JI

MMAUNIVERSI
TY
FACULTYOFBUSI
NESS&ECONOMI
CS

SCHOOLOFCONTINUI
NGANDDI
STANCE
STUDI
ES

DISTANCEEDUCATIONMODULE
FOR
PRINCIPLESOFACCOUNTINGPARTI
(ACCT201)

Pr
epar
edBy
: TezeraSel
amu(MCom,BA)
AregaSeyoum (
MBA,
BA)

November
,2008
Ji
mma, Et
hiopi
a
MODULEOUTLI
NE

UNI
TONE:
Basi
cSt
ruct
ureofAccount
i ByTezer
ng[ aSel
amu]

UNI
TTWO:TheAccount
ingCy
cle[
ByTezer
aSel
amu]

UNI
TTHREE:
Compl
eti
onoft
heAccount
ingCy
cle

ByTezer
[ aSel
amu]

UNI
TFOUR:
Account
ingf
oraMer
chandi
si
ngBusi
ness

Ar
[ egaSeyoum andTezer
aSel
amu]

UNI
TFI
VE:
Account
ingSy
st BYAr
emsDesgn[ egaSeyoum]

UNI
TSI
X:CashandCashEqui
val
ent
s[ByAr
egaSeyoum]

UNI
TSEVEN:Recei
vabl ByAr
es[ egaSeyoum]
 UNI
TONE:
BASI
CSTRUCTUREOFACCOUNTI
NG

Li
stofCont
ent
s:
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
1.
1 Account
ingAsanI
nfor
mat
ionSy
stem
1.
2 Pr
ofessi
onofAccount
ancy
1.
3 Speci
ali
zedAccount
ingFi
elds
1.
4 Account
ingPr
inci
plesandPr
act
ice
1.
5 Busi
nessTr
ansact
ionsandt
heAccount
ingEquat
ion
1.
6 Fi
nanci
alSt
atement
s
1.
7 Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive

Theuni
tai
msatdi
scussi
ngsomeoft
hef
undament
alconcept
sofaccount
ing.Det
ail
di
scussi
onsandexpl
anat
ionswi
l
lbemadeonsuchi
ssuesl
i
ke:account
ingas
i
nfor
mat
ionsy
stem,
prof
essi
onofaccount
ancy
,account
ingpr
inci
plesandpr
act
ices,
busi
nesst
ransact
ionandt
heaccount
ingequat
ion,
etc.Thus,
aft
ert
hecompl
eti
onof
t
hisuni
tyouwi
l
lbeabl
eto:
 Expl
ainaccount
ingasani
nfor
mat
ionsy
stem
 Descr
ibet
hepr
ofessi
onofaccount
ingandi
tsspeci
ali
zedf
iel
ds
 Di
scusst
hedev
elopmentofaccount
ingpr
inci
plesandt
hei
rrel
ati
ont
o
pr
act
ice
 Descr
ibebusi
nesst
ransact
ion

1
  I
dent
if
ytheaccount
ingequat
ionandi
tsbasi
cel
ement
s
 Anal
yzet
heef
fectofbusi
nesst
ransact
ionsont
hebasi
caccount
ing
equat
ion.
 I
ll
ust
rat
etheef
fectofbusi
nesst
ransact
ions
 Descr
ibe t
he f
inanci
alst
atement
s ofa sol
e pr
opr
iet
orshi
p and a
cor
por
ati
on.

I
ntr
oduct
ion

Hav
eyou ev
erknown t
he t
er f
m “i
nanci
ali
nfor
mat
ion syst
em”
?Whatar
ethe
pr
ocessesi
nvol
vedi
nthesy
stem?

Asa f
inanci
ali
nfor
mat
ion sy
stem,account
ing i
sa pr
ocessoft
hreeact
ivi
ti
es:
i
dent
if
ying,r
ecor
ding,andcommuni
cat
ingt
heeconomi
cev
ent
sofanor
gani
zat
ion
(
busi
nessornon-
busi
ness)t
oint
erest
eduser
soft
hei
nfor
mat
ion.

I
nthi
suni
tthev
ari
ousaspect
sofaccount
ingpr
inci
plesandpr
act
icessuchas
account
ingi
susedaspar
tofi
nfor
mat
ionsy
stem;t
hepr
ofessi
onofaccount
ancy
,
t
het
ypeandnat
ureofbusi
nesst
ransact
ions,howt
hoset
ransact
ionsaf
fectasset
s,
l
i
abi
l
iti
esandowner
’sequi
ty,andv
ari
ousi
nfor
mat
iont
hatcanbeobt
ainedf
rom
t
hosebasi
cfi
nanci
alst
atement
sofsol
epr
opr
iet
orshi
pandacor
por
ati
onwi
l
lbe
cov
ered.

1.
1. Account
ingasanI
nfor
mat
ionSy
stem

Whyaccount
inghasbeencal
l
ed“
thel
anguageofbusi
ness”
?

2
Account
inghasbeencal
l
edt
he“
languageofbusi
ness”becausei
tisameansof
communi
cat
ingbusi
nessi
nfor
mat
ion.
Asani
nfor
mat
ionsy
stem i
tpr
ovi
desappr
opr
iat
einf
ormat
ionaboutt
hef
inanci
al
act
ivi
ti
esofanent
it
ytov
ari
ousi
ndi
vi
dual
sorgr
oupst
omakesounddeci
sion.
Basi
cal
l
y,account
ingi
nfor
mat
ioni
scomposedoff
inanci
aldat
aaboutbusi
ness
t
ransact
ionexpr
essedi
nter
msofmoney
.Thef
inanci
aldat
amustber
ecor
ded.The
mer
erecor
d ofa t
ransact
ion doesnotpr
ovi
desuf
fi
cienti
nfor
mat
ion t
o make
i
nfor
meddeci
sion.Ther
ecor
deddat
amustbesor
tedandsummar
izedt
omake
r
epor
ts.Ther
epor
tsar
ebasi
sfordeci
sionmaki
ng.

1.
1.1. User
sofAccount
ingI
nfor
mat
ion

Dearst
udent
s,woul
dyoui
dent
if
ythet
wobr
oadgr
oupsofuser
sofaccount
ingi
n
f
ormat
ion?Ci
tef
ew exampl
esf
rom eachgr
oupbef
orey
ougot
othef
oll
owi
ng
di
scussi
on.
Theuser
sofaccount
ingi
nfor
mat
ionmaybedi
vi
dedi
ntot
wobr
oadgr
oups:i
nter
nal
user
sandext
ernal
user
s.

1.
1.1.
1. I
nter
nalUser
s
Managementper
sonnelar
ethei
nter
naluser
sofaccount
ingi
nfor
mat
ion.Thi
suser
s
gr
oupi
sresponsi
blef
or(
i)pl
anni
ngandcont
rol
l
ingcur
rentoper
ati
onand(
ii
)for
maki
ngi
nfor
medbusi
nessdeci
sions.

I
nbr
oadert
ermst
her
ear
ethr
eet
ypesofi
nter
naluser
s:-Management
,laboruni
ons
andempl
oyees.
1.
1.1.
2 Ext
ernalUser
s

3
Ext
ernaluser
sofaccount
ingi
nfor
mat
ionar
ethosepar
ti
eswhi
char
ehav
ingcer
tai
n
i
nter
estwi
thconcer
nedent
it
y.Thi
suser
sgr
oupi
ssomet
imescal
l
edout
sider
s
becauset
heyar
enott
aki
ngapar
tint
hemanagementandoper
ati
onoft
heent
it
y
underconsi
der
ati
on.

CheckYourPr
ogr
ess:Exer
cise1.
1.
1.Whyof
tenaccount
ingi
sknownasa“
Languageofbusi
ness”
?
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_
2.Whati
stheobj
ect
iveofaccount
ing?
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_

1.
2. Pr
ofessi
onofAccount
ancy

Whati
sthepur
poseofpubl
i
caccount
ing?Hav
eyouhear
daboutCPAs?
Theaccount
ingpr
ofessi
ont
ypi
cal
l
yhast
womaj
orf
iel
ds:Pr
ivat
eAccount
ing,and
Publ
icAccount
ing.

1.
2.1Pr
ivat
eAccount
ing
Anaccount
antmaybeanempl
oyeeofabusi
nessent
erpr
iseorf
ornotpr
ofi
t
or
gani
zat
ioni
.e.asachi
efaccount
ant
,cont
rol
l
er,orf
inanci
alv
icepr
esi
denti
ssai
d
t nPr
obeengagedi ivat
eAccount
ing.

Thescopeofact
ivi
ti
esandr
esponsi
bil
i
tiesofpr
ivat
eaccount
ant
svar
ieswi
del
y.

4
Theyar
efr
equent
lyr
efer
redt
oasmanager
ialaccount
ant
sorcostaccount
ant
sif
t
heyar
eempl
oyedbyamanuf
act
uri
ngconcer
n,account
ant
sengagedi
ndi
ff
erent
gov
ernment
aluni
tsand not
-f
or-
prof
itor
gani
zat
ion and al
so r
efer
red as pr
ivat
e
account
ant
s.
Pr
ivat
eaccount
ant
scanbe
i
) Manager
ial
account
ant
s
i
i
) I
nter
nal
audi
tor
s,et
c.
1.
2.2.Publ
icAccount
ing
I
napubl
i
caccount
ing,account
ant
sof
ferexper
tser
vicest
othegener
alpubl
i
cona
f
eebasi
s.Publ
i
caccount
antwhohav
emetst
andar
deducat
ion,exper
ienceand
exami
nat
ion r
equi
rement
smaybecomecer
ti
fi
ed publ
i
caccount
ant
s,commonl
y
cal
l
edCPAs.

CPAshav
eadut
ynotonl
ytot
hei
rcl
i
ent
sbutt
othei
rcol
l
eaguesandt
hepubl
i
cto
per
for
m ser
vices compet
ent
ly and wi
thi
ntegr
it
y.Cal
l
ed code ofpr
ofessi
onal
conductorcodesofpr
ofessi
onalet
hicshav
ebeenest
abl
i
shedbyAI
CPA(
Amer
ican
I
nst
it
uteofCer
ti
fi
ed Publ
i
cAccount
ing)t
o gui
deCPAsi
ntheconductoft
hei
r
pr
act
ices.

Thepur
poseofcodesofpr
ofessi
onalet
hicsi
stocr
eat
econf
idencei
nthequal
i
tyof
ser
vicesr
ender
edbyCPA,i
namannert
omeethonor
abl
ebehav
ior
,ev
enatt
he
sacr
if
iceofper
sonal
adv
ant
ageandi
nter
est
.

1.
3Speci
ali
zedAccount
ingFi
elds.

Cany
oui
dent
if
ysomespeci
ali
zedaccount
ingf
iel
ds?

Sev
eralspeci
ali
zedf
iel
dinaccount
inghav
eev
olv
edasar
esul
tofev
eri
ncr
easi
ng
r
api
dtechnol
ogi
caladv
ancesandaccel
erat
edeconomi
cgr
owt
h.Amongt
hemost

5
i
mpor
tantaccount
ingf
iel
dsar
edescr
ibedbr
ief
lyi
nthef
oll
owi
ngpar
agr
aphs.

Fi
nanci
alAccount
ing:-Concer
nedwi
tht
her
ecor
dingoft
ransact
ionsf
orabusi
ness
ent
erpr
iseorot
hereconomi
cuni
tandt
heper
iodi
cpr
epar
ati
onofv
ari
ousr
epor
ts
f
rom suchr
ecor
ds.Ther
epor
tisagener
al-
pur
poseonet
hatcanequali
simpor
tant
i
nmeet
ingt
heuser
s’i
nter
est
.Fi
nanci
alAccount
ingr
epor
tsar
epr
epar
edbasedon
Gener
all
yAccept
edAccount
ingPr
inci
ples(
GAAP)

Audi
ti
ng:-asaspeci
ali
zedaccount
ingf
iel
dinv
olv
ingani
ndependentr
evi
ewoft
he
account
ingr
ecor
ds.Dur
ingaudi
twor
k,publ
i
caccount
ant
sexami
net
her
ecor
ds
suppor
ti
ngt
hef
inanci
alr
epor
tsofanent
erpr
iseandgi
veanopi
nionr
egar
dingt
hei
r
f
air
nessandr
eli
abi
l
ity
.Audi
tor
s'r
esponsi
bil
i
ty(
job)mayt
aket
ofor
ms.

i
) I
nter
nalaudi
tor
s:-t
hosewhoar
eresponsi
bleaboutt
heoper
ati
onsoft
he
busi
ness (
organi
zat
ion)t
o det
ermi
ne compl
i
ance wi
th management
pol
i
ciesandev
aluat
ingt
heef
fi
ciencyofoper
ati
ons.
i
i
) Ext
ernalaudi
tor
s:-t
hoseexami
net
her
ecor
dssuppor
ti
ngt
hef
inanci
al
st
atement
sofaf
ir
m andgi
veanopi
nion.

CostAccount
ing:-par
ti
cul
arl
yconcer
nedwi
thdet
ermi
nat
ionandcont
roloft
hecost
of pr
oduci
ng speci
fi
c pr
oduct
s.I
tis pr
imar
il
y concer
ned wi
tht
he costof
manuf
act
uri
ngpr
ocessesandofmanuf
act
urespr
oduct
sul
ti
mat
elymanagement
usest
hesedat
eincont
rol
l
ingcur
rentoper
ati
onsandi
npl
anni
ngf
ort
hef
utur
e.

Manager
ialAccount
ing:-Usesbot
h hi
stor
icaland est
imat
ed dat
ain assi
sti
ng
managementi
ndai
l
yoper
ati
onsandpl
anni
ngf
utur
eoper
ati
onsi
tdeal
swi
thspeci
fi
c
pr
obl
emst
hatconf
rontent
erpr
isemanager
satv
ari
ousor
gani
zat
ionall
evel
s.I
tis
f
requent
lyconcer
nedwi
thi
dent
if
yingal
ter
nat
ivecour
sesofact
ionandt
henhel
ping
t
osel
ectt
hebestone.

TaxAccount
ing:-deal
swi
tht
hepr
epar
ati
onoft
axr
etur
nsandt
heconsi
der
ati
onof

6
t
het
axconsequencesofpr
oposedbusi
nesst
ransact
ionsoral
ter
nat
ivecour
sesof
act
ion.Onespeci
ali
zedi
nthi
sfi
eldshoul
dbewel
linf
ormedaboutt
axst
atues,
admi
nist
rat
iver
egul
ati
onsandcour
tdeci
sionsont
axcases.

Account
ing syst
em:-i
sthe speci
ali
zed f
iel
d concer
ned wi
tht
he desi
gn and
i
mpl
ement
ati
onofpr
ocedur
esf
ort
heaccount
antmustdev
iceappr
opr
iat
e“checks
andbal
ance”t
osaf
eguar
dbusi
nesspr
oper
ti
esandpr
ovi
def
ori
nfor
mat
ionf
lowt
hat
wi
l
lbeef
fi
cientandhel
pful
tomanagement
.

Budget
aryAccount
ing:-pr
esent
sthepl
anoff
inanci
aloper
ati
onf
oraper
iodand
t
hroughr
ecor
dsandsummar
ies,pr
ovi
dedcompar
isonsofact
ualoper
ati
oni
nthe
pr
edet
ermi
nedpl
an.Acombi
nat
ionofpl
anni
ngandcont
rol
l
ingf
utur
eoper
ati
ons,i
t
i
ssomet
imesconsi
der
edt
obeapar
tofmanager
ial
account
ing.

I
nter
nat
ionalAccount
ing:-i
sconcer
nedwi
tht
hespeci
alpr
obl
emsassoci
atedwi
th
i
nter
nat
ionalt
radeofmul
ti
nat
ional
busi
nessor
gani
zat
ions,
Account
ant
sspeci
ali
zi
ng
i
nthi
sar
eamustbef
ami
l
iarwi
tht
hei
nfl
uencest
hatcust
om,l
aw andt
axat
ionof
v
ari
ouscount
ri
esbr
ingt
obearoni
nter
nat
ional
oper
ati
onsandaccount
ingpr
inci
ples.

Not
-f
or-
prof
itAccount
ing:-speci
ali
zesi
nrecor
ding,r
epor
ti
ng,andpl
anni
ngt
he
oper
ati
onsofv
ari
ousgov
ernment
aluni
tsandot
hernot
-f
or-
prof
itor
gani
zat
ionssuch
aschur
ches,
char
it
ies,
andeducat
ional
inst
it
uti
ons.

Soci
alAccount
ing:-i
saki
ndofspeci
ali
zat
ionwhi
chemphasi
zest
hemeasur
ement
ofsoci
alcost
sandbenef
it
s.

CheckYourPr
ogr
ess:Exer
cise1.
2
1.Di
ff
erent
iat
ebet
weenpr
ivat
eaccount
ingandpubl
i
caccount
ing

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7
 _
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2.I
dent
if
ysomeoft
hespeci
ali
zedf
iel
dsofaccount
ingact
ivi
ty.
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1.
4 Account
ingPr
inci
plesandPr
act
ice

Dearst
udent
s,her
eaf
terwear
etr
yingt
ohav
edi
scussi
onwi
thaccount
ingpr
inci
ples
t
hatcanser
veasacor
nerst
onef
oraccount
ingpr
act
ices.

Tokeepi
npacet
heev
eri
ncr
easi
ngchangesanddev
elopment
sinsci
enceand
t
echnol
ogy
,account
ingpr
inci
plesandpr
act
icesdev
elopconst
ant
ly.Exper
ienced
pr
ofessi
onalaccount
ant
scont
ri
but
ethei
rbestt
hinki
ngt
othesol
uti
onofpr
obl
ems
cont
inual
l
yconf
ront
ingt
hei
rcl
i
ent
sorempl
oyer
s.Fi
nanci
alAccount
ingSt
andar
d
Boar
d(FASB)andAccount
ingPr
inci
plesBoar
d(APB)ar
eamongt
hev
eryi
mpor
tant
pr
ofessi
onalassoci
ati
onst
hati
ssuespr
onouncement
sonaccount
ing pr
inci
ples
per
iodi
cal
l
y.

1.
4.1 Busi
nessEnt
it
yConcept
The essence oft
his concepti
s busi
ness af
fai
rs oft
he busi
ness ent
erpr
ise
(
organi
zat
ion)mustbekeptsepar
atef
rom t
hoseofi
tsowner
sandot
herent
it
ies.
Thebusi
nessent
it
yconcepti
sbasedont
heappl
i
cabi
l
ityofaccount
ingt
oindi
vi
dual
economi
cuni
tsi
nsoci
ety
.Amongt
hei
ndi
vi
dualeconomi
cuni
tsbusi
nessent
erpr
ise
or
gani
zedf
orpr
ofi
tandot
hernot
-f
or-
prof
itar
eincl
uded.Thebasi
cassumpt
ion
undert
hisconcepti
sthatper
sonalt
ransact
ionsofowner
sshoul
dbekeptsepar
ate
f
rom t
hose oft
he busi
ness ent
erpr
ise.Commonl
y,busi
ness ent
erpr
ises ar
e
or
gani
zedi
nowner
shi
passol
epr
opr
iet
orshi
ps,
par
tner
shi
psorcor
por
ati
ons.

8
  Asol
epr
opr
iet
orshi
pisabusi
nessownedbyasi
ngl
eper
son.Most
of
tent
heyar
esmal
lbusi
nesst
hatar
eoper
atedandmanagedbyt
hei
r
owner
s.
 Apar
tner
shi
p-af
orm ofbusi
nessent
it
yinwhi
cht
woormor
eper
sons
ownedt
hebusi
nessbasedont
hei
rcont
ract
ual
arr
angement
.
 A cor
por
ati
on-A cor
por
ati
onor
gani
zedi
naccor
dancewi
thst
ateor
f
eder
alst
atusandi
sasepar
atel
egalent
it
yinwhi
chowner
shi
pis
di
vi
dedi
ntoshar
esofst
ock.

1.
4.2 TheCostPr
inci
ple
Ther
ecor
dsofpr
oper
ti
esandser
vicesbyabusi
nessar
emai
ntai
nedi
naccor
dance
wi
tht
hecostpr
inci
ple,whi
chr
equi
rest
hatt
hemonet
aryr
ecor
dbei
nter
msofcost
.
The t
ime ofexchanges t
he amountpai
d byt
he buy
eri
s used i
nthe buy
er’
s
account
ingr
ecor
ds.

1.
5 Busi
nessTr
ansact
ionsandt
heAccount
ingEquat
ion

Whatdoy
ouunder
standwhenev
ery
ouhear
daboutt
het
erm busi
nesst
ransact
ions?
Hav
eyouencount
eredwi
thsuchat
ransact
ion?

1.
5.1 Busi
nessTr
ansact
ions
Busi
nesst
ransact
ionscausechangesi
ntheasset
s,l
i
abi
l
iti
es,
orowner
’sequi
tyofa
busi
nessent
erpr
ise/
organi
zat
iont
ransact
ionsmaybecl
assi
fi
edi
ntot
wobr
oad
gr
oups

9
 i
) Ext
ernalt
ransact
ion:t
ransact
ionsoccur
redbet
weent
heor
gani
zat
ion
andout
sider
ssuchaspay
mentofdebt
s,sal
esonaccount
,et
c.,
i
i
) I
nter
nalt
ransact
ions:Expi
rat
ionort
ransf
erofcost
swi
thi
nthef
ir
m.
Suchasdepr
eci
ati
onofpl
antasset
s,est
imat
ionofdoubt
fulaccount
s
expense.

Abusi
nesst
ransact
ioni
stheoccur
renceofanev
entoracondi
ti
ont
hatmustbe
r
ecor
ded.Forexampl
ethepay
mentofmont
hlyr
entofBi
rr3,
000.
00,t
hepur
chases
ofmer
chandi
sef
orBi
rr5,
000.
00oncr
edi
t,andacqui
sit
ionofl
andandbui
l
dingf
or
Bi
rr450,
000.
00.

Acer
tai
nbusi
nesst
ransact
ionmayl
eadt
oanev
entoracondi
ti
ont
hatr
esul
tin
anot
hert
ransact
ion.Forexampl
e,t
hepur
chaseofmer
chandi
seoncr
edi
twi
l
lbe
f
oll
owedbypay
mentt
othecr
edi
torwhi
chi
sanot
hert
ransact
iont
hatmustbe
r
ecor
ded.

1.
5.2 Asset
s,Li
abi
li
ti
esandOwner
’sEqui
ty
Thepr
oper
ti
es(
resour
ces)ownedbyabusi
nessent
erpr
isear
eref
err
edt
oasasset
s
andt
her
ight
sorcl
aimst
othepr
oper
ti
es(
orasset
s)ar
eref
err
edt
oasequi
ti
es.I
f
t
heasset
sownedbyabusi
nessamountt
oBr
.500,
000.
00,
theequi
ti
esi
ntheasset
s
mustal
soamountt
oBi
rr500,
000.
00.Ther
elat
ionshi
pbet
weent
het
womaybe
st
atedi
nthef
orm ofanequat
ionasf
oll
ows.

ASSETS=EQUI
TIES

Theequi
ti
esmaybesubdi
vi
dedi
ntot
wopr
inci
palt
ypest
her
ight
sofcr
edi
tor
sand
t
her
ight
sofowner
s.Ther
ight
sofcr
edi
tor
srepr
esentdebt
soft
hebusi
nessandar
e
cal
l
ed l
iabi
li
ti
es.Ther
ight
soft
heownerorowner
sar
ecal
l
ed owner
’sequi
ty.
Expansi
onoft
heequat
iont
ogi
ver
ecogni
ti
ont
othet
wobasi
cty
pesofequi
ti
es

10
whi
chi
sknownasaccount
ingequat
ion.

Thi
sequat
ioni
sref
err
edt
oast
hebasi
caccount
ingequat
ion.Asset
smustequalt
o
sum ofl
i
abi
l
iti
es and owner
’s equi
ty.The ext
ended f
orm ofal
gebr
aicf
orm
expr
essi
onwi
l
lbeasf
oll
ows.

ASSETS=LI
ABI
LITI
ES+OWNER’
SEQUI
TY

I
nter
msofpr
ior
it
y,pl
aci
ng“
Liabi
l
iti
es”bef
ore“
owner
’sequi
ty”i
sappr
opr
iat
eint
he
account
ingequat
iont
oshowt
hatcr
edi
tor
shav
epr
efer
ent
ial
right
stot
heasset
s.

CheckYourPr
ogr
ess:Exer
cise1.
3

1. Whati
smeantmat
chi
ngpr
inci
ple?

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
2. Howar
erev
enuesr
epor
tedundert
heaccr
ual
basi
sofaccount
ing?

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

1.
5.3 Tr
ansact
ionsandt
heAccount
ingEquat
ion

Whati
saccount
ingequat
ion?Whatar
eit
sel
ement
s?

11
I
ngener
al,busi
nesst
ransact
ionsbei
tsi
mpl
eorcompl
ex,canbest
atedi
nter
msof
t
her
esul
ti
ngchangei
nthet
hreebasi
cel
ement
soft
heaccount
ingequat
ion.The
f
oll
owi
ngt
ransact
ionsar
eusedt
odemonst
rat
etheef
fectont
heel
ement
soft
he
account
ingequat
ion.Thet
ransact
ionsar
eaboutanew t
ranspor
tbusi
nessdur
ing
t
hef
ir
stmont
hofoper
ati
ons.

Tr
ansact
ion(
1)
I
nthef
ir
stmont
hofbusi
nessoper
ati
onAt
oMel
kamumadeadeposi
tofBi
rr80,
000
i
nabankaccounti
nthenameofMel
kamuTr
anspor
tAgency
.Theef
fectoft
his
t
ransact
ioni
stoi
ncr
easet
heasset(
cash)ont
hel
eftsi
deoft
heequat
ionbyBi
rr
80,
000andt
oincr
easeowner
’sequi
tyont
heot
hersi
deoft
heequat
ionbyt
hesame
amount
.Owner
’sequi
tyi
susual
l
yref
err
edbyt
henameoft
heownerand“
capi
tal
”i.
e.
Mel
kamu,
capi
tal
.”

Asset
s Owner
’sEqui
ty
Cash = Mel
kamuCapi
tal
(
1)80,
000.
00 80,
000.
00I
nvest
ment

Not
ethatMel
kamu’
sper
sonalasset
ssuchashi
shomeandhi
sper
sonalbank
accountandhi
sper
sonal
li
abi
l
iti
esar
eexcl
udedf
rom consi
der
ati
on.

Tr
ansact
ion(
2)
Forf
urt
herexpansi
onMel
kamudeci
dedt
opur
chasel
andasaf
utur
ebui
l
dingsi
tef
or
whi
chBi
rr45,
000.
00cashi
spai
d.Thi
str
ansact
ionbr
ingscer
tai
nchangesupont
he
composi
ti
onoft
heasset
sbutdoesnotchanget
het
otalamount
.Theef
fect
soft
he
t
ransact
ionandt
henewbal
ancesar
easf
oll
ows:

Asset
s = Owner
’sequi
ty
Cash + Land Mel
kamu,
capi
tal

12
 Bal
.80,
000 80,
000
(
2)-
45,
000 + 45,
000 _
___
___
_
35,
000 45,
000 80,
000

Tr
ansact
ion(
3)
Dur
ingt
hemont
h,Mel
kamupur
chasesBi
rr
.9000ofgasol
i
neoi
landot
hersuppl
i
es
f
rom v
ari
oussuppl
i
ersagr
eei
ngt
opayi
nthenearf
utur
e.Thi
sty
pesoft
ransact
ioni
s
edapur
cal
l chaseonaccountandt
hel
i
abi
l
itycr
eat
eist
ermedanaccountpay
abl
e.
Consumabl
egoodssuchassuppl
i
esar
econsi
der
edt
obepr
epar
edexpensesor
asset
s.Theef
fectoft
heabov
etr
ansact
ioni
stoi
ncr
easeassetandl
i
abi
l
iti
esbybi
rr
9,
000asf
oll
ows.

Asset
s = Li
abi
li
ti
es+owner
’sEqui
ty
Cash+suppl
i
es+Land Account
spay
abl
e+Mel
kamu’
sCapi
tal
Bal
.35000 45,
000 80,
000
(
3)
_
___
___ +9,
000_
___
___ +9,
000 _
___
__
35,
000 9,
000 45,
000 +9,
000
80,
000

Tr
ansact
ion(
4)
Dur
ingt
hemont
h,Bi
rr6,
000i
spai
dtocr
edi
tor
sonaccount
,ther
ebyr
educi
ngbot
h
asset
sandl
i
abi
l
iti
es.Theef
fectont
heequat
ioni
sasf
oll
ows.

Asset
s = Li
abi
li
ti
es + Owner
’sEqui
ty
Cash+Suppl
i
es+Land Account
spay
abl
e+Mel
kamu’
scapi
tal
Bal
.350009000 45000 9000 80,
000
(
4)–6000 _
___
_ _
___
___ -
6000 _
___
__
29000 9000 45000 3000 80,
000
Tr
ansact
ion(
5)

13
I
ngener
alt
heamountchar
gedt
ocust
omer
sforgoodsorser
vicessol
dtot
hem i
s
cal
l
edr
evenue.Ot
hert
ermsmaybeusedf
orcer
tai
nki
ndsofr
evenue,
suchassal
es
f
ort
hesal
eofmer
chandi
seorbusi
nessser
vices,f
eesear
nedf
orchar
gesbya
phy
sici
ant
opat
ient
s,r
entear
nedf
oruseofr
ealest
ateorot
herpr
oper
tyandf
ares
ear
nedf
orser
vicesast
ranspor
tbusi
ness.

Dur
ingt
hef
ir
stmont
hofoper
ati
on,Mel
kamuTr
anspor
tAgencyear
nedofBi
rr
18,
000r
ecei
vi
ngt
heamounti
ncash,t
heef
fectoft
hist
ransact
ioni
stoi
ncr
ease
cashbyBi
rr18,
000andt
oincr
easeowner
’sequi
tybyt
hesameamountasf
oll
ows.

Asset
s =Li
abi
li
ti
es+Owner
’sEqui
ty
Cash+suppl
i
es+l
and Accountpay
abl
e+Mel
kamu,
capi
tal
Bal
.29,
000 9000 45,
000 3,
000 80,
000
(
5)18,
000 _
___
___
___
___ _
___
__ 18,
000f
aresear
ned
47,
000 9,
000 45,
000 3,
000 98,
000

I
ntheor
dinar
ycour
seofbusi
ness,t
heownermaynotal
way
srequi
recashatt
he
t
imegoodsorser
vicesar
esol
d,abusi
nessmaymakesal
esonaccountal
l
owi
ngt
he
cust
omert
opayl
ater
.Insuchsi
tuat
iont
hef
ir
m acqui
resanaccountr
ecei
vabl
e,
whi
chi
sacl
aim agai
nstt
hecust
omer
.Anaccountr
ecei
vabl
eisasmuchanassetas
cashandt
her
evenuei
sreal
i
zedi
nexact
lyt
hesamemannerasi
fcashhadbeen
i
mmedi
atel
yrecei
ved.Atal
aterdat
e,upont
hemoneycol
l
ect
ion,cashi
ncr
eased
andaccount
srecei
vabl
edecr
eased.
Tr
ansact
ion(
6)
Theamountofasset
sconsumedorser
vicesusedi
nthepr
ocessofear
ningr
evenue
i edexpense.Expenseswoul
scal
l dincl
udesuppl
i
esused,wagesofempl
oyees,and
ot
herasset
sandser
vicesusedi
noper
ati
ngt
hebusi
ness.ForMel
kamuTr
anspor
t
Agency
,var
iousbusi
nessexpensesi
ncur
redandpai
ddur
ingt
hemont
hwer
eas
f
oll
ows:wages,Bi
rr3,
500,r
ent
,Bi
rr2000,ut
il
it
ies,Bi
rr950,mi
scel
l
aneous,Bi
rr750.
Theef
fectoft
hisgr
oupoft
ransact
ioni
stor
educecashandt
oreduceowner
’s
equi
tyasf
oll
ows.

14
 Asset
s =Li
abi
li
ti
es+ Owner
’sEqui
ty
Cash+suppl
i
es+l
and Account
spay
abl
e+ Mel
kamu’
s
capi
tal
Bal
.47000 9000 45000 3000 98,
000
(
6)-
7200 -3500WagesExp
-2000RentExp
-950Ut
il
it
iesExp
-750Mi
sc.Ex
p
_
___
__ _
___
_ _
___
_ _
___
__ _
___
___
_
39800 9000 45000 3000 90,
800

Tr
ansact
ion(
7)
Att
heendoft
hemont
hiti
sdet
ermi
nedt
hatcostofsuppl
i
esonhandi
sBi
rr3000,
t
her
emai
nder(
9000-3000)hav
ebeenusedi
ntheoper
ati
onsoft
hebusi
ness.Thi
s
r
educt
ionofBi
rr6000ofsuppl
i
esf
rom owner
’sequi
tymaybeshownasf
oll
ows:

Asset
s = Li
abi
li
ti
es + Owner
’sEqui
ty
Cash +Suppl
i
es +Land AccountPay
abl
e+Mel
kamu,
Capi
tal
Bal
.39800 9000 45000 3000 90,
800
(
7) -
6000 _
___
_ -
6000Supp.Exp.
39800 3000 45000 3000 84800

Tr
ansact
ion(
8)
Att
heendoft
hemont
hMel
kamuwi
thdr
awsf
rom t
hebusi
nessBi
rr2000i
ncashf
or
hi
sown per
sonaluse.Theef
fectoft
hist
ransact
ion whi
ch r
educescash and
r
educesowner
’sequi
tyi
stheexactopposi
teofani
nvest
menti
nthebusi
nessbyt
he
owner
.Iti
snotabusi
nessexpense,butawi
thdr
awalofapor
ti
onoft
heowner
’s
equi
ty.Theef
fectofsuchawi
thdr
awal
isshownasf
oll
ows:

15
 Asset
s = Li
abi
li
ti
es + Owner
’sEqui
ty
Cash +Suppl
i
es +Land Account
sPay
abl
e+Mel
kamu,
capi
tal
Bal
.39,
800 3,
000 45,
000 3,
000 84,
800
(
8) -
2,000 _
____
___
___
___
_ -
2,000Wi
thdr
awal
37,
800 3,
000 45,
000 3,
000 82,
800

Thebusi
nesst
ransact
ionsofMel
kamuTr
anspor
tAgencyar
esummar
izedi
na
t
abul
arf
orm asf
oll
ows.Thet
ransact
ionsar
eident
if
iedbynumber
,andt
hebal
ance
ofeachi
tem i
sshownaf
tereacht
ransact
ion.
Asset
s = Li
abi
li
ti
es + Owner
’sEqui
ty
Cash + Suppl
i
es +Land AccountPay
abl
e+Mel
kamu,
Capi
tal
1)+80,
000 +80,
000I
nvest
ment
2)–45,
000 +45,
000 _
___
___
35,
000 45,
000 80,
000
3)_
___
___
__ +9,
000_
___
___
_ +9,
000 _
___
___
_
35,
000 9,
000 45,
000 9,
000 80,
000
4)-6,
000 _
___
____
___
__ -6,
000 _
___
___
_
29,
000 9,
000 45,
000 3,
000 80,
000
5)+18,
000 _
___
____
___
__ _
___
__ +18,
000Far
esear
ned
47,
000 9,
000 45,
000 3,
000 98,
000
6) –7,
200 -3,500Wagesexp.
-2,000Rentexp
- 950Ut i
li
ti
esex
- 750Mi sc.exp
___
___ _
___
______
__ _
_____ _
___
_____
39,
800 9,
000 45,000 3,
000 90,
800
7) _
___
__ -6000 _
___
__ _
___
_ -6,
000Suppl
i
esexp
39,
800 3,
000 45,
000 3,
000 84,
800
8) -
2,000 _
___
___
___
__ _
___
_ -
2,000Wi
thdr
awal
s
37,
800 3,
000 45,
000 3,
000 82800

Thesummar
yoft
heef
fectoft
het
ransact
ionshownabov
eappl
ytoal
lty
pesof

16
busi
nesses.Thef
oll
owi
ngobser
vat
ionshoul
dbenot
ed.

i
) Theef
fectofev
eryt
ransact
ioncanbest
atedi
nter
msofi
ncr
easesand/
or
decr
easesi
noneormor
eoft
heaccount
ingequat
ionel
ement
s.
i
i
) Theequal
i
tyoft
het
wosi
desoft
heaccount
ingequat
ioni
sal
way
smai
ntai
ned.
i
i
i) Theowner
’sequi
tyi
sincr
easedbyamount
sinv
est
edbyt
heownerandi
s
decr
easedbywi
thdr
awal
sbyt
heowner
.Inaddi
ti
on,
owner
’sequi
tyi
sincr
eased
byr
evenuesandi
sdecr
easedbyexpenses.

CheckYourPr
ogr
ess:Exer
cise1.
4
1.I
dent
if
ythet
hreeel
ement
soft
heaccount
ingequat
ion.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
2.Supposeanent
erpr
isehasl
i
abi
l
iti
esofBi
rr50,
000andowner
’sequi
tyofBi
rr
250,
000.Whati
sthet
otal
theamountofi
tst
otal
asset
s?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

1.
6.Fi
nanci
alSt
atement
s

Whybusi
nessent
erpr
isespr
epar
eper
iodi
cfi
nanci
alst
atement
s?
Woul
dyoui
dent
if
ythebasi
cfi
nanci
alst
atement
s?Pr
ovi
dey
ouransweri
nwr
it
ing
bef
orey
ougot
othef
oll
owi
ngdi
scussi
ons

Per
iodi
cfi
nanci
alst
atement
scommuni
cat
euser
sofaccount
ingi
nfor
mat
iont
hose
per
ti
nentdat
awhi
chenabl
ethem t
oknowaboutt
hef
inanci
aloper
ati
onandposi
ti
on

17
ofaf
ir
m(anent
it
y).Mor
eov
er,t
hef
inanci
alst
atement
sul
ti
mat
elyhel
puser
sto
makesounddeci
sion.

Thus,af
tercompl
eti
on oft
he anal
ysi
s ofbusi
ness t
ransact
ions,t
he essent
ial
i
nfor
mat
ioni
scommuni
cat
edt
ouser
sthr
oughf
inanci
alst
atement
s.Theaccount
ing
st
atement
sthatcommuni
cat
esuchi
nfor
mat
i eknownasf
onar inanci
alst
atement
s.

Thebasi
c(pr
inci
pal
)fi
nanci
alst
atement
sar
ethei
ncomest
atement
,thest
atement
ofowner
’sequi
ty,
thebal
ancesheetandt
hest
atementofcashf
lows.

1.
6.1 Fi
nanci
alSt
atement
sfora Sol
e Pr
opr
iet
orshi
p(and Par
tner
shi
p
Busi
ness)
a)I
ncomeSt
atement

Ani
ncomest
atementshowst
heoper
ati
ngr
esul
tsofaf
ir
m ov
eraper
iodt
ime.I
tisa
summar
yoft
her
evenueandexpensesofabusi
nessent
it
yforaspeci
fi
edper
iodof
t
imesuchasamont
horay
ear
.Theexcessofr
evenueov
erexpensesi
ncur
redi
n
ear
ningr
evenuei
scal
l
edneti
ncomeornetpr
ofi
t.I
ftheexpensesexceedt
he
r
evenue,
ther
esul
tisnetl
oss.

b)St
atementofOwner
’sEqui
ty

I
tisal
laboutasummar
yofchangesi
ntheowner
’sequi
tyofabusi
nessent
it
ythat
hav
eoccur
redov
eraspeci
fi
edper
iodoft
imesuchasamont
horay
ear
.

I
nourpr
evi
ousexampl
esf
orMel
kamuTr
anspor
tAgencyt
her
ear
ethr
eet
ypesof
t
ransact
ionsaf
fect
edowner
’sequi
tyaccount
.(1)Theor
igi
nali
nvest
mentofBi
rr
80,
000,(
2)t
her
evenuesandexpenseswhi
chr
esul
tedneti
ncomeofbi
rr4,
800f
or
t
hemont
h,and(
3)awi
thdr
awalofBi
rr2,
000byt
heowner
.Al
lthesei
nfor
mat
ioni
s
summar
izedbyt
hest
atementofowner
’sequi
ty.

18
c)Bal
anceSheet
Abal
ancesheetpr
esent
sthef
inanci
alcondi
ti
onofabusi
nessent
it
yonaspeci
fi
c
dat
e.I
tisal
i
stofasset
s,l
i
abi
l
iti
esandowner
’sequi
tyasofaspeci
fi
cdat
e,usual
l
y
att
heendofamont
horay
ear
.
d)St
atementofCashFl
ows

Ast
atementofcashf
lowsf
ocusesont
ransact
ionst
hatdi
rect
lyaf
fectcash.I
tisa
summar
yoft
he cash r
ecei
pts and cash pay
ment
s ofa busi
ness ent
it
yon a
par
ti
cul
ardat
e,usual
l
yatt
hel
astdayofamont
horay
ear
.Hencest
atementofcash
f
lowspr
esent
sinf
ormat
ionaboutt
hei
nfl
owsandout
fl
owsofcashduet
ofi
nanci
ng,
oper
ati
ngandi
nvest
ingact
ivi
ti
esofabusi
nessent
it
ydur
inganaccount
ingper
iod.

Basedonourpr
evi
ousexampl
es,eachoft
hesest
atement
swi
l
lbei
l
lust
rat
edas
f
oll
ows:

Mel
kamuTr
anspor
tAgency
I
ncomeSt
atement
Formont
hendedMesker
em 30,
2000

Far
esEar
ned.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
18,
000
Oper
ati
ngexpenses
WagesExpanse.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr3,
500
RentExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 2,
000
Suppl
i
esExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 6,
000
Ut
il
it
iesExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 950
Mi
scel
l
ani
esExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 750
Tot
alOper
ati
ngExpenses.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 13,
2000
NetI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr4,
800

19
St
atementofowner
’sequi
tyi
saf
fect
edbyt
hreet
ypesoft
ransact
ions:

i
) Theor
igi
nal
inv
est
mentofBi
rr80,
000
i
i
) Ther
evenuesandex
pensest
hathav
eoccur
redandr
esul
tedi
nneti
ncome
ofBi
rr4,
800f
ort
hemont
hand.
i
i
i) A wi
thdr
awalofBi
rr2,
000madebyt
heowner
.Al
lthi
sinf
ormat
ioni
s
summar
izedi
nthest
atementofowner
’sequi
tyasf
oll
ows:

Mel
kamuTr
anspor
tAgency
St
atementofOwner
’sEqui
ty
Fort
heMont
hEndedMesker
em 30,
2000

I
nvest
mentdur
ingt
hemont
h..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
80,
000
NetI
ncomef
ort
hemont
h..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr 4,
800
Less:Wi
thdr
awal
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. (
2,000)
I
ncr
easei
nOwner
’sEqui
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 2,
800
Mel
kamu,
Capi
tal
,Mesker
em 30,
2000.
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr82,
800

Asf
arasbal
ancesheetpr
epar
ati
oni
sconcer
ned,t
heasset
s,l
i
abi
l
iti
esandowner
’s
equi
tyamount
sar
ear
rangedi
ntwof
orms:oneoft
hef
ormspr
esent
sthel
i
abi
l
ity
andowner
’sequi
tysect
ionsj
ustbel
ow t
heassetsect
ion,suchaf
rom i
scal
l
ed
r
epor
tfor
m.Theot
herar
rangementwhi
chi
sthecommononel
i
stt
heasset
sont
he
l
eftsi
deandt
hel
i
abi
l
iti
esandowner
’sequi
tyont
her
ightsi
dei
sref
err
edt
oast
he
accountf
orm ofbal
ancesheet
.

20
Cust
omar
il
y,t
hel
i
sti
ngbegi
nswi
tht
heassetsect
ionwi
thcash.Thef
oll
owi
ngi
tem
i
srecei
vabl
esandt
hensuppl
i
esandot
herpr
epai
dexpenseswhi
chdependupon
t
hei
rconv
ert
ibi
l
ityi
ntocashorusedup(
consumed)i
nthenearf
utur
e.

Mel
kamuTr
anspor
tAgency
Bal
anceSheet
Mesker
em 30,
2000

Asset
s
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr37,
800
Suppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 3,
000
Land.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 45,
000
Tot
alAsset
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
85,
800
Li
abi
li
ti
es
Account
spay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr 3,
000

Owner
’sEqui
ty
Mel
kamu,
Capi
tal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 82,
800
Tot
all
iabi
li
ti
esandOwner
’sEqui
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr85,
800

I
nrepor
ti
ngcashf
lows(
cashr
ecei
ptsandcashpay
ment
s)st
atementofcashf
lows
pr
esent
sthoseessent
ialdat
afr
om t
hreeper
spect
ives.Thr
eesect
ionsofbusi
ness

21
ent
it
y’sact
ivi
ti
esar
eshownbel
ow.
1.Oper
ati
ngact
ivi
ti
es
2.I
nvest
ingact
ivi
ti
es
3.Fi
nanci
ngact
ivi
ti
es
Basedonourpr
evi
ousdat
athest
atementofcashf
lowssummar
iest
hecashf
lows
f
rom oper
ati
ngact
ivi
ti
esi
ncl
udescasht
ransact
ionst
hatdet
ermi
net
heneti
ncome.
ForMel
kamuTr
anspor
tAgency
,thecashr
ecei
vedf
rom cust
omer
swasBi
rr18,
000
f
orf
aresear
ned.Cashpay
ment
stot
aledBi
rr13,
200whi
chcompr
isesofBi
rr6000
pai
dtocr
edi
tor
sforsuppl
i
espur
chasedandBi
rr7,
200pai
dforwages,
rent
,ut
il
it
ies,
andmi
scel
l
aneousexpense.Thenetcashf
lowf
rom oper
ati
ngact
ivi
ti
esi
sBi
rr4,
800
(
Bir
r18,
000–Bi
rr13,
200)
Mel
kamu Tr
anspor
tAgency
’s cash f
low r
elat
ed t
oinv
est
ing act
ivi
ti
es was t
he
acqui
sit
ionofl
andf
orBi
rr45,
000.

Thecash f
lowsf
rom f
inanci
ng act
ivi
ti
essect
ion r
epor
tst
hecash t
ransact
ions
r
elat
edt
ocashi
nvest
ment
sbyt
heownerandbor
rowi
ngsandcashwi
thdr
awal
sof
t
heowner
.ForMel
kamuTr
anspor
tAgency
,thecashf
lowsf
rom f
inanci
ngact
ivi
ti
es
wer
e Bi
rr80,
000 f
rom t
he i
nvest
mentby t
he owner
,less Bi
rr2000 ofcash
wi
thdr
awal
sbyt
heowner
.Thenetcashf
lowf
rom f
inanci
ngact
ivi
ti
es,
Bir
r78,
000i
s
det
ermi
nedbysubt
ract
ingt
hecashwi
thdr
awal
sofBi
rr2,
000f
rom Bi
rr80,
000cash
r
ecei
vedf
rom t
heownerasani
nit
ial
inv
est
ment
.

Si
nceMesker
em wasMel
kamuTr
anspor
tAgency
’sf
ir
stmont
hofoper
ati
ons,t
he
i
ncr
easei
ncashf
lowsf
orMesker
em i
stheMesker
em 30,2000bal
ance.I
nfut
ure
st
atement
s,t
hecashbal
anceatt
hebegi
nni
ngoft
heper
iodi
saddedt
othei
ncr
ease
(
ordecr
ease)i
ncashf
ort
heper
iodt
oindi
cat
ethecashbal
anceatt
heendoft
he
per
iod.To i
l
lust
rat
e assume Mel
kamu Tr
anspor
tAgency
’s netcash f
lows f
or
Mesker
em i
ncr
easedbyBi
rr2,
800.Thei
ncr
easer
esul
tedf
rom t
hef
oll
owi
ngcash
t
ransact
ions:

Cashr
ecei
vedf
rom cust
omer
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr18,
000

22
 Cashpay
ment
sfr
om expensesand
Pay
ment
stocr
edi
tor
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 13,
200
Cashwi
thdr
awal
byowner.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 2,
000

Thest
atementofcashf
lowsf
orMel
kamuTr
anspor
tAgencyf
orMesker
em woul
dbe
asf
oll
ows:

Mel
kamuTr
anspor
tAgency
St
atementofCashFl
ows
ForMont
hEndedMesker
em 30,
2000

Cashf
lowsf
rom oper
ati
ngact
ivi
ti
es:
Cashr
ecei
vedf
rom cust
omer
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..Bi
rr18,
000
Deductcashpay
ment
sforexpensesand
Pay
ment
stocr
edi
tor
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 13,
200
Netcashf
lowf
rom oper
ati
ngact
ivi
ti
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr4,
800
Cashf
lowsf
rom i
nvest
ingact
ivi
ti
es:
Cashpayment
sforacqui
sit
ionofl
and.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. (
45,
000)
Cashf
lowsf
rom f
inanci
ngact
ivi
ti
es:
...
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr80,
000
Deduct
:cashwi
thdr
awal
byowner
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. (
2,000)
Netcashf
lowf
rom f
inanci
ngact
ivi
ti
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 78,
000
Netcashf
lowMesker
em 30,
2000andcashbal
ance.
..
..
..
..
.. Bi
rr37,
800

23
CheckYourPr
ogr
ess:Exer
cise1-
5

1.Whatar
ethebasi
cfi
nanci
alst
atement
sofaser
vicegi
vi
ngent
erpr
ise?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.Namet
het
hreet
ypesofact
ivi
ti
esr
epor
tedi
nthest
atement
sofcashf
lows.

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

1.
6.2Fi
nanci
alSt
atementf
orCor
por
ati
on

I
sther
eanydi
ff
erencebet
weent
hef
inanci
alst
atement
sofacor
por
atet
ypeof
busi
nessandt
hef
inanci
alst
atementofsol
epr
opr
iet
orshi
p?Gi
vey
ourownr
easons
bef
orey
ougot
hrought
hef
oll
owi
ngpar
agr
aphs.

Thepr
evi
ousf
inanci
alst
atement
s,i
l
lust
rat
ed,assumet
hatt
hebusi
nessent
erpr
ise
wasownedbyasi
ngl
eindi
vi
dual
,asol
epr
opr
iet
orshi
p.

Mostoft
het
imebusi
nessent
erpr
isehav
ingl
argeamount
sofasset
sar
eusual
l
y
or
gani
zedascor
por
atebusi
nesses(
cor
por
ati
ons)andhav
emanyowner
s,cal
l
ed
st
ockhol
der
s

a)I
ncomeSt
atement

24
I
fMel
kamu Tr
anspor
tAgencyhad been or
gani
zed asacor
por
ati
on owner
shi
p
r
epr
esent
edbyshar
esofst
ock,i
tsi
ncomest
atementwoul
dbesi
mil
art
otheone
pr
evi
ousl
yshown.Ther
emai
ningf
inanci
alst
atement
swoul
dbedi
ff
erenti
nsome
r
espect
sfr
om t
he cor
respondi
ng st
atement
sfora sol
e pr
opr
iet
orshi
p(and
par
tner
shi
p).

b)Ret
ainedEar
ningsSt
atement

Ast
atementofr
etai
nedear
ningsorast
atementofst
ockhol
der
s’equi
tyi
sincl
uded
wi
thaev
erysetoff
inanci
alst
atement
sofacor
por
atet
ypeofbusi
nessent
erpr
ises.

I
n a cor
por
ate ent
erpr
ise t
he emphasi
sinr
epor
ti
ng changes i
n st
ock hol
der
s
(
owner
s’)equi
tyi
sont
hechangesi
nret
ainedear
nings,
orneti
ncomer
etai
nedi
nthe
busi
ness.Thechangesi
nret
ainedear
ningst
hathav
eoccur
reddur
ingaper
iodar
e
r
epor
t nar
edi etai
nedear
ningsst
atement
.

I
nacor
por
ate(
cor
por
ati
on)busi
ness,
changesi
ntheamountofear
ningsr
etai
nedi
n
t
hebusi
nesswoul
dhav
eresul
tedf
rom:
1.Neti
ncome,
and
2.Di
str
ibut
ionofear
nings,
cal
l
eddi
vi
dends,
toowner
s.
Ther
etai
nedear
ningsst
atementf
orMel
kamuTr
anspor
tCor
por
ati
onf
orMesker
em
woul
dappearasf
oll
ows.

Mel
kamuTr
anspor
tAgency
Ret
ainedEar
ningsSt
atement
ForMont
hEndedMesker
em 30,
2000

NetI
ncomef
ort
heMont
h..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr4,
800
Less:
Div
idends.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 2,
000

25
Ret
ainedEar
nings,
Mesker
em 30,
2000.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr2,
800

c)Bal
anceSheet

I
fMel
kamuTr
anspor
tAgencyhadbeenor
gani
zedasacor
por
ati
oni
tsbal
ancesheet
att
heendofMesker
em,
thef
ir
stmont
hofoper
ati
ons,
woul
dappearasf
oll
ows

Mel
kamuTr
anspor
tAgency
Bal
ancesheet
Mesker
em 30,
000

Asset
s
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr37,
800
Suppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 3,
000
Land.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 45,
000
Tot
alasset
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr85,
800

Li
abi
li
ti
es

26
Accountpay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr3,
000

St
ockhol
der
sEqui
ty
Capi
tal
stock.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..Bi
rr80,
000
Ret
ainedEar
nings.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 2,
800
Tot
alSt
ockhol
der
s’Equi
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 82,
800
Tot
alLi
abi
l
iti
esandSt
ockhol
der
s’Equi
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr85,
800

d)St
atementofCashFl
ows

I
fMel
kamuTr
anspor
tAgencyhadbeenor
gani
zedasacor
por
ati
ont
hest
atementof
cashf
lowswoul
dappearasf
oll
owsatt
heendofMesker
em

Mel
kamuTr
anspor
tAgency
St
atementofCashFl
ows
ForMont
hEndedMesker
em 30,
2000

Cashf
lowsf
rom oper
ati
ngact
ivi
ti
es:
Cashr
ecei
vedf
rom cust
omer
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr18,
000
Deductcashpay
ment
sforexpensesand
Pay
ment
stocr
edi
tor
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 13,
200
Netcashf
lowf
rom oper
ati
ngact
ivi
ti
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
4,
800

27
Cashf
lowsf
rom i
nvest
ingact
ivi
ti
es:
Cashpay
ment
sforacqui
sit
ionofl
and.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. (
45,
000)
Cashf
lowsf
rom f
inanci
ngact
ivi
ti
es:
Cashreceivedf
rom sal
eofcapit
alst
ock..
..
..
..
..
..
..
..
..
..
.. Birr80,
000
Deduct:cashpaymentsfordi
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
. (
2,000)
Netcashf
lowf
rom f
inanci
ngact
ivi
ti
es.
..
..
..
..
..
..
..
..
..
..
.. 78,
000
Netcashf
lowsandMesker
em 30,
2000cashbal
ance.
..
..
..
..
..
..
. Bi
rr
37,
800

Rev
iewExer
cises
Exer
cise1.
1
1.At
oAl
emui
spl
anni
ngt
ost
artabusi
nessandhasf
inal
i
zedpr
epar
ati
ons.The
f
ir
mist
obenamedAl
emuGent
'
sSal
on.Theownerhasi
nvest
edBi
rr18,
000
t
othef
ir
m andhasbor
rowedBi
rr32,
000f
rom Commer
cialBankofEt
hiopi
a.
Assumi
ngt
heownerpl
annedt
oinv
estBi
rr50,
000andt
obor
rowBi
rr100,
000
f
rom commer
cial
bank.Answerquest
ions(
a)t
o(c)bel
ow.
.
(
a) asset
soft
hef
ir
m
(
b) Li
abi
l
iti
esoft
hef
ir
m
(
c) Owner
'sEqui
tyi
nthef
ir
m

Exer
cise1.
2
2.Nebi
yuCompanyhast
otalasset
sofBi
rr30,
000andt
otalcapi
talbal
anceof
Bi
rr14,
000 att
he begi
nni
ng oft
he y
ear
.Dur
ing t
he y
ear
,asset
s wer
e
i
ncr
easedbyBi
rr25,
000andl
i
abi
l
iti
eswer
edecr
easedbyBi
rr10,
000.Byhow
muchandi
nwhatdi
rect
ionwi
l
lcapi
tal
oft
hef
ir
m af
fect
ed?

ModelExami
nat
ionQuest
ions

28
Par
t–I
:Tr
ueorFal
seQuest
ions
Wr
it
e‘Tr
ue’
ift
hest
atementi
scor
rectandwr
it
e‘Fal
se’
ist
hest
atementi
swr
ong.

1.Abusi
nesst
ransact
ioni
sanoccur
renceofanev
entorofacondi
ti
ont
hat
mustber
ecor
ded.
2.Thear
rangementofabal
ancesheet
,thel
i
abi
l
ityandowner
’sequi
tysect
ions
pr
esent
edbel
owt
heassetsect
ioni
ssai
dtobeaccountf
orm.
3.I
npr
ivat
eaccount
ing,
youwoul
dof
ferexper
tser
vicet
othegener
alpubl
i
cona
f
eebasi
s.
4.Taxat
ioni
sanot
hermaj
orar
eaofpubl
i
caccount
ing.
5.Par
tner
shi
pisaf
orm ofbusi
nessent
erpr
isei
nwhi
chowner
shi
pisdi
vi
ded
i
ntoshar
esofst
ock.

Par
t-I
I:Mul
ti
pleChoi
ceQuest
ions.
Choset
hebasedamongt
hegi
venal
ter
nat
ives
1.Thef
inanci
alst
atementt
hatr
epor
ts,asset
s,l
i
abi
l
iti
es,andowner
’sequi
tyi
s
t
he:
A.St
atementofcashf
low C.Bal
ancesheet
B.I
ncomest
atement D.Owner
’sequi
tyst
atement
2.Whi
choft
hef
oll
owi
ngi
snotast
epi
ntheaccount
ingpr
ocess?
A.Ver
if
icat
ion C.Recor
ding
B.I
ncomest
atement DOwner
’sequi
tyst
atement

3.Netl
osswi
l
lresul
tdur
ingt
het
imeper
iod:
A.whenasset
sexceedr
evenues
B.Whenexpensesexceedr
evenues
C.Whenr
evenuesexceedexpenses
D.Whenasset
sexceedl
i
abi
l
iti
es.
4.Thepr
oper
ti
esownedbyabusi
nessent
erpr
isear
eknownas:

29
 A.Owner
’sequi
ty C.Asst
s
B.St
ockhol
der
sequi
ty D.Li
abi
l
iti
es
5.Thebusi
nessent
it
yconceptst
atest
hat
?
A.Asset
sshoul
dbei
nit
ial
l
yrecor
dedatcostandadj
ust
edwhent
he
mar
ketv
alueschanges.
B.Asset
sshoul
dber
ecor
dedatt
hei
rcost
C.Act
ivi
ti
esofanent
it
yshoul
dbekeptsepar
atef
rom i
tsowner
.
D.Noneoft
heabov
e.
6.Whi
choft
hef
oll
owi
ngst
atement
sisi
ncor
rectaboutuser
sofaccount
ing
i
nfor
mat
ion?
A. Managementi
sconsi
der
edasani
nter
nal
user
.
B. Gov
ernmentagenci
esar
econsi
der
edi
nter
nal
user
s.
C. Taxi
ngaut
hor
izesar
econsi
der
edext
ernal
user
s
D. Noneoft
heabov
e
7.Debi
tsi
gni
fi
es:
A.Decr
easet
oli
abi
l
ity C.Lef
t-
handsi
deamountcol
umn
B.I
ncr
easet
oanasset D.al
loft
heabov
e
8.Thet
ri
albal
ance:
A.Pr
ovest
hecompl
eteaccur
acyofaccount
ingr
ecor
ds:
B.Test
stheequal
i
tyofdebi
tsandcr
edi
tsi
nthel
edger
C.Recor
dingt
hesamet
ransact
ionmor
ethanoncedoesnotcausean
i
nequal
i
tyi
nthet
ri
albal
ance.
D.BandCar
ecor
rect
.

9.Pr
ovi
dingser
vicesoncr
edi
twi
l
lhav
ethef
oll
owi
ngef
fect
sont
heel
ement
s
(
component
s)oft
hebasi
caccount
ingequat
ion.
A.I
ncr
easeasset
sandi
ncr
easeowner
’sequi
ty.
B.I
ncr
easeasset
sanddecr
easeowner
’sequi
ty.
C.I
ncr
easeasset
sandi
ncr
easel
i
abi
l
iti
es.

30
 D.I
ncr
easel
i
abi
l
iti
esandi
ncr
easeowner
’sequi
ty.
10.
Ser
vicespr
ovi
dedbyapubl
i
caccount
anti
ncl
udes:
A.I
nter
nal
audi
ti
ng,
budget
ing,
andmanagementconsul
ti
ng
B.Audi
ti
ng,
taxat
ion,
andmanagementconsul
ti
ng
C.Audi
ti
ng,
budget
ing,
andcostaccount
ing
D.Audi
ti
ng,
budget
ing,
andmanagementconsul
ti
ng
Par
t-
II
I:Wor
koutQuest
ions
At
temptt
hef
oll
owi
ngquest
ions:Showt
her
elev
antst
epsi
nyourcomput
ati
ons.
1.Gi
vent
heaccount
ingequat
ion,
answereachoft
hef
oll
owi
ngquest
ions:
i
) Thet
otalasset
sofZ-
companyar
eBi
rr280,
000andi
tsowner
’s
equi
tyi
sBi
rr90,
000.Whati
stheamountofi
tst
otal
li
abi
l
iti
es?
i
i
) Thet
otalasset
sofY-
companyar
eBi
rr500,
000andi
tsl
i
abi
l
iti
esar
e
equalt
oonehal
fofi
tst
otalasset
s.Whati
stheamountofY-
company
’sowner
’sequi
ty?
2.Fourdi
ff
erentsol
epr
opr
iet
orshi
ps,A,B,CandD,show t
hesamebal
ance
sheetdat
aatt
hebegi
nni
ngandendofay
ear
.Thesedat
a,exceptt
heamount
ofowner
’sequi
ty,
aresummar
izedasf
oll
ows:
Tot
al Tot
al
Asset
s Li
abi
li
ti
es
Begi
nni
ngoft
hey
ear
..
..
..
..
..
..
..
..
..
. Bi
rr650,
000 Bi
rr250,
000
Endoft
hey
ear
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 730,
000 320,
000

Ont
hebasi
soft
heabov
edat
aandt
hef
oll
owi
ngaddi
ti
onali
nfor
mat
ionf
ort
hey
ear
,
det
ermi
net
heneti
ncome(
ornetl
oss)f
oreachoft
hecompanyf
ort
hey
ear
.

CompanyA:Theownerhadmadeno addi
ti
onali
nvest
ment
sint
he
busi
nessandhadmadenowi
thdr
awal
sfr
om t
hebusi
ness
CompanyB:t
heownerhadmadeanaddi
ti
onali
nvest
ment
sofBi
rr
65,
000andhadwi
thdr
awnBi
rr60,
000

31
 CompanyC:t
heownerhadmadeaddi
ti
onali
nvest
ment
sofBi
rr65,
000
buthadmadenowi
thdr
awal
.
CompanyD:t
he ownerhad made no addi
ti
onali
nvest
menti
nthe
busi
nessbuthadwi
thdr
awnBi
rr60,
000

Li
stofRef
erenceMat
eri
als
1.I
ntr
oduct
iont
oAccount
i 21stcent
ng, ury
2.Fessandwar
ren,Account
ingpr
inci
ples,16th edi
ti
on,sout
h-west
ernpubl
i
shi
ng
company
.
3.Fessandwar
ren,Account
ingpr
inci
ples,18th edi
ti
on,sout
h-west
ernpubl
i
shi
ng
company
.
4.Wey
gandt
,ki
eso,Ki
mmel
,Account
ingpr
inci
ples,5th edi
ti
on,Johnwi
l
il
yand
sons,
Inc.
5.Mosi
ch,
Int
ermedi
ateAccount
i 6thedi
ng, ti
on,
MacGr
aw-
it
il
lBookCompany
.

32
 UNI
TTWO:THEACCOUNTI
NGCYCLE

Li
stofCont
ent
s
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
Cl
assi
fi
cat
ionofAccount
s
Char
tofAccount
s
Nat
ureofanAccount
Jour
nal
andAccount
s
I
ll
ust
rat
ionofJour
nal
i
zingandPost
ing
TheTr
ial
Bal
ance
Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive
Af
tert
hecompl
eti
onoft
hisuni
tyouwi
l
lbeabl
eto:
 Expl
ainwhatanaccounti
sandt
hecommoncl
assi
fi
cat
ionofaccount
s
f
orasmal
lser
viceent
erpr
ise.
 Descr
ibet
henat
ureofchar
tofaccount
s
 I
ll
ust
rat
eachar
tofaccount
sforasmal
lser
viceent
erpr
ise
 I
ll
ust
rat
edebi
tsandcr
edi
tsandnor
mal
bal
ancesofaccount
s
 Descr
ibet
heuseofat
wo-
col
umnj
our
nal
,at
wo-
col
umnaccountanda
f
our
-col
umnaccount
,andt
hepost
ingoft
ransact
ionst
othel
edger
.
 Pr
epar
eat
rai
lbal
ance
 Under
standt
heuseofat
ri
albal
ancei
nthedi
scov
eryofer
ror
s.
I
ntr
oduct
ion

33
Dearst
udent
s,i
nthepr
evi
ousuni
t,y
ouhav
ebeent
aughtaboutt
hebasi
cst
ruct
ure
ofaccount
ing.Mai
nly
,busi
nesst
ransact
ionswer
eanal
yzedandt
hei
ref
fect
supon
t
heaccount
ingequat
ionwer
edi
scussed.

I
nthi
suni
t,t
het
ermsdebi
tandcr
edi
twi
l
lbedi
scussedandi
l
lust
rat
edal
ongwi
tht
he
f
ormat
s(t
wocol
umnorf
our
-col
umn)ofaccount
sandt
heuseoft
wo-
col
umnj
our
nal
.
As a l
astpr
ocedur
e,t
he equal
i
tyofdebi
ts and cr
edi
ts wi
l
lbe t
est
ed byt
he
pr
epar
ati
onoft
ri
albal
ance.

2.
1.Cl
assi
fi
cat
ionofAccount
s

Whati
sthebasi
sfort
hecl
assi
fi
cat
ionofaccount
sinal
edger
?

Cust
omar
il
y account
s i
n a l
edger ar
e cl
assi
fi
ed accor
ding t
o common
char
act
eri
sti
cs.Bal
ance sheetaccount
s ar
e cl
assi
fi
ed as asset
s,l
i
abi
l
iti
es,or
owner
’sequi
ty.I
ncomest
atementaccount
sar
ecl
assi
fi
edasr
evenueorexpenses.

Asset
s
Anyphy
sicalt
hing(
tangi
ble)orr
ight(
int
angi
ble)t
hathasamonet
aryv
aluei
san
asset
.Asset
sar
ecust
omar
il
ydi
vi
dedi
ntogr
oupsf
orpr
esent
ati
onont
hebal
ance
sheet
.Thet
wogr
oupsusedmostof
tenar
e:
1. Cur
rentasset
s,and
2. Pl
antasset
s

Cur
rentAsset
sar
ecashandot
herr
elat
edasset
sthatmayr
easonabl
yeexpect
edt
o
ber
eal
i
zedi
ncashorusedupusual
l
ywi
thi
noney
earorl
ess,t
hrought
henor
mal
cour
seofbusi
nessar
eknownascur
rentasset
sot
hert
hancash,cur
rentasset
s
ownedbyaser
vicebusi
nessar
enot
esr
ecei
vabl
eandaccount
srecei
vabl
eand
suppl
i
esandot
herpr
epai
dexpenses.

34
 Cash: i
sanymedi
um ofexchanget
hatabankwi
l
lacceptatf
acev
alue.
Amongt
hosei
temsbankdeposi
ts,cur
rency
,checks,bankdr
aft
s,and
moneyor
der
s.Not
esr
ecei
vabl
ear
ecl
aimsagai
nstdebt
orsev
idenced
(
backed)byawr
it
tenpr
omi
set
opayasum ofmoneyatadef
ini
tet
ime
t
otheor
derofspeci
fi
edper
sonorbear
er.
Account
sRecei
vabl
e:ar
eal
socl
aimsagai
nstdebt
ors,butl
essf
ormalt
han
not
es. Account
s r
ecei
vabl
es ar
ise f
rom sal
es of ser
vices or
mer
chandi
seonaccount
.Pr
epai
dexpensesi
ncl
udesuppl
i
esonhand
andadv
ancepay
ment
sofexpensessuchasi
nsur
anceandpr
oper
ty
t
axes.
Pl
antAsset
s:Tangi
bleasset
susedi
nthebusi
nessest
hatar
eofaper
manent
orr
elat
ivel
yfi
xednat
urear
ecal
l
edpl
antasset
sorf
ixedasset
s.Pl
ant
asset
sincl
udeequi
pment
,machi
ner
y,bui
l
dings,andl
andsuchasset
s,
exceptl
andgr
adual
l
ywearoutorot
herwi
sel
oset
hei
rusef
ulnesswi
th
t
hepassageoft
ime.Theyar
esai
dtodepr
eci
ate.

Li
abi
li
ti
es
Li
abi
l
iti
esar
edebt
sowedt
oout
sider
s(cr
edi
tor
s)andar
efr
equent
lydescr
ibedon
t
hebal
ancesheetbyt
it
lest
hati
ncl
udet
hewor
d“pay
abl
e”.Thet
womai
ncat
egor
ies
mostof
tenusedar
e.
1.cur
rentl
i
abi
l
iti
esand
2.Longt
erml
i
abi
l
iti
es

Cur
rentl
iabi
li
ti
es:
-Li
abi
l
iti
est
hatwi
l
lbeduewi
thi
nashor
tti
me(
usual
l
yoney
earor
l
ess)andt
hatar
etobepai
doutofcur
rentasset
s.Themostcommonl
i
abi
l
iti
es
undert
hisgr
oupar
enot
espay
abl
eandaccount
spay
abl
e,t
hesel
i
abi
l
iti
esar
eexact
ly
si
mil
arwi
thr
ecei
vabl
ecount
erpar
tsexceptt
hatt
hedebt
or-
credi
torr
elat
ionshi
pis
r
ever
sed.Ot
hercur
rentl
i
abi
l
ityaccount
scommonl
yfoundi
nthel
edgerar
esal
ari
es
pay
abl
e,i
nter
estpay
abl
e,andt
axespay
abl
e.

35
Long-
Ter
mli
abi
li
ti
es–Li
abi
l
iti
est
hatwi
l
lnotbeduef
oracompar
ati
vel
ylongt
erm
(
usual
l
ymor
ethanoney
ear
)ar
ecal
l
edl
ong-
ter
mli
abi
l
iti
esorf
ixedl
i
abi
l
iti
es.Such
l
i
abi
l
iti
esbecomecur
rentl
i
abi
l
iti
esast
heyduewi
thi
none-
yearr
ange.

Owner
’sEqui
ty
Owner
’sequi
tyi
sther
esi
dualcl
aim agai
nstt
heasset
soft
hebusi
nessaf
tert
otal
l
i
abi
l
iti
esar
ededuct
ed.Foracor
por
atet
ypeofbusi
nessowner
’sequi
tyi
sfr
equent
ly
cal
l
edst
ockhol
der
s’equi
ty,
shar
ehol
der
sequi
ty,
orst
ockhol
der
sinv
est
ment
.

Capi
tal
,Capi
taSt
ock,andRet
ainedEar
nings–Capi
tal
ist
heowner
’sequi
tyi
nasol
e
pr
opr
iet
orshi
p(andpar
tner
shi
p).Theowner
’sequi
tymayal
sobedescr
ibedasnet
wor
th. For a cor
por
ati
on,capi
talst
ock r
epr
esent
sthe i
nvest
ment of t
he
st
ockhol
der
s’and r
etai
ned ear
nings r
epr
esentt
he neti
ncome r
etai
ned i
nthe
busi
ness.

Dr
awi
ngsandDi
vi
dends-Dr
awi
ngsr
epr
esentt
heamountofwi
thdr
awal
smadeby
t
heownerofasol
epr
opr
iet
orshi
p(andpar
tner
shi
p).Forcor
por
ati
on,di
vi
dends
r
epr
esentt
hedi
str
ibut
ionofear
ningst
ost
ockhol
der
s.

Rev
enues
Revenues ar
ethegr
ossi
ncr
easesi
nowner
’sequi
tyasar
esul
toft
hesal
eof
mer
chandi
se,t
heper
for
manceofser
vicesf
oracust
omeroracl
i
ent
,ther
ent
alof
pr
oper
ty,t
he l
endi
ng ofmoney
,and ot
herbusi
nessand pr
ofessi
onalact
ivi
ti
es
ent
eredi
ntof
ort
hepur
poseofear
ningi
ncome.Rev
enuef
rom sal
esofmer
chandi
se
i
sknown assal
es,ot
hert
han sal
esr
evenuesar
eter
med aspr
ofessi
onalf
ee,
commi
ssi
ons'
rev
enue,
far
esear
ned,
andi
nter
esti
ncome.

Expenses
Cost
sthathav
ebeenconsumedi
nthepr
ocessofpr
oduci
ngr
evenuear
eexpi
red

36
cost
sorexpenses.Thenumberofexpensecat
egor
iesand i
ndi
vi
dualexpense
account
smai
ntai
nedi
nthel
edgerv
ari
eswi
tht
henat
ureandsi
zeofanent
erpr
ise.

2.
2.Char
tofAccount
s

Whati
sachar
tofaccount
s?Gi
vey
ouranswerbef
orey
our
ead t
hef
oll
owi
ng
par
agr
aphs?

Thenumberofaccount
smai
ntai
nedbyaspeci
fi
cent
erpr
isei
saf
fect
edbyt
he
nat
ureofi
tsoper
ati
ons,i
tsv
olumeofbusi
ness,andt
heext
entt
owhi
chdet
ail
sar
e
neededf
ort
axi
ngaut
hor
it
ies,
manager
ial
deci
sions,
credi
tpur
poses,
etc.

Al
i
sti
ngoft
heaccount
sinal
edgeri
scal
l
edachar
tofaccount
s.Asf
araspossi
ble,
t
heor
deroft
heaccount
sint
hechar
tofaccount
sshoul
dagr
eewi
tht
heor
deroft
he
i
temsi
nthebal
ancesheetandt
hei
ncomest
atement
.Theaccount
sar
enumber
ed
t
oper
miti
ndexi
ngandal
sof
oruseasr
efer
ences.

Thoughaccount
sint
hel
edgermaybenumber
edconsecut
ivel
yasapageofabook,
af
lexi
blesy
stem ofi
ndexi
ngi
spr
efer
abl
e.Thef
oll
owi
ngchar
tofaccount
sisf
ora
smal
lser
vicebusi
ness,Al
em Dr
ycl
eaner
,eachaccountnumberhast
wodi
git
s.The
f
ir
stdi
giti
ndi
cat
est
hemaj
ordi
vi
sionoft
hel
edgeri
nwhi
cht
heaccounti
spl
aced.
Account
sbegi
nni
ngwi
th1r
epr
esentasset
s;2,l
i
abi
l
iti
es;3owner
’sequi
ty(
owner
’s
capi
talanddr
awi
ng)
;4,r
evenue;and5expenses.Theseconddi
giti
ndi
cat
est
he
posi
ti
onoft
heaccountwi
thi
nit
sdi
vi
sion.I
nsuchnumber
ingsy
stem t
her
eisan

37
adv
ant
ageofl
ateri
nser
ti
onofnew account
sint
hei
rpr
opersequencewi
thout
di
stur
bingt
heot
heraccountnumber
s.Foral
argeent
erpr
isewi
thanumberof
depar
tment
sorbr
anches,i
tisusualf
oreachaccountnumbert
ohav
efourormor
e
di
git
s.

Bal
anceSheetAccount
s I
ncomeSt
atementAccount
s
1.Asset
s 4.Rev
enue
11Cash 41Sal
es
12Account
sRecei
vabl
e 5.Expense
14.Suppl
i
es 51Suppl
i
esexpense
14Pr
epai
dRent 52Sal
aryexpense
15Dr
yCl
eani
ngEqui
pment 53Rentexpense
18Accumul
atedDepr
eci
ati
on 54Depr
eci
ati
onexpense
2.Li
abi
li
ti
es 59Mi
scel
l
aneousexpense
21Account
spay
abl
e
22Sal
ari
espay
abl
e
3.Owner
’sEqui
ty
31Al
em,
capi
tal
32Al
em,
Drawi
ng
33I
ncomeSummar
y

Thei
nit
ialpr
epar
ati
onoft
hel
edgerbasedont
hechar
tofaccount
sisof
tenr
efer
red
oasopeni
t ngt
hel
edger
.

38
Checky
ourpr
ogr
ess:Exer
cise2-
1
1.Onwhatbasi
saccount
sinal
edgercl
assi
fi
ed?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
2.Whati
smeantbychar
tofaccount
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
Nat
ureofanAccount

Doy
out
hinkt
hatusi
ngaTaccounti
saf
ormalaccount
ingpr
ocedur
e?Pr
ovi
dey
our
ownopi
nion.

Thesi
mpl
esf
orm ofanaccounthast
hreepar
ts(
1)at
it
lewhi
chi
sthenameoft
he
i
tem r
ecor
dedi
ntheaccount
,(2)aspacef
orr
ecor
dingi
ncr
easesi
ntheamountof
t
hei
tem,i
nter
msofmoney
;and(
3)aspacef
orr
ecor
dingdecr
easesi
ntheamount
f
orm oft
hei
tem,
alsoi
nmonet
aryt
erms.Thi
sfr
om ofanaccount
,il
l
ust
rat
edbel
ow,
i
sknownasaTaccountbecauseofi
tssi
mil
ari
tyt
othel
ett
erT.

TheTaccounti
sast
andar
dshor
thandi
naccount
ingt
hathel
psmakecl
eart
he
ef
fect
soft
ransact
ionsoni
ndi
vi
dual
account
s.

Ti
tl
e
Lef
tsi
de Ri
ghtSi
de
Debi
t Cr
edi
t

39
Thet
ermsdebi
tandcr
edi
tmeanl
eftandr
ightsi
desr
espect
ivel
y.Thel
eftsi
deofan
accounti
scal
l
edt
hedebi
tsi
deandt
her
ightsi
deofanaccounti
scal
l
edt
hecr
edi
t
si
de.Thewor
dchar
gei
ssomet
imesi
susedi
nsi
mil
arf
ashi
onf
ort
het
erm debi
t.
Amount
sent
eredont
hel
eftsi
deofanaccount
,regar
dlessoft
heaccountt
it
le,ar
e
cal
l
eddebi
tsorchar
gest
otheaccount
,andt
heaccounti
ssai
dtobedebi
tedor
char
ged.Amount
sent
eredont
her
ightsi
deofanaccountar
ecal
l
edcr
edi
tsandt
he
accounti
ssai
dtobecr
edi
ted.

Thei
l
lust
rat
iont
hatf
oll
ows,
recei
ptsofcashdur
ingaper
iodoft
imehasbeenl
i
sted
v
ert
ical
l
yont
hedebi
tsi
deoft
hecashaccount
.Thecashpay
ment
sfort
hesame
per
iodhav
ebeenl
i
stedi
nsi
mil
arf
ashi
onont
hecr
edi
tsi
deoft
heaccount
.A
memor
andum t
otaloft
hecashr
ecei
ptsf
ort
heper
iodt
odat
e,Bi
rr20,
500maybe
i
nser
tedbel
owt
hel
astdebi
tatanyt
imewhenev
ert
hei
nfor
mat
ioni
sdesi
red.The
f
igur
esshoul
dbesmal
landwr
it
teni
npenci
linor
dert
oav
oidanymi
stakeswhi
l
e
addi
ti
onalamounti
sdebi
ted.Suchapr
ocedur
eref
ereedt
oasPenci
lfoot
ing.The
t
otaloft
hecashpay
ment
s,bi
rr16,
800maybei
nser
tedont
hecr
edi
tsi
dei
nasi
mil
ar
f
ashi
on.Deduct
ionoft
hesmal
l
ersum f
rom t
hel
arger
,Bi
rr20,
500-Bi
rr16,
400,
pr
oducescashonhadamount
,whi
chi
scal
l
edt
hebal
anceoft
heaccount
.Thecash
account
,aspert
hisi
l
lust
rat
ioni
sBi
rr3,700.Thi
samountmaybei
nser
tedi
npenci
l
f
igur
esnextt
othel
argerpenci
lfoot
ing,whi
chi
dent
if
iesi
tasadebi
tbal
ance.The
debi
tbal
anceofBi
rr3,
700woul
dhav
ebeent
akeni
fbal
ancesheetwer
epr
epar
ed.
Cash
7,
200 2,
000
8,
800 6,
450
4,
500 1,
900
3,
700 3,
500
20,
500 2,
950
16,
800

Bal
anceSheetAccount
s

40
Thef
oll
owi
ngt
woi
l
lust
rat
ionsar
epr
esent
edt
hemannerofr
ecor
dingdat
aint
he
account
sandt
hei
rrel
ati
onshi
pst
othebal
ancesheet
.Assumet
hatBi
ft
uA/
Mecha
est
abl
i
shesabusi
nessv
ent
ure,t
obeknownasBi
ft
uEqui
pmentRepai
r,bymaki
ng
ani
nit
ialdeposi
tofBi
rr30,
800Cashi
nabankaccount
edf
ort
heuseoft
hebusi
ness
ent
erpr
ise.Soonaf
tert
hedeposi
t,t
hebal
ancesheetf
ort
hebusi
ness,i
naccount
f
orm woul
dconsi
stoft
hef
oll
owi
ngdat
a.

Bal
anceSheetAccount
s
Asset
s Owner
’sEqui
ty
Cash.
..
..
..
..
..
..
..
.Br30,
800 Bi
ft
uA/
Mecha,Capi
tal
..
..
..
. Bi
rr
30,
800

Eachbusi
nesst
ransact
ionsaf
fect
sami
nimum oft
woaccount
sinabal
ancesheet
.
Theef
fectofsuchat
ransact
iononaccount
sint
hel
edgercanbei
l
lust
rat
edasaBi
rr
30,
800 debi
tto cash and a Bi
rr30,
800 cr
edi
tto Bi
ft
u A/
Mecha,Capi
tal
.Thi
s
i
nfor
mat
ion,att
hebegi
nni
ng,i
sent
eredi
nrecor
dcal
l
edaJour
nal
.Jour
nali
sthe
f
ir
stbookofor
igi
nalent
ry.I
naj
our
nal
,thei
nfor
mat
ioni
sst
atedi
nfor
mal
i
zed
mannerbyl
i
sti
ngt
het
it
reoft
heaccountandt
heamountt
obedebi
tedandf
oll
owed
byt
heamountt
obecr
edi
ted.I
ndoi
ngt
his,t
hepr
ocessofr
ecor
dingt
ransact
ionsi
n
aJour
nal
issai
dtobej
our
nal
i
zing.Thef
orm ofpr
esent
ati
oni
scal
l
edaj
our
nal
ent
ry.
Thi
scanbei
l
lust
rat
edasf
oll
ows:

Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 30,
800
Bi
ft
uA/
Mecha,
Capi
tal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 30,
800

Oncet
hedat
afi
rsti
srecor
dedi
naj
our
nal
,thent
hei
nfor
mat
ioni
str
ansf
err
edt
othe
appr
opr
iat
eaccount
sbyapr
ocessknownaspast
ing.Thef
oll
owi
ngsar
eaccount
s
af
tert
hecompl
eti
onoft
hepast
ingpr
ocess.

41
 Cash Bi
ft
uA/
Mecha,
capi
tal
30,
800 30,
800

Consi
dert
hatt
heamountoft
heasset
,whi
chi
srepor
tedont
hel
eftsi
deoft
he
accountf
orm oft
hebal
ancesheet
,ispost
edt
othel
eft(
debi
t)si
deofcash.The
owner
’sequi
tyi
nthebusi
ness,whi
chi
srepor
tedont
her
ightsi
deoft
hebal
ance
sheeti
spost
edt
other
ight(
credi
t)si
deofBi
ft
u,A/
Mecha,
capi
tal
.

Fol
l
owi
ngt
hef
ir
sti
l
lust
rat
ion,assumet
hatBi
ft
upur
chasedacostofBi
rr28,
000.
Bi
ft
upai
dBi
rr8,
000i
ncashbywr
it
ingacheckont
hebankaccount
,andagr
eedt
o
payt
her
emai
ningBi
rr20,
000wi
thi
n30day
saf
tert
hedat
eoft
hei
nvoi
ce.Upont
he
compl
eti
onoft
hist
ransact
ion,t
hedat
arepor
tedi
nthebal
ancesheetwoul
dbeas
f
oll
ows:

Bal
anceSheetAccount
s
Asset
s Li
abi
li
ti
es
Cash.
..
..
..
..
..
..
..
..
..
..
..Bi
rr22,
800 Account
spay
abl
e..
..
..
..
..
..
Bir
r20,
000
Equi
pment 28,
000 Bi
ft
uA/
Mecha,
capi
tal 30,
800
Tot
alAsset
s..
..
..
..
..
..
.Bi
rr50,
800 Tot
all
iab.Owner
sequi
tyBi
rr50,
800

Theef
fectoft
het
ransact
ioni
sdescr
ibedasabi
rr28,
000(
incr
ease)t
oEqui
pment
,
anamountofBi
rr8,
000cr
edi
t(decr
ease)t
ocash,
andaBi
rr20,
000cr
edi
t(i
ncr
ease)
t
oAccount
spay
abl
e.(
Anent
rycomposedoft
woormor
edebi
tsoroft
woormor
e
cr
edi
tsi
scal
l
edacompoundj
our
nal
ent
ry.
)

Equi
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 28,
000
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 8,
000
Account
spay
abl
e..
..
..
..
..
..
..
..
..
.. 20,
000

42
Af
tert
hecompl
eti
onoft
hepost
ingofsecondt
ransact
ion,t
heaccount
sofBi
ft
u
Equi
pmentRepai
rappearasf
oll
ows:
Cash Account
spay
abl
e

30,
800 8,
000 20,
000

Equi
pment Bi
ft
uA/
Mecha,
Capi
tal

28,
000 30,
800

Consi
dert
hatt
heef
fectoft
het
ransact
ionwast
oincr
easeoneassetaccount
,
decr
ease anot
heraccount
,and i
ncr
ease a l
i
abi
l
ityaccount
.Consi
deral
so t
hat
al
thought
heamount
s,Bi
rr28,
000Bi
rr8,
000,andBi
rr20,
000ar
edi
ff
erent
,the
equal
i
tyofdebi
tsandcr
edi
tsar
ekept
.Forev
erybusi
nesst
ransact
ion,t
hesum of
t
hedebi
tsi
sal
way
sequalt
othesum oft
hecr
edi
ts.I
nabasi
caccount
ingequat
ion,
A = L + OE t
he equal
i
tyofdebi
tand cr
edi
tforeach t
ransact
ion ar
e al
way
s
mai
ntai
ned.Becauseofi
tsdual
i
tysuchasy
stem i
sknownasdoubl
e-ent
ryaccount
.

Aspert
hegener
alr
ulesofdebi
tandcr
edi
t,t
hedebi
tisal
efthandsi
de,wher
eas,a
cr
edi
tist
her
ightsi
deofal
laccount
swhet
herasset
,li
abi
l
ity
,orowner
sequi
ty,
Hence,adebi
tmaybeei
therani
ncr
easeoradecr
ease,dependi
ngont
henat
ureof
account
saf
fect
ed.Si
mil
arl
y,acr
edi
tmaybeei
therani
ncr
easeoradecr
ease,
dependi
ngont
henat
ureoft
heaccount
.Thegener
alusesofdebi
tandcr
edi
tmay
,
t
hus,
best
atedasf
oll
ows.

Debi
tmaysi
gni
fy Cr
edi
tmaysi
gni
fy
I
ncr
easei
nassetaccount
s Decr
easei
nassetaccount
s
Decr
easei
nli
abi
l
ityaccount
s I
ncr
easei
nli
abi
l
ityaccount
s
Decr
easei
nowner
’sequi
tyaccount
s I
ncr
easei
nowner
'sequi
tyaccount
s

43
I
tisacommonpr
act
icet
hat
,insol
epr
opr
iet
orshi
pbusi
nessent
erpr
ise,t
heowner
maywi
thdr
awcashf
rom t
hebusi
nessf
orper
sonaluse.Suchwi
thdr
awal
shav
ethe
ef
fectofdecr
easi
ngowner
’sequi
tyasdebi
tsandi
ncr
easi
ngt
hewi
thdr
awal
sbyt
he
sameamountasdebi
ts.Wi
thdr
awal
sar
edebi
tedt
oanaccounti
nthenameoft
he
ownerf
oll
owed byt
erm dr
awi
ng.The bal
ance oft
his accounti
s per
iodi
cal
l
y
t
ransf
err
edt
otheowner
’scapi
talaccount
.Hence,debi
tst
othedr
awi
ngaccount
maybet
houghtofasei
therdecr
easi
ngowner
’sequi
tyori
ncr
easi
ngdr
awi
ngs.
I
nacor
por
atef
orm ofbusi
nessent
erpr
ise,t
hedi
vi
dendsaccounti
scompar
abl
eto
t
he dr
awi
ng accountofa sol
e pr
opr
iet
orshi
p.Di
str
ibut
ions ofear
nings t
othe
st
ockhol
der
s ar
e debi
ted t
o Di
vi
dends,whi
ch i
s per
iodi
cal
l
ytr
ansf
err
ed t
othe
r
etai
ned ear
nings accountDebi
tst
othe di
vi
dends accounthav
ethe ef
fectof
decr
easi
ngowner
’sequi
tyori
ncr
easi
ngdi
vi
dends.

I
ncomeSt
atementAccount
s

Thepr
inci
pleofdebi
tandcr
edi
tini
tsappl
i
cat
iont
orev
enueandexpenseaccount
s
i
sbasedont
her
elat
ionshi
poft
heseaccount
stoowner
’sequi
ty.

Rev
enuei
ncr
easesowner
’sequi
ty.Thesamet
oasi
ncr
easesi
nowner
’sequi
tyar
e
r
ecor
dedascr
edi
ts;
incr
easesi
nrev
enuesdur
inganaccount
ingper
iodar
erecor
ded
ascr
edi
ts.

Expenseshav
etheef
fectofdecr
easi
ngowner
’sequi
ty,si
mil
arl
y,j
ustasdecr
eases
i
n owner
's equi
tyar
erecor
ded as debi
ts;i
ncr
eases i
n expense account
s ar
e
r
ecor
dedasdebi
ts.

44
Ther
ulesofdebi
tandcr
edi
tasappl
i
edt
orev
enueandexpenseaccount
sar
eshown
i
nthef
oll
owi
ngdi
agr
am.
I
ncomeSt
atement
sAccount
s
Debi
tfordecr
ease Cr
edi
tfori
ncr
ease
I
nowner
’sequi
ty i
nowner
’sequi
ty
ExpenseAccount
s Rev
enueAccount
s
Debi
t Cr
edi
t Debi
t Cr
edi
t
For f
or f
or f
or
I
ncr
eases Decr
eases Decr
ease i
ncr
eases

Att
hecl
oseoft
heaccount
ingper
iod,
allr
evenueandexpenseaccountbal
ancesar
e
t
ransf
err
edt
oasummar
izi
ngaccountandt
heaccount
sar
ethensai
dtobecl
osed.
Thebal
ance,whi
ch i
s,ei
thera neti
ncomeornetl
ossf
ort
heper
iod i
sthen
t
ransf
err
edt
otheowner
’scapi
talaccount(
tot
her
etai
nedear
ningsaccountf
ora
cor
por
ati
on)andt
hesummar
izi
ngaccount
sisal
socl
osed.Becauser
evenueand
expenseaccount
sar
eper
iodi
cal
l
ycl
osed,t
heyar
esomet
imescal
l
edt
empor
ary
account
sornomi
nalaccount
s.Al
lthoseaccount
sbal
anceswhi
char
erepor
tedi
n
bal
ancesheetar
ecar
ri
edf
orwar
dfr
om y
eart
oyearsomet
imesr
efer
redasar
eal
account
s.
Nor
malBal
ancesofAccount
s

Thesum oft
hei
ncr
easesr
ecor
dedi
nanaccounti
susual
l
yequalt
oorgr
eat
ert
han
t
hesum oft
hedecr
easesr
ecor
dedi
ntheaccount
.Duet
othi
sreason,t
henor
mal
bal
ancesofal
laccount
sar
eposi
ti
ver
athert
hannegat
ive.

Thegener
alr
ulesofdebi
tandcr
edi
tandt
henor
malbal
ancesoft
hedi
ff
erentt
ypes
ofaccount
sar
esummar
izedasf
oll
ows.

45
 I
ncr
ease Decr
ease Nor
mal
Bal
ance
Bal
anceSheetAccount
s:
Asset
s Debi
t Cr
edi
t Debi
t
Li
abi
l
iti
es Cr
edi
t Debi
t Cr
edi
t
Owner
’sEqui
tyorSt
ockhol
der
s
Equi
ty:
Capi
tal Capi
tal
Stock Cr
edi
t Debi
t Cr
edi
t
Ret
ainedEar
nings Cr
edi
t Debi
t Cr
edi
t
Dr
awi
ng/
Div
idends Debi
t Cr
edi
t Debi
t
I
ncomeSt
atementAccount
s:
Rev
enue Cr
edi
t Debi
t Cr
edi
t
Expanse Debi
t Cr
edi
t Debi
t

CheckYourPr
ogr
ess:Exer
cise2.
2
1. Thet
erm debi
tandcr
edi
tmeani
ncr
easeanddecr
ease,
respect
ivel
y.Doy
ou
agr
ee?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2. Di
ff
erent
iat
ebet
weenanaccountandal
edger
.

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2.
4.Jour
nal
andAccount
s

46
Thef
lowofaccount
ingdat
afr
om t
het
imeat
ransact
ionsoccur
stoi
tsr
ecor
dingi
n
t
hel
edgermaybedepi
ctedasf
oll
ows.

Busi
ness Busi
ness Ent
ryr
ecor
ded Ent
rypost
ed
TRANSACTI
ON DOCUMENT I
NJOURNAL TOLEDGER
Occur
s Pr
epar
ed

Thef
ir
str
ecor
dsofeacht
ransact
ion,
isev
idencedbyabusi
nessdocument
,suchas
asal
est
icket
,abi
l
l,oracashr
egi
stert
apeBasedont
heev
idencepr
ovi
dedby
r
espect
ivebusi
nessdocument
s,ev
eryt
ransact
ioni
sent
eredi
nchr
onol
ogi
calor
der
(
dat
e-wi
se)i
naj
our
nal
.Theamount
soft
hedebi
tsandcr
edi
tsi
nthej
our
nalar
ethen
t
ransf
err
edorpost
edt
otheaccount
sinal
edger
.

Two-
col
umnJour
nal

Whati
saj
our
nal
?Howi
sbusi
nesst
ransact
ionsr
ecor
dedi
naj
our
nal
?

Dependi
ngont
het
ypesandv
olumeofbusi
nesst
ransact
ions,
abusi
nessmayusea
si
ngl
eal
l
-pur
poset
wo-
col
umn j
our
nal
,ori
tmayuseanumberofmul
ti
col
umn
j
our
nal
s,l
i
mit
ingeacht
osi
ngl
ety
pesoft
ransact
ion.

Bef
oreat
ransact
ioni
sent
eredi
nthet
wo-
col
umnj
our
nal
,itshoul
dbeanal
yzed
accor
dingt
othef
oll
owi
ngsequenceofst
eps:
1.Det
ermi
newhet
heranasset
,al
i
abi
l
ity
,owner
’sequi
ty,r
evenue,orex
pense
i
s af
fect
ed
2. Det
ermi
newhet
hert
heaf
fect
edasset
,li
abi
l
ity
,owner
’sequi
ty,r
evenueor
expensei
ncr
easesordecr
eases.
3.Det
ermi
newhet
hert
heef
fectoft
het
ransact
ionshoul
dber
ecor
dedasa

47
 debi
torasacr
edi
tinanasset
,li
abi
l
ity
,owner
’sequi
ty,r
evenueorex
pense
account
.

The f
oll
owi
ng i
sthe i
l
lust
rat
ion t
hatexpl
ains t
he anal
ysi
s and r
ecor
ding ofa
t
ransact
ioni
ntoat
wo-
col
umnj
our
nal
.

Assumet
hatBi
rr3,
450.
50i
srecei
vedf
rom cashsal
esf
orHi
dar1,t
heassetcash
i
ncr
easesandt
her
efor
eshoul
dbedebi
tedf
orBi
rr3,
450.
50.Ther
evenueaccount
sal
esal
soi
ncr
easesandt
her
efor
ebecr
edi
tedf
orBi
rr3,
450.
50.Thet
wo-
col
umn
j
our
nal
inwhi
cht
het
ransact
ionhasbeenr
ecor
dedwoul
dbepr
esent
edasf
oll
ows.

Jour
nal Page15
Post
Dat
e Descr
ipt
ion Ref
. Debi
t Cr
edi
t
2000 Cash 3,
450 50
Hi
dar 1 Sal
es 3,
450 50

Thepr
ocessofr
ecor
dingat
ransact
ioni
nat
wo-
col
umnj
our
nali
ssummar
izedas
f
oll
ows:
1.Recor
dthedat
e:I
nser
tthey
ear
,themont
handt
heday
2.Recor
dthedebi
tbasedont
hegi
veni
l
lust
rat
ion.
3.Recor
dthecr
edi
tbasedont
hegi
veni
l
lust
rat
ion.
4.Wr
it
etheappr
opr
iat
eexpi
ati
onf
oreacht
ransact
ionwhi
chi
sthel
astst
ep
i
nthepr
ocessofj
our
nal
i
zing.

Two-Col
umnAccount
sandFour
-Col
umnAccount
s

Thesi
mpl
eTf
orm ofaccount
sisusedpr
imar
il
yfori
l
lust
rat
ionpur
poses.Addi
ti
onal

48
r
uli
ngst
otheTf
orm cr
eat
ethest
andar
dtwo-
col
umnf
orm asf
oll
ows:

Account Cash AccountNo11

I
tem Post Post
Dat
e Ref Debi
t Dat
e I
tem Ref Cr
edi
t
2000 2000
Hi
der 1 Bal
ance 15490 00 Hi
der 1 15 900 00
1 15 3450 50 1 15 2091 00
5 15 2015 30 5 15 790 00
5 15 3400 50
13,
774.
80 20955 80 7181 50

Account Cash AccountNo11

Post Bal
ance
Dat
e I
tem Ref Debt Cr
edi
t Debi
t Cr
edi
t
2000 15490 00
Hi
dar 1 Bal
ance
1 15 3450 50
1 15 900 00
1 15 2091 00
5 15 2015 30
5 15 790 00
5 15 3400 50 13,
774 80

Amongt
hesi
gni
fi
cantadv
ant
agesoft
hef
our
-col
umnaccountf
orm ar
ethef
oll
owi
ng:
 Onl
yasi
ngl
edat
ecol
umn i
srequi
red,wi
th each debi
tand cr
edi
t

49
 appear
ingi
nit
schr
onol
ogi
cal
order
 The debi
torcr
edi
tnat
ure ofan accountbal
ance i
s mor
e easi
l
y
det
ermi
nedandnot
iceabl
eint
heaccount
.
 Justbei
ngadj
acent
,thedebi
tandcr
edi
tcol
umns,makesi
teasi
ert
o
exami
net
hedat
ainanaccount
.

Post
ing

Whypost
ingi
srequi
red?

Thepr
ocedur
eoft
ransf
err
ingj
our
nal
ent
ri
est
othel
edgeraccount
siscal
l
edpost
ing.
Whenpost
ingi
sdonemanual
l
y,al
lthedebi
tsmaybepost
edf
ir
st,f
oll
owedbyt
he
cr
edi
ts.Thepost
ingofadebi
tjour
nalent
ryoracr
edi
tjour
nalent
ryt
oanaccounti
n
t
hel
edgeri
sdonei
nthef
oll
owi
ngmanner
:

1.Recor
dthedat
eandt
heamountoft
heent
ryi
ntheaccount
.
2.I
nser
tthenumberoft
hej
our
nal
pagei
nthepost
ingr
efer
encecol
umn
oft
heaccount
.
3.I
nser
tthel
edgeraccountnumberi
npost
ingr
efer
encecol
umnoft
he
j
our
nal
.
Thef
oll
owi
ngsar
ethest
epsi
nvol
vedi
nthepr
ocedur
esofpost
ingt
othecash
account
.Thesamesequenceofpr
ocedur
esi
sinv
olv
edi
ntheposi
ti
ngof
cr
edi
tent
ry.
Jour
nal Page15
Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
2000
Hi
dar 1 Cash 11 3450 50
Sal
es 3450 50

50
 Cashsal
esf
ort
heday
AccountCash AccountNo.11
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000
Hi
dar 1 Bal
ance 15490 00
1 15 3450 50 18940 50

2.
5Il
lust
rat
ionofJour
nal
izi
ngandPost
ing

Haml
e1.Al
em Tayeoper
atedaDr
ycl
eani
ngbusi
nessathomeandnowshedeci
ded
t
ogof
orr
ent
edquar
ter
sasofTi
r1andt
owor
kful
lti
met
oherownbusi
nesswhi
ch
i
sknown as“Al
em Dr
yCl
eaner
.“t
he f
oll
owi
ng asset
swer
einvest
ed i
nthe
ent
erpr
ise:CashBi
rr11,
000account
srecei
vabl
e,bi
rr17,
100,suppl
i
esBi
rr4,
400and
Dr
yCl
eani
ngi
nEqui
pmentbi
rr47,
000.Ther
ewer
enol
i
abi
l
iti
est
ransf
err
edi
nthe
busi
ness

Anal
ysi
s.Al
lthef
ourasset
sar
eincr
easedanddebi
tedr
espect
ivel
y.
Theowner
sequi
tyi
ntheseasset
sisequalt
othesum oft
heasset
s,orbi
rr79,
500;
henceAl
em Tay
e,Capi
tal
iscr
edi
tedf
ort
heamount
.

Jour
nal Page1
Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
2000
Haml
e 1 Cash 11 11000 00
Account
sRecei
vabl
e 12 17100 00
Suppl
i
es 14 4400 00

51
 Dr
ycl
eani
ngEqui
pment 18 47000 00
Al
em Tey
e,Capi
tal 31 79500 00

Hami
l
e1.Pai
dBi
rr5,
400onar
entcont
ractr
epr
esentt
hreemont
hsr
entoft
he
quar
ter
sfort
hebusi
ness

Anal
ysi
s:-Theassetacqui
redi
nexchangef
ort
hecashpay
menti
stheuseoft
he
pr
oper
tyf
ort
hreemont
hs.Hence,
theassetpr
epai
drenti
ncr
easesandi
sdebi
tedf
or
Bi
rr5,
400.Cust
omar
il
ywhenar
entf
orapar
ti
cul
armont
hispr
epai
datt
hebegi
nni
ng
ofmont
hiti
sdebi
tedt
other
entexpenseaccountatt
het
imeofpay
mentsoast
o
av
oidt
he necessi
tyoft
ransf
err
ing t
he amountf
rom Pr
epai
d Expense t
o Rent
Expenseatt
heendoft
hemont
h.

2000
Haml
e 1 Pr
epai
drent 15 5400 00
Cash 11 540000

Haml
e3.Pur
chasedaddi
ti
onalDr
ycl
eani
ngEqui
pmentonaccountf
rom Nat
ional
Equi
pmentCo.f
orBi
rr9,
000

3 Dr
ay-
cleani
ng
Equi
pment 18 9000 00
Account
spay
abl
e 21 9000 00

Haml
e4.Recei
vedBi
rr7,
100f
rom cust
omer
sinpaymentoft
hei
raccount
s
Anal
ysi
s:t
heassetcashi
ncr
easesandi
sdebi
tedf
orBi
rr7,
100;t
heassetaccount
s
r
ecei
vabl
edecr
easeandi
scr
edi
tedf
orBi
rr7,
100.

4 Cash 11 7100 00

52
 Account
srecei
vabl
e 12 7100 00

Haml
e5.Pai
dBi
rr1,
500f
orat
elevi
sionadver
ti
sement
Anal
ysi
s Expense account
s ar
e subdi
vi
sions ofowner
’s equi
ty.I
ncr
eases i
n
expenseanddecr
easesi
nowner
’sequi
ty;t
hus,anexpenseaccounti
sdebi
tedf
or
Bi
rr1,
500.The assetcash wasdecr
eased byt
he t
ransact
ion;t
her
efor
ethat
accounti
scr
edi
tedf
orBi
rr1,
500.(
Insuchasi
tuat
ion,usual
l
yMi
scel
l
aneous
Expense accounti
s used because t
otalexpendi
tur
eforadv
ert
isementar
e
expect
edt
ober
elat
ivel
ymi
nor
).

5 Mi
scel
l
aneousExpense 59 1500 00
Cash 11 1500 00

Haml
e9.Pai
dbi
rr4,
000t
oNat
ionalDr
yCl
eani
ngcompanyt
oappl
yont
heBi
rr9000
debtowedt
othem
Anal
ysi
s:t
hepay
mentoft
hel
i
abi
l
itydecr
easesAccount
spay
abl
e,t
her
efor
ethe
accounti
sdebi
tedf
orBi
rr4,
000.I
tal
sodecr
easest
heassetcash,
whi
chi
scr
edi
ted
f
orBi
rr4,
000.

9 Account
spay
abl
e 21 4,
000 00
Cash 11 4000 00

Haml
e16.Recei
vedBi
rr5,
845f
rom sal
esf
ort
hef
ir
sthal
fofHaml
e.
Anal
ysi
s:Cashi
ncr
easesandi
sdebi
tedf
orBi
rr5845.Ther
evenueaccountsal
es,

53
whi
chi
sasubdi
vi
si
onofowner
’sequi
ty,
incr
easesandi
scr
edi
tedf
orBi
rr5,
845.

16 Cash 11 5845 00
Sal
es 41 5845 00

Haml
e19.Pai
dBi
rr2,
900f
orsuppl
i
es

19 Sal
aryexpense 14 2900 00
Cash 11 2900 00

Haml
e26.Pai
dBi
rr470at
woweekssal
aryf
ort
her
ecept
ioni
st.
Anal
ysi
s:Si
mil
art
otr
ansact
ionofHaml
e13.

26 Sal
aryexpense 52 470 00
Cash 11 470 00

Haml
e30.Pai
dBi
rr367f
orel
ect
ri
c,t
elephone,
andwat
erbi
l
lsf
oramont
h.
Anal
ysi
s:si
mil
art
otr
ansact
ionofHaml
e5.

30 Mi
scel
l
aneousExpense 59 367 00
Cash 11 367 00

Haml
e30.Recei
vedBi
rr5,
735f
rom sal
esf
ort
hesecondhal
fofHaml
e
Anal
ysi
s:si
mil
art
otr
ansact
ionofHaml
e5.
Jour
nal Page2

54
 Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
2000
Haml
e 30 Cash 11 5735 00
Sal
es 41 5735 0
0

Haml
e30.Sal
esonaccountt
otal
edBi
rr3925.
Anal
ysi
s:t
heassetAccount
sRecei
vabl
eincr
easesandi
sdebi
tedf
orBi
rr3,
925.t
he
r
evenueaccountsal
esi
ncr
easesandi
scr
edi
tedf
orBi
rr3,
925.(
Whencust
omer
spay
t
hei
raccount
s,Cashwi
l
lbedebi
tedandaccount
srecei
vabl
ewi
l
lbecr
edi
ted)

30 Account
s 12 3925 00
r
ecei
vabl
e
Sal
es 41 3925 00

Haml
e30.Al
em wi
thdr
ewBi
rr2,
500f
orherper
sonaluse.
Anal
ysi
s:-t
hewi
thdr
awal
sofcashr
esul
tedi
nadecr
easei
ntheowner
’si
nvest
ed
capi
talandar
erecor
dedbyabi
rr2,
500debi
ttoAl
em Tay
e,Dr
awi
ng;
thedecr
easei
n
cashi
srecor
dedbyaBi
rr2,
500cr
edi
ttocash.

30 Al
em Tay
e,Dr
awi
ng 32 2500 00
Cash 11 2500 00

Af
tert
hecompl
eti
onoft
hepost
ingsofal
ltheent
ri
esf
ort
hemont
h,t
hel
edgerwi
l
l
appearasshownbel
ow.Theaccount
sar
enumber
edaccor
dingt
othechar
tof
account
s.

Rev
iewExer
cises

55
Exer
cise2.
1
(
a)Whati
sthebookt
hati
susedt
orecor
dtr
ansact
ions?
(
b)Whatar
eusedasev
idencewhenr
ecor
dingbusi
nesst
ransact
ions?
(
c)Whati
sanaccount
?
(
d)Whati
sthemeani
ngofdebi
tandcr
edi
tinr
ecor
dingandpost
ingt
ransact
ions?

Exer
cise2.
2
Thef
oll
owi
ngt
ransact
ionsoccurdur
ingNov
ember2008f
orLul
i
tTr
adi
ngCompany
.
Nov
ember15.TheownerW/
roLul
i
tinv
est
edBi
rr30,
000i
nabankchecki
ng
accounti
nthenameoft
hebusi
ness.
17.Pai
dBi
rr8,
500f
ort
heacqui
sit
ionofof
fi
ceequi
pment
s
18.pur
chasedof
fi
cesuppl
i
esamount
ingt
oBi
rr1,
000onaccount
.
20.Sol
dser
viceofBi
rr15,
000t
ocust
omer
scol
l
ect
ing50%ofi
tand
t
her
emai
nderonaccount
23.Pai
dBi
rr900f
orut
il
it
ies
27.Pai
dcashBi
rr3,
500assal
aryofempl
oyees
28.Sol
dser
vicest
ocust
omer
sBi
rr5,
500f
orcash.
28.Pai
dcashbi
rr500f
orof
fi
cer
epai
rs.
30.Pai
dcashBi
rr400aspar
tpay
mentoft
heamountowed.
Requi
red:
(
a)Recor
dtheabov
etr
ansact
ionsonpage10ofat
wo-
col
umngener
alj
our
nal
(
b)Postt
heent
ri
est
otheaccount
sint
hel
edger
(
c)Pr
epar
etr
ial
bal
anceasofNov
ember30,
2008

56
Account Cash AccountNo.11
POST BALANCE
DATE I
TEM REF DEBI
T CREDI
T DEBI
T CREDI
T
2000 1 1 11000 00 11000 00
Hamle

1 1 5400 00 5600
4 1 7100 00 12700 00
5 1 1500 00 11200 00
9 1 4000 00 7200 00
13 1 470 00 6730 00
16 1 5845 00 12575 00
19 1 2900 00 9675 00
26 1 470 00 9205 00
30 1 367 00 8838 00
30 2 5735 00 14573 00
30 2 2500 00 12073 00

Account Account
sRecei
vabl
e AccountNo.12
Post Bal
ance

57
 Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 17100 00 17,
100 00
Hamle

4 1 7100 00 10,
000 00
30 2 3925 00 13,
925 00

Account Suppl
i
es AccountNo.14
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 4400 00 4400 00
Hamle

19 1 2900 00 7300 00

Account Pr
epai
dRent AccountNo15
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000
Hamle
1 1 5400 00 5400 00

Account Dr
yCl
eani
ngEqui
pment AccountNo.
18
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 47000 00 47000 00
Hamle

3 1 9000 00 56000 00

58
Account Account
spay
abl
e AccountNo21
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 3 1 9000 00 9000 00
Hamle

9 1 4000 00 4000 00 5000 00

Account Al
em Tay
eCapi
tal AccountNo.31
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 79500 00 79500 00
Hamle

Account Al
em Tay
e,dr
awi
ng AccountNo32
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 2 2500 00 2500 00
Hamle

Account Sal
es AccountNo41
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 16 1 5845 00 5845 00
Hamle

30 2 5735 00 11580 00

59
 30 2 3925 00 15505 00

Account Sal
aryExpense AccountNo52
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000
Hamle
13 1 470 00 470 00
26 1 470 00 940 00

Account Mi
scel
l
aneousExpense AccountNo.59
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 5 1 1500 00 1500 00
Hamle

30 1 367 00 1867 00

CheckYourPr
ogr
ess:Exer
cise2.
3
1.Whati
sthenameoft
her
ecor
dinat
ransact
ioni
sini
ti
all
yrecor
ded?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
2.Whatar
ethest
epsi
nvol
vedwhi
l
ewear
eanal
yzi
ngabusi
nesst
ransact
ion?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

60
2.
6.TheTr
ailBal
ance

Whati
sat
ri
albal
ance?Whati
stheusual
timef
ori
tspr
epar
ati
on?

Theequal
i
tyofdebi
tsandcr
edi
tsi
nthel
edgeri
sknownast
rai
lbal
ance.I
nsuch
v
eri
fi
cat
ion,t
hesummar
yli
sti
ngofbot
hthebal
ancesandt
het
it
lesoft
heaccount
s
i
sal
sousef
uli
npr
epar
ingt
hef
inanci
alst
atement
s.Thei
l
lust
rat
ionsf
orAl
em Dr
y
cl
eaner
sar
easf
oll
ows:

Al
em Dr
yCl
eaner
s
Tr
ial
Bal
ance
Haml
e30,
2000
Cash 12073 00
Account
srecei
vabl
e 13925 00
Suppl
i
es 7300 00
Pr
epai
drent 5400 00
Dr
y-cl
eani
ngequi
pment 56000 00
Account
spay
abl
e 5000 0
0
Al
em Tay
e,capi
tal 79500 0
0
Al
em Tay
e,Dr
awi
ng 2500 00
Sal
es 15505 0
0

61
Sal
aryexpense 940 00
Mi
scel
l
aneousexpense 1867 00
100,
005 00 100,
005 0
0

Thet
ri
albal
ancedoesnotassur
eacompl
etepr
oofoft
heaccur
acyoft
hel
edger
.It
i
ssi
mpl
yat
estoft
heequal
i
tyofdebi
tsandcr
edi
tsi
nal
edger
.Thef
oll
owi
ngt
ypes
ofer
ror
smaycauseat
ri
albal
ancesnott
obal
ance

1.Er
rori
nthepr
epar
ati
onoft
het
rai
lbal
ance:
 Oneoft
hecol
umnsoft
het
ri
albal
ancewaser
roneousl
ycomput
ed
 Theamountofanaccountbal
ancewaswr
ongl
yrecor
dedont
het
ri
al
bal
ance
 Adebi
tbal
ancewasr
ecor
dedont
het
ri
albal
anceasacr
edi
t,orv
ice
v
ersa,
orabal
ancewasomi
tt
edent
ir
ely
.
2.Er
rori
ndet
ermi
ningt
heaccountbal
ances,
suchas:
 I
ncor
rectcomput
ati
onofabal
ance
 Abal
ancewasent
eredi
nthewr
ongbal
ancecol
umn
3.Er
rori
nrecor
dingat
ransact
ioni
nthel
edger
,suchas:
 Ani
ncor
rectamountwaspost
edt
otheaccount

 Adebi
tent
rywaspost
edasacr
edi
t,orv
isev
ersa
 Anomi
ssi
onofadebi
toracr
edi
tpost
ing

Numer
ouser
ror
smayexi
stev
ent
hought
het
ri
albal
ancecol
umnsar
ein-
bal
ance.
Suchas,
thet
ri
albal
ancemaybal
anceev
enwhen:
1)at
ransact
ioni
snotj
our
nal
i
zed(
compl
eteomi
ssi
on)
2)acor
rectj
our
nal
ent
ryi
snotpost
ed
3)aj
our
nal
ent
ryi
spost
edt
wice
4) I
ncor
rectaccount
sar
eusedi
njour
nal
i
zingorpost
ing,
or

62
 5)Post
ingapar
tofat
ransact
ioncor
rect
lyasdebi
torcr
edi
tbutt
othewr
ong
account
.

CheckYourPr
ogr
ess:Exer
cise2.
4
1.Whati
sat
ri
albal
ance?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.I
dent
if
ysomeer
ror
swhi
char
enotdet
ect
edbyt
het
ri
albal
ance.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.
7.ModelExami
nat
ionQuest
ions

Par
tI.Shor
tAnswerQuest
ions
1.Whati
sthet
ri
albal
anceandhow wi
l
lithel
ptodi
scov
erer
ror
sinr
ecor
dingand
post
ingt
ransact
ions?
2.Li
stt
heer
ror
sthatwi
l
lnotbedi
scov
eredbyusi
ngat
ri
albal
ance?
3.Howar
eaccount
sident
if
iedi
nthel
edger
?

63
Par
tII
.Thef
oll
owi
ngt
ri
albal
anceofShekurTr
adi
ngt
akenonNov
ember26,2008
doesn'
tbal
ancebecauseofsev
eraler
ror
sandi
rr
egul
ari
ti
es

Accountt
it
le Debi
t Cr
edi
t
Cash 37,
300
Account
sRecei
vabl
e 3,
000
Of
fi
cesuppl
i
es 20,
800
Of
fi
ceEqui
pment 7,
000
Of
fi
ceFur
nit
ure -
Account
sPay
abl
e 18,
500
ShekurCapi
tal 56,
000
Shekurdr
awi
ng 8,
500
FeesEar
ned 40,
000
RentExpense 3,
800
Sal
aryexpense 10,
000
Ut
il
it
iesExpense 25,
000
Rev
iew of t
he v
ari
ous document
sindi
cat
ed t
he f
oll
owi
ng er
ror
sthatneed
cor
rect
ions:
(
a)Of
fi
cef
urni
tur
eofBi
rr5,
800wasnoti
ncl
udedi
nthet
ri
albal
ance
(
b)Account
spay
abl
eofBi
rr15,
800wasl
i
stedasBi
rr18,
500
(
c)Feesi
ncomeofBi
rr9,
400wasomi
tt
edwhenpost
ingent
ri
est
othe
l
edger
(
d)Thebal
anceofAccount
sRecei
vabl
eshoul
dbeBi
rr3000
(
e)Al
laccount
sshoul
dhav
enor
mal
bal
ances
Requi
red:Pr
epar
ethecor
rectt
ri
albal
ancef
orShekurCompany

Li
stofRef
erenceMat
eri
als

1.I
ntr
oduct
iont
oAccount
i 21stcent
ng, ury
2.Fessandwar
ren,Account
ingpr
inci
ples,16th edi
ti
on,sout
h-west
ernpubl
i
shi
ng

64
 company
.
3.Fessandwar
ren,Account
ingpr
inci
ples,18th edi
ti
on,sout
h-west
ernpubl
i
shi
ng
company
.
4.Wey
gandt
,ki
eso,Ki
mmel
,Account
ingpr
inci
ples,5th edi
ti
on,Johnwi
l
il
yand
sons,
Inc.
5.Mosi
ch,
Int
ermedi
ateAccount
i 6thedi
ng, ti
on,
MacGr
aw-
it
il
lBookCompany
.

65
 UNI
TTHREE:COMPLETI
ONOFTHEACCOUNTI
NGCYCLE

Li
stofCont
ent
s
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
Mat
chi
ngPr
inci
ple
I
ll
ust
rat
ionofAdj
ust
ingEnt
ri
es
Wor
kSheet
Fi
nanci
alSt
atement
s
Jour
nal
i
zingandPost
ingAdj
ust
ingEnt
ri
es
Jour
nal
i
zingandPost
ingCl
osi
ngEnt
ri
es
Post
-Cl
osi
ngTr
ial
Bal
ance
Fi
scal
Yearandt
heAccount
ingCy
cle
Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive

Af
tert
hecompl
eti
onoft
heuni
tyouwi
l
lbeabl
eto:
 Di
scusst
hemat
chi
ng pr
inci
pleasi
tper
tai
nst
othecashbasi
sand t
he
accr
ual
basi
sofaccount
ing.
 Expl
aint
henat
ureoft
headj
ust
ingpr
ocess
 Descr
ibe t
he basi
c pr
ocedur
es f
oradj
ust
ing bef
oret
he pr
epar
ati
on of
f
inanci
alst
atement
s.
 I
ll
ust
rat
ethe wor
k sheetf
orsummar
izi
ng t
he account
ing dat
afort
he
pr
epar
ati
onoff
inanci
alst
atement
s.
 Pr
epar
ethepr
inci
pal
financi
alst
atement
s.
 Jour
nal
i
zeandpostadj
ust
ingandcl
osi
ngent
ri
es

66
  Descr
ibet
hebasi
cpr
ocedur
esf
ort
hepr
epar
ati
onofaccount
ingr
ecor
dsf
or
subsequentaccount
ingper
iod.

I
ntr
oduct
ion

I
nthepr
ecedi
ng uni
t(uni
ttwo)y
ou di
scussed how busi
nesst
ransact
ionsar
e
j
our
nal
i
zed and post
ed t
othel
edger
.Mor
eov
er,y
ou wer
eacquai
nted wi
tht
he
pr
epar
ati
onofat
ri
albal
ance.

Now,i
nthi
s uni
tyou wi
l
lbe acquai
nted wi
th such account
ing concept
s as
adj
ust
ment
s,mat
chi
ng pr
inci
ple,r
evenue r
ecogni
ti
on pr
inci
ple,cl
osi
ng ent
ri
es,
r
ecor
dingandpost
ingadj
ust
ingandcl
osi
ngent
ri
esandapost
-cl
osi
ngt
ri
albal
ance.

3.
1Mat
chi
ngPr
inci
ple

Dearst
udent
swhati
sthemai
nemphasi
sofmat
chi
ngpr
inci
ple?Whatdoy
ou
under
standbyt
het
erm‘
accr
ualbasi
sofaccount
ing?Tr
ytogi
vey
ourownanswer
bef
orey
oust
artr
eadi
ngt
hef
oll
owi
ngpar
agr
aphs.

Mat
chi
ngpr
inci
pleemphasi
zet
hepr
opermat
chi
ngofr
evenuesagai
nstexpensesof
t
heper
iod.Expensesar
eincur
redt
opr
oduce(
gener
ate)r
evenueoft
heper
iod.The
pr
act
iceofexpensei
ncur
rencei
sref
err
edt
oast
hemat
chi
ngpr
inci
plebecausei
t
st
resst
hatef
for
ts(
expenses)bemat
chedwi
thaccompl
i
shment
s(r
evenues)
.

Rev
enuesandexpensesmayber
epor
tedont
hei
ncomest
atementby(
1)t
hecash
basi
sor(
2)t
heaccr
ual
-basi
sofaccount
ing.Cashbasi
s-whencashbasi
sisputi
nto
use,
rev
enuesar
erepor
tedi
ntheper
iodi
nwhi
chcashi
srecei
ved,
andexpensesar
e
r
epor
tedi
ntheper
iodi
nwhi
chcashi
spai
d.Fori
nst
ance,sal
eswoul
dber
ecor
ded
onl
ywhencashi
srecei
vedf
rom cust
omer
s,andsal
ari
esexpensewoul
drecor
ded

67
onl
ywhencashi
spai
dtoempl
oyees.
Neti
ncome (
ornetl
ess)woul
d be t
he di
ff
erence bet
ween t
he cash r
ecei
pts
(
rev
enues)andt
hecashdi
sbur
sement
s(expenses)
.Smal
lser
viceent
erpr
iseswhi
ch
ar
ehav
ingf
ew r
ecei
vabl
esandpay
abl
esmayuset
hecashbasi
s.Besi
des,smal
l
busi
nesseswhi
char
erender
ingpr
ofessi
onalser
vices(
suchasser
vicesr
elat
edt
o
account
ant
s,phy
sici
ans,
att
orney
s)mayal
sousecashbasi
s.

Howev
er,f
ormostbusi
nessest
hecashbasi
sisnotconsi
der
edanaccept
abl
e
met
hod.

Accr
ualbasi
sofaccount
ingi
susedbymostbusi
nessent
erpr
ises.Undert
heaccr
ual
met
hod,
rev
enuesar
erepor
tedi
ntheper
iodi
nwhi
cht
heyar
eear
ned,
andexpenses
ar
erepor
tedi
ntheper
iodi
nwhi
cht
heyar
eincur
redi
nanat
temptt
ogener
ate
r
evenues.Fori
nst
ance,r
evenuewoul
dber
ecogni
zedt
hemomentser
vicesar
e
r
ender
edt
ocust
omer
sandnotwhent
hecashi
scol
l
ect
edf
rom cust
omer
s.Si
mil
arl
y,
suppl
i
esar
econsumedandnotwhent
hecashi
spai
dforsuppl
i
espur
chased.

Tomat
chr
evenuesandexpensespr
oper
ly,
theaccr
ualbasi
sofaccount
ingr
equi
res
t
heuseofanadj
ust
ingpr
ocessatt
heendoft
heaccount
ingper
iod.

CheckYourPr
ogr
ess:Exer
cise3-
1
1.Whati
smeantmat
chi
ngpr
inci
ple?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.Howdor
evenuesar
erepor
tedundert
heaccr
ual
basi
sofaccount
ing?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

68
3.
2Il
lust
rat
ionofAdj
ust
ingEnt
ri
es

I
nthepr
ecedi
nguni
t(uni
ttwo)
,thei
l
lust
rat
ionswer
eendedupwi
tht
hepr
epar
ati
on
oft
het
ri
albal
ance.Asast
art
ingpoi
ntmanyoft
heaccountbal
anceswhi
chhav
e
beenshowni
nthet
ri
albal
anceatt
heendoft
heaccount
ingper
iod,canbet
aken
wi
thoutanychangef
ort
hepr
epar
ati
onoff
inanci
alst
atement
s.Forexampl
ebal
ance
ofcashaccounti
snor
mal
l
ytheamountoft
hatassetownedbyt
heent
erpr
iseont
he
l
astdayoft
heaccount
ingper
iod.Li
kewi
se,t
hebal
anceofaccount
spay
abl
eist
he
amountowedupont
hel
astdayoft
heaccount
ingper
iod.

Nev
ert
hel
ess,
itdoesmeant
hatal
ltr
ial
bal
anceamount
sar
enecessar
il
ycor
rect
.For
i
nst
ance,t
heamount
sli
stedf
orpr
epai
dexpensesar
enor
mal
l
yov
erst
ated.The
r
eason f
orsuch ov
erst
atementi
sthatt
he f
ail
uret
orecor
dthe day
-to-
day
consumpt
ionorexpi
rat
ionoft
heseasset
s.

Mor
eov
er,t
hebal
anceoft
hesuppl
i
esaccountshowst
hesum t
otaloft
hecostof
suppl
i
esatt
hebegi
nni
ngoft
heper
iodaddedwi
tht
hatofsuppl
i
escostpur
chased
dur
ingt
heper
iod.Pr
act
ical
l
y,someoft
hesuppl
i
eswoul
dhav
ebeenuseddur
ingt
he
per
iod;
thebal
ancel
i
stedont
het
ri
albal
ancei
sov
erst
ated.I
nthesi
mil
armanner
,the
bal
ance ofpr
epai
dInsur
ance shows t
he begi
nni
ng bal
ance pl
us t
he costof
i
nsur
ancepol
i
ciespur
chaseddur
ingt
heper
iodandnoj
our
nalent
ri
eswer
emadef
or
t
hepr
emi
umsast
heyexpi
red.Handl
i
ngj
our
nalent
ri
esonadai
l
ybasi
swoul
dbe
cost
lyandunnecessar
y.Ther
ear
etwopossi
bleef
fect
sont
hel
edgerwhent
hedai
l
y
r
educt
ioni
nthebal
anceofpr
epai
dexpensesi
snotr
ecor
ded:(
1)assetaccount
sar
e
ov
erst
atedand(
2)expenseaccount
sar
eunder
stat
ed.

Someot
herdat
amaynotbei
ncl
udedi
nthet
ri
albal
anceandy
ett
heyar
eneededf
or

69
t
hef
inanci
alst
atement
spr
epar
ati
on.Ther
easonf
ort
hisi
srev
enueorex
pense
r
elat
edt
otheper
iodhasnotbeenr
ecor
ded.Fori
nst
ance,sal
aryexpensei
ncur
red
bet
weent
hel
astpaydayandt
heendoft
heaccount
ingper
iodwoul
dnotnor
mal
l
y
ber
ecor
dedi
nthebooksofaccountbecausesal
ari
esar
eusual
l
yrecor
dedonl
y
whent
heyar
epai
d.Asperpr
inci
pleofmat
chi
ng(
accr
ual
-basi
sofaccount
ing)
expensesar
erecogni
zedwhent
heyar
eincur
rednotwhencashi
spai
d.Hence,
accr
uedsal
ari
esar
eanexpenseoft
heper
iodbecauseser
viceswer
erender
ed
dur
ingt
heper
iod.Ont
heot
herhand,
theyal
sor
epr
esental
i
abi
l
ityont
hel
astdayof
t
heper
iodbecauset
heyar
eowedt
otheempl
oyees.

Att
heendofanaccount
ingper
iod,
ent
ri
est
hatar
erequi
redt
obr
ingt
heaccount
sup
t
odat
eandt
oassur
ethepr
opermat
chi
ngofr
evenuesandexpensesar
ecal
l
ed
adj
ust
ingent
ri
es.Forani
n-dept
hunder
standi
ngi
tisi
l
lust
rat
edasf
oll
ows.

Thei
l
lust
rat
ionsofadj
ust
ingent
ri
est
hatf
oll
owar
ebasedont
hel
edgerofAl
em Dr
y
Cl
eaner
s,asr
epor
tedi
ntheHaml
e30t
ri
albal
ance.Pr
esent
edbel
owf
ori
l
lust
rat
ion
pur
pose,
Taccount
sar
eused.

Al
em Dr
yCl
eaner
s
Tr
ial
Bal
ance
Haml
e30,
2000
Cash 12073 00
Account
sRecei
vabl
e 13925 00
Suppl
i
es 7300 00
Pr
epai
dRent 5400 00
Dr
y-Cl
eani
ngEqui
pment 56000 00
Account
sPay
abl
e 5000 0
0
Al
em Tay
e,Capi
tal 79500 0
0
Al
em Tay
e,Dr
awi
ng 2500 00

70
Sal
es 15505 0
0
Sal
aryexpense 940 00
Mi
scel
l
aneousexpense 1867 00
100,
005 00 100,
005 0
0

Pr
epai
dExpense

AsperAl
em’
str
ialbal
ance,t
hebal
ancei
nthesuppl
i
esaccountonHaml
e30i
sBi
rr
7,
300.Dur
ingt
hepastmont
h,somepor
ti
onofsuppl
i
eshasbeenconsumedand
somear
est
il
linst
ock.Assumi
ngt
hatt
hei
nvent
oryofsuppl
i
esonHaml
e30i
s
det
ermi
nedt
obeBi
rr5000t
heamountofsuppl
i
esused(
transf
err
edt
oex
pense
account
)iscomput
edasf
oll
ows:

Suppl
i
esav
ail
abl
e(bal
anceofaccount
).
..
..
..
..
..
..
.. Bi
rr7,
300
Suppl
i
esonhand(
inv
ent
ory
)..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 5,
000
Suppl
i
esused(
amountofadj
ust
ment
).
..
..
..
..
..
..
..
.. Bi
rr2,
300

Asar
esul
t,suppl
i
esexpenseshoul
dbedebi
tedf
orBi
rr2,
300andt
hesuppl
i
es
accounti
scr
edi
tedf
orBi
rr2,
300t
oshowt
hesuppl
i
esconsumeddur
ingHaml
e.The
adj
ust
ingent
ryi
sil
l
ust
rat
edi
nthef
oll
owi
ngTaccount
s.

Suppl
i
es Suppl
i
esexpense
Ham 1. 4400 Ham 30.2300 Ham 30.2300
19. 2900
7300

71
 5000
Af
tert
headj
ust
ment
,theassetaccounthasadebi
tbal
ancebi
rr5,
000andt
he
expenseaccounthasadebi
tbal
anceofBi
rr2,
300.

Al
em’
spr
epay
ment
sforr
entcov
eri
ngf
ort
hreemont
hshav
eadebi
tbal
anceofBi
rr
5,
400onHaml
e1.Att
heendofHaml
e,t
hepot
ionbel
ongst
oHaml
eisone-
thi
rd(
1/3)
oft
het
otalbal
anceofpr
epai
dRent
.Thust
her
entexpenseaccountshoul
dbe
i
ncr
eased(
debi
ted)andt
hepr
epai
drentaccountshoul
dbedecr
eased(
credi
tedby
Bi
rr1800.

Pr
epai
drent Rentexpense
Ham 1.5400 Ham 30, 1800 Ham 30.1800

I
fadj
ust
ment
sar
enotmadef
ort
hepr
evi
ousi
l
lust
rat
ionsuppl
i
es(
Bir
r2,
300)and
r
ent(
Bir
r1800)
,theef
fectont
hef
inanci
alst
atement
spr
epar
edonHaml
e30wi
l
lbe
i
ncor
rectt
otheext
enti
ndi
cat
edbel
ow:

i
) I
ncomeSt
atement
- Expenseswi
l
lbeunder
stat
ed.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr4,
100
- Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 4,
100
i
i)St
atementofOwner
’sEqui
ty
- Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr4,
100
- Endi
ngowner
’sequi
tywi
l
lbeov
erst
ated..
..
..
..
..
.. 4,
100
i
ii
)Bal
anceSheet
:
-Asset
swi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr4,
100
-Owner
’sequi
tywi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 4,
100

Pl
antAsset
s:-Li
keot
herasset
spl
antasset
sar
epr
oper
ti
esacqui
redf
orusei
nthe
or
dinar
ycour
seofbusi
ness.Howev
erwi
tht
hepassageoft
imet
hepl
antasset
slose
t
hei
rcapaci
tyt
opr
ovi
deusef
ulser
vices.Thi
sdecr
easei
nusef
ulnessi
sabusi
ness
expense,whi
chi
scal
l
eddepr
eci
ati
on.Thet
reat
mentf
oradj
ust
ingent
ryt
orecor
d

72
depr
eci
ati
onwi
l
lremai
nthesamet
otheent
ryi
l
lust
rat
edi
nthepr
evi
oussect
ion
whi
chmeansanexpenseaccounti
sdebi
tedandanassetaccounti
scr
edi
ted.The
accountdebi
tedi
sadepr
eci
ati
onexpenseaccount
,wher
east
heaccountcr
edi
tedi
s
notdi
rect
lyt
hepl
antassetaccount
.Iti
sacommonpr
act
icet
omai
ntai
nasepar
ate
accountwhi
ch i
srel
ated t
othegi
ven pl
antassetbuti
thasacont
ra(
minus)
r
elat
ionshi
ptot
hepl
antasset
.Theaccountcr
edi
tedi
sanaccumul
ateddepr
eci
ati
on
account
.Ithel
pst
orecor
ddepr
eci
ati
onsi
ncet
heacqui
sit
ionoft
hepl
antasset
s.An
accumul
ateddepr
eci
ati
onaccounti
sacont
raaccountbecausei
tis“
off
setagai
nst
”
anot
heraccount

Ty
picalt
it
lesf
orpl
antassetaccount
sandt
hei
rrel
atedcont
raassetaccount
sar
eas
f
oll
ows.

Pl
antAsset
s Cont
raAsset
Land.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. -
Bui
l
dings.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Accumul
atedDepr
eci
ati
on–Bui
l
dings
Equi
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Accumul
atedDepr
eci
ati
on–Equi
pment

Theadj
ust
ingent
ryt
orecor
ddepr
eci
ati
onf
orHaml
eforAl
em Dr
yCl
eaner
sis
i
l
lust
rat
edi
nthef
oll
owi
ngTaccount
s.Theest
imat
edamountofdepr
eci
ati
onf
ort
he
mont
hisassumedt
obeBi
rr
.

Dr
ycl
eani
ngEqui
pment Accumul
atedDepr
eci
ati
on
Ham 1.4700 Ham 30. 4500
9000
56,
000
Depr
eci
ati
onExpense

73
 Ham.30. 4500

The Bi
rr4,
500 i
ncr
ease i
nthe accumul
ated depr
eci
ati
on accountr
epr
esent
sa
subt
ract
ionf
rom t
heBi
rr56,
000costr
ecor
dedi
nther
elat
edpl
antassetaccount
.
Thedi
ff
erencebet
weent
het
wobal
ancesi
stheunexpi
redori
scal
l
edt
hebookv
alue
oft
heasset
.Thebookv
aluesomet
imesr
efer
redt
oasr
esi
dualv
alue.Pr
esent
ati
on
ofbookv
alueont
hebal
ancesheetmaybeshowni
nthef
oll
owi
ngmanner
.

Pl
antAsset
s:
Dr
yCl
eani
ngEqui
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..Bi
rr56,
000
Less:Accumul
ateddepr
eci
ati
on.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. (
4,500) Bi
rr51,
500

I
fthedepr
eci
ati
onofBi
rr4,
500i
snotr
ecor
ded,
thef
inanci
alst
atementofHaml
e30
wi
l
lbei
ncor
rect
lyaf
fect
edt
otheext
entshownbel
ow.
i
) I
ncomeSt
atement
:
-Expenseswi
l
lbeunder
stat
ed.
..
..
..
..
..
.. Bi
rr4,
500
-Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
. 4,
500
i
i) St
atementofOwner
’sEqui
ty:
-Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
. Bi
rr4,
500
-Endi
ngowner
’sequi
tywi
l
lbeov
erst
ated 4,
500
i
ii
) Bal
anceSheet
:
-Asset
swi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
. Bi
rr4,
500
-Owner
’sequi
tywi
l
lbeov
erst
ated.
..
..
. 4,
500

Accr
uedExpenses(
Liabi
li
ti
es)

Thei
ncur
renceofsomeexpensesi
srel
atedt
othepassageoft
imesuchexpenses
gener
all
yar
enotr
ecor
dedt
il
lpay
menti
smade,unl
esst
heendofanaccount
ing

74
per
iodcomesbef
oret
her
equi
reddat
eofpay
ment
.

Ty
pical
l
y,anexpenser
elat
edt
osucht
ypesofser
vicesi
sser
vicesper
for
medby
empl
oyeesar
eanexampl
eoft
hist
ypeofsi
tuat
ion.Cust
omar
il
y,t
hewagesor
sal
ari
esar
epai
dont
hepayday
.Usual
l
ytheendoft
heaccount
ingper
iodmayt
ofal
l
bet
weent
hel
astpay
dayandt
hecomi
ngpay
day
.Thewagesorsal
ari
esaccumul
ated
unt
ilt
heendoft
heaccount
ingper
iodi
snotpai
dandunr
ecor
dedar
eref
err
edt
oas
anaccr
uedexpense.

Thedat
aint
hef
oll
owi
ngT account
swer
etakenf
rom t
hel
edgerofAl
em dr
y
Cl
eaner
s.Thedebi
tsofBi
rr470onHaml
e13and26i
nthesal
aryexpenseaccount
wer
ebi
weekl
ypay
ment
sonal
ter
nat
eFr
iday
sfort
hepay
rol
lper
iodsendedont
hose
day
s.Thesal
ari
esear
nedonMondayandTuesday
,Haml
e29and30,t
otalBi
rr94.
Thi
samounti
sanaddi
ti
onalexpenseofHaml
eandi
sdebi
tedt
othesal
aryex
pense
account
.Int
hemeant
imei
tisal
soal
i
abi
l
ityasofHaml
e30andhencecr
edi
tedt
o
sal
ari
espay
abl
e.

Sal
ari
espay
abl
e Sal
aryexpense
Haml
e30 94 Haml
e13. 470
470
940

94
1,
034

Asi
tisshowni
ntheTaccountf
orsal
aryexpense,t
hedebi
tbal
anceoft
hesal
ary
expenseaccounti
sBi
rr1,
034,whi
chi
stheadj
ust
edamountandal
sot
heact
ual
expensef
ort
hemont
h.Ont
heot
herhand,t
hecr
edi
tbal
anceofBi
rr94i
ssal
ari
es
pay
abl
eist
heamountofl
i
abi
l
ityf
orsal
ari
esowedasofHaml
e30.I
fadj
ust
mentf
or
sal
ari
esBi
rr94i
snotr
ecor
ded,t
heef
fectont
hef
inanci
alst
atement
sasofHaml
e
30wi
l
lbei
ncor
rectt
otheext
enti
ndi
cat
edasf
oll
ows:

75
 I
ncomeSt
atement
:
Expenseswi
l
lbeunder
stat
ed.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr94
Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 94
St
atementofOwner
’sEqui
ty:
Neti
ncomewi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr94
Endi
ngowner
’sequi
tywi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
. 94

Bal
anceSheet
:
Li
abi
l
iti
eswi
l
lunder
stat
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr94
Owner
’sequi
tywi
l
lbeov
erst
ated.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 94

CheckYourPr
ogr
ess:Exer
cise3-
2
1.Whatar
eadj
ust
ingent
ri
es?

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2.Whyar
eadj
ust
ingent
ri
esneededatt
heendofanaccount
ingper
iod?

_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

3.
3Wor
kSheet

Whati
sawor
ksheet
?Doy
out
hinkt
hatwor
ksheeti
saper
manentr
ecor
d?Show
y
ourownposi
ti
on.

76
I
tis a common pr
act
ice t
hatbef
orej
our
nal
i
zing and post
ing adj
ust
ment
s,i
s
necessar
ytodet
ermi
neandassembl
ether
elev
antdat
a.A pr
eli
minar
ydr
aftof
f
inanci
alst
atement
s,and ot
herusef
ulanal
yses pr
epar
ed by account
ant
s ar
e
gener
all
ycal
l
edwor
kingpaper
s.

At
ypi
calwor
kingpaperf
requent
lyusedbyaccount
ant
spr
iort
opr
epar
ati
onof
f
inanci
alst
atement
siscal
l
edawor
ksheet
.Ev
ent
houghawor
ksheeti
snota
per
manentr
ecor
dli
ket
hatofaj
our
nal
andapar
tofal
edger
,ithasgr
eati
mpor
tance
wi
thr
espectt
oreduci
ngt
hepossi
bil
i
tyofov
erl
ooki
ngt
heneedf
oradj
ust
ment
,
al
l
owsaconv
eni
entmeansofv
eri
fyi
ng ar
it
hmet
icalaccur
acy
,pr
ovi
ded f
ort
he
ar
rangementofdat
ainal
ogi
calf
orm,andhel
psasapl
anf
ort
hepr
epar
ati
onof
f
inanci
alst
atement
s.

Thewor
ksheeti
shav
ingt
hreel
i
nesasaheadi
ng.Thatcanbei
dent
if
iedby
:(1)t
he
nameoft
heent
erpr
ise,
(2)t
henat
ureoft
hef
orm(
wor
ksheet
),and(
3)t
heper
iodof
t
imei
nvol
ved.

Awor
ksheethasal
soaf
orm usual
l
yusedasanaccountt
it
lecol
umnandt
enmoney
col
umnsar
r nf
angedi i
vepai
rsofdebi
tandcr
edi
tcol
umns.Thef
oll
owi
ngar
emai
n
headi
ngsoft
hef
iveset
sofmoneycol
umnsofawor
ksheetpr
esent
edonpage72.
o Tr
ial
Bal
ance
o Adj
ust
ment
s
o Adj
ust
edTr
ail
Bal
ance
o I
ncomeSt
atement
o Bal
anceSheet

Tr
ialBal
anceCol
umns

Al
ter
nat
ivel
y,t
het
ri
albal
ancedat
acanbeassembl
eddi
rect
lyont
hewor
ksheet
f
orm ort
heymaybepr
epar
edonasepar
atesheetf
ir
standt
hencopi
edont
hewor
k

77
sheetf
orm.The wor
ksheetf
orAl
em Dr
ycl
eaner
s,wi
tht
he t
ri
albal
ance dat
a
r
ecor
dedi
sshownont
hef
oll
owi
ngpage.

Adj
ust
ment
sCol
umns

Bot
hthe debi
tand cr
edi
tpar
ts ofan adj
ust
mentshoul
d be i
nser
ted on t
he
appr
opr
iat
eli
nesbef
oreext
endi
ngt
oanot
heradj
ust
ment
.Cr
oss-
ref
err
ingt
her
elat
ed
debi
tandcr
edi
tofeachadj
ust
mentbyl
ett
ersi
susef
ulf
ort
hepur
poseofr
evi
ewi
ng
t
hewor
ksheet
.Mor
eov
er,
iti
shel
pful
lat
erwhent
headj
ust
ingent
ri
esar
erecor
dedi
n
aj
our
nal
.

I
fthet
it
lesofsomeoft
heaccount
stobeadj
ust
eddonotappeari
nthet
ri
albal
ance
becauseofhav
ingzer
obal
ancebef
oreadj
ust
ment
,theyshoul
dbei
nser
tedi
nthe
accountt
it
lecol
umn,
bel
owt
het
ri
albal
ancet
otal
s.

78
 Alem Dr
yCleaner
s
WorkSheet
ForMont
hEndedHaml e30,
2000

AccountTi
tl
e Tri
albal
ance Adj
ust
ment
s Adjustedt
otalbal
ance I
ncomest
atement Balancesheet
Debi
t Cr
edi
t Debi
t Cr
edi
t Debit Credi
t Debi
t Credi
t Debi
t Credi
t
Cash 12073 00 12073 00 12073 00
Account sr eceiv
able 13925 00 13925 00 13925 00
Supplies 7300 00 (
a)2300 00 5000 00 5000 00
Prepaidr ent 5400 00 (
b)1800 00 3600 00 3600 00
Drycleani ng 56000 00 56000 00 56000 00
equipment
Account spay able 5000 00 5000 00 5000 00
Alem Tay e, Capit
al 79500 00 79500 00 79500 00
Alem taye, drawing 2500 00 2500 00 2500 00
Sales 15505 00 15505 00 15505 00
Salaryexpense 940 00 (
d)94 00 1034 00 1034 00
Miscellaneous 1867 00 1867 00 1867 00
expense
10000 00 100005 00
5
Suppli
esexpense (
a)2300 00 2300 00 2300 00
Rentexpense (
b)1800 00 1800 00 1800 00
Depreiati
onexpense (
c)4500 00 4500 4500 00
Accumul ated ©4500 00 4500 00 4500 00
Depreciati
on
Sal
ariespay abl
e (
d)94 00 94 00 94 00
8694 00 8694 00 104599 00 104599 00 11501 00 15505 00 89094 00
NetI
ncome 4004 00 4004 00
15505 00 15505 00 9309 00 93098 00
8

74
 a) Suppl
ies.Thesuppl
i
esaccounthasadebi
tbal
anceofBi
rr7,
300,
the
costoft
hesuppl
i
esonhadatt
heendoft
heper
iodi
sBi
rr5,
000,
thus,
t
hesuppl
i
esexpensef
orHaml
eist
hedi
ff
erencebet
weent
het
wo
amount
s orBi
rr2,
300.t
he adj
ust
menti
sent
ered bywr
it
ing (
1)
suppl
i
esexpensei
ntheaccountt
it
lecol
umn,(
2)Bi
rr2,
300i
nthe
adj
ust
ment
sdebi
tcol
umnont
hesomel
i
ne,and(
3)Bi
rr2,
300i
nthe
adj
ust
ment
scr
edi
tcol
umnont
hel
i
newi
thsuppl
i
es.
b) Rent
.Thepr
epai
drentaccounthasadebi
tbal
anceofBi
rr5,
400
whi
chr
epr
esent
sapay
mentoft
hreemont
hsbegi
nni
ngwi
thHaml
e
t
her
efor
e;t
her
entexpensef
orHaml
eisBi
rr1,
800.Theadj
ust
menti
s
ent
eredbywr
it
ing(
1)r
entexpensei
ntheaccountt
it
lecol
umn(
2)Bi
rr
1,
800i
ntheadj
ust
ment
sdebi
tcol
umnont
hesamel
i
ne,and(
3)Bi
rr
1,
800i
ntheadj
ust
ment
scr
edi
tcol
umnont
hel
i
newi
thpr
epai
drent
.
c) Depr
eci
ati
on. Depr
eci
ati
on of t
he Dr
y cl
eani
ng Equi
pment i
s
est
imat
edatBi
rr4,
500f
oramont
h.Thi
sexpi
redpor
ti
onoft
hecost
oft
heequi
pmenti
sbot
hanexpenseandar
educt
ioni
ntheasset
.
Theadj
ust
menti
sent
eredbywr
it
ing(
1)depr
eci
ati
onexpensei
nthe
accountt
it
lecol
umn,(
2)Bi
rr4,
500i
ntheadj
ust
ment
sdebi
tcol
umn
ont
hesamel
i
ne,(
3)accumul
ateddepr
eci
ati
oni
ntheaccountt
it
le
col
umn,and(
4)Bi
rr4,
500i
ntheadj
ust
ment
scr
edi
tcol
umnont
he
samel
i
ne.
d) Sal
ari
es:Sal
ari
esaccr
uedbutnotpai
datt
heendofHaml
eamount
t
oBi
rr94.Thi
sisani
ncr
easei
ntheexpenseandani
ncr
easei
n
l
i
abi
l
iti
es.Theadj
ust
menti
sent
eredbywr
it
ing(
1)Bi
rr94i
nthe
adj
ust
ment
sdebi
tcol
umnont
hesamel
i
newi
thsal
aryexpense,(
2)
sal
ari
espay
abl
eint
heAccountt
it
lecol
umn,and(
3)Bi
rr94i
nthe
adj
ust
ment
scr
edi
tcol
umnont
hesamel
i
ne.

Thel
astst
epi
ncompl
eti
ngt
headj
ust
mentcol
umnsi
stopr
ovet
heequal
i
tyof
debi
tsandcr
edi
tsbyt
otal
i
ngandr
uli
ngt
het
wocol
umns.
75
Adj
ust
edTr
ialBal
anceCol
umns

Thedat
aint
heTr
ialBal
ancecol
umnsar
ecombi
nedwi
tht
headj
ust
ment
sdat
aand
ext
endedt
otheadj
ust
edt
ri
albal
ancecol
umnsasi
ndi
cat
edont
hewor
ksheetf
or
Al
em Dr
yCl
eaner
sbel
ow.Forexampl
e,t
hecashandaccount
srecei
vabl
eaccount
s
ar
eext
endedatt
hei
ror
igi
nalamount
sofBi
rr12,
073andBi
rr13,
925,si
nceno
adj
ust
ment
saf
fect
edei
theraccount
.Suppl
i
eshasani
nit
ialbal
anceofBi
rr7,
300
andacr
edi
tadj
ust
ment(
decr
ease)ofBi
rr2,
300t
heamountt
obeext
endedi
sthe
debi
tbal
anceofbi
rr5000.Thesamepr
ocedur
eiscont
inued unt
ilal
laccount
bal
anceshav
ebeenext
endedt
otheadj
ust
edt
ri
albal
ancecol
umns.Thedebi
tand
cr
edi
tcol
umnsar
ethent
otal
edt
opr
ovet
hatnoar
it
hmet
icaler
ror
shav
ebeenmade
upt
othi
spoi
nt.

I
ncomeSt
atementandBal
anceSheetCol
umns

Thedat
aint
headj
ust
edt
ri
albal
ancecol
umnsar
eext
endedt
ooneoft
her
emai
ning
f
ourcol
umnsasi
ndi
cat
edont
hewor
ksheetf
orAl
em Dr
yCl
eaner
s.Theamount
sof
asset
s,l
i
abi
l
iti
es,owner
’sequi
ty,anddr
awi
ng(
ordi
vi
dends)ar
eext
endedt
othe
bal
ancesheetcol
umns,
andt
her
evenuesandex
pensesar
eext
endedt
otheI
ncome
St
atementCol
umns.

I
nthei
l
lust
rat
ivewor
ksheet
,fi
rstaccountl
i
stedi
scashandt
hebal
anceappear
ing
i
ntheAdj
ust
edTr
ialBal
ancedebi
tcol
umni
sBi
rr12,
073t
hisamountshoul
dbe
ext
endedt
otheappr
opr
iat
ecol
umn.Cashi
sanasset
,iti
sli
stedont
hebal
ance
sheet
,andi
thasadebi
tbal
ance.Accor
dingl
y,t
heBi
rr12,
073amounti
sext
endedt
o
t
hedebi
tcol
umnoft
heBal
anceSheetsect
ion.Thebal
anceofAccount
sRecei
vabl
e
i
s ext
ended i
n si
mil
armanner
.The Bi
rr5000 adj
ust
ed bal
ance ofsuppl
i
es i
s
ext
endedt
otheBal
anceSheetdebi
tcol
umn.Thesamepr
ocedur
eiscont
inuedunt
il
al
laccountbal
anceshav
ebeenext
endedt
otheappr
opr
iat
ecol
umns.Thebal
ances

76
oft
hecapi
talhav
ebeenext
endedt
otheappr
opr
iat
ecol
umns.Thebal
ancesoft
he
capi
talanddr
awi
ngaccount
sar
eext
endedt
othebal
ancesheetcol
umns,because
t
hiswor
ksheetdoesnotpr
ovi
def
orsepar
atest
atementofowner
’sequi
tycol
umns.

Af
teral
lbal
anceshav
ebeenext
ended,eachoft
hef
ourcol
umnsi
stot
aled.Thenet
i
ncomeort
henetl
ossf
ort
heper
iodi
stheamountoft
hedi
ff
erencebet
weent
he
t
otal
soft
het
woi
ncomest
atementcol
umns.I
fthecr
edi
tcol
umnt
otali
sgr
eat
er
t
hant
hedebi
tcol
umnt
otal
,theexcessi
stheneti
ncome.Fort
hewor
ksheet
pr
esent
edonpage69,
theComput
ati
onofneti
ncomei
sasf
oll
ows:

Tot
alofcr
edi
tcol
umn(
rev
enue)
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr15,
505
Tot
alofDebi
tcol
umn(
expenses)
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 11,
501
Neti
ncome(
excessofr
evenueov
erexpenses)
..
..
..
..
. Bi
rr4,
004

Rev
enue and expense account
s,whi
ch ar
e subdi
vi
sionsofowner
’sequi
ty,ar
e
t
empor
aryi
nnat
ure.Theyar
euseddur
ingt
heaccount
ingper
iodt
o ai
dint
he
accumul
ati
onofdet
ail
edoper
ati
ngdat
a.Af
tert
heyhav
eser
vedt
hei
rpur
pose,t
he
netbal
ancewi
l
lbet
ransf
err
edt
othecapi
talaccount(
ort
her
etai
nedear
nings
account
)int
hel
edger
.Thi
str
ansf
eri
saccompl
i
shedont
hewor
ksheetbyent
ri
esi
n
t
hei
ncomest
atementdebi
tcol
umnandt
hebal
ancesheetcr
edi
tcol
umn,wi
tht
he
descr
ipt
ionoft
heamount
,“NetI
ncome,
”inser
tedi
ntheaccountt
it
lecol
umn.I
fther
e
hadbeenanetl
ossi
nst
eadofaneti
ncome,
theamountwoul
dhav
ebeenent
eredi
n
t
hei
ncomest
atementcr
edi
tcol
umnand t
hebal
ancesheetdebi
tcol
umn,and
descr
ibedas“
NetLoss”i
ntheaccountt
it
lecol
umn.

Af
tert
hel
astent
ryi
smadeont
hewor
ksheet
,eachoft
hef
ourst
atementcol
umns
i
stot
aledt
over
if
ythear
it
hmet
icaccur
acyoft
heamountofneti
ncomeornetl
oss
t
ransf
err
edf
rom t
hei
ncomest
atementt
othebal
ancesheet
.Thet
otal
soft
het
wo
i
ncomest
atementcol
umnsmustbeequal
,asmustt
het
otal
soft
het
wobal
ance
sheetcol
umns.Thewor
ksheetmaybeexpandedbyt
headdi
ti
onofapai
rof
col
umnssol
elyf
ort
hest
atementofowner
’sequi
ty(
orret
ainedear
nings)dat
a.
77
CheckYourPr
ogr
ess:Exer
cise3-
3.
1.Whybusi
nessespr
epar
eawor
ksheetbef
oret
hepr
epar
ati
onoff
inanci
al
st
atement
s?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.I
fthebal
ancesheetcr
edi
tcol
umnofawor
ksheetexceedsi
tsdebi
tcol
umn,
then
t
her
eshoul
dbe:
(a)NetI
ncome (
b)NetLoss,
or(
c)Nei
therneti
ncomenor
netl
oss
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
3.Assumet
hatt
hei
ncomest
atementdebi
tandcr
edi
tcol
umnsofawor
ksheetshow
at
otalofBi
rr125,
000andBi
rr140,
000,r
espect
ivel
y.I
fthebal
ancesheetcr
edi
t
col
umnoft
hesamewor
ksheetshowsat
otalofBi
rr210,
000,whati
sthedebi
t
col
umnt
otal
oft
hesamewor
ksheet
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

3.
4.Fi
nanci
alSt
atement
s

78
 Whatar
esomeoft
hepur
posesoff
inanci
alst
atement
s?

Thewor
ksheeti
sthemai
nandonl
ysour
ceofal
lrel
evantdat
afort
hepr
epar
ati
onof
f
inanci
alst
atement
s.The i
ncome st
atement
,st
atementofowner
’s equi
ty,and
bal
ancesheetpr
epar
edf
rom t
hewor
ksheetofAl
em Dr
ycl
eaner
sappearasf
oll
ows.

Al
em Dr
yCl
eaner
s
I
ncomeSt
atement
ForMont
hEndedHaml
e30,
2000

Sal
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr15,
505
Oper
ati
ngExpenses
Sal
aryExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr1,
034
Suppl
i
esExpenses.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 2,
300
PentExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 1,
800
Depr
eci
ati
onExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 4,
500
Mi
scel
l
aneousExpense.
..
..
..
..
..
..
..
..
..
..
..
..
. 1,
867
Tot
alOper
ati
ngExpenses.
..
..
..
..
..
..
..
..
..
.. 11,
501
Neti
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr4,
004

Al
em Dr
yCl
eaner
s
St
atementofOwner
’sEqui
ty
ForMont
hEndedHaml
e30,
2000

Al
em Tay
e,Capi
tal
Haml
e1,
2000.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr79,
500
79
Neti
ncomef
ort
hemont
h..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..Bi
rr4,
004
Less:Wi
thdr
awal
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. (
2,500)
I
ncr
easei
nowner
’sequi
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 1,
504
Al
em Tay
e,Capi
tal
,Haml
e30,
2000.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr81,
004

Al
em DryCleaner
s
BalanceSheet
Hamle30,2000

Asset
s:
Cur
rentAsset
s:
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr12,
073
Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 13,
925
Suppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 5,
000
Pr
epai
dRent
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 3,
600
Tot
alCur
rentAsset
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr34,
598

Pl
antAsst
s:
Dr
yCl
eani
ngEqui
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr56,
000
Less:Accumul
atedDepr
eci
ati
on.
..
..
..
..
.. (
4,500) 51,
500
Tot
alAsset
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
86,
098
Li
abi
li
ti
es
Cur
rentLi
abi
li
ti
es:
Account
sPay
abl
e Bi
rr5000
Sal
ari
esPay
abl
e 94
Tot
all
i
abi
l
iti
es Bi
rr5094
80
 Owner
sEqui
ty
Al
em Tay
e,Capi
tal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
81,
004
Tot
alLi
abi
li
ti
esandOwner
’sEqui
ty.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr86,
098

3.
5.Jour
nal
izi
ngandPost
ingAdj
ust
ingEnt
ri
es

Whati
sthepur
poseofadj
ust
ingent
ry?Fr
om wher
eshal
lwegett
hedat
afor
r
ecor
dingadj
ust
ingent
ri
es?

Atev
eryendofanaccount
ingper
iod,t
headj
ust
ingent
ri
esappear
ingi
nthewor
k
sheetar
erecor
dedi
nthej
our
nalandpostt
othel
edger
.Suchapr
ocedur
ebr
ingst
he
l
edgeraccount
sint
heagr
eementwi
tht
hedat
arepor
tedont
hef
inanci
alst
atement
s.

Theadj
ust
ingent
ri
esi
nthej
our
nal
ofAl
em Dr
yCl
eaner
sar
epr
esent
edasf
oll
ows:
Jour
nal PageNo.1
Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
Adj
ust
ingent
ri
es
Haml
e 30 Suppl
i
esexpense 51 2300 00
Suppl
i
es 14 2300 00

30 RentExpense 53 1800 00
Pr
epai
drent 15 1800 00

30 Depr
eci
ati
onexpense 54 4500 00
Accumul
ateddepr
eci
ati
on 19 4500 00

30 Sal
aryexpense 52 94 00

81
 Sal
ari
espay
abl
e 22 94 00

CheckYourPr
ogr
ess:Exer
cise3-
4
1.Whatar
ethet
ypi
cal
financi
alst
atement
sofabusi
nessent
erpr
ise?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
2.Whatki
ndsofi
nfor
mat
iondoani
ncomest
atementr
epor
ts?[
Answert
hisquest
ion
f
rom y
ourpr
evi
ousknowl
edgeofani
ncomest
atement
]
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
3.
6Jour
nal
izi
ngandPost
ingCl
osi
ngEnt
ri
es

Whatar
ecl
osi
ngent
ri
es?Whycl
osi
ngent
ri
esar
erequi
red?Whatt
ypesof
account
sneedt
obecl
osed?Gi
vey
ouransweri
nwr
it
ingbef
orey
out
he
f
oll
owi
ngdi
scussi
on.

Ther
evenue,expense,anddr
awi
ng(
ordi
vi
dends)account
sar
esubdi
vi
sionsoft
he
owner
’sequi
tyaccount
.Hence,t
heyar
etempor
aryaccount
sandt
henetef
fectof
t
hei
rbal
ancesmustber
ecor
ded i
naper
manentcapi
tal(
orr
etai
ned ear
nings)
account
.Thebal
ancesmustal
sober
emov
edf
rom t
het
empor
aryaccount
ssot
hat
t
heywi
l
lber
eadyf
orusei
naccumul
ati
ngdat
afort
hef
oll
owi
ngaccount
ingper
iod.
Bot
hoft
hesegoal
sar
eaccompl
i
shedbyaser
iesofent
ri
escal
l
edcl
osi
ngent
ri
es.

Anaccountt
it
ledi
ncomesummar
yisusedf
orsummar
izi
ngt
hedat
aint
her
evenue
andexpenseaccount
s.I
tisusedonl
yatt
heendoft
heaccount
ingper
iodandi
sbot
h
openedandcl
oseddur
ingt
hecl
osi
ngpr
ocess.

82
Fourent
ri
es ar
erequi
red i
n or
dert
o cl
ose t
he t
empor
aryaccount
s ofa sol
e
pr
opr
iet
orshi
patt
heendoft
heper
iod.Theyar
easf
oll
ows.
1.Eachr
evenueaccounti
sdebi
tedf
ort
heamountofi
tsbal
ance,andI
ncome
Summar
yiscr
edi
tedf
ort
het
otal
rev
enue.
2.Eachexpenseaccounti
scr
edi
tedf
ort
heamountofi
tsbal
ance,andI
ncome
Summar
yisdebi
tedf
ort
het
otal
expense.
3.I
ncomeSummar
yisdebi
tedf
ort
heamountofi
tsbal
ance(
neti
ncome)
,and
t
hecapi
talaccounti
scr
edi
tedf
ort
hesameamount
.(Debi
tandcr
edi
tar
e
r
ever
sedi
fther
eisanetl
ess)
.
4.Thedr
awi
ngaccounti
scr
edi
tedf
ort
heamountofi
tsbal
ance,andt
hecapi
tal
accounti
sdebi
tedf
ort
hesameamount
.
Theaccountt
it
lesandamount
sneededi
njour
nal
i
zingt
hecl
osi
ngent
ri
esmaybe
obt
ainedf
rom anyoneoft
hreesour
ces(
1)wor
ksheet
,(2)i
ncomest
atementand
st
atementofowner
’sequi
tyand(
3)l
edger
.
Af
tert
hecl
osi
ngent
ri
eshav
ebeenj
our
nal
i
zed,i
l
lust
rat
edasf
oll
ows,andpost
edt
o
t
hel
edger
,thebal
ancei
nthecapi
talaccountwi
l
lcor
respond t
otheamount
s
r
epor
tedont
hest
atementofowner
’sequi
tyandbal
ancesheet
,inaddi
ti
on,t
he
r
evenue,
expense,
anddr
awi
ngaccount
swi
l
lhav
ezer
obal
ances.

Jour
nal Page2
Dat
e Descr
ipt
ion Post Debi
t Cr
edi
t
Ref
Cl
osi
ngEnt
ri
es
Haml
e 30 Sal
es 41 15505 00
I
ncomesummer
y 33 15505 00

30 I
ncomesummar
y 33 15001 00
Sal
aryexpense 52 1034 00
Mi
scel
l
aneousexpense 59 1867 00
Suppl
i
esexpense 51 2300 00

83
 Rentexpense 53 1800 00
Depr
eci
ati
onexpense 54 4500 00

30 I
ncomesummar
y 33 4004 00
Al
em Tay
e,Capi
tal 31 4004 00

30 Al
em Tay
e,Capi
tal 31 2500 00
Al
em Tay
e,Dr
awi
ng 32 2500 00

Thel
edgerofAl
em Dr
ycl
eaner
saf
tert
headj
ust
ingandcl
osi
ngent
ri
eshav
ebeen
past
edi
sshownasf
oll
ows.

Account
: Cash AccountNo:
11
Pos Bal
ance
Dat
e I
tem t Debi
t Cr
edi
t Debi
t Cr
edi
t
Ref
2000 1 1 11000 00 11000 00
Ham
1 1 5400 0 5600 00
0
4 1 7100 00 12700 00
5 1 1500 0 11200 00
0
9 1 4000 0 7200 00
0
1 1 470 0 6730
3 0
84
 1 1 5845 00 12575 00
6
1 1 2900 0 9675 00
9 0
2 1 470 0 9205 00
6 0
3 1 367 0 8838 00
0 0
3 2 5735 00 14573 00
0
3 2 2500 0 12073 00
0 0

Account
: Account
sRecei
vabl
e AccountNo:
12
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 17100 00 17100 00
Ham
4 1 7100 0 10,
000 00
0
3 2 3925 00 13925 00
0

Account
: Suppl
ies AccountNo.
:14
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 4400 00 4400 00
Ham
19 1 2900 00 7300 00
30 AJUSTI
NG 2 2300 00 5000 00
: Pr
Account epai
dRent AccountNo.
:15

85
 Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 5400 00 5400 00
Ham
30 Adj
ust
in 2 1800 00 3600 00
g

Account
: Dr
yCl
ear
ingEqui
pment AccountNo.
:18
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 4700 00 47,
000 00
Ham
3 1 9000 56,
000 00

Account
: Accumul
atedDepr
eci
ati
on AccountNo:
19
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 Adj
ust
in 2 4500 00 450 00
Ham
g 0

Account
: Account
sPayabl
e AccountNo:
21
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 1 9000 900 00
Ham
0
9 1 4000 00 500 00
0
Account
: Sal
ari
esPayabl
e AccountNo.
22
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 Adj
ust
in 2 94 00 94 00
Ham
86
 g

Account
: Al
em Taye,
Capi
tal AccountNo.31
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 1 1 7950 00 7950 00
Ham 0 0
30 Cl
osi
n 2 4004 00 8350 00
g 4
30 Cl
osi
n 2 2500 00 8100 00
g 4

Account
: Al
em Taye,
Drawi
ng AccountNo.32
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 2 2500 00 2500 00
Ham
30 Cl
osi
n 2 2500 00 250 00
g 0

Account
: I
ncomeSummer
y AccountNo:
.33
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 Cl
osi
n 2 1550 00 1550 00
Ham g 5 5
30 Cl
osi
n 2 11501 00 4004 00
g
30 Cl
osi
n 2 4004 00 4004 00 -
g

87
 :
Account Sal
es AccountNo.41
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 16 1 5845 00 5845 00
Ham
30 2 5735 00 1158 00
0
30 2 3925 00 1550 00
5
30 Cl
osi
n 2 15505 00
g

Account
: Suppl
iesExpense AccountNo.
51
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 Adj
usti
n 2 2300 00 2300 00
Ham g
30 Cl
osing 2 2300 00 230 00
0

Account
: Sal
aryExpense AccountNo.
52
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 13 1 470 00 470 00
Ham
26 1 470 00 940 00
30 Cl
osi
n 2 940 00
g

Account
: RentExpense AccountNo:
53
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 Adj
usti
n 2 2300 00
Ham g
30 Cl
osing 2 230 00
0
88
Account
: Depr
eci
ati
onExpense AccountNo.54
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 30 Adj
usti
n 2 4500 00 4500 00
Ham g
30 Cl
osing 2 4500 00 450 00
0

Account
: Mi
scel
laneousExpense AccountNo.59
Post Bal
ance
Dat
e I
tem Ref Debi
t Cr
edi
t Debi
t Cr
edi
t
2000 5 1 1500 00 1500 00
Ham
30 1 367 00 1867 00
30 Closi
n 2 1867 00 186 00
g 7
Ast
heent
ryt
ocloseanaccountispost
ed,
al i
neshoul
dbei
nser
tedi
nbot
hbalance
col
umnsopposi
tet
hef
inalent
ry,asi
l
lust
rat
edbyAl
em Tay
e,Dr
awi
ngandt
he
r
emai
ningt
empor
aryaccount
s.Tr
ansact
ionsaf
fect
ingt
heaccount
sint
hef
oll
owi
ng
per
iodwi
l
lbepost
edi
nthespacesi
mmedi
atel
ybel
owt
hecl
osi
ngent
ry.

3.
7Post
-Cl
osi
ngTr
ialBal
ance

Thef
inalpr
ocedur
eoft
heaccount
ingcy
clei
sthepr
epar
ati
onofat
ri
albal
anceaf
ter
al
loft
het
empor
aryaccount
shav
ebeencl
osed.Thepur
poseoft
hepost
-cl
osi
ng
t
ri
albal
ance,
ist
omakesur
ethatt
hel
edgeri
sinbal
anceatt
hebegi
nni
ngoft
henew
account
ing per
iod.The account
s and amount
s shoul
d agr
ee exact
lywi
tht
he
account
sandamount
sli
stedont
hebal
ancesheetatt
heendoft
heper
iod.

Al
em Dr
yCl
eancr
s
Post
-Cl
osi
ngTr
ialBal
ance

89
 Hamel
e30,
2000
Cash 12073 00
Account
sRecei
vabl
e 13925 00
Suppl
i
es 5000 00
Pr
epai
dRent 3600 00
Dr
yCl
eani
ngEqui
pment 56,
000
Accent
uat
edDepr
eci
ati
on 4500 00
Account
sPay
abl
e 5000 00
Sal
ari
esPay
abl
e 94 00
Mem Tay
e,Capi
tal 81004 00
90598 00 90598 00

Rev
iewExer
cise3.
1

Att
he end ofa f
iscalper
iod,t
he i
ncome st
atementdebi
tand Cr
edi
tcol
umn
subt
otal
sofawor
ksheetshowBi
rr65,
000andBi
rr95,
000,
respect
ivel
y.Tot
alasset
s
att
hebegi
nni
ngoft
hesameper
iodwer
eBi
rr130,
000andt
otall
i
abi
l
iti
esatt
heend
oft
heper
iodwer
eBi
rr50,
000.Li
abi
l
iti
esi
ncr
easedbyBi
rr20,
000dur
ingt
hef
iscal
per
iod.Ther
ewasanaddi
ti
onali
nvest
mentofBi
rr5,
000butnowi
thdr
awal
sdur
ing
t
heper
iod.
Whati
sthecapi
tal
bal
anceatt
hebegi
nni
ngoft
heper
iod?
Whati
stheamountofneti
ncomeornetl
ossdur
ingt
heper
iod?
Det
ermi
net
hecapi
tal
bal
anceatt
heendoft
heper
iod
Whati
stheamountof6het
otal
asset
satt
heendoft
heper
iod?

3.
8Fi
scalYearandt
heAccount
ingCy
cle
3.
8.1Fi
scalYear
I
ntheor
dinar
ycour
seofbusi
ness,t
hedur
ati
onofanaccount
ingper
iodi
soney
ear
,
90
begi
nni
ngonaspeci
fi
cdayandendi
ng12mont
hsl
ater

Theannualaccount
ingper
iodadopt
edbyanent
erpr
isei
sknownasi
tsf
iscaly
ear
.
Fi
scaly
ear
sor
dinar
il
ybegi
nwi
tht
hef
ir
stdayofapar
ti
cul
armont
hsel
ect
edandend
ont
hel
astdayoft
het
wel
ft
hmont
h.

3.
8.2Account
ingCy
cle
Thepr
inci
palaccount
ingpr
ocedur
esofaf
iscalper
iodhav
eal
readybeenpr
esent
ed.
Thesequenceofpr
ocedur
esi
sfr
equent
lycal
l
edt
heaccount
ingcy
cle.I
tbegi
nswi
th
anal
ysi
sandt
hej
our
nal
i
zingoft
ransact
ionsandendswi
tht
hepost
-cl
osi
ngt
ri
al
bal
ance.Themostsi
gni
fi
cantoutputoft
heaccount
ing cy
clei
sthef
inanci
al
st
atement
s.Thef
oll
owi
ngar
ethebasi
cphasesoft
hecy
cle.
Tr
ansact
ionsar
eanal
yzedandr
ecor
dedi
naj
our
nal
Tr
ansact
ionsar
epost
edt
othel
edger
.
Tr
ial
bal
ancei
spr
epar
ed,
dat
aneededt
oadj
ustaccount
sar
eassembl
ed,
andt
he
wor
ksheeti
scompl
eted.
Fi
nanci
alst
atement
sar
epr
epar
ed.
Adj
ust
ingandcl
osi
ngent
ri
esar
ejour
nal
i
zed
Adj
ust
ingandcl
osi
ngent
ri
esar
epost
edt
othel
edger
.
Post
-cl
osi
ngt
ri
albal
ancei
spr
epar
ed.

CheckYourPr
ogr
ess:Exer
cise3-
5
1.Whyar
ecl
osi
ngent
ri
esr
equi
redatt
heendofanaccount
ingper
iod?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
2.Whati
sthepur
poseofi
ncomesummar
yaccount
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

91
3.
9.ModelExami
nat
ionQuest
ions
Par
tI:Tr
ueorFal
seQuest
ions
Wr
it
e‘Tr
ue’
ift
hest
atementi
scor
rectandwr
it
e‘Fal
se’
ift
hest
atementi
swr
ong.
1.Underaccr
ual
basi
sofaccount
ing,
rev
enuesar
erepor
tedi
ntheper
iodi
nwhi
ch
t
heyar
eear
ned,
andexpensesar
erepor
tedi
ntheper
iodi
nwhi
cht
heyar
e
i
ncur
red.
2.Cl
osi
ngent
ri
esar
erequi
redatt
heendofaccount
ingper
iodt
obr
ingaccount
s
upt
odat
e.
3.Mat
chi
ngpr
inci
plesemphasi
zest
hepr
opermat
chi
ngofr
evenuesofaper
iod
wi
thexpensesi
ncur
redi
ngener
ati
ngt
heser
evenues.
4.Cashr
ecei
vedandr
ecor
dedasl
i
abi
l
iti
esbef
orer
evenuei
sear
nedi
scal
l
ed
accr
uedr
evenues.
5.Undercashbasi
sofaccount
ing,
neti
ncome(
ornetl
oss)woul
dthedi
ff
erence
bet
weencashr
ecei
ptsandcashpay
ment
s.

Par
tII
:Mul
ti
pleChoi
ceQuest
ions
Chooset
hebestansweramongt
hegi
venal
ter
nat
ives.

1.Eachoft
hef
oll
owi
ngi
samaj
ort
ypeofadj
ust
ingent
ri
esexcept
:
A.Pr
epai
dexpenses C.accr
uedr
evenues
B.Ear
nedr
evenues D.Accr
uedexpenses
2.I
dent
if
ythei
ncor
rectst
atementaboutt
heaccr
ual
basi
sofaccount
ing
A.Rev
enuei
srecogni
zedi
ntheper
iodi
nwhi
chi
tisear
ned.
B.Rev
enuei
srecor
dedonl
ywhencashi
srecei
ved,
andexpensei
srecor
ded
onl
ywhencashi
spai
d.
C.Thi
sbasi
s(met
hod)i
sinaccor
dwi
thgener
all
yaccept
edaccount
ing
pr
inci
ples
D.Noneoft
heabov
e.
92
3.Whi
choft
hef
oll
owi
ngaccount
swoul
dbecl
osedt
othei
ncomesummar
y
accountatt
heendofaper
iod?
A.sal
aryexpense C.bot
hsal
esandsal
aryexpense
B.Sal
es D.Nei
thersal
esnorsal
aryexpense.
4.Adj
ust
ingent
ri
esar
emadet
oensur
ethat
:
A.Rev
enuesar
erecor
dedi
ntheper
iodi
nwhi
cht
heyar
eear
ned.
B.Bal
ancesheetandi
ncomest
atementaccount
shav
ecor
rectbal
ancesat
t
he endofanaccount
ingper
iod.
C.Expensear
erecogni
zedi
ntheper
iodi
nwhi
cht
heyar
eincur
red
D.Al
loft
heabov
e

5.I
fthebui
l
dingaccounthasabal
anceofBi
rr85,
000andi
tsaccumul
ated
depr
eci
ati
onaccounthasabal
anceofBi
rr34,
000t
hebookv
alueoft
he
equi
pmenti
s:
A.Bi
rr85,
000 C.Bi
rr51.
000
B.Bi
rr119,
000 D.bi
rr34,
000
6.Senai
tear
nedasal
aryofBi
rr850f
ort
hel
astweekofSene.Shewi
l
lbepai
d
onHaml
e1.Theadj
ust
ingent
ryf
orSenai
t’
sempl
oyeratSene30i
s:
A.Sal
ari
esExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 850
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 850
B.Sal
ari
esPay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 850
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 850
C.Sal
ari
esExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 850
Sal
ari
espay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 850
D.Noent
ryi
srequi
red
7.Adj
ust
ment
sforaccr
uedexpenses:
A.I
ncr
easeexpensesanddecr
easel
i
abi
l
iti
es.
B.Decr
easeasset
sandi
ncr
easel
i
abi
l
iti
es.
C.Decr
easeexpensesandi
ncr
easeasset
s.
D.I
ncr
easeexpensesandi
ncr
easel
i
abi
l
iti
es
8.Adj
ust
ment
sforunear
nedr
evenues:
93
 A.Decr
easer
evenuesanddecr
easeasset
s.
B.Decr
easel
i
abi
l
iti
esandi
ncr
easer
evenues.
C.I
ncr
easeasset
sandi
ncr
easer
evenues
D.Noneoft
heabov
e.
9.Thef
oll
owi
ngaccount
swoul
dbei
ncl
udedi
nthepost
-cl
osi
ngt
ri
albal
ance
except
.
A.Pr
epai
dinsur
ance C.Sal
es
B.Cash D.Account
spay
abl
e
10.Thet
ri
albal
anceshowsSuppl
i
esBi
rr4,
250andSuppl
i
esExpensehav
ingzer
o
bal
ance.I
fbi
rr3,
250ofsuppl
i
esar
eonhandatt
heendoft
heper
iod,
the
adj
ust
ingent
ryi
s:
A.Suppl
i
esEx
pense 3,
250
Suppl
i
es 3,
250
B.Suppl
i
es 3,
250
Suppl
i
esExpense 3,
250
C.Suppl
i
es 1,
000
Suppl
i
esExpense 1,
000
D.Suppl
i
esExpense 1,
000
Suppl
i
es 1,
000

Par
tII
I:Wor
koutQuest
ions
At
temptt
hef
oll
owi
ngquest
ions:Showt
her
elev
antst
epsi
nyourcomput
ati
ons.
1.Thebookkeeperf
orTaborCompanyasksy
out
opr
epar
ethef
oll
owi
ngaccr
ued
adj
ust
ingent
ri
esatDecember31.
(
a)I
nter
estonnot
espay
abl
eofBi
rr5,
000i
saccr
ued.
(
b)Ser
vicespr
ovi
dedbutunbi
l
ledt
otal
Bir
r7,
500
(
c)Sal
ari
esear
nedbyempl
oyeesofBi
rr4,
900hav
enotbeenr
ecor
ded.

2.Uset
hef
oll
owi
ngaccountt
it
les:
Ser
viceRev
enue,
Account
sRecei
vabl
e,Account
s

94
 pay
abl
e,I
nter
estExpense,
Int
erestpay
abl
e,sal
ari
esexpense,
andsal
ari
espay
abl
e.
Att
heRai
nbowCompany
,pr
epay
ment
sar
edebi
tedt
oexpensewhenpai
dand
unear
nedr
evenuesar
ecr
edi
tedt
orev
enuewhenr
ecei
ved.Dur
ingJanuar
yoft
he
cur
renty
ear
,thef
oll
owi
ngt
ransact
ionsoccur
red
Jan 3.Pai
dBi
rr3,
300f
orf
ir
einsur
ancepr
otect
ionf
ort
hey
ear
.
9.Pai
dBi
rr2,
500f
orsuppl
i
es.
14.Recei
vedBi
rr7,
200f
orser
vicest
obeper
for
medi
nthef
utur
e.
OnJanuar
y31,
iti
sdet
ermi
nedt
hatbi
rr3,
200oft
heser
vicesf
eeshav
ebeen
ear
nedandt
hatt
her
ear
eBi
rr1,
000ofsuppl
i
esonhand.

I
nst
ruct
ions:
1.Jour
nal
i
zeandpostt
heJanuar
ytr
ansact
ions,
(useTaccount
s).
2.Jour
nal
i
zeandpostt
headj
ust
ingent
ri
esatJanuar
y31.
3.Det
ermi
net
heendi
ngbal
ancei
neachoft
heaccount
s
4.Thet
ri
albal
anceofEast
ernLaundr
omatatAugust31,
1999,
theandoft
he
cur
rentf
iscal
year
,andt
hedat
aneededt
odet
ermi
ney
earendadj
ust
ment
sar
e
asf
oll
ows.

East
ernLaundr
omat
Tr
ial
Bal
ance
August31,
1999
Cash 9,
890
Laundr
ysuppl
i
es 5,
250
Pr
epai
dinsur
ance 3,
125
Laundr
yequi
pment 87,
000
Accumul
ateddepr
eci
ati
on 56,
200
95
Account
spay
abl
e 69,
500
Ni
gistAbay
,Capi
tal 34,
400
Ni
gitAbay
,Dr
awi
ng 19,
000
Laundr
yrev
enue 79,
800
Wagesexpense 26,
500
Rentexpense 16,
575
Ut
il
it
iesexpense 9,
000
Mi
scel
l
aneousexpense 1,
010
177,
350 177,
350

Adj
ust
mentDat
a:
e)I
nvent
oryofl
aundr
ysuppl
i
esataugust31.
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr2,
100
f
)Insur
ancepr
emi
umsexpi
reddur
ingt
hey
ear.
..
..
..
..
..
..
..
..
..
.. 1,
900
g)Depr
eci
ati
ononequi
pmentdur
ingt
hey
ear
..
..
..
..
..
..
..
..
..
..
..
. 7,
250
h)Wagesaccr
uedbutnotpai
dataugust31.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 1,
900

I
nst
ruct
ions:
1.Recor
dthet
ri
albal
anceonat
en-
col
umnwor
ksheerandcompl
etet
hewor
k
sheet
.
2.Pr
epar
eani
ncomest
atement
,ast
atementofowner
’sequi
ty(
noaddi
ti
onal
i
nvest
ment
swer
emadedur
ingt
hey
ear
)andabal
ancesheet
.
3.Ont
hebasi
soft
headj
ust
mentdat
aint
hewor
ksheet
,Jour
nal
i
zet
headj
ust
ing
ent
ri
es.
4.Ont
hebasi
soft
hedat
aint
hewor
ksheet
,jour
nal
i
zet
hecl
osi
ngent
ri
es.

Li
stofRef
erenceMat
eri
als

1.I
ntr
oduct
iont
oAccount
i 21stcent
ng, ury
2.Fessandwar
ren,Account
ingpr
inci
ples,16th edi
ti
on,sout
h-west
ernpubl
i
shi
ng
Company
.

96
3.Fessandwar
ren,Account
ingpr
inci
ples,18th edi
ti
on,sout
h-west
ernpubl
i
shi
ng
Company
.
4.Wey
gandt
,ki
eso,Ki
mmel
,Account
ingpr
inci
ples,5th edi
ti
on,Johnwi
l
il
yandsons,
I
nc.
5.Mosi
ch,
Int
ermedi
ateAccount
i 6thedi
ng, ti
on,
MacGr
aw-
it
il
lBookCompany
.

UNI
TFOUR:ACCOUNTI
NGFORAMERCHANDI
SINGBUSI
NESS

97
Li
stofCont
ent
s
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
4.
1 Account
ingf
orPur
chases
4.
2 Account
ingf
orSal
es
4.
3 Mer
chandi
seI
nvent
orySy
stems
4.
4 Pr
esent
ati
onofCostofMer
chandi
seSol
d
4.
5 Account
ingf
orDef
err
alsandAccr
ual
s
4.
6 Wor
ksheetf
orMer
chandi
seEnt
erpr
ises
4.
7 Fi
nanci
alSt
atement
sforMer
chandi
singBusi
ness
4.
8 Adj
ust
ingandCl
osi
ngEnt
ri
es
4.
9 Rev
ersi
ngEnt
ri
es
4.
10 I
nter
im St
atement
s
4.
11 Cor
rect
ionofEr
ror
s
4.
12 Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive

Sof
ar,
thr
oughouty
ourdi
scussi
onoft
hiscour
sey
ouwer
eacquai
ntedwi
tht
hebasi
c
concept
sandpr
act
icesofaccount
ingf
oraser
vicebusi
ness.Aser
vicebusi
nessi
sa
busi
nesst
hatr
ender
sser
vicest
oit
scl
i
ent
s.I
nthi
suni
twewi
l
ltr
ytoacquai
nty
ou
wi
thbasi
caccount
ingpr
inci
plest
hatar
euni
quet
omer
chandi
singent
erpr
ises.A
mer
chandi
singbusi
nessi
sabusi
nesst
hatbuy
sandsel
l
smer
chandi
sef
orapr
ofi
t.
Thus,
aft
erhav
ingcompl
etedt
hisuni
t,y
ouwi
l
lbeabl
eto:

 Under
stand t
he account
ing f
or mer
chandi
sing t
ransact
ions i
ncl
udi
ng
pur
chasesofmer
chandi
se,sal
esofmer
chandi
se,t
ranspor
tat
ioncost
s,sal
es

98
 t
axes,
etc.
 Expl
aint
hedi
ff
erencebet
weenper
iodi
candper
pet
ual
inv
ent
orysy
stems
 I
ll
ust
rat
ethecostofgoodssol
d sect
ion oft
hei
ncomest
atementofa
mer
chandi
si
ngconcer
n
 Compr
ehendt
hedi
ff
erencebet
weeni
ncomest
atementf
oraser
vicebusi
ness
andi
ncomest
atementf
oramer
chandi
singbusi
ness.
 I
ll
ust
rat
eadj
ust
ingent
ri
esf
ordef
err
alsandaccr
ual
s
 Descr
ibet
hef
inanci
alst
atement
sforamer
chandi
singbusi
ness
 Recor
dcl
osi
ng,
rev
ersi
ng,
andcor
rect
ingent
ri
es,
etc.

I
ntr
oduct
ion

Hel
loDearSt
udent
s!I
nyourpr
evi
ousdi
scussi
ony
ouhav
elear
nedt
hef
undament
al
account
ingconcept
sandpr
act
icesasappl
i
edt
osmal
lser
viceent
erpr
ises.Ser
vice
busi
nessesar
ebusi
nessent
erpr
isest
hatgener
ate(
ear
n)r
evenueori
ncomet
hrough
r
ender
ingser
vicest
othei
rcl
i
ent
s.Asy
oudi
scussedear
li
eri
nuni
t3,t
hepr
inci
pal
t
ypeofi
ncomeorr
evenuef
oraser
vicebusi
nessi udes:f
ncl eesi
ncome,(
fees
ear
ned)
,commi
ssi
oni
ncome,
far
esi
ncome,
tui
ti
onf
ees,
etc.

Ont
heot
herhand,amer
chandi
singbusi
nessi
sabusi
nessent
erpr
iset
hatbuy
s
mer
chandi
se (
goods)f
orr
esal
eto cust
omer
s.These t
ypes ofbusi
nesses ar
e
pr
imar
il
yengagedi
nthebuy
ingandsel
l
ingofmer
chandi
se,i
nst
eadofr
ender
ing
ser
vicet
hatmakest
heact
ivi
ti
esofmer
chandi
si
ngent
erpr
isesdi
ff
erentf
rom t
he
act
ivi
ti
esofser
viceent
erpr
ises.Hence,i
nthi
suni
tyouwi
l
ldi
scussi
ndet
ailt
he
maj
oraccount
ingpr
inci
plesandpr
act
icesappl
i
edf
oramer
chandi
singbusi
ness.

4.
1Account
ingf
orPur
chases

Pur
chasesofmer
chandi
sear
eusual
l
yident
if
iedi
nthel
edgeraspur
chases.Amor
e
99
exactaccountt
it
le,suchas“
Pur
chasesofMer
chandi
se,
”coul
dbeused,butt
he
br
ief
ert
it
lei
scust
omar
il
yused.Thus,
amer
chandi
singent
erpr
isecanaccumul
atei
n
t
hepur
chasesaccountt
hecostofal
lmer
chandi
sepur
chasedf
orr
esal
edur
ingt
he
account
ingper
iod.Pur
chasesofmer
chandi
secanbemade(
1)onacashbasi
sor(
2)
onaccount
.Theset
ransact
ionsar
eil
l
ust
rat
edbel
ow:

4.
1.1Recor
dingCashPur
chasesofMer
chandi
se

Whenmer
chandi
sei
spur
chasedonacashbasi
s,t
hepur
chasesaccountwoul
dbe
debi
tedandt
hecashaccountwoul
dbecr
edi
tedasshownbel
ow:

Oct
.1.Pur
chases……………………………. 10,
000
Cash…………………………. 10,
000
Pur
chasesf
rom suppl
i
er,
Gif
tTr
adi
ng
4.
1.2Recor
dingPur
chasesofMer
chandi
seonAccount

Mostpur
chasesofmer
chandi
sear
emadeonacr
edi
tbasi
sandar
erecor
dedasa
debi
ttot
hePur
chasesaccountand acr
edi
tto Account
sPay
abl
eaccountas
i
l
lust
rat
edbel
ow:
Oct
.2.Pur
chases……………………………. 7,
500
AccountPay
abl
e…………….
. 7,
500
Pur
chasesf
rom Suppl
i
erABCCo

CheckYourPr
ogr
ess:Exer
cise4.
1
1.Whatdi
sti
ngui
shesamer
chandi
singbusi
nessf
rom aser
viceent
erpr
ise?
_
___
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___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
__
2.Whati
sthenameoft
heaccounti
nwhi
chpur
chasesofmer
chandi
sear
erecor
ded?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
100
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
__

4.
1.3Pur
chasesDi
scount
s
Thear
rangement
sagr
eeduponbyt
hebuy
erandt
hesel
l
erast
owhenpay
ment
sfor
mer
chandi
sear
etobemadei
scal
l he cr
edt edi
tter
ms.I
fpay
menti
srequi
red
i
mmedi
atel
yupondel
i
ver
yofgoods,t
het
ermsar
esai
dt cash”or“
obe“ netcash”
.
Ot
her
wise,
thebuy
eri
sal
l
owedacer
tai
namountoft
ime, hecr
knownast edi
tper
iod,
i
nwhi
cht
opay
.

I
tisusualf
ort
hecr
edi
tper
iodt
obegi
nwi
tht
hedat
eoft
hesal
easshownbyt
he
dat
eoft
hei
nvoi
ceorbi
l
l.I
fpay
menti
sduewi
thi
nast
atednumberofday
saf
tert
he
dat
eoft
hei
nvoi
ce,f
orexampl
e30day
s,t
het
ermsar
esai
dtobe“
net30day
s,”
whi
chmaybewr
it
t n/
enas“ 30”
.Ont
heot
herhand,i
fpay
menti
sduebyt
heendof
t
hemont
hinwhi
cht
hesal
ewasmade,
itmaybeexpr n/
essedas“ eom”
.

Whyi
sthesel
lergr
ant
sacashdi
scountt
othepur
chaser
?Whatdoyout
hinki
sthe
ef
fectofapur
chasesdi
scountont
hePur
chasesaccount
?Gi
veyouransweri
n
wr
it
ingbef
oreyour
eadt
hedi
scussi
onbel
ow.

Foracr
edi
tsal
e,abuy
eri
sexpect
edt
opayt
hesel
l
erwi
thi
nthecr
edi
tper
iodagr
eed
upon.Toencour
ageabuy
ert
omakepay
mentbef
oret
heendoft
hisper
iod,asel
l
er
mayal
l
ow adeduct
ionf
rom t
heamountoft
hei
nvoi
ce.Adeduct
iont
hatasel
l
er
al
l
owsont
heamountofi
nvoi
cet
oencour
ageabuy
ert
omakepr
omptpay
menti
s
edacashdi
cal
l scount
.

Acashdi
scounti
susual
l
yst
atedasaper
cent
aget
hatcanbededuct
edf
rom t
he
101
amountoft
hei
nvoi
ce.Forexampl
e,t
het
ermsofsal
eonani
nvoi
cemaybewr
it
ten
as2/
10,n/
30.Theset
ermsar
ecommonl
yreadt
wot
en,nett
hir
ty.Thet
ermt
wot
en
meanst
hatabuy
ermaydeduct2%oft
hei
nvoi
ceamounti
fpay
menti
smadewi
thi
n
10day
sfr
om t
hedat
eoft
hei
nvoi
ce.Thet
erm nett
hir
tymeanst
hati
fani
nvoi
cei
s
notpai
dwi
thi
n10day
s,t
hebuy
eri
srequi
redt
opayt
het
otal
amountwi
thi
n30day
s.

Abusi
nessal
somayi
ndi
cat
ethedat
eforf
ullpay
mentofani
nvoi
ceasEOM.Thi
s
meanst
hatf
ullpay
menti
sexpect
ednotl
atert heendoft
hant hemont
h.I
f,f
or
exampl
e,t
het
ermsar
est
atedas1/
10,
n/30EOM,
a1%di
scountmaybet
akeni
fthe
i
nvoi
cei
spai
dwi
thi
n10day
saf
tert
heendoft
hemont
hinwhi
cht
hei
nvoi
cei
sdat
ed.
Thef
ullamountoft
hei
nvoi
cemustbepai
donorbef
ore30day
saf
tert
heendoft
he
mont
h.

Whati
sthe advant
age f
ort
he pur
chaseroft
aki
ng a di
scount
?At
temptt
he
quest
ionbyyourowni
nwr
it
ing.

Acashdi
scountonpur
chasest
akenbyabuy
eri edapur
scal
l chasesdi
scount
.
Fr
om t
hebuy
er’
svi
ew poi
nt,i
tisi
mpor
tantt
otakeadv
ant
ageofal
lav
ail
abl
e
di
scount
s,becausewhent
hebuy
ert
akesadv
ant
ageofapur
chasesdi
scount
,he
pay
slesst
hant
hepur
chasepr
icer
ecor
dedonhi
sbooks.Ther
efor
e,apur
chase
di
scounti
sadeduct
ionf
rom pur
chases.Pur
chasedi
scount
stakenbyt
hebuy
erf
or
ear
lypay
mentofani
nvoi
cear
erecor
dedbyabuy
erasacr
edi
tt hepur
ot chases
di
scount
saccountt
oshowadeduct
ionf
rom t
hepur
chasesaccount
.

CheckYourPr
ogr
ess:Exer
cise4.
2
1.Whyacashdi
scounti
ssomet
imesof
fer
edt
oaper
sonwhohaspur
chased

102
 mer
chandi
seonaccount
?
_
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_
_
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___
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___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
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___
___
___
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___
___
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___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
2.Whati
smeantbyt
ermsofsal
e1/
10,
n/30?
_
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___
___
___
___
___
___
___
___
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_
_
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___
___
___
___
_
_
___
___
___
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___
___
___
___
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___
___
___
___
___
___
___
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___
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___
_
_
___
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___
___
___
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___
___
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___
___
___
___
___
__
3.Whati
sthet
erm appl
i
edt
odi
scount
sforear
lypay
mentbyt
hebuy
er
_
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_

I
ll
ust
rat
ionofPur
chasesDi
scount
sTr
ansact
ions

Assumi
ngt
hatOnOct
ober5,NobelTr
adi
ngPur
chasedmer
chandi
seamount
ingt
o
Bi
rr11,
000onaccountf
rom Val
l
eySuppl
yCompanywi
tht
erms2/
10,n/
30,FOB
Shi
ppi
ngPoi
nt.Nov
el’
sent
ri
esf
ort
hepur
chasei
nvoi
cepr
esent
edabov
eandi
ts
pay
mentatt
heendoft
hedi
scountper
iodcoul
dber
ecor
dedasf
oll
ows:
Oct
.5.Pur
chases……………………………………. 11,
000
Account
sPay
abl
e……………………. 11,
000
Tor
ecor
dpur
chasesf
rom Val
l
eySuppl
yCo.

Oct
.15.Account
sPay
abl
e…………………………… 11,
000
Cash………………………………….
. 10,
780
Pur
chasesDi
scount
s…………………. 220
Tor
ecor
dthepaymentoft
hei
nvoi
cet
oVal
l
eyCo.wi
thi
nthedi
scount
per
iod.
103
Whati
f,paymenti
snotmadewi
thi
nthedi
scountper
iod?Whatwoul
dbet
he
amountofcashr
equi
redf
orpayment
?

I
fpay
mentoft
hei
nvoi
cei
smadeaf
tert
hedi
scountper
iodhadbeenel
apsed,t
he
amountofcashr
equi
redf
orpay
menti
sequal
tot
hei
nvoi
ceamountandnodi
scount
wi
l
lber
ecor
dedi
nthebuy
er’
sbook.Theent
ryt
orecor
dthepay
mentoft
hei
nvoi
ce,
i
fpay
menti
smadeaf
tert
hedi
scountper
iodwoul
dbe:

Nov
.5.Account
sPay
abl
e……………………………. 11,
000
Cash………………………………….
.. 11,
000
Tor
ecor
dpaymentoft
hei
nvoi
cet
oVal
l
eyCo.af
tert
hedi
scount
per
iod.

4.
1.4Pur
chasesRet
urnsandAl
lowances

Thebuy
erofmer
chandi
semaybeal
l
owedar
educt
ioni
nanaccountf her
ort etur
nof
par
toral
loft
hemer
chandi
sepur
chased.Mer
chandi
ser
etur
nedbyabuy
erf
orcr
edi
t
i edaPur
scal
l chasesRet
urn.Abuyermayal
sobeal
l
owedar
educt
ioni
nanaccount
byt
hesel
l
eri
fthemer
chandi
ser
ecei
vedwasi
nfer
iori
nqual
i
tyorwasdamaged
whenr
ecei
ved.I
nthesecondsi
tuat
ion,
themer
chandi
sei
sret
ainedbyt
hebuy
erand
he wi
l
lask t
he sel
l
er a pr
ice adj
ust
ment (
reduct
ion) f
or t
he def
ect
ive or
unsat
isf
act
orymer
chandi
se.Thi
sisof
t edaPur
encal
l chasesAl
lowance.

Apur
chasesr
etur
noral
l
owanceshoul
dbeconf
ir
medi
nwr
it
ing.Thedet
ail
smaybe
st
atedi
nal
ett
eroronaf
orm.Af
orm pr
epar
edbyt
hebuy
ercont
aini
ngar
ecor
dof
t
heamountoft
hedebi
ttakenbyt
hebuy
erf
orr
etur
ns,
all
owances,
andsi
mil
ari
tems

104
i eda debi
scal
l tmemor
andum.I
tiscal
l
edadebi
tmemor
andum becauset
he
amounti
sadeduct
ion(
debi
t)f
rom t
hel
i
abi
l
ityaccountAccount
sPay
abl
e.

Thebuy
ermayuseacopyoft
hedebi
tmemor
andum ast
hesour
cedocumentf
or
r
ecor
dingapur
chasesr
etur
nsandal
l
owancest
ransact
ion.Howev
er,t
hebuy
ermay
wai
tforwr
it
tenconf
ir
mat
ionf
rom t
hesel
l
eranduset
hatast
hesour
cedocument
.

I
ll
ust
rat
ionofPur
chasesRet
urnsandAl
lowancesTr
ansact
ions

Toi
l
lust
rat
e,assumi
ngt
hatNobl
eTr
adi
ngi
dent
if
ieddef
ect
ivemer
chandi
sewi
th
i
nvoi
ceamountofBi
rr1000t
hatwer
eacqui
redf
rom Gi
ftTr
adi
ngasofOct
ober5.
Theent
ryf
orNobl
eTr
adi
ngt
orecor
dther
etur
noft
hemer
chandi
sei
dent
if
iedi
nthe
debi
tmemoabov
ewoul
dbeasf
oll
ows:

Oct
.12.Account
sPay
abl
e…………………………….
. 1000
Pur
chaseRet
urnsandAl
l
owances…….
. 1000
Tor
ecor
daDebi
tMemof
orPur
chaser
etur
nsandAl
l
owances

NB.Thepur
chasesr
etur
nsandal
l
owancesaccountcanbevi
ewedasadeduct
ion
f
rom t
he amounti
nit
ial
l
yrecor
ded i
n Pur
chases.I
nthi
s sense,l
i
ke Pur
chase
Di
scount
s,t
hePur
chasesRet
urnsandAl
l
owancesaccounti
sacont
ra(
orof
fset
ti
ng)
accountt
oPur
chases.

Whati
f,t
her
etur
nandal
lowancef
ordef
ect
ivemer
chandi
se,i
smadebyt
hebuyer

105
af
terpaymentoft
hei
nvoi
cei
smade?How doyour
ecor
dtheent
ry?At
temptt
he
quest
ionbyyourowni
nwr
it
ing.

I
fthebuy
eri
dent
if
ieddef
ect
ivemer
chandi
seaf
terhehasset
tl
edpay
mentoft
he
i
nvoi
ce,t
heset
tl
ementmaybeacashr
efund.Thati
s,t
hebuy
erwi
l
laskt
hesel
l
era
cashr
efundf
ort
hedef
ect
ivemer
chandi
se.Toi
l
lust
rat
ethi
s,assumi
ngt
hatNobl
e
Tr
adi
ngi
dent
if
iedt
heBi
rr1000def
ect
ivemer
chandi
seacqui
redf
rom Val
l
eyCo.
,
af
terset
tl
ementoft
heent
ir
einv
oice.Nobl
easkedacashr
efundequalt
othev
alue
ofdef
ect
ivemer
chandi
seandt
heent
ryt
orecor
dther
ecei
ptoft
hecashr
efundby
nobl
eTr
adi
ngcoul
dbeasf
oll
ows:

Oct
.15.Cash(
Account
sRecei
vabl
e)………………….
. 1000
Pur
chasesRet
urnsandAl
l
owances……. 1000
Tor
ecor
dthePur
chaseRet
urnsandAl
l
owancesandt
her
ecei
ptof
cashr
efundf
rom sel
l
er.

CheckYourPr
ogr
ess:Exer
cise4.
3
1.SekaTr
adi
ngpur
chasedmer
chandi
seonaccountf
rom asuppl
i
erf
orBi
rr15,
000,
t
erms 2/
10,n/
30.Seka Tr
adi
ng r
etur
ned Bi
rr3,
000 oft
hemer
chandi
seand
r
ecei
vedf
ull cr
edi
t.
(
a)I
fSekapay
sthei
nvoi
cewi
thi
nthedi
scountper
iod,whati
stheamountof
cashr
equi
redf
ort
hepay
ment
?(Showt
henecessar
ycomput
ati
ons)
.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

(
b)Whataccount
sar
ecr
edi
tedbySekaTr
adi
ngt
orecor
dther
etur
nsandt
he
cashdi
scount
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
106
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
__

4.
2Account
ingf
orSal
es

I
nthepr
evi
oussect
ionoft
hisuni
tyouhav
elear
nedoneoft
hemaj
oract
ivi
ti
esofa
mer
chandi
singbusi
ness,t
hepur
chaseofmer
chandi
se.Anot
hermaj
oract
ivi
tyofa
mer
chandi
singbusi
nessi
sthesal
eofmer
chandi
se.Mer
chandi
sesal
esar
eusual
l
y
i
dent
if
iedi
nt edgerasSal
hel es,oramor
eexactt
it
l suchassal
e, esofmer
chandi
se,
coul
dbeused.

A mer
chandi
si
ng busi
nessmaysel
lmer
chandi
seei
ther(
1)f
orcash or(
2)on
accountorcr
edi
tbasi
s.

4.
2.1Recor
dingSal
eofMer
chandi
sef
orCash
Whenabusi
nesssel
l
smer
chandi
seonacashbasi
s,t
heassetaccount
,Cash,woul
d
bedebi
tedandt
her
evenueaccount
,Sal
es,
woul
dbecr
edi
tedasshownbel
ow:

Oct
.1.Cash……………………………………….
. 5,
500
Sal
es………………………………. 5,
500
Tor
ecor
dcashsal
esofmer
chandi
se

4.
2.2Recor
dingSal
esonAccount
Amer
chandi
singbusi
nessmayal
sosel
lmer
chandi
seonaccount
,thati
s,wi
thout
r
ecei
vi
ngcashi
mmedi
atel
yatt
het
imeofsal
e.Suchsal
esr
esul
tinadebi
ttot
he
assetaccount
,Account
sRecei
vabl
e,andacr
edi
ttot
her
evenueaccount
,Sal
es.To

107
i
l
lust
rat
e,assumet
hatonOct
ober4,2007,Nobl
eTr
adi
ngsol
dmer
chandi
seon
accountt
o Sunr
ise Co.
,amount
ing t
o Bi
rr4,
500,wi
tht
erms 1/
10,n/
30,FoB
Dest
inat
ion.Theent
ryt
orecor
dthi
str
ansact
ionwoul
dbeasshownbel
ow:

Oct
.4.Account
sRecei
vabl
e………………………. 4,
500
Sal
es……………………………….
. 4,
500
Ent
ryt
orecor
dcr
edi
tsal
est
oacust
omer
,Sunr
iseCo

4.
2.3Sal
esDi
scount
s
A cashdi
scountonsal
esgr
ant
edt
oacust
omerbyt
hesel
l
eri edasal
scal
l es
di
scount
.Sal
esdi
scount
sar
egr
ant
edbyt
hesel
l
ert
oencour
aget
hebuy
ert
omake
pr
omptpay
ment
.Whenasal
esdi
scounti
sgr
ant
ed,
thesel
l
err
ecei
vesl
esst
hant
he
sal
epr
icer
ecor
dedatt
het
imeoft
hesal
e.Sal
esdi
scount
sreducet
her
evenuef
rom
sal
esandar
evi
ewedasacont
ra(
orof
fset
ti
ng)accountt
osal
es.Toi
l
lust
rat
e,
assumi
ngt
hatNobl
eTr
adi
ngr
ecei
vedpay
mentf
rom Sunr
iseCo.wi
thi
nthedi
scount
per
iod.The ent
ryt
orecor
dthe r
ecei
ptofcash f
rom Sunr
ise Co and t
he
accompany
ingsal
esdi
scount
sar
eshownbel
ow:

Oct
.14.Cash……………………………………….
.. 4,
455
Sal
esDi
scount
s…………………………….
. 45
Account
sRecei
vabl
e………………… 4,
500
Tor
ecor
dcol
l
ect
ionofcashf
rom t
hecust
omerwi
thi
nthedi
scount
per
iod

I
fSunr
isemakest
hepay
mentaf
tert
hedi
scountper
iodhadbeenel
apsed,sayon
Nov
ember3,t
heamountofcashr
ecei
vedbyNobl
eTr
adi
ngwoul
dbeequalt
othe
i
nvoi
ceamount
,i.
e.,
Bir
r4,
500,
andt
heent
rywoul
dber
ecor
dedasbel
ow:

Nov
.3.Cash……………………………….
..
..
..
..
..
..
..
..
..
..
..
.4,
500
108
 Account
sRecei
vabl
e……………………. 4,
500
Tor
ecor
dcol
l
ect
ionofcashf
rom t
hecust
omeraf
tert
hedi
scount
per
iod

CheckYourPr
ogr
ess:Exer
cise4.
4
1.Whataccount
sar
eaf
fect
ed whencashi
srecei
ved onaccountand acash
di
scounti
s t
aken?Howar
etheaccount
saf
fect
ed?
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

4.
2.4Sal
esRet
urnsandAl
lowances
Mer
chandi
sesol
dmayber
etur
nedbyt
hebuy
er(
sal
esr
etur
n)or
,becauseofdef
ect
s
orf
orot
herr
easons,t
hebuy
ermaybeal
l
owedar
educt
ionf
rom t
heor
igi
nalsel
l
ing
pr
iceatwhi
cht
hegoodswer
esol
d(sal
esal
l
owance)
.Ift
her
etur
noral
l
owancei
s
f
orasal
eonaccount
;thesel
l
erusual
l
ygi
vest
hebuy
eracr
edi
tmemor
andum.Thi
s
memor
andum showst
heamountf
orwhi
cht
hebuy
eri
stobecr
edi
tedandt
he
r
easont
her
efor
e.

Sal
esr
etur
nsandal
l
owancesdecr
easet
heamountofsal
esandt
heamountofcash
oraccount
srecei
vabl
e.Somebusi
nessesdebi
tthesal
esaccountf
ort
heamountof
ar
etur
noral
l
owance.Howev
er,
mostbusi
nessesdebi
ttheseamount
stoasepar
ate
account
.Asepar
ateaccounti
susedt
oshowhowl
arget
heamountofsal
esr
etur
n
andal
l
owanceshasbecome.Fur
ther
mor
e,t
hebusi
nesscanseei
fther
etur
nsand
al
l
owancesar
eincr
easi
ngordecr
easi
ngf
rom oneaccount
ingper
iodt
othenext
.If
t
heamount
sar
ever
ylar
ge,oneaccountmaybemai
ntai
nedf
orsal
esr
etur
nand
anot
heraccountf
orsal
esal
l
owances.Thesal
esr
etur
nsandal
l
owancesaccounti
s
pl
acedi
nther
evenuedi
vi
sionoft
hegener
all
edger
.

Toi
l
lust
rat
etheaccount
ingf
orsal
esr
etur
nsandal
l
owances,assumet
hatNobl
e
109
Tr
adi
ngr
ecei
veddef
ect
ivemer
chandi
sewi
thi
nvoi
ceamountofBi
rr500f
rom a
cust
omer
,Zi
qual
aTr
adi
ng.Theent
rywoul
dber
ecor
dedi
nthebooksofNobl
e
Tr
adi
ngasf
oll
ows:

Oct
.15.Sal
esRet
urnsandAl
l
owances……………… 500
Account
sRecei
vabl
e………………… 500
Tor
ecor
dcr
edi
tmemof
orsal
esr
etur
nsandal
l
owances

NB.I
facashr
efundi
smadebecauseofmer
chandi
ser
etur
nedorf
oranal
l
owance,
Sal
esr
etur
nsandAl
l
owancesi
sdebi
tedandcashi
scr
edi
ted.

CheckYourPr
ogr
ess:Exer
cise4.
5
1.Whataccount
sint
hegener
all
edgerar
eaf
fect
edbyasal
esr
etur
nsand
al
l
owancest
ransact
ion?
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
__
2.Af
tert
heamountdueonasal
eofBi
rr4000,t
erms2/
10,n/
eom,i
srecei
ved
f
rom acust
omerwi
thi
nthedi
scountper
iod,t
hesel
l
erconsent
stot
her
etur
n
oft
heent
ir
eshi
pment
(
a)Whati
stheamountoft
her
efundowedt
othecust
omer
?
(
b)Whataccount
sshoul
dbedebi
tedandcr
edi
tedbyt
hesel
l
ert
orecor
d
t
her
etur
nandt
her
efund?
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

110
_
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___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
__

4.
2.5 Tr
anspor
tat
ionCost
s
The t
erms oft
he agr
eementbet
ween t
he buy
erand sel
l
eri
ncl
ude pr
ovi
sions
r
egar
ding:
(
1)whent
heowner
shi
port
it
leoft
hemer
chandi
sepassesf
rom t
hesel
l
ert
o
t
hebuy
er,
and
(
2)whi
chpar
tyi
stobeart
hecostofdel
i
ver
ingt
hemer
chandi
set
othebuy
er.

Ther
eAr
eTwoTer
msRegar
dingt
heOwner
shi
poft
heGoods:

a)FoBShi
ppi
ngPoi
nt:i
fthet
erm st
atedont
hei
nvoi
cei
sFoBShi
ppi
ngPoi
nt,
tit
leor
owner
shi
ptot
hegoodspassest
othebuy heshi
eratt ppi
ngpoi
ntoratt
hepoi
ntof
or
igi
nandt
hebuy
eri
sresponsi
blet
ocov
ert
het
ranspor
tat
ioncost
s.Tr
anspor
tat
ion
costpai
d byt
he buy
eri
s added t
othe costofgoods t
oyi
eldt
otalcostof
mer
chandi
se pur
chased.FoB Shi
ppi
ng Poi
ntmeans t
hatt
he sel
l
erpl
aces t
he
mer se“
chandi freeonboar
d”att
heshi
ppi
ngpoi
ntandt
hebuy
eri
sresponsi
blef
or
t
het
ranspor
tat
ioncost
sbey
ondt
hatpoi
nt.

Somet
imes,asacour
tesyt
oacust
omer
,asel
l
erof
tenpay
sthet
ranspor
tat
ion
char
ges on mer
chandi
se att
he t
ime i
tis shi
pped.When t
hisi
s done,t
he
t
ranspor
tat
ionchar
gesar
eincl
udedont
hei
nvoi
ceandbecomepar
toft
het
otalof
t
hei
nvoi
ce.I
fasel
l
erpay
sthet
ranspor
tat
ionchar
gesandi
ncl
udest
hem ont
he
i
nvoi
ce,t
he buy
er debi
tst
he ent
ir
e amount of t
he i
nvoi
ce,i
ncl
udi
ng t
he
t
ranspor
tat
ion char
ges,t
othe Pur
chases account
.Tr
anspor
tat
ion char
ges on
i
ncomi
ngshi
pment
sar
epar
toft
het
otalcostofpur
chases.I
ftr
anspor
tat
ioncost
s
ar
eincl
udedonani
nvoi
ce,t
hedi
scount(
ifany
)isnotal
l
owedont
hispor
ti
onoft
he
i
nvoi
ce.To i
l
lust
rat
e,assume t
haton Oct
ober16,Nobl
e Tr
adi
ng pur
chases

111
mer
chandi
sef
rom Br
idgeCompanyonaccount
,Bi
rr2,
500,
ter
msFoBShi
ppi
ngPoi
nt,
3/
10,n/
45,wi
thpr
epai
dtr
anspor
tat
ioncost
sofBi
rr200addedt
othei
nvoi
ce.The
ent
rybyNobl
eTr
adi
ngwoul
dber
ecor
dedasf
oll
ows:

Oct
.16.Pur
chases……………………………………… 2,
500
Fr
eight–I
n…………………………………… 200
Account
sPay
abl
e………………………. 2,
700

Ont
hecont
rar
y,t
hesamet
ransact
ioncoul
dber
ecor
dedbyt
hesel
l
erasf
oll
ows:
Oct
.16.Account
sRecei
vabl
e………………………….2,
700
Sal
es…………………………………… 2,
500
Cash……………………………………. 200
I
fthet
ermspr
ovi
def
oradi
scountf
orear
lypay
ment
,thedi
scounti
sbasedont
he
amountoft
hesal
erat
hert
hanont
het
otalamountoft
hei
nvoi
ce.Toi
l
lust
rat
e,i
f
Br
idgeCo.pay
stheamountdueont
hepur
chaseofOct
ober16wi
thi
nthedi
scount
per
iod,t
heamountoft
hedi
scount
,theamountoft
hepay
ment
,andt
heent
ryt
o
r
ecor
dthepay
mentwoul
dbe:

Oct
.26.Account
sPay
abl
e……………………………… 2,
700
Cash…………………………………….
. 2,
625
Pur
chasesDi
scount
s……………………. 75

I
nsomecases,
thet
ranspor
tat
ionchar
gesonpur
chasesar
epai
dbyabuy
erdi
rect
ly
t
othet
ranspor
tat
ionCompany
.Whenabuy
erpay
sthet
ranspor
tat
ionchar
ges,t
he
buy
erdebi
tsPur
chasesf
ort
heamountoft
hechar
ges.Somebusi
nessespr
efert
o
r
ecor
dthet
ranspor
tat
ionchar
gesi
nasepar
ateaccountt
it
ledTr
anspor
tat
ion–I
nor
Fr
eight–I
n.Whenei
theroft
heseaccount
sisused,i
tiscl
assi
fedasacostof
i
mer
chandi
seaccountandi oPur
saddedt chasesont
hei
ncomest
atement
.

b)FoBDest
inat
ion: Ont
heot
herhand,i
fthet
erm st
atedont
hei
nvoi
cei
sFoB
Dest
inat
ion,
tit
leorowner
shi
ptot
hegoodspassest
othebuy
erwhent
hegoodsar
e

112
r
ecei
vedbyt
hebuy
er.I
nthi
scaset
hesel
l
eri
sresponsi
blet
ocov
ert
ranspor
tat
ion
cost
s.FoBDest
inat
ionmeanst
hatt
hesel
l
erpl hegoods“
acest freeonboar
d”t
oit
s
dest
inat
ionbypay
ingt
hedel
i
ver
ycost
s.I
nthi
scase,t
het
ranspor
tat
ioncost
spai
d
byt
hesel
l
ershoul
dbedebi
tedt
oFr
ei ,Tr
ght– Out anspor
tat
ion– Out
,Del
i
ver
y
Expense,orasi
mil
arl
yti
tl
edaccount
.Thet
otalofsuchcost
sincur
reddur
inga
per
iodi
srepor
tedont
hesel
l
er’
sincomest
atementasasel
l
ingexpense.

CheckYourPr
ogr
ess:Exer
cise4.
6
1.Whobear
sthet
ranspor
tat
ioncost
swhent
het
ermsofsal
ear
e(a)FoB
Shi
ppi
ngpoi
nt,
(b)FoBDest
inat
ion?
_
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___
___
___
___
___
___
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___
___
___
___
___
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___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
2.Mer
chandi
sei
ssol
donaccountt
oacust
omerf
orBi
rr20,
000,t
ermsFoB
shi
ppi
ngpoi
nt,3/
10,n/
30,t
hesel
l
erpay
ingt
het
ranspor
tat
ioncost
sofBi
rr
1,
500.Det
ermi
net
hef
oll
owi
ng:
(
a)t
heamountoft
hesal
e
(
b)Amountdebi
tedt
oAccount
sRecei
vabl
e
(
c)Amountoft
hedi
scountf
orear
lypay
ment
(
d)Amountoft
her
emi
tt
anceduewi
thi
nthedi
scountper
iod
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
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___
_
4.
2.6 Sal
esTaxes
Hel
loDearSt
udent
s!Don’
tyouknowasal
est
ax?Wehopey
ouknowal
i
ttl
eabouti
t.
I
tisat
axi
mposedont
hesal
eofgoods.I
nEt
hiopi
a,t
hegov
ernmentorot
hert
axi
ng
uni
tsl
evyat
axonr
etai
lsal
esofmer
chandi
se.Thel
i
abi
l
ityf
ort
hesal
est
axi
s
or
dinar
il
yincur
redatt
het
imet
hesal
eismade,r
egar
dlessofwhet
hert
hesal
eis
madef
orcashoroncr
edi
tbasi
s.

Att
het
imeofcashsal
es,t
hesel
l
ercol
l
ect
sthesal
estax.Whenasal
eismadeon
113
account
,thebuy
eri
schar
gedf
ort
het
ax.Thesel
l
ercr
edi
tst
hesal
esaccountf
or
onl
ytheamountoft
hesal
e,andcr
edi
tst
het
axt
oSal
esTaxPay
abl
eAccount
.To
i
l
lust
rat
e,assumet
hatNobl
eTr
adi
ngsol
dmer
chandi
seonaccountamount
ingt
o
Bi
rr1000,subj
ectt
oa15%sal
est
ax.Theent
ryt
orecor
dthesal
eandt
hesal
est
ax
l
i
abi
l
itywoul
dbeasshownbel
ow:
Oct
.19.Account
sRecei
vabl
e……………………… 1,
150
Sal
es………………………………… 1000
Sal
esTaxPay
abl
e…………………… 100

NB.Att
heendofeachper
iodt
heact
ualamountoft
hesal
est
axl
i
abi
l
ityi
spai
dto
t
heappr
opr
iat
etaxi
nguni
t,andSal
esTaxPayabl
eisdebi
ted.

CheckYourPr
ogr
ess:Exer
cise4.
7
1.Asal
eofmer
chandi
seonaccountf
orBi
rr9000i
ssubj
ectt
oa4%sal
est
ax.
(
a)Shoul
dthesal
est
axber
ecor
dedatt
het
imeofsal
eorwhenpay
menti
s
r
ecei
ved?
(
b)Whati
stheamountoft
hesal
e?
(
c)Whati
stheamountdebi
tedt
oAccount
sRecei
vabl
e?
(
d)Whati
sthet
it
leoft
heaccountt
owhi
cht
heBi
rr360i
scr
edi
ted?
_
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___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
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___
__

4.
3Mer
chandi
seI
nvent
orySy
stems

I
namer
chandi
si
ngbusi
ness,mer
chandi
sepur
chaseddur
ingt
heper
iodhasbeen
r
ecor
dedi
nthepur
chasesaccount
.Someoft
hismer
chandi
semayhav
ebeensol
d

114
dur
ingt
heper
iod,andsomemaybeunsol
datt
heendoft
heper
iod.Theunsol
d
mer
chandi
seatt
heendoft
heper
iodr
epr
esent
sanendi
ngi
nvent
oryt
hatshoul
dbe
r
epor
tedont
hebal
ancesheetasanasset
.Thi
ssamei
nvent
orybecomest
he
begi
nni
ngi
nvent
oryi
nthenextaccount
ingper
iod.

Thephy
sicalquant
it
iesi
ninv
ent
orymaybemeasur
edbyuseofei
theraper
iodi
c
i
nvent
orysyst
em oraper
pet
uali
nvent
orysyst
em.Theessent
ialdi
ff
erencebet
ween
t
heset
wosy
stemsf
rom anaccount
ingpoi
ntofv
iewi
sthef
requencywi
thwhi
cht
he
phy
sicalf
lowsar
eassi
gnedav
alue.I
ntheper
iodi
csy
stem,t
hei
nvent
oryv
aluei
s
det
ermi
nedonl
yatpar
ti
cul
art
imes,
suchasatt
heendoft
her
epor
ti
ngper
iod.

I
naper
pet
ualsy
stem ofi
nvent
oryv
aluat
ion,
theongoi
ngphy
sicalf
lowi
smoni
tor
ed,
andt
hecostoft
hei
temsi
smai
ntai
nedonacont
inual
basi
s.

4.
3.1Per
iodi
cInv
ent
orySy
stem
I
naper
iodi
cinv
ent
orysy
stem,anact
ualphy
sicalcountoft
hegoodsonhandi
s
t
akenatt
heendofeachaccount
ingper
iodf
orwhi
chf
inanci
alst
atement
sar
e
pr
epar
ed.The goods ar
e count
ed,wei
ght
ed,orot
her
wise measur
ed,and t
he
quant
it
iesar
ethenmul
ti
pli
edbyuni
tcostt
oval
uet
hei
nvent
ory
.Int
hissy
stem
pur
chasesar
edebi
tedt
oapur
chasesaccount
,andend-
of-
per
iodent
ri
esar
emade
t
ocl
oset
hepur
chasesaccount
,tocl
oseoutbegi
nni
ngi
nvent
oryasanasset(
i.
e.,
t
heendi
ngi
nvent
oryr
epl
acest
hebegi
nni
ngi
nvent
oryi
ntheaccount
s).Whenasal
e
ofmer
chandi
sei
smadeonl
yther
evenuef
rom sal
eisr
ecor
dedandnoat
temptcan
bemadet
orecor
dthecostofgoodssol
datt
het
imeeachsal
eismade.I
nst
ead,
the
d(
costofgoodssol costofsal
es)i
scomput
edasar
esi begi
dualamount( nni
ng
I
nvent
orypl
usnetpur
chasesl
essendi
ngi
nvent
ory)
.

4.
3.2Per
pet
ualI
nvent
orySy
stem
Whenaper
pet
uali
nvent
orysy
stem i
sused,det
ail
edper
pet
uali
nvent
oryr
ecor
ds,i
n
115
addi
ti
ont
otheusuall
edgeraccount
s,ar
emai
ntai
nedf
oreachi
nvent
oryi
tem,
andan
i
nvent
orycont
rol
accounti
smai
ntai
nedi
nthegener
all
edgeronacur
rentbasi
s.

Whenpur
chaseofmer
chandi
sei
smade,i
tisdebi
tedt
otheMer
chandi
seI
nvent
ory
account
;andwhenasal
eofmer
chandi
sei
smadewer
ecor
dbot
hther
evenuef
rom
sal
eandt
hecostofgoodssol
d.Thus,i
nthi
smet
hodt
heaccount
ingr
ecor
ds
cont
inuousl
ydi
scl
oset
hei
nvent
oryonhand.

4.
4Pr
esent
ati
onofCostofMer
chandi
seSol
d

For mer
chandi
si
ng ent
erpr
ises t
hat use t
he per
iodi
c sy
stem,t
he cost of
mer
chandi
sesol
ddur
ingaper
iodi
srepor
tedi
nasepar
atesect
ioni
nthei
ncome
st
atement
.Toi
l
lust
rat
eassumet
hatNobl
eTr
adi
ngbegani
tsbusi
nessoper
ati
ons
onJanuar
y10,2007,andpur
chasedBi
rr380,
000ofmer
chandi
sedur
ingt
hey
ear
.If
t
hei
nvent
oryatDecember31,2007,t
heendoft
hey
ear
,isBi
rr90,
500t
hecostof
mer
chandi
sesol
ddur
ingt
hey
earwoul
dber
epor
tedasf
oll
ows:

CostofMer
chandi
seSol
d(For2007Fi
scal
per
iod)
Pur
chases……………………………………………………….
.Bi
rr380,
000
Less:
Mer
chandi
seI
nvent
ory
,December31,
2007……………… 90,
500
CostofMer
chandi
seSol
d………………………………. 289,
500
Cont
inui
ngt
heabov
eil
l
ust
rat
ion,assumet
hatdur
ing2008Nobl
eTr
adi
ngacqui
red
mer
chandi
seamount
ingt
oBi
rr471,
800,r
ecei
vescr
edi
tforpur
chasesr
etur
nsand
al
l
owances ofBi
rr11,
800,t
akes pur
chases di
scount
s ofBi
rr4,
100,and pay
s
t
ranspor
tat
ioncost
sofBi
rr21,
000.Thepur
chasesr
etur
nsandal
l
owancesandt
he
pur
chase di
scount
s ar
e deduct
ed f
rom t
he t
otalpur
chases t
oyi
eldt
he net
pur
chases,andt
het
ranspor
tat
ioncost
sar
eaddedt
othenetpur
chasest
oyi
eldt
he
t
otal
costofmer
chandi
sepur
chased.

Themer
chandi
sei
nvent
oryaccountasofJanuar
y1,showsa bal
anceofBi
rr
90,
500(
i.
e. heendi
,t ngi
nvent
oryf
oroneper
iodbecomest
hebegi
nni
ngi
nvent
oryf
or

116
t
henextf
iscalper
iod)
,andt
hephy
sicalcountoft
hei
nvent
oryasofDecember31,
2008 r
eveal
s unsol
dinv
ent
ory amount
ing t
o Bi
rr 102,300.Ther
efor
e,t
he
comput
ati
onoft
hecostofgoodssol
dsect
ionoft
hei
ncomest
atementf
orNobl
e
Tr
adi
ngbasedont
hedat
agi
venf
or2008f
iscal
per
iodi
spr
esent
edasf
oll
ows:

CostofMer
chandi
seSol
d(For2008Fi
scal
Per
iod)

Mer
chandi
seI
nvent
ory
,Januar
y1,
2008…………………………………….Bi
rr90,
500
Pur
chasesdur
ingt
heper
iod……………………………….
.Bi
rr471,
800
Less:Pur
chaseRet
urnsandAl
l
owances………Bi
rr11,
800
Pur
chaseDi
scount
s……………………… 4,
100 15,
900
NetPur
chases……………………………………………….
.Bi
rr455,
900
Pl
us:Fr
eight–I
n……………………………………………. 21,
000
Costofmer
chandi
sepur
chased……………………………… 476,
900
Mer
chandi
seAv
ail
abl
eforSal
e……………………………… 467,
400
Less:Mer
chandi
seI
nvent
ory
,December31,
2008…………… 102,
300
CostofMer
chandi
seSol
d…………………………………….
. 365,
100

CheckYourPr
ogr
ess:Exer
cise4.
8
1.I
nwhi
cht
ypeofsy
stem f
oraccount
ingf
ormer
chandi
sehel
dforsal
eist
her
eno
at
temptt
orecor
dthecostofmer
chandi
sesol
dunt
ilt
heendoft
heper
iodwhena
phy
sical
inv
ent
oryi
staken?
_
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___
___
___
___
___
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___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
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___
___
___
___
___
_
2.Whyi
scostofgoodssol
dsomet
imeschar
act
eri
zedasar
esi
dualamount
?In
whi
chi
nvent
orysy
stem i
sthi
schar
act
eri
zat
ionappr
opr
iat
e?
_
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_
_
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117
_
___
___
___
___
___
___
___
___
___
___
___
___
3.Expl
aint
hepr
inci
pal
feat
uresofaper
iodi
cinv
ent
orysy
stem?
_
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_
_
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___
_
_
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__
Rev
iewExer
cise4.
1
1.Pr
esentent
ri
esf
ort
hef
oll
owi
ngt
ransact
ionsofGej
aCompany
.
(
a)Sol
dmer
chandi
sef
orcash,
Bir
r5000
(
b)Sol
dmer
chandi
seonaccount
,Bi
rr10,
000
2.Pr
esentent
ri
esf
ort
hef
oll
owi
ngr
elat
edt
ransact
ions
Nov
.1.Sol
dmer
chandi
set
oacust
omerf
orBi
rr8,
000,t
ermsFoBShi
ppi
ng
Poi
nt,
2/10,
n/30
3.Pai
dthet
ranspor
tat
ionchar
gesofBi
rr200,debi
ti
ngt
heamountt
o
Account
sRecei
vabl
e
6.I
ssued a cr
edi
tmemor
andum f
orBi
rr500 t
othe cust
omerf
or
mer
chandi
se r
etur
ned
10.Recei
vedacheckf
ort
heamountduef
rom t
hesal
e
3.Pr
esentent
ri
est
orecor
dthef
oll
owi
ngr
elat
edt
ransact
ionsofSur
boTr
adi
ng
Co.
, assumi
ngper
iodi
cinv
ent
orysy
stem i
sused
(
a)Pur
chasedmer
chandi
seonaccount
,Bi
rr30,
000,
ter
ms1/
10,
n/30.
(
b)Sol
dBi
rr20,
000ofmer
chandi
seonaccount
,subj
ectt
oasal
est
axof5%.
(
c)Pai
dtheamountowedi
n(a)wi
thi
nthedi
scountper
iod
(
d)Pai
dBi
rr4,
560t
othest
ater
evenuedepar
tmentf
orsal
est
axcol
l
ect
ed.
4.Thef
oll
owi
ngi
nfor
mat
ionwasav
ail
abl
eforMasonCor
por
ati
onf
or2007f
iscal
per
iod:
Begi
nni
ngI
nvent
ory
,Januar
y1,
2007………….
.Bi
rr36,
000
Pur
chasesdur
ingt
heper
iod………………………. 180,
000
Fr
eight–I
n……………………………………….
. 10,
000
CostofGoodsSol
ddur
ingper
iod……………….
. 191,
000

118
 Pur
chasesRet
urnsandAl
l
owances……………… 2,
500
Pur
chasesDi
scount
s……………………………… 500
Requi
red:1.Comput
eMason’
sendi
ngi
nvent
ory
2.Pr
epar
ethecostofgoodssol
dsect
ionofMason’
sCompanyI
ncome
St
atement

4.
5Account
ingf
orDef
err
alsandAccr
ual
s

I
nthepr
evi
ousuni
t(Uni
t3)
,youhav
ebeenl
ear
nedt
heuseofadj
ust
ingent
ri
esatt
he
end oft
he account
ing per
iod t
o mat
ch pr
oper
lyt
he r
evenues and expenses.
Fur
ther
mor
e,pr
epai
dexpenses(
def
err
als)
,suchassuppl
i
esandr
ent
,andaccr
ual
s
ofexpenses,
suchaswages,
wer
edescr
ibedandi
l
lust
rat
ed.

I
nthi
suni
tyouwi
l
llear
nindet
ailaboutt
heconcept
sofdef
err
alsandaccr
ual
sand
t
hecor
respondi
ngadj
ust
ingent
ri
es.

4.
5.1Account
ingf
orDef
err
als

Dearst s!I
udent nyouropi
nionwhatar
edef
err
als?

Adef
err
ali
sadel
ayoft
her
ecogni
ti
onofanexpenseal
readypai
dorofr
evenue
al
readyr
ecei
ved.

Def
err
edexpensesexpect
edt
obenef
itashor
tper
iodoft
imear
eli
stedont
he
bal
ancesheetamongt
hecur
rentasset
s,wher
etheyar edPr
ecal
l epai
dExpenses.
Long-
ter
m pr
epay
ment
sthatcanbechar
gedt
otheoper
ati
onsofsev
eraly
ear
sar
e
pr
esent
edont
hebal
ancesheeti
nasect
i edDef
oncal
l err
edChar
ges.

119
Def
err
edr
evenuesmaybel
i
stedont
hebal
ancesheetasacur
rentl
i
abi
l
ity
,wher
e
t
heyar edUnear
ecal
l nedRevenuesorr
evenuesr
ecei
vedi
nadvance.I
fal
ongper
iod
oft
imei
sinv
olv
ed,t
heyar
epr
esent
edont
hebal
ancesheeti
nasect
ioncal
l
ed
Def
err
edCr
edi
ts.
4.
5.1.
1Adj
ust
ment
sforDef
err
als:
a)Adj
ust
ingEnt
ri
esf
orPr
epai
dExpenses(
Def
err
als)

Pr
epai
dexpensesar
ethecost
sofgoodsandser
vicest
hathav
ebeenpur
chasedbut
notusedatt
heendoft
heaccount
ingper
iod.Thepor
ti
onoft
heassett
hathasbeen
useddur
ingt
heper
iodhasbecomeanexpense;t
her
emai
nderwi
l
lnotbecomean
expenseunt
ilsomet
imei
nthef
utur
e.Pr
epai
dexpensesi
ncl
udesuchi
temsas
pr
epai
dinsur
ance,pr
epai
drent
,pr
epai
dadv
ert
isi
ng,pr
epai
dint
erest
,andv
ari
ous
hi
ndsofsuppl
i
es.

I
nsur
ancepr
emi
umsorot
herser
vicesorsuppl
i
est
hatar
eusedmaybedebi
tedt
o
assetaccount
swhenpur
chased,ev
ent
houghal
lorapar
toft
hem ar
eexpect
edt
o
beconsumed dur
ing t
heaccount
ing per
iod.Theamountact
ual
l
yused i
sthen
det
ermi
nedatt
heendoft
heper
iodandt
heaccount
sadj
ust
edaccor
dingl
y.
I
ll
ust
rat
ionofadj
ust
ingent
ri
esf
ordef
err
als:

I
ll
ust
rat
ion1

Assumet
hatt
heof
fi
cesuppl
i
esaccountofNobl
eTr
adi
ngCompanyhasabal
ance
ofBi
rr8,
181atDecember31,
2008,
theendoft
hey
ear
.Thi
samountr
epr
esent
sthe
costofof
fi
cesuppl
i
esonhandatt
hebegi
nni
ngoft
hey
earandt
heof
fi
cesuppl
i
es
pur
chaseddur
ingt
hey
ear
.Ift
hephy
sicali
nvent
oryatt
heendoft
hey
eari
ndi
cat
ed
of
fi
cesuppl
i
esonhandt
otal
i
ngBi
rr2,
550,t
hecostoft
heof
fi
cesuppl
i
esused
dur
ingt
hey
eari
sBi
rr5,
635(
Bir
r8,
185-
bir
r2550)
.Theadj
ust
ingent
ryt
orecor
dthe
Bi
rr5,
635decr
easeoft
heassetandt
hecor
respondi
ngi
ncr
easei
nexpensei
sas

120
f
oll
ows.

Adj
ust
ingEnt
ry
Dec.31Of
fi
cesuppl
i
esexpense.
..
..
..
..
..
..
..
..
..
..
..
..
.5,
635
Of
fi
cesuppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.5,
635

Af
tert
heent
ryhasbeenpost
ed,t
heof
fi
cesuppl
i
esexpenseaccountwi
l
lhav
ea
bal
anceofBi
rr5,
635andt
hatamountwi
l
lber
epor
tedasanexpenseont
hei
ncome
st
atement
.Theof
fi
cesuppl
i
esaccountwi
l
lhav
ebal
anceofBi
rr2,
550andt
hat
amountwi
l
lber
epor
tedasanassetonNobl
eTr
aci
ng'
sbal
ancesheet
.

I
ll
ust
rat
ion2
Assumet
hatt
hepr
epai
dinsur
anceaccountf
ornobl
etr
adi
nghasabal
anceofBi
rr
16,
750atDecember31,2008.Thi
samountr
epr
esent
stheunexpi
redi
nsur
anceat
t
hebegi
nni
ngoft
hey
earpl
ust
het
otalofpr
emi
umsonpol
i
ciespur
chaseddur
ing
t
hey
ear
.Assumef
urt
hert
hatBi
rr10,
435ofi
nsur
ancepr
emi
umshav
eexpi
reddur
ing
t
hey
ear
,leav
ingBi
rr6,
315ofunexpi
redpr
emi
ums(
Bir
r16,
750-
Bir
r6,
315)
.The
adj
ust
ing ent
ryt
orecor
dthe Bi
rr 10,
435 decr
ease of t
he asset and t
he
cor
respondi
ngi
ncr
easei
nexpensei
sasf
oll
ows:
Adj
ust
ingEnt
ry
Dec.31I
nsur
anceexpense.
..
..
..
..
..
..
..
..
..
..
..
..10,
435
Pr
epai
dInsur
ance.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.10,
435

Af
tert
hisent
ryhasbeenpost
ed,t
hei
nsur
anceaccountwi
l
lhav
eabal
anceofBi
rr
18,
435andt
hatamountwi
l
lber
epor
tedasanexpenseont
hei
ncomest
atement
.
Thepr
epai
dinsur
anceaccountbal
ancewi
l
lbeBi
rr6,
315andt
hatamountwi
l
lbe

121
r
epor
tedasanassetonNobl
eTr
adi
ng’
sbal
ancesheet
.

CheckYourPr
ogr
ess:Exer
cise4.
9

Answereachoft
hef
oll
owi
ngquest
ions
1.Fr
om t
ime t
oti
me dur
ing t
he f
iscaly
ear
,an ent
erpr
ise makesadv
ance
pay
mentofpr
emi
umsont
hree-
yearandone-
yearpr
oper
tyi
nsur
ancepol
i
cies:
a.Att
hecl
oseofsuchf
iscalper
iodwi
l
lther
ebeadef
err
aloranaccr
ual
?
Gi
ver
easoni
nsuppor
tofy
ourdeci
si
on.
b.Whi
ch oft
he f
oll
owi
ng account
s wi
l
lbe af
fect
ed by t
he r
elat
ed
adj
ust
ingent
ryatt
heendoft
hef
iscaly
ear
;(1)asset
,(2)l
i
abi
l
ity
,(3)
r
evenue,
(4)expense?Whyorwhynot
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

b)Adj
ust
ingEnt
ri
esf
orUnear
nedRev
enues(
Def
err
als)
Rev
enuer
ecei
veddur
ingapar
ti
cul
arper
iodmaybeonl
ypar
tl
year
nedbyt
heendof
t
heper
iod.I
temsofr
evenuet
hatar
erecei
vedi
nadv
ancer
epr
esental
i
abi
l
ityt
hat
maybet
ermedunear
nedr
evenue.Thepor
ti
onoft
hel
i
abi
l
ityt
hati
schar
geddur
ing
t
heper
iodt
hroughdel
i
ver
yofgoodsorser
viceshasbeenear
ned;
ther
emai
nderwi
l
l
beear
nedi
nthef
utur
e.Forexampl
e,magazi
nepubl
i
sher
susual
l
yrecei
vei
nadv
ance
pay
mentf
orsubscr
ipt
ionscov
eri
ngper
iodsr
angi
ngf
rom af
ewmont
hst
oanumber
ofy
ear
s.Att
heendoft
heaccount
ingper
iod,t
hatpor
ti
onoft
her
ecei
ptswhi
chi
s
r
elat
edt
ofut
ureper
iodshasnotbeenear
nedandshoul
d,t
her
efor
e,appeari
nthe
bal
ancesheetasal
i
abi
l
ity
.

Byaccept
ingadv
ancepay
mentofagoodorser
vice,abusi
nesscommi
tsi
tsel
fto
f
urni
sht
hegoodort
heser
viceatsomef
utur
eti
me.Att
heendoft
heaccount
ing
per
iod,i
fsomepor
ti
onoft
hegoodort
heser
vicehasbeenf
urni
shed,pastoft
he
r
evenuehasbeenear
ned.Theear
nedpor
ti
onappear
sinthei
ncomest
atement
.The
122
unear
nedpor
ti
onr
epr
esent
sal
i
abi
l
ityoft
hebusi
nesst
ofur
nisht
hegoodort
he
ser
vicei
naf
utur
eper
iodandi
srepor
tedi
nthebal
ancesheetasal
i
abi
l
ity

Whenr
evenuei
srecei
vedi
nadv
ance,
itmaybecr
edi
tedt
oal
i
abi
l
ityaccount
.

I
ll
ust
rat
ion1:
Assumet
hatonOct
ober1,2008Nobl
eTr
adi
ngCompanyr
ent
sapor
ti
onofa
bui
l
dingt
hathasbeenl
easi
ngf
oraper
iodofoney
ear
,recei
vi
ngBi
rr10,
000i
n
pay
mentf
ort
heent
ir
erent
al.Assumeal
so t
hatt
het
ransact
ion wasor
igi
nal
l
y
r
ecor
dedbyadebi
ttocashandacr
edi
ttot
hel
i
abi
l
ityaccountUnear
nedRent
.On
December31,2008,t
heendoft
hef
iscalper
iod,onef
our
thoft
heamounthasbeen
ear
nedandt
hreef
our
thsoft
heamountr
emai
nsal
i
abi
l
ity
.Theent
ryt
orecor
dthe
r
evenueandr
educet
hel
i
abi
l
ityappear
sasf
oll
ows:
Adj
ust
ingent
ry
Dec.31Unear
nedRent.
..
..
..
..
..
..
..
..
..
..
..
. 2,
500
RentI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
.. 2,
500

Af
tert
hisent
ryhasbeenpost
ed,t
heunear
nedr
entaccountwi
l
lhav
eabal
anceof
Bi
rr1,
600(
Bir
r10,
000–Bi
rr2,
500)
,whi
chwi
l
lber
epor
tedasal
i
abi
l
ityonNobl
e
Tr
adi
ngbal
ancesheet
.Ther
enti
ncomeaccountwi
l
lhav
eabal
anceofBi
rr2,
500
andt
hatamountwi
l
lber
epor
tedont
hei
ncomest
atement
.

CheckYourPr
ogr
ess:Exer
cise4.
10

123
SamsonAdv
ert
isi
ngr
ecei
vedcashofBi
rr24,
000asadv
ert
isi
ngi
ncomecov
eri
nga
per
iodofoney
eart
orel
easeasi
ngl
eadv
ert
isi
ngpermont
h.TheCompany
'sf
iscal
per
iodendsonDecember31,
2007.
1. Assumi
ngadv
ancer
ecei
ptsar
erecor
dedasal
i
abi
l
ity
,recor
dthef
oll
owi
ng:
(
a)Recei
ptofcashonDec.1,
2007
(
b)Adj
ust
ment
stobemadeonDec.
,31,
2007
(
c)Rev
ersi
ngent
ryonJanuar
y1,
2008

2. Assumi
ngadv
ancer
ecei
ptsar
eini
ti
all
yrecor
dedasr
evenue,answert
he
abov
equest
ions.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
4.
5.1.
2Adj
ust
ment
sforAccr
ual
s:
a) Adj
ust
ingEnt
ri
esf
orAccr
uedLi
abi
li
ti
es(
Accr
ued
Expenses)
Someexpensesaccr
uef
rom dayt
odaybutar
eusual
l
yrecor
dedonl
ywhent
heyar
e
pai
d.Exampl
esar
esal
ari
espai
dtoempl
oyeesandi
nter
estpai
donnot
espay
abl
e.
Theamount
sofsuchaccr
uedbutunpai
dit
emsatt
heendoft
hef
iscalper
iodar
e
bot
hanexpenseandal
i
abi
l
ity
.Iti
sfort
hisr
easont
hatsuchaccr
ual
sar
ecal
l
ed
accr
uedl
iabi
li
ti
esoraccr
uedexpenses.

I
ll
ust
rat
ion1:
Assumet
hatonDecember31,2008,t
heendoft
hef
iscaly
ear
,thesal
essal
ari
es
expenseaccountf
orNobl
eTr
adi
ngCompanyhasadebi
tbal
anceofBi
rr68,
250and

124
t
heof
fi
cesal
ari
esexpenseaccounthasadebi
tbal
anceofBi
rr29,
860.Fort
his
par
ti
cul
arf
iscalper
iod,
ther
ecor
dsoft
hebusi
nessshowt
hatt
heaccr
ual
sforsal
es
sal
ari
esandof
fi
cesal
ari
esar
eBi
rr8,
850andBi
rr4,
450,r
espect
ivel
yatt
heendof
t
hey
ear
.Theent
ryt
orecor
dtoaddi
ti
onal
expenseandl
i
abi
l
ityi
sasf
oll
ows:
Adj
ust
ingEnt
ry
Dec.
31Sal
essal
ari
esexpense.
..
..
..
..
..
..
..
..
..
..
..
..8,
850
Of
fi
cesal
ari
esexpense.
..
..
..
..
..
..
..
..
..
..
..
..4,
450
Sal
ari
espay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
.13,
300

Af
tert
he adj
ust
ing ent
ryhasbeen post
ed t
othe account
s,t
he sal
essal
ari
es
expenset
otal
sBi
rr77,
100(
Bir
r68,
250+Bi
rr8,
850)andt
heof
fi
cesal
ari
esex
pense
t
otal
sBi
rr34,
310(
Bir
r29,
860+Bi
rr4,
450)
.Theseamount
swi
l
lappearasexpenses
ont
hei
ncomest
atement
.Thebal
ancei
nsal
ari
espay
abl
ewi
l
lbeBi
rr13,
300andt
hat
amountwi
l
lber
epor
tedasal
i
abi
l
ityonNobl
eTr
adi
ngCompanybal
ancesheet
.

CheckYourPr
ogr
ess:Exer
cise4.
11

OnDecember31,t
heendofi
tsf
iscaly
ear
,anent
erpr
iseowessal
ari
esofBi
rr1,
200
f
orani
ncompl
etepay
rol
lper
iod.Ont
hef
ir
stpay
dayi
nJanuar
y,sal
ari
esofBi
rr3,
200
ar
epai
d.
(
a)I
stheBi
rr1,
200adef
err
aloranaccr
ual
asofDecember31?
(
b)Whi
choft
hef
oll
owi
ngt
ypesofaccount
swi
l
lbeaf
fect
edbyt
her
elat
ed
adj
ust
ingent
ry:
(1)asset
,(2)l
i
abi
l
ity
,(3)r
evenue,
(4)expense?
(
c)Howmuchoft
heBi
rr3,
200sal
aryshoul
dbeal
l
ocat
edt
oJanaur
y?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
____
___
___
___
___
___
___
___
___
___
125
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___

b)Adj
ust
ingEnt
ri
esf
orAccr
uedAsset
s(Accr
uedRev
enues)
Al
lasset
sbel
ongi
ngt
othebusi
nessatt
heendofanaccount
ingper
iodandal
l
r
evenuesear
neddur
ingt
heper
iodshoul
dber
ecor
dedi
nthel
edger
.Butdur
inga
f
iscalper
iodi
tiscommont
orecor
dsomet
ypesofr
evenueonl
yast
hecashi
s
r
ecei
ved;consequent
ly,att
heendoft
heper
iodt
her
emaybei
temsofr
evenuet
hat
hav
enotbeenr
ecor
ded.I
nsuchcases,
theamountoft
heaccr
uedr
evenuemustbe
r
ecor
dedbydebi
ti
nganassetaccountandcr
edi
ti
ngar
evenueaccount
.Becauseof
t
he dualnat
ure ofsuch accr
ual
s,t
heyar ed accr
e cal
l ued asset
s oraccr
ued
r
evenues

I
ll
ust
rat
ion1:
Toi
l
lust
rat
etheadj
ust
ingent
ryf
oranaccr
uedassetassumet
hatonDecember
31,
2008,t
heendoft
hef
iscaly
earNobl
eTr
adi
ngCompanyhasani
nter
est
-bear
ing
not
eassumef
urt
hert
hatt
hei
nter
estear
nedbutnotcol
l
ect
edasofDecember31,
2008i
sBi
rr4,
980.Theent
ryt
orecor
dthi
sincr
easei
ntheamountofi
nter
estdue
(
recei
vabl
e)ont
henot
eandt
her
evenueear
nedi
saf
oll
ows:
Adj
ust
ingent
ry
Dec.31I
nter
estRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.4,
990
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 4,
990

Af
tert
heent
ryhasbeenpost
ed,
thei
nter
estr
ecei
vabl
eaccountwi
l
lhav
eabal
ance
ofBi
rr4,
990whi
chwoul
dber
epor
tedasanasseti
nthebal
ancesheetf
orNobl
e
Tr
adi
ngCompanyt
hei
nter
esti
ncomewoul
dber
epor
tedont
hei
ncomest
atement
.

126
CheckYourPr
ogr
ess:Exer
cise4.
12
Cl
assi
fyt
hef
oll
owi
ngi
temsas:
(
a)Pr
epai
dExpenses
(
b)Unear
nedRev
enue
(
c)Accr
uedAsset
,or
(
d)Accr
uedLi
abi
l
ity
Pr
intt
hel
ett
eri
dent
if
yingy
ourr
esponseont
hespacepr
ovi
ded:
_
___
___
_1.I
nter
estear
nedbutnotcol
l
ect
ed
_
___
___
_2.Of
fi
cesuppl
i
esonhand
_
___
___
_3.Recei
ptsf
rom sal
eofmeal
ticket
sbyar
est
aur
ant
_
___
___
_4.I
nter
estowedbutnoty
etdue
_
___
___
_5.I
nsur
ancepr
emi
um pai
dinadv
ance
_
___
___
_6.Tui
ti
onf
eecol
l
ect
edi
nadv
ancebyaschool
_
___
___
_7.Taxesowedbutnoty
etdue
_
___
___
_8.Sal
aryowedbutnotpay
abl
e
4.
6 Wor
kSheetf
orMer
chandi
singEnt
erpr
ises

Af
tery
ear
-endpost
ingoft
hej
our
nal
siscompl
eted,
awor
ksheeti
susedt
oassi
sti
n
pr
epar
ingt
headj
ust
ingent
ri
es,
closi
ngent
ri
es,
andf
inanci
alst
atement
s.

Adj
ust
ment
sint
heWor
kSheet

The dat
a needed f
oradj
ust
ing t
he account
s ofNobl
e Tr
adi
ng Company ar
e
summar
izedasf
oll
ows:

I
nter
estaccr
uedonnot
esr
ecei
vabl
eon
December31,
2008.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr 4,
990
Mer
chandi
sei
nvent
oryasofDecember31,
2008.
..
..
..
.
102,
300
Of
fi
cesuppl
i
esasofDecember31,
2008.
..
..
..
..
..
..
..
..
.. 2,
550

127
 I
nsur
anceexpi
reddur
ing2008.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 10,
435
Depr
eci
ati
ondur
ing2008on:
St
oreequi
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 5,
650
Of
fi
ceequi
pment
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 8,
998
Sal
ari
esaccr
uedonDecember31,
2008
Sal
essal
ari
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr8,
850
Of
fi
cesal
ari
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 4,
450 13,
300
Renti
ncomeear
neddur
ing2008.
..
..
..
..
..
..
..
2,
500

Al
thought
her
eisnospeci
fi
cor
deri
nwhi
cht
heaccount
sneedt
obeanal
yzed,t
he
adj
ust
mentdat
aassembl
ed,
andt
headj
ust
ingent
ri
esmade,
timecanbesav
edand
gr
eat
eraccur
acyachi
evedbysel
ect
ingt
heaccount
sint
heor
deri
nwhi
cht
hey
appearont
het
ri
albal
ance

Compl
eti
ngt
heWor
kSheet

Asi
l
lust
rat
edi
nthepr
ecedi
ngchapt
er,t
hebal
ancesoft
heaccount
sint
heTr
ial
Bal
ancecol
umnsandt
heamount
sofanyadj
ust
ment
sar
eaddedordeduct
edas
appr
opr
iat
e.Theadj
ust
edbal
ancesar
ethenext
endedi
ntot
headj
ust
edt
ri
albal
ance
col
umns,
whi
char
etot
aledt
opr
ovet
heequal
i
tyofdebi
tsandcr
edi
ts.Bot
hthedebi
t
andcr
edi
tamount
sfori
ncomesummar
yar
eext
ended.

I
ncomesummar
ydebi
tandcr
edi
tamount
sar
edi
rect
lyext
endedt
othei
ncome
st
atementcol
umns oft
he wor
k sheet
.Si
nce bot
hthe amountoft
he debi
t
adj
ust
ment(
begi
nni
ng i
nvent
oryofBi
rr90,
500)and t
he amountoft
he cr
edi
t
adj
ust
ment(
endi
ng i
nvent
oryofbi
rr102,
300)mayber
epor
ted on t
hei
ncome
128
st
atement
,ther
eisnoneedt
odet
ermi
net
hedi
ff
erencebet
weent
het
woamount
s.

I
nthei
l
lust
rat
ion,t
hedi
ff
erencebet
weent
hecr
edi
tandt
hedebi
tcol
umnsoft
he
i
ncomest
atementsect
ioni
sBi
rr50,
818,t
heamountofneti
ncome.Thedi
ff
erence
bet
weent
hedebi
tandt
hecr
edi
tcol
umnsoft
hebal
ancesheetsect
ioni
sal
soBi
rr
50,
818,
whi
chi
sthei
ncr
easei
ntheowner
’sequi
tyasar
esul
toft
heneti
ncome.

Thecompl
etedwor
ksheetf
orNobl
eTr
adi
ngCompanyi
spr
esent
edonpage124.

B.I
N. nthi
sil
lust
rat
ion,weassumet
hatt
heTr
ialbal
ancecol
umnsoft
hewor
k
sheetconsi
stsofaccountbal
anceswhi
char
edi
rect
lyt
akenf
rom t
hei
r
r
espect
ivel
edgeraccount
s.

129
 Nobl
eTr
adi
ngCompany
Wor
ksheet
Fory
earendedDecember31,
2008

Tr
ial
Balance Adj
ust
ments Adj
ustedt
ri
albal
ance I
ncomest
atement Bal
ancesheet
Accountt
it
le Debi
t Credi
t Debi
t Credi
t Debi
t Credi
t Debi
t Credi
t Debi
t Credi
t
Cost 106500 106500 106500
Notesr ecei vabl e 60000 60000 60000
Account sr ecei vabl e 102000 (
a)4880 102000 102000
I
nter estr ecei vabl e ©102300 4990 4990
Mer chandi seI nv entory 90500 (
b)90508 102300 102300
Onicesuppl ies 8185 (
d)5635 2550 2550
Prepai di nsur ance 16750 (
e)10435 6315 6315
Storeequi pment 56500 56500 56500
Accumul at eddepr eciati
on-storeequi
pment 11300 (
f)5650 16950 16950
Offi
ceequi pment 44970 44970 44970
Accumul at eddepr eciati
onof fi
ceequi
pment 5996 (
g)2998 3994 8994
Account spay able 51448 51440 51440
Salariespay abl e (
h)13300 13300 13300
Unear nedr ent 10000 (
i)
2500 7500 7500
Notepay abl e( fi
nal pay ment2010) 46750 46750 46750
Capi tal stock 801110 201110 201110
Retainedear ni ngs 116250 116250 116250
Divi
dends 26987 26987 26987
I
ncomesummar y (
b)90500 ©102300 90500 102300 90500 102300
Sales 695200 695200 695200
Salesr eturnsandal l
owances 6942 6942 6942
SalesDi scount s 6592 6592 6591
Purchases 471800 471800 471800
Purchasesr et urnsandal lowances 11800 11800 11800
Purchasesdi scount s 4100 4100 4100
Transpor tat ionI n 21000 21000 21000
Salessal ar iesexpense 68250 (
h)8850 77100 77100
Adv ert i
singexpense 12500 12500 12500
Depr ecat ionexpense- storeequipment (
f)5650 5650 5650
Miscel l
aneoussal liesexpenses 4860 4860 4860
Offi
cesuppl i
esexpense 29800 (
b)4450 34250 34250
Rentexpense 12450 12450 12450
Depr eci ationexpense- off
iceequipment (
g)2998 2998 2998
I
nsur anceexpense (
e)10435 10435 10435
Offi
cesupposeex pense (
d)5635 5635 5635
Miscel l
aneousadmi nist
rati
veexpense 4250 4250 4250
Renti ncome (i
)2500 2500 2500
I
nter estI ncome 6130 (
a)4990 11120 11120
I
nter estexpenses 9240 9240 9240
1160076 1160076 235308 238308 1289314 1289314 776202 827020 513112 462294
50818 50818
827020 827020 513112 513112

126
CheckYourPr
ogr
ess:Exer
cise4.
13

Thef
oll
owi
ngbal
anceswer
etakenf
rom t
her
ecor
dsofNaodCompany
.
Bal
ancesBef
oreAdj
ust
ment Bal
anceAf
terAdj
ust
ment
I
nter
estRecei
vabl
e..
..
..
. Bi
rr-
0- Bi
rr12,
400
Suppl
i
esexpense.
..
..
..
.. 4,
500 1,
500
Adv
ert
isi
ngPay
abl
e..
.. -
0- 23,
100
RentI
ncome.
..
..
..
..
..
..
..
.. 48,
000 12,
000
Requi
red:Recor
dtheadj
ust
ingent
ri
est
hatshoul
dber
ecor
dedbyt
heCompany

4.
7Fi
nanci
alSt
atement
sforMer
chandi
singBusi
nesses

Dearst
udent
syouhav
eal
readyacquai
ntedwi
tht
hosebasi
cfi
nanci
alst
atement
s
i
nthepr
evi
ousuni
t.

Bef
oreyougot
othesubsequentdi
scussi
ons,whatdoyout
hinkaboutt
he
si
mil
ari
tyand di
ff
erences bet
ween t
he f
inanci
alst
atement
sforser
vice
r
ender
ingent
erpr
isesandmer
chandi
singent
erpr
ises?Gi
veyourownvi
ewi
n
wr
it
ing

Basi
cal
l
y,i
nthi
suni
t,wear
edeal
i
ngwi
tht
hesamef
inanci
alst
atement
swi
tht
he
except
ionoft
hei
ncomest
atement“
costofMer
chandi
zesol
d”sect
ion.Si
ncewe
ar
edeal
i
ngwi
thaki
ndofent
erpr
isewhosemaj
oroper
ati
onor
igi
nat
edf
rom
buy
ing and sel
l
i CostofMer
ng ofgoods,“ chandi
se Sol
d”sect
ion hel
ps t
o
det
ermi
net
hecostofgoodswhi
char
eal
readysol
d(costofsal
es)
.

127
I
ncomeSt
atement

I
tisknownt
hati
ncomest
atementi
spr
epar
edt
osummar
izeandr
epor
tthe
oper
ati
ngr
esul
tsofabusi
nessov
eraper
iodoft
ime.

Asast
art
ingpoi
nt,woul
dyoul
istsomei
ncomest
atementel
ement
sbef
ore
youpr
oceedt
othef
oll
owi
ngdi
scussi
ons?Pl
easeat
tempti
t.

TwoFor
msofI
ncomeSt
atementar
einCommonUsage
Thet
wof
ormsofi
ncomest
atementf
ormatusedbymer
chandi
singent
erpr
ises
ar
e:
i
)Si
ngl
e–st
epi
ncomest
atement
i
i
)Mul
ti
ple–st
epi
ncomest
atement

a)Si
ngl
e-St
epI
ncomeSt
atement

Si
ngl
e-st
epf
ormi
ssonamedbecauseonl
yonest
ep,subt
ract
ingt
otalexpenses
f
rom t
otalr
evenues,
isr
equi
redi
ndet
ermi
ningneti
ncome(
ornetl
oss)
.Toseei
n
concr
etet
ermsl
etust
ryt
oseet
hef
oll
owi
ngi
l
lust
rat
ionf
orNobl
eTr
adi
ng
Company
.

128
 Nobl
eTr
adi
ngCompany
I
ncomeSt
atement
ForYearEndedDecember31,
2008

Rev
enues:
Netsal
es Bi
rr681,
666
I
nter
estI
ncome 11,
120
RentI
ncome 2,
500
Tot
alr
evenues Bi
rr695,
286
Expenses:
CostofMer
chandi
sesol
d Bi
rr465,
100
Sel
l
ingex
penses 100,
110
Admi
nist
rat
iveexpenses 70,
018
I
nter
estexpense 9,
240
Tot
alexpenses 644,
468
NetI
ncome Bi
rr 50,
818

b)Mul
ti
ple–St
epI
ncomeSt
atement

Thi
sfor
missonamedbecausei
tshowst
henumer
ousst
epsi
ndet
ermi
ningnet
i
ncome(
netl
oss)
.Itpr
ovi
desuser
swi
thmor
einf
ormat
ionaboutanent
erpr
ise’
s
oper
ati
ng r
esul
ts.The st
atementemphasi
zes i
nter
medi
ate component
s of
i
ncomeandshowssub-gr
oupi
ngsofexpenses.Thef
oll
owi
ngar
ety
picali
ncome
st
atementel
ement
s.

129
Revenuef
rom Sal
es:-pr
inci
pal
sour
ceofr
evenuef
oramer
chandi
singent
erpr
ise
f
rom sal
eofmer
chandi
se,
bot
hforcashandonaccount
.Todet
ermi
nenetsal
es,
sal
esr
etur
nsandal
l
owances,andsal
esdi
scount
sar
ededuct
edf
rom gr
oss
amount
.
Costofmer
chandi
sesol
d:-Costofgoodssol
dorcostofsal
esdur
ingt
heper
iod.
Gr
oss Pr
ofi
t:The excess oft
he netr
evenue f
rom sal
es ov
ert
he costof
mer
chandi
sesol
d.Si
mil
arl
y,i
tmaybecal
l
edasgr
osspr
ofi
tonsal
esorgr
oss
mar
gin.

Oper
ati
ngExpenses:Expensesi
ncur
redi
nthepr
ocessofear
ning(
gener
ati
ng)
sal
esr
evenuest
hatar
ededuct
edf
rom gr
osspr
ofi
tint
hei
ncomest
atement
.For
ar
etai
lbusi
ness,usual
l
ysubdi
vi
dedi
nthet
wogr
oupi
ngs:i
)sel
l
ingexpensesi
i
)
Admi
nist
rat
iveorgener
alexpense

Sel
li
ngExpenses.Expensest
hatar
eincur
reddi
rect
lyandent
ir
elyi
nconnect
ion
wi
tht
hesal
eofmer
chandi
se,
suchassal
ari
esofsal
esf
orce,
stor
esuppl
i
esused,
depr
eci
ati
onofst
oreequi
pment
,andadv
ert
isi
ng,
etc.

Admi
nist
rat
iveExpenses:Expensesr
elat
ingt
ogener
aloper
ati
ngact
ivi
ti
essuch
asper
sonnelmanagement
,account
ing,andof
fi
cesuppl
i
esuseddepr
eci
ati
onof
of
fi
ceequi
pment
,et
c.

Ot
herI
ncome.Revenue f
rom sour
cesot
hert
han t
he pr
inci
palact
ivi
tyofa
busi
nessi
scl
assi
fi
edasot
heri
ncome,
ornonoper
ati
ngi
ncome.
NetI
ncome.Thef
inalr
esi
dualf
igur
eont
hei
ncomest
atementi
slabel
ednet
i
ncomeornetl
oss)
.

Forbet
terunder
standi
ngl
etusgot
hrought
hecompl
etedi
ncomest
atementf
or
Nobl
etr
adi
ngcompany
.

130
 Mul
ti
ple-
StepI
ncomeSt
atement
:
NobleTradi
ngCompany
Incomestat
ement
Fory
earendedDecember31,2008
Revenuef rom sal es
Sales Bir
r695200
Less:Sal esr etur nsandal lowances Bi
rr6942
Salesdi scount s 6592 13534
Netsal es Br
.681666
Costofmer chandi sesol d:
Mer chandi sei nv ent ory
Januar y1, 2008 Bi
rr90500
Purchases Birr471800
Less:pur chasesr et urns
Andal lowances Bi
rr11800
Pur chasesdi scount s 4100 ( 15900)
Netpur chases Birr455900
Add:t ranspor tationi n 21000
Costofmer chandi sepur chased 476900
Mer chandi seav ailablef orsale Br567400
Less:mer chandi sei nv entory
December31, 2008 (1023000)
Costmer chandi sesol d (
465100)
Grosspr of it Bir
r216566
Oper atingexpenses:
Sel
l
ingExpenses
Salessal ari
esexpense Bi
rr77100
Adv erti
singexpense 12500
Depr eciati
onexpense
Storeequi pment 5050
Mi scellaneoussell
i
ngexpense 4860
Totalselli
ngexpenses Bi
rr100110
Admi nistrati
veExpenses:
Off
icesal ariesexpense Bi
rr34250
Rentexpense 12450
Depreciationexpense
Of fi
ceequi pment 2998
I
nsuranceexpense 10435
131
Offi
cesuppl i
esex pense 5635
Miscell
aneousadmi ni
str
ati
veExpense 4250
Totaladmi ni
strat
iveexpenses 70018
Totaloper at
ingexpenses 170128
I
ncomef orm operati
ons Bi
rr46438
Otherincomes
Interestincome Bi
rr11120
Renti ncome 2500
Totalotherincome Bi
rr13620
Otherexpenses:
Interestexpense (
9240) 4380
Netincome Bi
rr50,
818
St
atementofRet
ainedEar
nings

Ther
etai
nedear
ningsst
atementsummar
izest
hechangeswhi
chhav
eoccur
red
i
nthe r
etai
ned ear
nings accountdur
ing t
he f
iscalper
iod.I
tser
ves as a
connect
ing l
i
nkbet
ween t
hei
ncomest
atementand t
hebal
ancesheet
.The
r
etai
nedear
ningsst
atementf
orNobl
etr
adi
ngcompanyi
sil
l
ust
rat
edasf
oll
ows:

Nobl
eTr
adi
ngCompany
St
atementofRet
ainedEar
nings
ForYearEndedDecember31,
2008

Ret
ainedear
nings,
Januar
y1,
2008.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr116250
Neti
ncomef
ort
hey
ear
..
..
..
..
..
..
..
. Bi
rr50,
818
Less:di
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
. 26,
987
I
ncr
easei
nret
ainedear
nings.
..
..
. 23,
831
Ret
ainedear
nings,
December31,
2008.
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr140081

Bal
anceSheet(
Stat
ementofFi
nanci
alPosi
ti
on)

As i
thas been di
scussed ear
li
er,bal
ance sheetwi
l
ltake t
wo f
orms one
ar
rangementi
sanaccountf
orm-
placi
ngasset
sont
hel
eft
-handsi
deoft
he
bal
ancesheetandt
hel
i
abi
l
iti
eswi
thowner
’sequi
tyont
her
ighthandsi
deoft
he
bal
ancesheet
.
132
Theot
herar
rangementi
srepor
tfor
m –i
tisav
ert
icall
i
sti
ngofasset
s,l
i
abi
l
iti
es
andowner
’sequi
typr
act
ical
l
y,t
hisf
ormati
swi
del
yused.

N.
B.Thet
otaloft
heasset
ssect
ionequal
ingt
hecombi
nedt
otal
soft
heot
her
t
wosect
ions.

NobleTradi
ngCompany
Bal
ancesheet
December31,2008

Asset
s
Cur
rentAsset
s
Cash Bi
rr106500
Notespayable 60000
Accountspay abl
e 102000
I
nterestReceivabl
e 4990
MerchandiseInventor
y 102300
Offi
cesupplies 2550
Prepaidi
nsurance 6315
Tot
alcurr
entasset
s Bi
rr384655
Pl
antassets:
Storeequi
pment Bir
r56500
Less:Accumulat
eddepr
eci
ati
on 16950 Bir
r39550
Offi
ceequipment 44970
Less:Accumulat
eddepr
eci
ati
on 8994 35970
Totalpl
antasset
s 75526
Tot
alAssets Bi
rr460186

Li
abi
li
ti
es
Currentli
abilit
ies
Account spay able Bi
rr 51440
Not epay able(Curr
entpor
ti
on) 6750
Salari
espay abl
e 13300
Unear nedr ent 7500
Totalcurrentli
abilit
ies Bi
rr78990
Long-ter
ml i
abili
ti
es
Notepay able(finalpayment2010) 40,
000
Totalli
abili
ti
es Bi
rr118,
990
133
 St
ockhol
der
sEqui
ty
Capit
alstock Bi
rr201110
Retai
nedearnings 140001
TotalSt
ockholder
s'Equi
ty 341191
TotalLi
abil
it
yandStockhol
der
s'Equi
ty Bi
rr436350

4.
8Adj
ust
ingandCl
osi
ngEnt
ri
es
4.
8.1Adj
ust
ingEnt
ri
es

I
nuni
t3,y
ouhav
erecor
dedadj
ust
ingent
ri
esf
oraser
vicet
ypeent
erpr
ise.The
samer
easonandpur
posei
sal
soexpl
ainedher
e

Whatwast
hepr
imei
mpor
tanceofr
ecor
dingadj
ust
ingent
ri
es?

Gener
all
y,t
hewhol
eanal
ysi
srequi
redt
omaket
headj
ust
ment
swer
ecompl
eted
dur
ingt
hepr
ocessofpr
epar
ingt
hewor
ksheet
.Af
tercompl
eti
onoft
hepost
ing
oft
heseent
ri
es,t
hebal
ancesofal
lasset
s,l
i
abi
l
ity
,rev
enueand expenses
account
scor
respondexact
lyt
otheamount
srepor
tedi
nthef
inanci
alst
atement
s.
Theadj
ust
ingent
ri
esf
orNobl
eTr
adi
ngCompanyar
easf
oll
ows.
Gener
alJour
nal Page_
_
Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
Adj
ust
ingEnt
ri
es
2008 31 I
nter
estr
ecei
vabl
e 4990 00
Dec.
Int
erestincome 4990 00
31 I
ncomesummar y 90500 00
Merchandi sei
nvent
ory 90500 00
31 Merchandiseinvent
ory 102300 00
I
ncomesummar y 102300 00
Off
icesuppli
es 5635 00
134
 Off
icesuppl ies 5625 00
31 Insuranceexpense 10435 00
Prepaidi nsurance 10435 00
31 Depr eci
at i
onexpensest oreequi
p 5650 00
Accumul atedDepr.st
ore 5650 00
equipment
31 Depr eci
at i
onexpenseof fi
ce 2998 00
equipment
Accumul atedDeproffi
ce 2998 00
equipment
31 Salessal ari
esexpense 8850 00
Officesalar i
esexpense 4450 00
Salari
espay able 13300 00
31 Unear nedr ent 2500 00
Rentincome 2500 00

4.
8.2 Cl
osi
ngEnt
ri
es

Whydoweneedt
oconductcl
osi
ngent
ri
es?
Nor
mal
l
ycl
osi
ngent
ri
esar
erecor
dedi
nthej
our
nali
mmedi
atel
yfol
l
owi
ngt
he
adj
ust
ingent
ri
es.Thepur
posei
stocl
eart
hebal
ancesofal
ltempor
aryowner
s'
equi
tyaccount
s,r
educi
ngt
hem t
ozer
o.Theul
ti
mat
eef
fectoft
heseent
ri
esi
snet
i
ncr
easeoranetdecr
easei
nther
etai
nedear
ningsaccount
.Thecl
osi
ngeat
eri
es
f
orNobl
etr
adi
ngcompanyar
easf
oll
ows:

Gener
alJour
nal Page_
_
Post
Dat
e Descr
ipt
ion Ref Debi
t Cr
edi
t
Cl
osi
ngent
ri
es
2008 31 Sal
es 95200 00
Dec
Purchasesr eturnsandal l
owances 11800 00
Purchasesdi scount s 4100 00
I
nterestIncome 11120 00
RentIncome 2500 00
I
ncomesummar y 724720 00
31 I
ncomesummar y 685702 00
Salesr eturnsandal l
owances 6942 00
Salesdi scount s 6592 00
Purchases 471800 00
Transpor tationIn 21000 00
Salessal ariesexpense 77100 00
135
 Adverti
singexpense 12500 00
Depreciati
onexp-stor
eequip 5650 00
Miscell
aneoussel l
i
ngexpense 4860 00
Offi
cesal ar
iesexpense 34250 00
Rentexpense 12450 00
Depreciati
onexp-offi
ceequi
p 2998 00
I
nsuranceexpense 10435 00
Offi
cesuppl i
esexpense 5635 00
Miscell
aneous admi
nist
rat
ive 4250 00
Expense
I
nterestexpense 9240 00
31 I
ncomesummar y 50818 00
Retai
nedear nings 50818 00
31 Retai
nedearnings 26987 00
Divi
dends 26987 00

Theef
fectoft
heaf
orement
ionedf
ourent
ri
esmaybedescr
ibedasf
oll
ows:
i
) The f
ir
stent
ry cl
oses al
lincome st
atementaccount
s wi
th cr
edi
t
bal
ancesbyt
ransf
err
ingt
het
otal
tot
hecr
edi
tsi
deofi
ncomesummar
y
i
i
)The second ent
rycl
osesal
lincome st
atementaccount
swi
th debi
t
bal
ancesbyt
ransf
err
ingt
het
otal
tot
hedebi
tsi
deofi
ncomesummar
y.
i
i
i)Thet
hir
dent
rycl
osesi
ncomesummar
ybyt
ransf
err
ingi
tsbal
ance,t
he
neti
ncomef
ort
hey
ear
,tor
etai
nedear
nings.
i
v)Thef
our
thent
rycl
osesdi
vi
dendsbyt
ransf
err
ingi
tsbal
ancet
oret
ained
ear
nings.

Atl
ast
,al
ltempor
aryowner
s'equi
tyaccount
swi
l
lbecl
osed.Theonl
yaccount
s
l
eftar
ethecont
raasset
,li
abi
l
ity
,capi
talst
ockandr
etai
nedear
ningsaccount
s.
Tov
eri
fyt
heequal
i
tyofdebi
tandcr
edi
tint
hebal
ancesoft
heseaccount
sandt
o
maket
hem r
eadyf
ort
hesubsequentaccount
ingper
iod,
iti
sadv
isabl
etopr
epar
e
apost
-cl
osi
ngt
ri
albal
ance.

4.
9 Rev
ersi
ngEnt
ri
es

136
Whatki
ndofpr
ocedur
esshoul
dyouf
oll
ow i
nrever
singent
ry?Pl
easef
orwar
d
yourownopi
nion?

Cust
omar
il
y,f
oll
owi
ngt
headj
ust
ingandcl
osi
ngent
ry,r
ever
singent
rycanbe
made.Ar
ever
singent
ryi
smadeatt
hebegi
nni
ngoft
henextaccount
ingper
iod
andi
stheex
actopposi
teoft
headj
ust
ingent
rymadei
nthepr
evi
ousper
iod.The
pr
epar
ati
onofr
ever
singent
ri
esi
sanopt
ionalaccount
ingpr
ocedur
ethatmaynot
ber
equi
rednecessar
il
y.

4.
9.1Rev
ersi
ngent
ri
esf
orAccr
uedLi
abi
li
ti
es
Nat
ural
l
y,someexpensesaccr
ueast
imepasses(
from dayt
oday
)butar
e
r
ecor
dedonl
ywhent
heyar
epai
d.Forexampl
e,t
hewageorsal
aryexpenseofan
ent
erpr
iseandt
her
elat
edl
i
abi
l
ityaccumul
atesdaybydaydur
ingt
hef
iscal
per
iod.

Dearst
udent
s,i
fyouwer
einaposi
ti
onofanaccount
ingcl
erk,ar
eyougoi
ngt
o
r
ecor
dtheexpenseandt
her
elat
edl
iabi
li
tywhi
char
eaccr
uingonadai
lybasi
s?
Whyorwhynot
?

Fr
om pr
act
icalpoi
ntofv
iew,i
twoul
dnotbeadv
isabl
etocar
ryout(
handl
e)i
n
suchamannerbecausei
tisnotef
fi
cient(
cost
-ef
fect
ive)
.

Now l
etusexempl
i
fy,assumet
hef
oll
owi
ngf
act
sforanent
erpr
iset
hatpay
s
sal
ari
esweekl
yandendsi
tsf
iscal
per
iodonDecember31.

i
. Sal
ari
esar
epai
donFr
idayf
orf
ive-
daywor
kweekendi
ngonFr
iday
.
i
i
.The bal
ance i
n sal
aryexpense asofFr
iday
,December27 i
sBi
rr
105,
600
137
 i
i
i.Sal
ari
esaccr
uedf
orMondayandTuesday
,December30and31t
otal
Bi
rr800.
i
v.Sal
ari
espai
donFr
iday
,Januar
y3,
oft
hef
oll
owi
ngy
eart
otal
Bir
r2000

Theadj
ust
ingent
ryt
orecor
dtheaccr
uedsal
aryexpenseandsal
ari
espay
abl
efor
MondayandTuesday
,December30and31,
isasf
oll
ows.

Dec31 Sal
aryexpense 800
Sal
ari
espay
abl
e 800

Af
tercompl
eti
onoft
hepost
ingoft
hef
oregoi
ngent
ry,sal
aryexpensei
sin
bal
anceandsal
arypay
abl
ewi
l
lhav
eacr
edi
tbal
anceofBi
rr800ont
hepayday
Fr
idayJanuar
y3oft
hef
oll
owi
ngper
iod.Thej
our
nalent
rywi
l
lbeadebi
tofBi
rr
2000sal
aryexpenseandacr
edi
tofBi
rr2000cash.

B. Mi
N. ndyout
heamountofBi
rr800wasr
ecor
dedonDecember31f
ort
wo
days sal
ary(
December30 and 31)
.So,we mustdi
vi
de t
he weekl
y
paymentofBi
rr2000i
nadebi
tofbi
rr800t
osal
ari
espayabl
eanda
cr
edi
tofbi
rr800t
osal
aryexpense.

Dearst
udent
s,t
oov
ercomesuchacompl
i
cat
ionr
ecor
dingofr
ever
singent
ryon
Januar
yfi
rst(
atbegi
nni
ngofnewper
iod)ar
erecommended.

Cont
inui
ngwi
tht
hei
l
lust
rat
ion,t
her
ever
singent
ryf
ort
heaccr
uedsal
ari
esi
sas
f
oll
ows:

Jan1 Sal
aryPay
abl
e 800
Sal
aryExpense 800

138
Theef
fectoft
her
ever
singent
ryi
stot
ransf
ert
heBi
rr800l
i
abi
l
ityf
rom sal
ari
es
pay
abl
etot
hecr
edi
tsi
deofsal
aryexpense.Whenapay
rol
lispai
donJanuar
y3,
sal
aryexpensewi
l
lbedebi
tedandcashwi
l
lbecr
edi
tedf
orBi
rr2000t
heent
ir
e
amountofweekl
ysal
ari
es.Af
tert
heent
ryi
spost
edsal
aryexpensewi
l
lhav
ea
debi
tbal
ancebi
rr1200,
whi
chi
stheamountofexpensei
ncur
redf
orJanuar
y1-
3.

4.
9.2Recor
dingandPost
ingRev
ersi
ngEnt
ri
es
Nowl
etusr
esor
ttooursi
tuat
ionwhi
chi
sacaseofNobl
eTr
adi
ngCompany
.The
y
ear
-endpr
ocedur
eforNobl
eTr
adi
ngCompanyi
scompl
etedbyj
our
nal
i
zingand
post
ingt
her
ever
singent
ri
esf
oraccr
uedsal
ari
esandaccr
uedi
nter
esti
ncome.I
t
wi
l
lbei
l
lust
rat
edasf
oll
ows:

Gener
alJour
nal PageNo.
:
Post
Dat
e Descr
ipt
ions Ref Debi
t Cr
edi
t
Rever
singent
ri
es
2008 1 Sal
ari
espay
abl
e 13300 00
Jan.
Sal
essal
ari
esexpense 8850 00
Of
fi
cesal
ari
esexpense 4450 00
1 I
nter
estI
ncome 4990 00
I
nter
estr
ecei
vabl
e 4990 00

4.
10 I
nter
im St
atement
s

St
atement
sissuedf
orper
iodscov
eri
ngl
esst
hanaf
iscaly
earar edi
ecal
l nter
im
139
st
atement
s

Bot
h ser
vice and mer
chandi
sing ent
erpr
ises f
requent
ly pr
epar
efi
nanci
al
st
atement
s ati
nter
val
s wi
thi
nthe f
iscaly
ear
,i.
e.as mont
hlyquar
ter
ly,or
semi
annual
l
y.

Wheni
nter
imf
inanci
alst
atement
sar
etobepr
epar
ed,t
headj
ust
mentdat
aar
e
assembl
edandawor
ksheeti
scompl
etedasoft
heendoft
hei
nter
im per
iod.
Nev
ert
hel
ess,adj
ust
ingandcl
osi
ngent
ri
esar
enotr
ecor
dedi
ntheaccount
s.
Theseent
ri
esar
erecor
dedonl
yatt
heendoft
hef
iscal
per
iod.

How r
evenuesand expensesofi
nter
im per
iod canbedet
ermi
ned?Pl
ease
f
orwar
dyourownopi
nion.

4.
11 Cor
rect
ionofEr
ror
s

Account
ing r
ecor
ds may not be hundr
ed per
cent cor
rect al
lthe t
ime
unf
ort
unat
ely
,er
ror
s mayoccuri
nthe r
ecor
ding pr
ocess.Er
ror
s shoul
d be
cor
rect
edassoonast
heyar
edi
scov
eredbyj
our
nal
i
zingandpost
ingcor
rect
ing
ent
ri
es.

Pr
ocedur
esf
orcor
rect
ionofer
ror
sint
hej
our
nalandl
edgerv
aryaccor
dingt
othe
nat
ureoft
heer
ror
.Whenaner
rori
nanaccountt
it
leoramounti
nthej
our
nali
s
di
scov
eredbef
oret
heent
ryi
spost
ed,
thecor
rect
ionmaybemadebydr
awi
nga
l
i
net
hrought
heer
rorandi
nser
ti
ngt
hecor
rectt
it
leoramounti
mmedi
atel
yabov
e.

When an ent
ryi
nthej
our
nali
spr
epar
ed cor
rect
ly,butt
hedebi
tpor
ti
on i
s

140
i
ncor
rect
lypost
edt
otheaccountasacr
edi
t(orv
icev
ersa)
,thei
ncor
rectpost
ing
maybecor
rect
edbydr
awi
ngal
i
net
hrought
heer
rorandpost
ingt
hei
tem
cor
rect
ly.

Dearst
udent
s,onet
hingt
hatyoushoul
dbeari
nmi
ndi
scor
rect
ingent
ri
esi
san
“
avoi
dabl
est
ep”
.

Toi
l
lust
rat
e,assumeonJune10,Bi
rr500cashcol
l
ect
iononaccountf
rom a
cust
omeri
sjour
nal
i
zedandpost
edasadebi
ttocash“
Bir
r500andacr
edi
tto
r
enti
ncomebi
rr500.Theer
rori
sdi
scov
eredonMay20,
whent
hecust
omerpay
s
t
her
emai
ningbal
ancei
nful
l
.

I
ncor
rectEnt
ry(
May10) Cor
rectEnt
ry(
May10)

Cash 500 Cash 500

Renti
ncome 500 Account
srecei
vabl
e 500

Acompar
isonoft
hei
ncor
rectent
rywi
tht
hecor
rectent
ryr
eveal
sthatt
hedebi
t
t
ocashBi
rr500i
scor
rect
.Howev
er,t
heBi
rr500cr
edi
ttoRentI
ncomeand
Account
sRecei
vabl
ear
eov
erst
atedi
nthel
edger
.Thef
oll
owi
ngcor
rect
ingent
ry
i
srequi
red.
Cor
rect
ingEnt
ry

May20 RentI
ncome 500
Account
sRecei
vabl
e 500
(
tocor
rectent
ryofmay10)

Pr
ocedur
esf
orcor
rect
inger
ror
s
Er
ror Cor
rect
ionpr
ocedur
e
Jour
nal
ent
ryi
ncor
rect
,butnot Dr
awl
i
net
hroughtheer
rorand
141
Post
ed i
nser
tcor
rectt
it
leoramount
Jour
nal
ent
rycor
rect
,butpost
ed Dr
awl
i
net
hrought
heer
rorand
i
ncor
rect
ly. postcor
rect
ly.
Jour
nal
ent
ryi
ncor
rectandpost
ed Jour
nal
i
zeandpostacor
rect
ing
ent
ry

4.
12ModelExami
nat
ionQuest
ions

1.Whatar
ethemaj
oroper
ati
onsofmer
chandi
si
ngbusi
ness?
2.Howar
esal
esofmer
chandi
ser
ecor
ded?
3.Di
scusshow eachoft
hef
oll
owi
ngar
etr
eat
edasr
elat
edt
othesal
eof
mer
chandi
se.
(
a)Sal
esr
etur
nsandal
l
owances
(
b)Sal
esdi
scount
s
(
c)Taxesr
elat
edt
othesal
es
(
d)Fr
eightcost
s
4.St
atet
headj
ust
mentf
orbegi
nni
ngmer
chandi
sei
nvent
ory
5.St
atet
headj
ust
mentf
orendi
ngmer
chandi
sei
nvent
ory

Li
stofRef
erenceMat
eri
als
1.I
ntr
oduct
iont
oAccount
i 21stCent
ng, ury
2.Dy
ckman,
DukesandDav
is.(
1995)
.Int
ermedi
ateAccount
ing.Thi
rdEdi
ti
on.
Vol
umeI
,Chapt
ers1–14.McGr
awHi
l
lCompani
es,
Inc.
,
3.FeesandWar
ren,Account
ingPr
inci
ples.16th edi
ti
on.Sout
h– West
ern
Publ
i
shi
ngCompany
.
4.FeesandWar
ren,Account
ingPr
inci
ples.18th edi
ti
on.Sout
h– West
ern

142
Publ
i
shi
ngCompany
.

UNI
TFI
VE:ACCOUNTI
NGSYSTEMSDESI
GN

143
Li
stofCont
ent
s
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
5.
1Account
ingSy
stems
5.
2Pr
inci
plesofAccount
ingSy
stems
5.
3Account
ingSy
stem I
nst
all
ati
onandRev
isi
on
5.
4Int
ernal
Cont
rol
Str
uct
ure
5.
5Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ives

Thi
s uni
tis dev
oted t
o acquai
ntt
he st
udent
s wi
tht
he desi
gn ofpr
oper
account
ingsy
stem.Thus,af
tercar
eful
l
yreadi
ngt
hisuni
tthest
udent
swi
l
lbe
abl
eto:
 Expl
aint
hepr
inci
plesofpr
oper
lydesi
gnedaccount
ingsy
stems
 Appl
ythet
hreephasesofaccount
ingsy
stem i
nst
all
ati
onandr
evi
sion
 Descr
ibet
hepr
inci
plesofi
nter
nal
cont
rol
 Anal
yzet
hedat
apr
ocessi
ngmet
hodst
hatmaybeusedi
naccount
ing
sy
stems.
 Under
stand t
he di
ff
erence bet
ween admi
nist
rat
ive cont
rol
s and
account
ingcont
rol
s.

I
ntr
oduct
ion

I
nthepr
evi
ousuni
tyouhav
edi
scussedper
iodi
crepor
ti
ngf
oramer
chandi
sing
busi
ness:Thepr
epar
ati
onofsi
ngl
est
epandmul
ti
plest
epI
ncomeSt
atement
s,
144
Ret
ainedEar
ningsSt
atement
,andBal
anceSheetf
oramer
chandi
singbusi
ness
hav
ebeendi
scussedi
ndet
ail
.Fur
ther
mor
e,y
ouhav
elear
nedt
heconcept
s,
pur
posesand pr
act
icalusesofadj
ust
ing,cl
osi
ng,r
ever
sing,and cor
rect
ing
ent
ri
es.Al
so,y
ouhav
elear
nedwi
thi
l
lust
rat
ionsaboutt
hepr
epar
ati
onofi
nter
im
f
inanci
alst
atement
sandt
hei
rpur
poses.

Oneoft
hear
easofspeci
ali
zat
ioni
sthedesi
gnandi
nst
all
ati
onofaccount
ing
sy
stems.Anaccount
ingsy
stem shoul
dassur
etheav
ail
abi
l
ityofdat
arequi
redby
managementi
n conduct
ing t
heaf
fai
rsofan ent
erpr
iseand i
nrepor
ti
ng t
o
owner
s,cr
edi
tor
s,andot
heri
nter
est
edpar
ti
es.

I
nthi
suni
tyouwi
l
lbeacquai
ntedwi
tht
hebasi
cconceptofaccount
ingsy
stems
desi
gn,t
he need f
orpr
oper
lydesi
gned account
ing sy
stems,t
he phases of
account
ing sy
stem i
nst
all
ati
on and r
evi
sion,t
hebr
oad pr
inci
plesofi
nter
nal
cont
rol
,et
c.

I
nyouropi
nion,whatdoesi
tmeanbyt
heaccount
ingsyst
em?Whyf
ir
ms
desi
gnandi
nst
allaccount
ingsyst
em?At
temptt
hesequest
ionsi
nyourown
bef
oreyougot
hrought
hedi
scussi
onsbel
ow.

5.
1.Account
ingSy
stems

I
nuni
t1,
youhav
elear
nedwhyaccount
ingi
svi
ewedast
hel
anguageofbusi
ness
orani
nfor
mat
ionsy
stem.I
tisani
nfor
mat
ionsy
stem i
nthesenset
hat
,fi
rstdat
a
(
busi
nesst
ransact
ions)ar
eent
eredi
ntot
hesy
stem,t
henanal
yzed,r
ecor
ded,
sor
ted,summar
ized,andf
inal
l
yrepor
tedandcommuni
cat
edt
ouser
s(deci
sion

145
maker
s)i
nsi
deandout
sidet
hebusi
nessent
erpr
ise.Unl
esst
hisi
nfor
mat
ioni
s
communi
cat
edt
otheenduser
sont
ime,t
hewhol
epr
ocessi
sconsi
der
edas
usel
essorf
uti
l
e.

Thewayi
nwhi
chmanagementi
sgi
vent
hei
nfor
mat
ionf
orusei
nconduct
ingt
he
af
fai
rsoft
hebusi
nessandi
nrepor
ti
ngt
oowner
,cr
edi
tor
s,andot
heri
nter
est
ed
par
ti
esi
scal
l heaccount
edt ingsyst
em.

I
n a gener
alsense,an account
ing sy
stem i
ncl
udes t
he ent
ir
e net
wor
k of
communi
cat
ionsusedbyabusi
nessor
gani
zat
iont
opr
ovi
deneededi
nfor
mat
ion.
Now adaymanyor
gani
zat
ions(
especi
all
ylar
geor
gani
zat
ions)i
nEt
hiopi
aar
e
t
ryi
ngt
odesi
gnt
hei
rownaccount
ingsy
stem byal
l
ocat
inghugebudget
.

CheckYourPr
ogr
ess:Exer
cise5.
1
1.Whyi
stheaccount
ingsy
stem ofanent
erpr
iseani
nfor
mat
ionsy
stem?
_
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___
___
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___
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___
___
___
___
___
___
___
___
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___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.Whati
saccount
ingsy
stem?Whatdoesi
tconsi
stsof
?Expl
aini
ndet
ail
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

Doyoubel
ievet
hatt
heaccount
ingsyst
em desi
gnedandusedbyonef
ir
mis
sui
tabl
e(oradapt
abl
e)t
oanot
herf
ir
m(s)
? I
f“Yes”why?I
f“No”whynot
?
Tr
ytoj
ust
if
yyourr
easoni
ngbef
oreyougot
hrought
hedi
scussi
onpr
esent
ed
bel
ow:
146
5.
2 Pr
inci
plesofAccount
ingSy
stems

Si
nceev
eryor
gani
zat
iondesi
gnsi
tsaccount
ingsy
stem bycar
eful
l
yconsi
der
ing
i
ts own oper
ati
on and nat
ure and t
ype ofact
ivi
ti
es,i
tis di
ff
icul
tthatt
he
account
ingsy
stem desi
gnedbyonef
ir
m coul
dbeadapt
abl
etoanot
herf
ir
m(s)

Becauseofdi
ff
erencesi
nbusi
nessoper
ati
ons,i
nthenumberoft
ransact
ionst
o
bepr
ocessed,
andi
ntheusesmadeofaccount
ingdat
a,account
ingsy
stemswi
l
l
v
aryf
rom busi
nesst
obusi
ness.Howev
er,
ther
ear
eanumberofbr
oadpr
inci
ples
t
hatappl
ytoal
lsy
stems.Det
ail
eddi
scussi
onsoft
hesepr
inci
plesar
epr
esent
ed
her
eunder
:

a)Cost
-Ef
fect
ivenessBal
ance
Anaccount
ingsy
stem mustbet
ail
oredt
omeett
hespeci
fi
cneedsofeach
busi
ness.Si
ncecost
smustbei
ncur
redi
nmeet
ingt
heseneeds,
oneoft
hemaj
or
consi
der
ati
onsi
ndev
elopi
nganaccount
ingsy
stem i
scost
-ef
fect
iveness.For
exampl
e,al
thought
her
epor
tspr
oducedbyanaccount
ingsy
stem ar
eav
aluabl
e
endpr
oductoft
hesy
stem;t
hev
alueoft
her
epor
tspr
oducedshoul
dbeatl
east
equalt
othecostofpr
oduci
ngt
hem.Nomat
terhowdet
ail
edori
nfor
mat
ionala
r
epor
tmaybe,i
tshoul
dnotbepr
oducedi
fitcost
smor
ethant
hebenef
it
s
r
ecei
vedbyt
hosewhousei
t.

b)Fl
exi
bil
it
yofMeetFut
ureNeeds
Now a day busi
ness or
gani
zat
ions ar
e oper
ati
ng i
nat
urbul
entchangi
ng
env
ironment
.Ther
efor
e,i
tismandat
oryt
hateachbusi
nessmustadeptt
othe
const
ant
lychangi
ngenv
ironmenti
nwhi
chi
toper
ates.

Whet
hert
hechangesar
ether
esul
tofnew gov
ernmentr
egul
ati
ons,changesi
n
account
ingpr
inci
ples,or
gani
zat
ionschangesnecessar
ytomeetpr
act
icesof

147
compet
ingbusi
nesses,changesi
ndat
apr
ocessi
ngt
echnol
ogy
,orot
herf
act
ors,
t
heaccount
ingsy
stem mustbef
lexi
bleenought
omeett
hechangi
ngdemands
madeofi
t.Forexampl
e,r
egul
ator
yagenci
essuchast
heEt
hiopi
anAudi
tor
s
Gener
al,of
tenr
equi
resaconst
ant
lychangi
ngv
ari
etyofr
epor
tst
hatr
equi
re
changesi
ntheaccount
ingsy
stem.
c) Adequat
eInt
ernalCont
rol
s

Whatdoyouunder
standbyi
nter
nalcont
rol
?

I
nter
nalcont
rol
sar
edet
ail
edpol
i
ciesandpr
ocedur
esusedt
odi
rectoper
ati
ons
andpr
ovi
der
easonabl
eassur
ancet
hatt
hef
ir
m’sobj
ect
ivesar
eachi
eved.Thus,
i
naddi
ti
ont
osuppl
yi
ngt
hei
nfor
mat
ionneededbymanagementi
nrepor
ti
ngt
o
owner
s,cr
edi
tor
s,and ot
her i
nter
est
ed par
ti
es,t
he sy
stem shoul
d hel
p
managementi
ndi
rect
ingoper
ati
ons.

d)Ef
fect
iveRepor
ti
ng
Account
ingi
nfor
mat
ionuser
sar
emanyandv
ari
edwi
thdi
ff
erentbackgr
ound,
knowl
edge,et
c.Theseuser
srel
yont
heaccount
ingi
nfor
mat
ionpr
ovi
dedbyt
he
account
ingsy
stem t
omakewi
seeconomi
cdeci
sions.Ther
efor
e,whent
hese
r
epor
tsar
epr
epar
ed,t
her
equi
rement
sandknowl
edgeoft
heuser
sshoul
dbe
t
akeni
ntoaccount
.Forexampl
e,managementmayneeddet
ail
edr
epor
tsf
or
di
rect
ingoper
ati
onsonaweekl
yorev
endai
l
ybasi
sandl
endi
ngi
nst
it
uti
onsl
i
ke
banksmayneedper
iodi
crepor
tst
oev
aluat
ethepr
ofi
tabi
l
ityoft
hebusi
ness
bef
oret
heygr
antcr
edi
t.Al
so,
thet
axi
ngaut
hor
it
ies(
theI
nlandRev
enueAut
hor
it
y)
mayr
equi
reuni
for
m dat
aandest
abl
i
shcer
tai
ndeadl
i
nesf
ort
hesubmi
ssi
onof
t
axr
epor
ts.

148
 e)Adapt
ati
ont
oOr
gani
zat
ional
Str
uct
ure
I
nor
derf
ort
heaccount
ingsy
stem achi
evei
tsobj
ect
iveofpr
ovi
dingi
nfor
mat
ion
needsatt
hel
owestcost
,weneedt
oef
fect
ivel
yadaptt
hesy
stem wi
tht
he
humanr
esour
cesoft
hebusi
ness.Si
ncenot
wobusi
nessesar
est
ruct
uredal
i
ke,
t
heaccount
ingsy
stem mustbet
ail
oredt
otheor
gani
zat
ionalst
ruct
ureofeach
busi
ness.Thel
i
nesofaut
hor
it
yandr
esponsi
bil
i
tywi
l
laf
fectt
hei
nfor
mat
ion
r
equi
rement
s ofeach busi
ness.Mor
eov
er,an ef
fect
ive sy
stem needs t
he
appr
oval
andsuppor
tofal
ll
evel
sofmanagement
.
CheckYourPr
ogr
ess:Exer
cise5.
2
1.I
nyourdi
scussi
onoft
hebr
oadpr
inci
plesofaccount
ingsy
stems,
whatdo
y
ouunder
standbyt
hepr
inci
pleof‘
cost–ef
fect
ivenessbal
ance’
?Gi
ve
y
ourownansweri
nwr
it
ingi
nyourownwor
ds.
_
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_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
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___
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___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
2.Whatar
eint
ernal
cont
rol
s?
_
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___
__

5.
3 Account
ingSy
stem I
nst
all
ati
onandRev
isi
on

I
nyouropi
nion,whoi
sgoi
ngt
oassumet
her
esponsi
bil
it
iesofdesi
gni
ngt
he
f
ir
m’s account
ing syst
em? What f
act
ors must be consi
der
ed when
desi
gni
ngt
hesyst
em?Gi
veyouransweri
nwr
it
ingbef
oreyour
eadt
het
ext
bel
owandcompar
eyouranswer
.
149
Ther
esponsi
bil
i
tiesf
ordesi
gni
ngandi
nst
all
i
ngt
hef
ir
m’saccount
ingsy
stem
shoul
dbebor
nebypeopl
ewhohav
eacompl
eteknowl
edgeoft
hebusi
ness’
oper
ati
ons.Howev
er,t
hedesi
gnershoul
drecogni
zet
hatsomear
easoft
he
sy
stem,suchast
het
ypesanddesi
gnoft
hef
ormsneededandt
henumberand
t
it
lesoft
heaccount
srequi
red,maybeaf
fect
edbyf
act
orst
hatar
enotknown
whenabusi
nessi
sfi
rstor
gani
zed.Asnew i
nfor
mat
ionaboutabusi
nessi
s
obt
ainedandasabusi
ness“
out
grows”i
tsaccount
ingsy
stem wheni
texpandst
o
newoper
ati
onal
areas,
thesy
stem wi
l
lneedt
ober
evi
sed.

Manyl
argebusi
nessescont
inual
l
yrev
iew t
hei
raccount
ing sy
stem and may
const
ant
lybei
nvol
vedi
nchangi
ngsomepar
tofi
t.

Thewor
kofi
nst
all
i
ngorchangi
nganaccount
ingsy
stem,ei
theri
nit
sent
ir
etyor
onl
yin par
t,i
smade up oft
hree phases:(
1)anal
ysi
s,(
2)desi
gn,and (
3)
i
mpl
ement
ati
on.

5.
3.1 Sy
stemsAnal
ysi
s

Whatdoyout
hinki
sthepur
poseofsyst
emsanal
ysi
s?Fr
om wher
edoest
he
anal
ystbegi
nhi
sact
ivi
ti
es?

Thegoalofsy
stemsanal
ysi
sist
odet
ermi
nei
nfor
mat
ionneeds,t
hesour
cesof
suchi
nfor
mat
ion,andt
hedef
ici
enci
esi
npr
ocedur
esandt
hedat
apr
ocessi
ng
met
hodspr
esent
lyused.

Theanal
ysi
susual
l
ybegi
nswi
thar
evi
ewoft
heor
gani
zat
ionalst
ruct
ureandt
he
150
j
obdescr
ipt
ionsoft
heper
sonnelaf
fect
ed.Thi
srev
iewi
sfol
l
owedbyast
udyof
t
hef
orms,r
ecor
ds,pr
ocedur
es,pr
ocessi
ngmet
hods,andr
epor
tsusedbyt
he
ent
erpr
ise.Thesour
ceofsuchi
nfor
mat
ioni
susual
l
ythef
ir
m’ssy
stemsManual
.

Dearst
udent
s,whatel
set
heanal
ystshoul
dconsi
derwhi
lemaki
nghi
s/her
anal
ysi
soft
hesyst
em?
I
naddi
ti
ont
olooki
ngatt
hel
i
mit
ati
onsoft
heex
ist
ingsy
stem,
theanal
ystshoul
d
det
ermi
nemanagement
’spl
ansf
orchangesi
noper
ati
ons.

5.
3.2Sy
stemsDesi
gn
Af
terdet
ail
edanal
yseshav
ebeenmade;t
her
ecomest
hej
obofdesi
gni
ngt
he
account
ing sy
stem.Thedesi
gn oft
henew sy
stem mayi
nvol
veonl
ymi
nor
changesf
ort
heexi
sti
ngsy
stem,suchasr
evi
sionofapar
ti
cul
arf
orm andt
he
r
elat
edpr
ocedur
esandpr
ocessi
ngmet
hods,ori
tmaybeacompl
eter
evi
sionof
t
heent
ir
esy
stem.

Sy
stemsdesi
gner
smusthav
eagener
alknowl
edgeoft
hequal
i
tiesofdi
ff
erent
ki
ndsofdat
apr
ocessi
ngequi
pment
,andt
heabi
l
ityt
oev
aluat
eal
ter
nat
ives.
Successf
ulsy
stem desi
gn depends t
oal
argerext
entupon t
he cr
eat
ivi
ty,
i
magi
nat
ion,
andgener
alcapabi
l
iti
esoft
hedesi
gner
.

5.
3.3Sy
stemsI
mpl
ement
ati
on

Whati
ssyst
em i
mpl
ement
ati
onmean?Whatdoyout
hinkar
ethemaj
ort
asks
t
hatar
egoi
ngt
obeunder
takeni
nthi
sphase?Dearst
udent
spl
easet
akeouta
pi
eceofpaperandgi
veyouranswerbef
oreyour
eadt
hedi
scussi
onsbel
ow.

151
Thef
inal
phaseoft
hecr
eat
ionorr
evi
sionofanaccount
ingsy
stem i
stocar
ryout
,
ori
mpl
ement
,the pr
oposal
s.I
nthi
s phase new orr
evi
sed f
orms,r
ecor
ds,
pr
ocedur
es,andequi
pmentmustbei
nst
all
ed,andanyt
hatar
enol
ongerusef
ul
mustbedi
scar
dedorwi
thdr
awn.Tr
aini
ngshoul
dbegi
venf
oral
lper
sonnel
r
esponsi
blef
oroper
ati
ngt
hesy
stem andcl
osesuper
visi
onoft
heseper
sonnel
shoul
dbemadet
il
lsat
isf
act
oryef
fi
ciencyi
sachi
eved.

CheckYourPr
ogr
ess:Exer
cise5.
3
1.Whati
stheobj
ect
ivesy
stemsanal
ysi
s?
_
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___
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___
_
___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2.Whatski
l
lsandknowl
edgeshoul
dber
equi
redf
rom t
hesy
stemsdesi
gner
?
_
___
___
___
___
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___
___
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___
___
___
___
___
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___
___
___
___
_
___
___
___
___
___
___
___
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___
___
___
___
___
___
___
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___
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___
___
___
___
___
_
___
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___
___
___
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___

5.
4 I
nter
nalCont
rolSt
ruct
ure

Anent
erpr
ise’
sint
ernalcont
rolst
ruct
ureconsi
stsoft
hepol
i
ciesandpr
ocedur
es
est
abl
i
shedt
opr
ovi
der
easonabl
eassur
ancet
hatt
heent
erpr
ise’
sgoal
sand
obj
ect
iveswi
l
lbeachi
eved.Thi
sint
ernalcont
rolst
ruct
urecanbedi
vi
dedi
nto
t
hreeel
ement
s:(
1)t
hecont
rolenv
ironment
,(2)t
hecont
rolpr
ocedur
es,and(
3)
t
heaccount
ingsy
stem.

152
I
tshoul
d be not
ed t
hatt
he pol
i
cies and pr
ocedur
es ofan i
nter
nalcont
rol
st
ruct
urewi
l
lvar
yaccor
dingt
othesi
zeandt
ypeofbusi
nessent
erpr
ise.I
na
smal
lbusi
nesswher
eiti
spossi
blef
ort
heowner
-managert
osuper
viset
he
empl
oyeesper
sonal
l
yanddi
rectt
heaf
fai
rsoft
hebusi
ness,f
ewcont
rolpol
i
cies
andpr
ocedur
esar
enecessar
y.Howev
er,ast
henumberofempl
oyeesandt
he
compl
exi
ti
es of an ent
erpr
ise i
ncr
ease, i
t becomes mor
e di
ff
icul
tfor
managementt
omai
ntai
ncont
rolov
eral
lphasesofoper
ati
ons.Asf
ir
m gr
ows,
managementneedst
odel
egat
eaut
hor
it
yandt
opl
acemor
erel
i
anceont
he
cont
rol
str
uct
urei
nor
dert
oachi
eveadher
encet
oent
erpr
isegoal
sandobj
ect
ives.

5.
4.1TheCont
rolEnv
ironment

Whatdoesi
tmeanbyacont
rolenvi
ronment
? Whatar
esomeoft
he
f
act
orsi
nfl
uenci
ngt
hecont
rolenvi
ronmentofanent
erpr
ise?

Thecont
rolenv
ironmentofanent
erpr
iser
epr
esent
sanov
eral
lat
ti
tudet
owar
d
andawar
enessoft
hei
mpor
tanceofcont
rol
sbybot
hmanagementandot
her
empl
oyees.

Fact
ors i
nfl
uenci
ng t
he cont
rol env
ironment of an ent
erpr
ise i
ncl
ude
management
’sphi
l
osophyandoper
ati
ngst
yle,
theor
gani
zat
ional
str
uct
ureoft
he
ent
erpr
ise,
andper
sonnel
pol
i
ciesandpr
act
ices.

Management
’sphi
l
osophyandoper
ati
ngst
ylei
ncl
udesmanagement
’sat
ti
tude
153
concer
ning cont
rol
. For exampl
e,i
ftop management r
out
inel
yvi
olat
es
est
abl
i
shedcont
rolpol
i
ciesandpr
ocedur
es,t
hecont
rolenv
ironmentcoul
dbe
adv
ersel
y af
fect
ed because l
owermanagementand empl
oyees may v
iew
cont
rol
sasuni
mpor
tantont
heot
herhand,at
opmanagementt
hatemphasi
zes
t
hei
mpor
tanceofcont
rol
sindeal
i
ngwi
thoper
ati
ngper
sonnelandencour
ages
adher
encet
ocont
rolpol
i
ciesandpr
ocedur
eswi
l
lcr
eat
eaf
avor
abl
econt
rol
env
ironment
.

Theor
gani
zat
ionalst
ruct
ureofan ent
erpr
iseest
abl
i
shest
hef
ramewor
kfor
pl
anni
ngandcont
rol
l
ingoper
ati
ons.Forexampl
e,amer
chandi
singent
erpr
ise
mi
ghtor
gani
zeeachofi
tsst
oresasr
elat
ivel
ysepar
atebusi
nessuni
ts,
wit
heach
st
oremanagergi
venf
ull
aut
hor
it
yov
erpr
ici
ngandot
heroper
ati
ngact
ivi
ti
es.

Fi
nal
l
y,per
sonnelpol
i
cies and pr
ocedur
es i
ncl
ude t
he t
rai
ning,ev
aluat
ion,
pr
omot
ion,
andcompensat
ionofempl
oyeest
oaccompl
i
shanent
erpr
ise’
sgoal
s
and obj
ect
ives.Common per
sonnelpol
i
cies t
hat i
mpact on t
he cont
rol
env
ironmenti
ncl
udet
heest
abl
i
shmentofcodesofet
hicsf
orempl
oyeeconduct
andconf
li
ctofi
nter
estpol
i
cies.

5.
4.2 TheCont
rolPr
ocedur
es
Cont
rolpr
ocedur
esar
ethosepol
i
ciesandent
erpr
ise,andmanagementhas
est
abl
i
shed wi
thi
nthe cont
rolenv
ironmenti
n or
dert
o pr
ovi
de r
easonabl
e
assur
ancet
hatent
erpr
isegoal
swi
l
lbeachi
eved.

Thedet
ail
edpr
ocedur
esadopt
edbyanent
erpr
iset
ocont
roli
tsoper
ati
onsar
e
col
l
ect
ivel
yter
medi
tssy
stemsofi
nter
nalcont
rol
.Thepl
anofor
gani
zat
ionand
t
he accompany
ing met
hods and pr
ocedur
es ofsuch a sy
stem shoul
d be
desi
gnedt
o:

 Saf
eguar
dasset
s,
 Yi
eldaccur
ateaccount
ingdat
a,
154
  Pr
omot
eef
fi
ci
encyt
hroughoutt
heent
erpr
ise,
and
 Assur
eadher
encet
omanagement
’spol
i
cies.

I
nter
nalcont
rol
sar
ecl
assi
fi
edas:(
1)i
nter
naladmi
nist
rat
ivecont
rol
sand,(
2)
i
nter
nalaccount
ingcont
rol
s.I
nter
naladmi
nist
rat
ivecont
rol
sar
epr
ocedur
esand
r
ecor
dst
hatai
dmanagementi
nachi
evi
ngbusi
nessgoal
s.Ont
heot
herhand,
i
nter
nalaccount
ingcont
rol
sconsi
stofpr
ocedur
esandr
ecor
dst
hatar
emai
nly
concer
ned wi
tht
her
eli
abi
l
ityoff
inanci
alr
ecor
dsand r
epor
tsand wi
tht
he
saf
eguar
dingofasset
s.

Act
ivi
ti
essuchasmot
ionandt
imest
udy
,qual
i
tycont
rol
,andst
ati
sti
calanal
ysi
s
ar
e,i
nabr
oadsense,el
ement
sofi
nter
nalcont
rol
.Thecashr
egi
ster
,sal
es
i
nvoi
ces, cr
edi
t memor
andums, r
ecei
vi
ng r
epor
ts, v
oucher
s, and ot
her
document
aryev
idencesoft
ransact
ionsar
einst
rument
sfor
mingani
ntegr
alpar
t
ofi
nter
nal
cont
rol
s.

Thought
hesi
zeandowner
shi
pofbusi
nessdet
ermi
nest
hesy
stem ofi
nter
nal
cont
rol
sempl
oyed,
allbusi
nesses,
lar
geandsmal
lshoul
dconsi
dert
hef
oll
owi
ng
br
oadpr
inci
plesofi
nter
nal
cont
rol
s.
(
a) Compet
entPer
sonnelandRot
ati
onofDut
ies
Thesuccessf
uloper
ati
onofanaccount
ingsy
stem r
equi
respeopl
ewhoar
e
suf
fi
cient
lycompet
entt
oper
for
mthedut
iest
owhi
cht
heyar
eassi
gned.Al
l
account
ing empl
oyees shoul
d be adequat
elyt
rai
ned and super
vised i
nthe
per
for
manceoft
hei
rrespect
ivet
asks.I
tisal
so adv
isabl
etor
otat
ecl
eri
cal
per
sonnelper
iodi
cal
l
yfr
om j
ob t
ojob.I
n addi
ti
on t
o br
oadeni
ng t
hei
r
under
standi
ngoft
hesy
stem,t
heknowl
edget
hatot
her
smay
,int
hef
utur
e,
per
for
mthei
rtaskst
endst
odi
scour
agedev
iat
ionsf
rom pr
escr
ibedpr
ocedur
es.
Occasi
onalr
otat
ioni
sal
sohel
pfuli
ndi
scl
osi
nganyi
rr
egul
ari
ti
est
hatmaybe
r
equi
redt
otakeannualv
acat
ions,
wit
hthei
rtasksassi
gnedt
oot
her
sdur
ingt
hei
r
absence.

155
CheckYourPr
ogr
ess:Exer
cise5.
4
Answert
he f
oll
owi
ng quest
ionsi
n wr
it
ing and checky
ouranswerwi
tht
he
answer
sat
tachedatt
hebackoft
hemodul
e.

1.How doesapol
i
cyofr
otat
ingcl
eri
calempl
oyeesf
rom j
obt
ojobai
din
st
rengt
heni
ngi
nter
nal
cont
rol
?
_
___
___
___
___
___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
_
2.Li
stt
het
hreeel
ement
sofi
nter
nal
cont
rol
str
uct
ure
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

(
b)Assi
gnmentofResponsi
bil
it
y
I
tisessent
ialt
hatt
hei
rresponsi
bil
i
tiesbecl
ear
lydef
inedsot
hatempl
oyeescan
wor
k ef
fi
cient
ly.Ther
e shoul
d be no ov
erl
appi
ng orundef
ined ar
eas of
r
esponsi
bil
i
ty.Forexampl
e,i
fapar
ti
cul
arcashr
egi
steri
stobeusedbyt
woor
mor
esal
escl
erks,eachoneshoul
dbeassi
gnedasepar
atecashdr
awerand
r
egi
sterkey
.Thus,dai
l
ypr
oofoft
hehandl
i
ngofcashcanbeobt
ainedf
oreach
cl
erk.Si
mil
arl
y,i
fsev
eralempl
oyees ar
e assi
gned t
o post
ing ent
ri
es t
o
cust
omer
s’account
s,each empl
oyee shoul
d be assi
gned t
o a par
ti
cul
ar
al
phabet
icalsect
orsot
hater
ror
scanbet
racedt
otheper
sonr
esponsi
blef
ort
he
er
ror
.

(
c)Separ
ati
onofResponsi
bil
it
yforRel
atedOper
ati
ons

156
Tomi
nimi
zet
hepossi
bil
i
tyofi
nef
fi
ciency
,er
ror
s,andf
raud,r
esponsi
bil
i
tyf
ora
sequenceofr
elat
edoper
ati
onsshoul
dbedi
vi
dedamongt
woormor
eper
sons.
Forexampl
e,nosi
ngl
eindi
vi
dualshoul
dbeaut
hor
izedt
oor
dermer
chandi
se,
v
eri
fyt
her
ecei
ptoft
hegoods,andpayt
hesuppl
i
er.Todosowoul
dinv
itesuch
abusesaspl
aci
ngor
der
swi
thasuppl
i
eront
hebasi
soff
ri
endshi
prat
hert
hanon
pr
ice,qual
i
ty,andot
herobj
ect
ivef
act
ors;i
ndi
ff
erentandr
out
inev
eri
fi
cat
ionof
t
hequal
i
tyandquant
it
yofgoodsr
ecei
ved,conv
ersi
onofgoodst
otheper
sonal
useoft
heempl
oyee;car
elessnessi
nver
if
yingt
hev
ali
dit
yandt
heaccur
acyof
i
nvoi
ces;
andpay
mentoff
ict
it
iousi
nvoi
ces.

Whent
her
esponsi
bil
i
tyf
orpur
chasi
ng,r
ecei
vi
ng,andpay
ingar
edi
vi
dedamong
t
hreeper
sonsordepar
tment
s,t
hepossi
bil
i
tiesofsuchabusesar
emi
nimi
zed.
Thedocument
aryev
idenceoft
hewor
kofeachper
sonordepar
tment
,incl
udi
ng
pur
chase or
der
s,r
ecei
vi
ng r
epor
ts,and i
nvoi
ces shoul
d be r
out
ed t
othe
account
ingdepar
tmentf
orcompar
isonandr
ecor
ding.

The“
checksandbal
ances”pr
ovi
dedbyt
hedi
str
ibut
ingr
esponsi
bil
i
tyamong
v
ari
ous depar
tment
srequi
res no dupl
i
cat
ion ofef
for
t.The wor
k ofeach
depar
tment
,asev
idencedbyt
hebusi
nessdocument
sthati
tpr
epar
es,must“
fi
t”
wi
tht
hosepr
epar
edbyt
heot
herdepar
tment
s.

(
d)Separ
ati
onofOper
ati
onsandAccount
ing
Responsi
bil
i
tyf
ormai
ntai
ningt
heaccount
ingr
ecor
dsshoul
dbesepar
atedf
rom
t
her
esponsi
bil
i
tyf
orengagi
ngi
nbusi
nesst
ransact
ionsandf
ort
hecust
odyof
t
hef
ir
m’sasset
s.Bydoi
ngso,t
heaccount
ingr
ecor
dsser
veasani
ndependent
checkont
hebusi
nessoper
ati
ons.Forexampl
e,t
heempl
oyeesent
rust
edwi
th
r
emi
tt
ancesf
rom cr
edi
tcust
omer
sshoul
dnothav
eaccesst
othej
our
nal
sand
l
edger
s.Separ
ati
onoft
het
wof
unct
ionsr
educest
hepossi
bil
i
tiesofer
ror
sand
def
alcat
ions.

157
(
e)Pr
oof
sandSecur
it
yMeasur
es
Pr
oof
sandsecur
it
ymeasur
esshoul
dbeempl
oyedt
osaf
eguar
dbusi
nessasset
s
andassur
erel
i
abl
eaccount
ingdat
a.Thi
spr
inci
pleappl
i
est
oawi
dev
ari
etyof
t
echni
ques and pr
ocedur
es,such as t
he use ofcont
rol
l
ing account
s and
subsi
diar
yledger
s;t
heuseofabankaccountandot
hersaf
ekeepi
ngmeasur
es
f
orcash,i
nvest
ment
s,andot
herv
aluabl
edocument
s;andt
heuseofv
ari
ous
t
ypesofmechani
cal
equi
pment
.

Cashr
egi
ster
sar
ewi
del
yusedi
nmaki
ngt
hei
nit
ialr
ecor
dofcashsal
es.The
pr
act
iceoff
aci
l
itat
ingf
orcust
omer
stoobser
vet
heamountr
ecor
dedast
hesal
e
ort
oacceptapr
int
edr
ecei
ptf
rom t
hesal
escl
erki
ncr
easest
heef
fect
ivenessof
t
hemachi
neaspar
tofi
nter
nalcont
rol
.Anot
hersi
mil
ardev
icei
stheaut
omat
ic
count
ersi
ngasoroi
lst
ati
ons.

(
f)I
ndependentRev
iew
Todet
ermi
newhet
hert
heot
heri
nter
nalcont
rolpr
inci
plesar
ebei
ngef
fect
ivel
y
appl
i
ed,t
hesy
stem shoul
dbeper
iodi
cal
l
yrev
iewedandev
aluat
edbyi
nter
nal
audi
tor
swhoar
eindependentoft
heempl
oyeesr
esponsi
blef
oroper
ati
ons.The
audi
tor
sshoul
drepor
tanyweaknessesandr
ecommendchangest
ocor
rectt
hem.
Forexampl
e,ar
evi
ew ofcashdi
sbur
sement
smaydi
scl
oset
hati
nvoi
ceswer
e
notpai
dwi
thi
nthedi
scountper
iod,
event
houghsuf
fi
cientcashwasav
ail
abl
e.

5.
4.3TheAccount
ingSy
stem
Theaccount
ingsy
stem i
sani
ntegr
alpar
toft
hei
nter
nalcont
rolst
ruct
ureofan
ent
erpr
ise.Wi
thoutt
he i
nfor
mat
ion gener
ated by t
he account
ing sy
stem,
managementwoul
dlackt
heabi
l
ityt
opl
ananddi
rectoper
ati
onsi
nachi
evi
ng
ent
erpr
isegoal
s.

158
CheckYourPr
ogr
ess:Exer
cise5.
5
Fort
hef
oll
owi
ngquest
ionsgi
vey
ouransweri
nwr
it
ingonasepar
atesheetof
paperandchecky
ouranswer
s.
1.Howdoesaper
iodi
crev
iewbyi
nter
nalaudi
tor
sst
rengt
hent
hesy
stem of
i
nter
nal
cont
rol
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

2.Whyshoul
dther
esponsi
bil
i
tyf
ormai
ntai
ningt
heaccount
ingr
ecor
dsbe
separ
atedf
rom t
her
esponsi
bil
i
tyf
oroper
ati
ons?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
3.Thebookkeeperpay
sal
lobl
i
gat
ionsbypr
enumber
edchecks.Whatdoy
ou
t
hinkar
ethest
rengt
hsandt
heweaknessesi
nthei
nter
nal
cont
rol
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

159
5.
5ModelExami
nat
ionQuest
ions

I
nst
ruct
ion:Answereachoft
hef
oll
owi
ngquest
ionsi
nwr
it
ing.
1.Whatar
ethemaj
orcomponent
sofaccount
ingsy
stem?
2.Br
ief
lydescr
ibet
hepr
inci
plesofpr
oper
lydesi
gnedaccount
ingsy
stems.
3.Descr
ibeandexpl
aint
het
hreephasesofaccount
ingsy
stem i
nst
all
ati
on
andr
evi
si
on.
4.Whyshoul
dtheessent
ialf
eat
uresofi
nter
nalcont
rolbei
ncor
por
atedi
n
t
hedesi
gnofal
laccount
ingsy
stems?
5.Whyshoul
dther
esponsi
bil
i
tyf
orasequenceofr
elat
edoper
ati
onsbe
di
vi
dedamongdi
ff
erentper
sons?

Li
stofRef
erenceMat
eri
als
1.FeesandWar
ren,Account
ingPr
inci
ples.16th edi
ti
on.Sout
h– West
ern
Publ
i
shi
ngCompany
.
2.FeesandWar
ren,Account
ingPr
inci
ples.18th edi
ti
on.Sout
h– West
ern
Publ
i
shi
ng Company
.

160
 UNI
TSI
X:CASHANDCASHEQUI
VALENTS

Li
stofCont
ent
s

 Uni
tObj
ect
ive
 I
ntr
oduct
ion
6.
1Int
ernal
Cont
rol
sforCash
6.
2Il
l
ust
rat
ionofBankReconci
l
iat
ionandJour
nal
Ent
ri
es
6.
3Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive

Af
tercompl
eti
ngt
hisuni
t,y
ouwi
l
lbeabl
eto:
 Def
inecash
 Under
standt
heneedf
orcont
rol
l
ingcash
 Under
standt
heneedf
ormai
ntai
ningpet
tycash
 Reconci
l
ethebankst
atementwi
tht
hebookbal
ance
 Summar
izet
hepr
ocedur
est
obef
oll
owedi
nthei
nter
nalcont
rolof
cashr
ecei
pts
 Summar
izet
hepr
ocedur
est
obef
oll
owedi
nthei
nter
nalcont
rolof
cashpay
ment
s

161
I
ntr
oduct
ion

Dearst
udent
s,wel
comet
othesi
xthuni
toft
hecour
se!
I
nthepr
evi
ousuni
t(uni
tfi
ve)
,youhav
ecov
eredt
heneedf
oraccount
ing
sy
stemsdesi
gnf
oref
fect
iveoper
ati
onsandr
epor
ti
ng.Fur
ther
mor
e,y
ou
hav
edi
scussedt
hepr
inci
plesandneedf
oref
fect
ivei
nter
nalcont
rol
s.Thi
s
uni
tdeal
swi
tht
heappl
i
cat
ionoft
hesei
nter
nalcont
rolpr
inci
plest
othe
desi
gnofanef
fect
ivesy
stem f
orcont
rol
l
ingcashandt
heaccount
ingf
or
cash t
ransact
ions.Such concept
sli
ke cont
rolofcash r
ecei
pts and
pay
ment
s,t
heneedf
orkeepi
ngi
mpr
estcashf
unds,
thebankaccountand
r
econci
l
iat
ionofbankst
atementandcashbookbal
ance,t
heneedf
or
keepi
ngcashchangef
und,
etcwi
l
lbedi
scussedi
ndet
ail
.

Whati
scash?Whatar
esomeoft
hei
temst
hatar
eregar
dedascash?
Whatdoyout
hinkar
esomeoft
hef
eat
uresofcash?Pl
easegi
veyourown
answer
sfort
heabovequest
ionsbef
oreyour
eadt
hedi
scussi
onbel
ow.

Cashi
samedi
um ofexchanget
hatabankwi
l
lacceptf
ordeposi
tand
i
mmedi
atecr
edi
ttot
hedeposi
tor
saccount
.Thecashaccounti
ncl
udes
onl
ythose i
tems i
mmedi
atel
yav
ail
abl
eto payobl
i
gat
ions (
li
abi
l
iti
es)
.
Speci
fi
cal
l
y,t
hei
temst
hatar
eregar
dedascashi
ncl
udes:

162
 Bal
ancesondeposi
twi
thf
inanci
ali
nst
it
uti
ons,
 Coi
nsandcur
rency
,
 Pet
tycash,andcer
tai
nnegot
iabl
einst
rument
saccept
edbyf
inanci
al
i
nst
it
uti
onsf
ori
mmedi
atedeposi
tandwi
thdr
awal
.Thesenegot
iabl
e
document
sincl
udeor
dinar
ychecks,cashi
erschecks,cer
ti
fi
edchecks,
and moneyor
der
s.Thust
hebal
anceoft
hecashcont
rolaccount
r
efl
ect
sal
li
temsi
ncl
udedi
ncash.

Whatar
eCashEqui
val
ent
s?

Cashequi
val
ent
sar
eit
emssi
mil
art
ocashbutnotcl
assi
fi
edassuch.They
i
ncl
udet
reasur
ybi
l
ls,commer
cialpaper
s,andmoneymar
ketf
unds.Cash
equi
val
ent
sar
ever
ynearcashbutar
enoti
nnegot
iabl
efor
m,andhence
t
heyar
enoti
ncl
udedi
nthecashaccount
.Ot
heri
temst
hatar
eexcl
uded
f
rom cashar
e:Post
agest
amps,t
rav
eladv
ancest
oempl
oyees(
prepai
d
ex
penses)
,recei
vabl
esf
rom companyempl
oyeesandcashadv
ancest
o
ei
therempl
oyeesorout
sidepar
ti
es(
recei
vabl
es)
.

I
sanover
draf
tconsi
der
edascash?I
fnotwher
eshal
lyour
epor
tit
?How
doesanoverdr
aftcr
eat
ed?

Anov
erdr
afti
snotconsi
der
edascashr
atheri
tisanegat
ivebankaccount
bal
anceandi
srepor
tedasacur
rentl
i
abi
l
ity
.

163
Ov
erdr
aft
soccurwhent
heamountofcheckshonor
edbyt
hebankexceeds
t
heaccountbal
ance.Forexampl
e,i
fyouor
der
ed y
ourbankt
o make
pay
mentofBr
.10,
000t
oacr
edi
torf
rom y
ourbankchecki
ngaccount
wher
easy
ouraccountshowsonl
yBr
.7000.Ev
ent
houghy
ouraccount
bal
ancei
sinsuf
fi
cientt
omaket
hepay
menty
ouor
der
ed,t
hebankmay
maket
hef
ull
pay
mentonbehal
fofy
out
othedesi
gnat
edper
son.Howev
er,
af
tert
hepay
menty
ourchecki
ngaccountbal
anceshowsnegat
iveBi
rr
.
2000(
i.
e.Br
.8000-Br
.10,
000)
.

TheBr
.2000 i
sthusabankov
erdr
aftcr
eat
ed asar
esul
tofexcess
pay
mentbey
ondt
hebal
ancei
nthebankaccount
.

Whati
sacompensat
ingbal
ance?Ar
ecompensat
ingbal
ancesi
ncl
udedi
n
t
hecashaccount
?Whyorwhynot
?

Acompensat
ingbal
ancei
sami
nimum bal
ancet
hatmustbemai
ntai
nedi
n
adeposi
tor
saccountassuppor
tforf
undsbor
rowedbyt
hedeposi
tor
.
Compensat
ingbal
ancesar
enoti
ncl
udedi
nthecashaccountbecauset
hey
ar
enotcur
rent
lyav
ail
abl
eforuse.I
tisar
est
ri
ctedcashbal
ance;t
hati
s,
cashhel
dforaspeci
fi
cpur
poseandnoti
ntendedf
orgener
alpay
mentuse.
Forexampl
e,af
ir
m maybor
rowsBr
.15,000f
oroney
earat10%butmust
mai
ntai
naBr
.1000compensat
ingbal
ancei
nanaccountwi
tht
hebank.

Dearst
udent
sar
eyoucl
earwi
tht
heconceptofr
est
ri
ctedcashbal
ance?

164
Whatot
herexampl
esofr
est
ri
ctedcashbal
ancedoyouknow?Pl
easel
ist
asmanyi
temsaspossi
ble.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

6.
1.I
nter
nalCont
rol
sforCash

Dearst
udent
s,i
n youropi
nion whatar
e some oft
he r
easons f
or
mai
ntai
ningcont
rolovercash?And,whatar
esomeoft
hemechani
sms
usedi
nsaf
eguar
dingcash?

Theneedt
osaf
eguar
dcashi
scr
uci
ali
nmostbusi
nesses.Cashi
seasyt
o
concealand t
ranspor
t,car
ri
es no mar
k ofowner
shi
p,and uni
ver
sal
l
y
v
alued.Ther
iskoft
hef
tisdi
rect
lyr
elat
edt
otheabi
l
ityofi
ndi
vi
dual
sto
accesst
heaccount
ingsy
stem andobt
aincust
odyofcash.

Fi
rmsaddr
esst
hepr
obl
em wi
thcasht
hrought
hei
nter
nalcont
rolsy
stem.
Ani
nter
nal
cont
rol
syst
em i
sasetofpol
i
ciesandpr
ocedur
esdesi
gnedt
o:
 Pr
otectasset
s
 Ensur
ecompl
i
ancewi
thl
awsandcompanypol
i
cy
 Pr
ovi
deadequat
eaccount
ingr
ecor
ds
 Ev
aluat
eper
for
mance
Asoundi
nter
nalcont
rolsy
stem f
orcashi
ncr
easest
hel
i
kel
i
hoodt
hatt
he
r
epor
tedv
aluesf
orcashandcashequi
val
ent
sar
eaccur
ateandmaybe
r
eli
eduponbyf
inanci
alst
atementuser
s.
165
I
nter
nalcont
rol
sforcashshoul
d
 Separ
atecust
odyofandaccount
ingf
orcash
 Accountf
oral
lcasht
ransact
ions
 Mai
ntai
nonl
ythemi
nimum cashbal
anceneeded
 Pr
ovi
def
orper
iodi
ctestcount
sofcashbal
ances
 Per
mitr
econci
l
iat
ionofl
edgerandbankcashaccountbal
ances.
 Achi
eveanadequat
eret
urnoni
dlecashbal
ances
 Resul
tint
hephy
sical
cont
rol
ofcash

6.
1.1Cont
rolofCashRecei
pts

Howcancompani
escont
rolt
hei
rcashr
ecei
pts?

Cashi
nfl
owshav
emanysour
ces,and cashcont
rolpr
ocedur
esv
aryacr
oss
compani
est
hef
oll
owi
ngpr
ocedur
esappl
yinmostsi
tuat
ions.

1.Separ
atet
he r
esponsi
bil
i
ties f
orhandl
i
ng cash,f
orr
ecor
ding cash
t
ransact
ions,andf
orr
econci
l
ingcashbal
ances.Thi
ssepar
ati
onr
educes
t
hepossi
bil
i
tyoft
hef
tandconceal
mentt
hroughf
alser
ecor
ding.
2.Assi
gn cash-
handl
i
ng and cash-
recor
ding r
esponsi
bil
i
ties t
o di
ff
erent
per
sonst
oensur
eanuni
nter
rupt
edf
lowofcashf
rom r
ecei
ptt
odeposi
t.
Thi
scont
rolr
equi
resi
mmedi
atecount
ing,i
nter
medi
ater
ecor
ding,and
t
imel
ydeposi
tofal
lcashr
ecei
ved.
3.Anot
herpr
ocedur
e used t
o cont
rolcash r
ecei
pti
sto mai
ntai
n cl
ose
super
visi
onofal
lcash-handl
i
ngandcash-r
ecor
dingf
unct
ions.Thi
s
cont
roli
ncl
udesbot
hrout
ineandsuper
visescashcount
s,i
nter
nalaudi
ts,
166
 anddai
l
yrepor
tsofcashr
ecei
pts,
pay
ment
s,andbal
ances.

I
ngener
alal
loft
hesear
ethepr
ocedur
esbywhi
chacompany(
orf
ir
m)usedi
n
or
dert
ocont
rol
andsaf
eguar
dthecashr
ecei
pts.

6.
1.1.
1CashShor
tandOv
er

Theamountofcashact
ual
l
yrecei
veddur
ingadayof
tendoesnotagr
eewi
tht
he
r
ecor
dofcashr
ecei
pts.Whenev
ert
her
eisadi
ff
erencebet
weent
her
ecor
dand
t
heact
ualcashandnoer
rorcanbef
oundi
nther
ecor
d,i
tmustbeassumedt
hat
t
hemi
stakeoccur
redi
nmaki
ngchange.

Thecashshor
tageorov
eragei
srecor
dedi
nanaccountent
it
ledcashshor
tand
ov
er.Acommonmet
hodofhandl
i
ngsuchmi
stakesi
stoi
ncl
udei
nthecash
r
ecei
ptsj
our
nalcashshor
tandov
erdebi
tcol
umni
ntowhi
chal
lcashshor
tages
ar
eent
ered.Let
’st
akeexampl
e.

Assumet
hatt
heact
ualcashr
ecei
vedf
rom cashsal
esi
sBr
.7,
577.
60andt
he
amountshowni
nthecashr
egi
stert
apei
sBr
.7,580.
76.Thi
smeanst
hatt
he
amountofcash act
ual
l
yrecei
ved dur
ing t
he dayi
sless t
han t
he amount
i
ndi
cat
edbyt
hecashr
egi
stert
all
ybyBr
.3.
16.Thus,
theBr
.3.
16cashshor
tagei
s
r
ecor
dedi
nthecashr
ecei
ptsj
our
nal
asf
oll
ows.
Cashi
nBank……………………………….
7,577.
60
CashShor
tOv
er……………………………….
..
3.16
Sal
es………………………………………………….
7,580.
76

I
f,att
heendoft
hef
iscalper
iod,t
her
eisadebi
tbal
ancei
nthecashshor
tand
ov
eraccount
,iti
s an expense and may be i
ncl n“
uded i Mi
scel
laneous
167
admi
nist
rat
iveexpense”ont
heI
ncomeSt
atement
.Ont
heot
herhand,i
fther
eis
acr
edi
tbal
ancei
nthecashshor
tandov
eraccount
,iti
srev
enueandmaybe
l
i
stedi
nthe“
OtherI
ncome”sect
ion.

CheckYourPr
ogr
ess:Exer
cise6.
1

1.Thecombi
nedcashcountofal
lcashr
egi
ster
satt
hecl
oseofabusi
ness
i
sBi
rr4.
63l
esst
hant
hecashsal
esi
ndi
cat
edbyt
hecashr
egi
stert
apes.
(
a)I
nwhataccounti
sthecashshor
tager
ecor
ded?(
b)Ar
ecashshor
tage
debi
tedorcr
edi
tedt
othi
saccount
?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2.I
nwhi
chsect
ionoft
hei
ncomest
atementwoul
dacr
edi
tbal
ancei
nCash
Shor
tandOv
erber
epor
ted?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
6.
1.1.
2CashChangeFunds

Dearst
udent
s,whatdoyouunder
standbyacashchangef
unds?Whatdoyou
t
hinki
sit
spur
pose?Answert
hequest
ionsi
nwr
it
ingandr
eadt
hedi
scussi
ons
bel
ow f
orchangef
undsandcompar
eyourr
esponsewi
thwhati
sgi
veni
nthe
modul
e.

168
Ret
ailst
oresandot
herbusi
nessest
hatr
ecei
vecashdi
rect
lyf
rom cust
omer
s
mustmai
ntai
naf
undofcur
rencyandcoi
nsi
nor
dert
omakechange.Thef
und
maybeest
abl
i
shedbydr
awi
ngacheckf
ort
her
equi
redamount
,debi
ti
ngt
he
account‘
CashonHand’andcr
edi
tng ‘
i Cashi
nBank’
.Noaddi
ti
onalchar
ges
(
debi
ts)orcr
edi
tst
othecashonhandaccountar
enecessar
yunl
esst
heamount
oft
hef
undi
stobei
ncr
easedordecr
eased.Att
heendofeachbusi
nessday
,the
t
otalamountofcashr
ecei
ved dur
ing t
hedayi
sdeposi
ted and t
heor
igi
nal
amountoft
hechangef
und(
wit
hthepr
operdenomi
nat
ions)i
sret
ainedf
orusei
n
t
henextbusi
nessday
.Andt
hedesi
redcomposi
ti
onoft
hef
undi
smai
ntai
nedby
exchangi
ngbi
l
lsorcount
sfort
hoseofot
herdenomi
nat
ionsatt
hebank.
CheckYourPr
ogr
ess:Exer
cise6.
2
1.Recor
dingener
alj
our
nal
for
mthef
oll
owi
ngt
ransact
ions:
(
a)CheckNo.012i
sissuedt
oest
abl
i
shachangef
undofBi
rr600.
00.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

(
b)Cashsal
esf
ort
heday
,accor
dingt
othecashr
egi
stert
apes,wer
e
Bi
rr10,
327.
75,andcashonhandi
sBi
rr10,
920.35.Abankdeposi
t
t
icketwaspr
epar
edf
orBi
rr10,
320.
35.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

169
Whatar
esomeoft
hemechani
smsf
requent
lyusedbyf
ir
mst
ocont
rolcash
di
sbur
sement
s?

Al
thoughcashdi
sbur
sementcont
rolsy
stemsar
etai
l
oredt
oeachf
ir
m’sspeci
fi
c
needs,
cer
tai
nfundament
alswoul
dappl
ytoal
lfi
rms.

6.
1.2Cont
rolofCashDi
sbur
sement
s(Pay
ment
s)

1.Separ
atet
her
esponsi
bil
i
tiesf
orcashdi
sbur
sementdocument
ati
oncheck
wr
it
ingchecksi
gni
ngcheckmai
l
ing,
andr
ecor
dkeepi
ng.
2.Exceptf
ori
nter
nal
cashf
und(
pet
tycash)
,makeal
lcashdi
sbur
sement
sby
check.
3.I
fpet
tycashf
undsar
eempl
oyed,
dev
elopt
ightcont
rol
sandaut
hor
izat
ion
pr
ocedur
esf
ort
hei
ruse
4.Pr
epar
e and si
gn checks onl
y when suppor
ted by adequat
e
document
ati
onandv
eri
fi
cat
ion,
5.Super
viseal
lcashdi
sbur
sement
sandr
ecor
dkeepi
ngf
unct
ions.

TheVoucherSy
stem

Oneoft
hewi
del
yusedmet
hodsofest
abl
i
shi
ngcont
rolov
ercashpay
ment
sis
t
hev
ouchersy
stem.Thebasi
cideaoft
hissy
stem i
sthatev
eryt
ransact
ionwhi
ch
wi
l
lresul
tinacashpay
mentmustbev
eri
fi
ed,appr
ovedi
nwr
it
ing,andr
ecor
ded
bef
oreachecki
sissued.Awr
it
tenaut
hor
izat
ioncal
l
edav
oucheri
spr
epar
edf
or
ev
eryt
ransact
ion t
hatwi
l
lrequi
recash pay
ment
,regar
dlessofwhet
hert
he

170
t
ransact
ioni
sforpay
mentofanexpense,pur
chaseofmer
chandi
seorapl
ant
asset
,forpay
mentofl
i
abi
l
ity
.

Dearst s!Whati
udent savouchersyst
em?
Av
ouchersy
stem i
sthemet
hodsandpr
ocedur
esempl
oyedi
nver
if
yingand
r
ecor
dingl
i
abi
l
iti
esandpay
ingandr
ecor
dingcashpay
ment
s.

Theuseofav
ouchersy
stem woul
denabl
ethat
:
(
a)t
heappr
ovalofi
nvoi
cesf
orpay
mentbecl
ear
lysepar
atedf
rom t
he
i
ssuanceofcheckst
omakesuchpay
ment
:
(
b)Ev
eryt
ransact
ion r
equi
ri
ng a cash di
sbur
sementbe v
eri
fi
ed and
appr
ovedbef
orepay
menti
smade.
Av
ouchersy
stem uses:
(
1)Voucher
s
(
2)Voucherr
egi
ster
(
3)Af
il
eforunpai
dvoucher
s
(
4)Acheckr
egi
ster
,and
(
5)Af
il
eforpai
dvoucher
s

Voucher
s

Av
oucheri
saspeci
alf
orm onwhi
chi
srecor
dedr
elev
antdat
aaboutal
i
abi
l
ity
andt
hepar
ti
cul
arsofi
tspay
ment
.Av
ouchermayi
ncl
udei
nfor
mat
ionr
egar
ding:
t
henameandaddr
essoft
hecr
edi
tor
s,t
hedat
eandt
henumberoft
hev
oucher
,
t
hebasi
cdet
ail
soft
hei
nvoi
cesuchassel
l
er'
sinv
oicenumberandt
heamount
andt
het
ermsoft
hei
nvoi
ce,
andt
hedet
ail
sofpay
ment
,et
c.

Voucher
sar
ecust
omar
il
ypr
epar
edbyt
heaccount
ingdepar
tmentont
hebasi
sof

171
t
hei
nvoi
ceormemor
andum t
hatser
vesasev
idenceofexpendi
tur
e.Voucher
s
ar
epr
epar
edaf
tert
hef
oll
owi
ngcompar
isonsandv
eri
fi
cat
ionshav
ebeenmade:
(
a)Compar
isonoft
hei
nvoi
cewi
thacopyoft
hepur
chaseor
dert
over
if
y
quant
it
ies,
pri
ces,
andt
erms.
(
b)Compar
isonoft
hei
nvoi
cewi
tht
her
ecei
vi
ngr
epor
ttov
eri
fyr
ecei
ptof
t
hei
temsbi
l
led.
(
c)Ver
if
icat
ionoft
hear
it
hmet
ical
accur
acyoft
hei
nvoi
ce.

Bef
oreavoucherf
ort
hepur
chaseofmer
chandi
sei
sappr
ovedf
orpayment
,
t
hreedocument
sshoul
dbecompar
edt
over
if
ytheaccur
acyoft
hel
iabi
li
ty.
Namet
heset
hreedocument
s?

Whatar
eyouranswer
s?Compar
eyouranswer
swi
tht
heanswer
sgi
venbel
ow.

Thet
hreedocument
ssuppor
ti
ngt
hel
i
abi
l
iti
esar
e:Sel
l
er'
sinv
oice,pur
chase
or
der
,andr
ecei
vi
ngr
epor
t.Thei
nvoi
ceshoul
dbecompar
edwi
tht
her
ecei
vi
ng
r
epor
tto det
ermi
ne t
hatt
he i
tems bi
l
led hav
e been r
ecei
ved and wi
tht
he
pur
chasesor
dert
over
if
yquant
it
ies,
pri
cesandt
erms.

172
VoucherRegi
ster

Af
terappr
ovalbyt
hedesi
gnat
edof
fi
cial
s,eachv
oucheri
srecor
dedi
naj
our
nal
knownasav
oucherr
egi
ster
.Thev
oucherr
egi
steri
ssi
mil
art
oandr
epl
acest
he
pur
chasesj
our
nal
.Itmaybet
houghtofasanexpandedpur
chasesj
our
nalwi
th
addi
ti
onaldebi
tcol
umnsf
orv
ari
oust
ypesofexpensesandassetaccount
s.
Ev
eryent
ryi
nthev
oucherr
egi
sterwi
l
lconsi
stofacr
edi
ttoAccount
sPay
abl
e,
butt
hedebi
tsmayaf
fectv
ari
ousasset
sandex
pensesaccount
s.Eachv
oucher
i
sent
eredi
nthev
oucherr
egi
steri
nnumer
icalor
derassoonasi
tispr
epar
edand
appr
oved.Thet
otaloft
heunpai
dvoucher
sappear
ingi
nthev
oucherr
egi
ster
shoul
dagr
eewi
tht
het
otaloft
hev
oucher
sint
heunpai
dvoucherf
il
eatt
hesame
dat
e.

Unpai
dVoucherFi
le

Af
tert
hev
oucherhasbeenent
eredi
nthev
oucherr
egi
ster
,iti
sfi
l
edi
ntheunpai
d
v
oucherf
il
eaccor
dingt
othedat
eofr
equi
redpay
ment
,wher
eitr
emai
nsunt
ili
tis
pai
d.Theamountdueoneachv
oucherr
epr
esent
sthecr
edi
tbal
anceofan
accountpay
abl
e,andt
hev
oucheri
tsel
fiscompar
abl
etoani
ndi
vi
dualaccounti
n
asubsi
diar
yaccountpay
abl
eledger
;accor
dingl
yasepar
atesubsi
diar
yledgeri
s
notnecessar
y.

Whenav
oucheri
stobepai
d,i
tisr
emov
edf
rom t
heunpai
dvoucherf
il
eanda
checki
sissuedi
npay
ment
.Thedat
e,t
henumber
,andt
heamountoft
hecheck
ar
eli
stedont
hebackoft
hev
oucherf
orusei
nrecor
dingt
hepay
menti
nthe
checkr
egi
ster
.Pai
dvoucher
sand t
hesuppor
ti
ng document
sar
eof
ten r
un
t
hroughacancel
i
ngmachi
net
opr
eventacci
dent
alori
ntent
ional
reuse.
173
CashRegi
ster

Thepay
mentofav
oucheri
srecor
dedi
nacheckr
egi
ster
.Thecheckr
egi
steri
sa
modi
fi
edf
orm oft
hecashpay
ment
sjour
nalandi
tissocal
l
edbecausei
tisa
compl
eter
ecor
d ofal
lchecks.Al
lchecksi
ncl
udi
ng t
he v
oided hav
eto be
r
ecor
dedi
nthecheckr
egi
steri
nsequent
ial
order
.

Eachchecki
ssuedi
npay
mentofav
ouchert
hathaspr
evi
ousl
ybeenr
ecor
dedas
anaccountpay
abl
eint
hev
oucherr
egi
ster
.Theef
fectofeachent
ryi
nthecheck
r
egi
steri
sadebi
tto Account
sPay
abl
eandaCr
edi
tto Cashi
nBank(
and
Pur
chasesDi
scount
s,whenappr
opr
iat
e).

Pai
dVoucherFi
le

Af
terpay
ment
,voucher
sar
ecust
omar
il
yfi
l
edi
nnumer
icalsequencei
napai
d
v
oucher
sfi
l
esot
hatf
utur
eexami
nat
ionofeachv
oucheri
smadepossi
ble.

Af
terpay
ment
,voucher
sar
ecust
omar
il
yfi
l
edi
nnumer
icalsequencei
napai
d
v
oucher
sfi
l
esot
hatf
utur
eexami
nat
ionofeachv
oucheri
smadepossi
ble.
So,
whatdoyout
hinkar
etheusesoft
hevouchersyst
em?

Thef
oll
owi
ngar
etheusesoft
hev
ouchersy
stem:
(
1)I
tpr
ovi
desef
fect
iveaccount
ingcont
rol
s
(
2)I
tpr
ovi
desassur
ancet
hatal
lpay
ment
sar
einl
i
qui
dat
ion ofv
ali
d
l
i
abi
l
iti
es.
(
3)i
tassi
stsi
ndet
ermi
ningf
utur
ecashr
equi
rement
sther
ebyenabl
i
ng
managementt
omakemaxi
mum useofcashr
esour
cesby
:(a)t
aki
ng
174
 adv
ant
ageofcash di
scount
s,(
b)pl
anni
ng seasonalbor
rowi
ng f
or
wor
kingcapi
tal

Thef
oll
owi
ngdi
scussi
onhi
ghl
i
ght
stwooft
hemostcommonel
ement
sofcash
cont
rol
andmanagement
:Pet
tycashf
undsandbankaccount
s.
CheckYourPr
ogr
ess:Exer
cise6.
3
1.Whyi
scasht
heassett
hatof
tenwar
rant
sthemostat
tent
ioni
nthedesi
gnof
anef
fect
ivei
nter
nal
cont
rol
str
uct
ure?
_
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_
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___
___
___
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_
___
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___
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__

6.
1.2.
1Pet
tyCashFunds

Whatdoyouunder
standbyapet
tycashf
unds?Whyf
ir
msmai
ntai
npet
tycash
f
unds?Dearst
udent
swoul
dyoupl
easet
ryt
oanswert
heabovequest
ionsi
n
wr
it
ingbef
oreyouar
egoi
ngt
hrought
hedi
scussi
on.
Apet
tycashf
undi
sat
ypeofi
mpr
estf
und,pr
ovi
dingr
eadycur
rencyf
orr
out
ine
di
sbur
sement
s.Somet
imesi
tbecomesv
erydi
ff
icul
ttomakesmal
lpay
ment
s
t
hatar
isef
requent
lydur
ingadayt
hroughchecks.

Apar
tfr
om i
tsi
nconv
eni
encei
tisconsi
der
edv
eryexpensi
vet
owr
it
eacheckf
or
ev
erysi
ngl
epay
ment
.Ther
efor
e,i
tisadv
isabl
eforf
ir
mst
omakesmal
lpay
ment
s
t
hatar
efr
equent
lymadebymai
ntai
ningapet
tycashf
und.

Thef
ir
stst
epi
nest
abl
i
shi
ngapet
tycashf
undi
stoest
imat
ethesi
zeoft
hef
und
r
equi
redf
ordi
sbur
sementofaspeci
fi
edper
iodoft
ime,sayf
oramont
h.Af
ter
det
ermi
ningt
hesi
zeoft
hef
undacheckshoul
dbepr
epar
edandi
ssuedf
ort
he
r
equi
redamountt
her
ecomesr
ecor
dingt
heest
abl
i
shmentoft
hepet
tycashf
und
175
bydebi
ti
ngpet
tycashaccountandcr
edi
ti
ngt
hecashi
nbankaccount
.The
amount
soft
hef
undmayv
arydependi
ngupont
heneedsoft
hecompani
esand
t
hel
engt
hoft
imei
nvol
ved.I
naddi
ti
onal
argeor
gani
zat
ionmayhav
esev
eral
pet
tycashf
undsi
nav
ari
etyofof
fi
cesandpr
oduct
ionf
aci
l
iti
es.Al
thought
he
amounti
nanyonel
ocat
ionmayber
elat
ivel
ymi
nor
,thet
otalofal
lpet
tycashcan
besi
gni
fi
cant
.Thebal
anceoft
hepet
tycashaccount
,whi
chi
spar
toft
het
otal
cashbal
ance,
changesonl
ywhent
hef sest
undi abl
ished,changedi
namount
,or
di
scont
inued.

Pet
tycashf
undsar
eint
endedt
ohandl
emanyt
ypesofsmal
lpay
ment
s,i
ncl
udi
ng
empl
oyeet
ranspor
tat
ioncost
s,post
age,of
fi
cesuppl
i
es,anddel
i
ver
ychar
ges.
Gener
all
y,cont
rolofcashi
napet
tycashsy
stem i
sinf
ormal
.Incr
easedeconomy
andconv
eni
enceof
tenj
ust
if
ytheuseofpet
tycashf
unds.

Thef
oll
owi
ngchr
onol
ogi
calst
epsi
ll
ust
rat
eat
ypi
calpet
tycashf
und
oper
ati
on:

1.Assumet
hataBr
.3000pet
tycashf
undi
sest
abl
i
shedataspeci
fi
c
l
ocat
ion.Thecashi
spl
acedi
nasecur
edl
ocat
ion(
usual
l
yast
rongboxor
saf
eundercust
odi
alcont
rol
).Thej
our
nal
ent
ryi
sasf
oll
ows:
Pet
tycash………………………….3000.
00
Cash……………………….
.………….
.3000.
00

2.Thecust
odi
anr
evi
ewsaut
hor
izat
iononv
oucher
sforcashr
equest
sand
di
spensest
her
equi
redcash.Thev
oucher
sar
ekeptwi
tht
hef
und.The
sum ofcashandv
oucher
sshoul
dequalBr
.3000.Jour
nalent
ri
esar
enot
madef
ordi
sbur
sement
s.

3.Att
heendoft
hef
ir
stmont
h,Br
.560r
emai
nsi
nthef
und,
indi
cat
ingt
hatBr
2,
440wasdi
sbur
seddur
ingt
hemont
h(Br
.3000-Br
.560)andt
hatt
he

176
 cust
odi
an shoul
d hav
e Br
.2,
440 i
n suppor
ti
ng pay
outv
oucher
s.The
f
oll
owi
ngi
ndi
vi
dualv
oucher
saccompanyt
hef
und:post
age,
Br.900,
off
ice
suppl
i
es,Br
.700,andt
axif
ares,Br
.800(
Br.2400i
ntot
al)
.Ther
eisaBr
.
40cashshor
tage(
Br.2,
440-Br
.2,
400)
.Pr
esumabl
y,av
oucherwasl
ost
,
orav
oucherunder
stat
est
heamountdi
sbur
sed.Theshor
tagei
sref
lect
ed
i
nar
epl
eni
shmentent
ry:

Post
ageexpense……………………………….
.900.
00
Of
fi
cesuppl
i
esexpense……………………….
.700.
00
Tr
anspor
tat
ionexpense……………………….
.800.
00
CashShor
tandOv
er…………………………….40.
00
Cash……………………………. 2,
440.
00

Thi
sent
ryi
srecor
dedbyt
heaccount
ingdepar
tment
,nott
hecust
odi
an.
Repl
eni
shmentoft
hepet
tycashf
undoccur
swhenev
ert
hef
undr
unsl
ow
andatt
heendofeachf
iscalper
iodf
orpr
operr
epor
ti
ngofexpensesand
cashbal
ance.

Cashshor
tandov
eri
sanexpense(
debi
tbal
ance)orr
evenueaccount
(
credi
tbal
ance)
.A shor
tage orov
erage i
s caused by r
ecor
ding or
di
sbur
singer
ror
s.I
fashor
tagei
slar
gert
hannor
malori
fshor
tageoccur
s
r
egul
arl
ywi
tht
hesamef
und,t
hef
tshoul
dbesuspect
ed.Whenf
raudor
t
hef
tissuspect
ed,
alossi
srecor
dedr
athert
hancashshor
tandov
er.

4.Whenapet
tycashf
undi
sincr
eased,decr
eased,orcl
osed,anent
ryi
s
madeaf
fect
ingbot
hthepet
tycashandcashaccount
s.Forexampl
e,i
fthe
f
undi
sincr
easedt
oBr
.5000becauseofi
ncr
easedoff
icecashneeds,
the
177
 ent
ryi
sasf
oll
ows:

Pet
tycash…………………………….2,
000.
00
Cash………………………………………2000.
00

What
,ift
hef
ir
mint
heabovei
ll
ust
rat
ion,want
stodecr
easet
hesi
zeoft
hepet
ty
cashf
undt
oBr
.2,
500?Maket
henecessar
yjour
nalent
ry.
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___
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___
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___
___
___
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___
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__

I
nSummar
y,pet
tycashsy
stemsf
ost
eri
nter
nalcont
rolt
hrought
her
equi
rement
t
hatsomeoneot
hert
hant
her
eci
pientofcashmustaut
hor
izet
hedi
sbur
sement
.
Ar
ecor
dofeachdi
sbur
sementi
smade,t
hef
undi
scr
eat
edandr
epl
eni
shedby
checkandi
sreconci
l
ed,andt
her
epl
eni
shmentchecki
swr
it
tenbysomeone
ot
hert
hant
hecust
odi
anoft
hef
und.

CheckYourPr
ogr
ess:Exer
cise6.
4
1.Whataccountoraccount
sar
edebi
tedwhenr
ecor
ding(
a)t
heest
abl
i
shi
nga
pet
tycash f
undand(
b)r
epl
eni
shi
ngapet
tycashf
und?
_
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___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
2.Recor
dingener
alj
our
nal
for
mthef
oll
owi
ngr
elat
edt
ransact
ions
(
a)Achecki
sissuedi
ntheamountofBi
rr750.
00t
oest
abl
i
shapet
tycash
f
und
(
b)Theamountofcashi
nthepet
tycashf
undi
snowBi
rr47.
30.CheckNo.
1213 i
sissuedt
orepl
eni
sht
hef
und,basedont
hef
oll
owi
ngsummar
y

178
ofpet
tycash r
ecei
pts:of
fi
ce suppl
i
es,Bi
rr282.
15;mi
scel
l
aneous
sel
l
ingexpense,Bi
rr 180.
60;mi
scel
l
aneousadmi
nist
rat
iveexpense,
Bi
rr258.
70;(
Sincet
he amountoft
hecheckt
orepl
eni
sht
hef
undpl
us
t
hebal
ancei
nthef
unddonot equalBi
rr750,r
ecor
dthedi
ff
erencei
n
t
hecashshor
tandov
eraccount
.)
_
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___
___
___
___
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___
___
_
___
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___
___
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___
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___
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6.
1.2.
2Cont
rolofCasht
hroughBankAccount
s

Whatar
esomeoft
hebenef
it
sofusi
ngabankaccount
? Tr
ytogi
veyour
answerf
rom yourownper
spect
ives.

Bankaccount
sar
eani
mpor
tantmeansofcashcont
rolandpr
ovi
desev
eral
adv
ant
ages:
 Cashi
sphy
sical
l
ypr
otect
edbyt
hebank
 Asepar
ater
ecor
dofcashi
smai
ntai
nedbybank
 Cashhandl
i
ngandt
hef
tri
skar
esummar
ized
 Cust
omer
smayr
emi
tpay
ment
sdi
rect
lyt
othebank
 Fi
nanci
ali
nst
it
uti
ons pr
ovi
de cash management ser
vices such as
checki
ngpr
ivi
l
eges,
inv
est
mentadv
ice,
andi
nter
estr
evenueonaccount
s.

Oneoft
hemaj
ordev
icesf
ormai
ntai
ningcont
rolov
ercashi
sthebankaccount
.
Togett
hemostbenef
itf
rom bankaccount
,al
lcashr
ecei
vedmustbedeposi
ted
i
nthebankandal
lpay
ment
smustbemadebychecksdr
awnont
hebankorf
rom
speci
alcashf
unds.Whensuchasy
stem i
sst
ri
ctl
yfol
l
owed,t
her
eisadoubl
e
r
ecor
dofcash,onemai
ntai
nedbyt
hedeposi
tor(
busi
ness)andt
heot
herbyt
he

179
bank.

Ther
ear
ecer
tai
nfor
msusedbyabusi
nessi
nconnect
ionwi
thabankaccount
.
Thesear
e:si
gnat
urecar
d,deposi
tti
cket
,check,andr
ecor
dofchecksdr
awn.A
br
iefdescr
ipt
ionofeachoft
hesef
ormsi
spr
esent
edbel
ow.

Si
gnat
ure car
d -when y
ou open a bankaccount
,an i
dent
if
ying numberi
s
assi
gnedt
oyouraccount
,andasi
gnat
urecar
dmustbepr
epar
edandsi
gnedby
y
out
heaccounthol
deroranyot
herper
son(
s)aut
hor
izedt
osi
gnchecksdr
awn
ont
heaccount
.

Dearst
udent
s,doyouhaveasavi
ngsaccountwi
thanyoft
hel
ocalbanksi
n
Et
hiopi
a?I
fyourr
esponsei
s‘yes’
,haven’
tyousi
gnedont
hesi
gnat
urecar
dup
onopeni
ngt
hisaccount
?Whatdoyout
hinki
sthepur
poseofsi
gni
ngont
he
si
gnat
urecar
d?

Thebankl
aterusedt
hesi
gnat
urecar
dtodet
ermi
net
heaut
hent
ici
tyoft
he
si
gnat
ureoncheckspr
esent
edt
oitf
orpay
ment
.Ift
hesi
gnat
urepr
esent
edon
t
hechecki
snoti
dent
icalwi
tht
hesi
gnat
ureont
hesi
gnat
urecar
d,t
hebankmay
r
efuset
omakepay
ment
.

Deposi
tti
cket-I
tisapr
int
edf
orm suppl
i
edbyt
hebankt
ofi
l
lthedet
ailoft
he
deposi
t.Deposi
tti
cketi soknownasadeposi
sal tsl
ipordeposi
tvoucher
.Iti
s
pr
epar
edi
ntwocopi
es,i
nwhi
chcaset
hecopyi
sst
ampedandi
nit
ial
edbyt
he
bank’
stel
l
erandgi
vent
othedeposi
torasar
ecei
ptorasawr
it
tenpr
oofoft
he
dat
eandt
het
otal
amountoft
hedeposi
t.

180
Check-Achecki
sawr
it
teni
nst
rumentsi
gnedbyt
hedeposi
tor
,or
der
ingt
he
bankt
opayacer
tai
nsum ofmoneyt
otheor
derofaspeci
fi
edper
son(
s).

Thr
eepar
ti
esar
einv
olv
edi
nachecki
ssuance:(
1)t
hedr
awer
,theonewhosi
gns
t
hecheck,(
2)t
hedr
awee,t
hebankonwhi
cht
hechecki
sdr
awn;and(
3)t
he
pay
ee,
theonet
owhoseor
dert
hechecki
sdr
awn.I
nsi
mpl
eter
ms,
thedr
aweri
s
t
heper
sonorf
ir
m whoownst
hebankaccount(
theaccounthol
der
),t
hedr
awee
r
efer
stot
hebank(
branch)i
nwhi
cht
heaccounti
sdeposi
ted;andt
hepay
ee
r
efer
stot
heper
sonorf
ir
mtowhoseor
dert
hepay
menti
smade.

Whenchecksar
eissuedt
opaybi
l
ls,t
heyar
erecor
dedascr
edi
tst
oCashont
he
dayi
ssued,ev
ent
hought
heyar
enotpr
esent
edt
othedr
awer
’sbankunt
ilsome
l
atert
ime.Ont
heot
herhand,
whenchecksar
erecei
vedf
rom cust
omer
s,t
heyar
e
r
ecor
dedasdebi
tst
oCash,ont
heassumpt
iont
hatt
hecust
omerhasenough
moneyondeposi
t.

Thecheckf
orm cont
ainsi
nfor
mat
ionconcer
ningt
henamesandaddr
essoft
he
deposi
tor(
accounthol
der
)pr
int
ed oneachcheck.And,t
ofaci
l
itat
eint
ernal
cont
rol
ofcashpay
ment
s,checksar
eusual
l
ynumber
edsequent
ial
l
y.

Recor
dofchecksdr
awn-Amemor
andum r
ecor
doft
hebasi
cdet
ail
sofacheck
shoul
dbepr
epar
edatt
het
imet
hechecki
swr
it
ten.Thi
srecor
dmaybeast
ub
f
rom whi
cht
hechecki
sdet
achedori
tmaybeasmal
lbookl
etdesi
gnedt
obe
keptwi
tht
he check f
orms.Each t
ype ofr
ecor
d al
so pr
ovi
des spaces f
or
r
ecor
dingdeposi
tsandt
hecur
rentbankbal
ance.

Busi
nessf
ir
msmaypr
epar
eacopyofeachcheckdr
awnandt
henusei
tasa
basi
sforr
ecor
dingt
het
ransact
ioni
nthecashpay
ment
sjour
nal
.

CheckYourPr
ogr
ess:Exer
cise6.
5
1.Di
sti
ngui
shbet
weenadr
awerandapay
ee
181
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BankSt
atement

Whatdoyouunder
standbyabankst
atement
?Whopr
epar
esabankst
atement
?
And,how of
teni
sabankst
atementpr
epar
ed?Woul
dyoupl
easegi
veyour
answeri
nwr
it
ingbef
oreyour
eadt
hef
oll
owi
ngdi
scussi
on?

Abankst
atementi
sast
atementt
hatcont
ainsal
lchecki
ngaccountt
ransact
ions
made
byt
hedeposi
tori
nagi
venper
iodoft
ime,usual
l
yamont
h.Abankst
atementi
s
pr
epar
ed byt
he bank att
he end ofeach mont
hforal
lchecki
ng account
deposi
tor
sandi
ncl
udes:
 t
hebegi
nni
ngbal
anceoft
hecashaccount
,
 al
ldeposi
tsandot
hercr
edi
tst
othedeposi
tor
’saccount
,(
addi
ti
onsbyt
he
bank)
,
 al
lpay
ment
s(checks)andot
herdeduct
ionsbyt
hebank,
and
 t
hebal
anceoft
hecashaccountatt
heendoft
hemont
h.

Usual
l
ythebanksentt
hest
atementt
oeachchecki
ngaccountdeposi
tor
’satt
he
endofeachmont
h.Thest
atementmayal
soi
ncl
udet
hedeposi
tor
’schecks
r
ecei
vedbyt
hebank
dur
ingt
hemont
har
rangedi
ntheor
derofpay
ment
. Thepai
d or cancel
ed
checksar
est
amped“
pai
d”,
toget
herwi
tht
hedat
eofpay
ment
.

182
I
n addi
ti
on,debi
torcr
edi
tmemor
andums descr
ibi
ng ot
herent
ri
es i
nthe
deposi
tor
’s
accountmayal
sobeencl
osedwi
tht
hest
atement
.Forexampl
e,t
hebankmay
hav
e
cr
edi
tedt
hedeposi
tor
’saccountf
orl
oansgr
ant
edbyt
hebankorf
orcol
l
ect
ions
ofr
ecei
vabl
esf
rom cust
omer
s.Al
so,t
hebankmayhav
edebi
tedt
hedeposi
tor
’s
accountf
orser
vice char
ge orf
ordeposi
ted checks r
etur
ned because of
i
nsuf
fi
cientf
unds.

BankReconci
li
ati
on

Whatdoesi
tmeanbybankr
econci
li
ati
on?Whomakest
hisr
econci
li
ati
onoft
he
bankst
atementbal
ancewi
tht
hebal
ancei
nthedeposi
tor
’sr
ecor
ds?

Whenal
lcashr
ecei
ptsar
edeposi
tedi
nthebankandal
lpay
ment
sar
emadeby
check,t
heaccounti
sof
tensai
dtobe “
cashi
nbank”
.Thi
saccounti
nthe
deposi
tor
’sl
edgeri
sther
eci
procaloft
heaccountwi
tht
hedeposi
tori
nthe
bank’
sledger
.

Cashi
nbanki
nthedeposi
tor
’sl sanassetwi
edgeri thadebi
tbal
ance,andt
he
accountwi
tht
hedeposi
tori
nthebank’
sl sal
edgeri iabi
li
tywi
thacr
edi
tbal
ance.
Onecansayt
hatt
het
wobal
ancesshoul
dbeequal
,butt
heyar
enotl
i
kel
ytobe
equal
onanyspeci
fi
cdat
ebecauseofei
therorbot
hoft
hef
oll
owi
ng;

(
1)Del
aybyei
thert
hebankort
hedeposi
tori
nrecor
dingt
ransact
ions,
and
(
2)Er
ror
sbyei
thert
hebankort
hedeposi
tori
nrecor
dingt
ransact
ions.

183
Wi
thr
espectt
odel
ay,nor
mal
l
yther
eisat
imel
agofonedayormor
ebet
ween
t
hedat
eachecki
swr
it
tenandt
hedat
ethati
tispr
esent
edt
othebankf
or
pay
ment
.Al
so,i
fthedeposi
tormai
l
sdeposi
tst
othebankorusest
heni
ght
deposi
tor
y,at
imel
agbet
weent
hedat
eoft
hedeposi
tandt
hedat
ethati
tis
r
ecor
dedbyt
hebankmayhappen.Toputt
hisdi
ff
erent
ly,t
hebankmaydebi
tor
cr
edi
tthedeposi
tor
’saccountf
ort
ransact
ionsaboutwhi
cht
hedeposi
torwi
l
lnot
bei
nfor
medunt
ill
ater
.Exampl
esar
eser
viceorcol
l
ect
ionf
eeschar
gedbyt
he
bankandt
hepr
oceedsofnot
esr
ecei
vabl
esentt
othebankf
orcol
l
ect
ion.

Ther
efor
e,t
odet
ermi
net
her
easonsf
oranydi
ff
erenceandt
ocor
rectanyer
ror
s
t
hatmayhav
ebeenmadebyt
hebankort
hedeposi
tor
,thedeposi
tor
’sown
r
ecor
dsshoul
dber
econci
l
edwi
tht
hebankst
atement
.

TwoFor
msofBankReconci
li
ati
onar
einCommonUsage

(
a) Bot
h t
he bank st
atement bal
ance and t
he bal
ance i
n t
he
deposi
tor
’sr
ecor
dsar
e r
econci
l oacor
edt rectbal
ance,
and
(
b)Thebankst
atementbal
ancei
sreconci
l
edt
otheunadj
ust
edbal
ancei
n
t
he deposi
tor
’sr
ecor
ds.

Basedont
heconcept
sdi
scussedt
husf
ar,i
l
lust
rat
ionofbankr
econci
l
iat
ionwi
l
l
bemadei
nthef
oll
owi
ngsect
ionusi
ngt
het
wof
orms.

6.
2Il
lust
rat
ionofBankReconci
li
ati
onandJour
nalEnt
ri
es

Assumet
hatt
hebankst
atementasofApr
il30,
2008sentt
oAbogi
daTr
adi
ngPl
c,
r
epor
tedanendi
ngbal
anceofBi
rr38,
660,andt
hecashi
nbankaccountr
efl
ect
s
an endi
ng Bi
rr 34,
880 cash bal
ance.Dat
a per
tai
ning t
othe Apr
ilbank

184
r
econci
l
iat
ionf
orAbogi
daTr
adi
ngPl
cissummar
izedbel
ow:

(
1)Deposi
tint
ransi
t-t
hesear
edeposi
tsmadet
ool
atet
ober
efl
ect
edi
nthe
bankst
atement
.Youcandet
ermi
net
hisamountbycompar
ingt
hef
ir
msr
ecor
d
ofdeposi
tswi
tht
hedeposi
tsl
i
stedi
nthebankst
atement
.Accor
dingl
y,t
he
deposi
tint
ransi
tfort
hemont
hofApr
ilf
orAbogi
daTr
adi
ngi
sBi
rr3000.When
maki
ngt
her
econci
l
iat
ion,t
hedeposi
tint
ransi
tamounti
saddedt
othebal
ance
perbankst
atement
.
(
2)Out
standi
ngchecks-t
hesear
echecksi
ssuedbyt
hedeposi
torbutt
hathav
e
notbeenpai
dbyt
hebank.Theamountofout
standi
ngchecksi
sdet
ermi
nedby
compar
ingcheckswr
it
tenwi
thcheckscl
ear
edandshowni
nthebankst
atement
.
Theout
standi
ngchecksf
orAbogi
daf
ort
hemont
hofApr
ili
sBi
rr7000.Whi
l
e
pr
epar
ingt
hebankr
econci
l
iat
ion,t
heamountofout
standi
ngchecksshoul
dbe
deduct
edf
rom t
hebal
ancepert
hebankst
atement
.
(
3) BankCr
edi
tmemo-t
hiscr
edi
tmemor
epr
esent
scol
l
ect
ionofr
ecei
vabl
es
madebyt
hebankdur
ingt
hemont
honbehal
foft
hedeposi
tor
,ort
hebankmay
gr
antl
oanst
othedeposi
tor
.Thesecr
edi
tmemor
andumsar
etr
acedt
othecash
r
ecei
ptsj
our
nal
.Cr
edi
tmemor
andumsnotr
ecor
dedi
nthecashr
ecei
ptsj
our
nal
ar
eaddedt
othebal
ancepert
hedeposi
tor
’sr
ecor
ds.ForAbogi
daTr
adi
ng,t
he
bankcol
l
ect
edandcr
edi
tedt
hedeposi
tor
’saccountf
orBi
rr1,
100f
oranot
es
r
ecei
vabl
ewi
thaf
acev
alueofBi
rr1000pl
usBi
rr100i
nter
est
.Thi
samountwas
notr
ecor
dedbyAbogi
daTr
adi
ngPl
c.

(
4) Er
rori
nrecor
ding -er
rordi
scov
ered dur
ing t
he pr
ocess ofmaki
ng
compar
isonsar
eli
sted separ
atel
yon t
her
econci
l
iat
ion.Forexampl
e,i
fthe
amountf
orwhi
chadeposi
tsl
i
pwaswr
it
tenhadbeenr
ecor
deder
roneousl
yby
t
hedeposi
tor
,theamountoft
heer
rorshoul
dbeaddedt
oordeduct
edf
rom t
he
bal
anceaccor
dingt
othedeposi
tor
’sr
ecor
ds.Si
mil
arl
y,er
ror
sbyt
hebankshoul
d
beaddedordeduct
edf
rom t
hebal
anceaccor
dingt
othebankst
atement
.For
Abogi
daTr
adi
ngPl
c.,
theaccount
antoft
hef
ir
mrecor
dedaBi
rr240checki
nthe
cashpay
ment
sjour
nali
ntheamountofBi
rr420,
causi
ngthebookbal
ancet
obe
185
under
stat
edbyBi
rr180(
Bir
r420-Bi
rr240)
.Thus,
whenmaki
ngt
her
econci
l
iat
ion
t
heBi
rr180deposi
tor
’ser
rorshoul
dbeaddedt
othebal
anceperdeposi
tor
’s
r
ecor
ds.

(
5)Bank Debi
tMemor
andums -t
hese ar
etr
ansact
ions t
hatdecr
ease t
he
deposi
tor
’scashbal
ancewi
tht
hebank.Thesear
ededuct
ionsmadebyt
hebank
f
rom t
he bank bal
ance wi
tht
he deposi
tor
’s account
.Debi
tmemor
andums
i
ncl
ude:
bankser
vicechar
ge,
nonsuf
fi
cientf
unds(
NSF)checks,
int
erestexpense,
costofchecks,andanyot
hert
ransact
ionst
hatdecr
easet
hedeposi
tor
’sbank
accountbal
ance.

(
a)Non-
suf
fi
cientf
unds(
checks)-y
ou maymadecol
l
ect
ion f
rom a
cust
omert
hroughchecksand,
iti
scommont
haty
oupr
efert
odeposi
tthe
checksy
our
ecei
vedf
rom t
hecl
i
enti
nyourbankaccount
,yourbank
i
nit
ial
l
ycr
edi
tsy
ourbankaccountf
ort
hedeposi
ted amountwi
tht
he
assumpt
iont
hatt
hecl
i
enthassuf
fi
cientf
unds.Howev
er,l
ateron,t
he
cl
i
entwhoi
ssuedt
hecheckmaynothav
esuf
fi
cientf
undi
nhi
sbank
account
.Whent
hishappens,t
hebankdebi
ts(
deduct
s)t
hedeposi
tor
’s
accountf
ort
heamountandr
etur
nthecheckwi
tht
hest
atementt
othe
deposi
tor
.

ForAbogi
daTr
adi
ngPl
c,aBi
rr300checkf
rom cust
omer(
Alet
aCo.
),whi
chwas
notsuppor
tedbysuf
fi
cientf
undsi
nAl
eta’
schecki
ngaccount
,wasr
etur
nedt
o
Abogi
daTr
adi
ngbyt
hebank.Abogi
dahaddeposi
tedt
hecheck,i
ncr
easedcash,
anddecr
easedaccount
srecei
vabl
e,butt
hebankwasunabl
etocr
edi
tAbogi
da’
s
account
.Thus,t
he Bi
rr300 NSF check i
s deduct
ed f
rom t
he bal
ance per
deposi
tor
’sr
ecor
ds.

(
b)Bankser
vicechar
ges-Thebankser
vicechar
ger
epr
esent
sdeduct
ions
bybankf
rom t
hedeposi
tor
sbankbal
ance.Thesededuct
ionsar
emade
eachmont
hfort
heser
vicer
ender
edbyt
hebanktot
hedeposi
tor
.
186
Accor
dingl
y,t
hebankdebi
tedAbogi
da’
saccountf
orBi
rr200ofbankchar
gesi
n
Apr
ilf
orcheckpr
int
ing,checki
ngaccountpr
ivi
l
eges,andpr
ocessi
ngcust
omer
checksandnot
es.

Ther
efor
e,i
nmaki
ngt
her
econci
l
iat
iont
heBi
rr200ser
vicechar
geshoul
dbe
deduct
edf
rom t
hebal
anceperdeposi
tor
’sr
ecor
ds.

Based on t
he abov
e bank r
econci
l
iat
ion i
nfor
mat
ion l
et'
s pr
epar
e a bank
r
econci
l
iat
ionusi
ngbot
hfor
ms.

oachA.Bankst
Appr atementbal
anceanddeposi
tor
’sbal
ancer
econci
ledt
o
cor
rect(
adj
ust
ed)bal
ance.
Thi
sfor
m ofbankr
econci
l
iat
ionhast
wosect
ions:Onesect
ionbegi
nswi
tht
he
bal
anceperbankst
atementandendswi
tht
headj
ust
ed(
cor
rect
)bal
anceandt
he
ot
hersect
ionbegi
nswi
tht
hebal
anceperdeposi
tor
’sr
ecor
dsandendswi
tht
he
adj
ust
ed(
cor
rect
)bal
ance.Beari
nmi
ndt
hatt
het
woadj
ust
edbal
ancesshoul
d
beequal
.

Nowl
et’
spr
epar
ethebankr
econci
l
iat
ionf
orAbogi
daTr
adi
ngPl
c.,
fort
hemont
h
ofApr
il2008:

Abogi
daTr
adi
ngPl
c.,
BankReconci
li
ati
on
Apr
il28,
2008

Bal
anceperbankst
atement
,Apr
il29,
2008……………………….
. Bi
rr38,
660
Addi
ti
ons:Deposi
tint
ransi
tnotshownont
hest
atement………….
. 4,
000
Subt
otal
…………………………………………………………….
. Bi
rr42,
660
Deduct
ions: Out
standi
ng checks not shown on t
he st
atement …….
..
(
7,000)
187
Adj
ust
edbal
ance,
Apr
il29,
2008…………………………………… Bi
rr35,
660*
Bal
anceperdeposi
tor
’sr
ecor
ds,
Apr
il29,
2008……………………. Bi
rr34,
880
Addi
ti
ons:Bankcr
edi
tmemof
or:
 Not
esr
ecei
vabl
e………………………Bi
rr1,
000
 I
nter
estI
ncome………………………. 100
o Er
rori
nrecor
dingcheckbyt
hedeposi
tor
..
. 180
1,
280
Subt
otal……………………………………………………………… Bi
rr36,
160
Deduct
ions:Bankdebi
tmemor
andumsf
or:
 I
nsuf
fi
ci
entf
und……………………….Bi
rr300
 Ser
vicechar
ge…………………………. 200 (
500)
Adj
ust
edbal
ance,
Apr
il29,
2008…………………………………… Bi
rr35,
660*

*
Asi
thasbeeni
ndi
cat
edear
li
ert
het
woadj
ust
mentbal
ancesshoul
dbe
equal
i.
e.,
for Abogi
daTr
adi
ngPl
c.,
iti
sBi
rr35,
660.

Ent
ri
esbasedonbankr
econci
li
ati
on.Bankdebi
tandcr
edi
tmemor
andumsnot
r
ecor
ded by t
he deposi
tor and deposi
tor
’s er
ror
s shown by t
he bank
r
econci
l
iat
ionr
equi
ret
hatent
ri
esbemadei
ntheaccount
s.Ther
efor
e,t
heent
ri
es
f
orAbogi
daTr
adi
ngPl
c.,basedont
heApr
ilbankr
econci
l
iat
ionabov
e,ar
eas
f
oll
ows:

Apr
il28.Cashi
nBank………………………………. 1,
100
Not
esRecei
vabl
e……………………. 1,
000
I
nter
estI
ncome……………………… 100
Tor
ecor
dnot
escol
lect
edbybanki
ncl
udi
ngi
nter
est

28.Cashi
nBank……………………………….
..
. 180
Repai
rsExpense………………………. 180
Tor
ecor
ddeposi
tor
’ser
rori
nrecor
dingchecks
188
 28.Admi
nist
rat
iveMi
scel
l
aneousExpense……… 200
Account
sRecei
vabl
e(Al
etaCo.
,
)……………. 300
Cashi
nBank…………………………… 200
Tor
ecor
dbankser
vicechar
gesandNSFchecks

CheckYourPr
ogr
ess:Exer
cise6.
6
1.I
dent
if
yeachoft
hef
oll
owi
ngr
econci
l
ingi
temsas:
(
a)anaddi
ti
ont
othebal
anceperbankst
atement
(
b)adeduct
ionf
rom t
hebal
anceperbankst
atement
(
c)anaddi
ti
ont
othebal
anceperdeposi
tor
'sr
ecor
ds,
or
(
d)adeduct
ionf
rom t
hebal
anceperdeposi
tor
'sr
ecor
ds
Assumi
( ng t
hatnone oft
he t
ransact
ions r
epor
ted bybank debi
torcr
edi
t
memor
andumshavebeenr
ecor
dedbyt
hedeposi
tor
.)
(
i)Not
ecol
l
ect
edbybank,
Bir
r700
(
ii
)Deposi
tint
ransi
t,Bi
rr4,
500
(
ii
i)
Out
standi
ngchecks,
Bir
r5,
300
(
iv)
Bankser
vicechar
ge,
Bir
r25.
50
(
v)Checkdr
awnbyt
hedeposi
torf
orBi
rr96hadbeenr
ecor
dedi
nthe
checkr
egi
sterasBi
rr69
(
vi)
Check ofa cust
omerr
etur
ned by bank t
o deposi
torbecause of
i
nsuf
fi
ci
entf
unds,
Bir
r1,
500
2.Whi
choft
her
econci
l
ingi
temsl
i
stedi
nQuest
ion1abov
enecessi
tat
esan
ent
ryi
nthedeposi
tor
'saccount
s?

oach B.The bankst

Appr atementbal
ance i
sreconci
led t
othe unadj
ust
ed
bal
ancei
nthedeposi
tor
’sr
ecor
ds.

I
nthi
sfor
m ofbankr
econci
l
iat
iont
hebankst
atementbal
ancei
sreconci
l
edt
o
t
heunadj
ust
edbal
ancei
nthedeposi
tor
’sr
ecor
ds,t
hent
headj
ust
mentcash
189
bal
ancei
saddedt
oordeduct
edf
rom t
hisbal
ancet
oyi
eldt
headj
ust
edor
cor
rect
edbal
ance.Her
eunderi
sthei
l
lust
rat
ionoft
hisappr
oach.

Abogi
daTr
adi
ngPl
c.,
BankReconci
li
ati
on
Apr
il28,
2008

Bal
anceperbankst
atement
,Apr
il29,
2008……………………….
. Bi
rr38,
660
Addi
ti
ons:
 Deposi
tint
ransi
tnotshownont
hest
atementBr
.4,
000
 Bankser
vicechar
ges………………………… 200
 NSFchecksr
etur
nedbybank……………….
.. 300 4,
500
Subt
otal
…………………………………………………………….
. Bi
rr43,
160
Deduct
ions:
o Out
standi
ngchecksnotshownont
hest
atement………Br
.7,
000
o Bankcr
edi
tmemof
ornot
escol
l
ect
edi
ncl
udi
ngi
nter
est 1,
100
o Deposi
tor
’ser
rori
nrecor
dingchecks………………… 180 8,
280
Unadj
ust
edbal
anceperdeposi
tor
’sr
ecor
ds…………………… Bi
rr34,
880
Addi
ti
ons:Adj
ust
mentt
ocashl
edgeraccount……………….
. 780*
*
Adj
ust
edorcor
rect
edcashbal
ance,
Apr
il28,
2008…………… Bi
rr35,
660

Jour
nal
ent
ri
esasar
esul
toft
heApr
il28bankr
econci
l
iat
ionf
oll
ows:

Apr
il28.Cashi
nBank………………………………. 780*
*
Mi
scel
l
aneousAdmi
nist
rat
iveEx
pense…… 200
Account
sRecei
vabl
e………………………. 300
Not
esRecei
vabl
e…………………………… 1000
I
nter
estI
ncome…………………………….
. 100
Repai
rsExpense……………………………. 180
190
Ther
efor
e,whi
chev
erf
orm ofbankr
econci
l
iat
ioni
sused t
headj
ust
ed cash
bal
ancei
sthesame,
Bir
r35,
660.Butbot
hfor
mshav
ethei
rownadv
ant
ages.

NB.I
ngener
al,t
hebankr
econci
li
ati
oni
sani
mpor
tantpar
toft
hesyst
em of
i
nter
nalcont
rolbecausei
tisameansofcompar
ingr
ecor
dedcash,asshownby
t
heaccount
ingr
ecor
ds,wi
tht
heamountofcashr
epor
tedbyt
hebank.I
tthus
pr
ovi
desf
orf
indi
ngandcor
rect
inger
ror
sandi
rr
egul
ari
ti
es.Gr
eat
eri
nter
nal
cont
roli
sachi
evedwhent
hebankr
econci
li
ati
oni
spr
epar
edbyanempl
oyee
whodoesnott
akepar
tinorr
ecor
dcasht
ransact
ionswi
tht
hebank.Wi
thouta
pr
opersepar
ati
onoft
hesedut
iescashi
smor
eli
kel
ytobeembezzl
ed.

CheckYourPr
ogr
ess:Exer
cise6.
7
1.Do i
tems r
epor
ted on t
he bank st
atementas cr
edi
tsr
epr
esent(
a)
addi
ti
onsmadebyt
hebankt
othedeposi
tor
’sbal
anceor(
b)deduct
ions
madebyt
hebankf
rom t
hedeposi
tor
’sbal
ance?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

2.Descr
ibeandexpl
aint
hepur
poseofpr
epar
ingabankr
econci
l
iat
ion
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

3.When checksar
erecei
ved,t
heyar
erecor
ded asdebi
tst
o Cash,t
he
assumpt
ionbei
ngt
hatt
hedr
awerhassuf
fi
cientf
undsondeposi
t.What
191
 ent
ryshoul
dbemadei
facheckr
ecei
vedf
rom acust
omeranddeposi
ted
i
sret
urnedbyt
hebankf
orl
ackofsuf
fi
cientf
unds(
NSF)
.
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

4.Thecashi
nbankaccountf
orGhi
beCompanyatJune30oft
hecur
rent
y
eari
ndi
cat
edabal
anceofBi
rr15,
215.
80af
terbot
hthecashr
ecei
pts
j
our
naland t
he checkr
egi
sterf
orJune had been post
ed.The bank
st
atementi
ndi
cat
edabal
anceofBi
rr20,
513.
90onJune30.Compar
ison
oft
he bank st
atementand t
he accompany
ing cancel
ed checks and
memor
andumswi
tht
her
ecor
dsr
eveal
edt
hef
oll
owi
ngr
econci
l
ingi
tems:
(
a)Adeposi
tofBi
rr4,
207.
85,r
epr
esent
ingr
ecei
ptsofJune30,had
beenmadet
ool
atet
oappearont
hebankst
atement
.
(
b)Checkout
standi
ngt
otal
edBi
rr5,
980.
65.
(
c)A checkdr
awnf
orBi
rr75hadbeener
roneousl
ychar
gedbyt
he
bankasBi
rr57.
(
d)Thebankhadcol
l
ect
edBi
rr4,
080onani
nter
est
-bear
ingnot
elef
t
f
orcol
l
ect
ion.Thef
aceamountoft
henot
ewasBi
rr4000.
(
e)Bankser
vicechar
gesf
orJuneamount
edt
oBi
rr55.
50
(
f)Bankdebi
tmemof
orcheckr
etur
nedbecauseofi
nsuf
fi
cientf
unds,
Bi
rr517.
20

I
nst
ruct
ions:(
a)Pr
epar
eabankr
econci
l
iat
ionf
orGhi
beCompanyf
ort
hemont
h
ofJune
(
b)Recor
dthenecessar
yent
ri
esi
nGener
alJour
nal
for
m.

Rev
iewExer
cise6.
1
At
temptt
hef
oll
owi
ngquest
ions:
1.Thepr
ocedur
esempl
oyedbyBongaTr
adi
ngmai
lrecei
ptsar
easf
oll
ows:
192
 mai
lcl
erkssendal
lremi
tt
ancesandr
emi
tt
anceadv
isest
othecashi
er.
Thecashi
erdeposi
tst
hecashi
nthebankandf
orwar
dst
her
emi
tt
ances
adv
isesanddupl
i
cat
edeposi
tsl
i
pst
otheaccount
ingdepar
tment
.
(
a)I
ndi
cat
etheweakl
i
nki
nthei
nter
nal
cont
rol
(
b)Howev
ant
heweaknessbecor
rect
ed
2.Thepr
ocedur
esempl
oyedbyVar
iet
yCaf
eforov
ert
hecount
err
ecei
ptsar
e
asf
oll
ows:Att
hecl
oseofeachwor
kingdayt
hesal
escl
erkscountt
he
cash i
nthei
rrespect
ivecash dr
awer
,af
terwhi
ch t
heydet
ermi
net
he
amountr
ecor
dedbyt
her
egi
sterandpr
epar
ethememor
andum cashf
orm,
not
inganydi
scr
epanci
es.Anempl
oyeef
rom t
hecashi
erof
fi
cecount
sthe
cash,
compar
est
het
otal
wit
hthememor
andum,
andt
akest
hecasht
othe
cashi
er'
sof
fi
ce.
(
a)I
ndi
cat
etheweakl
i
nki
nthei
nter
nal
cont
rol
(
b)Howcant
heweaknessbecor
rect
ed
3.Thecashi
nbankaccountf
orSur
boCompanyatJanuar
y31oft
hecur
rent
y
eari
ndi
cat
edabal
anceofBi
rr17,
450.
80af
terbot
hthecashr
ecei
pts
j
our
nalandt
hecheckr
egi
sterf
orJanuar
yhadbeenpost
ed.Thebank
st
atementi
ndi
cat
ed a bal
ance ofBi
rr23,713.
90 on Januar
y 31.
Compar
ison oft
he bank st
atementand t
he accompany
ing cancel
l
ed
checks and memor
andums wi
tht
he r
ecor
ds r
eveal
ed t
he f
oll
owi
ng
r
econci
l
ingi
tems:
(
a)Adeposi
tofBi
rr8720.
50,r
epr
esent
ingr
ecei
ptsofJanuar
y31,had
beenmadet
olat
etoappearont
hebankst
atement
(
b)Out
standi
ngchecks,
tot
aledBi
rr4570.
20
(
c)Thebankhadcol
l
ect
edBi
rr5119.
25onani
nter
est
-bear
ingnot
elef
t
f
orcol
l
ect
ion.Thepr
inci
pal
amountoft
henot
ewas,
Bir
r5000.
00
(
d)Bankser
vicechar
gesf
orJanuar
yamount
edt
oBi
rr50.
00
(
e)A checkdr
awnf
orBi
rr96hadbeener
roneousl
ychar
gesbyt
he
bankasBi
rr69.
00
(
f)Adeposi
tsl
i
pforBi
rr218.
50r
etur
nedwi
tht
hest
atementhadbeen
r
ecor
deder
roneousl
yint
hecashr
ecei
ptsj
our
nal
asBi
rr21.
85
193
 (
g)Acheckamount
ingt
oBi
rr400r
ecei
vedf
rom YebuCompanyhad
beenr
etur
nedbybankbecauseofi
nsuf
fi
cienttf
und.
I
nst
ruct
ions:(
1)Pr
epar
eabankr
econci
l
iat
ionf
orSur
boCompany
(
2)Recor
dthenecessar
yjour
nal
ent
ri
es

6.
3ModelExami
nat
ionQuest
ions
Par
tI. 1. Def
inecashasi
tisusedf
oraccount
ingpur
poses
1. Whyi
s a pet
tycash f
und r
epl
eni
shed att
he end ofa
r
epor
ti
ngper
iod?
2. Br
ief
lyexpl
aint
hebasi
cpur
poseofabankr
econci
l
iat
ion
3. Def
inet
hef
oll
owi
ngt
ermsr
elat
edt
oaccount
ingf
orcash:
(
a)Deposi
tint
ransi
t
(
b)Checksout
standi
ng
(
c)NSFcheck
(
d)Cor
rectcashbal
ance
(
e)Cashshor
tandov
er
Par
tII
.1. Mai
nCompanydeci
dedt
ouseapet
tycashsy
stem f
ormaki
ng
smal
l pay
ment
s.Thef
oll
owi
ngt
ransact
ionswer
ecompl
eteddur
ing
December 2007:
(
a)OnDecember1,2007t
heCompanyt
reasur
erpr
epar
edan
Bi
rr800checkpay
abl
etopet
tycash;t
hecashwasgi
vent
o
t
hecust
odi
an.
(
b)Expendi
tur
esbyt
hecust
odi
an(
andsi
gnedr
ecei
ptsr
ecei
ved)
t
hroughDecember20wer
epost
age,
bir
r160;
off
icesuppl
i
es,
Bi
rr140;newspaper
s,Bi
rr72;of
fi
ceequi
pmentr
epai
rs,Bi
rr
240;cof
feer
oom suppl
i
es,
Bir
r60;andmi
scel
l
aneousi
tems,
Bi
rr48.
(
c)OnDecember20t
het
reasur
erf
ull
yrepl
eni
shedt
hef
und.
(
d)Expendi
tur
esbyt
hecust
odi
ant
hroughDecember31wer
e
post
age,
Bir
r52;
off
icesuppl
i
es,
bir
r72;
newspaper
s,Bi
rr28;

194
 of
fi
ceequi
pmentr
epai
rs,Bi
rr84;Cof
feer
oom suppl
i
es,Bi
rr
40;and mi
scel
l
aneous i
tems,Bi
rr 24.The f
und was
r
epl
eni
shedonDecember31.
Requi
red:1.Gi
veal
ljour
nalent
ri
est
hatshoul
dbemader
elat
ingt
othepet
ty
cash f
und t
hrough December 31,2007 (
end of t
he annual
account
ing per
iod)
,assumi
ng t
hatt
he pet
tycash expendi
tur
es
wer
eforadmi
nist
rat
iveexpenses.
2.Showhowt
hepet
tycashf
undshoul
dber
epor
tedont
hebal
ance
sheet
.

Li
stofRef
erenceMat
eri
als
1.I
ntr
oduct
iont
oAccount
i 21stCent
ng, ury
2.Dy
ckman,
DukesandDav
is.(
1995)
.Int
ermedi
ateAccount
ing.Thi
rdEdi
ti
on.
Vol
umeI
,Chapt
ers1–14.McGr
awHi
l
lCompani
es,
Inc.
,
3. FeesandWar
ren,Account
ingPr
inci
ples.16th edi
ti
on.Sout
h–West
ern
Publ
i
shi
ngCompany
.
4. FeesandWar
ren,Account
ingPr
inci
ples.18th edi
ti
on.Sout
h–West
ern
Publ
i
shi
ngCompany
.

195
 UNI
TSEVEN:RECEI
VABLES

Li
stofCont
ent
s
 Uni
tObj
ect
ive
 I
ntr
oduct
ion
7.
1Pr
omi
ssor
yNot
esRecei
vabl
es
7.
2Char
act
eri
sti
csofNot
esRecei
vabl
e
7.
3Account
ingf
orNot
esRecei
vabl
e
7.
4Uncol
l
ect
ibl
eRecei
vabl
es
7.
5Met
hodsofRecogni
zi
ngRecei
vabl
es
7.
6Model
Exami
nat
ionQuest
ions
 Li
stofRef
erenceMat
eri
als

Uni
tObj
ect
ive

I
nuni
tsi
xyouhav
edi
scussedt
heconceptoft
hemostl
i
qui
dasset
,Cashand
Cashequi
val
ent
s,whi
char
emuchal
i
kecashbutwoul
dnev
erber
epor
tedas
cashont
hef
inanci
alr
epor
ts.I
nthi
suni
t,y
ouwi
l
ldi
scussi
ndet
ailt
heconceptof
anot
hercur
rentassetcat
egor
y,Recei
vabl
es.Thus,t
hepur
poseoft
hisuni
tist
o
acquai
nty
oudearl
ear
ner
swi
tht
hebasi
cconcept
sofr
ecei
vabl
esandt
empor
ary
i
nvest
ment
s;t
he account
ing f
or:not
es r
ecei
vabl
es,account
srecei
vabl
es,
uncol
l
ect
ibl
e r
ecei
vabl
es and t
empor
aryi
nvest
ment
s. Speci
fi
cal
l
y,af
ter
di
scussi
ngt
heconcept
sint
hisuni
t,y
ouwi
l
lbeabl
eto:
o Def
ineandunder
standt
het
ermr
ecei
vabl
es
o Di
ff
erent
iat
ethedi
ff
erentt
ypesofr
ecei
vabl
esusedi
nbusi
ness

196
 o Det
ermi
net
hemat
uri
tydat
eofapr
omi
ssor
ynot
es
o Comput
ethemat
uri
tyv
alueandpr
oceedsofapr
omi
ssor
ynot
es
o Maket
hej
our
nal
ent
ri
esr
elat
edt
opr
omi
ssor
ynot
es
o Under
standt
heconceptofuncol
l
ect
ibl
erecei
vabl
es
o Compr
ehendt
hedi
ff
erencest
hatexi
stsbet
weent
heal
l
owancemet
hod
andt
hedi
rect
-wr
it
e-of
fmet
hodofaccount
ingf
oruncol
l
ect
ibl
e

I
ntr
oduct
ion

Asy
oudi
scussedi
nthepr
evi
ousuni
t,y
ouwer
eacquai
ntedwi
thoneoft
hemost
l
i
qui
dasset
s;t
hati
s,Cashandi
tsequi
val
ent
s.Asi
thasbeeni
ndi
cat
edear
li
eri
n
t
he uni
t,cash i
sthe assett
hati
sreadi
l
yav
ail
abl
efort
he pay
mentofan
obl
i
gat
ion.Thus,t
oqual
i
fyascashani
tem mustber
eadi
l
yav
ail
abl
efort
he
set
tl
ementofal
i
abi
l
ityandi
tmustbef
reef
rom anycont
ract
ualr
est
ri
cti
onst
hat
maypr
ohi
biti
tsuse.I
nthi
suni
tyouwi
l
lbef
ami
l
iar
izedwi
tht
heconceptof
anot
hercur
rentasset
s;t
hati
s,Recei
vabl
es.Recei
vabl
es,
li
kecash,
arecl
assi
fi
ed
as‘
Cur
rentAsset
s’ont
hebal
ancesheet
.Butr
ecei
vabl
esar
econsi
der
edl
ess
l
i
qui
dthancash.Li
qui
dit
yint
hiscont
extmeanst
hatt
hespeedwi
thwhi
cht
he
under
lyi
ng asseti
s conv
ert
ed i
nto cash,orconsumed orexpi
red.Si
nce
r
ecei
vabl
esar
eexpect
edt
obeconv
ert
edi
ntocashwi
thi
nashor
tper
iodoft
ime
(
usual
l
ywi
thi
noney
earorl
ess)
,theyar
erepor
tedundert
hecapt
ion‘
cur
rent
asset
s’ont
hebal
ancesheet
.

Thet
ermr
ecei
vabl
esi
ncl
udeal
lmoneycl
aimsagai
nstpeopl
e,or
gani
zat
ionsand
ot
herdebt
ors.Recei
vabl
es r
epr
esentexpect
ed f
utur
e cash i
nfl
ows f
ort
he
cr
edi
tor(
tot
hel
endi
ngpar
ty)
.Recei
vabl
esar
eacqui
redbyabusi
nessent
erpr
ise
i
nvar
ious ki
nds of t
ransact
ions, t
he most common bei
ngt
he sal
e
ofmer
chandi
se(
goods)orser
vicesonacr
edi
tbasi
s.Fori
nst
ance,
ifashopnear
y
ourhome makes a sal
e ofdr
y cel
lwi
thoutbei
ng r
ecei
vi
ng t
he money
i
mmedi
atel
y(t
ober
ecei
vedatal
aterdat
e),
itmeanst
hatar
ecei
vabl
eiscr
eat
ed

197
oracqui
redbyt
heshopowner
.Thecl
aim agai
nstt
hedebt
or(
buy
erofdr
ycel
lon
cr
edi
t)r
epr
esent
sar
ecei
vabl
etot
heshop owner(
sel
l
er)
.Theshop owner
expect
sthi
srecei
vabl
etobecol
l
ect
edi
nthenearf
utur
e.
Recei
vabl
escanbecl
assi
fi
edi
ntot
wogr
oups,v
iz,(
i)t
rader
ecei
vabl
esand(
ii
)
non-
tr
ader
ecei
vabl
es.Thet
rader
ecei
vabl
esar
ethoser
ecei
vabl
eswhi
chr
esul
t
f
rom t
he sal
e ofpr
oduct
s orser
vices t
o di
ff
erentgr
oups ofcust
omer
s
(
indi
vi
dual
s,f
ir
ms,gov
ernmentor
gani
zat
ions,et
c).Ont
heot
herhand,t
henon-
t
rader
ecei
vabl
esor
igi
nat
edf
rom ot
herev
ent
sandt
ransact
ions(
othert
hansal
e
ofpr
oduct
sandser
vices)andi
ncl
udeamongot
her
s;adv
ancest
oempl
oyees,
accr
uedr
ecei
vabl
es,anddeposi
tswi
thut
il
it
ies.Tocl
ari
fyt
heconceptf
urt
her
,
supposey
ouappl
yforal
oanf
rom y
ourempl
oyert
obor
rowy
ourannualsal
aryi
n
adv
ancesot
haty
ouagr
eedt
orepaybackwi
thi
n2y
ear
sti
meoni
nst
all
ment
s.
Thi
str
ansact
ionbet
weeny
ouandy
ourempl
oyercr
eat
esanon-
tr
ader
ecei
vabl
e
t
oyourempl
oyer
.

7.
1Pr
omi
ssor
yNot
esRecei
vabl
es

Cr
edi
tmaybegr
ant
edonopenaccountoront
hebasi
sofaf
ormali
nst
rumentof
cr
edi
t,suchasapr
omi
ssor
ynot
e.Apr
omi
ssor
ynot
eisawr
it
tenpr
omi
set
opay
asum ofmoneyondemandoratadef
ini
tet
ime.APr
omi
ssor
ynot
eisf
requent
ly
r
efer
redt
oasanot
e,awr
it
tenpr
omi
set
opayasum ofmoneyondemandorata
def
ini
tet
ime.

APr
omi
ssor
ynot
eisanuncondi
ti
onalpr
omi
set
opayadef
ini
tesum ofmoney
ondemandorataf
utur
edat
e.Not
esar
eusual
l
yusedf
orcr
edi
tper
iodsofmor
e
t
han60day
s,asi
nthesal
eofequi
pmentont
hei
nst
all
mentpl
an,andf
or
t
ransact
ionsofr
elat
ivel
ylar
geBi
rramount
s.Forexampl
e,i
n Et
hiopi
amost
i
mpor
ter
sofel
ect
roni
csl
i
keGar
ad,Equat
ori
alBusi
nessGr
oup,Gl
ori
ous,et
cand
ot
herent
erpr
isesl
i
keOmedad,Del
uxFur
nit
ure,and3F,andot
herf
ir
msuseda
pr
omi
ssor
ynot
ewhi
l
emaki
ngcr
edi
tsal
esont
hei
nst
all
mentpl
an.

198
Not
esmayal
sobeusedi
nset
tl
ementofanopenaccountandasameansof
bor
rowi
ngorl
endi
ngmoney
.

CheckYourPr
ogr
ess:Exer
cise7.
1
1.Compar
edt
oot
herr
ecei
vabl
es,speci
all
ycompar
edt
oAccount
sRecei
vabl
e,
whatdoy
out
hinkar
esomeoft
hebenef
it
stoacr
edi
torofacl
aimi
nthef
orm of
anot
esr
ecei
vabl
e?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

Adv
ant
agesofNot
esRecei
vabl
etot
heCr
edi
tor

Fr
om t
hepoi
ntofv
iew oft
hecr
edi
tor
,acl
aim ev
idencedbyanot
ehasan
adv
ant
ageov
eracl
aimi
nthef
orm ofanaccount
srecei
vabl
e,i
nthat
:-
(
1)Bysi
gni
nganot
e,t
hedebt
oracknowl
edgest
hedebtandagr
eest
opayi
t
accor
dingt
othet
ermsgi
ven.Hence,
thenot
erepr sast
esent rongerl
egal
cl
aimt
hanaccount
srecei
vabl
efort
hecr
edi
tor
.
(
2)I
ti somor
sal eli
qui
dthanaccount
srecei
vabl
ebecauset
hehol
dercan
usual
l
ytr
ansf
eri
tmor
ereadi
l
ytoabankorot
herf
inanci
alagencyi
n
exchangef
orcash.Li
keacheck,
anot
ecanbeendor
sed/
transf
err
edt
oa
bankort
oot
herf
inanci
ali
nst
it
uti
onsort
oot
heri
ndi
vi
dual
s.
(
3)I
tal
sosomet
i oducesi
mespr nter
esti
ncome.Somepr
omi
ssor
ynot
esmay
beart
hepay
mentofacer
tai
nper
cent
ageofi
nter
esti
ncomef
ort
heper
iod
oft
imebet
weent
hei
ssuancedat
eandt
heduedat
e.
199
Theent
erpr
iseowni
nganot
eref
erst
oitasanot
erecei
vabl
e.I
fnot
esand
account
srecei
vabl
eor
igi
nat
efr
om sal
est
ransact
ions,
theyar
esomet
imescal
l
ed
t
rader
ecei
vabl
es.I
ntheabsenceofanydescr
ipt
ivewor
dsorphr
ase,account
s
andnot
esr
ecei
vabl
emaybeassumedt
ohav
eor
igi
nat
edf
rom sal
esi
ntheusual
cour
seoft
hebusi
ness.

Al
thoughnot
esandaccount
srecei
vabl
esar
ethecommont
ypesofr
ecei
vabl
es,
t
her
ear
eal
soot
herl
esscommonr
ecei
vabl
eswhi
chi
ncl
ude:
 I
nter
estr
ecei
vabl
es
 Loanst
oof
fi
cer
sorempl
oyees
 Loanst
oaf
fi
li
atedcompani
es

Al
lrecei
vabl
es t
hatar
e expect
ed t
o be r
eal
i
zed i
n cash wi
thi
nay
earar
e
pr
esent
edi
nthecur
rentassetsect
ionoft
hebal
ancesheet
.Thoset
hatar
enot
cur
rent
lycol
l
ect
i e,suchasl
bl ong-
ter
mloans,shoul
dbel
i
stedundert
hecapt
ion
“
Invest
ment
s”bel
owt
hecur
rentassetsect
ion.

7.
2Char
act
eri
sti
csofNot
esRecei
vabl
e

(
1)Li tmustbepay
keachecki abl
etot
heor
derofacer
tai
nper
sonorf
ir
m,or
t
othebear
er.
(
2)I sobesi
tmustal gnedbyt
heper
sonorf
ir
mthatmakest
hepr
omi
se.

Par
ti
est
oanot
e:
1.Pay
ee–Theent
it
ytowhom pay
menti
stobemade.Theonet
owhose
2.Maker–Theent
it
ywhosi
gnst
henot
eandt
her
ebypr
omi
sest
opayor
,
t
heonemaki
ngt
hepr
omi
se.

Not
eshav
esev
eral
char
act
eri
sti
cst
hathav
eaccount
ingi
mpl
i
cat
ions.Thesear
e:

200
 (
1)I
ssuanceDat
e:Thedat
aanot
eisi
ssuedbyt
hemaker
.
(
2)DueDat
e:Thedat
eanot
eist
obepai
discal
l heduedat
edt eormat
uri
ty
dat
a.Theper
iodoft
imebet
weent
hei
ssuancedat
eandt
heduedat
eofa
shor
t–t
erm not
emaybest
atedi
nei
therday
sormont
hs.Whent
het
erm
ofanot
eisst
atedi
nday
s,t
heduedat
eist
hespeci
fi
ednumberofday
s
af
teri
tsi
ssuance.

Exampl
e:Toi
l
lust
rat
etheduedat
eofa90–daynot
edat
edMay19pr
esent
ed
bel
owmaybedet
ermi
nedasf
oll
ows:

Ter
m oft
her
ote…………………………………………………90
Day
sinMay
………………………….31
Dat
eofNot
e………………………….
19………………………12
Noofday
sremai
ning…………………………………….
..
..
..
.78
days)
June( ……………………………………………………….
30
Noofday
sremai
ning…………………………………………48
Jul
y(days)……………………………………………………….
31
Duedat
e,August
……………………………………………….
.17

Whent
het
erm ofnot
eisst
ated asacer
tai
nnumberofmont
hsaf
tert
he
i
ssuancedat
e,t
heduedat
eisdet
ermi
nedbycount
ingt
henumberofmont
hs
f
rom t
hei
ssuancedat
e.
Forexampl
e:Theduedat
eofa4-mont
hnot
edat
edJanuar
y15woul
dbeMay15.
Anda2–mont
hnot
edat
edonDecember31woul
dbedueonFebr
uar
y28.I
n
t
hiscase,t
heduedat
ebecomest
hel
astdayoft
hemont
hregar
dlessoft
he
numberofday
seachmont
hhas.

CheckYourPr
ogr
ess:Exer
cise7.
2
1.Wheni
sthedue(
mat
uri
ty)dat
eofa75–daynot
eissuedMar
ch10?
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
201
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

2.Whenwi
l
lbet
hemat
uri
tydat
eofa3–mont
hnot
eissuedDecember11?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___

I
nter
estBear
ingandNon–I
nter
estBear
ingNot
es

Pr
omi
ssor
y not
es can be i
nter
est bear
ing or non-
int
erest bear
ing.
Anot
ethatpr
ovi
des f
or
t
hepay
mentofi
nter
estf
ort
heper
iodbet
weent
hei
ssuancedat
eand t
he due
dat
ei edi
scal
l nter
estbear
ingnot
e.Thi
sty
peofnot
esi
nbl
ackandwhi
test
ates
t
hei
nter
estr
atet
hatt
heypr
omi
set
opayont
hef
aceoft
henot
e.Uponmat
uri
ty
t
hehol
derofi
nter
est-bear
ingnot
ewi
l
lrecei
venotonl
ythepr
inci
pal(
face)
amountoft
henot
ebuts/
heal
sor
ecei
vet
hei
nter
estaccr
uedont
henot
e.

Ont
heot
herhand,
anon–i
nter
estbear
ingnot
edoesnotmakei
nter
estpay
ment
f
ort
heper
iodoft
imebet
weent
hei
ssuancedat
eandt
heduedat
e.I
tshoul
dbe
cl
eart
hat
,itdoesnotmeant
hatnon-
int
erestbear
ingnot
edonotpayi
nter
est
,but
i
tmeanst
hatt
henot
edoesn’
tspeci
fyi
nbl
ackandwhi
tet
hei
nter
estr
atei
t
pr
omi
sest
opay
.Inot
herwor
ds,t
hei
nter
esti
snotst
atedexpl
i
cit
ly.Butt
her
e
mi
ghtbei
mpl
i
citi
nter
estast
her
eisnof
reel
unch.

(
3)I
nter
est
:Isanamountr
ecei
ved(
pai
d)f
ort
heuseoft
hepr
inci
pal
ofanot
ef
ora per
iodoft
imebet
weent
hei
ssuancedat
eandt
hedue
dat
e.Thei
nter
est i
sthecostofbor
rowi
ngmoneyort
her
etur
n
f
orl
endi
ngmoney
, dependi
ngonwhet
heronei
sthebor
roweror
t
hel
ender
.

202
 Theamountofi
nter sbasedont
esti hreef
act
ors:Thesear
e:
 Theamountofmoneybor
rowed(
lent
),[
P]
 Thel
oan’
slengt
hoft
ime.[
T]
 Ther
ateofi
nter
est[
R]

I
nter
estr
atef
ori
nter
estbear
ingnot
esusual
l
yst
atedi
nter
msofaper
iodofone
y
ear
,regar
dlessoft
heact
ualper
iodoft
imei
sinv
olv
ed.Not
escov
eri
ngaper
iod
oft
ime l
ongert
han one y
earor
dinar
il
y pr
ovi
de t
hatt
he i
nter
estbe pai
d
semi
annual
l
y,quar
ter
ly,orsomeot
herst
atedi
nter
val
s.I
ncomput
ingi
nter
estf
or
aper
iodofl
esst
hanoney
ear
,agenci
esoft
hef
eder
algov
ernmentusest
he
act
ualnumberofday
sint
hey
ear
.Forexampl
e,90day
sisconsi
der
edt
obe
90/
365ofoney
ear
.Howev
er,t
heusualcommer
cialpr
act
icei
stouse360asa
denomi
nat
oroft
hef
ract
ion.

Thef
ormul
aforcomput
ingi
nter
esti
sasf
oll
ows;

PRI
NCI
PAL*RATE*TI
ME=I
NTEREST

Exampl
e:Whati
sthei
nter
estamountofa60-day
,12%not
eforBi
rr10,
000?
I=PRT/
100
I=10,
000*12*60 =200.
00
100*360
Oneoft
hecommonl
yusedshor
tcutmet
hodsofcomput
ingi
nter
esti
scal
l t
ed,he
60day6%met
hod,(
60/
360of6%)
.Accor
dingl
y,t
hei
nter
estonanyamountf
or
60day
sat6%i
sdet
ermi
nedbymov
ingt
hedeci
malpoi
nti
nthepr
inci
palamount
t
wopl
acest
othel
eft
.

203
Exampl
e:Thei
nter
estonBr
.3000at6% f
or60day
sisBr
.30.Theamount
obt
ainedbymov
ingt
hedeci
malpoi
ntmustbeadj
ust
ed;(
1)f
ori
nter
estr
ates
gr
eat
erorl
esst
han6%and,(
2)f
orper
iodsoft
imegr
eat
erorl
esst
han60day
s.
Forexampl
e,t
hei
nter
estonBr
.3000at6%f
or90day
sisBr
.45=(
90/
60x30)
.
Whent
het
erm ofanot
eisst
atedi
nmont
hsi
nst
eadofi
nday
s,eachmont
hmay
beconsi
der
edasbei
ng1/
12ofay
ear
,oral
ter
nat
ivel
ytheact
ualnumberofday
s
i
nthet
erm maybecount
ed.

Exampl
e:The i
nter
eston a 3 – mont
h not
e dat
ed Nov
ember1 coul
d be
comput
edont
hebasi
sof3/
12ofay
ear
,oront
hebasi
sof92/
360ofay
ear
.

CheckYourPr
ogr
ess:Exer
cise7.
3
1.Usi
ngt
heshor
t– cutmet
hodofcomput
ingi
nter
est
,cal
cul
atet
hei
nter
est
amountofa 120-
day
,10%f
orBi
rr5000?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__
(
4)Mat
uri
tyVal
ue:Theamountt
hati
sdueatt
hemat
uri
tyorduedat
eiscal
l
ed
hemat
t uri
tyval
ue.Themat
uri
tyv
aluei
sthet
otalpr
oceedsoft
henot
eatt
he
mat
uri
tydat
e.Mat
uri
tyv
aluef
orani
nter
estbear
ingnot
eist
hef
acev
alueoft
he
not
epl
usi
nter
est
.Wher
east
hemat
uri
tyv
alueofanon-i
nter
estbear
ingnot
eis
hef
t aceval
ueort
hepr
inci
palamount
.Int
hiscase,t
hepr
inci
pali
ncl
udesan
i
mpl
i
edi
nter
estcost
.

Forexampl
e,t
hemat
uri
tyv
alueofa90day
s10%not
eforBi
rr2500woul
dbe
comput
edasf
oll
ows:

Mat
uri
tyVal
ue=Pr
inci
pal
+Int
erestonPr
inci
pal
Amount
MV=2500+(
2500x0.
1x90/
360)

MV=Bi
rr2500+Bi
rr62.
50

204
 MV=Bi
rr2562.
50

CheckYourPr
ogr
ess:Exer
cise7.
4
1.Whati
sthemat
uri
tyv
alueofa60–day
,8%not
eforBi
rr4,
800?
2.Whati
sthemat
uri
tyv
alueofa60–day
,non–i
nter
estbear
ingnot
eforBi
rr
4,
800?
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___

7.
3Account
ingf
orNot
esRecei
vabl
e

Whenanot
eisr
ecei
vedf
rom acust
omert
oappl
yonaccount
,thef
act
sar
e
r
ecor
ded bydebi
ti
ng Not
esRecei
vabl
eAccountand Cr
edi
ti
ng t
heAccount
s
Recei
vabl
eCont
rol
l
ingAccountandt
her
elat
edchar
gecust
omer
saccounti
nthe
subsi
diar
yledger
.

I
ngener
al,t
heaccount
ingent
ri
esf
orpr
omi
ssor
ynot
esr
ecei
vabl
efal
lint
ofi
ve
gr
oups:
(
1)Recei
ptofanot
e
(
2)Recor
dofadj
ust
ingent
ri
es,
(
3)Col
l
ect
ionofanot
e,
(
4)Di
scount
ingNot
esr
ecei
vabl
e,and
(
5)Recor
dingofadi
shonor
ednot
e.
Let
'sdi
scusseachoft
heseent
ri
eswi
tht
hehel
pofi
l
lust
rat
ions:

205
 7.
3.1Recei
ptofaNot
e:
a)Recei
ptofNon–I
nter
estBear
ingRecei
vabl
es

Whenanot
eisr
ecei
vedf
rom acust
omert
oappl
yonaccount
,thef
act
sar
e
r
ecor
ded bydebi
ti
ng Not
esRecei
vabl
eAccountand Cr
edi
ti
ng t
heAccount
s
Recei
vabl
eCont
rol
l
ingAccountandt
her
elat
edchar
gecust
omer
saccounti
nthe
subsi
diar
yledger
.

Exampl
e:Toi
l
lust
rat
e,assumet
hatt
heaccountofAbdul
ahiCo,whi
chhasa
bal
anceofBi
rr8400i
spastdue.A90-day
,noni
nter
estbear
ingnot
efort
hat
amount
,dat
edApr
il27,
2007i
saccept
edi
nset
tl
ementoft
heaccount
.Thenot
es
r
ecei
vabl
eisr
ecor
dedati
tsf
acev
alue,
andt
heent
ryt
orecor
dthet
ransact
ioni
s
asf
oll
ows.
2007
Apr
il27.Not
esRecei
vabl
e………………….
..
..
..
..
..
..
..
..
.8400.
00
Account
sRecei
vabl
e………………………………….
.8400.
00
(
Abdul
ahi
Co,
)
Tor
ecor
dtheaccept
anceof90day,
Noni
nter
estbear
ingr
ecei
vabl
e

Whent
heBi
rr8400,i
sdueonanot
eiscol
l
ect
ed,t
hef
oll
owi
ngent
rywoul
dbe
r
ecor
dedi
ntheCashRecei
ptsJour
nal
asf
oll
ows:

2007
July26.Not
esRecei
vabl
e……………………………….
8400.
00
Not
esRecei
vabl
e……………………………………….
.8400.
00
Tor
ecor
dthecol
lect
ionofnot
esf
rom cust
omer
.

b)Recei
ptofI
nter
est–Bear
ingRecei
vabl
es
Assumet
hatonJune15,
2007,
WOW Fashi
onr
ecei
veda60-
day12%not
efr
om a
cust
om,GYBGar
ment
,inset
tl
ementofanexi
sti
ngAccount
sRecei
vabl
eofBi
rr
4000.
00.Theent
ryf
ort
hist
ransact
ioni
sasshownbel
ow:
2007

206
 June15.Not
esRecei
vabl
e………………….
..
..
..
..
..
..
..
..
..
.4000.
00
Account
ingr
ecei
vabl
e…………………………………4000.
00
(
GYBGar
ment
)
Tor
ecor
dther
ecei
ptofa60-day,
12%not
e

7.
3.2Recor
dofAdj
ust
ingEnt
ry

Cont
inui
ngwi
tht
heabov
eil
l
ust
rat
ion,assumet
hatt
heaccount
ingper
iodf
or
WOW Fashi
onendonJune30oft
hecur
renty
ear
.Ther
ecor
doft
heaccr
ued
i
nter
esti
ncomeandt
her
elat
edaccr
uedi
nter
estr
ecei
vabl
efor15day Fr
s,( om
June15-June30)
,isshownbel
ow.
2001
June30.I
nter
estRecei
vabl
e………………….
..
..
..
..
..
..
..
..
.20.
00
I
nter
estI
ncome………………………………….
..
……20.
00
Tor
ecor
daccr
uedi
nter
esti
ncomef
or
t
heaccount
ingper
iod(
400x12x15=20.
00)
100 360

Af
tert
heabov
eadj
ust
ingent
ryhav
ebeenpost heassetaccountI
ed,t nter
est
Recei
vabl
e showsadebi
tbal
anceofBi
rr20.
00t
hatshoul
dber
epor
tedas
cur
rentasset
sont
hebal
ancesheet
.Ont
heot
herhand,t
her
evenueaccount
I
nter
estI
ncomeshoul
dber
epor
tedi
ntheot
heri
ncomesect
ionoft
hei
ncome
st
atement
.Bef
oret
heamountont
henot
eiscol
l
ect
edi
nnextf
iscalper
i i
od(.
e.
onAugust14,
arever
singent
ryi
smadeatt
hebegi
nni
ngoft
hef
oll
owi
ngyear
).
2001
July1.I
nter
estI
ncome………………….
..
..
..
..
..
..
..
..
..
..
..20.
00
I
nter
estRecei
vabl
e………………….
..
..
..
..
..
..
..
..
..
..
..
..
.20.
00

Att
het
imet
henot
emat
uresandpay
menti
srecei
ved,t
heent
ir
eamountoft
he
i
nter
estr
ecei
vedi
scr
edi
tedt
othei
nter
esti
ncomeaccount
.

AccountTi
tl
e:I
nter
estRecei
vabl
e AccountNo.
:
Bal
ance

207
 Dat
e I
tem P.R. Debi
t Cr
edi
t Debi
t Cr
edi
t
3 Adj
ust
ing J1 00 00
June 0 20 20
Jul
y 1 Rever
sing J1 00 -
- -
- -
- -
-
20

AccountTi
tl
e:I
nter
estI
ncome AccountNo.
:
Bal
ance
Dat
e I
tem P.R. Debi
t Cr
edi
t Debi
t Cr
edi
t
3 Adj
ust
ing J1 00 00
June 0 20 20
3 Cl
osi
ng J1 00 -
- -
- -
- -
-
June 0 20
Jul
y 1 Rever
sing J1 00 00
20 20
Aug 1 J1 00 00
4 80 60

7.
3.3Col
lect
ionofNot
esRecei
vabl
e
Whent
heNot
esr
ecei
vabl
eincl
udi
ngt
hei
nter
esti
scol
l
ect
ed,60day
slat
er,t
he
ent
ryi
srecor
dedasf
oll
ows:
2001
Aug.
14.Cash.………………….
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
4080.
00
Not
esRecei
vabl
e.………………….
..
..
..
..
..
..
..
..
..
..
..
..
4000.
00
I
nter
estI
ncome………………………….
..
..
..
..
..
..
..
..
..
..
80.
00
Tor
ecor
dthecol
lect
ionofa60day12%not
e.
Af
ter t
he col
l
ect
ion i
s made,t
he af
fect
ed gener
all
edger account
s ar
e
summar
izedasf
oll
ows:

208
AccountTi
tl
e:Not
esRecei
vabl
e AccountNo.
:
Bal
ance
Dat
e I
tem P.R. Debi
t Cr
edi
t Debi
t Cr
edi
t
1 J1 00 4000 00
June 5 4000
Aug 1 J1 00 -
- -
- -
- -
-
4 4000

AccountTi
tl
e:Cash AccountNo.
:
Bal
ance
Dat
e I
tem P.R. Debi
t Cr
edi
t Debi
t Cr
edi
t
Aug 1 J1 00 4080 00
4 4080

Not
ethatt
heAdj
ust
ingandr
ever
singpr
ocessdi
vi
dedt
heBr
.80.
00ofi
nter
est
r
ecei
vedonAugust14,
2007i
ntot
wopar
tsf
ort
heaccount
ingpur
poses:

(
i)Bi
rr20.
00r
epr
esent
ingt
hei
nter
esti
ncomef
ort
hecur
rentf
iscalper
iod
endi
ngJune30, r
2007(ecor
dedbyt
headj
ust
ingent
ry)and,
(
ii
)Bi
rr60.
00r
epr
esent
ingt
hei
nter
esti
ncomef
ort
hef
oll
owi
ngy
ear
.

7.
3.4Di
scount
ingNot
esRecei
vabl
e
Di
scount
inganot
esr
ecei
vabl
einv
olv
essel
l
inganot
erecei
vabl
ewi
thr
ecour
set
o
abank.Thebankdeduct
sthei
nter
estf
rom t
hemat
uri
tyv
alueoft
henot
e
i
mmedi
atel
yandgi
vest
hesel
l
eroft
henot
eonl
ythepr Wi
oceeds." t
hrecour
se"
meanst
hatt
hebankwi
l
lcol
l
ectt
hemat
uri
tyv
alueoft
henot
efr
om t
hesel
l
eri
f
t
heor
igi
nalmakeroft
henot
efai
l
stopayt
othebankatmat
uri
ty.Acont
ingent

209
l
i
abi
li
ty,
ther
efor
e,ar
iseswhenanot
eisdi
scount
edonr
ecour
se.

Ther
ateofi
nter
estt
hebankchar
gesf
ordi
scount
ingt
henot
eiscal
l
edt
he
di
scountr
ate.Thebankmaychar
geadi
ff
erentr
ateofi
nter
estt
hani
sst
atedon
t
henot
e.Thecashpr
oceedsr
ecei
vedbyt
hesel
l
eri
scomput
edbydeduct
ingt
he
bankdi
scountf
rom t
hemat
uri
tyv
alueoft
henot
e.
Theamountr
ecei
vedbyt
heendor
serf
oranot
eaf
tert
hebankhasdeduct
edt
he
di
scounti edpr
scal
l oceeds.Theamountofpr
oceedspai
dtot
heendor
seri
sthe
excessoft
hemat
uri
tyv
alueov
ert
hedi
scount
.

Exampl
e:Toi
l
lust
rat
eassumet
hata120day
,10%not
esr
ecei
vabl
eforBi
rr3000
dat
edOct
ober16,i
sdi
scount
edatt
hepay
eesbankonDecember25att
her
ate
of12%.Thedat
ausedi
ndet
ermi
ningt
heef
fectoft
het
ransact
ioni
sasf
oll
ows.

Facev
alueofanot
e,dat
edOct
ober16……………….
..
..
.Br
.3000.
00
I
nter
estonanot
e120day
sat10%……………………….
..
…..
100.
00
Mat
uri
tyv
alueoft
henot
e,Feb.
13……………………….
..
..
..
.3100.
00
Di
scountper
iod,
(Dece.
25–Feb.
13)
,50day
s
Di
scountonmat
uri
tyv
aluef
or50day
sat12% (
52.
67)
Pr
oceedsr
ecei
vedbydi
scount
ingt
henot
e………………Br
.3048.
33

Theexcessoft
hepr
oceedsf
rom di
scount
ingt
henot
e,Br
.3048.
33,
overi
tsf
ace
v
alue
Br
.3000i
sr dedasi
ecor nter
esti
ncomeandt
heent
ryf
ort
het
ransact
ioni
sas
f
oll
owsi
nagener
alj
our
nal
for
m:
Dec.25.Cash ………………….
..
..
..
..
..
..
..
..
..
..
..
..
.3048.
33
Not
esRecei
vabl
e…………………….
………… 3000.
00
I
nter
estI
ncome……………………………………. 48.
33
I
tshoul
dbeobser
vedt
hatt
hepr
oceedsf
rom di
scount
inganot
erecei
vabl
emay
bel
esst
hant
hef
acev
alue.Whent
hissi
tuat
ionoccur
s,t
heexcessoft
hef
ace
v
alueov
ert
hepr
oceedsi
srecor
dedasadebi
ttoI
nter
estExpense.
210
 e:acont
Not ingentl
i
abi
l
ityi
sacondi
ti
onall
i
abi
l
ityt
hatmat
eri
ali
zesonl
yifan
eventhappensi
nthef
utur
e.Cont
ingentl
i
abi
l
iti
esar
enotr
epor
tedont
hebal
ance
sheetbutar
edi
scl
osedt
hroughasuppl
ement
aryr
epor
tornot
etot
hef
inanci
al
st
atement
s.
CheckYourPr
ogr
ess:Exer
cise7.
5

Onasepar
atesheetofpapergi
vey
ourr
esponsef
ort
hef
oll
owi
ngquest
ions
andchecky
ouranswerwi
tht
heanswer
spr
ovi
dedatt
hebackoft
hismodul
e

1.Thepay
eeofa100-
day
,12%not
eforBi
rr5000,
dat
edSept
ember2,
endor
ses
i
ttoabankonNov
ember1.Thebankdi
scount
sthenot
eat14%.

Requi
red:I
dent
if
yordet
ermi
net
hef
oll
owi
ngast
heyr
elat
etot
henot
e:(
a)
f
acev
alue,
(b)mat
uri
tyv
alue,
(c)duedat
e,(
d)numberofday
sint
hedi
scount
per
iod,(
e)pr
oceedamountr
ecei
vedbyt
heendor
ser
,(f
)int
eresti
ncomeor
expenser
ecor
dedbyt
heendor
ser
,(g)amountpay
abl
etot
hebanki
fthe
makershoul
ddef
aul
t,(
h)passt
heent
ryt
orecor
dthedi
scount
ingoft
henot
e
byt
heendor
ser
.

2.Thef
oll
owi
ngquest
ionsr
efert
oa45-
day
,10% not
eforBi
rr20,
000,dat
ed
August1:(
a)whati
sthei
nter
estamountpay
abl
eatmat
uri
ty,(
b)whati
sthe
mat
uri
tyv
alueoft
henot
e?(
c)Wheni
stheduedat
eoft
henot
e?I
fonAugust
31,t
hehol
deroft
henot
edi
scount
edt
henot
eatt
her
ateof12%,(
d)whati
s
t
heamountofpr
oceedsr
ecei
vedbyt
heendor
seroft
henot
e,(
e)passt
he
ent
ryt
orecor
dthedi
scount
ingoft
henot
e.
_
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___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
211
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_

7.
3.5Di
shonor
edNot
esRecei
vabl
e

Somet
imest t
hemaker(heonewhomakest
hepr
omi
se)maydef
aul
t(f
ail
s)t
o
maket
hepay
mentdueont
henot
euponmat
uri
ty.Whent
hishappens,t
henot
e
i
ssai
dtobedi
shonor
ed.Thehol
der
,orpay
ee,
ofadi
shonor
ednot
eshoul
dmake
anent
ryt
otr
ansf
ert
het
otalamountduef
rom not
esr
ecei
vabl
etoanaccount
s
r
ecei
vabl
efr
om t
he debt
or.The di
shonor
ed not
es r
ecei
vabl
eis no l
onger
negot
iabl
e.

Exampl
e:Toi
l
lust
rat
e,i
ftheBr
.4000,
60-
day
,12%not
esr
ecei
vabl
eandr
ecor
ded
onJune15,hadbeendi
shonor
edatmat
uri
ty,t
heent
ryt
ochanget
henot
e
i
ncl
udi
ngt
hei
nter
estbackt
othecust
omer
saccountwoul
dhav
ebeenasf
oll
ows:

2007
Aug.14.Account
sRecei
vabl
e………………………….4080.
00
(
GYBGar
ment
)
Not
esRecei
vabl
e…………………….
. 4000.
00
I
nter
estI
ncome…………………….
.……. 80.
00
Tor
ecor
da12%,
60-daynot
edi
shonor
edbyGYBGar
ment
.

Ont
heot
herhand,whenadi
scount
ednot
erecei
vabl
eisdi
shonor
ed,t
hehol
der
usual
l
ynot
if
iest
heendor
serofsuchf
actandasksf
orpay
ment
.Ift
her
equestf
or
pay
mentandnot
if
icat
ionofdi
shonorar
eti
mel
y,t
heendor
seri
slegal
l
yobl
i
gat
ed
t
opayt
heamountdueont
henot
e.Theent
ir
eamountpai
dtot
hehol
derbyt
he
endor
ser
,incl
udi
ngt
hei
nter
est
,shoul
dbedebi
tedt
otheAccount
sRecei
vabl
eof
t
hemaker
.

Exampl
e:Toi
l
lust
rat
e,assumet
hatt
heBi
rr3000,120-
day
,10%not
edi
scount
ed
212
onDecember25,
isdi
shonor
edatmat
uri
tybyt
hemaker
.Theent
ryt
orecor
dthe
pay
mentbyt
heendor
ser
,inGener
alJour
nal
for
m,woul
dbeasf
oll
ows:

Feb13.Account
sRecei
vabl
e………………. 3100.
00
Cash……………………………………… 3100.
00

I
nsomecases,t
hehol
derofadi
shonor
ednot
egi
vest
heendor
seranot
ari
zed
st
atementoft
hef
act
soft
hedi
shonor
.Thef
eef
ort
hisst
at ,knownasa
ement
pr
otestf
ee,i
schar
gedt
otheendor
ser
,whoi
ntur
nchar
gesi
ttot
hemakeroft
he
not
e.I
fther
ehadbeenapr
otestf
eeofBr
.15.
00i
nconnect
ionwi
tht
hedi
shonor
andt
hepay
mentpr
evi
ousl
yrecor
ded,t
heDebi
tto Account
sRecei
vabl
e(t
he
maker
s)accountandt
heCr
edi
ttoCashwoul
dhav
ebeenBi
rr3115.
00.

CheckYourPr
ogr
ess:Exer
cise7.
6
1.ThemakerofaBi
rr4000,
11%,
75–daynot
erecei
vabl
efai
l
edt
opayt
henot
e
ont
heduedat
e.Whatent
ryshoul
dbemadei
ntheaccount
soft
hepay
eet
o
r
ecor
dthedi
shonor
ednot
erecei
vabl
e?

2.Adi
scount
ednot
esr
ecei
vabl
eisdi
shonor
edbyt
hemakerandt
heendor
ser
pay
sthebankt
hef
aceoft
henot
e,Bi
rr15,
000,t
hei
nter
est
,Bi
rr900,anda
pr
otestf
eeofBi
rr50.Whatent
ryshoul
dbemadei
ntheaccount
soft
heendor
ser
t
orecor
dthepay
ment
?
_
___
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___
___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
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___
___
___
___
___
___
___
___
___
___
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_
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___
___
___
___
___
___
___
___
___
___
___
___
__

7.
4Uncol
lect
ibl
eRecei
vabl
es

213
 Whatdoyouunder
standbyuncol
lect
ibl
erecei
vabl
es? How doesi
tar
isei
n
t
hef
ir
m? Whati
sit
sef
fectont
hef
ir
m’spr
ofi
tabi
li
tyandoper
ati
ons?Dear
st
udent
str
yto answert
hesequest
ionsbef
oreyougot
hrought
hedi
scussi
on
pr
esent
edbel
ow.

Whenmer
chandi
seorser
vicesar
esol
dwi
thoutt
hei
mmedi
ater
ecei
ptofcash,
a
par
toft
he cl
aim agai
nstcust
omer
s usual
l
y pr
oves t
o be uncol
l
ect
ibl
e.
Regar
dlessofhowt
hor
oughandef
fi
cienti
tscr
edi
tcont
rolsy
stem i
s,acompany
wi
l
lal
way
shav
esomecust
omer
swhocannotorwi
l
lnotpay
.

Anaccount
srecei
vabl
ethathasbeenj
udgedt
obeuncol
l
ect
ibl
eisnol
ongeran
asset
.The oper
ati
ng expense i
ncur
red because oft
he f
ail
uret
o col
l
ect
r
ecei
vabl
esi edanexpense,
scal
l oral
ossf
orm uncol
lect
ibl
eaccount
s,doubt
ful
account
s,orBadDebt
s.

Ther
eisnoasi
ngl
egener
alr
ulef
ordet
ermi
ningwhenanaccount
srecei
vabl
eor
not
esr
ecei
vabl
ebecomeuncol
l
ect
ibl
e.Thef
actt
hatt
hedebt
orf
ail
stopayt
he
accountaccor
dingt
othesal
escont
ractordi
shonoranot
eont
heduedat
edoes
notnecessar
il
ymeant
hatt
heaccountwi
l
lbeuncol
l
ect
ibl
e.

I
ndi
cat
ionofPar
ti
alorFul
lWor
thl
essnessofRecei
vabl
es
How canabusi
nessknow wi
thcer
tai
nthatwhet
heranamountwi
thaspeci
fi
c
cust
omerwi
l
lbecol
l
ect
edornotcol
l
ect
ed?Asi
thasbeeni
ndi
cat
edear
li
er,
ther
e
i
snohar
dandf
astr
ulef
ordet
ermi
ningwhenar
ecei
vabl
ebecomesuncol
l
ect
ibl
e.
Howev
er,t
her
e ar
e some i
ndi
cat
ions ofpar
ti
alorf
ullwor
thl
essness of
r
ecei
vabl
es.Someoft
hesei
ndi
cat
ionsar
edescr
ibedher
eunder
.

1.Bankr
upt
cyoft
hedebt
or.
2.Cl
osi
ngoft
hedebt
or’
sbusi
ness
214
 3.Di
sappear
anceoft
hedebt
or
4.Fai
l
ureofr
epeat
edat
tempt
stocol
l
ect
,andt
hebar
ri
ngofcol
l
ect
ionby
t
he st
atur
eofl
i
mit
ati
on

Dearst
udent
s!We bel
i
evet
hatnow y
ou ar
e a bi
tawar
e ofuncol
l
ect
ibl
e
r
ecei
vabl
es,andasi
thasbeensai
ditr
epr
esent
srecei
vabl
est
hatwi
l
lnotor
cannotbecol
l
ect
ed.Theser
ecei
vabl
esar
efr
equent
lyr
efer
r oasDoubt
edt ful
Account
s,orBadDebt
s,andar
eexpensest
hatr
esul
tfr
om t
hef
ail
uret
ocol
l
ect
r
ecei
vabl
es.Baddebtexpensehast
heef
fectofdecr
easi hef
ngt ir
m’spr
ofi
tand
asset
s.Butt
hequest
ionher
ei het
st imi
ngandamountofr
ecogni
zi
ngbaddebt
s.
I
nyouropi
nion,whenshoul
dtheseuncol
l
ect
ibl
eaccount
sber
ecogni
zedi
nthe
account
ingr
ecor
ds?Gi
vey
ouransweri
nwr
it
ingbef
orey
our
eadt
hef
oll
owi
ng
di
scussi
on.

7.
5Met
hodsofRecogni
zingUncol
lect
ibl
e

Ther
ear
etwomet
hodsofaccount
ingf
orr
ecei
vabl
est
hatar
ebel
i
evedt
obe
uncol
l
ect
ibl
e:

7.
5.1TheAl
lowanceMet
hod(
Reser
veMet
hod)

Thi
s met
hod pr
ovi
des i
n adv
ance f
oruncol
l
ect
ibl
erecei
vabl
es.Mostl
arge
busi
nessent
erpr
isesusedt
hismet
hodt
opr
ovi
decur
rent
lyf
ort
heamountof
t
rader
ecei
vabl
esest
imat
edt
obecomeuncol
l
ect
ibl
eint
hef
utur
e.Theadv
ance
pr
ovi
si
onf
orf
utur
euncol
l
ect
ibi
l
ityi
smadebyanadj
ust
ingent
ryatt
heendoft
he
f
iscalper
iod.Aswi
thal
lper
iodi
cadj
ust
ment
s,t
heent
ryser
vest
wopur
poses.I
n
t
hisi
nst
ance,
itpr
ovi
desf
or

(
1)t
her
educt
ionoft
hev
alueoft
her
ecei
vabl
est
otheamountofcash
expect
edt
o ber
eal
i
zedf
rom t
hem i
nthef
utur
eand

215
 (
2)t
heal
l
ocat
iont
othecur
rentper
iodoft
heexpect
edexpenser
esul
ti
ng
f
rom suchr
educt
ion.

Thesel
ossesar
eexpensest
hatoccuratt
het
imesal
esoncr
edi
tar
emadeand
shoul
dbemat
chedt
other
evenuest
heyhel
ptogener
ateatt
het
imet
hesal
es
ar
emade.Managementcannoti
dent
if
ywhi
chcust
omer
(s)wi
l
lnotpayt
hei
r
debt
s,norcani
tpr
edi
ctt
heexactamountofmoneyt
hatwi
l
lbeuncol
l
ect
ibl
e.
Ther
efor
e,t
oobser
vet
hemat
chi
ngr
ule,
lossesf
rom uncol
l
ect
ibl
eaccount
smust
beest
imat
ed,andt
hisest
imat
ebecomesanexpensef
ort
hef
iscaly
eari
nwhi
ch
t
hesal
esar
emade.Theadv
ancepr
ovi
sionsf
orf
utur
euncol
l
ect
ibl
eismadeby
andadj
ust
ingent
ryatt
heendoft
hef
iscal
per
iod.

Exampl
e:Toi
l
lust
rat
e,assumet
hatCot
tageSal
esCompanymademostofi
ts
sal
esoncr
edi
tdur
ingi
tsf
ir
sty
earofoper
ati
on.Att
heendoft
hey
earaccount
s
r
ecei
vabl
eamount
edt
oBi
rr97500.Ont
hisdat
e,managementr
evi
ewedt
he
col
l
ect
ibl
e st
atus of t
he Account
s Recei
vabl
e.Base on a car
efulst
udy
appr
oxi
mat
ely Bi
rr5,
500 oft
he Bi
rr97500 ofAccount
s Recei
vabl
e wer
e
est
imat
edt
obeuncol
l
ect
ibl
ether
efor
e,t
heuncol
l
ect
ibl
eaccount
sexpensef
or
t
hef
ir
sty
earofoper
ati
onwasest
imat
edt
obeBi
rr5500.Thef
oll
owi
ngadj
ust
ing
ent
rywoul
dbemadeonDecember31oft
haty
ear
.

Dec31.Uncol
l
ect
ibl
eAccount
sExpense………….
..
..
..
..
..
..
..
.5,
500.
00
Al
l
owancef
orUncol
l
ect
ibl
eAccount
s…… 5,
500.
00
Tor
ecor
dtheest
imat
eduncol
lect
ibl
eaccount
sexpensef
ort
heyear
.
216
Not
ethatt
heBi
rr5,
500.
00r
educt
ioni
nAccount
sRecei
vabl
ecannoty
etbe
i
dent
if
iedwi
thspeci
fi
ccust
omeraccount
sint
hesubsi
diar
yledgerandshoul
d
t
her
efor
e,notbe cr
edi
ted t
othe cont
rol
l
ing accounti
nthe gener
all
edger
.
Ther
efor
e,t
hecust
omar
ypr
act
icei
stouseacont
raassetaccountent
it
led
Al
lowancef
orDoubt
fulAccount
s.(
Reser
vef
orBadDebt
s)

Uncol
l
ect
ibl
eaccountexpensei
sgener
all
yrepor
tedont
hei
ncomest
atementas
anoper
ati
ngexpense.Andt
heal
l
owancef
ordoubt
fulaccountappear
sont
he
ance sheetas a cont
bal ra-
assetaccountt
hati
s deduct
ed f
rom account
s
r
ecei
vabl
e.I
treducest
heAccount
sRecei
vabl
etot
heamountt
hati
sexpect
edt
o
ber
eal
i
zedorcol
l
ect
edi
ncashasf
oll
ows:

Cur
rentAsset
s:
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Br 45,
000.
00
Shor
t-
Ter
mInv
est
ment
s..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 61,
500.
00
Account
sRecei
vabl
e………………………….
..
..
..
.Br
.97,
500.
00
Less: Al
l
owance f
or Uncol
l
ect
ibl
e Account
s..
..
..
..
..
..
..
..
. (
5,500.
00)
92,
000.
00
Mer
chandi
seI
nvent
ory
………………………………………….
. 17,
000.
00
Suppl
i
es……………………………………………………….
..
.. 6,
200.
00
Tot
alcur
rentAsset
s…………………………….
..
..
..
..
..
..
..
..
..
..
..
.Br
.217,
700.
00
Thedebi
tbal
anceofBr
.97,
500i
nAccount
sRecei
vabl
e(t
heamountoft
het
otal
cl
aimsagai
nstcust
omer
sonopenaccount
),andt
hecr
edi
tbal
anceofBr
.5,
500
i
ntheAl
l
owancef
orUncol
l
ect
ibl
eAccount
sist
heamountt
hatwi
l
lbededuct
ed
f
rom t
heAccount
sRecei
vabl
eAccountt
odet
ermi
net
henetr
eal
i
zabl
eval
ue.

Not
e:Becausesomebusi
nessesar
eshowi
ngat
endencyofov
erest
imat
ingt
he
amountofdoubt
fulaccount
sinor
dert
orepor
tlessneti
ncomeandt
opayl
ess
pr
ofi
ttax,t
heAl
l
owancemet
hodofr
ecogni
zi
nguncol
l
ect
ibl
eaccount
sisnot
217
accept
abl
efort
heFeder
alI
ncomet
axPur
pose.

7.
5.1.
1Wr
it
eOf
fsTot
heAl
lowanceAccount

Whatwoul
dhappen,i
fsomeoft
hecust
omer
sofCot
tageSal
esCompanyi
s
i
dent
if
iedt
obebankr
upt
edandar
enotabl
etopayt
hei
rdebt
?Whatj
our
nal
ent
rywoul
dbemadet
orecor
dthef
act
?Maket
hej
our
nalent
rybyyourownand
under
standt
heef
fect
.

Whenaspeci
fi
ccust
omeraccounti
sbel
i
evedt
obeuncol
l
ect
ibl
e,i
tiswr
it
tenof
f
agai
nstt
heAl
l
owanceAccountasi
nthef
oll
owi
ngent
ry.

Jan10.Al
l
owancef
orDoubt
ful
account…….
..
..
..
..
..
..
..
..
.. 500.
00
Account
sRecei
vabl
e………………………… 500.
00
Towr
it
eof
ftheuncol
lect
ibl
eaccount

Al
though t
he wr
it
e-of
fsr
emov
ethe uncol
l
ect
ibl
e amount f
rom Account
s
Recei
vabl
e,i
tdoesnotchanget
heest
imat
ednetr
eal
i
zabl
eval
ueofAccount
s
Recei
vabl
e.Thewr
it
eof
fssi
mpl
yreducest
hecust
omer ozer
saccountt oand
r
educest
heAl
l
owancef
orDoubt
ful
Accountbyasi
mil
aramount
.

Nat
ural
l
yenough,t
het
otalamountwr
it
tenof
fagai
nstt
heal
l
owanceaccount
dur
ing t
heper
iod wi
l
lrar
elybeequalt
otheamounti
ntheaccountatt
he
begi
nni
ngoft
heper
iod.
Theal
l
owanceaccountwi
l eacr
lhav edi
tbal
anceatt
heendoft
heper
iod,i
fthe
wr
it
e of
fdur
ing t
he per
iodamountl
ess t
han t
he begi
nni
ng bal
ance.The
al
l
owanceaccountwi
l eadebi
lhav tbal
anceatt
heendoft
heper
iod,i
fthewr
it
e
of
fsdur
ingt
heper
iodamountgr
eat
ert
hant
hebegi
nni
ngbal
ance.Howev
er,
aft
er
218
t
hey
earendadj
ust
ingent
ryi
srecor
dedt owanceaccounthasacr
heal
l edi
t
bal
ance.

7.
5.1.
2Recov
eryofAccount
sRecei
vabl
eWr
it
tenOf
f

Whatwoul
dhappen,i
facust
omerwhoseaccountwaswr
it
ten–of
fear
li
eras
uncol
lect
ibl
eisnowcol
lect
ed?Whatwoul
dbet
hej
our
nalent
ryorent
ri
est
obe
made?Makeyouranswerbef
oreyoust
artr
eadi
ngt
hef
oll
owi
ngdi
scussi
on.

Anaccount
srecei
vabl
ethathasbeenwr
it
tenof
fagai
nstt
heal
l
owanceaccount
mayl
aterbecol
l
ect
ed.I
nsuchcases,
theaccount dr
sshoul ei
nst
atedbyanent
ry
t
hati
stheexactr
ever
seoft
hewr
it
tenof
fent
ry.Whent
hishappens,t
woj
our
nal
ent
ri
esmustbemade: or
Onet ever
set
heear
li
erwr
it
eof
fs,
andt
heot oshow
hert
t
hecol
lect
ionoft
heaccount
.

Exampl
e:Assumet
hatonMar
ch15XYCo,af
terhi
sbankr
upt
cyonJanuar
y10,
not
if
iedt
heCot
tageSal
esCompany
,thathewoul
dbeabl
etopayBr
.250ofhi
s
accountandsentacheckf
orBr
.150.Theent
ri
est
orecor
dthi
str
ansact
ionar
e
asf
oll
ows.

Mar
ch15.Account
sRecei
vabl
e(XYCo.
)…….
..
..
..
..
..
..
.. 250.
00
Al
l
owancef
orDoubt
ful
Account…………….
250.
00
Tor
einst
ateaccountwr
it
tenof
fear
li
eri
ntheyear
.
Mar
ch15.Cash………….
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 150.
00
Account
sRecei
vabl
e(XYCo,
)…………… 150.
00
Col
lect
ionf
rom XYCo.

7.
5.1.
3Est
imat
ingUncol
lect
ibl
e

219
Theest
imat
eofuncol
l
ect
ibl
eatt
heendoft
hef
iscalper
iodi
sbasedonpast
exper
ienceandf
orecast
soff
utur
ebusi
nessact
ivi
ty.
Ther
ear
etwoal
ter
nat
iveway
stoest
imat
euncol
l
ect
ibl
erecei
vabl
es:

a)Basedont
heamountofsal
esf
ort
heent
ir
efi
scal
per
iod,
or
b)Basedont
heamountandageofr
ecei
vabl
es

a)Est
imat
ionBasedonSal
es

Account
srecei
vabl
ear
eacqui
redasar
esul
tofsal
esonaccount
.Theamountof
suchsal
esdur
ingt
hey
earmayt
her
efor
ebeusedt
odet
ermi
net
hepr
obabl
e
amountoft
heaccount
sthatwi
l
lbeuncol
l
ect
ibl
e.Theamountoft
hisest
imat
eis
addedt
owhat
everbal
anceexi
stsi
ntheAl
l
owancef
orDoubt
ful
Account
s.

Exampl
e:Assumet
hatt
heAl
l
owanceaccounthasacr
edi
tbal
anceofBr
.500
bef
oreadj
ust
ment
.Ifi
tisknownf
rom pastexper
i hatabout½of1% oft
encet he
char
gesal
eswi
l
lbeuncol
l
ect
ibl
eandt
hechar
gesal
esf
oracer
tai
nyeari
sBr
.400,
000.
00,
theadj
ust
ingent
ryf
oruncol
l
ect
ibl
eaccount
satt
heendoft
hey
ear
woul
dbeasf
oll
ows:

Dec.31.Uncol
l
ect
ibl
eAccount
sExpense………….
. 2000.
00
Al
l
owancef
orDoubt
ful
Account
s……………… 2000.
00
Tor
ecor
dtheadj
ust
ingent
ryf
oruncol
l
ect
ibl
eaccount
sexpense

Af
tert
headj
ust
ingent
ryi
spost
ed,t
hebal
anceoft
heAl
l
owancef
orDoubt
ful
Accounti
sBi
rr2500,(
i.
e.,Br
.500cr
edi
tbal
ance+2000adj
ust
mentbal
ance)
.If
t ehadbeenadebi
her tbal
anceofBr
.500i
ntheAl
l
owancef
orDoubt
fulAccount
bef
ore adj
ust
ment
,the amountoft
he adj
ust
mentwoul
d st
il
lhav
e been
Br
.2000.
00butt
hebal
ancei
ntheAl
l
owanceAccountaf
teradj
ust
ingent
ryi
s
post
ed,
woul
dbeBr
.1500(
i.
e.Br
.2000–Br500)
.
CheckYourPr
ogr
ess:Exer
cise7.
7
220
 1.Att
heendoft
hecur
renty
ear
,theaccount
srecei
vabl
eaccounthasadebi
t
bal
anceofBi
rr162,500,andnetsal
esf
ort
hey
eart
otalBi
rr1,500,
000.
Det
ermi
net
heamountoft
headj
ust
ingent
ryt
orecor
dthepr
ovi
sionf
or
doubt
ful
account
sundereachoft
hef
oll
owi
ngassumpt
ions:
a)TheAl
l
owanceAccountbef
oreadj
ust
menthasacr
edi
tbal
anceof
Bi
rr1,
050.Assumi
nguncol
l
ect
ibl
eaccount
sexpensei
sest
imat
ed
at2%ofnetsal
es.
b)TheAl
l
owanceaccountbef
oreadj
ust
menthasadebi
tbal
anceof
Bi
rr900.Assumi
nguncol
l
ect
ibl
eaccount
sexpensei
sest
imat
edat
½of3%ofnetsal
es.
_
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_
___
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___
___
___
___
___
___
___
___
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___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
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___
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___
___
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___
___
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___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
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___
___
___
___
___
___
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___
___
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___
___
_
___
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___
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
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___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
_

b)Est
imat
ionBasedonAnal
ysi
sofRecei
vabl
e
The most wi
del
y used met
hod of est
imat
ing t
he pr
obabl
e amount of
uncol
l
ect
ibl
eaccount
sisbaseduponanagi
ngoft
heaccount
srecei
vabl
e.Under
t
his met
hod,t
he y
ear
-end bal
ance ofAl
l
owance f
orDoubt
fulAccount
sis
det
ermi
ned di
rect
ly by an anal
ysi
s ofaccount
srecei
vabl
e.The di
ff
erence
bet
weent
heamountdet
ermi
nedt
obeuncol
l
ect
ibl
eandt
heact
ualbal
anceof
Al
l
owancef
orDoubt
ful
Account
si heexpensef
st ort
hey
ear
.
“
Agi
ng”Account
sRecei
vabl
emeanscl
assi
fyi
ngeachr
ecei
vabl
eaccor
dingt
oit
s
age.

Anagi
ngschedul
efort
heAccount
sRecei
vabl
eofEastAfr
icanTr
adi
ngHousei
s
221
 i
l
lust
rat
edbel
ow:
Anal
ysi
sofAccount
sRecei
vabl
ebyAge
Dec.31.
19x1
Day
sPastDue
Bal
ance NotYet
Cust
omer Ov
er
Due
1-
30 31-
60 61-
90 91-
181 181-
365 365

ABCTr
adi
ngCo.
, Br
.900 Br
.900
AbebeB.
,Suppl
i
esCo.
, 240 Br
.240
Chal
tuB.Suppl
i
esCo.
, 400 300 Br
.100
DebebeZ.Supermar
k 160 Br
.100
Br
.60
XYCompany 1300 700 600
Br
.400
ZooTr
adi
ng 7000 3200 2200 Br240
960

Br
.10.000 Br
.5100 Br
.2900 Br
.1200 Br
.240 Br
.400 Br
.100 Br
.60

Ther
eisagener
alassumpt
iont
hatt
hel
ongeranaccounti
spastdue,
thegr
eat
er
t
hel
i
kel
i
hood t
hati
twi
l
lnotbecol
l
ect
ed i
nful
l
.Ther
efor
e,based on past
exper
ience,
thecr
edi
tmanagerest
imat
est
heper
cent
ageofcr
edi
tlossesl
i
kel
yto
occuri
neachagegr
oupofaccount
srecei
vabl
e.

Thef
oll
owi
ngschedul
eli
stst
hegr
oupt
otal
sfr
om t
heagi
ngschedul
eandshows
howt
heest
imat
edt
otal
amountofuncol
l
ect
ibl
eaccount
siscomput
ed.

222
 Est
imat
edUncoll
ecti
bleAccount
sRecei
vabl
e
December31.
Agegroup Percentageconsi
der
ed
Est
imatedUncol
lect
ible
Total Uncoll
ectibl
e Account
s

Noty
etdue Br.
5100 1% Br
.51.
00
1–30day
spastdue 2900 3% 87.
00
31–60day
spastdue 1200 10% 120.
00
61–90day
spastdue 240 20% 48.
00
91–180day
spastdue 400 30% 120.
00
181–365day
spastdue 100 50% 50.
00
Ov
er365day
spastdue 60 80% 48.
00
Bi
rr10,
000 Bi
rr524.
00

Theest
imat
eduncol
l
ect
ibl
eaccount
sofBi
rr524i
ntheexampl
eabov
e,i
stheamountt
o
bededuct
edf
rom Account
sRecei
vabl
etoy
iel
dthei
rexpect
ednetr
eal
i
zabl
eval
ue.I
tis
t
hus,
thedesi
redbal
anceoft
heal
l
owancef
ordoubt
ful
accountaf
teradj
ust
ment
.

Theexcessoft
hisf
igur
eov
ert
hebal
anceoft
heal
l
owanceaccountbef
oreadj
ust
menti
s
t
heamountoft
hecur
rentpr
ovi
sionst
obemadef
oruncol
l
ect
ibl
eaccount
sexpense.

Tocont
inuewi
tht
hei
l
lust
rat
ion,
assumet
hatt
heal
l
owanceaccounthasacr
edi
tbal
ance
ofBi
rr120bef
oreadj
ust
ment
.Theamountt
obeaddedt
othi
sbal
ancei
sther
efor
e,Bi
rr
404(
Bir
r524–Bi
rr120)
,andt
headj
ust
ingent
ryi
sasf
oll
ows:

Dec.31.Uncol
l
ect
ibl
eaccount
sexpense……………………….
. 404.
00
Al
l
owancef
orDoubt
ful
………………………….
. 404.
00
Tor
ecor
dtheadj
ust
ingent
ryf
oruncol
lect
ibl
eaccount
sexpense

Af
tert
headj
ust
ingent
ryi
spost
edt
hecr
edi
tbal
ancei
ntheal
l
owanceaccountwi
l
lbeBi
rr
524,whi
chi
sthedesi
redamount
.Ift
her
ehadbeenadebi
tbal
anceofBi
rr76i
nthe

223
al
l
owanceaccountbef
oreadj
ust
ment
,theamountofadj
ust
mentwoul
dhav
ebeenBi
rr
Bi
600( r
r524desi
redbal
ance+Bi
rr76Debi
tbal
ance)
.
CheckYourPr
ogr
ess:Exer
cise7.
8

2.Att
heendoft
hecur
renty
ear
,theaccount
srecei
vabl
eaccounthasadebi
t
bal
anceofBi
rr175,
000,andnetsal
esf
ort
hey
eart
otalBi
rr1,500,
000.
Det
ermi
net
heamountoft
headj
ust
ingent
ryt
orecor
dthepr
ovi
sionf
or
doubt
ful
account
sundereachoft
hef
oll
owi
ngassumpt
ions:
a)Theal
l
owanceaccountbef
oreadj menthasacr
ust edi
tbal
anceof
Bi
rr1,
050.Andanal
ysi
soft
heaccount
sint
hecust
omer
sledger
i
ndi
cat
esdoubt
ful
account
sofBi
rr11,
750
b)TheAl
l
owanceaccountbef
oreadj menthasadebi
ust tbal
anceof
Bi
rr900.Anal
ysi
s oft
he account
sint
he cust
omer
s’l
edger
i
ndi
cat
eddoubt
ful
account
sofBi
rr10,
100.
_
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___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

7.
5.1.
4Compar
isonoft
heTwoMet
hods

Bot
htheper
cent
ageofnetsal
esmet
hodandt
heaccount
srecei
vabl
eagi
ngmet
hod
est
imat
est
heuncol
l
ect
ibl
eaccount
sexpensei
naccor
dancewi
t hemat
ht chi
ngr
ule,but
t
heydosoi
ndi
ff
erentway
s.

Theper
cent
ageofnetsal
esmet
hodi
sani
ncomest
atementappr
oach.I
tassumest
hat
acer
tai
npr
opor
ti
onofeachBi
rrofsal
eswi
l
lnotbecol
l
ect
ed,andt
hispr
opor
ti
oni
sthe
amountofUncol
l
ect
ibl
eAccount
sExpensef
ort
hey
ear
.

TheAccount
sRecei
vabl
eAgi
ngmet
hodi
sabal
ancesheetappr
oach.I
tassumest
hata
cer
tai
npr
opor
ti
onofeachBi
rrofaccount
srecei
vabl
eout
standi
ngwi
l
lnotbecol
l
ect
ed.
Thi
spr
opor
ti
on i
sthedesi
red bal
anceoft
heAl
l
owancef
orUncol
l
ect
ibl
eAccount
s
224
account
.Theexpensef
ort
hey
eari
sthedi
ff
erencebet
weent
het
arget
ed(
desi
redbal
ance
andt
hecur
rentbal
anceoft
heAl
l
owanceaccount
.
Thet
womet
hodsar
efur
therel
abor
atedi
nthef
oll
owi
ngdi
agr
am.

I
ncomeSt
atementAppr
oach:
Per
cent
ageofNetSal
esMet
hod

Uncol
l
ecti
bleAccount
s
Netsal
es Applya Expense
Percentage
to

Bal
anceSheetAppr
oach:
Agi
ngofAccount
sRecei
vabl
eMethod

Tar
getedBalanceof
Applya All
owanceforDoubt’
s
Account
s Percentage Accounts
Recei
vabl
e to
determine

Rev
eiwExer
cise7.
1
At
temptt
hef
oll
owi
ngquest
ions.
1.Assumet
hatonMay4,2007,Dol
ceCompanyr
ecei
vedf
rom MeskelCompanya
Bi
rr!
0,000,
60-
day
,9per
centnot
edat
edMay4,
2007
(
a)Det
ermi
net
hemat
uri
tydat
eandv
alueoft
henot
e
(
b)OnMay14,2007Dol
ceCompanysol
dthenot
etoDashenBankwi
tha
di
scountr
ateof10per
cent
.Det
ermi
net
hecashpr
oceedr
ecei
vedbyDol
ce
Company
.
(
c)Passt
heent
ryt
orecor
dthecol
l
ect
ionofcashbyDol
ceCompany

225
 2.AT company uses t
he al
l
owance met
hod ofr
ecor
ding uncol
l
ect
ibl
eaccount
s
expense.Sal
esi
nthey
ear2007wer
eBi
rr750,
000andt
heAccount
sRecei
vabl
e
accounthadaBi
rr350,
000bal
anceonDecember31,1995.TheAl
l
owancef
or
Dpoubt
ful
Accounthadacr
edi
tbal
anceofBi
rr3000ont
hesamedat
e.
Requi
red:
(
a) Whatadj
ust
mentj
our
nalent
rywoul
dber
ecor
edeonDecember31,2007i
f
(
i)t
hecompanyest
imat
esi
tsuncol
l
ect
ibl
eaccount
stobe1%oft
hey
ear
's
sal
es (
ii
)the company est
imat
es 55 oft
he r
ecei
vabl
es bal
ance on
December31wi
l
lbeuncol
l
ect
ibl
e.
(
b) OnJanuar
y15,2008i
twasdeci
dedt
hatAl
mexCompany
'saccounti
nthe
amountofBi
rr500i
suncol
l
ect
ibl
e.
(
c) OnFebr
uar
y12,
2008Al
mexCompanysentacheckf
orBi
rr300

7.
5.2Di
rectWr
it
e–of
fMet
hodofAccount
ingf
orUncol
lect
ibl
e.

Some busi
ness ent
erpr
ises do notuse any cont
ra accountf
oraccount
s
r
ecei
vabl
e.I
nst
ead ofmaki
ng an end ofy
earadj
ust
ing ent
ri
es t
orecor
d
uncol
l
ect
ibl
eaccount
sexpensesont
hebasi
sofest
imat
es,t
hesebusi
nesses
r
ecogni
zenouncol
l
ect
ibl
eaccountexpenseunt
ilspeci
fi
cchar
gecust
omer
sar
e
i
dent
if
iedt
obewor
thl
ess.

Oneoft
hedr
awbacksoft
hismet
hodi
sthat
,itmakesnoat
temptt
omat
ch
r
evenue and r
elat
ed expenses,because uncol
l
ect
ibl
e account
s expense i
s
r
ecor
dedi
ntheper
iodi
nwhi
chi
ndi
vi
dualaccount
srecei
vabl
ear
edet
ermi
nedt
o
bewor
thl
essr
athert
hani
ntheper
iodi
nwhi
cht
hesal
eswer
emade.

Whenapar
ti
cul
arcust
omer
’saccounti
sdet
ermi
nedt
obeuncol
l
ect
ibl
e,i
tis
wr
it
tenofdi
rect
lyt
ouncol
l
ect
ibl
eaccountexpenseasf
oll
ows:

Uncol
l
ect
ibl
eAccount
sExpense…………… 150.
00
Account
sRecei
vabl
e(Abebe)………… 150.
00

226
 Tor
einst
ateaccountwr
it
tenofear
li
eri
ntheyear
.

 Whent
hedi
rect–wr
it
e–of
fmet
hodi
susedt
heAccount
sRecei
vabl
e
wi
l
lbel
i
stedont
hebal
ancesheetatt rgr
hei ossamount
,and no
val
uat
ional
lowancewi
l
lbeused.Ther
ecei
vabl
est
her
efor
ear
enot
st
atedatest
imat
edr
eal
izabl
eval
ue.
 I
fanaccountt
hathasbeenwr
it
ten–of
fiscol
l
ect
edl
ater
,theaccount
shoul
dber
e-i
nst
atedasf
oll
ows:

Account
srecei
vabl
e(Abebe)
……………. 150.
00
Uncol
l
ect
ibl
eAccount
sexpense….
. 150.
00
Tor
einst
ateaccountwr
it
tenofear
li
eri
ntheyear
.

Ther
ecei
ptofcashwoul
dal
sober
ecor
dedi
ntheusual
mannerby
:
Debi
ti
ng: Cash…………….
. 150.
00
Cr
edi
ti
ng: Account
sRecei
vabl
e(Abebe)
……………….
. 150.
00
Tor
ecor
dcol
lect
ionofcash

Whenanaccountt
hathasbeenwr
it
tenof
fiscol
l
ect nal
edi aterf
iscalper
iod,i
t
mayber
e-i
nst
atedi
nthesameway
,oranal
ter
nat
ivemaybecr tRecov
edi eryof
Uncol
lect
ibl
eAccount
sWr
it
ten–of
f.Thecr
edi
tbal
ancei
nsuchanaccountat
t
he end oft
he y
earmayt
hen be r
epor
ted on t
he i
ncome st
atementasa
deduct
ionf
rom Uncol
l
ect
ibl
eAccount
sExpense.

CheckYourPr
ogr
ess:Exer
cise7.
9
1.TheBi
rr1000bal
anceofanaccountowedbyacust
omeri
sconsi
der
edt
o
beuncol
l
ect
ibl
eandi
stobewr
it
tenof
f.Gi
vet
heent
ryt
orecor
dthewr
it
-
of
fint
hegener
all
edger
(
a)assumi
ngt
hatt
heal
l
owancemet
hodi
sused,
and
(
b)assumi
ngt
hatt
hedi
rect
-wr
it
eof
fmet
hodi
sused
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
227
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
__

2.Whi
choft
het
wo met
hodsofest
imat
inguncol
l
ect
ibl
e,whenadv
ance
pr
ovi
sionf
oruncol
l
ect
ibl
erecei
vabl
esi
smade,pr
ovi
desf
ort
hemost
accur
ateest
imat
eoft
hecur
rentr
eal
i
zabl
eval
ueoft
her
ecei
vabl
es?
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
_
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
__

7.
6ModelExami
nat
ionQuest
ions
Par
tI.Answert
hef
oll
owi
ngshor
tanswerquest
ions
1.Whatar
etr
ader
ecei
vabl
es?
2.Whatar
ethe adv
ant
ages t
othe cr
edi
tor
,ofa not
erecei
vabl
ein
compar
isont
oanaccount
srecei
vabl
e?
3.Whi
choft
het
womet
hodsofaccount
ingf
oruncol
l
ect
ibl
eaccount
s
pr
ovi
desf
ort
her
ecogni
ti
onoft
heexpenseatt
heear
li
erdat
e?
4.Whatki
ndofanaccount(
asset
,li
abi
l
ity
,et
c.)i
sAl
l
owancef
ordoubt
ful
account
s,andi
sit
snor
mal
bal
anceadebi
toracr
edi
t?

Par
tII
.Wor
koutt
hef
oll
owi
ngquest
ions
1.Af
tert
heaccount
sar
eadj
ust
edandcl
osedatt
heendoft
hef
iscaly
ear
Account
sRecei
vabl
ehasabal
anceofBi
rr317,500andAl
l
owancef
or
Doubt
ful
Account
shasabal
anceofBi
rr9,
750.

(
a)Whati
stheexpect
edr
eal
i
zabl
eval
ueoft
heaccount
srecei
vabl
e?

228
 (
b)I
fanaccountr
ecei
vabl
eofBi
rr1,
500i
swr
it
tenof
fagai
nstt
he
al
l
owanceaccount
,whatwi
l
lbet
heexpect
edr
eal
i
zabl
eval
ueof
t
heaccount
srecei
vabl
eaf
tert
hewr
it
ten-
off
,assumi
ngt
hatno
ot
herchangesi
nei
theraccounthav
eoccur
redi
nthemeant
ime?

2.BezaCompanyhol
dsa120–day
,12% not
eforBi
rr100,
000,dat
ed
Sept
ember19,t
hatwasr
ecei
ved f
rom acust
omeronaccount
.On
Nov
ember20,
thenot
eisdi
scount
edatDashenBankatt
her
ateof15%.
(
a)Det
ermi
net
hemat
uri
tyv
alueoft
henot
e
(
b)Det
ermi
net
henumberofday
sint
hedi
scountper
iod
(
c)Det
ermi
net
heamountoft
hedi
scount
(
d)Det
ermi
net
heamountoft
hepr
oceeds
(
e)Pr
esent t
he ent
ryi
n gener
alj
our
nalf
orm t
orecor
dthe
di
scount
ingoft
henot
eonNov
ember20.

Li
stofRef
erenceMat
eri
als
1.I
ntr
oduct
iont
oAccount
i 21stCent
ng, ury
2.Dy
ckman,DukesandDav
is.(
1995)
.Int
ermedi
ateAccount
ing.Thi
rdEdi
ti
on.
Vol
ume I
,Chapt
ers1–14.McGr
awHi
l
lCompani
es,
Inc.
,
3.Fees and War
ren,Account
ing Pr
inci
ples.16th edi
ti
on.Sout
h – West
ern
Publ
i
shi
ng Company
.
4.Fees and War
ren,Account
ing Pr
inci
ples.18th edi
ti
on.Sout
h – West
ern
Publ
i
shi
ng Company
.

229
ANSWERSTOCHECKYOURPROGRESSQUESTI
ONS
UNI
TONE
Exer
cise1.
1
1.Account
inghasbeenknownasa“
languageofbusi
ness”becauseoft
hef
act
t
hati
tcan be v
iewed as an i
nfor
mat
ion sy
stem.I
tpr
ovi
des r
elev
ant
i
nfor
mat
ionaboutt
hef
inanci
aloper
ati
onsofanent
it
ytov
ari
ousi
ndi
vi
dual
s
orgr
oupsf
ort
hei
rusei
nmaki
ngi
nfor
medj
udgment
sanddeci
sions.
2.Mosti
mpor
tant
ly,t
he obj
ect
ive ofaccount
ing i
s mai
nlyused t
orecor
d,
summar
ize,r
epor
t,andi
nter
preteconomi
cdat
aforusebymanygr
oups
wi
thi
ntheeconomi
candsoci
alsy
stem.

Exer
cise1.
2
1.Thebasi
cdi
ff
erencebet
weent
hepr
ivat
e(ormanager
ial
account
ing)anda
publ
i
caccount
ingi
s:
 Pr
ivat
e(ormanager
ial
account
ing)i
sanar
eaofaccount
ingwi
thi
na
f
ir
m bei
tacompanyorgov
ernment
al(
not
-f
or-
prof
itor
gani
zat
ions)
t
hati
nvol
vessuchact
ivi
ti
esascostaccount
ing,budget
ing,i
nter
nal
audi
ti
ng,
andaccount
ingi
nfor
mat
ionsy
stems.Apr
ivat
eaccount
ant
i
sanempl
oyeeofaf
ir
m whopr
ovi
despr
ofessi
onalser
vicesona
sal
arybasi
s.
 Asagai
nstpr
ivat
eaccount
ing,publ
i
caccount
ing i
san ar
ea of
account
ing i
n whi
ch t
heaccount
antof
fer
sexper
t(pr
ofessi
onal
ser
vicet
othegener
alpubl
i
conaf
eebasi
s.Themaj
orpor
ti
onof
publ
i
caccount
ingpr
act
icei
sinv
olv
edwi
thaudi
ti
ng.

230
 2.Thef
oll
owi
ngar
esomeoft
hespeci
ali
zedf
iel
dsofaccount
ingact
ivi
ty:
f
inanci
alaccount
ing,
costaccount
ing,
manager
ial
account
ing,
audi
ti
ng,
tax
account
ing,budget
ary account
ing,account
ing sy
stems,account
ing
i
nst
ruct
ions,
etc.

Exer
cise1.
3
1. Busi
ness ent
it
y conceptemphasi
zes t
hateconomi
c ev
ent
s can be
i
dent
if
ied wi
th a par
ti
cul
aruni
tofaccount
abi
l
ity
.The par
ti
cul
aruni
t
(
economi
cent
it
y)canbeabusi
nessent
erpr
ise,
gov
ernment
aluni
t,not
-f
or
-
prof
itor
gani
zat
ion,
andani
ndi
vi
dualorf
ami
l
yuni
t.Thi
sconceptr
equi
res
t
hatt
heact
ivi
ti
esoft
heent
it
ybekeptsepar
atef
rom t
heact
ivi
ti
esofi
ts
ownerandot
hereconomi
cent
it
ies.
2. Basi
cal
l
y,equi
ti
esar
ecl
aimsagai
nstasset
sofaf
ir
m.Equi
ti
esmaybe
subdi
vi
dedi
ntot
wopr
inci
pal
types.
 Ther
ight
sofcr
edi
tor
srepr
esentdebt
s(l
i
abi
l
iti
es)oft
hebusi
ness.
Wher
eas,t
her
ight
soft
heownerorowner
sar
eowner
’sequi
ty
(
resi
dual
equi
ty)
.

Exer
cise1.
4
1.Thet
hreeel
ement
sofaccount
ingequat
ionar
easset
s,l
i
abi
l
iti
es,and
owner
’sequi
ty
2.Anent
erpr
ise’
stot
alasset
s:Tot
all
i
abi
l
iti
espl
usowner
’sequi
ty
Tot
alasset
s=Bi
rr50,
000+Bi
rr250,
000
=Bi
rr300,
000
Exer
cise1.
5
1.Thef
oll
owi
ngar
ethef
inanci
alst
atement
sofaser
vicegi
vi
ngent
erpr
ise:
i
) I
ncomeSt
atement

231
 i
i
) St
atementofOwner
’sEqui
ty
i
i
i) Bal
anceSheet
,and
i
v) St
atementofCashFl
ows.

2.Thef
oll
owi
ngar
ethr
eet
ypesofact
ivi
ti
eswhi
char
erepor
tedi
nthecash
f
lowsst
atement
i
) Oper
ati
ngact
ivi
ti
es,
i
i
) I
nvest
ingact
ivi
ti
esand
i
i
i) Fi
nanci
ngact
ivi
ti
es.

UNI
TTWO
Exer
cise2.
1
1.Account
sinal
edgerar
ecl
assi
fi
edbasedoncommonchar
act
eri
sti
cs
usual
l
y;account
sint
hel
edgerar
eli
stedi
ntheor
deri
nwhi
cht
heyappear
i
nthef
inanci
alst
atement
s.Bal
ancesheetaccount
sar
ecl
assi
fi
edas
asset
sli
abi
l
iti
es,orowner
’s equi
ty.I
ncome st
atement
s account
s ar
e
cl
assi
fi
edasr
evenuesorexpenses.
2.Char
tofaccount
sisal
i
sti
ngofaccount
sandt
heaccountnumber
swhi
ch
i
dent
if
ythanl
ocat
ioni
nthel
edger
.

Exer
cise2.
2
1.No.Becauset
het
ermsdebi
tandcr
edi
tmeanl
eftandr
ightr
espect
ivel
y.
Theset
ermsdonotmeani
ncr
easeordecr
ease.Theycanhel
ptor
ecor
d
asi
ncr
easeordecr
easedependsont
henat
ureofaccount
s.Forexampl
e,
asset
swoul
dincr
easet
hroughdebi
tsi
deanddecr
easet
houghcr
edi
tsi
de.
2.The t
ype ofr
ecor
dtr
adi
ti
onal
l
y used f
ort
he pur
pose ofr
ecor
ding
i
ndi
vi
dualt
ransact
ionsi
sanaccount
.Wher
eas,t
hegr
oupofaccount
s
mai
ntai
nedbyaf
ir
misr
efer
redast
hel
edger
.
Exer
cise2.
3

232
 1.I
tisabusi
nessdocument
s(paper
)suchasasal
est
icket
,abi
l
l,oracash
r
egi
stert
ape.
2.St
epsi
nvol
vedi
nbusi
nesst
ransact
ionanal
ysi
sar
e:
i
. I
dent
if
ythenamesofaccount
saf
fect
ed
i
i
. Det
ermi
newhet
hert
heaccount
saf
fect
edi
ncr
easesordecr
ease.
i
i
i. Det
ermi
newhet
hert
heef
fectoft
het
ransact
ionshoul
dber
ecor
ded
asadebi
toracr
edi
t.
Exer
cise2.
4
2.At
ri
ali
sal
i
stofaccount
sandt
hei
rbal
ancesatagi
vent
ime.Besi
des,a
t
ri
albal
ancei
sat
estf
ort
heequal
i
tyofdebi
tsandcr
edi
tsi
nthel
edger
.
3.Er
ror
swhi
char
enotdet
ect
ed(
discov
ered)byt
het
ri
albal
ancear
e:
i
. whenat
ransact
ioni
snotj
our
nal
i
zed
i
i
.Whenacor
rectj
our
nal
ent
ryi
snotpost
ed.
i
i
i.Whenaj
our
nal
ent
ryi
spost
edt
wice
i
v.Recor
dingt
hesamei
ncor
rectamountf
orbot
hthedebi
tandt
hecr
edi
t
par
tsofat
ransact
ion.
v
.Post
ingapar
tofat
ransact
ioncor
rect
lyasadebi
torcr
edi
tbutt
othe
wr
ongaccount
.

UNI
TTHREE
Exer
cise3.
1
1.Mat
chi
ngpr
inci
plei
soneoft
hegener
all
yaccept
edaccount
ingpr
inci
ples
whi
chr
equi
ret
heaccr
ualbasi
sofaccount
ing,
sot
hatr
evenuesr
ecogni
zedi
n
t
heaccount
ingper
iodar
emat
chedwi
tht
her
elat
edexpensesi
ncur
redi
n
pr
oduci
ngt
her
evenues.
2.Undert
heaccr
ualbasi
sofaccount
ing,r
evenuesar
erepor
tedi
ntheper
iodi
n
whi
cht
heyar
eear
ned,andexpensesar
erepor
tedi
ntheper
iodi
nwhi
cht
hey
ar
eincur
redi
nanat
temptt
opr
oducer
evenues.

Exer
cise3.
2

233
1.Att
heendofanaccount
ingper
iod,adj
ust
ingent
ri
esusual
l
ymadet
oupdat
e
t
hebal
ancesheetandi
ncomest
atementaccount
s.Thi
spr
ocedur
ebr
ingst
he
l
edgeri
ntoagr
eementwi
tht
hedat
arepor
tedont
hef
inanci
alst
atement
s.
2.Thepur
poseofanadj
ust
edt
rai
lbal
ancei
stopr
ovet
heequal
i
tyoft
het
otal
debi
tbal
ancesandt
het
otal
credi
tbal
ancesi
nthel
edgeraf
teral
ladj
ust
ment
s
hav
ebeenmade

Exer
cise3.
3
1.AWor
ksheeti
samul
ti
plecol
umnf
ormt
hatmaybeusedi
ntheadj
ust
ment
pr
ocessandi
npr
epar
ingf
inanci
alst
atement
s.A wor
ksheeti
sat
ypeof
wor
kingpaperf
requent
lyusedpr
iort
opr
epar
ati
onoff
inanci
alst
atement
s.
Basi
cal
l
y,awor
ksheeti
snotaper
manentaccount
ingr
ecor
djustl
i
kea
j
our
nal
oral
edgeraccount
.
2.No.Becausewor
ksheeti
smer
elyapl
an(
wor
kingpaper
)usedt
omakei
t
easi
ert
opr
epar
efi
nanci
alst
atement
s.

Exer
cise3.
4
Thef
oll
owi
ngar
ethef
ivest
epsi
nvol
vedi
nthepr
epar
ati
onofawor
ksheet
:
(
1)Pr
epar
eat
ri
albal
anceont
hewor
ksheet
.
(
2)Ent
ert
headj
ust
ment
sint
headj
ust
mentcol
umns
(
3)Ent
ert
headj
ust
edbal
ancesi
ntheadj
ust
edt
ri
albal
ancecol
umns
(
4)Ext
endt
headj
ust
edt
ri
albal
anceamount
stoappr
opr
iat
efi
nanci
al
st
atementcol
umns.
(
5)Tot
alt
hest
atementcol
umns,
comput
etheneti
ncome(
ornetl
oss)
,and
compl
etet
hewor
ksheet
(
6)Thepur
poseofani
ncomest
atementi
stosummar
izet
her
evenueandt
he
expensesofabusi
nessent
it
yov
eraspeci
fi
edper
iodoft
ime,
suchasa
mont
horay
ear
.

Exer
cise3.
5:

234
 1.Att
heendofanaccount
ingper
iod,
closi
ngent
ri
esar
erequi
redt
otr
ansf
er
t
het
empor
aryaccountbal
ancest
otheper
manentowner
’sequi
tyaccount
.
Ont
opoft
hat
,cl
osi
ngent
ri
espr
oduceazer
obal
ancei
neacht
empor
ary
account
,sot
hati
tcanbeusedt
oaccumul
atedat
aint
hesubsequent
account
ingper
iod.
2. I
ncome summar
y accounthel
ps t
o cl
ose t
he accountbal
ances of
r
evenuesandexpenses.Si
ncer
evenueandexpensesaccount
sar
edi
rect
ly
t
ransf
err
edt
hei
rbal
ancest
othei
ncomesummar
yaccount
,owner
’sequi
ty
accountwoul
dbesav
edf
rom bei
ngcl
utt
eredwi
thexcessi
vedet
ail
.

UNI
TFOUR
Exer
cise4.
1
1.A mer
chandi
singbusi
nessi
sdi
ff
erentf
rom aser
vicebusi
nessi
nthat
wher
eas a ser
vice busi
ness r
ender
s ser
vices t
o i
ts cl
i
ent
s, a
mer
chandi
si
ngbusi
nessbuy
smer
chandi
sef
orr
esal
etocust
omer
s.
2.Pur
chases

Exer
cise4.
2
1.Acashdi
scounti
sgr
ant
edbyt
hesel
l
erofmer
chandi
sef
orear
lypay
ment
ofi
nvoi
cebyt
hebuy
er.Thesel
l
ergr
ant
sacer
tai
nper
cent
ageofcash
di
scount
stoencour
aget
hebuy
ert
omakepr
omptpay
ment
.
2.Thet
erm 1/
10,n/
30meanst
hatev
ent
hought
hecr
edi
tper
iodi
s30day
s,
t
hebuy
erwi
l
lbeal
l
oweda1%cashdi
scounti
fpay
menti
smadewi
thi
n10
day
saf
tert
hei
nvoi
cedat
e.
Exer
cise4.
3
1.(
a)Bi
rr15,
000–Bi
rr3000.Neti
nvoi
ceamounti
sBi
rr12,
000
I
fpay
menti
s made wi
thi
nthe di
scountper
iod,t
he amountofcash
r
equi
redf
orpay
menti
s:Bi
rr12,
000–[
Bir
r12,
000*
0.02]
=Bi
rr12,
000–Bi
rr240

235
 =Bi
rr11,
760
2.Pur
chasesRet
urnsandAl
l
owancesaccounti
scr
edi
tedf
ort
her
etur
nsand
Pur
chasesDi
scount
saccounti
scr
edi
tedf
ort
hedi
scount
s.
Exer
cise4.
4
1.Theaccount
saf
fect
edar
e:
 Cash–i
ncr
easedanddebi
ted
 Sal
esDi
scount
s–i
ncr
easedanddebi
ted,
and
 Account
sRecei
vabl
e–decr
easedandcr
edi
ted

Exer
cise4.
5
1.Sal
esRet
urnsandAl
l
owancesandAccount
sRecei
vabl
eorCashaccount
s
ar
eaf
fect
ed
2.(
a)Theamountoft
her
efundi
sBi
rr4000–(
Bir
r4000*0.
02)=Bi
rr3,
920

(
b)Sal
esRet
urnsandAl
l
owances………………… 4000
Cash………………………………………. 3,
920
Sal
esDi
scount
s…………………………… 80

Exer
cise4.
6
1.(
a)Thebuy
er
(
b)Thesel
l
er

2.(
a)Bi
rr20,
000
(
b)Bi
rr21,
500
(
c)Bi
rr 600
(
d)Bi
rr20,
000–Bi
rr600+Bi
rr1,
500=Bi
rr20,
900
Exer
cise4.
7
1.(
a)Thel
i
abi
l
ityofsal
est
axi
srecor
dedatt
het
imeofsal
enotatt
het
ime
of col
l
ect
ion
(
b)Amountofsal
eisBi
rr9000
236
 (
c)Amountdebi
tedt
oAccount
sRecei
vabl
e,Bi
rr9,
360
(
d)Sal
esTaxPay
abl
e
Exer
cise4.
8
1.I
nper
iodi
cinv
ent
orysy
stem
2.Becauseunderper
iodi
cinv
ent
orysy
stem t
hecostofgoodssol
d(orcost
ofsal
e)i
scomput
edonl
yaf
tert
hecostofendi
ngi
nvent
oryi
sdet
ermi
ned.
Fr
om t
het
otalcostofmer
chandi
seav
ail
abl
eforsal
ecostofendi
ng
i
nvent
oryi
ssubt
ract
edt
odet
ermi
net
hecostofgoodssol
d.Hence,i
tisa
r
esi
dualamount
.Thi
schar
act
eri
zat
ioni
sappr
opr
iat
eundert
heper
iodi
c
i
nvent
orysy
stem.

3.Undert
heper
iodi
cinv
ent
orysy
stem,
 t
hewei
ght
ing,
count
ing,
andassi
gni
ngv
aluest
othei
nvent
ori
esar
e
madeatt
heendoft
hef
iscal
per
iod
 t
her
evenuesf
rom sal
esar
erecor
dedwhensal
esar
emade
 noat
temptcanbemadeont
hesal
esdat
etor
ecor
dthecostof
goodssol
d
 t
hecostofmer
chandi
sepur
chasesar
erecor
dedi
nthePur
chases
account
 i
tisonl
yatt
heendoft
hef
iscalper
iodt
hatt
hedet
ermi
nat
ionoft
he
costofendi
ngi
nvent
oryandgoodssol
dar
emade.

Exer
cise4.
9
(
a)adef
err
al (
b)(
1)asset
,and (
4)expense account
s wi
l
lbe
af
fect
ed
Exer
cise4.
10
1.(
a)Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 24,
000
Unear
nedAdv
ert
isi
ng.
..
..
..
..
..
..
..
.. 24,
000
(
b)Unear
nedAdv
ert
isi
ng.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 2,
000
Adv
ert
isi
ngI
ncome.
..
..
..
..
..
..
..
..
. 2,
000
(
c)Notr
equi
red!
237
 2.(
a)Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 24,
000
Adv
ert
isi
ngRev
enue.
..
..
..
..
..
..
..
..
. 24,
000
(
b)Adv
ert
isi
ngI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 22,
000
Unear
nedAdv
ert
isi
ng.
..
..
..
..
..
..
..
..
. 22,
000
(
c)Unear
nedAdv
ert
isi
ng.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 22,
000
Adv
ert
isi
ngRev
enue.
..
..
..
..
..
..
..
..
. 22,
000
Exer
cise4.
11
(
a)t
heBi
rr1,
200r
epr
esent
sanaccr
ual
asofDec.
,31
(
b)l
i
abi
l
ityandexpensear
eaf
fect
edbyt
headj
ust
ingent
ry
(
c)Bi
rr2,
000oft
hesal
arywi
l
lbeal
l
ocat
edt
oJanuar
y

Exer
cise4.
12
1. (
c),
2.(
a),
3.(
b),
4.(
d),
5.(
a),
6.(
b),
7.(
d),
8.(
d)
Exer
cise4.
13
Adj
ust
ingent
ri
est
obemadei
nthebooksofNaodCompany
:
I
nter
estRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 12,
400
I
nter
estEar
ned.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 12,
400
Of
fi
ceSuppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 3,
000
Suppl
i
esEx
pense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 3,
000
Adv
ert
isi
ngExpense.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 23,
100
Adv
ert
isi
ngPay
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
. 23,
100
RentI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 36,
000
Unear
nedRent
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 36,
000
Answer
stoRev
iewExer
cise–UNI
TFOUR
Exer
cise1.(
a)Cash…………………………………… 5000
Sal
es…………………………….
.. 5000
(
b)Account
sRecei
vabl
e………………….
.10,
000
Sal
es……………………………… 10,
000
Exer
cise2.Nov
.1.Account
sRecei
vabl
e………………… 8000
Sal
es……………………………… 8000

238
 Nov
.3.Account
sRecei
vabl
e………………… 200
Cash………………………………. 200
Nov
.6.Sal
esRet
urnsandAl
l
owances………. 500
Account
sRecei
vabl
e……………… 500
Nov
.10.Cash…………………………………. 7,
550
Sal
esDi
scount
s……………………… 150
Account
sRecei
vabl
e……… 7,
700
Exer
cise3.(
a)Pur
chases………………………………….
.30,
000
Account
sPay
abl
e…………………. 30,
000

(
b)Account
sRecei
vabl
e………………………. 21,
000
Sal
es………………………………… 20,
000
Sal
esTaxPay
abl
e…………………… 1000
(
c)Account
sPay
abl
e…………………………… 30,
000
Cash…………………………………. 29,
700
Pur
chasesDi
scount
s………………… 300
(
d)Sal
esTaxPay
abl
e…………………………… 4,
560
Cash…………………………………. 4,
560
Exer
cise4.(
a)Mason’
sEndi
ngI
nvent
ory=CostofMer
chandi
seAv
ail
abl
efor
Sal
e– CostofGoodsSol
d
=Bi
rr223,
000–Bi
rr191,
000
=Bi
rr32,
000

(
b)CostofGoodsSol
d:
Begi
nni
ngi
nvent
ory
,Januar
y1,
2007………………………… Bi
rr36,
000
Pur
chasesdur
ingt
heper
iod…………………….
.Bi
rr180,
000
Less:Pur
chasesRet
urnsandAl
l
owances…Bi
rr2,
500
Pur
chasesDi
scount
s………………… 500 (
3,000)
NetPur
chasesdur
ingt
heper
iod…………… Bi
rr177,
000

239
 Add:Fr
eight–I
n………………………….
. 10,
000
Tot
alCostofMer
chandi
sePur
chased…….
.
187,
000
Tot
alcostofmer
chandi
seAv
ail
abl
eforsal
e Br
223,
000
Less:Endi
ngMer
chandi
seI
nvent
ory……… (
32,
000)
CostofGoodsSol
d………………………… Br
.191,
000

UNI
TFI
VE
Exer
cise5.
1
1.Theaccount
ingsy
stem ofanent
erpr
isei
sof
tencal
l
edani
nfor
mat
ion
sy
stem because i
tpr
ovi
des usef
uli
nfor
mat
ion aboutt
he f
inanci
al
act
ivi
ti
esofanent
it
ytov
ari
ousi
ndi
vi
dual
sorgr
oupsf
ort
hei
rusei
n
maki
ngsoundeconomi
cdeci
sions.

2.Account
ingsy
stem r
efer
stot
hewayi
nwhi
chmanagementi
sgi
vent
he
i
nfor
mat
ionf
orusei
nconduct
ingt
heaf
fai
rsoft
hebusi
nessandr
epor
ti
ng
t
oowner
s,cr
edi
tor
sandot
heri
nter
est
edpar
ti
es.I
ngener
al,
anaccount
ing
sy
stem i
ncl
udes t
he ent
ir
e net
wor
k ofcommuni
cat
ions used by a
busi
nessor
gani
zat
iont
opr
ovi
deneededi
nfor
mat
ion.

Exer
cise5.
2
1.I
nthepr
ocessofpr
epar
ingandpr
ovi
dingusef
uli
nfor
mat
ioncost
sar
e
i
ncur
red.Themanagementoft
heent
erpr
iseshoul
dal
way
sbecar
efult
hat
t
hecostoft
her
epor
tspr
oducedshoul
dnotexceedt
hebenef
it
stobe
gai
nedbyt
hosewhousei
t.Thus,costi
sthemaj
orconsi
der
ati
oni
n
dev
elopi
ngaccount
ingi
nfor
mat
ion.

2.I
nter
nalcont
roli
sdef
inedasapr
ocessaf
fect
edbyanor
gani
zat
ion'
s

240
 st
ruct
ure,wor
kandaut
hor
it
yfl
ows,peopl
eandmanagementi
nfor
mat
ion
sy
stems,desi
gnedt
ohel
ptheor
gani
zat
ionaccompl
i
shspeci
fi
cgoal
sor
obj
ect
ives.
Iti
sameansbywhi
chanor
gani
zat
ion'
sresour
cesar
edi
rect
ed,
moni
tor
ed,andmeasur
ed.I
tpl
aysani
mpor
tantr
olei
npr
event
ingand
det
ect
ingf
raudandpr
otect
ingt
heor
gani
zat
ion'
sresour
ces,bot
hphy
sical
(
e.g.
,machi
ner
y and pr
oper
ty) and i
ntangi
ble(
e.g.
,reput
ati
on or
i
ntel
l
ect
ual
proper
tysuchast
rademar
ks)
.

Exer
cise5.
3
1.Theobj
ect
iveofsy
stemsanal
ysi
sist
odet
ermi
nei
nfor
mat
ionneeds,t
he
sour
cesofsuchi
nfor
mat
ion,andt
hedef
ici
enci
esi
npr
ocedur
esanddat
a
pr
ocessi
ngmet
hodspr
esent
lyused.
2.Sy
stemsdesi
gner
sshoul
dhav
easoundknowl
edgeoft
hequal
i
tiesof
di
ff
erentki
ndsofdat
apr
ocessi
ngequi
pment
,andt
heabi
l
ityt
oev
aluat
e
al
ter
nat
ives.Fur
ther
mor
e,s/
he shoul
d be cr
eat
ive,i
magi
nat
ive,and
capabl
eindeal
i
ngwi
tht
hings.

Exer
cise5.
4
1.Theknowl
edget
hatj
ob r
otat
ion i
spr
act
iced and oneempl
oyeemay
per
for
m anot
her
'sj
obatal
aterdat
etendst
odi
scour
agedev
iat
ionsf
rom
pr
escr
ibedpr
ocedur
es.Al
sor
otat
ionhel
pst
odi
scl
oseanyi
rr
egul
ari
ti
es
t
hatmayoccur
.Mor
eov
er,i
thel
psempl
oyeest
obr
oadent
hei
rknowl
edge
oft
hesy
stem.
2.Thet
hreeel
ement
sofi
nter
nal
cont
rol
str
uct
urear
e:
(
i)Thecont
rol
env
ironment
(
ii
)Thecont
rol
procedur
es,
and
(
ii
i)Theaccount
ingsy
stem
Exer
cise5.
5
1.I
nter
nalaudi
tor
s,whoshoul
dbei
ndependentoft
heempl
oyeesr
esponsi
blef
or
oper
ati
ons,per
iodi
cal
l
yrev
iew andev
aluat
ethei
nter
nalcont
rolsy
stem t
o
det
ermi
net
hatt
hei
nter
nalcont
rolpr
inci
plesar
ebeingef
fect
ivel
yappl
i
ed.
241
 Theyr
epor
tweaknessesandr
ecommendchangest
ocor
rectt
hem.
2.Ther
esponsi
bil
i
tyf
ormai
ntai
ningt
heaccount
ingr
ecor
dsshoul
dbesepar
ated
f
rom t
her
esponsi
bil
i
tyf
oroper
ati
onssot
hatt
heaccount
ingr
ecor
dscan
ser
veasani
ndependentcheckonoper
ati
ons.
3.Thepr
e-number
ingofchecksandt
hepay
ingofal
lobl
i
gat
ionsbycheckar
e
desi
rabl
eel
ement
sofi
nter
nalcont
rol
,al
thought
hepr
operuseofapet
tycash
f
undf
orsmal
lcashdi
sbur
sement
swoul
dbeusef
ul;andwoul
dnotweaken
t
hesy
stem.Thebasi
cweaknessi
nthei
nter
nalcont
roli
sthef
ail
uret
o
separ
ate t
he r
esponsi
bil
i
ty f
or t
he
mai
ntenanceofaccount
ingr
ecor
ds(
bookkeepi
ng)f
rom t
her
esponsi
bil
i
tyf
or
oper
ati
ons(
pay
mentofobl
i
gat
ions)
.

UNI
TSI
X
Exer
cise6.
1
1.
(
a)Thecashshor
tisr
ecor
dedi
nthecashshor
tandov
eraccount
(
b)Thecashshor
tagei
sdebi
tedt
othecashshor
tandov
eraccount
.
3.i
ntheot
heri
ncomesect
ionoft
hei
ncomest
atement
Exer
cise6.
2
1. (
a)Changef
und.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..600.
00
Cashi
nBank.
..
..
..
..
..
..
..
..
..
. 600.
00

(
b)Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 10,
320.
35
Cashshor
tandov
er.
..
..
..
..
..
..
..
..
..
..
..
.. 7.
40
Sal
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 10,
327.
75
Exer
cise6.
3
1.Becausecashi
sthemostl
i
qui
dassett
hatcanbeeasi
l
ymi
sappr
opr
iat
ed
andembezzl
edbyt
heempl
oyeesi
ntheor
gani
zat
ion.Fur
ther
mor
e,cashi
s
subj
ectt
othef
t.
Exer
cise6.
4

242
 1.(
a)Pet
tycashf
unddebi
tedandcashi
nbankcr
edi
ted
(
b)Thev
ari
ousexpendi
tur
esdebi
tedandcashi
nbankcr
edi
ted

2.(
a)Pet
tycash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 750.
00
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
.
750.
00
(
b)Of
fi
cesuppl
i
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 282.
15
Mi
scel
l
aneoussel
l
ingexpense.
..
..
..
.. 180.
60
Mi
scel
l
aneousadmi
nist
rat
iveexpense 258.
70
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
702.
70
Cashshor
tandov
er.
..
..
..
..
..
..
.
18.
75
Exer
cise6.
5
(
a)Adr
aweri
stheper
sonoranor
gani
zat
ionwhosi
gnst
hecheck
(
b)Apay
eei
stheper
sonoranor
gani
zat
iont
owhoseor
dert
hechecki
s
pay
abl
e(dr
awn)
.
Exer
cise6.
6
1.
(
1)Addedt
othebal
anceaspert
hedeposi
tor
'sr
ecor
d
(
2)Addedt
othebal
anceaspert
hebankst
atement
(
3)Deduct
edf
rom t
hebal
anceaspert
hebankst
atement
(
4)Deduct
edf
rom t
hebal
anceaspert
hedeposi
tor
'sr
ecor
d
(
5)Deduct
edf
rom t
hebal
anceaspert
hedeposi
tor
'sr
ecor
d
(
6)Deduct
edf
rom t
hebal
anceaspert
hedeposi
tor
'sr
ecor
d
2.I
temst
hatnecessi
tat
esj
our
nalent
ryi
nthedeposi
tor
'sr
ecor
dar
e:(
1),(
4),(
5),
and(
6)

Exer
cise6.
7
1.I
temsr
epor
tedont
hebankst
atementascr
edi
tsr
epr
esentaddi
ti
onsmade
byt
hebankst
atementt
othedeposi
tor
'saccount
.
243
 2.Bankr
econci
l
iat
ioni
spr
epar
edbyt
hedeposi
tort
odet
ermi
net
her
easons
f
orany di
scr
epancy bet
ween t
he deposi
tor
'sr
ecor
ds and t
he bank
st
atementbal
anceandt
ocor
rectanyer
ror
sthatmayhav
ebeenmade
ei
therbyt
hedeposi
tororbyt
hebank.
3.Account
sRecei
vabl
eaccounti
sdebi
tedandCashi
nBanki
scr
edi
ted

4.(
a) Ghi
beCompany
BankReconci
li
ati
on
June30,
2008
Bal
anceperbankst
atement
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr
20,
513.
90
Addi
ti
ons:
Deposi
tint
ransi
t..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.
4,
207.
85
Subt
otal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 24,
721.
75
Deduct
ions:Out
standi
ngcheckst
otal
.
...
..
..
..
..
..
..
.Bi
rr5,
980.
15
Banker
ror.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 18.
00 (
5,998.
65)
Adj
ust
edbal
ance.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
18,
723.
10
Bal
anceperdeposi
tor
'sr
ecor
ds.
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
15,
215.
80
Addi
ti
ons:
Not
escol
l
ect
edbybanki
ncl
udi
ngi
nter
est 4,
080.
00
Subt
otal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr19,
295.
80
Deduct
ions:Bankser
vicechar
ge.
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr55.
50
NSFchecks.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 517.
20
(
572.
70)
Adj
ust
edbal
ance,
June30,
2008.
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
18,
723.
10

(
b)Jour
nal
ent
ri
esr
equi
redasar
esul
toft
heJuneBankReconci
l
iat
ion:
244
 June30.Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 4080.
00
Not
esr
ecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 4000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 80.
00
Tor
ecor
dNot
escol
lect
edbybank
30.Admi
nist
rat
iveMi
scel
l
aneousexpense.
..
..
..
.. 55.
50
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 55.
50
Tor
ecor
dSer
vicechar
ge

30.Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 517.
20
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 517.
20
Tor
ecor
dNSFCheckr
etur
nedbybank

Answert
oRev
iewExer
cise–UNI
TSI
X
1.(
a)Ther
emi
tt
anceadv
isesshoul
dnotbesentt
othecashi
er
(
b)Ther
emi
tt
anceadv
isesshoul
dbesentdi
rect
lyt
otheaccount
ing
depar
tmentby mai
lcl
erks
2.(
a)Thesal
escl
erksshoul
dnothav
eaccesst
othecashr
egi
stert
apes.
(
b)Thecashr
egi
stert
apesshoul
dbel
ockedi
nthecashr
egi
sterandt
hekey
r
etai
nedbyt
hecashi
er.Anempl
oyeeoft
hecashi
er'
sof
fi
ceshoul
dremov
e
t
hecashr
egi
stert
ape,
recor
dthet
otal
ont
hememor
andum f
orm,
andnot
e
di
scr
epanci
es.

3.(
a) Sur
boCompany
BankReconci
li
ati
on
Januar
y31,
2008
Bal
anceperbankst
atementJanuar
y31,
08.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
23,
713.
90
Addi
ti
ons:
Deposi
tint
ransi
t.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..

245
 8,
720.
50
Subt
otal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. Bi
rr
32,
434.
40
Deduct
ions:
Out
standi
ngcheckst
otal
ed.
..
..
..
..
..
..
..
..
..
..Bi
rr4,
570.
20
Banker
ror.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 27.
00
(
4,597.
20)
Adj
ust
edbal
ance,
Januar
y31,
2008.
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
27,
837.
20
Bal
anceperdeposi
tor
'sr
ecor
ds,
Januar
y31,
2008.
..
. Bi
rr
23,
071.
30
Addi
ti
ons:
Bankcr
edi
tmemof
ornot
escol
l
ect
ed
i
ncl
udi
ngi
nter
est
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr5,
119.
25
Deposi
tor
'ser
ror.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 196.
65
5,
315.
90
Subt
otal
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr
28,
387.
20
Deduct
ions:
Bankdebi
tmemor
andum f
or:
 Ser
vicechar
ge.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.Bi
rr50.
00
 NSFcheckr
etur
nedbybank.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 500.
00
(
550.
00)
Adj
ust
edbal
ance,
Januar
y31,
2008.
..
..
..
..
..
..
..
..
..
..
..
..
..
. Bi
rr27,
837.
20

(
b)Jour
nal
ent
ri
esr
equi
redasofJanuar
y31,
2008:
Januar
y31.Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 5,
119.
25
Not
esr
ecei
vabl
e..
..
..
..
..
..
..
..
..
..
5,
000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..

246
119.
25
31.Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 196.
65
Sal
es.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.
196.
25
31.Admi
nist
rat
iveMi
scel
l
aneousexpense. 50.
00
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
.. 50.
00
31.Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
.. 500.
00
Cashi
nBank.
..
..
..
..
..
..
..
..
..
..
. 500.
00

UNI
TSEVEN
Exer
cise7.
1
1.Thenot
erepr
esent
sast
rongl
egalcl
aimt
hanacl
aimi
nthef
orm of
account
s r
ecei
vabl
e
2.I
tismor
eli
qui
dthanacl
aimi
nthef
orm ofaccount
srecei
vabl
e
3.Somenot
esal
sopr
oducei
nter
esti
ncome.

Exer
cise7.
2
1.May24 2.Mar
ch11
Exer
cise7.
3
1.Bi
rr166.
67
Exer
cise7.
4
1.Bi
rr4,
864 2.Bi
rr4,
800

Exer
cise7.
5
1.(
a)Bi
rr5000 (
b)Bi
rr5,
166.
67 (
c)December11 (
d)40day
s(e)Bi
rr
5,
086.
30(
f)I
nter
estI
ncomeofBi
rr86.
30 (
g)Bi
rr5,
166.
67

247
 (
h)Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 5,
086.
30
Not
esRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
. 5000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
..
.. 86.
30
2.(
a)Bi
rr250.
00 (
b)Bi
rr20,
250(
c)Sept
ember15 (
d)Bi
rr20,
148.
75
(
e)Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 20,
148.
75
Not
esRecei
vabl
e..
..
..
..
..
..
..
. 20,
000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
148.
75
Exer
cise7.
6
1.Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 4,
091.
67
Not
esRecei
vabl
e..
..
..
..
..
..
..
..
..
. 4000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
.
91.
67
2.Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.. 15,
950
Not
esRecei
vabl
e..
..
..
..
..
..
..
..
..
. 15,
000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
.
900.
00
Pr
otestFee.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
50.
00
Exer
cise7.
7
1.(
a)Bi
rr30,
000
(
b)Bi
rr22,
500
Exer
cise7.
8
(
a)Bi
rr11,
750–Bi
rr1,
050=Bi
rr10,
700
(
b)Bi
rr900+Bi
rr10,
100=Bi
rr11,
000

Answert
oRev
iewExer
cise–UNI
TSEVEN
1.(
a)Mat
uri
tydat
eJul
y3andmat
uri
tyv
aluei
sBi
rr10,
150
(
b)pr
oceedsont
henot
eisBi
rr10.
009.
03
(
c)Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 10,
009.
03

248
 Not
esRecei
vabl
e..
..
..
..
..
..
..
..
..
..
..
..
. 10,
000.
00
I
nter
estI
ncome.
..
..
..
..
..
..
..
..
..
..
..
..
..
. 9.
03
2.(
a)(
i)Uncol
l
ect
ibl
eAccount
sExpense.
..
..
..
..
.. 7,
500.
00
Al
l
owancef
orDoubt
ful
Account
s.
7,
500.
00
(
ii
)Uncol
l
ect
ibl
eAccount
sExpense.
..
..
..
.14,
500.
00
Al
l
owancef
orDoubt
ful
Account
s..
..
14,
500.
00
(
b)Al
l
owancef
orDoubt
ful
Account
s..
..
..
..
..
..
..
.. 500.
00
Account
srecei
vabl
e..
..
..
..
..
..
..
..
..
..
.. 500.
00
(
c)Account
sRecei
vabl
e(Al
mex
)..
..
..
..
..
..
..
..
..
..
.. 300.
00
Al
l
owancef
orDoubt
ful
Account
s 300.
00
Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
. 300.
00
Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
.. 300.
00

Exer
cise7.
9
1.(
a)Al
l
owancef
orDoubt
ful
Account
s..
..
..
..
..
..
..
. 1000.
00
Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
. 1000.
00
(
b)Uncol
l
ect
ibl
eAccount
sExpense.
..
..
..
..
..
..
..
.. 1000.
00
Account
sRecei
vabl
e..
..
..
..
..
..
..
..
..
..
. 1000.
00

249