Name: NIMRA NASEEM

Roll No: cc430117

Class: Bachelor Associate Degree in Commerce
Semester: Autumn 2020
Course: Principles of Accounting (5401)
ASSIGNMENT NO. 1
Q1) Define “Accounting” and elaborate in details the elements of accounting
cycle.
Answer
Accounting Cycle: The accounting cycle is a collective process of identifying analyzing and recording
the accounting events of a company. it is a standard 8-step process that begins when a transaction occurs
and ends with its inclusion in the financial statements.
The key steps in the eight-step accounting cycle include recording journal entries, posting to te general
ledger, calculation trial balance, making adjusting entries, and creating financial statements.
Accounting Cycle Works: The accounting Cycle is a methodical set of rules to ensure the accuracy and
conformity of financial statements. Computerized accounting system and uniform process of the
accounting cycle have helped to reduce mathematical errors. Today, most software fully automates the
accounting cycle, which results in less human efforts and errors associated with manual processing.
Steps of the Accounting Cycle: There are eight steps to the accounting cycle:
1.Identify Transactions:An organization begins its accounting cycle with the identification of those
transaction that comprise a bookkeeping event This could be a sale, refund, payment to a vendor,
and so on.
2.Record Transaction in a journal: Next come recording of transactions using journal entries. The
entries are based on the receipt of an invoice, recognition of a sale, or completion of other
economics events.
3.Posting : Once a transaction is recorded as a journal entry, it should post to an account in the
general ledger. The general ledger provides a breakdown of all accounting activities by account.
4.Unadjusted Trial Balance: After the company posts journal entries to individual general ledger
accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal
the total credits in the financial record.
5.Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the
cycle. A worksheet is credit and use to ensure that debits and credits are equal. If there are
discrepancies, then adjustments will need to be made.
6.Adjusting journal Entries: At the end of the periods, adjusting entries are made. These are the
results of corrections made on the worksheet and the results from the passage of time. For
example, an adjusting entry may accrue interest revenue that has been earned based on the passage
of time.
7.Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial
balance followed by the actual formalized financial statements.
 8.Closing the Book: An entity finalizes temporary account, revenues, and expenses, at the end of the
periods using closing entries. These closing entries include transferring net income into retained
earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits
match and the cycle can begin anew.
Timing of the Accounting Cycle: The accounting cycle is started and completed within an accounting
period, the time in which financial statements are prepared. Accounting periods vary and depend on
different factors; however, the most common type of accounting period is the annual periods. During the
accounting cycle, many transactions occur and are recorded.
At the end of the year, financial statements are generally prepared, which are often required by regulation.
Public entities are required to submits financial statements by certain dates. Therefore, their accounting
cycle revolves arounds reporting requirements dates.

Q2) Mr. Zhaid & Co. keeps his books by single entry system. He gives you the financial
information from which you are required to ascertain his profit or loss during 2019.
Answer

Zhaidd & Co Statement of Affairs As on 31 Dec 2018

Assets Amount Liabilities Amount
Cash in hand 100000 Overdraft in bank 80000
Sundry Debtor 157500 Sundry Creditors 130600
Furniture 100000 Capital at the start 421900
Building 200000
Plant & Machinery 75000
632500 632500
Zhaid & Co Statement of Affairs As on 31 Dec 2019
Assets Amount Liabilities Amount
Cash in hand 80000 Overdraft in bank 65200
Sundry Debtors 200000 Sundry Creditor 140500
Less: Write off (5000) 195000 Capital at the end 427800
Furniture 100000
Less: Dep (10000) 90000
Building 196000
Plant & Mach 72500
633500 633500
Zhaid & Co statement of Profit and Loss For the year ended 31 Dec 2019
 Capital at the end (31 Dec 2019) 427800
Add: Drawings 30000
457800
Less: Capital at the start (Jan 1 2019) (421900)
Adjusted capital on (31 Dec 2019) 35900
Less: Fresh capital (1-7-2019) (25000)
10900
Less: Interest on capital 5%P. a
on Rs: 421900@5%12M= 21095
on Rs: 25000@5%6M= 625 (21720)
Net loss of the year (10820)
Q3) What do you understand by merchandise inventory? Write a comparative note on
perpetual inventory method and periodic inventory method.
Answer
Merchandise Inventory: Merchandise inventory is the cost of goods on hand and available for
sale at any given time. Merchandise inventory (also called inventory) is current asset with a
normal debit balance meaning a debit will increase and a credit will decrease.
To determine the cost of goods sold in any accounting period, management needs inventory
information. Management must know:
Its cost of goods on hand at the start of the period (beginning inventory)
The net cost of purchases during the period
And the cost of goods on hand at the close of the period (ending inventory)
Since the ending inventory of the one period is the beginning inventoey for the next period,
management already knows the cost of the beginning inventory. Companies record purchases.
Purchase discount, purchase return and allowance, and transportation in throughout the period.
Therefore, management needs to determine only the cost of the ending inventory at the end of the
period in order to calculate cost of goods sold.
Cost of goods sold is the inventory cost to the seller of the goods sold to customers. Cost of
Goods Sold is an EPXENSE iten with a normal debit balance (debit to increase and credit to
decrease). Even though we do not see the word Expense this in fact is an expense item found on
the income Statement as a reduction to revenue.
Accountants must have accurate merchandise inventory figure to calculate cost of goods sold.
Accountant’s use two basic methods for determining the amount of merchandise inventory
perpetual inventory procedure and periodic inventory procedure.
When discussing inventory, we need to clarify whether we are referring to the physical goods on
hand or the Merchandise Inventory account, which is the financial representation of the physical
goods on hand. The difference between perpetual and periodic inventory procedures is the
frequency with which the Merchandise inventory account is updated to reflect what is physically
on hand.
Under perpetual inventory procedure, the Merchandise inventory account is continuously updated
to reflect items on hand, and under the periodic method we wait until the END to count
everything.
Difference between the periodic and perpetual inventory system
Accounts: Under the perpetual system, there are continual updates to either the general ledger or
inventory ledger as inventory related transaction occur. Conversely, an accounting period until
such time as there is a physical count, which is then used to derive the cost of goods sold.
Computer system: It is impossible to manually maintain the records for a perpetual inventory
system, since there may be thousands of transactions at the until level in every accounting period.
Conversely, the simplicity of a periodic inventory system allows for the use of manual record
keeping for very small inventory.
Cost of goods sold: Under the perpetual system, there are continual updates to the cost of goods
sold account as each sale is made. Conversely, under the periodic inventory system, the cost of
goods sold is calculated in a lump sum at the end of the accounting period, by adding total
purchases t6 the beginning inventory and subtracting ending inventory. In the latter case, this
means it can be difficult to obtain a precise cost of goods sold figure prior to the end of the
accounting period.
Cycle counting: It is impossible to use cycle counting under a periodic inventory system, since
there is no way to obtain accurate inventory count in real time (which are used as a baseline for
cycle count).
Purchases: Under the perpetual system, inventory purchases are recorded in either the raw
material inventory account or merchandise account (depending on the nature of the purchase),
while there is also a unit count entry into the individual system, all purchases records to which
any unit count information could be added.
Transaction investigation: It is nearly impossible to track through the accounting record under a
periodic inventory system to determine why an inventory related error of any kind accourred,
since the information is aggregated at a very high level. Conversely, such investigations are much
easier in a perpetual inventory system, where all transaction are available in detail at the
individual unit level.
Q4)On 1st January, 2017 Mr. Naeem started business with a capital of Rs. 500,000/- and his
transactions of the month were as follows:- (20)
Jan.1. Purchased building for cash Rs. 80,000.

5. Purchased goods from Miss Hareem Rs.50, 000.

9. Sold goods for cash Rs. 30,000.

20. Goods returned to Miss Hareem Rs.2, 000.

25. Sold goods to Furqan Rs.10, 000.

27. Furqan returned goods Rs.1, 500.

28. Salaries paid for the month Rs.20, 000.

31. Rent paid for the month Rs.15, 000.

Required: Journalize the following transactions, post them into ledger and prepare the trial
balance:

Answer: Journal
Date Particular Amount Amount

1-1-17 Cash 500000

Capital 500000
(Owner invested cash)

1-1 Building 80000

Cash 80000
(Building purchase for cash)

5-1 Purchase 50000

Miss Hareem 50000
(Goods purchase on credit)

9-1 Cash 30000

Sale 30000
(Sold goods on cash)
20-1 Miss Hareem 2000
Purchase return 2000
(Goods return to miss hareem)
25-1 Furqan 10000
Sale 10000
(Sold goods to Furqan)
27-1 Sale return 1500
Furqan 1500
(Goods return from Furqan)
28-1 Salaries 20000
Cash 20000
(Paid salaries)
31-1 Rent 15000
Cash 15000
(Paid rent)s

Cash Account

Date Detail Amount Date Detail Amount

1-1 Capital 500000 1-1 Building 80000
9-1 Sale 30000 28-1 Salaries 20000
31-1 Rent 15000
Balance c/d 415000

530000 530000
Capital Account

Date Detail Amount Date Detail Amount

Balance c/d 500000 1-1 Cash 500000
 500000 500000
Building Account

Date Detail Amount Date Detail Amount

1-1 Cash 80000 Balance c/d 80000
80000 80000
Purchase Account

Date Detail Amount Date Detail Amount

5-1 Miss Hareem 50000 Balance c/d 50000

50000 50000
Miss Hareem Account
Date Detail Amount Date Detail Amount
20-1 Purchase return 2000 5-1 Purchase 50000
Balance c/d 48000
50000 50000
Sale Account
Date Detail Amount Date Detail Amount
9-1 Cash 30000
25-1 Balance c/d 40000 25-1 Furqan 10000
40000 40000
Purchase Return Account
Date Detail Amount Date Detail Amount
Balance c/d 2000 20-1 Miss Hareem 2000

2000 2000
Furqan Account
Date Detail Amount Date Detail Amount
25-1 Sale 10000 27-1 Sale return 1500
Balance c/d 8500
10000 10000

Sale Return Account

Date Deatail Amount Date Detail Amount
27-1 Furqan 1500 Balance c/d date
1500 1500
Salaries Account
Date Detail Amount Date Detail Amount
28-1 Cash 20000 Balance c/d 20000

20000 20000
 Rent Account
Date Detail Amount Date Detail Amount
31-1 Cash 15000 Balance c/d 15000

15000 15000
Trail Balance
Cash 415000
Capital 500000
Building 80000
Purchase 50000
Debtors (Furqan) 8500
Creditors (Miss Hareem) 48000
Sale 40000
Purchase return 2000
Sale return 1500
Salaries 20000
Rent 15000
Total 590000 590000

Q5. Describe the major parts of the income statements of a merchandising concern. (20)

Ans: Merchandising Financial Statements: A merchandising company uses the same 4

financial statements we learned before : Income statement of retained earning ,balance
sheet ,and statement of cash flow. The balance sheet used is the classified balance sheet. The
income statement for a merchandiser is expanded to include groupings and subheadings
necessary to make it easier for investors to read and understand. We will look at the income
statements have been discussed previously.
Multi-Step (or classified) income statement: In receding chapters, we illustrated the income
statement with only two categories revenues and expenses. In contrast, a multi-step income
statement divides both revenues and expenses into operating and no operating (other) items.
The statement also separates operating expenses into selling and administrative expenses. A
multi-step income statement is also called a classified income statement.
The multi-step income statement shows important relationship that help in analyzing how
well the company is performing. For example, is lower then desired, a company may need to
increase its selling prices and decrease its cost of goods sold. The classified income statement
subdivides operating expenses into selling and administering expenses. Thus, statement users
can see how much expense is incurred in selling the product and how much in administering
the business. Statement users can also make comparisons with other years’ data for the same
business and with other businesses. Non operating revenues and expenses appear at the
bottom of the income statement because they are less significant in assessing the profitability
of business.
The major headings of the classified multi-step income statement are explained below:
  Net sales are the revenues generated by the major activities of the business - usually
the sale of products or both less any sales discounts and sales returns and
allowances.
 Cost of goods sold is the major expense in merchandising companies and represents
what the seller paid for the inventory it has sold.
 Gross margin or gross profit is the net sales – cost of goods sold and represents the
amount we charge customers above what we paid for the items. This is also referred
to as a company’s markup.
 Operating expenses for a merchandising company are those expenses, other than
cost of goods sold, incurred in the normal business functions of a company. Usually,
operating expenses are either selling expenses or administrative expenses. Selling
expenses are expenses a company incurs in selling and marketing efforts. Examples
include salaries and commissions of salespersons, expenses for salespersons’ travel,
delivery, advertising, rent (or depreciation, if owned) and utilities on a sales
building, sales sullies used, and depreciation on delivery trucks used sales.
Administrative expenses are expenses a company incurs in the overall management
od a business. Examples include administrative salaries rent (or depreciation, if
owned ) and utilities on an administrative building, insurance expense,
administrative supplies used ,and depreciation on office equipment.

 Income from operations is gross profit (or margin) – operating expenses and
represents the amount of income directly earned by business operations.
 Other revenues and expenses are revenues and expenses not related to the sale of
products or services regularly offered for sale by a business. This typically includes
interest earned (interest revenue) and interest owed (interest expense).
 Net income is the income earned after revenues are added other expenses are
subtracted.

Look at these selected accounts from Hanlon’s adjusted trial balance:

Adjusted Trial Balance Debit Credit
Sales 275,000
Sales discounts 2,000
Sales returns and 1,000
allowances
Interest revenue 150
Cost of goods sold 159,000
Commissions expense 10,000
Advertising expense 7,000
Sales Salaries expense 20,000
Rent expense-sales 12,000
Rent expenses -office 12,000
Office Salaries expense 40,000
 Utilities expense 5,000
Interest expense 50
We can prepare Hanlon’s Multi-step Income statement as:
Multi -step Income Statement
For the Year Ended December 31
Sales $275,000
Less: Sales Discounts 2,000
Sales Returns and allowances 1,000 3,000
Net Sales (275,000 – 3,000) $272,000
Cost of goods sold 159,000
Gross profit (272,000 – 159,000) $113,000
Operating expenses:
Selling expenses
Commissions expense 10,000
Advertising expense 7,000
Sales Salaries expense 20,000
Rent expense – sales 12,000
Total selling expenses 49,000
Administrative expenses
Rent expense – office 12,000
Office Salaries expense 40,000
Utilities expense 5,000
Total Admin. Expenses 57,000
Total Operating expenses (49,000 + 57,000) 106,000
Income from operations (113,000 – 106,000) 7,0000
Other Revenue (Expense)
Interest Revenue 150
Interest Expense -50
Total Other Revenue (expense) (150 – 50) 100
Net Income (7,000+100) 7,100
Reporting Cost of Goods Sold
Cost of goods sold can be reported two ways: as a single line item or as detailed section
showing net purchases and calculating cost of goods sold. When using the perpetual
inventory method, cost of goods sold is reported as a single line item (as illustrated in video
and example above).
Under the periodic method, you use a single line item in the multi – step income statement
with a separate schedule od cost of goods sold OR you can report the cost of goods sold
within the income statement itself. The following videos reviews the periodic method entries
and show how to complete the cost of goods sold section within the multi – step income
statement.
To illustrate a cost of goods sold statement, Hanlon food store had the following unadjusted
trial balance amounts:
Debit Credit
Merchandise Inventory 24,000
Purchases 167,000
 Purchase discount 3,000
Purchase returns and allowances 8,000
Transportation In 10,000

Remember, the merchandise inventory on the unadjusted trial balance is the beginning
balance (or ending balance from the previous period). A physical count of inventory on
December 31 showed inventory of $31,000 unsold. The cost of goods sold. The cost of goods
sold statement would appear as:
Hanlon Food Store
Cost of Goods Sold Statement
For the year ended December 31
Merchandise Inventory, January 1 24,000
Purchases 167,000
Less: Purchase discount 3,000
Purchase returns and allowances 8,000 11,000
Net Purchases (167,000 – 156,000) 156,000
Add: Transportation in 10,000
Net cost of purchases (156,000+10,000) 166,000
Cost of goods available for sale 190,000
(24,000+166,000)
Less: merchandise Inventory, December 31,000
31
Cost of goods sold (190,000 – 31,000) 159,000
Other financial statements: After the income statement is complete, we would use the net
income to calculate ending retained earning on the statement of retained earnings. We could
use ending retained earning in preparing the balance sheet. Finally, we would prepare the
statement of cash flows. These financial statements are prepared the same way under either
the perpetual or periodic inventory methods.
Summary: To summarize the important relationships in the income statement of a
merchandising firm in equation from:
 Net sales = Sales revenue – sales discounts – Sales returns and allowances.
 Gross margin = Net sales – cost of goods sold.
 Total from operations = selling expenses + Administrative expenses.
 Income from operations = Gross margin – operating (selling and administrative)
expenses.
 Total other revenues (expenses) = Other Revenues – other Expenses.
 Net income = Income from operating + other revenues – other Expenses.
Each of these relationships is important because of the way it relates o an overall measure of
business profitability. For example, a company may produce a high gross margin on sales.
However, because of large sales commission and delivery expenses, the owner may realize
only a very small amount of the gross margin of profit.