Acb3 01
Acb3 01
Acb3 01
Learning Guide
Unit of CompetenceProcess Financial Transactions and Extract Interim
Reports
Module TitleProcess Financial Transactions and Extract Interim
Reports
LG Code: BUF ACB3 01 0812
TTLM Code: BUF ACB3M 01 0812
INTRODUCTION
Dear learner! This all steps /procedures will be illustrated and elaborated by giving a brief
example at the end of this chapter. Before that elaboration, let’s see the nature and
classification of accounts and some rules of accounts.
TTLM Development Manual Date: 2010/17
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QUEENS’ COLLEGE AYERTENA CAMPUS
Training, Teaching and Learning Materials
Nature and classification of accounts
Definition: an account is a business form used to record additions (increases) and deductions
(decreases) for each individual asset, liability, owner’s equity, revenue and expense items. A
group of related accounts of a specific business enterprise is called a ledger
Nature of an account:- the simplest form of an account is called T account ; and it has
three parts
Title to write the name of the account
Space for recording increases or decreases in the account (item) interns of money. ,
i.e. (left and right sides). It can be presented as follows:
Title (name)
Left side Right side
(Debit) (Credit)
As is shown in the simplest account above the title is used to write the name of the account (e.g. cash,
accounts receivable, salary expense, capital, etc). The left-hand side of the accounts is called debit, but
the right-hand side is called the credit.
The right side (credit) and the left-side (debit) are used to record either the increases or decreases
of the accounts of a transaction. Depending on the type of the account the debit or credit sides
serve to record the effect of the transaction.
2.2.3 Classification of accounts:- generally accounts are categorized as
_ Balance sheet accounts and
_ Income statement accounts
i) Balance sheet accounts they are also called real or permanent accounts. They include the
following groups of accounts.
a) Assets: are both physical (tangible/ sensible) or rights (intangible or the right to use some
thing) properties that have monetary values which are owned by the business. They are further
classified as:
Class of the account when increases when decreases its normal balance
Balance sheet accounts
Assets Debit Credit Debit
Liabilities Credit Debit Credit
Owner’s equity/
Capital stock/Retained turnings/ Credit Debit Credit
Withdrawal and dividends Debit Credit Debit
Income statement account
Revenue Credit Debit Credit
Expenses Debit Credit Debit
Charts of accounts
The number of accounts maintained by a specific enterprise is affected by the nature of its
operations, its volume of business and the extent to which details are needed for taxing
authorities, managerial decisions, credit purpose, etc.
Accounting systems are intended to show the increase and decrease in financial statement item
in a separate record. This is called an account.
A group or collection of all the accounts of a business entity is called a ledger. (a ledger and its
forms will be discussed in detail later on the accounting cycle using examples). A list of all
general ledger account titles and their related identification numbers is called chart of accounts.
The chart of accounts for Aksum Hotel, for example, is shown below.
Balance sheet accounts
1. Assets:
1001 cash
1002 accounts receivable
1003 inventory
1004 supplies
1005 prepaid insurance
1006 prepaid rent
1007 land
1008 office equipments
1009 machinery
2. Liabilities
2001 accounts payable
2002 salary payable
2004 notes payable
2006 unearned rent
2008 bank loan payable
3. Owner’s equity
3001 owner’s Hotels, capital
3001 owner’s Drawing
4. Revenue:
5. Expenses:
In the chart of account shown above, each account has four digits. It is up to the organization to
limit the number of digits. In any case, the first digit indicates the major classification of the
ledger in which the account is located. Accounts beginning with1 represents assets with 3 capital
or owner’s equity, with 5 expenses, etc.
The other digits indicate the location of the account with in its class. For example
4001 sales revenue indicates it is a revenue with a first class in its category, revenue; and
2008 bank loan payable indicates it is a liability with the either position in its category liabilities.
Therefore, digits in an account number may show major divisions (assets, liabilities, owner’s equity,
revenue and expenses), subdivision or position of the account in the subdivision. Of course, this
numbering depends on the size and type of the business. There should be a flexible system.
Illustration: - on the debits and credits of the accounts. (Analyzing and summarizing
transaction)
Every business transaction affects a business’s financial statements (the accounting equation)
and at least two accounts. In chapter one, the effect of each transaction was stated in terms of the
increases (+) and decreases (-). In this chapter, you are introduced what debits and credits are.
Hence, the effects of a business transaction on the accounts will be stated in terms of debits and
credits using examples.
Examples: - 1. Aksum Hotel deposited Br. 150,000 cash in a bank account on September-1
After the deposit, the balance sheet for the business is as follows
Aksum Hotel
Balance sheet
On September 1
Assets
Owner’s
Since the cash account is increased and cash is an asset, this increase is recorded on the left side
(debit side) of the account. And owner’s equity or capital is increased and this increase is
recorded in the right side (credit) of the account. Hence, using the simplest account the effects
are shown as follows:
Cash Aksume, Capital
Sep. 1 1150,000(+) 150,000(+) Sep1
150,000
2. Aksum paid salary Br. 2000 for the month of September on September 30
The effect of the above transaction is decreasing cash (an asset) by Br. 2000 and increasing salary
expense account by Br. 2000. Increase an expenses is recorded on the debit side and decrease on assets
on the credit side. Using the T accounts the effect is shown as follows:
148,000 2000
At the end of the month the balance on cash account is Br. 148,000, on salary expense Br. 2000
and on the capital account Br. 150,000
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Note: - The procedures involved in the accounting cycle will be discussed next using transactions
in an organization.
The accounting cycle
It is the sequence of procedures in which that begins with the analysis and journalizing of transactions
and ends with the post-closing trial balance. The procedures are summarized as follows and will be
discussed by considering an example
Unadjusted
Source Analyzing Journalizing Posting trial balance
Adjusting
entries
Adjusted
Post closing Closing Financial trial balance
trial balance entries statements
Roble and Rahel, the two outstanding NewMillenniumCollege students and the first batch graduates of
the accounting department had operated a super snak in Rahel’s parents’ home on their extra time. As
of January 2002, after graduation, they decided to open a new metal and wood work shop and moved to
rented campus and to devote full time to the business, which is to be known as “2 R lovers shaping”
service. Assume a fiscal /accounting year of January to December and entered the following transitions
during January
January 1 the following assets were received (transferred) from the super snak to the shop
Cash --------------------------------------------Br. 7500
Accounts receivable ----------------------------900
Supplies ------------------------------------------1,250
Service equipment -----------------------------11,000
1. Open a ledger of four- column for accounts of “2R – lovers shopping service” using the
following titles and account numbers;
Cash, 11; accounts receivable, 12; supplies 14; prepaid rent15; prepaid insurance, 16; service
equipment, 18; accumulated depreciation, 19; accounts payable, 21; salaries payable, 22; 2R-
lovers, capital, 31; 2R lovers Drawing, 32; income summary, 33, service revenue. 41; salary
expense, 51; Rent expense, 52; supplies expense, 53; depreciation expense, 54’ insurance
expense, 55; miscellaneous expense, 59.
2. Record the transactions in a two-column journal
3. Post the journal to the ledger, extending the month-end balances to the appropriate
balance columns after all posting is completed
4. Prepare a trial balance as of January 31, on a ten-column work sheet, listing all the
accounts in the order given in the ledger. Complete the worksheet, using the following
adjustment data:
a. Insurance expired during January ---------------Br. 145
b. Inventory of supplies on January31-------------1520
c. Depreciation of service equipment for January 100
d. Accrued salary on January 31 ------------------ 100
e. Rent expired during September ------------------- 750
The ability to analyze the effects of transactions on financial statements is an essential skill for a
successful career in a business. Double accounting system is very powerful tool in this regard.
Analyzing transactions involve the following steps.
a. Determine whether an assets, a liability, owner’s equity, revenue of an expense account is
affected by the transaction
b. For each account affected by the transaction, determine whether the accounts increases or
decreases
c. Determine whether each increase or decrease should be recorded as a debit or a credit
To illustrate this analysis let’s consider two transactions from the example given. Transaction
(January 2 and January 9) is taken randomly. The others effect is left to you.
January 2 paid the premiums on property and casualty insurance policies, Br. 1, 740
Analysis: advance payments of expenses such as
a. Insurance are prepaid expenses, which are assets. Hence the accounts involved are assets
(prepaid insurance) and cash (an asset).
b. The asset cash decreases and another asset prepaid insurance increases
c. Cash is credited and prepaid insurance debited.
January 9: paid cash for a newspaper advertisement.Br.110
Analysis:
a. The accounts involved are cash (asset) and advertisement expense (could simply be
charged to miscellaneous expense)
b. Cash decreases and miscellaneous expense increases
c. Cash is credited and miscellaneous expense debited
Procedure / step4 posting: is the process of transferring debits and credits from the journal to
the accounts in the ledger. There are different types of accounts. T- Account, two columns, three-
column and four- column accounts.
There are two types of ledgers-general and subsidiary. A general ledger is the principal ledger when
used in conjunction with the subsidiary ledgers that contains all accounts. It is containing account.
Subsidiary ledger is a ledger containing individual accounts with common characteristic
In the accounting procedures the journalizing and posting processes are actions taken simultaneously.
Therefore, these procedure are presented together using a journal form and a ledger (an account) form
To record the Description about the Refers from Used to record the Used to show the debit
item increase/decease on the or credit balance of the
date (year, which page of account due to a account
month, date) the journal the transaction
the transaction
transaction is comes
posted
After these steps using the forms (General Journal and a ledger) let’s return back to the transactions and
record and post them. To do that first let us open the ledgers given and use a general journal.
Journal page 1
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Post
Date Description Ref Debit Credit
2002
Jan 1 Prepaid rent 15 Br.2250 00
Cash 11 2250 00
2 Prepaid insurance 16 1740 00
Cash 11 1740 00
4 Service equipment 18 2500 00
Accounts payable 21 2500 00
6 Cash 11 500 00
Accounts receivable 12 500 00
9 Miscellaneous expe. 59 110 00
Cash 11 110 00
11 Accounts payable 21 1250 00
Cash 11 1250 00
12 Accounts receivable 12 1000 00
Service revenue 41 1000 00
13 Salary expense 51 500 00
Cash 11 500 00
17 Cash 11 1100 00
Service revenue 41 1100 00
17 Supplies 14 950 00
Cash 11 950 00
20 Accounts receivable 12 700 00
Service revenue 41 700 00
24 Cash 11 1850 00
Service revenue 41 1850 00
Journal page 2
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Post
Date Description Ref Debit Credit
2002
Jan 27 Cash 11 1200 00
Accounts receivable 12 1200 00
27 Salary expense 51 500 00
Cash 11 500 00
30 Miscellaneous expense 59 75 00
Cash 11 75 00
30 Miscellaneous expense 59 140 00
Cash 11 140 00
30 Cash 11 950 00
Service revenue 41 950 00
30 Account receivable 12 800 00
Service revenue 41 800 00
30 2R- Drawing 32 1500 00
Cash 11 1500 00
31 Adjusting entries
Insurance expense 55 145 00
Prepaid insurance 16 145 00
Supplies expense 53 680 00
Supplies 14 680 00
Depreciation ex. Stor.eq. 54 100 00
Accumulated dep.exp. 19 100 00
Salary expense 51 100 00
Salary payable 22 100 00
Rent expense 750 00
Prepaid rent 15 750 00
Account receivable 12
Balance
Supplies 14
Balance
1520
After adjustment
Prepaid Rent 15
Balance
After adjustment
Prepaid insurance 16
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
ent
2002
balance
Jan 2 1 1740 1740
31 Adjusting entry 145 1595
1595
After adjustment
Service equipment 18
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Balance
Accounts payable 21
Balance
Salary Payable 22
Balance
100
2R - Capital 31
2R drawing 32
Balance
Income summary 33
Balance
Service revenue 41
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Balance
Salary Expense 51
Balance
Rent expense 52
Balance
Supplies expense 53
Balance
Insurance expense 55
Balance
Miscellaneous expense 59
Balance
After posting all the entries, including adjusting and closing, the end balances and tittles of 2R-
shopping service using the trial balance is shown as below.
2R –shopping service
Trial balance
(The above trial balance which is computed and completed is is an answer to question # 4)
The trial balance does not provide the complete proof of accuracy of the ledger. It indicates only
that debits and credits are equal.
If the two totals of the trial balance are not equal it is probably due to the following errors.
Errors in preparing the trial balance was incorrectly added: it may be due to one of the
following activates
One of the columns of the trial balance may be incorrectly determined
Omitting balance of an account
Incorrect listing of an account
Detecting errors: There are no standard rules for searching errors. Errors can be detected by trial and
error, by auditing, by chance, etc.
Correction of errors: For incorrect journal entry but not yet posted or for incorrect amounts posted
draw a single line through the error and write the correct title or amount
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-For incorrect Journal entry which is posted or for posting to the wrong account journalizing and posting
a correcting entry.
i. Accounting period concept: according to this concept reports should be prepared at periodic
intervals such as monthly, quarterly or yearly called accounting periods. The annual accounting
period adopted by a business enterprise is called fiscal/ accounting year. Financial statements
prepared for less than one-year period are called interim financial statements
ii. Accrual concept: there are two revenue and expense recording methods
Cash basis: under this method revenues are recorded and reported in which cash is collected; and
expenses are recorded and reported in the period in which cash is paid
Accrual basis: under this method of accounting revenues are recorded and reported in the period in
which they are earned (goods are sold or services are performed regardless of collection of cash).
Expenses are recorded and reported in the period in which they are incurred (assets are consumed or
expired; services are received regardless of payment of cash).
Activity: an enterprise has provided services to a customer in March and the customer paid for the
service in April. When should the revenue be recorded and reported using cash basis? Or Accrual basis?
iii. Matching principle: this principle states that in determining net income / net loss for a given period,
all expenses incurred in that period should be deducted from the revenues earned in that period, i.e. the
income statement should match the revenues earned and the expenses incurred in a certain period to
determine net income/ net loss of that period.
At the end of an accounting period, many of the balances of accounts in the ledger can be reported,
with out change, in the financial statements. Some accounts in the ledger, however, require updating.
The process of updating the balances of accounts by recording unrecorded transactions at the end of
the accounting period is called an adjusting process; and the journal entries needed are called adjusting
Accruals: are created by failure to record an expense that has been incurred or revenue that has been
earned. Examples include unrecorded wage (accrued expense/ accrued liabilities) and unrecorded fees
earned (accrued revenue often called accrued assets)
Plant assets: the expired cost of plant assets due to usage and passage of time is called depreciation.
‘Accumulated depreciation’ is a contra plant asset account whose balance must be deducted from the
original cost of a plant asset.
Unearnedrevenues: are liabilities created by receiving cash in advance for provision of goods or services
Note: deferrals are cash received or paid in the current period but revenues or expanse recorded in the
future period
-Accruals are revenues or expenses recorded in the current period but cash received or paid is the future
period.
- Journalizing and posting adjusting entries is used to bring the balance of accounts in the general ledger
in to agreement with the balances shown on the financial statements, i.e. to update balances. The
entries should be recorded on the Journal and posted to the respective ledgers.
For the example given above, 2R- shopping service the adjustment data is given. From the adjustment
data adjusting entries are recorded on the journal at the end of the month (January 31) and posted to
the respected ledgers on that time. Let’s see the effect, of the adjusting entries using a worksheet
(Answers for question 4- adjusting entries are recorded on the Journal)
Procedure/ step 7: worksheet completion: it is a working paper used by an accountant. It is a
multicolumn sheet of paper used to collect and summarize data needed for preparation of financial
statements, adjusting and closing entries
The worksheet of 2R –shopping service is presented as follows using the given data. The beginning data
on the worksheet is the trial balance prepared above, then the adjusting entries recorded (from the
given data) helps for the adjustment column. In the adjustment column similar items (debits or credits)
are added and different items are deducted. To begin the completion of the column worksheet for 2R-
shopping service, let we inset the figures on a ten-column worksheet as follows complete it
Account title Trial balance Adjustments Adjusted trial In come Balance sheet
balance statement
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 4085 4085 4085
Acco/Receivable 1700 1700 1700
Supplies 2200 b) 680 1520 1520
Prepaid Rent 2250 e) 750 1500 1500
Prepaid insurance 1740 a) 145 1595 1595
1250 1250 1250
Service. Equip. 13500 13,500 13500
20,650 20,650 20650
Acc. Payable
2R-capital
6400 6400 6400
d) 100 1100 1500
2R,drawing 1500 1500 325
Service Revenue
28,300
Salary expense 1000 1100
Misce. Expense 325 a) 145 325 145
b) 680 680
c) 100 100
Total 28,30 100 100
0 100 100
e) 750 c) 100 750
Insurance Expe. 1875 d) 100 145 28,500 3,200 6,400 22,200
Supplies. Exp. 680 3,200 3,200
1875 6,400 6,400 25,400 25,400
Deprecation Exp. 100
Accumulated dep. 25,400
Salary payable
Rent expense 751
28,500
Adjustment
b) Supplies used Br. 650 (2200-1520)
a) Insurance expired Br. 145
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e) Rent expired Br. 750
d) Salary accrued but not paid Br. 100
c) Depreciation of service equipment Br. 100
The adjustment columns are totaled to verify the mathematical accuracy of the adjustment data. The
total of the debit column must equal the total of the credit column
2R shopping service
Statement of owner’s equity
Asset s:
Current assets:
Cash -----------------Br.4085
A/R 1700
Supplies 1520
Prepaid rent 1500
Prepaid insurance 1595
Total current assets Br. 10400
Plane assets:
Service equipment 13500
Less accumulate. Depreciation ( 200) 13300
Total assets 23,700
Activity-two
8. A business enterprise pays weekly salaries of Br.12,000 on Friday for a five-day week ending
on that day, Journalize the necessary adjusting entry at the end of the fiscal period, assuming
that the fiscal period ends. (a) On Monday (b) On Wednesday
9. The balance in the supplies account, before adjustment at the end of the year, is Br.2,750. The
inventory of supplies at the end of the year was determined to be Br.600. The estimated
depreciation on equipment used during the year is Br.1,600. Journalize the adjusting entries
required at the end of the year to recognize a) supplies used during the year and b)
depreciation expense for the year.
10. The trial balance of west side Laundromat at July 31,1991, the end of the fiscal year, and the
data needed to determine year-end adjustments are as follows.
Westside Laundromat
Trial balance
Adjustment data:
(a) Inventory of Laundry supplies at July 31 ............................................. Br. 1,840
(b) Insurance premiums expired during the year ....................................... 1,500
(c) Depreciation on equipment during the year .......................................... 5,720
(d) Wages accrued but not paid at July 31 .................................................. 850
Instructions:
1. Record the trial balance on a ten-column worksheet and complete the worksheet.
2. Prepare an income statement, a statement of owner’s equity and a balance sheet. (No
additional investments were made during the year).
3. On the basis of the adjustment data in the worksheet, journalize the adjusting & closing
entries.
11. J. F. M. D. Outz has been practicing as a cardio list for three years. During April Outz
completed the following transactions in her practice of cardiology.
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Outz’s account title, members and business as of April 1 (all normal balances) are listed as
follows:
Cash, 11, Br.4,123; Accounts Receivable, 12, Br.6,725; Supplies, 13, Br.290; Prepaid Insurance,
14, Br.465; Equipment, 18, Br.19,745; Accounts payable, 22, Br.765; J.F. outz, Capital, 31,
Instructions
5. Open a ledger of standard four-column accounts for Dr. Outz as of April 1 of the current year.
Enter the balances in the appropriate balance columns and place a check mark () in the
posting reference column. (it is advisable to verify the equality of the debit and credit
balances in the ledger before proceeding with the next instruction).
6. Journalize each transaction in a two-column journal.
7. Post the journal to the ledger, extending the month-end balance to the appropriate balances
columns after each posting.
8. Prepare a trial balance as of April 30.