. Again the word “paid”
means a deduction of cash and a reduction in capital. This time it refers to Salaries
Expense.

- ٣٠ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Assets & Expenses = Liabilities & Revenues & Owner’s

Equity
Part-time Accounts Payable Fees Income
Cash + Supplies + Equipment + Office rent + Salary SR٢٥،٠٠٠ SR ٢٠،٠٠٠ Capital
SR٦٢, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR ٥،٠٠٠ SR٢،٠٠٠ _________ ________ SR ٥٠،٠٠٠
 ٢, ٠٠٠ + ________ + __________ + ________ + _________ = SR٢٥،٠٠٠ + SR ٢٠،٠٠٠ ________
SR٦٠, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR ٥،٠٠٠ SR٢،٠٠٠ SR ٥٠،٠٠٠

Transaction (٧) Completed a consultation to one of his friends for SR ١٥،٠٠٠. He

received cash.

Assets & Expenses = Liabilities & Revenues & Owner’s

Equity
Part-time Accounts Fees Income
Cash + Supplies + Equipment + Office rent + Salary Payable SR ٢٠،٠٠٠ Capital
SR٦٢, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR ٥،٠٠٠ SR٢،٠٠٠ SR٢٥،٠٠٠ + SR ٥٠،٠٠٠
 ٢, ٠٠٠ + ________ + __________ + ________ + _________ = _________ + Consulta-tion ________
SR٦٠, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ SR ٥،٠٠٠ SR٢،٠٠٠ SR٢٥،٠٠٠ fees SR ٥٠،٠٠٠
+ SR ١٥،٠٠٠
SR١٥, ٠٠٠ SR ٣٥،٠٠٠
SR٧٥, ٠٠٠

Transaction (٨) Paid SR١٠, ٠٠٠ to Al-aamer Furniture Company on account. Here
Mr. Saleh is reducing the asset Cash because he is paying SR١٠, ٠٠٠, and reducing
the liability Accounts Payable. He will now owe SR١٠, ٠٠٠ less.
Assets & Expenses = Liabilities & Revenues & Owner’s
Equity
Part-time Accounts Fees Income
Cash + Supplies + Equipment + Office + Salary Payable SR ٢٠،٠٠٠ Capital
SR٦٢, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ rent SR٢،٠٠٠ SR٢٥،٠٠٠ + SR ٥٠،٠٠٠
 ٢, ٠٠٠ + ________ + __________ + SR ٥،٠٠٠ + _________ = _________ + Consulta- ________
SR٦٠, ٠٠٠ SR٣،٠٠٠ SR٢٥،٠٠٠ ________ SR٢،٠٠٠ SR٢٥،٠٠٠ tion fees SR ٥٠،٠٠٠
+ SR ٥،٠٠٠ ─ SR ١٥،٠٠٠
SR١٥, ٠٠٠ SR١٠،٠٠٠ SR ٣٥،٠٠٠
SR٧٥, ٠٠٠ SR١٥،٠٠٠
─
SR١٠،٠٠٠
SR٦٥،٠٠٠

- ٣١ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Summary

١. The four phases of accounting are __________, __________, __________, and

_____________.
٢. The accounting equation is _________ = __________ + ___________.
٣. Items owned by a business that have monetary value are known as
________________.
٤. ___________ is the interest of the owners in a business.
٥. money owed to an outsider is a(n) ______________.
٦. the difference between assets and liabilities is _____________.
٧. financial events that occur in a business are termed ______________.
٨. an investment in the business increases ________ and ______________.
٩. to purchase “on account” is to create a(n) ____________.
١٠. when the words “paid on account” occur, it means a reduction of the asset
__________ and reduction of the liability _____________.
١١. income increases net assets and also ___________.
١٢. a withdrawal of cash reduces cash and ____________.

Answers: ١. recording, classifying, summarizing, reporting; ٢. assets, liabilities,

owner’s equity; ٣. assets; ٤. owner’s equity; ٥. liability; ٦. owner’s equity; ٧.
transactions; ٨. assets, owner’s equity; ٩. liability; ١٠. cash, Accounts Payable; ١١.
owner’s equity; ١٢. capital.

- ٣٢ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Determine what accounts are affected, by how much, and if it is an

increase (+), decrease (-), or there is no effect (٠).

Nov. ٥ Invested SR٧, ٠٠٠ cash and SR٤٠٠ of supplies into the business
٧ Received SR٤،٢٠٠ for services rendered
٩ Purchased equipment on account, SR٣, ٧٠٠
١١ Paid SR٧٥٠ for supplies
١٤ Paid salaries, SR٢, ١٠٠
١٦ Paid SR٣, ٥٠٠ for land
١٧ Paid SR٢, ٠٠٠ on account from Nov. ٩ transaction
١٩ Paid utilities, SR٢٠٠
٢٠ Paid SR٣،٠٠٠ for supplies and SR٧٠٠ for equipment
٢١ Received SR٤٧،٠٠٠ for services rendered
٢٥ Withdrew SR٢،٠٠٠ cash for personal use
٣٠ Inventory of supplies showed SR٦٠٠ of supplies on hand

Record the effect of each transaction in the following table:

Accounts
Cash Supplies Equipment Land Capital
Payable
Nov. ٥
٧
٩
١١
١٤
١٦
١٧
١٩
٢٠
٢١
٢٥
٣٠

- ٣٣ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Solution Accounts
Cash Supplies Equipment Capital Land
Payable
Nov. ٥ +SR٧،٠٠٠ +SR٤٠٠ ٠ ٠ ٠ +SR٧،٤٠٠
٧ + ٤،٢٠٠ ٠ ٠ ٠ ٠ + ٤،٢٠٠
٩ ٠ ٠ +SR٣،٧٠٠ ٠ +SR٣،٧٠٠ ٠
١١ - ٧٥٠ + ٧٥٠ ٠ ٠ ٠ ٠
١٤ - ٢،١٠٠ ٠ ٠ ٠ ٠ - ٢،١٠٠
١٦ - ٣،٥٠٠ ٠ ٠ +SR٣،٥٠٠ ٠ ٠
١٧ - ٢،٠٠٠ ٠ ٠ ٠ - ٢،٠٠٠ ٠
١٩ - ٢٠٠ ٠ ٠ ٠ ٠ - ٢٠٠
٢٠ - ١،٠٠٠ + ٣،٠٠٠ + ٧٠٠ ٠ ٠ ٠
٢١ + ٠ ٠ ٠ ٠ +
٤٧،٠٠٠ ٤٧،٠٠٠
٢٥ - ٢،٠٠٠ ٠ ٠ ٠ ٠ - ٢،٠٠٠
٣٠ ٠ - ٨٥٠ ٠ ٠ ٠ - ٨٥٠

THE TRIAL BALANCE

As every transaction results in an equal amount of debits and credits in the ledger, the total
of all debit entries in the ledger should equal the total of all credit entries. At the end of the
accounting period we check this equality by preparing a schedule called a trial balance,
which compares the total of all debit balances with the total of all credit balances. The
procedure is as follows:

١. List account titles in numerical order.

٢. Record the balance of each account, entering debit balances in the debit column
and credit balances in the credit column. (Note: Asset and expense accounts are
debited for increases and would normally have debit balances. Liability, capital,
and income accounts are credited for increases and would normally have credit
balances).
٣. Add the columns and record the totals.
٤. Compare the totals. They must both be the same.

- ٣٤ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


If the totals agree, the trial balance is in balance, indicating the equality of the debits
and credits for the hundreds or thousands of transactions entered in the ledger. Although
the trial balance provides arithmetic proof of the accuracy of the records, it does not
provide theoretical proof. For example, if the purchase of equipment was incorrectly
charged to Expense, the trial balance columns may agree, but theoretically the accounts
would be wrong, as Expense would be overstated and Equipment understated. In addition
to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the
preparation of the periodic financial statements.

To illustrate how to determine the trial balance, follow the example below:

The summary of the transactions for Mr. AL-rashed and their effect on the accounts is
shown below. The trial balance is then taken. Note that each account now has a numerical
designation, in this case using a two-digit base.

Assets Liabilities Owner’s Equity

Cash Accounts Payable Capital
(١) ٣،٠٠٠ (٨) ٢٥،٠٠٠ ٥٠،٠٠٠ (١)
٥٠،٠٠٠ (٢) ١٠،٠٠٠ (٣)
(٤) ٥،٠٠٠
٢٠،٠٠٠ (٥)
(٧) ٢،٠٠٠
١٥،٠٠٠ (٦) ١٥،٠٠٠ ٥٠،٠٠٠
١٠،٠٠٠
(٨)
٢٥،٠٠٠ ٢٥،٠٠٠ ٥٠،٠٠٠ ٥٠،٠٠٠
٦٥،٠٠٠
٨٥،٠٠٠ ٨٥،٠٠٠ Consultation fees
١٥،٠٠٠
(٤)
١٥،٠٠٠
١٥،٠٠٠ ١٥،٠٠٠

Supplies Income Fees

- ٣٥ -
‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


(٢) (٥)
٣،٠٠٠ ٢٠،٠٠٠
٣،٠٠٠ ٢٠،٠٠٠
٣،٠٠٠ ٣،٠٠٠ ٢٠،٠٠٠ ٢٠،٠٠٠

Equipment Rent Expense

(٣) ٢٥،٠٠٠ (٥)
٥،٠٠٠
٢٥،٠٠٠ ٥،٠٠٠
٢٥،٠٠٠ ٢٥،٠٠٠ ٥،٠٠٠ ٥،٠٠٠

Salaries Expense
(٦)
٢،٠٠٠
٢،٠٠٠
٢،٠٠٠ ٢،٠٠٠

Al-Rashed, Lawyer
Trial Balance
January ٣١, ١٩X٨

Dr. Cr.
Cash ٦٥،٠٠٠

Supplies ٣،٠٠٠

Equipment ٢٥،٠٠٠

Accounts Payable ١٥،٠٠٠

Capital ٥٠،٠٠٠

- ٣٦ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Consultation ١٥،٠٠٠

Income Fees ٢٠،٠٠٠

Rent Expense ٥،٠٠٠

Salaries Expense ٢،٠٠٠

SR١٠٠،٠٠٠ SR١٠٠،٠٠٠

JOURNALIZING
We describe the entries in the general journal according to the numbering.

(١) Date. The year, month, and day of the entry are written in the
date column. The year and month do not have to be repeated for additional
entries until a new month occurs or a new page is needed.
(٢) Description. The account title to be debited is entered on the
first line, next to the date column. The name of the account to be credited is
entered on the line below and indented.
(٣) P.R. (Posting Reference). Nothing is entered in this column
until the particular entry is posted, that is, until the amounts are transferred to the
related ledger accounts. The posting process will be described in Sec. ٤٫٤.
(٤) Debit. The debit amount for each account is entered in this
column adjacent to the left margin. Generally there is only one item, but there
can be two or more separate items.
(٥) Credit. The credit amount for each account is indented and
entered in this column. Here again, there is generally only one account, but two
or more accounts with different amounts can be involved. When there is more
than one debit or credit in a single entry, the transaction is known as a compound
entry.
(٦) Explanation. A brief description of the transaction is usually
made on the line below the credit. Some accountants feel that if the transaction is
obvious, the explanation may be omitted. Generally a blank line is left between
the explanation and the next entry.

Example ١

To help in understanding the operation of the general journal, let us journalize the
transactions previously described for Mr. AL-rashed lawyer

- ٣٧ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Dec. ٤ Mr. AL-rashed invested SR٥٠،٠٠٠ in his law practice.

٤ Bought supplies for cash, SR٣،٠٠٠
٤ Bought equipment from Al-aamer Furniture Company on account, SR٢٥،٠٠٠
١٥ Received SR٢٠،٠٠٠ in fees earned during the month
٣٠ Paid office rent for January, SR٥،٠٠٠
٣٠ Paid salary for part-time help, SR٢،٠٠٠
٣٠ Completed a consultation to one of his friends for SR ١٥،٠٠٠ cash
٣١ Paid SR١٠،٠٠٠ to Al-aamer Furniture Company, on account.

Date Description P.R Dr. Cr.

١٩XX
Jan. ٤ Cash ٥٠،٠٠٠
Capital ٥٠،٠٠٠
Investment in law practice.
٤ Supplies ٣،٠٠٠
Cash ٣،٠٠٠
Bought supplies for cash
٤ Equipment ٢٥،٠٠٠
Accounts Payable ٢٥،٠٠٠
Bought equipment from Al-aamer
١٥ Cash ٢٠،٠٠٠
Fees Income ٢٠،٠٠٠
Received payment for services
٣٠ Rent Expense ٥،٠٠٠
Cash ٥،٠٠٠
Paid rent for month.
٣٠ Salaries Expense ٢،٠٠٠
Cash ٢،٠٠٠
Paid salaries of part-time help.
٣٠ Cash ١٥،٠٠٠
Consultation fees ١٥،٠٠٠

- ٣٨ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


Cash received
٣١ Accounts Payable ١٠،٠٠٠
Cash ١٠،٠٠٠
Payment on account to Al-aamer

POSTING
The process of transferring information from the journal to the ledger for the purpose of
summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in
the following steps:

١. Record the amount and date. The date and the amounts of the debits and credits
are entered in the appropriate accounts.

General Journal Page J-١

Date Description P.R. Dr. Cr.

Jan. ٤ Cash ٥٠،٠٠٠

Capital ٥٠،٠٠٠

Cash Capital
Jan.٤ Jan. ٤ ٥٠،٠٠٠
٥٠،٠٠٠

٢. Record the posting reference in the account. The number of the journal page is
entered in the account.

٣. Record the posting in the journal. For cross-referencing, the code number of the
account is now entered in the P.R. column of the journal (solid line).

General Journal Page J-١

Date Description P.R. Dr. Cr.

Jan. ٤ Cash ١١ ٥٠،٠٠

- ٣٩ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


٠
Capital ٣١ ٥٠،٠٠
٠

Cash ١١ Capital ٣
١
J-١ J-١
٥٠،٠٠٠ ٥٠،٠٠٠

Example ٢
The results of the posting from the journal of AL-rashid appear below.

Assets Liabilities Owner’s Equity

Cash Accounts Payable Capital
(١) ٣،٠٠٠ (٨) ٢٥،٠٠٠ ٥٠،٠٠٠ (١)
٥٠،٠٠٠ (٢) ١٠،٠٠٠ (٣)
(٤) ٥،٠٠٠
٢٠،٠٠٠ (٥)
(٧) ٢،٠٠٠
١٥،٠٠٠ (٦) ١٥،٠٠٠ ٥٠،٠٠٠
١٠،٠٠٠
(٨)
٢٥،٠٠٠ ٢٥،٠٠٠ ٥٠،٠٠٠ ٥٠،٠٠٠
٦٥،٠٠٠
٨٥،٠٠٠ ٨٥،٠٠٠ Consultation fees
١٥،٠٠٠
(٤)
١٥،٠٠٠
١٥،٠٠٠ ١٥،٠٠٠

Supplies Income Fees

(٢) (٥)
- ٤٠ -
‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬ ‫א‬ 


٣،٠٠٠ ٢٠،٠٠٠
٣،٠٠٠ ٢٠،٠٠٠
٣،٠٠٠ ٣،٠٠٠ ٢٠،٠٠٠ ٢٠،٠٠٠

Equipment Rent Expense

(٣) ٢٥،٠٠٠ (٥)
٥،٠٠٠
٢٥،٠٠٠ ٥،٠٠٠
٢٥،٠٠٠ ٢٥،٠٠٠ ٥،٠٠٠ ٥،٠٠٠

Salaries Expense
(٦)
٢،٠٠٠
٢،٠٠٠
٢،٠٠٠ ٢،٠٠٠

- ٤١ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


Contents

Part one
Close the nominal accounts into the profit & loss account –
preparation of income statement

Part two
Preparation of Balance sheet – preparation of
cash flow statement

- ٤٢ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


Preparing closing Entries

At the end of the accounting fiscal year, the balances of the nominal accounts are to
be transferred from the trial balance to the profit and loss account through closing entries,
these entries produce a zero balance in each nominal account.

Journalizing and posting closing entries is an essential step in the accounting cycle.

Separate closing entries could be prepared for each nominal account, but the following two
entries satisfy the desired result:

١. Debit each revenue account for its balance and credit profit and loss account for
total revenues.

٢. Debit profit and loss account for total expenses and credit each expense account
for its balance.

Below, is closing entries illustration:

To illustrate the journalizing and posting of closing entries, we will assume that
Al-Rashed, lawyer closes his books monthly. The closing entries at December ٣١ are
shown in the following illustration.

General Journal J٤
Date Account Titles and explanation Ref. Debit Credit

Dec., ٣١ Income fees ٢٠،٠٠٠

Profit and loss account ٢٠،٠٠٠

٣١ Consultation fees ١٥،٠٠٠

Profit and loss account ١٥،٠٠٠

٣١ Profit and loss account ٧،٠٠٠

Office rent ٥،٠٠٠
Salaries expense ٢،٠٠٠

- ٤٣ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


Posting of closing entries

The posting of the closing entries are shown in the following accounts, all the
nominal accounts have zero balances.

Consultation Income Fees

Dr Cr Dr Cr
١٥،٠٠٠ ٢٠،٠٠٠
١٥،٠٠٠ ٢٠،٠٠٠
١٥،٠٠٠ ١٥،٠٠٠ ٢٠،٠٠٠ ٢٠،٠٠٠

Office rent Salaries expense

Dr Cr Dr Cr
٥،٠٠٠ ٢،٠٠٠
٥،٠٠٠ ٢،٠٠٠
٥،٠٠٠ ٥،٠٠٠ ٢،٠٠٠ ٢،٠٠٠

Profit and loss account

Dr Cr
Office rent ٥،٠٠٠ Income fees ٢٠،٠٠٠
Salaries expense ٢،٠٠٠ Consultation fees ١٥،٠٠٠
٢٨،٠٠٠

٣٥،٠٠٠ ٣٥،٠٠٠

* Note that profit and loss account is used only in closing. No entries are journalized and
posted to this account during the year.

- ٤٤ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


Preparation of income statement

The income statement is designed the report the results of earning activities
(operations) for a specific time period such as a month, quarter, or year.

Net income for the period is the excess of revenues over expenses for that time.

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. Below an illustration of
Al-Rashed lawyer income statement for the month of December ٢٠٠٢.

Al-Rashed, Lawyer
Income Statement
For the month of December ٢٠٠٢

Dr. Cr.
Revenues :
Fees revenue ٢٠،٠٠٠
Consultation fees ١٥،٠٠٠
Total revenue ٣٥،٠٠٠
Expenses :
Rent expense ٥،٠٠٠
Salaries expense ٢،٠٠٠
Total expenses ٧،٠٠٠

Net Income ٢٨،٠٠٠

Note that :

١. Revenues are defined as in flows of assets either from the sale of goods or the
performance of services.
٢. Expenses are defined as out flows or other uses of assets to produce revenue, and
- ٤٥ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


٣. Net income is defined as the excess of revenues over expenses, and will be
transferred to the balance sheet as either profit or loss.

Balance Sheet

The balance sheet reports the financial position of a business at a specific point in
time. 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).
Below an illustration of Al-Rashed lawyer balance sheet for one month practice period on
December ٣١, ٢٠٠٢.

Al-Rashed, Lawyer
Balance Sheet
December ٣١, ٢٠٠٢

Assets Liabilities
Cash ٦٥،٠٠٠ Accounts payable ١٥،٠٠٠

Supplies ٣،٠٠٠ Owners equity ٥٠،٠٠٠

Equipment ٢٥،٠٠٠

Net profit ٢٨،٠٠٠

٩٣،٠٠٠ ٩٣،٠٠٠

- ٤٦ -
 ‫א‬‫א‬‫א‬ ٢٤٥ ‫א‬
 ‫א‬‫א‬‫א‬ ‫א‬ 


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 are 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.

Left side Right side

Assets = Liabilities + Owners’ equity

- ٤٧ -
 ٢٤٥ ‫א‬
‫א‬‫א‬
‫א‬ 


W‫א‬‫א‬‫א‬

K‫א‬‫א‬?W‫?א‬،‫א‬‫א‬K J ١

‫א‬‫א‬W‫א‬F،‫א‬‫א‬،‫א‬‫א‬،‫א‬K J ٢
KE

 W‫א‬‫א‬‫א‬

١. Eldon S. Hendriksen, Accounting Theory, (Illinois: Richard D. Irwin, Inc.,

١٩٩٠).

٢. Kieso, D. and Weygandit, J. Financial Accounting (New York: John Wiley,

Third Edition).

٣. Joel Lerner and James A. Cashin, Theory and Problems of Principles of

Accounting-I, Fifth Edition).

- ٤٨ -
 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

‫א‬
Above……..…………………………………KKKKKKKKKKKKKKKKKKKKK……………...………
Accept……..……………K…………………KKKKKKKKKKKKKKKKKKKKKKKKKKKK…………………….
Accepted….……………K……………………KKKKKKKKKKKKKKKK……………………….
Accompanied….……………………………KKKKKKKKKKKKKKK……………………….
Accounting cycle…K.KKKKKKKKKKKKKKKKKK………………………...……………………
Accounting equation…KKKK…K………………………….………………‫א‬‫א‬
Accounting……………KKKKK…K….…………………………………….‫א‬‫א‬
Accounts payable…KKKKKKKKKKKKKKKKKKKKKK……………………..………………………..‫א‬
Accounts receivable………KKKKKKKKKKKKKKKKKK…………….………………………….
Acquire………………………KKKKKKK.KK……………..…………………….
Add……………………………KKKKKKK.……………..……………………
Additional…KKKKKKKKKKKKKKKKKKK………….…………………………………………….
Adjust………KKKKKKKKKKKKKKKKKKK……………………….………………………………
Adjusted trial balance……KKK……………...…………………‫א‬‫א‬‫א‬‫א‬
Adjusting entries………KKKKKKKKKK………………………………………….‫א‬
Advertise…………KKKKKKKKKKKKKKKKKKKK….…………....…………………………………
Advertisement……KKKKKKKKKKKKKKKKK…….………….………………………………
Affect……………KKKKKKKKKKKKKKKKKKK…….………….………………………………..
Agree……KKKKKKKKKKKKKKKK……………….………….………………………………‫א‬
Agreement…KKKKKKKKKKKKKKKKKKK………….……………..…………………………….
Amount…………………………………………………………..……
Annually……………………………………………………………...…….
Appear………………………………………………………………..…….
- ٤٩ -
 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Apply………………………………….…………………………….………
Application………………………………………………………..…..…….
Arrangements……………………………………………….…...……....‫א‬‫א‬‫א‬
Assets………………………………………………………………………
Auditing……………………………………………………………….…...‫א‬‫א‬
Available…………………………………………………….…...……...……
Bad debt…………………………………………..……………………
Balance…………………………………………………………………..…
Balance sheet……………………………………………………….………‫א‬‫א‬
Bank reconciliation…………………………………………….…‫א‬
Bank statement……………………………………..………….…‫א‬
Based on……………………………………………………………..…
Beginning………………………………………………………...…………‫א‬
Below……………………………………………………………………...…
Bill………………………………………………………….………………
Blanks………………………………………………..……………………‫א‬
Book value………………………………………………..…………‫א‬‫א‬
Budget………………………………………………….………….………‫א‬
Building…………………………………………………………..…………
Business………………………………………………….…………
Buy…………………………………………………………………...……
Buyer……………………………………………………………...………
Calculate……………………………………………………..……………
Capital……………………………………………………….…………‫א‬

- ٥٠ -
 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Capital expenditure……………………………………….……
Cash…………………………………………………………………………
Cash basis…………………………………………..…………………‫א‬‫א‬
Cheqe…………………………………………………………………..……
Circle…………………………………………………………...…………‫א‬
Classify…………………………………………………………....…
Closing entries…………………………………………………...……‫א‬
Collect……………………………………………………………...………
Collections………………………………………………………...………
Combination……………………………………………………………..…
Commissions………………………………………………………..……
Complete…………………………………………………………….…
Compute……………………………………………………………...……‫א‬
Concept……………………………………………………………………
Consist……………………………………………………………..………
Continue………………………………………………………..….………
Copyrights………………………………………………………………‫א‬
Correct……………………………………………………..…………….…
Corrected balance………………………………………........………‫א‬‫א‬
Cost…………………………………………………………………...……‫א‬
Count………………………………………………………………………
Credit………………………………………………………………..………‫א‬
Creditor……………………………………………………………...………‫א‬
Currency……………………………………………………………………

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Current……………………………………………………………………‫א‬
Current assets…………………………………….……..…………‫א‬‫א‬‫א‬
Current liabilities…………………………………..………….……‫א‬‫א‬‫א‬
Customer……………...……………………………………………………
Cycle…………………………………...……………………………………
Date…………………………………………………..……………………‫א‬
Data ………………………………………………………………..………
Debit…………………...……………………………………………………
Decide………………………………….……………………………………
Decision………………………………………………...……………………‫א‬
Decrease…………………………………………………..………
Deduct……………………………………….……………………
Delivery……………………………………………………………………
Deposit…………………………………...……………………………
Determine…………………………………………………………………
Difference…………………………………………………..………………
Double entry system……………………………………….………‫א‬‫א‬
Each……………………………………………...…………………………
Earn…………………………………………………..……………………
Economic entity……………………....………………..………‫א‬‫א‬
Effect…………………………………………………...……………………
Elements……………..……………………………………………………
Employ…………………………….………………………….……………
Employee…………………………..………………………….…

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Enclosed……………………………………………………….……………
Enough……………………………………………………………………
Enterprise……………………………………...…………………………
Entry………………………………………………………….………………
Equal……………..…………………………………………………………
Equation……………………...……………………………………………
Equipment…………………………………………………………………‫א‬
Equivalent………………………………………….………………………
Error…………………………………………………………………………
Essential………….………………………………………………………
Estimate……………………..………………………………………………
Estimation……………………………..……………………………………
Event………………………………………………...………………………
Exceed………………………………………………………..……………
Expansion……………………………………………..……………………
Expect………………………………………………………………………
Expense…………..…………………………………………………..……
Expenditure………………..……………………………………..………
Factors……………………………………..………………………………‫א‬
Fees……………………………………………………….…………………
Fill…………………………………………………….………………………
Finance…………………………………………..…………………………
Financial statements………………………………..…….……………‫א‬‫א‬‫א‬
Fiscal…………………………………………………………………...……

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Fiscal year………………………………………………………………
Fixed assets…………………………………………………..…………
Future………………………………………………………………..……‫א‬
Furniture………………………………………………………….…………
General………………….……………………………………………………
General journal…………….………………………………..………‫א‬‫א‬
General ledger…………………...…………………………………‫א‬‫א‬
Goodwill……………………………………..………………...……………‫א‬
Important…………………………………………………….………………I
ncome statement………………………………..……………….………‫א‬
Include…………………………………………………….……..…………
Increase…………………………………………………………..…..………‫א‬
Intangible assets…..………………………………………….……..
Interest………………………………………………………………………KKK
Invest…………………………………………………………………..……
Investments…………………………………………….…………………..‫א‬
Invoice………………………………………………………………..…..…
Issue……………………...…………………………………………………
Item …………………………………………...………………………………
Journal………………………………………………………..………………
Journalize………..……………………………………………….……
Know………………………….…………………………………….………
Known…………………………………….……………………………...…
Land……………………………………………………...………………..…

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Legal…………………………………………….…………………………
Less……………………………………………………..………..……EF
Liabilities………………………………………………………..……..……
List……………………..……………………………………………………
Loan…………………………………...……………………………………
Long-term liabilities ……………………………………………… ‫א‬
Maintenance expense…………………………….…….……..………
Minus……………………………………………………….………………
Month…………………..……………………………………………………
Necessary………………………...………………………………...………
Need……………………………………...……………………………
Net…………………………………………………………..………………
Net income………………………………………………………….…...‫א‬
Nominal accounts…………..…………………………………………‫א‬
None……………………………………...………………………………
Normal………………………………………………...……………………
Note payable………………………………………………..…………‫א‬‫א‬
Note receivable………………………………………………………‫א‬‫א‬
Obligation……………………………………………..……………………‫א‬‫א‬
Obtain…………………………………………………………………
Occur……………………………………………….………………………
Offer…………………………….…………...………………………
Office………………………………………………………..……………
Office supplies…………………………………………………..…‫א‬

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

On account………………………………………………...……………‫א‬
On credit………………………………………...…………………..………
Operating expenses……………………………...…………………..
Outstanding checks……………………………………….……..……
Owner’s equity……………………………...………………....………‫א‬
Owe…………………………………………………………..………………
Own…………………….……………………………………………………
Patent………………………………..……………………………………‫א‬‫א‬
Pay………………………………………………………...…………………
Payee…………………………………………………..……………..……‫א‬
Payments………………………………………………………...……..…
Payroll…………………...………………………………………..…………‫א‬
Per …………………………...……………………………….………
Percentage…………………………….……………………….…………
Period…………………………………………………..…………..…………
Petty cash………………………………...……….….……..…‫א‬‫א‬
Physical………………………………………….………...…………L
Plus……………………………………………………………...……………‫א‬
Point………………………………………………………………………… 
Policy………………………………………………………………………
Possible………………………………………..……………………………
Post………………………………………………………….………………
Prepare…………………………………………………………………...……
Preparation…………………………………………………………..………‫א‬
Present…………………………….………………………………….………
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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Previous…………………………………...………………………………‫א‬
Price……………………………………………..……………………
Principal…………………………………………………..…………………
Problem……………………………………………………………
Process……………………………………………………………...………
Produce………………...……………………………………………………
Production……………………………..……………………………………
Promise……………………………………...…………………………‫א‬
Property………………………………………………..……………………
Provide………………………………………………………………………
Purchases………………………………………….………………………
Real accounts………………………………………………………‫א‬‫א‬
Receive………………………………………………………...……………
Receipts…...…………………………………………………………‫א‬
Record……………...………………………………………………………
Records……………………………………………………………………
Related……………………………………………………………………
Rent…………………………………………………………………………
Repair………………………………………………………………………
Report………………………………………………………………………
Require…………….………………………………………………………
Respectively……………...…………………………………...………… ‫א‬‫א‬
Resources…………………………..………………………………………‫א‬
Result…………………………………………….…………………………

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Retained earnings…………………………………………...…………
Return………………………………………………………...…………
Revenues…………………………………………………………….….…‫א‬‫א‬
Rights…………………………………………………………...……………
Salary (salaries) ……………..………………………………………………‫א‬
Sales……………………………………..…………………………………
Schedule………………………………………………….…………………
Select……………………………………………………………………..…
Selections…………...……………………………………………………‫א‬‫א‬
Sell……………………………………………………………………………
Service………………………………………..……………………………
Show……………………………………………………...…………………
Space………………………………………………………………...………‫א‬
Specific……………………………………………...………………………
Spend / spent…………………………………………………..………‫א‬L
Statement of cash flows…………………………………………‫א‬‫א‬
Statement of changes in owner’s equity…………….....…‫א‬‫א‬‫א‬
Steps………………………………………………………………………‫א‬
Store…………………………………..……………………………
Subtract……………………………………………….……………………
Such as…………………………………………………………………….…
Suitable……………………………………………………………………
Sum …………………………………………………………………………
Summarize…………………………………………...……………………

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 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

Supplies……………………………………………………………………
System…………….…………………………………………………………
Table…………………………..………………………………………….…
Tangible assets……………………..…………………………………
Term …………………………………………………………………
Total……………………………………………….………………………
Trade mark…………………………………………….………..………
Trade name………………………………………………………………‫א‬
Transaction. ………………………………………………………...…….…
Trial balance…………………………………………….…….………‫א‬‫א‬‫א‬
True…………………………………………………….……………….…
Types………………………………………………….…………….………‫א‬
Understand………………………………………….………………………
Units…………….…………………………………………………………‫א‬
Until………………………………………………….………………………
Use……………………………………..…………….……………………
Usually……………………………………………………………………… 
Utility expense……………………………………….…….…………‫א‬
Value………………………………………………………………...………
Valuation……………………………………………………………………
Wages…………………………………….…………………………………
Wish…………………………………………………...……………………
Withdraw……………………………………………………………………
Year……………………………………………………………….…………

- ٥٩ -
 ٢٤٥ ‫א‬
‫א‬
‫א‬ 

 ‫א‬  ‫א‬

  

  

١  ‫א‬‫א‬‫א‬

١٤  ‫א‬‫א‬‫א‬

٤١  ‫א‬‫א‬‫א‬

٤٨  ‫א‬‫א‬

٤٩  ‫א‬

  ‫א‬