acct principles -study material

8/18/2019 Acct Principles -Study Material

http://slidepdf.com/reader/full/acct-principles-study-material 1/61

A

STUDY MATERIAL

ON

PRINCIPLES OF ACCOUNTING

BY

Dr. M. BHATTA MCOM.,MPHIL.PhD.,,FICWA.,

DEPARTMENT OF MANAGEMENT

PES SCHOOL OF ENGINEERING,

HOSUR ROAD( 1Km be!re E"e#$r!%&# #&$'

BANGALORE

1



STUDY MATERIALCourse : Principles of Accounting

Preface

“Accounting” su!ect "as een recentl# intro$uce$ at t"e %a&aret" college of Tec"nical

Teac"er E$ucation' T"e stu$ent strengt" is progressi(el# increasing #ear after #ear'T"ere is a great nee$ for appropriate oo)s' T"e lirar# is (er# *ell e+uippe$ *it" goo$

oo)s' ,o*e(er -I "a(e oser(e$ a “conte.tual gap” et*een t"e en(iron/ent in *"ic"

t"e stu$ents are stu$#ing an$ t"e en(iron/ent for *"ic" t"e oo)s are *ritten' 0urt"er-no lirar# can pro(i$e oo)s on a one 1to1one asis' Consi$ering t"e cost of suppl#ing

t"e stu$# /aterial -t"e ratio of stu$ents to oo)s can reasonal# e increase$' It is

e.actl# to ri$ge t"is gap t"at t"is stu$# /aterial "as een $e(elope$' It is ai/e$ at

ac"ie(ing t"ese $ual o!ecti(es' Main features:

234 Accounting is /a$e si/ple to un$erstan$ an$ eas# to co/pre"en$'254 T"e accounting concepts an$ principles are luci$l# e.plaine$ '264 T"e lengt" -*i$t"- an$ $ept" of t"e su!ect is suital# $esigne$ accor$ing to t"e

re+uire$ le(el of $ifficult#'

274 It is e.actl# in tune *it" t"e course outline prepare$ # t"e accounting $epart/ent of t"e college'

284 Enoug" e.a/ples -illustrations an$ e.ercises are pro(i$e$ ase$ on rele(ance'

294 It is cost effecti(e' Ac)no*le$ge/ents: T"e asic structure is $ra*n fro/ t"e course outline for Principles

of accounting prepare$ # t"e accounting $epart/ent' T"e for/at of t"e stu$# /aterial is

a/pl# $ra*n fro/ t"e Accounting Principles; *ritten # 0ess an$ <arren' T"e i$ea an$

presentation are original' I offer /# great sense of gratitu$e to all t"ose *"o "elpe$ /ein $e(eloping t"is stu$# /aterial' M# special t"an)s are $ue to :

34 Ato Solo/on S"ifera*- Dean -%CTTE-

54 Ato A#ele Aee -Aca$e/ic (ice Dean-64 Ato Molla Pi*eta- A$/inistrati(e =ice Dean -

74 Ato <assi"un Yi/er -i//e$iatel# prece$ing A$/inistrati(e (ice $ean-

84 <>T Misra) Anesu- ,ea$ -Accounting Depart/ent -94 Ato ,aileleul ?ele)e -Researc" an$ Pulication office-

@4 Teac"ing staff-Ato E$o Rango-Ato Te*o$ros Da/te* an$ t"e secretar# of

Accounting Depart/ent <> <oins"et-

B4 Lirar# an$ Staff

4 Colleagues at %CTTE'-

I a/ "ig"l# re*ar$e$ if t"is "u/le effort is accepte$ # t"e teac"ers -stu$ents an$ t"e *ell *is"ers'

Prof' ,'S'M'"atta'

2



STUDY MATERIAL

ON

PRINCIPLES OF ACCOUNTING

CONTENTS Page No

CHAPTER 1 INTRODUCTION------------------------------------------------------------1-21

1.1 Definition----------------------------------------------------------------------------------------!

1.2 Fo"# of $%ine O&ne"'i(---------------------------------------------------------------)

1.* T+(e of $%ine O(e"ation----------------------------------------------------------------,

1. Ue" of Ao%nting info"#ation------------------------------------------------------------/

1.! Ao%nting Cone(t an0 P"ini(e-------------------------------------------------------

1.) Ao%nting e3%ation--------------------------------------------------------------------------11

1., Finania State#ent fo" oe ("o("ieto"'i( $%ine--------------------------------1,

CHAPTER 2 ACCOUNTING CYCLE FOR SER4ICE RENDERING$USINESSES----------------------------------------------------------------------------------22-*2

2.1 Ao%nt an0 Nat%"e of an Ao%nt-------------------------------------------------------22

2.2 Caifiation of Ao%nt-------------------------------------------------------------------2*

2.* 5o%"na-----------------------------------------------------------------------------------------2)

2. Poting to Le0ge"----------------------------------------------------------------------------2/

2.! T"ia $aane-----------------------------------------------------------------------------------*1

CHAPTER * COMPLETION OF ACCOUNTING CYCLE-------------------------**-)2

*.1 $ai of "e(o"ting Ao%nting Data 6 Defe""a an0 A"%a-----------------------**

*.2 7o"8'eet &it' A09%t#ent---------------------------------------------------------------*!

*.* Finania State#ent-------------------------------------------------------------------------*,

*. A09%ting an0 Coing Ent"ie an0 Poting----------------------------------------------*/

*.! Pot Coing T"ia $aane------------------------------------------------------------------2

*.) O(ening Ent"ie-------------------------------------------------------------------------------*

CHAPTER ACCOUNTING CYCLE FOR MERCHANDISING ENTERPRISES

---------------------------------------------------------------------------------------------------)*-1:!

.1 Ao%nting fo" (%"'ae-------------------------------------------------------------------)

.2 Ao%nting fo" Sae--------------------------------------------------------------------------))

.* Cot of Me"'an0ie So0-------------------------------------------------------------------),

. Me"'an0ie In;ento"+ S+te#------------------------------------------------------------)/

.! Defe""a an0 A"%a-----------------------------------------------------------------------)

.) 7o"8'eet--------------------------------------------------------------------------------------,2

CHAPTER ! PERIODIC REPORTING FOR MERCHANDISING ENTERPRISE

---------------------------------------------------------------------------------------------------,*-1:!

!.1 Finania State#ent-------------------------------------------------------------------------,*

!.2 A09%ting an0 Coing ent"ie an0 Poiting ---------------------------------------------,

!.* Pot Coing T"ia $aane------------------------------------------------------------------,

!. Re;e"ing Ent"ie-----------------------------------------------------------------------------,

CHAPTER ) ACCOUNTING FOR CASH-------------------------------------------1:)-12

).1 Ca'< Ca' E3%i;aent an0 Li3%i0it+---------------------------------------------------1:)

3



).2 Cont"o of Ca' Reei(t an0 Pa+#ent 6 $an8 Reoniiation State#ent-----1:/

).* Cont"o of Ca' Di=%"e#ent 6 4o%'e" S+te#-Pett+ Ca' +te#-----------11,

CHAPTER 1

INTRODUCTION TO ACCOUNTING

E;o%tion> Accounting can be traced back to the evolution of the number systemitself. It has been there in one form or the other ,since the human beings started

exchanging things. In ancient times the “kings” or “ monarchs” used to maintain

“treasury records”. hey used to kee! records of the incomes and ex!enses to the

treasury."o#ever, the real beginning can be traced to the reference to double entry system in

the book !ublished about $%% years ago. It #as the great Italian &athematician, 'uca

(acioli, #ho authored the book and got it !ublished in 1)*).+very transaction hast#o as!ects . he double entry system !rovides for recording both as!ects of a

transaction in such a manner as to establish an euilibrium.

$a"te" S+te#> A system in #hich goods are exchanged for goods, is called “-arter ystem”. for exam!le, Ato A has some sur!lus #heat and he #ants to have a goat. Ato

- has some goats and he #ants some #heat. /o#, #hen they meet ,the #heat is

exchanged for goat .his is called “-arter”. his system of exchange #as !revailing

before the invention of money.

Mone+> In order to overcome the limitations of barter system the “money” #as

invented. &oney is a medium of exchange. In ancient times a !iece of leather served

as money. 'ater ,gold coins ,co!!er coins, iron coins #ith the stam! of the 0ing etc.#ere used as money. In the modern times ,!a!er money is used. or exam!le, -irr

,dollars etc. in the form of !rinted !a!er, act as money. /o# Ato A can sell #heat to

some body and get money and #ith this money or a !art of it ,he can buy goat. Ato Aneed not go in search of a !erson #ho can exchange goat for #heat.

1.1 Definition>

$%ine An entity #hich carries on trading manufacturing and selling of goods

and services for a !rofit is called “ business4. he main intention of a business is to

make !rofit, #hile trading manufacturing and selling. or exam!le, a retail sho!o#ner #ho sells a variety of goods is carrying on business.

T"anation> An event in #hich an exchange of things takes !lace or a condition

occurs is called a transaction. or exam!le, the cash !aid for !urchasing stationery,

salary !aid , interest received etc.$%ine t"anation are the transactions relating to a business such as, sale,

!urchase , recei!t of cash etc. A machinery is sub5ect to #ear and tear due to usage

,#hich is a condition ,considered as a transaction to be recorded.

Ao%nting> Accounting is a body of kno#ledge #hich !rovides essential

information about the financial activities of an entity to facilitate informed 5udgments

and decisions .It is connected #ith identifying ho# transactions and events should bedescribed in financial re!orts.

)



$oo8 8ee(ing -ook kee!ing is the !art of accounting that records transactions and

other events manually or #ith com!uters .It is the #riting !art of accounting .It is

concerned #ith ho# the transactions are recorded in the books.

Do%=e ent"+ +te#> or each transaction there are t#o as!ects. A system #hich

!rovides for the recording each of the t#o as!ects of a transaction ,se!arately ,to

facilitate euilibrium is called “ double entry system”. It is called double entry because ,t#o entries have to be made in the books for every transaction.

Se";ie Ren0e"ing > rom the business !oint of vie# , rendering service refers to

!roviding an utility to the customer for a “fees” or “ fare”. or exam!le, 'aundryservice ,rans!ortation ,consultancy by 6octors, !rofessionals etc.

Me"'an0iing?T"a0ing@> An activity of buying and selling of goods and services is

called “&erchandising” “rading”.

or exam!le , a merchant buys hoes from the manufacturer and sells them to theultimate customers. "e is merchandising trading the shoes.

Man%fat%"ing he !rocess of converting ra# materials in to the finished goods

ready for use is called “manufacturing”. he material is converted in to usable

finished !roduct #ith the hel! of labor and machines . inally they are sold toconsumers. or exam!le ,manufacturing shoes in a factory.

P"ofit he difference in money bet#een the selling !rice 7being higher 8 and thecost of sales of goods or services in a business entity during a !eriod is called

“!rofit”. "o#ever ,if cost of sales is more than the selling !rice ,the difference is

called “loss”.or exam!le, if a retailer buys a !air of shoes at -r 9% and sells it for -r 1%% ,he

makes a !rofit of -r 2%. :n the other hand ,if he sells the same for -r ;$, he incurs a

loss of -r $.

1.2 FORMS OF $USINESS O7NERSHIP

A business can be carried on by either a single !erson or a small grou! of !ersons or

very large grou! of !ersons .Accordingly ,the main forms of business o#ner shi! are18 ole !ro!rietorshi! 28 (artnershi! firms 38 <oint stock com!anies =or!orations.

hey are discussed as belo#

1. Soe ("o("ieto"'i( A business is called !ro!rietorshi! business, #hen it has

only one o#ner. A single (erson as o#ner carries on the business . :nly one

!erson contributes money, called ca!ital, to the business . "o#ever, he takes the

hel! of others for the manufacturing, Administration, > selling activities of the business . It is also called !ro!rietary concern. In sole !ro!rietorshi! form of

business, the entire !rofit loss goes to the only o#ner. he criterion is not the

si?e of the business but the number of o#ners. A sole !ro!rietorshi! businessmay have billions of -irr transactions also. A small !etty retail store is also a sole

!ro!rietary concern. he condition is that only one !erson should be the o#ner of

the business.2. Pa"tne"'i( fi"# @ A grou! of t#o or more !ersons to carry on a business and

to share the !rofit or loss, under an agreement is called a “ (artnershi! firm . In

this form of organi?ation t#o or more !ersons combine together and contribute

ca!ital to carry on the business and the !rofitloss is shared among themselves.

$



(artnershi! agreement is the most im!ortant binding factor. he !artners enter in

to an agreement relating to ca!ital contribution, ratio of !rofitloss to be shared,

business to be carried on, interest on loan and ca!ital , salary to !artners, nature of liability, dissolution, admission of a !artner, etc. hese !artnershi! concerns are

governed by the “!artnershi! acts” formulated by the government.

3. S'a"e o#(an+ o" 9oint to8 o#(an+ o" o"(o"ation@ An association of t#oor more !ersons having a se!arate legal entity, to carry on a business, registered

under a state or federal statute #ith a common seal and in #hich o#nershi! is

divided in to shares of stock, is called “cor!oration” or “5oint stock com!any” or “share com!any”. Bhen huge ca!ital is reuired to carry on the business, this

form of business o#nershi! is formulated. he ca!ital is contributed by a large

number of !ersons called hare holders. ince there is a large number of share

holders , the management is se!arated from the o#nershi! .he business is carriedon by a board of directors, elected by the share holders. hese directors have to

re!ort the result of the business o!erations back to the share holders every year.

1.* T+(e of $%ine o(e"ation

A business is carried on for the !ur!ose of making !rofit. here are various ty!es of business o!erations. hey are

234 Tra$ing>Merc"an$ising -uying and selling of goods for !rofit is calledrading&erchandising . A #hole seller buys goods from manufacturers and sells

them to retailers. he retailers buy goods form #holesalers and sell them to

ultimate consumers. Cenerally, they deal #ith the finished goodsmerchandise. In

the !rocess they make !rofit.

254 Manufacturing Selling:1 =onversion of Da# &aterials in to finished goods

ready for consum!tion is called manufacturing . +xam!le &anufacturing cycle,=ement, hoes etc. he manufacturers sell the goods at a !rice #hich is fixed

after adding a certain !ercentage of !rofit.

264 Ren$ering Ser(ice @ his is a ty!e of business o!eration #here a service is

rendered to the customers. Ender this, !hysical goods are not su!!lied to the

consumers, instead a utility@!lace, time, kno#ledge, is !rovided to the customer.

:ne cannot !hysically see a service but only, can feel and utili?e the service. or exam!le, rans!ortation. -ank, +ducation, consultancy etc.

274 Agenc#>ro)ering his is a ty!e of business o!eration #here the buyers > sellersare brought together to exchange goods > services. or this o!eration a

=ommission-rokerage is charged.

F



1. USERS OF ACCOUNTING INFORMATION

Accounting is designed to suit the needs of many users. It is a system to !rovide useful

information to the users to make informed 5udgments. ollo#ing are the users of accounting information

18 Manage/ent: he !ro!rietor, the !artners, the board of directors are all the

!eo!le concerned #ith the management of the business. hey are reuired tokno# the financial results in the form of !rofit loss, financial !osition and the

!rogress made from year to year. hey are also reuired to take managerial

decisions. Accounting su!!lies crucial information to them.

28 S"are"ol$ers: In the 5oint stock form of organi?ation, shareholders are theo#ners. hey elect and authori?e the directors to manage the affairs and re!ort

back. hey #ish to kno# ho# the business is managed , #hat is the share of

!rofit , ho# is the financial !osition ,health and #ealth of the com!any.

38 In(estors: Individuals and institutions #ho #ant to take !art in the o#nershi!,reuire information about organi?ation. -ecause, they #ant good return for

their ca!ital , the gro#th and safety of the investment.)8 an) an$ financial institutions -anks and financial institutions lend money to

the business. hey are more concerned #ith the return of the amount lent and

the interest income. herefore , they enuire about the financial condition of the enter!rises.

$8 Cre$itors an$ suppliers of goo$s an$ ser(ices he creditors and su!!liers of

goods and services need to kno# the credit #orthiness of the business i.e. the

ca!acity to !ay for the su!!lies #ithin the s!ecified time. A careful verificationand analysis of financial data reveals this information.

F8 Fo(ern/ent he government is res!onsible for the socio@economic

develo!ment of a country. Garious sectors like agriculture, industry and serviceneed !ro!er direction. Covernment !rovides regulation and formulates !olicies

to sho# the !ath of develo!ment. or these !ur!oses, money is collected from

the !ublic through taxes. Accounting !rovides the information about the !rofitand financial !ositions of the businesses on the basis of #hich the tax is

collected.

;8 E/plo#ees: +m!loyees need monetary and non monetary incentives to im!rove

the !roductivity and relationshi! #ith the management. he data relating to !rofit, liuidity !osition and solvency status ,hel! the em!loyee unions to

bargain #ith the management to get bonus and other benefits.

98 International organi&ations In the #ake of globali?ation movement , themultinational com!anies need accounting information for collaborations,

franchises and investments.

*8 t"er enterprises Accounting analysis is very useful for mergers,amalgamations collaborations inter@firm com!arison and bench marking of the

firms and com!anies.

;



1%8 Stan$ar$i&ation: he !rofessional bodies ,academics and accountants need the

accounting information for the !ur!ose of evolving standard accounting

!ractices, from time to time.

1.! Ao%nting Cone(t P"ini(e

1@ $%ine Entit+ @ Bhen a business is started, for all !ractical !ur!oses, it is treated as

inde!endent of its o#ner. :nce the o#ner invests ca!ital to start a business, for

Accounting !ur!ose, the business is considered as a se!arate unit having its o#n identity,distinct from its o#ner #ho created it. his a called business entity conce!t. herefore,

every event of the o#ner #ith the business is treated as a transaction that must be

recorded in the books of the business. A business cannot be !hysically seen. It is run by

natural !ersons. It is conce!tually and legally, a se!arate entity or unit or a !erson.2@ Going Cone"n @ Bhen a business is started, it is ex!ected to be existing for a long

!eriod of time. he business is ex!ected to be continuing even if the o#ner is changed

due to transfer from father to son, or death. +very business is assumed to have a

continued existence #ith !rofit for an indefinite !eriod of time. his is called goingconcern conce!t7 continuing business8.-ased on this assum!tion the accounting entries

are made. or exam!le, #hen a machine is !urchased for business, the machine isex!ected to be #ith the business for an indefinite !eriod of time and so it is recorded as

an asset at !urchase cost.

38 O=9eti;e e;i0ene In business transaction ,to make an entry in the books ,evidenceof the ex!ense or income is reuired. +xam!les of evidences are, invoice and vouchers

for !urchases, bank statement for bank balance etc. :b5ective evidence means ,the !roof

of a transaction that can be verified #ith the relevant su!!ort documents. :ne cannot

sho# the !urchase invoice as the evidence for !ayment of salary."o#ever, individual 5udgments are made in some cases #here estimates are involved.

Any #ay the user of the accounts must believe the entries. Ado!tion of ob5ective

evidence !rinci!le #ill minimi?e the accounting errors, bias and frauds. or exam!le, !hysical verification re!ort #ith res!ect to materials acts as an evidence of material

!urchased and stored.

)8 Unit of #ea%"e#ent All business transactions are recorded on terms of money. +achcountry #ill have its o#n currency as common unit of measurement. or exam!le, E

dollars, <a!an yen, Indian ru!ees, 0enyan shilling, +thio!ian birr etc. Bhile recording

and !resenting accounting data, every business enter!rise #ill ex!ress the amounts in

the country4 s currency. or exam!le, if a business !urchases 1%% !airs of shoes at birr 12% each and 1%% liters of oil at 2% birr !er liter ,then the recording is done as belo#

6etails uantity unit !rice total amount

Ds Ds18 hoes !urchased 1%% !airs 12% 12,%%%

28 :il !urchased 1%% liters 2% 2,%%%

otal 1),%%%hough ,the details of other units of measurement such as number of shoes ,1%% liters

of oil, are stated ,it is the ex!ression of their value in terms of ru!ees that is significant.

Imagine ex!ressing the information only in terms of 1%% shoes and 1%% liters of oil.

9



6oes it convey any uniformity in informationH =an you dra# any inference out of itH

herefore, all these transactions are entered in a common unit of measurement, namely

Du!ees.$8 Ao%nting (e"io0 he gro#th of a business has to be measured over a !eriod of

time frame. he universally acce!ted standard time !eriod is ONE YEAR . his is

called accounting !eriod. or exam!le, the year from A!ril 1,2%%2 to march,31, 2%%3.7a !eriod of t#elve months8. he business !rofit and financial !osition are ex!ressed

for one year. his hel!s to measure the successfailure as #ell as the health of the

business. In modern times ,business results are re!orted as freuently as needed ,say,every month.

F8 Mat'ing "e;en%e an0 eB(i"e0 ot +x!ired cost refers to the money s!ent

relating to an item in an accounting !eriod. or exam!le, salary !aid ,rent !aid etc. In

case of Assets , the usage is ex!ressed in terms of ex!ired cost and not the !urchasecost of assets.

Devenue is the regular income that is generated out of business transactions. or

exam!le, sales for the !eriod, commission received etc. =om!aring the revenue #ith

that of ex!ired cost during the !eriod results in !rofit or loss. If revenue is more thanthe ex!ense the result is the !rofit and if the revenue is less than the ex!ense ,the result

is loss. &atching conce!t ,therefore, refers to the !rocess of com!aring the revenue#ith that of ex!ense during an accounting !eriod so as to determine the !rofit or loss

for the business.

;8 A0e3%ate 0io%"e Accounting is a system to !rovide useful information to theuser. A standard !ractice is follo#ed to disclose all the relevant material facts in the

re!ort. :nly necessary data are re!orted. his is called adeuate disclosure. Bhenever

the individual 5udgment is involved, the !ractice follo#ed is stated to avoid any

misinter!retation. or exam!le, if the method of valuing inventory is changed ,itshould be disclosed.

98 Coniten+ he result of one accounting !eriod is com!ared #ith the result of the

next accounting !eriod to kno# the !rogress made. he com!arison hel!s to kno# thedirection in #hich the business is moving. =om!arison of the results is meaningful to

the user only #hen the same accounting !rinci!les are follo#ed year after year. his is

called consistency. or exam!le, there are several methods of valuing the inventory.he value has an effect on the !rofit !osition. If the method is changed in any year, the

resulting !rofit is the result of change in the method and not necessarily due to business

o!erations. his #ill not facilitate to form an o!inion about the !rogress of the

business. herefore, same accounting !ractice is follo#ed every year. "o#ever, changemade only if it could be 5ustified.

*8 Mate"iait+ In the business records, the amounts are normally rounded off to the

nearest birr . or exam!le, if the amount is -irr 1*9.%1, it could as #ell be rounded off to birr 1*9,ignoring ,%1. It does not matter much. In fact it saves labor ,time and energy.

ome times it !rovides clarity also. If the administrative and stationery ex!enses of

recording a fraction of amount is more than the amount itself ,then it is not #orth theeffort of recording. It is better to ignore, if it has no significant im!act. his is called

materiality conce!t. Bhen non disclosure of an item does not affect the reuired

information to be given , then there is no need to disclose the same. he materiality

*



conce!t s!eaks about the feasibility of recording and re!orting of an item of ex!ense or

income.

1%8 Cone";ati# uture is most uncertain. /o body can !redict the future !erfectly.In case of businesses, there is no 1%% guarantee that there #ill al#ays be !rofit.

herefore , #hile !resenting the financial results, #herever individual 5udgments are

involved, care is taken to see that only lesser !rofit is sho#n in the current year. his isto reserve the rest of the !rofit ,if any for safeguarding the future uncertainty. his is

called conservatism conce!t. or exam!le, #hile valuing the inventory at the end of the

year, the market !rice or the cost #hichever is less, is taken. A higher value results inhigher !rofit and lo#er value in lo#er !rofit. According to this conce!t , lo#er value is

considered.

1.) ACCOUNTING EUATION

A business is, normally, started #ith cash. Garious !ro!erties are !urchased to carry

on the business. In the course of the business, it may have to o#e money to others and

may have to receive money from others. hey are defined as belo#

Assets he cash and other !ro!erties o#ned and moneys receivable by a business

enter!rise are called “Assets”. or exam!le, cash in hand, cash at bank, bills andamount receivables stock of goods, !lant and machinery, land etc. o#ned by the

business.

+uities he rights or claims on the assets of the business are called “+uities”. or exam!le, the o#ners have the right over the !ro!erties, the creditors and su!!liers

have the claim over the money or goods etc.

'iabilities hat !art of euities #hich is re!resented by the claims of the creditors is

called“'iabilities”. or exam!le, bills !ayable and amounts !ayable by the business on

account !urchases.

:#ner4s euity hat !art of the euities #hich is re!resented by the rights of theo#ners is called “o#ner4s euity”. or exam!le, ca!ital contributed by the !ro!rietor,

!artners and shareholders.

Ao%nting E3%ation According to the double entry !rinci!le, each transaction hast#o as!ects and each as!ect has to be recorded se!arately to !rovide for the

euilibrium.

/o#, let us take an exam!le.

Assume that, 18 &r. -ekele started a business #ith cash of Ds 1%,%%% and 28 the business has !urchased su!!lies like stationeries “on credit” for Ds F,%%%. :n credit

means, cash is not !aid to su!!liers no# but #ill be !aid later.

here are t#o transactions. In the first, the cash coming to business forms the “asset”of the business and the o#ner has the right over this cash contributed by him called ,

Jca!ital4, #hich forms the “:#ner4s euity”. As the cash contributed is eual to

o#ner4s right over it, #e can establish the relation bet#een the t#o as belo#=ash 7asset8 K =a!ital 7o#ner4s euity8.

In the second transaction, the su!!lies 7stationery etc.8 coming in to business becomes

the “asset” called Jsu!!lies4, and the claim over this by the su!!liers on this 7since the

money is not yet !aid8 becomes the “liability” , called Jaccount !ayable4. As the

1%



amount of su!!lies is eual to the amount of the claim over the su!!lies, the relation

bet#een the t#o can be established as belo#

u!!lies 7asset8 K Account !ayable 7liabilities8

he liabilities and o#ner4s euity are together called as “euities”.

he relation among these can be stated as belo#

'iabilitiesAssets K +uities L

:#ner4s euity

he relation bet#een the three can be ex!ressed in the form of euation as belo#

Aet Lia=iitie O&ne" e3%it+

his is called Ao%nting e3%ation. /o#, the above exam!le can be summari?ed and !resented in the euation form as

belo#

Assets K 'iabilities L :#ner4s euity

=ash L u!!lies K Accounts (ayable L -ekele, =a!ital

1%,%%% L F,%%% K F,%%% L 1%,%%%.

:bserve that the total of the left hand side of the euation 71F,%%%8 is eual to thetotal of the right hand side of the euation 71F,%%%8, #hich sets the euilibrium

according to double entry conce!t.

State#ent of ao%nting e3%ation A statement !re!ared to kno# the effect of each

business transaction on assets and euities and balances at the end, is called

State#ent of ao%nting E3%ation.

Effet of t"anation on t'e ao%nting e3%ation> +ach business transaction has

t#o@fold effect on the accounting euation the effect could be as belo#

a@ Increase in asset and increase in euities 7liabilities or o#ner4s euity8,

=@ 6ecrease in asset and decrease in euities 7liabilities or o#ner4s euity8,

@ Increase in one asset and decrease in another asset,

0@ Increase in one liability and decrease in another liability or o#ner4s euity. uch an effect #ill al#ays maintain e3%ii="i%#. After the record of each

transaction, the total of assets #ill be eual to the total of euities.

11



7ORED OUT PRO$LEMS

1@ &r. Albert is a =onsulting 6octor .he transactions relating to his consultancy servicefor the month of /ovember 2%%F, are as belo#

a8 tarted the consultancy service #ith a cash Ds 1%,%%%,

b8 (urchased clinical eui!ment Ds 3,%%%,c8 (aid office rent Ds F%%,

d8 (urchased office su!!lies on account Ds 9%%,

e8 Deceived consultancy fees from !atients Ds F,%%%,

f8 (aid office staff salary Ds 9$%,g8 (aid to#ards account !ayable Ds F$%,

h8 &r. Albert #ithdra#s Ds 1,2%% for his !ersonal use.

i8 =ost of su!!lies remaining at the end of the month Ds 2$%,

(re!are an Accounting euation statement and sho# the balances at the end of the month. %ote Co through the !roblem until the end to identify various assets and euities and

!rovide column for each in the statement .In the above !roblem, the assets are, cash,eui!ment, and office su!!lies and euities are, Account !ayable, &r. Abert4s ca!ital.

So%tion Accounting +uation tatement for /ovember 2%%F.

Assets K +uities

6ate /umber =ash u!!lies +ui!ment Account

!ayable

Alemu4s

ca!ital

6etails

a8

b8

1%,%%%

@3,%%%

@ @ @ 1%,%%%

@3,%%%

tarted

business

+ui!ment !urchase

-alance

c8

;,%%%

@F%%

3,%%% 1%,%%%

@F%% (aid rent

-alance

d8

F,)%%

L9%%

3,%%%

L9%%

*,)%%

u!!lies on

account

-alance

e8

F,)%%

LF,%%%

9%% 3,%%% 9%% *,)%%

LF,%%%

ees

received

-alance

f8

12,)%%

@9$%

9%% 3,%%% 9%% 1$,)%%

@9$% alary !aid-alance

g8

11,$$%

@F$%

9%% 3,%%% 9%%

@F$%

1),$$%

(aid ac

!ayable

-alance

h8

1%,*%%

@12%%

9%% 3,%%% 1$% 1),$$%

@ 1,2%%

Bithdra#

.

-alance *;%% 9%% 3,%%% 1$% 13,3$%

12



i8 @$$% @$$% u!!lies ex!

-alance *,;%% 2$% 3,%%% 1$% 12,9%% -alance at

the end

Note on S%((ie u!!lies are small consumable items in an office. +xam!les are !ins, !a!er, !encils etc. reuently they are !urchased, but used continuously. It is

uneconomical to record every time they are used. herefore, the accounting !rocedure is

to record all the !urchases during the !eriod and at the end of the !eriod ,the balanceremaining is !hysically counted .he difference bet#een the total !urchases and the value

of su!!lies at the end is called “ u!!lies ex!ense”.

It is determined as belo# 7 ormat8M

6etails Amount 7Ds8tock of the su!!lies at the beginning xx

L (urchases during the !eriod xxx

otal su!!lies available for the !eriod xxx

@ tock of su!!lies at the end xu!!lies ex!ense 7su!!lies consumed8 xxx

Bith this euation, the missing figure can be calculated.In the above exam!le, (urchase of su!!lies 9%%

'ess, tock of su!!lies at the end 2$%

herefore, u!!lies ex!ense $$%

28 he assets and liabilities of <eevu 6ry =leaners as on 6ec,1,2%%$ are as belo#7 in

Ds8M=ash 2,%%%,Account receivable ),)%%,u!!lies 1,;%%,'and 22,*%%,Account !ayable

),%F%. he business transactions for the !eriod are as belo#a8 Deceived cash from the customers *9$F,

b8 (aid creditors on account 3$1%,c8 <eevu ,the o#ner ,contributed additional ca!ital ;,)%%,d8 (aid rent 2,)%%,

e8 =harged customers for dry cleaning sales on account 2,%$%,

f8 (urchased su!!lies on account )*%,

g8 Deceived cash from customers on account ),%%%,h8 Deceived monthly invoice for dry cleaning ex!enses to be !aid in <an,2%%),

3,2;%,

i8 (aid #ages 1,;%%,truck ex!enses $%%, utilities ex!ense F$%,miscellaneousex!ense 1$%,

58 he cost of su!!lies used 23%

Deuired 18 6etermine o#ner4s euity as on 6ec 1, 2%%$, 28 (re!are a tatement of accounting euation and sho# the balances as

:n 6ec 31, 2%%$.

So%tion 18 :#ner4s euity K Assets N 'iabilities Assets =ash 2,%%%

Account receivable ),)%%

u!!lies 1,;%%

'and 22,*%%

13



otal 31,%%%

'ess Account !ayable ),%F%

herefore, :#ner4s euity 2F,*)%

28 tatement of Accounting +uation

Assets K +uities

l /o. =ash Acreceivable

u!!lies 'and Ac(ayable

:#ner4seuity

6etails

a8

2,%%%

L*,9$F

),)%% 1,;%% 22,*%% ),%F% 2F,*)%

L*,9$F

-alance at

the beginning

-alance

b8

11,9$F

@3,$1%

),)%% 1,;%% 22,*%% ),%F%

@3,$1%

3F,;*F

(aidcreditors

-alancec8

9,3)F;,)%%

),)%% 1,;%% 22,*%% $$% 3F,;*FL;,)%% Additional

ca!ital-alance

d8

1$,;)F

@2,)%%

),)%% 1,;%% 22,*%% $$% )),1*F

@2,)%% Dent !aid

-alancee8

13,3)F ),)%%L2,%$%

1,;%% 22,*%% $$% )1,;*FL2,%$% Ac

receivable

-alance

f8

13,3)F F,)$% 1,;%%

L)*%

22,*%% $$%

L)*%

)3,9)F

u!!lies

!urchase

-alance

g8

13,3)F

L),%%%

F,)$%

@),%%%

2,1*% 22,*%% 1,%)% )3,9)F

=ash recd

-alanceh8

1;,3)F 2,)$% 2,1*% 22,*%% 1,%)%L3,2;%

)3,9)F@3,2;% +x!enses on

Ac

-alance

i8

1;,3)F

@3,%%%

2,)$% 2,1*% 22,*%% ),31% )%,$;F

@1,;%%@$%%

@F$%

@1$%

Bagesruck

Etilities

&iscel.

-alance 58

-alance

1),3)F

1),3)F

2,)$%

2,)$%

2,1*%@23%

1,*F%

22,*%%

22,*%%

),31%

),31%

3;,$;F@23%

3;,3)F

u!!lies ex!.

/ote on u!!lies u!!lies ex!ense is given in the !roblem. herefore, the closing value

of su!!lies K 2,1*%@23%K 1,*F%.

38 &r.Abraham o#ns a 'A" 6+IC/ E6I:. he Assets, 'iabilities and +uity

as on 6ec 1, 2%%$, #ere 7In Ds8

1)



=ash,1F%%,Account receivable,9%%,u!!lies,$%%,:ffice urniture,3%%%, ,=a!ital,$%%%.

ransactions during the month #ere

6ec1. (erformed ervices for 12%% on account. 9 (aid 12$ cash for Etilities

1;. Deceived for services on account 1,%%%.

2$. (aid alary 1%%, 31. Bithdre# for !ersonal use 2%%

31. (aid 3%% to creditors.

Re3%i"e0 > a8 6etermine the Account !ayable as on 6ec. 1, 2%%$

b8 (re!are a statement of accounting euation and sho# the balances as on

6ec 31, 2%%$

So%tion>

a8 Assets N ca!ital K Account !ayable

Assets =ash 1,F%%

Account receivable 9%%

:ffice furniture 3,%%% u!!lies $%%

$,*%% @ =a!ital $,%%%

herefore, Ac (ayable *%%

b8 tatement of Accounting +uation

6ate6ec

2%%3.

=ash Acreceivable

u!!lies furniture Ac(ayable

=a!ital 6etails

1

1

1,F%% 9%%

L1,2%%

$%% 3,%%% *%% $,%%%

L1,2%%

:!ening balance

Decd forservice

-alance9

1,F%%@12$

2,%%% $%% 3,%%% *%% F,2%%@12$ utilities

-alance

1;

1,);$

L1,%%%

2,%%%

@1,%%%

$%% 3,%%% *%% F,%;$

Decd for

service

-alance2$ 2,);$@1%% 1,%%% $%% 3,%%% *%% F,%;$@1%% alary

-alance

31

2,3;$

@2%%

1,%%% $%% 3,%%% *%% $,*;$

@2%% #ithdre#

-alance 2,1;$ 1,%%% $%% 3,%%% *%% $,;;$(aid to

1$



31 @3%% @3%% creditors

-alance 1,9;$ 1,%%% $%% 3,%%% F%% $,;;$

7o"8 o%t P"o=e#>

18 &r.0amal o#ns a 'A" 6+IC/ E6I:. he assets. 'iabilities and +uity as

on 6ec, 1,2%%$,are7Ds8 =ash, 39%%,

Account receivable, 21$%

u!!lies, 1*2$,:ffice =om!uter, F;1$,

Account (ayable, 3*)%,

=a!ital, H

ransactions during the month are6ec 1 (erformed ervices for 2$%% on account.

1%. (aid $3$ cash for Etilities

1$. (erformed services for 2)$%,received in cash.

2%. (aid alary )$%, 2*. (aid 1$)% to creditors.

3%. Bithdre# $%%. 31. u!!lies at the end $2$.

Re3%i"e0 et u! an accounting euation form using the balances given at the

beginning of 6ecember 1, 2%%$. Decord the effects of the transactions thatoccurred during 6ecember.

1., Finania State#ent fo" Soe P"o("ieto"'i(

he users of accounting information need to kno# 18#hat !rofit the organi?ation hasmade during a !eriod ,28 #hat is the financial !osition of the organi?ation at the end of a !eriod, and 38#hat is the !rogress made year after year. he accounting euation is only a

fundamental relation bet#een the assets, liabilities, and o#ner4s euity. It does not

indicate the financial o!erations.

Finania tate#ent he accounting statements !re!ared for communicating essentialinformation to the users are called Jfinancial statements4. hey are 18 Income statement

28 tatement of o#ner4s euity,38 -alance heet and )8 =ash flo# statement.

18 Inco/e State/ent A statement !re!ared to sho# the result of o!eration #ith

res!ect to revenues and ex!enses for a specific accounting perio$ is called

ino#e tate#entP"ofit Lo Ao%nt. he excess of revenue over theex!enses is called “net income” “!rofit”. he excess of ex!enses over the

revenues is called “net loss”.

Re(enue refers to the regular income to the organi?ation on day@to@day recurringtransactions. he criteria are the regularity and recurring 7re!eating8 inflo# of

revenue on a day@to@day basis. It includes actual recei!ts or accrual due to be

received. or exam!le, sale of goods, and services, !rofessional fees earned, rent

received, fares received commission received, interest received etc.

1F



/ote that the income on the sale of asset and lottery are not considered as

revenues.

E.pense refers to the regular s!ending by the organi?ation on day@to@day recurringtransactions for earning revenue. hey are also called ex!ired costs. It includes

items of actual or accrued !ayments. or exam!le, su!!lies ex!ense, salary, rent,

utilities !aid etc. /ote that, !ayments for the !urchase of assets !ro!erties are not considered as

ex!enses.

Capital receipt he money received other than the revenue is called ca!italrecei!t. or exam!le, money received on sale of assets.

Capital e.pen$iture he money s!ent other than to#ards the ex!enses are called

ca!ital ex!enditure. or exam!le, money s!ent on !urchasing assets such as, land,

machinery, furniture etc. :nly revenues and ex!enses enter the income statement directly.

28 State#ent of o&ne" e3%it+ inally, the o#ner of the business has to en5oy the

result of business o!erations. he statement !re!ared to kno# the increase or

decrease in o#ner4s euity over a !eriod is called “tatement of o#ner4s euity”.he euity changes due to the revenues, ex!enses, additional investment to and

#ithdra#als from the business by the o#ner. he ultimate effect is either a netincrease or a net decrease in euity. In other #ords, the difference bet#een the

ca!ital at the end and the ca!ital at the beginning of a !eriod is either an increase

or decrease in the euity.38 $aane S'eet A statement sho#ing the !osition of assets, liabilities and

o#ner4s euity as on the last date of the accounting !eriod is called “-alance

heet”. It contains the details of the balances of assets, liabilities and o#ner4s

euity on a specific $ate.)8 Ca' fo& tate#ent A statement sho#ing the cash at the beginning of a !eriod,

actual cash recei!ts and !ayments during the !eriod and cash balance at the end of

the !eriod is called “=ash flo# statement”.

7o"8e0 o%t ("o=e#>

18 &r. aranath, is o!erating a axi ervice in -angalore. he assets ,liabilities and

euity on <an,1,2%%F, are as belo# 7in Ds8 =ash 2,$%%,u!!lies 9%%,Account

receivable 1,2%%,axi !urchased 2%,%%%,'and 11,%%%,Account !ayable

1;,$%%,euity 19,%%%.he transactions for the month are as belo#a8 (urchase of su!!lies )%%,

b8 axi fares received $,%%%,

c8 Dent !aid 2%%,d8 (aid for utilities 1$%,

e8 Additional investment made *,%%%,

f8 &iscellaneous ex!enses !aid 2%%,g8 alary !aid 1,2%%,

h8 Interest !aid 1,$%%,

i8 Bithdre# for !ersonal use 3,F%%,

58 u!!lies at the end $%%.

1;



Deuired

718 (re!are an income statement for <an 2%%F,

728 (re!are a statement of o#ner4s euity,738 (re!are a cash flo# statement

7)8 (re!are a balance sheet as on <an 31, 2%%F.

So%tion /ote Identify the items relating to revenues and ex!enses, items relating

to o#ner4s euity, and items relating to assets and liabilities.

Devenues and ex!enses enter the income statement ,additional investment#ithdra#als, and the result of income statement enter the o#ner4s euity ,the ending

balances of assets, liabilities and o#ner4s euity a!!ear in the balance sheet.

&r.aranath18 Income statement for the month of <an,2%%F

6etails Amount 7Ds8

Devenues axi fares+x!enses u!!lies ex!ense

Dent

Etilities &isc.

alary

Interest

79%%L)%%@$%%8

;%%

2%%1$%

2%%

1,2%%

1,$%%

$,%%%

3,*$%

/et income 1,%$%

28 tatement of o#ner4s euityor the month ended <an,31,2%%F.

6etails Amount 7Ds8

=a!ital at the beginning

Additional investment

/et income

'ess #ithdra#als

*,%%%

1%$%1%,%$%

3,F%%

19,%%%

F,)$%

=a!ital at the end 2),)$%

38 =ash flo# statement6etails Amount 7Ds8

=ash at the beginning

Add Decei!ts fares recdInvestment recd

'ess !aymentsu!!lies

$,%%%*,%%%

1),$%%

)%%

2,$%%

19



Dent

Etilities+x!enses

alary

Interest

Bithdra#al

2%%

1$% 2%%

1,2%%

1,$%%

3,F%% ;2$% ;,2$%

=ash balance at the end *,2$%

)8 -alance heet as on <an 31, 2%%F.

Assets 'iabilities

6etails Amount 7Ds8 6etails Amount7Ds8

=ashu!!lies

Account receivables

axi

'and

*,2$%$%%

1,2%%

2%,%%%

11,%%%

Account !ayable:#ner4s euity

1;,$%%2),)$%

otal )1,*$% otal )1,*$%

/ote It should be noted that there are no changes #ith res!ect to accountreceivable ,account !ayable ,taxi and land.

7OR OUT PRO$LEMS

1@ &r. Akash is a =onsulting 6octor .he transactions relating to his consultancy servicefor the month of /ovember 2%%F, are as belo#7inDs8

a8 tarted the consultancy service #ith a cash 1%,%%%,

b8 (urchased clinical eui!ment 3,%%%,

c8 (aid office rent F%%,d8 (urchased office su!!lies on account 9%%,

e8 Deceived consultancy fees from !atients F,%%%,

f8 (aid office staff salary 9$%,g8 (aid to#ards account !ayable F$%,

h8 =ost of su!!lies remaining at the end of the month 2$%,

i8&r.Akash #ithdra#s 1,2%% for his !ersonal use.

(re!are the financial tatements

28he assets and liabilities of <ames -ond 6ry =leaners as on 6ec,1,2%%$ are as belo#

7 in Ds8M=ash 2,%%%,Account receivable ),)%%,u!!lies 1,;%%,'and 22,*%%,Account !ayable ),%F%. he business transactions for the !eriod are as belo#

a8Deceived cash from the customers *9$F,

b8(aid creditors on account 3$1%,c8<ames ,the o#ner ,contributed additional ca!ital ;,)%%,

1*



d8(aid rent 2,)%%,

e8=harged customers for dry cleaning sales on account 2,%$%,

f8(urchased su!!lies on account )*%,g8Deceived cash from customers on account ),%%%,

h8Deceived monthly invoice for dry cleaning ex!enses to be !aid in <an,2%%), 3,2;%,

i8(aid #ages 1,;%%,truck ex!enses $%%, utilities ex!ense F$%,miscellaneous ex!ense 1$%, 58he cost of su!!lies used 23%

(re!are inancial tatements

38 &r.Abebe o#ns a 'A" 6+IC/ E6I:. he Assets, 'iabilities and +uity as

on 6ec 1, 2%%3, #ere 7In Ds8

=ash,1F%%,Account receivable,9%%,u!!lies,$%%,:ffice urniture,3%%%, ,=a!ital,$%%%.

ransactions during the month #ere6ec1. (erformed ervices for 12%% on account.

9 (aid 12$ cash for Etilities

1;. Deceived for services on account 1,%%%.

2$. (aid alary 1%%, 31. Bithdre# for !ersonal use 2%%

31. (aid 3%% to creditors.(re!are inancial tatements.

)8 &r.Ibrahim o#ns “amera ervices”. he assets, 'iabilities and +uity as on 6ec,

1,2%%$,are7inDs8 =ash, 39%%,

Account receivable, 21$%

u!!lies, 1*2$,

:ffice =om!uter, F;1$,Account (ayable, 3*)%,

=a!ital, H

ransactions during the month are6ec 1 (erformed ervices for 2$%% on account.

1%. (aid $3$ cash for Etilities

1$. (erformed services for 2)$%,received in cash. 2%.(aid alary )$%,

2*.(aid 1$)% to creditors.

3%.Bithdre# $%%.

31. u!!lies at the end $2$.(re!are inancial tatements.

2%



CHAPTER 2

ACCOUNTING CYCLE FOR SER4ICE RENDERING $USINESSES

Int"o0%tion -usiness o!erations can broadly be divided in to three categories. hey

are 18 ervice rendering 28 merchandising 7trading8 38 &anufacturing and selling

ervice rendering businesses are the businesses, #hich !rovide s!ecific utility to the

user. ervice can only be felt and cannot be seen. or exam!le, trans!ortation,

education, consultancy, bank etc.

In trans!ortation, goods and !assengers are moved from one !lace to another !lacecalled !lace utility. or exam!le, taxi service. -anks collect de!osits and lend loansM

educational institutions make the students graduates. A !rofessional Accountant

solves the !roblems of the clients .or exam!le, calculating the tax liability. A doctor

cures the diseases, etc.

Be have seen in the !receding !ages that, the transactions relating to revenues,ex!enses, assets, liabilities and o#ner4s euity are very fe#. Imagine, if there are

hundreds and thousands of transactions #ith res!ect to each item. (robably,

recording looks very clumsy and confusing. It may not hel! to dra# any inferences.herefore, there is a need to have a systematic a!!roach that is uniformly acce!table.

he systematic accounting a!!roach is discussed as belo#

2.1 Ao%nt Bhen several transactions occur, relating to a s!ecific item, then it is better to !ut them all in one !articular !lace to have a com!lete !icture about that

item, of ex!ense, revenue, asset, liability and o#ner4s euity. or exam!le, su!!lies

!urchased on different dates can be !ut in one !lace of recording, to have an idea of the total !urchases during the !eriod. A !lace in the business book #here all the

related transactions of a s!ecific item are recorded is called an “Account”. or

exam!le, su!!lies account, rent account, !lant account, account !ayable, ca!italaccount etc.

Nat%"e of an ao%nt +ach transaction has t#o as!ects. In order to !rovide s!ace for

recording these t#o as!ects, an account is divided in to t#o sides@ left hand side and

right hand side. An account can be #ritten in t#o forms 18 form, 28 tatementform.

18 An account in form is as belo#

u!!lies account Account /o

6ate Item (ost.

ref.

Amount 6ate Item (ost.

ref.

Amount

itle of the account is #ritten on the to! center. he entries are #ritten on both the

sides of the account de!ending on the effect of a transaction.

21



28 An account in the statement form

u!!lies account Account /o6ate Item (ost.ref. 6ebit =redit -alance

6ebit =redit

De=it an0 C"e0it he effect on an account due to a transaction is ex!ressed in t#o #ays

for recording.

De=it his is an accounting term, #hich is understood in three #ays

a8 o debit o debit means, )$! m*+e *% e%$r' on the left hand side of an

account, b8 6ebit side 6ebit side refers to the )"e$ h*%- &-e ! *% *##!/%$,

c8 6ebit entry 6ebit entry refers to )*% e%$r' on the left hand side of anaccount.

C"e0it his is an accounting term, #hich is understood in three #aysM

a8 o =redit o credit means #a8e an ent"+ on the right side of an account,

b8 =redit side =redit side refers to the "ig't 'an0 i0e of an ao%nt,

c8 =redit entry =redit entry refers to an ent"+ on the right side of an account. %a/e of t"e account he name of the account is #ritten on the to! centerleft corner.

Account nu/er +ach account is given a se!arate number for the !ur!ose of

identification. Date In this column, the year, month, and date on #hich the transaction occurred is

#ritten.

Ite/: he name of the o!!osite account, #hich is affected in #ritten in this column. Posting reference 7!ost.ref.8 he !age number of the 5ournal 7ex!lained later8 is #ritten

in this column.

Deit an$ Cre$it he res!ective amounts are #ritten in these columns.-alance he amount remaining at the end of the !eriod or at the end of each entry is

called “balance”.

6ebit balance, refers to the amount of debit in excess over the credit.

=redit balance, refers to the amount of credit in excess over the debit.

$aaning an ao%nt is an act of determining the excess of debit or credit in each

account.

In form, the balance is determined at the end of the !eriod and in the statement form,

the balance is found out after recording each entry.Le0ge" A ledger is a book in #hich all the accounts are #ritten .his book #ill have a

number of !ages .!ecified number of !ages are “earmarked”7ke!t a!art8 for eachaccount de!ending on the number of entries. ome times a se!arate book is maintained

for each account. A ledger is a book of “second entry”.

2.2 CLASSIFICATION OF ACCOUNTS

=lassification of accounts refers to grou!ing of accounts according to some commoncharacteristics. here are t#o ty!es

22



18 $ae0 on (e"ona o" i#(e"ona

Personal accounts are the accounts indicated by the names of !ersons related to

the business through business transactions. or exam!le, Ato =linton4s account,Ato &amo4s account, Account !ayable, debtors, creditors, A-= =om!any

account etc.

I/personal accounts are divided in to t#o !artsM Real or asset accounts are the accounts indicated by the names of the assets

,related to the business through business transactions. or exam!le, !lant account,

machinery account, land account etc. %o/inal accounts are the accounts indicate d by the names of the ex!enses or

revenues related to the business through business transactions. or exam!le,

salary account, rent account, commission received account, sales account. fares

received account, etc.28 $ae0 on finania State#ent According to this ,the accounts are classified

as ,A8 -alance Accounts, -8 Income statement Accounts.

A8 alance S"eet Accounts he accounts that a!!ear in a balance sheet are called

balance sheet accounts. hey are further divided in to a8 Assets accounts, b8'iabilities accounts, and c8 :#ner4s +uity Accounts.

a8 Assets Accounts he !ro!erties o#ned and accounts receivable by the businessare called “Assets”. hey can be i8 angible Assets ,or ii8 Intangible.

7i8Tangile Assets are the assets #hich can be !hysically seen .or exam!le,

urniture, 'and .&achinery etc.

2ii4Intangile Assets are the rights obtained by the business. hey are not

!hysically seen but only felt. or exam!le, (atent right, co!y right etc.7these

are ex!lained at a later stage8.

or the !ur!ose of !resenting in the balance sheet, the assets are divided in to i8=urrent Assets and ii8 (lant Assts

i8 =urrent Assets, are the assets including cash, #hich are converted in to

cash #ithin one year. or exam!le, cash, bills and notes receivables,ending inventory ,!re!aid ex!enses etc.

ii8 (lant assets, are the assets #hich are ex!ected to be !ermanently #ith the

business. hey are not ex!ected to be sold #ithin one year. hey are alsocalled “ixed assets”. or exam!le, land ,furniture ,!atent right, good #ill

etc.

b8 Lia=iitie Ao%nt he amounts that the business has to give to others are

called “'iabilities”. here are t#o categories i8 =urrent 'iabilities ,and ii8 'ongterm 'iabilities.O

i8 =urrent liabilities are the liabilities #hich are to be !aid #ithin one year.

hey are !aid out of current assets. or exam!le, Accounts !ayable, notes !ayable, sales tax ,interest !ayable etc.

ii8 'ong term liabilities are the liabilities #hich are due for !ayment beyond an

accounting !eriod. or exam!le, long tem loans, mortgage note !ayable, etc."o#ever, such !art of long term liability #hich falls due for !ayment #ithin

a year is categori?ed as current liability.

c8 O&ne" E3%it+ Ao%nt he Accounts that are related to the o#ners of the

business are called “o#ner4s euity Accounts”. he o#ner of the business has

23



the last claim over the !ro!erties. It means, the business clears the outside debt

first and after#ards o#ners can claim the residual !ro!erty. or exam!le,

=a!ital account, 6ra#ings Account etc.-8 Ino#e State#ent Ao%nt he accounts that a!!ear in the income statement

are called income statement accounts. hey are further divided in to a8 Devenue

Accounts b8 +x!enses Accounts.a8 Re(enue accounts are the accounts relating to the regular incomes to the

business. +xam!le, sales ,interest received, fees received ,discount received etc.

b8 E.penses accounts are the accounts relating to the moneys s!ent to get therevenues to the business .or exam!le, salary, rent , interest !aid ,de!reciation,

su!!lies ex!ense etc.

Co0e o" In0eB n%#=e" or the !ur!ose of easy identification ,the accounts are

given individual code numbers. A suggested codification is as belo# 7 "o#ever, other #ays are also !ossible8

C'a"t of Ao%nt

$aane 'eet Ao%nt

1.Aet 2. Lia=iitie *. O&ne" e3%it+11.=ash 21.Accounts !ayable 31.=linton ca!ital

12.Ac Deceivable 22.alary (ayable and so, on 32.=linton dra#ing1). u!!lies and so, on

19.'and

1*.+ui!ments and so, onIncome tatement Accounts

.Re;en%e !.EB(ene

)1. ales $1. alary

)2. Dent received and so, on. $2. u!!lies $3.Dent !aid

$).Insurance !aid and so, on.

De=it an0 C"e0it R%e>

Feneral Rule: Deit t"e Account *"ic" recei(es-

Cre$it t"e account *"ic" gi(es' Personal Account: Deit t"e recei(er- cre$it t"e gi(er'

Real Account: Deit *"at co/es in- cre$it *"at goes out'

%o/inal Account: Deit All e.penses an$ losses

Cre$it All inco/es an$ gains'

he effect of a transaction is as belo#

Assets 6ebit increase ,=redit decrease.

'iabilities 6ebit decrease , =redit increase.:#ner4s +uity 6ebit decrease, =redit increase.

:#ner4s dra#ing 6ebit increase, =redit decrease.

Devenues 6ebit decrease, =redit increase.

+x!enses 6ebit increase, =redit decrease.

2)



2.* 5OURNAL>

&any transactions occur during a !eriod. +very day several transactions take !lace. Atransaction may not relate to an immediate !revious transaction. It is not advisable to

directly enter the transactions in to the ledger accounts situated in different !laces in a

ledger. herefore, there is a need for an intermediate device. he ga! bet#een atransaction and the ledger is filled by a book called “<ournal”.

A 5ournal is a book in #hich the transactions are first entered in the chronological order in

#hich the transactions take !lace. It is a book of “(rime entry”.

ormat of a t#o column 5ournal <ournal (age /o.

l./o. 6ate Account itle (ost.ref. 6ebit =redit

Sl %o In this column the serial number of the transactions are #ritten.

Date he year ,month ,date of the transactions are #ritten here.

Description he names of the account to be debited and credited are #ritten in thiscolumn.

Post'ref . 7!osting reference8he account number of each account is #ritten here.

Deit an$ cre$it he amounts are #ritten here.

Paing t'e ent"ie in a 9o%"na he !rocess of entering the transactions in a 5ournal in

a chronological order ,that is ,in the order in #hich they occur, is called “ passing t"e

entries”. :r “ Gournali&ing ”.te!s 18 Co through the transactions one by one,

28 Identify only the t#o relevant accounts affected by the transaction,

38 A!!ly the rule and decide #hich account to be debited and #hich to becredited,

)8 Brite the serial number ,year, month and the date and in the account title

column, #rite firstly the name of the account to be debited and belo# that inthe next ro#, #ith a small s!ace left, in the beginning, #rite the name of the

account to be credited.7o!!osite account8 .A small descri!tion of the

transaction could be #ritten in the next ro# ,#hich is called “/arration”.$8 Brite the amount of debit and credit against the res!ective accounts and in

their columns.Co#(o%n0 5o%"na ent"+> Bhen t#o or more accounts are debited and credited

simultaneously ,then such a 5ournal entry is called “ =om!ound <ournal +ntry”.

I%t"tion> ?1@ &rs. Ciri5a tarted A De!air #orks sho! #ith a ca!ital of Ds 2%,%%%

on /ovember, 1,2%%F.:ther transactions for the month are as belo# 7Ds82%%F.

/ov. 2. (urchased De!air +ui!ment for cash 1%,%%%,

2$



1%. (urchased office su!!lies 1,2%%,

1F. (aid rent 1,%%%,

2). Deceived re!air charges $,3%%, 3%. (aid salary to #orkers 1,$%%,

3%. Bithdre# for !ersonal use 9%%.

Deuired a8 Identify the affected accounts in each transaction and determine the account to be debited and account to be credited.

b8 (re!are the 5ournal and !ass the entries7<ournalise8.

olutiona8 Analysis

Affected accounts 6ebit =redit

/ov.1 =ash and Ciri5a4s ca!ital =ash Ciri5a4s ca!ital

/ov. 2 De!air eui!ment and cash +ui!ment =ash

/ov.1% :ffice su!!lies and cash :ffice su!!lies =ash

/ov.1F. Dent and cash Dent =ash /ov.2). =ash and re!air charges received =ash De!air service charges

/ov.3%. alary and cash alary ex!ense =ash

/ov.3%. 6ra#ings and cash 6ra#ings =ash

/ote Analysis is only for learning !ur!ose, at the initial stages till the student

becomes familiar #ith debit and credit

b8 &rs. Ciri5a De!air Bork sho! <ournal


1. 2%%F /ov.1

=ashCiri5a,ca!ital

1131

2%,%%%2%,%%%

2. 2 De!air eui!ment

=ash

19

11

1%,%%%

1%,%%%

3. 1% :ffice su!!lies

=ash

13

11

1,2%%

1,2%%

). 1F Dent

=ash

$3

11

1,%%%

1,%%%

$. 2) =ashDe!air charges received

11)1

$,3%%$,3%%

F. 3% alary

=ash

$1

11

1,$%%

1,$%%

;. 3% 6ra#ings=ash

3211

9%%9%%

/ote a8 /arration is not com!ulsory #hen the transaction is obvious,

b8Brite year and month only once #hen it is changed,

c8 (osting reference is filled #ith account number at the time of entering in to

the ledger.

2F



2. Poting t'e 9o%"na ent"+ to e0ge">After !assing the entry in the 5ournal ,the next ste! in the accounting cycle is to

transfer this entry to the res!ective account in the ledger. A se!arate s!ace7!age8 is !rovided for each account in the ledger. he entries in an account give the com!lete

!icture about #hat is ha!!ening #ith res!ect to that account, that is, #hether the

amount in the account is increasing or decreasing . At the end of an accounting !eriod, say ,a month ,or a year, the balance is sho#n in each account. "o#ever, if the

total of debit is eual to total of credit ,then there #ill be no balance at all, that is /il

balance at the end. he ending balance of an account becomes the o!ening balance of that account in the beginning of the next !eriod.

Poting> he !rocess of transferring the entries in the 5ournal to the res!ective

accounts in the ledger is called “(osting”.

his is an act of grou!ing the related entries. or exam!le, all the cash related entries

in the 5ournal on different dates are !osted to cash account in the ledger . Aconsolidated !icture of cash is obtained at one !lace.

te!s 18 (rovide enough !lace for each account in the ledger book,28 After !assing an entry in the 5ournal, take first, the account to be debited ,go to the

relevant !age in the ledger ,enter in the debit side the name of the o!!osite account in

the account title column, and #rite the amount in the amount column of debit side.38 /ext, take the account to be credited ,go to the relevant !age number in the ledger

and enter in the credit side of that account ,the name of the o!!osite account in the

account title column and #rite the amount in the credit column.)8 De!eat this for all the other entries.

$8 Brite the year, month and date in the date column.

F8 Brite the !age number of the 5ournal in the !ost ref. column of the res!ectiveaccount in the ledger.;8 inally, at the end of the !eriod7in case of form account8 or at the end of each

!osting 7in case of tatement form 8 ,determine the balance and #rite this balance

amount in the debit side7column8 or credit side7column8 as the case may be.6istinction bet#een <ournal and 'edger

De"i(tion 5o%"na Le0ge"

1@ P%"(oe $oo8 fo" "eo"0ing

9o%"na ent"ie

$oo8 fo" "eo"0ing

e0ge" ao%nt

2@ Nat%"e T&o o%#n< one fo"

0e=it an0 anot'e" fo""e0it

T&o i0e <0e=it an0

"e0it o" fo%" o%#n0e=it <"e0it an0

=aane.

*@ Ent"+ $oo8 of o"igina o"

("i#e o" fi"t ent"+

$oo8 of eon0 ent"+

@ O"0e" C'"onoogia o"0e" of

t"anation in gene"a

O"0e" of t"anation

"eating to "e(eti;e

ao%nt

2;



!@ $"i0ge $"i0ge =et&een

t"anation an0 t'e

e0ge".

$"i0ge =et&een t'e

9o%"na an0 t'e t"ia

=aane.

)@ Refe"ene S%((o"ting 0o%#ent

i8e (%"'ae in;oie<

(a+"o et.

5o%"na ent"ie

Co#(a"ion <ournal is like a general assembly of all the students in a college

auditorium and ledger account is like a class for each faculty such as ,Accounting

class, &anagement class, Automotive class, construction class etc.

5o%"na Gene"a Ae#=+

St%0ent> a<=<<0<e<f<g<'< JJJ.K

Le0ge" Ao%nting

A<f<I<8<.

Manage#ent

=<<#<<+<K.

A%to#oti;e

g<9<o<n.

Cont"%tion

0<'<(<"<%

I%t"ation ?2@> =ontinuing the &rs. Ciri5a4s De!air Borksho! illustration, !ost theentries in the 5ournal to ledger accounts and determine the balances.

&rs. Ciri5a4s De!air Borksho!=ash account Account /umber 11

Date

2::)

Ite# Pot."ef. De=it C"e0it De=it

=aane

C"e0it

=aan

No;.1 Gi"i9a<a(ita :1 2:<::: - 2:<::: -

2 Re(ai"

E3%i(#ent

:1 - 1:<::: 1:<::: -

1: Offie %((ie :1 - 1<2:: /</:: -

1) Rent :1 - 1<::: ,</:: -

2 Re(ai" 'a"ge

"eei;e0

:1 !<*:: - 1*<1:: -

*: Saa"+ :1 - 1<!:: 11<):: -

*: D"a&ing :1 - /:: 1:</:: -

29



De!air +ui!ment Account Account /o 19

Date

2::)

Ite# Pot."ef. De=it C"e0it De=it =a. C"e0it =a.

No;.2 Ca' :1 1:<::: - 1:<::: -

Ciri5a ,ca!ital Account /o 31

Date

2::*


No;.1 Ca' :1 2:<::: - 2:<

:ffice su!!lies Account /o 13

Date

2::)


No;.1

:

Ca' :1 1<2:: - 1<2:: -

Dent !aid Account /o $3

Date

2::)


No;.1

)

Ca' :1 1<::: - 1<::: -

De!air charges received Account /o )1

Date2::)


No;.2

Ca' :1 !<*:: !<

alary Account /o $1

Date

2::)


No;.*

:

Ca' :1 1<!:: - 1<!:: -

6ra#ings Account /o 32

Date

2::)


2*



No;.*

:

Ca' :1 /:: - /:: -

2.! TRIAL $ALANCE

+very day numerous transactions are entered in the 5ournal and !osted to ledger accounts. +ach task is !erformed by a different accounting clerk. <ournali?ing could be done by a clerk, !osting by another and so on. In large firms ,even the 5ournali?ing

task is shared by several !ersons. Bhile !erforming these tasks errors may occur.

+rrors could occur at the time of 5ournali?ing or !osting or at the time of balancing. It becomes necessary to verify the accuracy of the entries made, for t#o im!ortant

reasons18 to u!hold the !ur!ose of double entry !rinci!le, 28 to get the accurate

financial results.

T"ia $aane A statement !re!ared at the end of an accounting !eriod to verify the

arithmetical accuracy of the amounts in the books is called “rial -alance”. It

contains the ending balances of all the accounts. Bhen all the transactions are

correctly 5ournali?ed, !osted to accounts and all the accounts are balanced !ro!erly,the debit total must be eual to credit total. It is to check this that a trial balance is

!re!ared as on the last date of the accounting !eriod he trial balance contains the

names of all the accounts and their res!ective debit and credit balances. 6ebit columntotal is eual to credit column total so that the euilibrium is established . If there is

any error at any !oint of entry ,the debit total #ill not be eual to credit total. hus a

trial balance hel!s to trace the error of arithmetic accuracy in the accounting. A trial balance acts as a bridge bet#een ledger accounts and the financial statements. It is

!re!ared as on a s!ecific date for the !eriod ended and not for the !eriod. his is also

called P"e-oing t"ia =aane.

te!s 18 6ra# a rial balance !roviding columns for serial number, account

balances, account number, debit balance and credit balance, 28 ransfer the balance in each account to the trial balance to the a!!ro!riate

!laces, 38 ind the total of debit column and credit column. hey must be eual. Be

#ill discuss at a later stage as to #hat to do #hen the totals are not eual.

I%t"ation?*@ =ontinuing &rs.Ciri5a4s De!air Borksho! illustration, !re!are arial -alance as on /ov.3%,2%%F.

rial -alance

3%



for the month ended /ovember ,3%,2%%F.

S.No. Ao%nt =aane Ao%nt

No.

De=it C"e0it

1

2

*

!

)

,

/

Ca'

Re(ai" e3%i(#ent

Gi"i9a<a(ita

Offie %((ie

Rent (ai0

Re(ai" 'a"ge "eei;e0

Saa"+ eB(ene

D"a&ing

11

1/

*1

1*

!*

1

!1

*2

1:</::

1:<:::

-

1<2::

1<:::

-

1<!::

/::

2:

!

Tota 2!<*:: 2!

CHAPTER *

COMPLETION OF ACCOUNTING CYCLE

Introduction In this section #e discuss

18 Accounting !eriod end ad5ustments,

31



28 Borksheet com!rising Ad5ustments, ad5usted trial balance ,draft income

statement ,and balance sheet,

38 (re!aration of financial statement N income statement ,tatement of o#ner4s euity and balance sheet,

)8 <ournali?ing and !osting ad5usting entries,

$8 =losing entries ,5ournali?ing and !osting,F8 (ost closing trial balance.

In the !receding section #e have studied as to ho# the transactions are 5ournali?ed,!osted, accounts are balanced and a trial balance is !re!ared. heses #ere very sim!le

transactions . In this section #e are studying some more advanced ty!es of transactions.

*.1 $ai of "e(o"ting ao%nting 0ata

6uring an accounting !eriod several business transactions take !lace. =ash is receivedfor revenues and cash is !aid for ex!enses. ome times though revenues are earned, cash

might not have been actually received ,during an accounting !eriod. or exam!le ,assume

that the accounting !eriod is <an 1 to 6ec31.A doctor has !rovided service to a !atient on

dec.1%,amounting -irr 1%%. -ut the !atient has reuested the doctor that he #ould !ay themoney in the next month, that is <an. next year. his is the case of revenue earned for the

year but not actually received in that same year. imilarly the ex!enses are incurred in ayear but !aid in the next year. Ender such circumstances , the uestion arises as to ho#

to re!ort the accounting data. Accordingly, there are t#o bases for re!orting the data.

hey are18 Cas" asis Ender this, revenues and ex!enses are re!orted on the basis

of actual recei!t and !ayment of cash, irres!ective of #hether revenue is

earned or not and ex!enses are incurred or not. herefore ,the actual

recei!t and !ayment of cash is im!ortant.28 Accrual asis Ender this, revenues and ex!enses are re!orted on the

basis of revenue earned and ex!enses incurred in the !eriod ,irres!ective

of #hether cash is received or not and cash is !aid or not. herefore,earning of revenue or incurring of ex!ense is im!ortant and not the

actual recei!t or !ayment. his also !rovides for “matching” the revenue

#ith the related ex!enses.&ost of the businesses use the accrual basis for re!orting accounting data.

A09%t#ent> At the end of an accounting !eriod ,before !re!aring the financial

statements ,it is necessary to determine the exact amount of revenue earned and ex!enses

incurred for the !eriod. -ecause, the accounting !ractice is to record the exact amount of cash received and !aid during the !eriod. =ash received may be more or less than the

revenue earned .imilarly, cash !aid may be more or less than the ex!ense incurred. he

!rocess of bringing the amounts u! to date for the accounting !eriod is called “ Ad5ustments”.

hey act as bridge bet#een the trial balance and the ad5usted trial balance. hese

ad5ustments are discussed as belo#

A@ Defe""a he cases #here i8 cash !aid is more than the actual ex!ense of the !eriod

and ii8 cash received is more than the actual revenue earned of the !eriod ,are called

“deferrals”. hey are called deferrals because, the recognition of ex!ense or revenue is

!ost!oned7deferred8 for the next !eriod.

32



=ase 7i8 (re!aid ex!enses the ex!enses #hich are already !aid but not actually used by

the end of the !eriod are called “!re!aid ex!enses”.

I%t"ation Assume that the su!!lies !urchased during a !eriod7 say, <anuary to6ecember 8 amounted to Ds 1,$%%.-ut the actual su!!lies consumed by the end of

6ecember, amounted to Ds 1,2%%. herefore, su!!lies remaining un used at the end of the

!eriod is Ds 3%% 71,$%% @1,2%%8. u!!lies used is called “su!!lies ex!enses” ,sho#n inincome statement and su!!lies stock unused at the end is called “ su!!lies on hand”,

sho#n in the balance sheet as current asset. :ther exam!les are !re!aid insurance

,!re!aid interest ,de!reciation etc.

De("eiation> he !lant assets are continuously used for the !ur!ose of business

o!erations to get revenues. hey are sub5ect to #ear and tear due to usage. he gradual

reduction in the value of an asset due to usage is called “ de!reciation”. he !ractice is to

ex!ress this rate of reduction in the form of !ercentage .Illustration Assume that a machinery is !urchased for Ds 3%,%%%. 6e!reciation rate is

1%!er year. herefore ,the de!reciation for the year is 1%of 3%,%%% that is , 3,%%%.

his de!reciation is an ex!ense for the !eriod and sho#n in income statement. he cost

of the machine at the end of the !eriod is 2;,%%%73%,%%%@3,%%%8, called “book vale” .hisis sho#n in the balance sheet as !lant asset. "o#ever , the de!reciation could also be

credited to “accumulated de!reciation account” and sho#n as current liability in the balance sheet.

=ase 7ii8 Devenue received in advance 7revenue un earned8 Devenue #hich are already

received but not actually earned by the end of the !eriod are called “ revenue received inadvance” or “revenue unearned.

I%t"ation Assume that the rent received is Ds $,%%%, but the actual rent for the !eriod

is only Ds ),%%%. herefore ,the rent received in advance is Ds1,%%%7$,%%%@),%%%8.

Dent earned ,Ds ),%%%, is sho#n in income statement and rent unearned ,Ds 1,%%%, issho#n in the balance sheet as current asset. :ther exam!les are , insurance !remium

received in advance ,college fees received in the beginning of the year, subscri!tions to

maga?ines etc.

$@ A"%a he cases #here, i8 cash !aid to#ards an ex!ense is less than the actual

ex!ense for the !eriod and ii8 cash received to#ards a revenue is less than the actual

revenue earned for the !eriod are called “accruals”. hey are called accruals becausethey are due for !ayment or due to be received. hey #ill be !aid or received in the next

!eriod.

=ase 7i8 Accrued ex!ense the ex!enses #hich are already incurred but not actually !aid

at the end !f the !eriod are called “accrued ex!enses”.Illustration Assume that the salary for the year at Ds 1,%%% !er month is 1,%%% P 12 K

12,%%%. -ut actual salary !aid is only Ds 1%,%%% during the !eriod. herefore ,the salary

still to be !aid ,called “salary !ayable” ,is Ds 2,%%%712,%%%@1%,%%%8. alary for the !eriodDs12,%%%, is an ex!ense, #hether !aid or not , and sho#n in income statement as salary.

alary accrued, that is still to be !aid ,2,%%%, is sho#n as salary !ayable under current

liabilities. :ther exam!les are ,rent !ayable, stationery !urchased on credit, etc.=ase 7ii8 Accrued revenue he revenues #hich are already earned but not actually

received at the end of the !eriod are called “accrued revenue”.

33



Illustration Assume that the interest for the year on the note receivable amounted to

Ds9,%%% but the actual interest received is only Ds F,$%% at the end of the !eriod.

herefore , the interest still receivable 7accrued8 for the !eriod is Ds1,$%%79,%%%@F,$%%8.Interest for the year, Ds9,%%%, is a revenue #hether received or not , and sho#n in income

statement as interest. Interest receivable ,Ds 1,$%%, is sho#n as current asset.

:ther exam!les are , commission receivable ,consultancy fees ,fares receivable etc.

*.2 7OR SHEET 7ITH AD5USTMENTS

(rior to the !re!aration of financial statements it is necessary to incor!orate all thead5ustments in to the trial balance. A sheet !re!ared to make all the ad5ustments is called

“#orksheet”. It is a #orking !a!er . It hel!s to

a8 record all the ad5ustments ,

b8 verify arithmetical accuracy ,c8 arrange the data systematically,

d8 !rovide a basis for !re!aring balance sheet and income statement ,

e8 bridge the ga! bet#een the ad5ustments and financial statements.

A #orksheet contains 1% columns ,t#o columns each for 18 rial -alance ,28Ad5ustments,38 Ad5usted trial balance, )8 6raft income statement, and $8 6raft balance

sheet.

I%t"ation> ?@> =ontinuing &rs Ciri5a4s re!air #orksho!, let us consider the follo#ing

ad5ustments

a8 :ffice su!!lies on hand at the end Ds 2%%, b8 6e!reciation on eui!ment At 12 !er year,

c8 alary still !ayable Ds 3%%,

d8 De!air service charges due from customers Ds1%%.

Deuired (re!are a 1% column #orksheet sho#ing the ad5ustments, ad5usted trial balance ,draft income statement and balance sheet.

So%tion

Analysis 18 here is no change #ith res!ect to cash, re!air eui!ment , Ciri5a4s ca!ital,dra#ing and rent !aid.

28 :ffice su!!lies ex!ense71,%%%8 K :ffice su!!lies 71,2%%8 N u!!lies on

hand 72%%8. 38 6e!reciation on eui!ment at 12 on 1%,%%%, 1,2%% 12 K1%% !er month.

)8 alary ex!ense 71,9%%8 K alary !aid 71,$%%8 L alary (ayable 73%%8.

$8 De!air services earned 7$,)%%8 K ervices charges received 7$,3%%8 L

ervices charges receivable71%%8.

M" Gi"i9a Re(ai" &o"8'o(

7o"8'eet fo" t'e #ont' en0e0 No;.*:<2::*.

l.

/o.

Account itle rial -alance Ad5ustments Ad5usted trial

balance

Income statement -alance sheet

3)



6ebit =redit 6ebit =redit 6ebit =redit 6ebit =redit 6ebit =redi

1

23

)

$F

;9

*

1%

11

12

13

1)

=ash

+ui!mentCiri5a,ca!ital

:ffice su!!lies

Dent !aidDe!air chargesreceived

alary ex!ense6ra#ings

%ffice su!!liesex!ense

6e!reciation

ex!enseAccumulated

de!reciationalary !ayable

ervice chargesreceivable

/et income

otal

1%,9%%

1%,%%%@

1,2%%

1,%%%

@

1,$%%9%%

2$,3%%

@

@2%,%%%

@

$,3%%

2$,3%%

@

@@

@

3%%

1,%%%

1%%

1%%

1,$%%

@

@@

1,%%%

1%%

1%%

3%%

1,$%%

1%,9%%

1%,%%%@

2%%

1,%%%

1,9%%

1,%%%

1%%

1%%

2$,9%%

@

@2%,%%%

$,)%%

1%%

3%%

2$,9%%

@

@@

1,%%%

1,9%%

1,%%%

1%%

1,$%%

$,)%%

@

@@

$,)%%

$,)%%

1%,9%%

1%,%%%@

2%%

9%%

1%%

21,*%%

2%,%%

1%

3%

1,$%

21,*%

*.* FINANCIAL STATEMENTS

inancial statements com!rise of 18 Income statement,

28 tatement of o#ner4s euity,38 -alance sheet.

7cash flo# statement is not discussed here8

3$



Ino#e State#ent M All the items of revenue and ex!enses a!!ear in this statement.

Borksheet is the source document. All the revenues and ex!enses are transferred to

income statement. /et income or loss is finally transferred to o#ner4s euity. It is !re!ared for the !eriod.

State#ent of o&ne" e3%it+ Additional investments if any and net income are added to

ca!ital at the beginning and then loss and #ithdra#als are deducted to find the ca!ital balance at the end. his is !re!ared for the !eriod ended.

$aane 'eet All the items of assets ,liabilities and balance in o#ner4s euity a!!ear in

this statement.

I%t"ation?!@> =ontinuing &rs Ciri5a4s De!air Borksho! illustration ,

(re!are,18 Income statement 28 statement of o#ner4s euity and 38 -alance sheet as on

/ov.3%,2%%F.

18 &rs Ciri5a4s re!air #orksho!Income statement for the month of /ov. 2%%F.

6escri!tion Amount 7Ds8

Devenues De!air service charges received

+x!enses Dent !aid alary

:ffice su!!lies ex!ense

6e!reciation ex!ense

1,%%%1,9%%

1,%%%

1%%

$,)%%

3,*%%

/et income 1,$%%

28 tatement of :#ner4s +uity

6escri !tion Amount 7Ds8

Ciri5a4s ca!ital as on 1st /ov.2%%F

LAdditional investmentL /et income for the month

@ Bithdra#als

/il1,$%%

2%,%%%

1,$%%

21,$%%9%%

Ciri5a4s ca!ital at the end 2%,;%%

38 -alance sheet as on /ov.3%,2%%F

Assets Amount7Ds8

'iabilities Amount7Ds8

=ash:ffice su!!lies

De!air service receivable

De!air eui!ment 1%,%%%

@Acc.de!n 1%%

1%,9%%2%%

1%%

*,*%%

alary !ayableCiri5a4s ca!ital

3%%2%,;%%

otal 21,%%% otal 21,%%%

Note Accumulated de!reciation can either be deducted from the asset or can be sho#n

se!arately on the liability side as current liability.

*. AD5USTING AND CLOSING ENTRIES AND POSTING >

3F



AD5USTING ENTRIES>

he 5ournal entries that are !assed to give effect to all the ad5ustments are called“Ad5usting entries”. +ach ad5ustment is considered as a transaction and hence a 5ournal

entry is reuired for each.

Poting a09%ting ent"ie he ad5usting entries are !osted to the res!ective ledger accounts to u!date the accounts . After the u!date ,the balances #ill be similar to the

balances sho#n in the financial statement.

Illustration 7F8 =ontinuing &rs Ciri5a4s re!air #orksho! illustration, !ass the ad5usting 5ournal entries .

<ournal (age 2

6ate2%%F

Ad5ustments (ost.ref. 6ebit =redit

/ov.3%

3%

3%

3%

:ffice su!!lies ex!ense :ffice su!!lies

6e!reciation ex!ense

Accumulated de!reciationalary ex!ense

alary !ayable

De!air charges receivable De!air charges received

$213

$)

23$1

2)

1*)1

1,%%%

1%%

3%%

1%%

@1,%%%

1%%

3%%

1%%

CLOSING ENTRIES

he 5ournal entries that are !assed in order to close the revenue ,ex!ense ,dra#ing and

income summary accounts are called “ =losing entries”. he balances in the revenue andex!ense accounts are transferred to an account called “Income ummary Account” to

determine the net income or loss for the !eriod. he balance in the income summary isfinally transferred to :#ner4s euity. he balance in the dra#ing s account is transferredto o#ner4s euity.

he revenue, ex!ense, dra#ings and income summary accounts are all “tem!orary

accounts” and hence ,these are closed at the end of the !eriod. hus, closing is the

!rocess of transferring the balances in the tem!orary accounts to the !ermanentaccounts ,so that these tem!orary accounts #ill be ready for entries in the next year. hey

are the accounts !re!ared to only determine the net income or the loss of the !eriod and

#hen the !ur!ose is over they need to be closed. he net effect of these accounts is thechange in the o#ner4s euity.

he balance sheet accounts are !ermanent accounts .he balances in these accounts are

carried for#ard to the next year and not closed.

Ad5usting entries18 +ach revenue account is closed by 6ebiting revenue account and

=rediting income summary.

28 +ach ex!ense account is closed by 6ebiting income summary and

=rediting ex!ense.

3;



38 Income summary is closed by 6ebiting income summary and crediting

o#ner4s euity for net income and =rediting income summary and

debiting o#ner4s euity for loss.)8 6ra#ing account is closed by 6ebiting o#ner4s euity and =rediting

dra#ings account.

Poting oing ent"ie to e0ge" ao%ntAfter !assing all the closing entries, they are !osted to the res!ective ledger accounts to

u!date the accounts. After the u!date there #ill be no balances in these tem!orary

accounts. hey #ill be ready for making the entries in the next year.

I%t"ation >? ,@ =ontinuing &rs Ciri5a4s De!air Borksho! illustration ,

a8 (ass the closing entries b8 (ost the ad5usting and closing entries and close the accounts.

So%tion>

a8 =losing entries

<ournal (age 3

6ate

2%%F

=losing entries (ost.ref. 6ebit =redit

/ov.3%

3%

3%

3%

De!air service charges received

Income summary

Income summary Dent !aid

alary

:ffice su!!lies ex!ense

6e!reciation ex!enseIncome summary

Ciri5a4s ca!ital

Ciri5a4s ca!ital

6ra#ing

)1

33

331F

1;

$2

$)33

31

31

32

$,)%%

@

3,*%%@

@

@

@1,$%%

@

9%%

@

@

$,)%%

@1,%%%

1,9%%

1,%%%

1%%@

1,$%%

@

9%%

b8 (osting Ad5usting and closing entries and closing the accounts

7/ote :nly affected accounts are considered8

'edger

Ciri5a ,ca!ital Account /o 31

Date

2::)


No;.1

*:

*:

Ca'

Ino#e

%##a"+D"a&ing

:1

:*:* /::

2:<:::

1<!::-

-

--

2:<

21<2:<

:ffice su!!lies Account /o 13

Date

2::)


39



No;.1

:

*:

Ca'

S%((ie

eB(ene

:1

:2

1<2::

-

-

1<:::

1<2::

2::

-

-

Dent !aid Account /o $3

Date

2::)


No;.1

)

*:

Ca'

Ino#e

%##a"+

:1

:*

1<:::

-

-

1<:::

1<:::

-

-

-


Date

2::)


No;.*

:

*:

Ca'

Gi"#a

a(ita

:1

:*

/::

-

-

/::

/::

-

-

-

De!air charges received Account /o )1

Date

2::)


No;.2

*:

*:

Ca'

Re(ai"

'a"ge

"eei;a=e

Ino#e

%##a"+

:1

:2

:*

!<::

!<*::

1::

!<

!<

alary ex!ense Account /o $1

Date

2::)


No;.*

: Ca' :1 1<!::

-

1<!:: -

3*



*:

*:

Saa"+

(a+a=e

Ino#e

%##a"+

:2

:*

*::

- 1</::

1</::

-

:ffice su!!lies ex!ense Account /o $2

Date

2::)


No;.

*:

*:

Offie %((ie

Ino#e

%##a"+

:2

:*

1<:::

-

-

1<:::

1:::

-

-

-

6e!reciation ex!ense Account /o $)

Date

2::)


No;.*:

*:

A%#%ate0

0e("eiation

Ino#e

%##a"+

:2

:*

1::

-

-

1::

1::

-

-

-

Accumulated de!reciation Account /o 23

Date

2::)


No;.

*: De("eiation

eB(ene

:2 - 1:: -

alary !ayable Account /o 2)

Date

2::)


No;.

*: Saa"+

eB(ene

:2 - *:: -

De!air charges receivable Account /o 1*

Date

2::)


No;.

*: Re(ai"

'a"ge

"eei;e0

:2 1:: 1:: -

)%



Income summary Account /o 33

Date

2::)


No;.

*:

*:

*:

Re(ai"'a"ge

"eei;e0

Rent

Saa"+

Offie %((ie

eB(ene

De("eiation

eB(ene

Gi"#a

Ca(ita

:*

1<:::

1</::

1<:::

1::

1<!::

!<:: -

1<!::

!<

<

2<

1<

1<

/ote he accounts that sho# balances #ill a!!ear in the balance sheet.

*.! Pot oing t"ia =aane>After all the ad5ustments are recorded in the ledger accounts, it is necessary to u!date the

trial balance again.

A trial balance that is !re!ared at the end #ith the final balances in the ledger accounts,after relevant ad5ustments ,is called “(ost closing rial -alance”. he !ur!ose is to

ensure that the amounts sho#n in the balance sheet are in agreement #ith the balances in

the ledger accounts . "o#ever it is not a necessity.

I%t"ation?/@> =ontinuing &rs Ciri5a4s De!air Borksho! illustration ,

(re!are a (ost closing trial balance

Ato Ciri5a4s De!air Borksho!

(ost closing trial balance as on /ov.3%,2%%F.

Items Account

/umber

6ebit

7Ds8

=redit

7Ds8

=ash

:ffice su!!lies

De!air charges receivable

11

13

)1

1%,9%%

2%%

1%%

@

@

@

)1



De!air eui!ment

alary !ayableAccumulated de!reciation

Ciri5a4s ca!ital

19

232)

31

1%,%%% @

3%%1%%

2%,;%%

otal 21,1%% 21,1%%

/ote :bserve that these balances are similar to the balances sho#n in the balance sheet.

*.) O(ening Ent"ie> Be have seen in the !receding discussions that the business

man starts the business #ith cash. A business can be started #ith not only cash but alsoother assets and liabilities. he 5ournal entries that are reuired to record the o!ening

assets ,liabilities and o#ner4s euity are called “ :!ening +ntries”. A single com!ound

5ournal entry is !assed to record the assets ,liabilities and o#ner4s euity #ith #hich the

business is started. In this entry ,all the assets are debited and all liabilities and o#ner4seuity are credited. After !assing this entry , the transactions that occur hence forth are

5ournali?ed in the chronological order. 'et us understand the o!ening entry #ith an

illustration.

I%t"ation?@> Assume that &rs Ciri5a #ishes to introduce the accounting system for his De!air #ork sho! business #hich has the follo#ing assets and euities as on

6ecember, 1, 2%%F.7in Ds8.=ash 1%9%%, :ffice u!!lies 2%%, De!air charges receivable 1%%, De!air +ui!ment

1%,%%% ,alary (ayable 3%%, Accumulated de!reciation 1%%, and the =a!ital 2%,;%%.

Deuired Brite the o!ening entries as on <an,1, 2%%;.Ato Ciri5a4s De!air #ork sho!

<ournal

l./o. 6ate 6escri!tion (ost.ref. 6ebit =redit

1

2%%;

<an.1 =ash

:ffice su!!liesDe!air =harges receivable

De!air +ui!mentalary (ayable

Accumulated 6e!reciation

Ciri5a,=a!ital

7-usiness started #ith Assets

,liabilities and ca!ital8

11

131*

192)

23

31

1%9%%

2%%1%%

1%%%%3%%

1%%%

1*9%%

7ORED OUT PRO$LEMS

18 &r annaith is a !racticing doctor. he follo#ing are the transactions for the month of

6ecember, 2%%F6ec.1 Introduced Ds 29,%%% to commence the !ractice ,

1%. (urchased office eui!ment on account from &edico.co. 'td for Ds 2%,%%%,

1F. (aid for office stationery !urchased Ds 12,9%%, 21. Deceived consultancy service fees Ds 1$,%%%,

2F. (aid on account Ds 1F,%%%,

2*. -illed to clients the !rofessional service charges Ds9,%%%,

3%. :ffice ex!enses !aid Ds2,$%%,

)2



31. alary !aid Ds $%%,

31. Bithdre# for !ersonal use Ds 1,%%%.

Deuired a8 (ass 5ournal entries, b8 (re!are ledger accounts,

c8 (re!are a rial -alance as on 6ec.31.2%%F.

Ad5ustments18 =losing tock of stationery Ds 1,9%%,18 alary due Ds 9%%,

28 6e!reciation on eui!ment Ds 2%%.

d8 (ass ad5usting entries,e8 (re!are a 1% column Borksheet ,

f8 (re!are inancial tatements i8 Income statement ,ii8 :#ner4s +uity tatement ,and

iii8 -alance sheet as on 6ec.31,2%%F.

So%tion>

<ournal


1

2%%F

6ec.1 =ashannaith ,=a!ital 1131 29%%% 29%%%

2 1% :ffice eui!ment

Account !ayable @ &edico co.

19

22

2%%%%

2%%%%

3 1F :ffice stationery=ash

1311

129%%129%%

) 21 =ash=onsultancy fees

11)%

1$%%%1$%%%

$ 2F Account !ayable N &edico co. =ash

2211

1F%%%1F%%%

F 2* Account receivable =onsultancy fees

12)%

9%%%9%%%

; 3% :ffice ex!enses

=ash

$1

11

2$%%

2$%%

9 31 alary

=ash

$2

11

$%%

$%%

* 31 6ra#ings

=ash

32

11

1%%%

1%%%

'+6C+D

=ash account Account /umber 11

Date

2::)

Ite# Pot."ef. De=it C"e0it De=it

=aane

C"e0it

=aan

De. 1 Sannait'<a(ita :1 2/<::: - 2/<::: -

)3



1) Offie tatione"+ :1 - 12/:: 1!2:: -

21 Con%tan+ fee :1 1!::: *:2:: -

2) Ao%nt (a+a=e :1 - 1)::: 12:: -

*: Offie eB(ene :1 2!:: 11,:: -*1 Saa"+ :1 - !:: 112:: -

*: D"a&ing :1 - 1::: 1:<2:: -

:ffice +ui!ment Account Account /o 19

Date

2::)


De

1:

Ao%nt

(a+a=e

-Me0io o

:1 2:::: - 2:::: -

annaith,ca!ital Account /o 31

Date

2::)


De1 Ca' :1 2/::: - 2/:::

:ffice stationery Account /o 13

Date

2::)


De

1)

Ca' :1 12/:: - 12/:: -

=onsultancy fees Account /o )%

Date

2::)


De

21

2

Ca'

Ao%nt

(a+a=e

:1

:1

1!:::

/:::

1!

2*

Account !ayable account Account /o 22

Date

2::)


De Offie :1 2:::: 2:

))



1:

2)

e3%i(#ent

Ca' :1 1):::

Account receivable Account /o 12

Date2::) Ite# Pot."ef. De=it C"e0it De=it =a. C"e0it =a.

De

2

Con%tan+

fee

:1 /::: /:::

:ffice ex!enses account Account /o $1

Date

2::)


De

*:

Ca' :1 2!:: - 2!:: -

alary Account Account /o $2

Date

2::)


De

*1

Ca' :1 !:: - !:: -


Date

2::)


De*1 Ca' :1 1::: - 1::: -

T"ia $aane

for the month ended 6ecember ,31,2%%F.

S.No. Ao%nt =aane Ao%nt

No.

De=it C"e0it

1

2

*

!

)

,

/

1:

Ca'

Offie e3%i(#ent

Sannait' <a(ita

Offie Statione"+Offie eB(ene

Con%tan+ fee "eei;e0

Saa"+ eB(ene

D"a&ing

Ao%nt (a+a=e

Ao%nt "eei;a=e

11

1/

*1

1*!1

:

!2

*2

22

12

1:<2::

2:<:::

-

12</::2<!::

-

!::

1:::

/<:::

2/

2*

)$



Tota !!<::: !!

A09%ting Ent"ie

<ournal (age 26ate

2%%F

Ad5ustments (ost.ref. 6ebit =redit

<an,31

31

31

:ffice tationery ex!ense

:ffice tationeryalary ex!ense

alary !ayable

6e!reciation ex!ense N

eui!ment Accumulated de!reciation @

eui!ment

$3

13$2

23

$)

2)

11,%%%

9%%

2%%

@

11,%%%

9%%

2%%

7o"8'eet fo" t'e #ont' en0e0 5an.*1<2::).

l.

/o.

Account itle rial -alance Ad5ustments Ad5usted trial

balance

Income statement -alance sheet

6ebit =redit 6ebit =redit 6ebit =redit 6ebit =redit 6ebit =redit

1

2

3

)

$

F

;

9*

=ash

:ffice

eui!mentannaith ,ca!ital

:ffice

tationery:ffice ex!enses

=onsultancy

fees receivedalary ex!ense

6ra#ingsAccount!ayable

1%,2%%

2%,%%%@

12,9%% 2,$%%

@

$%%

1%%%

@@

29,%%%

@

@

23%%%

@

),%%%

9%%

11%%%

1%2%%

2%%%%

19%%2$%%

13%%

1%%%

29%%%

23%%%

)%%%

2$%%

13%%

23%%%

1%2%%

2%%%%

19%%

1%%%

29%%

)%%

)F



1%

11

12

13

1)

Account

receivable

:ffice stationeryex!enses

alary !ayable

6e!reciation N eui!ment

Accumulated

6e!reciation

9,%%%

11%%%

2%%

9%%

2%%

9%%%

11%%%

2%%

9%%

2%%

11%%%

2%%

9%%%

9%

2%

Net

ino#e

!!<::: !!<::: 12%%% 12%%% $F%%% $F%%% 1$%%%

9%%%

23%%%

9%%

Tota 23%%% 23%%% )1%%% )1%%

Finania State#ent>

Ino#e State#ent fo" t'e #ont' en0e0 5an<*1< 2::)> R R

Devenue =onsultancy fees

6educt +x!enses :ffice ex!enses

alary:ffice stationery ex!enses

6e!reciation @ +ui!ment

2$%%

13%%11%%%

2%%

23%%%

1$%%%

/et income 9%%%

Sannait' <E3%it+ State#ent

Initial =a!ital

L /et Income

@ 6ra#ings

29%%%

9%%%3F%%%

1%%%

=a!ital at the end 3$%%%

);



$aane S'eet a on 5an< *1 <2::)

Assets Ds 'iabilities Ds

=ash

:ffice stationeryAccount receivable

:ffice eui!ment 2%%%% @ 6e!reciation 2%%

1%2%%

19%%9%%%

1*9%%

Account !ayable ,&edico

co.alary !ayable

annaith,=a!ital

)%%%

9%%

3$%%%

otal 3*9%% otal 3*9%%

28he follo#ing are the accounts of Akaki enter!rises #ith their balances as of 6ec,

31,2%%F

Account title Ds

Accounts (ayable ),3%%Accounts receivable 2,3%%

Advertising ex!ense 2,2%%-uilding )$,%%%=ash F,92$

+ui!ment 11,;%%

Insurance ex!ense 1,91%

'and 3,%%%&iscellaneous ex!ense 1,*1%

/otes !ayable 9,%%%

ales 3$,;9$alaries (ayable 2,1$%

alaries ex!ense 19,$$%

u!!lies *;%u!!lies ex!ense 3,F%%

(ro!erty tax ex!ense 1,$%%

(ro!erty tax !ayable 1,%9%Etilities ex!ense 1,*$%

eben, ca!ital $%,%%%

Deuired

(re!are a trial balance, an income statement for the current fiscal year, and a balance

sheet as of 6ec, 31.

So%tion>

Akaki +nter!rises

rial -alance

As of 6ec 31, 2%%F

Ds Ds

)9



/et Income )2F$

eben, +uity statementAs on 6ecember 31, 2%%F

6escri!tionAmount

Ds.

=a!ital $%%%%

L /et Income )2F$

=a!ital at the +nd $)2F$

eben -alance heet

As on 6ecember 31, 2%%F.

Assets 'iabilities

=ash F92$ Account (ayable )3%%Account Deceivable 23%% /otes (ayable 9%%%

u!!lies *;% alary (ayable 21$%

+ui!ment 11;%% ax !ayable 1%9%

-uilding )$%%% =a!ital $)2F$

'and 3%%%

otal F*;*$ otal F*;*$

7o"8 o%t P"o=e#

1. he follo#ing are the business transactions of &rs.het, a !racticing la#yer, for

the moth of &ay 2%%F.a. het invested Ds 21,%%% cash to begin her !ractice.

b. (urchased furniture and eui!ment on account for Ds 1%,9%%,

c. (urchased su!!lies for Ds 2$% cash.

d. -illed clients Ds 2,$%% for services rendered.e. (aid office rent of Ds 9%% for the month.

f. Deceived Ds )$% cash from clients on account.

g. Deceived Ds ;%% cash from clients on account.h. (aid office eui!ment su!!liers Ds F%% on account.

i. (aid salaries of Ds 2%% to em!loyees.

5. -illed clients Ds 1,*%% for services rendered.k. u!!lies consumed during the month of &ay amounted to Ds 1$%.

$%



l. &ade !ayments for the ollo#ing ex!enses Etilities, Ds 2%, Insurance, Ds.$%%,

&iscellaneous, Ds 1$%.

Deuired

1. <ournali?e these transactions.

2. (ost them to ledger accounts3. (re!are a !er@closing trial balance

2. his is the balance sheet of esant and =om!any as of &ay 31, 2%%3. hetransactions that follo# the balance sheet occurred during <une 2%%3.

esant and =om!any

-alance sheetAs of may 31, 2%%3

Assets Ds 'iabilities Ds

=ash $2%%% Accounts (ayable 31%%%Accounts Deceivable F9%%% /otes (ayable )2%%%

u!!lies 3%%% esant, =a!ital 1;2%%%+ui!ment $9%%%

urniture and ixtures F)%%%

otal assets 2)$%%% otal liabilities > :#ners euity 2)$%%%

ransactions for the month

<une 1. Deceived Ds. 2%%% on account from customers.1. (aid rent for the month, Ds. )$%%

2. (urchased su!!lies on account, Ds. $%%.

3. Deceived invoice for advertising ex!ense, Ds.;$%.). (aid a su!!lier on account, Ds. 1$%%.

$. -illed customers on account, Ds. 12%%%

9. (aid utilities for the month, Ds. 12$%12. Deceived a note from a customer in !ayment of an account receivable of Ds. 9%%%.

1$. -illed customers, Ds. *$%%.

1;. (urchased eui!ment on account, Ds. 3%%%.

19. Deceived cash for services rendered, Ds. ;2$%.2%. Deceived credit memo for defective eui!ment !urchased on <une 1;.

Deturned to the su!!lier eui!ment #orth Ds. $%%.

21. &ade a Ds. 2%%% !ayment on the note !ayable,2$. he o#ner contributed furniture #orth Ds. $%%% to the firm.

29. -illed customers, Ds. $%%%.

3%. (aid em!loyeesR salaries, Ds. 1$%%%

Deuired

1. +nter the o!ening 5ournal entries.

2. <ournali?e the above transactions.

$1



3. (re!are 'edger accounts.

). (re!are a !re@ closing trial balances as of <une 3%.

3. he rial balance and year end ad5ustments are !resented belo#.

&ysore 'aundry ervicerial -alance

As of 6ec 31, 2%%3

Ds Ds

=ash $%%%

'aundry su!!lies $;$%

(re!aid insurance 13F9'aundry eui!ment F;)))

Accumulated de!reciation@'aundry eui!ment 1$%%%

Accounts (ayable 11F9

C0 =hokshi, ca!ital 229;2C0 =hokshi, #ithdra#als 9F$%

'aundry revenue ;3$$2Bages ex!ense 1F))F

Dent ex!ense $)$F

Etilities ex!ense 1);9Interest ex!ense 1%%%

112$*2 112$*2

Ad5ustmentsa. 'aundry su!!lies on hand at 6ec. 31,Ds, 9;%

b. he insurance !olicy #as taken out on <an 1,2%%3 and the !remium #as for t#o years

c. 6e!reciation on the eui!ment during the year #as Ds. 1);%.d. C0 =hokshi o#ed his em!loyees Ds. F*% for #ages at the end of the year.

Deuired

a8 (re!are a ten@column #orksheet.

b8 (re!are an income statement, a statement of o#nerRs euity, and a balance sheet.

). he unad5usted trial balance of Adama Industries at 6ec. 31, 2%%3, is as follo#s.

Adama Industriesrial -alance

As of 6ec. 31, 2%%3

Ds Ds

=ash **%%

:ffice su!!lies 12F;$

(re!aid rent 1))%%

$2



(re!aid insurance *F%%

rucks 9$*$%

Accumulated de!n@ruck 1)32$Accounts !ayable 29$%%

alem, ca!ital ;*%9%

alem, Bithdra#als 1F2%%Devenue 1$F%%%

Bages ex!ense 11)%%%

Dent ex!ense ;9%%"eat, 'ight, and Bater ex!ense ;39%

otal 2;;*%$ 2;;*%$

Additional Information

1. :ffice su!!lies used during the year amounted to Ds. 2F2$.

2. he insurance !remium #as !aid on <an, 1,2%%3 and covered t#o years.

3. he truck #as !urchase on <an. 1,2%%1 to be used for 1% years. 6e!reciation ex!ense for truck is Ds. F9;F.

). Bages not !aid as of 6ec. 31, 2%%3 amounted to Ds. F*%%.$. Dent #as !aid for t#o years on <an. 1,2%%2.

Deuired1. (re!are a ten@column #orksheet.

2. rom the additional information make the necessary ad5ustments and com!lete the #orksheet

3. (re!are Income statement, statement of o#nerRs euity > -alance sheet.

$8he unad5usted rial balance of +tho Cra!hics =onsultancy ervices as of &arch 31, 2%%F, ifiscal year end, a!!ears belo#, follo#ed by some additional dataM

+tho Cra!hics =onsultancy ervices

rial -alance

As of &arch 31, 2%%FDs Ds

=ash 31,%%%

Account receivable 23,;$% /otes receivable 3,%%%

u!!lies 9,%%%

(re!aid advertising 1,9%%En ex!ired insurance 1,3F9

'and 2,)%%

-uilding F2,;%%

Accumulated de!reciation@building 12,$)%

$3



+ui!ment 1F,1%%

Accumulated de!reciation@eui!ment 3,22%

Accounts !ayable 11,%%% /otes !ayable 2,%%%

-hatta, =a!ital 3),*$9

-hatta, Bithdra#als 2$,%%%ervice revenue 21%,%%%

alaries ex!ense F2,$%%

De!air and maintenance ex!ense 3,2%%u!!lies ex!ense 29,%%%

Etilities ex!ense ),9%%

Interest ex!ense 1%%

2;3,;19 2;3,;19

Additional 6ata

1. he note receivable #as received from a customer on &arch1,2%%F, it bears 19 !ercent annu

interest2. u!!lies on hand amounted to Ds. 9,$%% on &arch 31. Bhen su!!lies are !urchased, t

su!!lies ex!ense account is debited instead of the asset account su!!lies.3. he amount in the !re!aid Advertising account re!resents a !ayment made in advance on

1, 2%%F for a nine month advertising !rogram,

). En ex!ired insurance amounted to Ds. 11) on &arch 31.$. he building #as being de!reciated over a 3% year !eriod. +ui!ment #as being de!reciat

over ten years.

F. he note !ayable #as issued on <an 1, 2%%F. 12 annual interest is due at maturity on <an

2%%;.

Deuired

a. =onstruct a ten@column #orksheet for the year ended &arch 31. b. <ournali?e the ad5usting entries as of &arch 31.

c. (re!are an income statement and a balance sheet

d. (re!are closing entries as of &arch 31.

F8 &r.-asanth =ommenced a =onsultancy service business. he transactions for the

month of <an.2%%3, are as follo#s<an.1. =ommenced business #ith cash Ds 39,%%%,

F. (urchased office eui!ment Ds 2),%%%,

;. (urchased office su!!lies on account Ds),%%%, 1$.(aid salary Ds 3,%%%,

1;.Deceived commission Ds 9$%,

19.(aid for utilities Ds 2,1%%, 2%.Introduced additional ca!ital Ds 1%,%%%,

2).(aid on account for office su!!lies Ds 21%%,

2$.(aid for miscellaneous ex!enses Ds 1,9$%,

3%.Deceived =onsultancy fees Ds1F,%%%,

$)



31.(re!aid insurance 1,2%%,

31 -illed customers for fees Ds $,%%%.

Deuireda8 (ass 5ournal entries,

b8 (re!are ledger accounts,

c8 (re!are a rial balance as on <an.31,2%%3,d8 (ass ad5usting entries #ith res!ect to the follo#ing i8 u!!lies at the end

Ds1,%%%,ii8 alary !ayable Ds 3%%,iii86e!reciation on eui!ment at 1% !er year,

iv8 =ommission receivable Ds 1$%e8 (re!are a 1% column #orksheet,

f8 (re!are financial statements i8 Income statement for the month, ii8 tatement of

o#ner4s euity and iii8 -alance heet as on <an.31,2%%3.

;8 he records of oda 'aundry ervices sho# the follo#ing transactions for the month

of 6ecember ,2%%3

6ec.1 <ose!h ,the !ro!rietor,started the business #ith a ca!ital of Ds 1$,%%%,

1%. (urchased a #ashing machine on account Ds 9,%%%,1;. (urchased :ffice stationery Ds 3,$%% ,

2% (aid on account Ds F,%%%,2). Deceived from 'aundry sales Ds *,$%%,

2;. (aid salary Ds 2,9%%,

2*. (aid for utilities Ds 1,)%%,3%. -illed customers for laundry sales Ds F,%%%,

31 Bithdre# for family ex!enses Ds 1,$%%.

he Account numbers are M =ash 11,taionery 13,Bashing &achine 19,Account !ayable

22,'aundry sales )1, alary $1, Etilities $2,=a!ital 31 and 6ra#ings 32.Deuired

a8 (ass the 5ournal entries,

b8 (re!are ledger accounts,c8 (re!are a rial -alance as on 6ec.31,2%%3,

d8 &ake the follo#ing Ad5ustments i8 tationery consumed during the !eriod Ds

3,2$%,ii8 alary still due Ds 3%% iii8 6e!reciation on eui!ment for the month Ds1%%, iv8 'aundry sales receivable Ds*$%,

e8 (re!are a #orksheet for the above,7assume other account numbers8

f8 (re!are the financial statementsM i8 Income statement for 6ecember,2%%3,ii8

&r.<ose!h4s +uity statement and iii8 -alance sheet as on 6ec.31,2%%3.98 he follo#ing are the business transactions of A-= for the month of &ay

2%%3.7Ds8

a. A invested 1%,$%% cash to begin his accounting !ractice.

b. (urchased furniture and eui!ment on account for $,)%%.

c. (urchased su!!lies for 12$ cash.

d. -illed clients 1,2$% for services rendered.

e. (aid office rent of )%% for the month.

f. Deceived 22$ cash from clients for services rendered.

$$



g. Deceived 3$% cash from clients on account.

h. (aid office eui!ment su!!liers 3%% on account.

i. (aid salaries of 1,%%% to em!loyees.

5. -illed clients *$% for services rendered.

k. u!!lies consumed during the month of &ay amounted to $%.

l. &ade !ayments for the follo#ing ex!enses utilities, 1%M insurance, 2$%M

miscellaneous, ;$.

Re3%i"e0

1. <ournali?e these transactions.

2. (ost them to ledger accounts.

3. (re!are a (re@closing trial balance

*.he records of CSD: =:/E'A/=S +DGI=+ sho# the follo#ing transactions

for the month of <anuary 2%%3.

<an, 1. tarted the business #ith cash Ds 2$,%%%, $. (urchased a com!uter on account Ds ;,%%%,

1%. (urchased u!!lies for cash Ds 2,%%%,

1$. (aid alary Ds 1,9%%,

2%. ees earned but not received in cash Ds 1$,%%%, 2$. Etilities (aid Ds 2,$%%,

29. -ooks (urchased for office use Ds 1F%%,

2*.(aid com!uter su!!liers on account Ds $,%%%,

3%. &ade !ayments for &iscellaneous ex!enses Ds 19%, 31.-illed clients for services Ds 3,%%%.

Deuired a. <ournali?e the above transactions

b. (ost the 5ournal entries into the four@column accounts of the 'edger of

Cyro =onsultancy ervices. Ese the follo#ing account titles and accountnumber

=ash 11 Account !ayable 21

Account receivable 12 =a!ital 31

u!!lies 13 ervice revenue )1-ook 1) alary ex!ense $1

=om!uter 1$ Etility ex!ense $2 &iscellaneous ex!ense $$ c. (re!are a rial balance

1%.he DIA' -A'A/=+ of a ole (ro!rietorshi! business as on <an, 31,2%%3 is as

belo#CDA"A& =:&(A/S

DIA' -A'A/=+

A :/ <A/, 31,2%%3.

$F



'./: A==:E/ I'+ A==:E/

/:

6+-I

Ds

=D+6I

Ds

1 =ash 11 *,%%%

2 Account receivable 12 1,*%%

3 u!!lies 13 1,2$%

) :ffice eui!ment 19 1F,%%%$ Account !ayable 22 @ 2,%%%

F =a!ital 31 @ 2$,%%%

; 6ra#ings 32 1,2%%

9 ees earned 31 @ 1%,2$%

* alary ex!ense $1 2,1%%

1% Etilities ex!ense $2 1,F$%

11 Advertisement ex!ense $3 2,*%%

12 &iscellaneous ex!. $) 1,2$%

:A' 3;,2$% 3;,2$%

Ad5ustment data

18 u!!lies on hand at the end, Ds2$%. 28 alary (ayable )%%.

38 6e!reciation on office eui!ment for the month Ds 1F%.

)8 =ommission earned but not received Ds1*%.

Re3%i"e0.a. <ournali?e the ad5usting entries

b. =om!lete a ten@column #orksheet by incor!orating the ad5ustments.

c. (re!are

i. an Income statement for the month of <anuary 2%%3ii. an :#ner4s euity statement

iii. -alance sheet as on <anuary 31,2%%3.

118he records of /I'I (hoto studio sho# the follo#ing transactions for the month <an

@2%%3

<an 1. (aid office Dent Ds 3%%%$. (urchased =amera Ds 12,%%%

;. (urchased su!!lies on Account Ds. 1$2$.

*. Deceived cash from costumers Ds. F%%%, on sales13. (urchased another =amera Ds. 19%% on Account

1$. Devenue earned on Account Ds. 2$%%%

19. (aid on Account Ds. 1%,%%% for =amera (urchased.

21. (aid insurance !remium Ds. 19%%23. (aid alary Ds. F%%%

2$. (aid #ater charges Ds )$%.

29. (aid +lectricity -ill Ds )9%3%. (aid ele!hone -ill Ds 2$%

$;



31. (aid on Account su!!lies Ds. 122$

31. -illed =ustomers for sales Ds. F%%%

31. =ustomers !aid cash on account Ds. )$%%31. Bithdre# cash Ds. 2%%%

he Account title, Account numbers and Amounts on <an 1, 2%%3 are =ash, 11,19%%%,Account Deceivable, 12,1$%%, u!!lies, 13, 32$, =amera, 19, 1%,%%%,Account (ayable,

22,F%%%, /iliRs ca!ital, 31,H 6ra#ings, 32, ales, )1, alary, $1 Dent, $2. Insurance

!remium, $3, Etilities $), u!!lies ex!ense, $$, (re!aid insurance, $F, alary !ayable$;, 6e!reciation, $9, Accumulated de!reciation, $*.

(re!are 7i8 <ournal 7ii8 'edger 7iii8 rial -alances as on 31. 1,2%%3.

Ad5ustments 7a8 =losing stock of su!!lies Ds. 2;$

7b8 (re!aid insurance !remium Ds 3%%7c8 alary !ayable Ds 1%%%,

7d8 6e!reciation on =amera for the month, Ds )%%.

(ass Ad5usting entries, =losing entries, !re!are a #orksheet, Income statement, /iliRs+uity statement and -alance sheet as on 31,1, 2%%3.

I. O=9eti;e t+(e>- ?C'ooe t'e o""et an&e"@>

1. A business o#ned by one !erson is called as a

a8 <oint stock com!any b8 (artnershi! c8 ole !ro!rietorshi! d8 =or!oration

2. he !ro!erties o#ned by a business are called

a8 'iabilities b8 (rofit c8 Assets d8 :#nerRs euity

3. he Assets K Ds 2F,%%%, :#nerRs euity KDs 22,$%%. he liability KH

a8 )9,$%% c8 3,$%%

b8 ),$%% d8 /one of these

). Bhen the business is commenced #ith cash Ds )%,%%%, the account to be debited is

a8 =ash b8 :#nerRs =a!ital

c8 6ra#ings d8=ommenced -usiness

$9



a8 Borksheet,

b8 -alance sheet,

c8 +uity statement,d8 Income statement.

1)8 he statement !re!ared to check the accuracy of the debit and the credit side of the

entries is calleda8 rial -alance,

b8 -alance sheet,

c8 'edger,d8 Borksheet.

1$8 he book of original entry is called

a8 'edger,

b8 <ournal,c8 Degister,

d8 Decord.

II .Brite the meaning of the follo#ing 7:ne sentence each8

18 Accounting euation 28 Accounting 38 6ouble +ntry ystem

)8 (rivate Accounting $8 (ublic accounting F8 -usiness +ntity

;8 =ost !rinci!le 98 -ook value of an asset *8 Coing concern1%8 :b5ective evidence 118 Enit of measurement 128 &atching conce!t

138 Accounting (eriod 1)8 &ateriality 1$8 =onsistency

1F8 Asset 1;8 'iability 198 :#nerRs euity

1*8 ransaction 2%8 Income statement 218 -alance heet228 rial -alance 238inancial tatements 2)8 Ad5usting +ntries

2$8 Borksheet 2F8 /et 'oss 2;8 Account -alance

298 6ebit 2*8 =redit 3%8 (osting318 6e!reciation 328 ole (ro!rietorshi! 338 An entry

3)8 =losing +ntries 3$8 An o!ening entry

III. 6istinguish -et#een

718 +x!ense !aid and (re!aid ex!enses

728 Devenue and +x!ense738 <ournal and 'edger

7)8 /ote Deceivable and Account Deceivable

7$8 rial -alance and -alance heet7F8 6ebit and =redit

7;8 /ote !ayable and Account !ayable

798 alary !aid and alary (ayable7*8 (ublic accounting and (rivate Accounting

118 6ebtor and =reditor.

I4. Cive short ans#er for each of the follo#ing uestions

F%



1. Bhat is a #orksheet and #hy is it usedH

2. Bhat is meant by the terms current asset and current liabilityH "o# are theyrelated H

3. +x!lain briefly the going concern conce!t

). Bhat does !re!aid ex!enses meanH.

acct principles -study material

Documents