Fundamentals of Accounting I Chapter Two May, 2022

CHAPTER TWO: ACCOUNTING CYCLE FOR SERVICE GIVING BUSINESS

The Recording Process
The recording process holds detailed discussions on the terminologies of the elements used in recording of
business transactions. These are an account, the recording system and the proving process.
2.1.1. The Account
An account is an individual accounting record of increases and decreases in a specific asset, liability, or equity
item. An account is a sub division of the three elements of the accounting equation For example; Melkam internet
Cafe (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts Receivable,
Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on.
2.1.2. Characteristics of an Account
The simplest (basic) form of an account consists of three parts: (1) an account title, (2) a left or debit side, and (3)
a right or credit side. We use this form often throughout this course to explain basic accounting
relationships. Illustration 2.1 shows the basic form of an account.
Illustration 2.1 Basic form of account.
Accounts Title
Debit Credit

As you see from the figures the format looks like the letter ―T‖, as a result the simplest form of an account is
referred to as a T-account
1. Account Title: The account title represents the name of the particular account which is written on the top of
the account.
2. Debits and Credits: The term debit indicates the left side of an account, whereas the term credit indicates the
right side of the account. They are commonly abbreviated as Dr. for debit and Cr. for credit. The
termsdebit and credit repeatedly used in the recording of the increases and decreases of a particular account.
The act of entering an amount on the left side of an account is called debiting. Whereas making an entry on
the right side is crediting the account. The act of debiting or crediting by itself doesn’t represent an increase
or a decrease in a specific account. Increase or decrease of an account is determined on the basis of account
classification only.
2.1.3. Balance Side of an Account
Increasing side of an account is called balance side. An account shows a debit balance side if the total of the
debit amounts exceeds the credits. An account shows a credit balance side if the credit amounts exceed the
debits. Dear students’ illustration 2.1 shows you the recordings and the balance determination of an account.
Beside the illustration also shows you how the account format sparely records increases and decreases in a
particular account compared with tabular format dealt on Chapter 1). The data for the illustration is taken from
Melkam Internet Café tabular Summaryof illustration 1.2.
Illustration 2.2 Tabular summary and account form for Melkam Internet Café Cash account 0
Account Form
Cash
Debit 45,000 Credit 20,000
8,500 1,200
2,000 6,750
2,200 2,500
Look, the above two formats for your comparison. Every positive figure in the tabular summary represents an
Bal. figure
increase in cash and every negative 27,250
represents a decrease in cash balance. Notice also in the account
form the increases and decreases in cash are recorded in a separate side. I.e the increases in cash is
recorded as debits, and the decreases as credits.
There is no need to uses + or – signs in the account format.Having increases on one side and decreases on the
other reduces recording errors and helps in determining the totals of each side of the account as well as the

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 Fundamentals of Accounting I Chapter Two July, 2021

account’s balance side. The balance is determined by netting the two sides (subtracting one amount from the
other). The account balance, a debit of Br. 27,250, indicates that Melkam Internet Cafe had Br. 27,250 more
increases than decreases in cash. As a result cash has a debit balance side.
NB: For simplicity all accounts which, appear in the left hand side of the accounting equation has a debit
balance side. Whereas all those accounts which appeared on the right hand side of the accounting equation has a
credit Balance side.
2.1.4. The Rules of Debit and Credit in a double entry system
In Chapter 1, you have learned the effect of a transaction each transaction has a dual effect on the basic
accounting equation and that maintains the accounting equation always in balance. Thisfactprovides the basis for
the double-entry system in the formal records of transactions. Under the double-entry system, the dual (two-
sided) effect of each transaction is recorded in appropriate accounts as debits and credits. This system provides a
logical method for recording transactions and helps to ensure the recording accuracy. If every transaction is
recorded with equal debits and credits, the sum of all the debits to the accounts must equal the sum of all the
credits. The double-entry system for determining the equality of the accounting equation is much more efficient
than the plus/minus procedure used in Chapter 1. On the following pages, we will illustrate debit and credit
procedures in the double-entry system.
Rules of Debits and Credits for Asset, Liabilities and Owners Equity
In Illustration 2.2 above increases in Cash (an asset) were entered on the left side i.e debit, and decreases in Cash
were entered on the right side i.e credit. Since assets are found on the left side of the basic accounting equation.
On the other hand increases in liabilities must be entered on the right or credit side, and decreases in liabilities
must be entered on the left or debit side. It is therefore follows that increases and decreases in liabilities will have
to be recorded oppositefrom increases and decreases in assets. balance side or normal balance of an account is the
side where the increaseing in the account is recorded. For instance Asset accounts normally show debit
balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability
accounts normally show credit balances. That is, credits to a liability account should exceed debits to that
account.
As it is discussed in Chapter 1 indicated, owner’s equity has four subdivisions: Owner’s Capital, drawing,
revenues, and expenses. In a double-entry system, companies keep accounts for each of these subdivisions, as
explained below.
Owner’s capital has a credit balance side. Revenues increase equity, a revenue account use the same debit/credit
rules as owner’s capital account. As you know Drawing and Expenses decreases equity account, they have the
opposite Debit/credit rules as owner’s capital account. As a result they have a debit normal balance.
Knowing the normal balance in an account may help you to trace errors. For example, a credit balance in an asset
account such as Equipment or a debit balance in a liability account such as Accounts Payable usually indicates an
error.

Summary of Debit/Credit Rules

Illustration 2.3 shows a summary of the debit/credit rules and effects on each type of account. Study this diagram
carefully. It will help you understand the fundamentals of the double-entry system.
Illustration 2.3 Summary of debit/credit rules
Accounting Equation Asset = Liabilities + Owners Equity
Owners
account Classification Asset = Liability + Capital + Revenue - Expense - Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Debit/Credit Rule + - - + - + - + + - + -
NB: in the above illustration, the plus sign represents an increase in an account where as minus sign represents a
decrease in an account.
The information in the above table is summarized as follows.
Debit Credit

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- Increase in asset - Decrease in asset

- Decrease in Liability - Increase in Liability
- Decrease in equity - Increase in equity
- Decrease in revenue - Increase in revenue
- Increase in Expense - Decrease in Expense
2.1.2 Classification of Accounts
Accounts are classified in to five. Namely Assets, Liability, Equity, Revenue (referred to as income) and Expense.
The first three are reported the statements of financial position accounts. So they are called financial Position
accounts. Whereas the last two are called Income statement accounts and are called income statement accounts.

The simplified versions of the official account definitions provided by the FASB, using the IASB definitional
structure, are as follows.
i. Assets: - A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
The following three characteristics must be present for an item to qualify as an asset:
1. The asset must provide probable future economic benefit that enables it to provide future net cash inflows.
2. The entity is able to receive the benefit and restrict other entities’ access to that benefit.
3. The event that provides the entity with the right to the benefit has occurred.
Assets have features that help identify them in that they are exchangeable, legally enforceable, and have future
economic benefit (service potential). It is that potential that eventually brings in cash to the entity and that
underlies the concept of an asset.
IFRS based Classification of assets:-International Financial Reporting Standard made asset classification as
follows:
 Property Plant and Equipment’s:- are asses held to be used in the production and supply of goods or
services, for administrative purpose, or for rental to others. As per IAS 16 Property, plant, and equipment
includes land, building structures (offices, factories, warehouses), and equipment (machinery, furniture,
tools). PPEs also include Biological assets (Bearer Plants) and mineral recourses. Biological assets are Bearer
plants that are used to produce agricultural products, like Rubber tree, Fruit tree, Sheep, Dairy cattle etc.
Mineral Recourses and Mineral reserves used to produce such as oil, natural gas and mineral water etc.
 Intangible Asset:- are identifiable assets, without physical existence, held for use in production and supply
of goods or services, for administrative purpose or, for rental to others. (IAS 38). Intangible assets includes
Brand, Copyrights, Trademarks, Trade secrets, Permits, Corporate intellectual property etc.
 Noncurrent Asset Held for Sale:-is a PPE that are available for immediate sale in its present condition and
its sale must be highly probable. In addition, the asset must be currently being marketed actively at a price
that is reasonable in relation to its current fair value. For example a building in use by a business but the entity
is committed to sale it on the moment the company gets buyers.(IFRS 5)
 Inventories:- Are asset held for sale in the normal course of business or in the process of production for
such sale or in the form of materials or supplies to be used in the production process or in the rendering of
services. Harvested and stored biological assets held for sale is also categorized under inventories. (IAS2)
 Biological Asset in Agricultural Activity and Agricultural Products:- assets point of harvest:- assets that
are agricultural products growing on bearer plant Example, Picked fruit, harvested sugar cane or wool on the
sheep at point of harvest. (IAS41).
 Investment Property:- Are properties held to earn rentals or for capital application or both rather than for use
in production for use or for sale. For instance, holding a building or a land for rental purpose is an investment
property.
 Financial Asset:- is cash, an equity investment of another company (e.g., ordinary or preference shares), or a
contractual right to receive cash from another party (e.g., loans, receivables, and bonds).( IAS 32 and IFRS 7)
NB: the above are detailed classification for the assets; you are required to read more about the classifications.
However for the purpose of simplicity, assets generally are classified in to noncurrent and current asset.
 Noncurrent assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-
current assets are also termed fixed assets, or long-term assets which serve an entity for a period more than

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Fundamentals of Accounting I Chapter Two July, 2021

one year. Noncurrent asset is reclassified in to three. These are PPEs, Mineral Recourses and Intangible
Assets.
 Current assets are cash or other assets that companies reasonably expect to convert into cash, sell, or
consume in operations within a single operating cycle or within a year. This includes Cash, account
receivable, inventory etc. The general classification is within the scope of the above asset category.
ii. Liabilities. A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
The following three characteristics must be present for an item to qualify as a liability:
1. A liability requires that the entity settle a present obligation by the probable future transfer of an asset
on demand when a specified event occurs or at a particular date.
2. The obligation cannot be avoided.
3. The event that obligates the entity has occurred.
IFRS based Classification of Liabilities:-IFRS categorized liabilities as follows:
 Financial liabilities:- a contractual obligation to deliver cash or another financial asset, obligation to
exchange financial liabilities under unfavorable condition. Financial liability includes accounts payables,
deposit liabilities, bond issued etc.(FRS 9 and IAS39)
 Lease liability:- a present obligation arising from lease agreements. Lease an agreement whereby the leaser
conveys to the lessee the right to use an asset for an agreed period of time in return for payment. (IAS 17).
 Employee Benefit liability:- a present obligation incurred by an entity in exchange for service rendered by
employees for the termination of employment. Employee benefits liability included, salary payable, Bonus
payable, pension payable, severance pay.(IAS 19)
 Income Tax liability:- A present statutory obligation to pay taxes to the government based on taxable
profits(IAS12).
 Provisions:-A provisionis a liability of uncertain timing or amount and sometimes referred to as an estimated
liability. Common types of provisions are obligations related to litigation, warrantees or environmental
damage etc.(IAS37).
Depending on the date of expected payment Liabilities can be classified in to Current and Noncurrent liabilities.
This classification is within the framework of the above category,
 Current liabilities are obligationswhich are expected to be settled within its normal operating cycle; or
within 12 months after the reporting date. Current liabilities include Accounts payables, salary payable, notes
payables etc.
 Non-current liabilities (sometimes referred to as long-termdebt) consist of an expected outflow of resources
arising from present obligations that are not payable within a year or the operating cycle of the company,
whichever is longer. Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and
lease liabilities are examples of non-current liabilities.
iii. Equity. A residual interest in the assets of the entity after deducting all its liabilities.
iv. Income. Increases in economic benefits that result in increases in equity (other than those related to
contributions from shareholders). Income includes both revenues (resulting from ordinary activities) and
gains.
v. Expenses. Decreases in economic benefits that result in decreases in equity (other than those related to
distributions to shareholders). Expenses includes losses that are not the result of ordinary activities.
2.1 The Recording System
Recording system is an accounting system used to capture (Record) continues track of business
transaction. Steps in the recording transactions
There are three basic steps in the recording process:
I. Analyze each transaction for its effects on the accounts.
II. Enter the transaction information in a journal.
III. Transfer the journal information to the appropriate accounts in the ledger.
I. Analyzing Business Transaction

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Analyzing a business transaction is reviewing the information included in a particular business document and
identifies the transaction effect on a particular account. Business documents are those source documents like
Receipts, invoices, a check or a bill that provides evidence for the occurrence of the transaction.
The analysis of business transaction answers the following three questions.
i. Which accounts are affected? helps to identify the specific account affected by a particular transaction
ii. How are they affected? Helps to specify whether the identified accounts are increased or decreased due
to the transaction.
iii. Which account is to be debited and which account is to be credited by how much.
NB; dear students this activity is a pre-stage for the recording activity. It helps to enhance the accuracy of the
recording activity. The company then enters the transaction in the journal. Finally, it transfers the journal entry to
the designated accounts in the ledger.
The steps in the recording process occur repeatedly. In Chapter 1, we have illustrated the first step, i.e transaction
analysis, and in this chapter and the later chapters you will have more examples and advanced illustrations to
practice the recording activity.
2.2.1 Journal and Recording Transactions
The journal is a format used to record a transaction for the first time. The process of enteringa transaction from
the source document in to a journal is called Journalizing. Companies uses a journal to record transactions in
chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry.
For each transaction, the journal shows the debit and credit effects on specific accounts.
2.2.2 Types of Journal
There are two types of Journal: General journal and the Special journal. General journal is the most basic form
of Journal which is used to record all kinds of business transactions.
Whereas special journal is a journal used to record only as specific transaction type. For instance cash journal
records only a transaction which involves cash receipt or payments, purchase journal records only purchase
transaction only etc., for the matter of this course whenever we use the term ―journal‖ in this course, we mean the
general journal, unless we specify otherwise.
Significances of recording transaction in a journal
The journal makes several significant contributions to the recording process:
1. It discloses the complete effects of a transaction in one place.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily
compared.
Illustration 2.3 Format for a General Journal
As shown inillustration2.3.below a general journal has a space for date, account titles and explanations,
references, and two amount columns.
General Journal Page No.
Date Descriptions P/R Debit Credit

Parts of a General Journal

Companies make separate journal entries for each transaction. A complete entry consists of: (1) the date of the
transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction.
Illustration 2.4 shows the technique of journalizing, using the first two transactions of Melkam Internet café. On
August 1, Melkam invested Br. 45,000 cash to start the business and on August 2, Melkam purchased equipment
for Br. 20,000 for cash. The number page 1 indicates that the company records these two entries on the first page
of the general journal.

Illustration 2.4 Steps of journalizing

General Journal Page 1
Date Account Title and Descriptions P/R Debit Credit

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2016
Aug 1 Cash 45,000
Owner's capital 45,000
(Initial Investment)

2 Equipment 20,000
Cash 20,000
(purchase of equipment)
Steps in Journalizing Transaction
1. Enter the date of the transaction in the Date column in the way it is shown on the above table
2. Enter the name of the account to be debited in the ―Account Titles and Description,‖ column and record its
respective amount in the Debit column. As you see from the above table the account Cash is written bend to
the extreme left end of the column, this is to indicate that the account is recorded on the left hand side or
debited.
3. Enter the name of the account to be credited in the ―Account Titles and Description,‖ column of the Journal
and record its respective amount in the Credit column. As you see from the above illustrations the account
Owners capital is written bend to the right end of the column, this is to indicate that specific account is
recorded on the right side or credited.
4. Include brief description of the transaction on the line below the credit account title. A space is left between
journal entries. The blank space separates individual journal entries and makes the entire journal easier to
read.
5. The column titled P/R. (which stands for Post Reference) is left blank when the journal entry is made. This
column is used later when the journal entries are transferred to the ledger accounts.
NB:
 Dear student’s as a beginner you might face difficulties in understanding while you have tried to journalize
transactions. But don’t worry, take it normal, what you are advised to do is continue with practicing until you
develop the knowhow to identify accounts, and there balance sides to journalize them. Once you are able to
journalize correctly and properly, the other recording activities are so simple for you. The base for financial
reporting is the ability to journalize transactions properly. Note also that journal is the source document or
the base for further activities on the recording process so please take time and record it properly and correctly.
Simple and Compound Entry
An individual record for debit or credit of a particular transaction is called journal entry. Journal entries for a
transaction which involves only two accounts i.e one debit and one credit account is called simple entry. The
journal entry on illustration 2.4 above is simple entries. Journal entries which involve more than two accounts for
a transaction is called compound entry. To illustrate let us take transition 6 of Melkam Internet Café’ of chapter 1.
On August 20, Melkam performed a Br. 6,000 photocopy service to customers and receives cash of br. 2,000.
Melkam billed the customer balance of Br. 4,000 on account. The compound entry is as follow
Illustration 2.5 Compound Journal Entry
Date Account Title and Descriptions P/R Debit Credit
2016Aug 20 Cash 2,000
Accounts receivable 4,000
Service fee 6,000
(Sales of service for cash and on account)
NB; service fee is a revenue account.
2.2.3 Posting Journal to a Ledger
The Ledger
The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the
information about changes in specific account balances. Companies may use various kinds of ledgers for each

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account. But every accountmust have at least one ledger calleda general ledger. A general ledger contains all the
asset, liability, and equity accounts.
The ledger provides the balance in each of the accounts and keeps track of changes in these balances. For
example, the Cash account shows the amount of cash available to meet current obligations. The Accounts
Receivable account shows amounts due from customers. The Accounts Payable account shows amounts owed to
creditors. Each account is numbered for easier identification.
Standard Form of Account
The simple T-account format of a ledger used in accounting course is often very useful for illustration purposes.
However, in practice, the account format (three-column format) is appropriate and standardized for the formal
posting process. The three-column form of an accounthas three money columns—debit, credit, and balance.
The balance in the account is determined after posting each entry. Companies use the Postreference (P/R)
columns to specifying the source document for each posting and for cross checking purpose. Illustration
2.6 shows a typical form, using assumed data from a cash account.
Illustration 2.6 Three-column form of account

Date Explanation P/R Debit Credit Balance

Posting
The process of transferring information from a journal to a ledger is called posting. This phase of the recording
process accumulates the effects of those journalized transactions into the respective ledger accounts. Posting
involves the following steps.
1. In the ledger, enter, the date and amount shown in the journal in the appropriate column of the account(s)
debited,
2. Enter the journal page number in the post reference column of the account
3. Enter account number in the post reference column of the journal.
4. In the ledger, enter, the date and amount shown in the journal, in the appropriate column of the account(s)
credited,
5. repeat step 2 and 3
Illustration 2.7 the following illustration shows you how to recording and post transactions.
On April 1, 2016, Ato Enkopa B fikir established a House Finishing and Decor business, during the month of
April Ato Enkopa completed the following business transactions.
April 1. Enkopa transferred cash of Br. 50,000 from his personal bank account to the account opened by the name
of the business. He has Br. 175,000 left in his personal bank account and one residential house worth br. 980,000
around Gereji.
April 3. Paid office rent for the month, Br. 3,000.
April 8. Purchased a used truck for Br.60,000, paying Br. 20,000 cash and giving a note payable for the
remainder.
April12. Purchased various equipment’s on cash, Br. 10,000.
April 14. Purchased supplies for cash, Br. 3,200.
April 14. Paid for a one year property insurance premium Br. 2, 400.
April 18. Received cash for job completed, Br. 14, 800.
April 21. Paid creditor a portion of the amount owed for equipment on April 08 April, 15, 000.
April 23. Sent invoices to customers, of Br. 9,600 service delivered on account.
April 24.Recieve cash of 2000 from customer to provide service in the month of May.
April 25. Received an invoice for truck expenses, to be paid in May Br.1,000.
April 26. Paid Telephone and electric expense of the month, Br. 650
April 27. Paid miscellaneous expenses, Br. 420.
April 27. Received cash from customers on account, Br. 4,000.
April 29. Paid salary and wages of employees for the month, Br. 6,400.

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April 30. Ato Enkopa the owner withdrew cash for personal use, Br. 1,800.
Instructions:
i. Journalize the above transactions using the general journal
ii. Post the Journal in to a ledger
iii. prepare Trail Balance
Summary Illustration of Journalizing and Posting
I. Journalizing
Illustration 2.7.1 Journal entries of the above transactions
General Journal Page 1
Date Account Title and Descriptions P/R Debit Credit
2016April 1 Cash 50,000
Enkopa Capital 50,000
(Initial Investment)
3 Rent Expense 3,000
Cash 3,000
(Payment For rent)
8 Truck 60,000
Cash 20,000
Notes payable 40,000
(Purchase of Truck)
12 Office Equipment 10,000
Cash 10,000
(Purchase of Equipment)
14 Supplies 3,200
Cash 3,200
(Purchase of Supplies)
14 Prepaid Insurance 2,400
Cash 2,400
(Purchase of insurance coverage)
18 Cash 14,800
service fee 14,800
(cash received from customers)
21 Notes payable 15,000
Cash 15,000
(Cash Paid on account)
23 Accounts Receivable 9,600
Service Fee 9,600
(Provision of service)
24 Cash 2000
Unearned revenue 2000
(Cash collected before service provision)
25 Truck Expense 1,000
Accounts payable 1,000
(Payment for Truck Expense)

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26 Utilities Expense 650

Cash 650
(payment for Light and telephone)
27 Miscellaneous Expense 420
Cash 420
(Payment for various Expenses)
Page 2
27 Cash 4,000
Accounts Receivable 4,000
(cash received on account)
29 Salary Expense 6,400
Cash 6,400
(Salary payment)
30 Enkopa's Drawing 1,800
Cash 1,800
(Withdrawal of cash)

II. Posting the Journal to a Ledger

Illustration 2.7.2. Posting the above journal to individual ledger accounts
Before posting a journal you need to prepare charts of account. This helps you to open a ledger by the name of
each account.
2.2.4 Charts of Account
The list of all accounts used by the business with their account numbers is called Charts of account. The account
number is the identification code given to each account. Depending on the size of the businesses, companies
might code their accounts using two or more digits. In a two digit coding the first digit represents account
classification and the second indicates the position of the account with in the classification. For instance is 13 is
given to an account Supplies: it is to mean that supplies is an assets account listed third.
Here is the chart of account for Enkopa House Finishing and Décor.
Enkopa House Finishing and Décor
Charts of Account
Account Account
Account Title Number Account Title Number
Asset Owner’s Equity
Cash 11 Enkopa's capital 31
Accounts Receivable 12 Enkopa's Drawing 32
Supplies 13 Income Summary 33
Prepaid Insurance 14 Revenue 41
Office Equipment 15 Service Fee
Accumulated Depreciation – Equipment 15-1 Expenses
Truck 16 Salary Expense 51
Accumulated Depreciation – Truck 16-1 Rent Expense 52
Liabilities Utilities Expense 53
Notes Payable 21 Truck Expense 54
Accounts Payable 22 Miscellaneous Expense 55

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NB:- Posting should be performed in chronological order. That is, the company should post all the debits and
credits of a particular day journal before proceeding to the next day journal entry. Postings should be made on a
timely basis to ensure that the ledger is up to date.
The reference column of a ledger account appoints the journal page from which the transaction was posted. The
explanation column of the ledger account is used infrequently because an explanation already appears in the
journal.
Illustration 2.7.2 below displayed all the postings of the above journal.
Posting the Journal to a ledger
Illustration 2.7.2 posting of the above journal to the respective general ledgers accounts
Cash Account No.11
Date Explanation P/R Debit Credit Balance
2016
April 1 Jp1 50,000 50,000
3 Jp1 3,000 47,000
8 Jp1 20,000 27,000
12 Jp1 10,000 17,000
14 Jp1 3,200 13,800
14 Jp1 2,400 11,400
18 Jp1 14,800 26,200
21 Jp1 15,000 11,200
24 Jp1 2,000 13,200
26 Jp1 650 12,550
27 Jp1 420 12,130
27 Jp2 4,000 16,130
29 Jp2 6, 400 9, 730
30 Jp2 1,800 7, 930

Accounts Receivables Account No. 12

Date Explanation P/R Debit Credit Balance
2016
April 23 Jp1 9,600 9,600
27 Jp1 4,000 5,600

Supplies Account No. 13

Date Explanation P/R Debit Credit Balance
2016
April 14 Jp1 3,200 3,200

Prepaid Insurance Account No. 14

Date Explanation P/R Debit Credit Balance
2016
April 14 Jp1 2,400 2,400

Office Equipment Account No. 15

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Date Explanation P/R Debit Credit Balance

2016
April 14 Jp1 10,000 10,000

Truck Account No. 16

Date Explanation P/R Debit Credit Balance
2016
April 8 Jp1 60,000 60,000
Notes Payable Account No. 21
Date Explanation P/R Debit Credit Balance
2016
April 8 Jp1 40,000 40,000
21 15,000 25,000

Accounts Payable Account No. 22

Date Explanation P/R Debit Credit Balance
2016
April 25 Jp1 1,000 1,000

Unearned Service Revenue Account No. 23

Date Explanation P/R Debit Credit Balance

2016 24 Jp1 2,000 2,000

Enkopa's Capital Account No. 31

Date Explanation P/R Debit Credit Balance
2016
April 1 Jp1 50,000 50,000

Enkopa's Drawing Account No. 32

Date Explanation P/R Debit Credit Balance
2016 30 Jp2 1,800 1,800

Service Fee Account No. 41

Date Explanation P/R Debit Credit Balance
2016 18 Jp1 14,800 14,800
23 Jp1 9,600 24,400

Salary Expense Account No. 51

Date Explanation P/R Debit Credit Balance
2016 29 Jp2 6,400 6,400

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Rent Expense Account No. 52

Date Explanation P/R Debit Credit Balance
2016 3 Jp1 3,000 3,000

Utilities Expanse Account No. 53

Date Explanation P/R Debit Credit Balance
2016 26 Jp1 650 650

Truck Expense Account No. 54

Date Explanation P/R Debit Credit Balance
2016 25 Jp1 1,000 1,000

Miscellaneous Expense Account No. 55

Date Explanation P/R Debit Credit Balance
2016 27 Jp1 420 420

2.2.5 Trial Balance

A trial balance is a list of accounts and their balances at a given time. It list accounts in the order in which they
appear in the charts of account. Debit balances appear in the left column and credit balances in the right column.
The trial balance proves the mathematical accuracy and equality of the total debits and the total credits
after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances
equals the sum of the credit account balances. In addition, a trial balance is useful in the preparation of
financial statements.
The steps for preparing a trial balance are:
1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
III. Trial Balance
Illustration 2.7.3. Trial balance
Enkopa House Finishing and Decor
Trial Balance
For the month ended April30, 1016
Account Title Debit Balance Credit Balance
Cash 7,930
Accounts Receivable 5,600
Supplies 3,200
Prepaid Insurance 2,400
Office Equipment 10,000
Truck 60,000

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Notes Payable 25,000

Accounts Payable 1,000
Unearned Service Revenue 2,000
Enkopa's capital 50,000
Enkopa's Drawing 1,800
Service fee 24,400
Salary Expense 6,400
Rent Expense 3,000
Utilities Expense 650
Truck Expense 1,000
Miscellaneous Expense 420
Total 102,400 102,400
The trial balance for Enkopa House Finishing and Décor as of April30, 2016, is shown in illustration 2.7.3.The
balances of the accounts in the above trial balance is taken from the ledger balance of the individual ledger
illustration 2.7.2. Before the preparation of a trial balance the individual account balance of each account of ledger
must be determined. The trial balance prepared immediately after completion of posting is called unadjusted trial
balance. The above trial balance is known as an unadjusted trial balance. This is to distinguish it from the adjusted
trial balances that we will prepare in the next chapters.
Limitations of a Trial Balance
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even
though the totals of the trial balance columns agree. For example, the trial balance may balance even when (1) a
transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4)
incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of
a transaction. As long as equal debits and credits are posted, even to the wrong account or in the wrong amount,
the total debits will equal the total credits. The trial balance does not prove that the company has recorded all
transactions or that the ledger is correct.
2.2 Completing an Accounting Cycle for Service Giving Business
Dear students in the previous part of this section we have tried to learn how business transactions are recorded
posted and preparing of trial balance. Now in this part we will try to complete the accounting cycle and to issue
financial statement. Then some accounts are adjusted and we have also seen why and how to adjust accounts.
Completion of the accounting cycle involves the following completion activities,
i. Preparation of work sheet(optional Step)
ii. Preparation of financial statements
a. Income Statement
b. Statements of Owners Equity
c. Statements of financial position
iii. Record and post adjusting entries
iv. Record and post-closing entries
v. Preparation of post-closing trial balance
The following trial balance is taken from Enkopa House Finishing prepared for April 30, 2016. This trial
balance is prepared by taking the ending balance of each ledger. Such trial balance is referred to as unadjusted
trial balance. So, adjusting (updating) accounts are required before preparation of financial statement.
Although issues of Adjusting accounts will be deeply discussed in chapter 3, the following are the reasons
for adjustment

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1. To record those events which are not journalized daily, for example daily consumption of supplies like a
piece of paper
2. To record those costs, which expire with time and are therefore not recorded, for example prepaid
insurance or rent
3. To record those items previously unrecorded, for example accrued salary
Using the following information perform the instructions ordered below.
Enkopa House Finishing and Décor
Unadjusted Trial Balance
For the month ended April30, 1016
Account Title Debit Balance Credit Balance
Cash 7,930
Accounts Receivable 5,600
Supplies 3,200
Prepaid Insurance 2,400
Office Equipment 10,000
Truck 60,000
Notes Payable 25,000
Accounts Payable 1,000
Unearned Service Revenue 2,000
Enkopa's Capital 50,000
Enkopa's Drawing 1,800
Service fee 24,400
Salary Expense 6,400
Rent Expense 3,000
Utilities Expense 650
Truck Expense 1,000
Miscellaneous Expense 420
Total 102,400 102,400
Information for adjustments
 Supplies on hand April 30,2016 Br.1,200
 Insurance expired during April 30,2016 Br. 200
 Deprecation of for Truck April 30,2016 Br. 100
 Deprecation of office equipment for April 30,2016 Br. 150
 Revenue earned for April 30, 2016, Br.1,300
 Salary accrued but not yet paid Br. 1,250
Instructions: - using the above information perform:
i. Prepare work sheet
ii.Prepare of financial statements
a. Income Statement
b. Statements of Owners Equity
c. Statements of financial position
iii. Record and post adjusting entries
iv. Recording and posting closing entries
v.Prepare Post Closing trial balance
vi. Preparation of post-closing trial balance

IV. Work Sheet

Worksheet is a working paper of an accountant. It showed the details of accounting works and adjustment to
check their arithmetical accuracy before preparing financial statements.

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It is a multi-columnar sheet of paper used in the accounting cycle to facilitate the work of making adjusting and
closing entries and preparing financial statements. It is a working paper, which helps the accountant to assemble
all the ledger account balance and adjustment information together on one schedule.
The basic objective of a worksheet is to organize the information needed to prepare financial statement without
recording and posting adjusting entries.
Worksheet is a working tool or a supplementary device for the accountant and not a permanent accounting record.
A worksheet generally contains eight to ten columns. A ten column work sheet contains the following five
column heading. Each item needs two amount column, one for debit the other for credit.
 Unadjusted Trial Balance:-a trial balance shows the balance of all accounts after adjustment at the end of the
accounting period.
 Adjustments:- Shows accounts that are adjusted as per the adjustment information.
 Adjusted trial balance:-a trial balance shows the balance of all accounts after adjustment at the end of the
accounting period.
 Income statement:- shows all revenue and expense accounts extended from the adjusted trail balance.
 Balance sheet. Shows all asset, liability, and equity accounts extended from the adjusted trail balance.
Steps in preparing worksheet
Step 1 entering unadjusted trial balance
Step 2 enter adjustments in the adjustments column
Step 3 prepare adjusted balance using unadjusted trial balance and adjustments column
Step 4 Extend the adjusted trial balance to the appropriate financial statements

Enkopa House Finishing and Décor

Work Sheet
For April 30,1016
Unadjusted Adjusted trail Income
Trial Balance Adjustment Balance Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit Debit Credi Debit Credi
Cash 7,930 7,930 7,930
Accounts 5,600 5600 5600
Supplies 3,200 a)2,00 1200 1200
Prepaid 2,400 b)200 2,200 2,200
Office Equipment 10,000 10,000 10,00
Accumulated
Depreciationequi d)100 100 100
Truck 60,000 60,000 60,00
Accumulated
Depreciation c)150 150 150
Notes Payable 25,000 25,000 25,00
Accounts Payable 1,000 1,000 1,000
Salary Payable g) 1250 1,250
Unearned Service 2,000 e)1,30 700 700
Enkopa's Capital 50,000 50,000 50,00
Enkopa's 1,800 1800 1,800
Service fee 24,400 e)1,30 25,700 25,70
Salary Expense 6,400 g)1,25 7,650 7,650
Rent Expense 3,000 3,000 3,000
Utilities Expense 650 650 650
Truck Expense 1,000 1000 1,000

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Miscellaneous 420 420 420

Supplies Expense a)2,00 2000 2,000
Insurance b) 200 200 200
Deprecation c,d) 250 250
Total 102,40 102,40 5,400 5,400 103,90 10370 15,17 25700 88,73 78200
Net income 10,53 10,53
25,70 25,70 88,73 88,73
Total 0 0 0 0
Step 5 Total the income statement column and compute net income or net loss
Step 6 Extend the amount of the net income to credit column or the net loss to the debit column of the balance
sheet and equate the columns
Illustration 3.7 shows you how to prepare worksheet
V. Preparation of financial statement
a. Statements of profit or loss and other comprehensive income
Enkopa House Finishing and Décor
Statements of profit or loss and other Comprehensive Income
For April 30,1016
Revenues
Service Revenue Br. 25,700
Expenses
Salary Expense Br. 7,650
Rent expense 3,000
Utilities Expense 650
truck expense 1,000
Miscellaneous expense 420
supplies expense 2,000
insurance expense 200
Depreciation Expense 250
Total Expense 15,170
Net Income 10,530
b. Owners Equity Statement
Enkopa House Finishing and Décor
Statements of Owner's Equity
For April 30,1016
Owners Capital January 1, 50,000
Add Net income 10,530
sub total 60,530
Less Drawing 1,800
Owner's capital August 30, 58,730

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c. Statements of Financial Position

Enkopa House Finishing and Décor Statements of Financial
Position For April 30,1016

Asset
Non Current Asset
Property, Plant and Equipment
Truck 60,000

Accumulated depreciation on truck 150

59,850
Equipment 10,000

Accumulateddepreciation on equipment 100 9,900

Total PPE’s 69,750
Current Asset
Prepaid Insurance 2,200
Supplies 1,200
Accounts Receivable 5,600
Cash 7,930
Total Current asset 16,930
Total Asset 86,680
Liability and Equity
Owners equity
Enkopa.’s Capital Br. 58,730
Liabilities
Accounts Payable 1,000
Salary Payable 1,250
Unearned Revenue 700
Notes Payable 25,000
Total Liability 27,950

Total Equity and liabilities Br. 86,680

vii. Recording Adjusting Entry

Adjusting Entry

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2016 30 Supplies Expense 2000

Supplies 2000
(Adjustment of supplies)
30 Insurance Expense 200
Prepaid Insurance 200
(Adjustment of insurance)
30 Depreciation Expense 150
Accumulated Dep.Truck 150
(Recognition of Deprecation)
30 Depreciation Expense 100
Accumulated Dep.Equip 100
30 Unearned Revenue 1,300
Service revenue 1,300
(Adjustments of unearned rev)
30 Salary Expense 1,250
Salary Payable 1,250
(Recording Accrued Salary)
VI. Recording Closing Entry
Closing Accounts
The revenue, expenses, and drawing accounts are temporary accounts used in classifying and summarizing
changes in the owner’s equity during the accounting period. At the end of the period, the net effect of the balances
in these accounts must be included in the permanent capital (Retained Earnings) account through closing entry.
The balances must also be removed from the temporary accounts and transferred to permanent account so that
will be ready for use in accumulating data for the following account period. Both of these goals are accomplished
by a series of entries is called closing entries. Closing entries transfer the balances of temporary accounts to the
owner’s capital account.
The closing process involves the following four steps:
1. 1. Revenue account balances are transferred to an account called Income Summary by debiting each service
fee and crediting Income Summary for the total revenue.
2. Expense account balances are transferred to an account called Income Summary by crediting each expense
account for its balance and debiting Income Summary for the total expenses.
3. The balance of Income Summary (net income or net loss) is transferred to the owner’s capital account by
debiting Income Summary for its balance and crediting the owner’s capital account
4. The balance of the Owner’s Drawing account is transferred to the Owner’s Capital account debiting the
owner’s capital account for the balance of the drawing account and crediting the drawing account .
In the case of a net loss, Income Summary will have a debit balance after the first two closing entries. In this case,
credit Income Summary for the amount of its balance and debit the owner’s capital account for the amount of the
net loss. Closing entries are recorded in the journal and are dated as of the last day of theaccounting period. In the
journal, closing entries are recorded immediately followingthe adjusting entries. The caption, Closing Entries, is
often inserted above the closing entriesto separate them from the adjusting entries
Closing Entries
Date Account Title and Descriptions P/R Debit Credit
2016 31 Service Fee 25,700
Income Summary 25,700
(Closing revenue Accounts)
31 Income Summary 15,170

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Salary Expense 7,650

Rent Expense 3,000
Utilities Expense 650
Truck Expense 1,000
Miscellaneous expense 420
Supplies Expense 2,000
Insurance Expense 200
Depreciation Expense 250
(Closing Expense Accounts)
31 Income Summary 10,,530
Owner's Capital 10,530
(Closing income Summary)
31 Owner’s Capital 1,800
Owner’s Drawing 1,800
(Closing Drawing account)
VII. Post-closing Trial Balance
A post-closing trial balance is prepared after the closing entries have been posted. Thepurpose of the post-closing
(after closing) trial balance is to verify that the ledger is inbalance at the beginning of the next period. The
accounts and amounts should agreeexactly with the accounts and amounts listed on the statements of financial
position at the end of the period.
Enkopa House Finishing and Decor
Post-Closing Trial Balance
For the month ended April30, 1016
Account Title Debit Balance Credit Balance
Cash 7,930
Accounts Receivable 5,600
Supplies 1,200
Prepaid Insurance 2,200
Office Equipment 10,000
Accumulated deprecation 100
Truck 60,000
Accumulated deprecation 150
Notes Payable 25,000
Accounts Payable 1,000
Salary Payable 1250
Unearned Service Revenue 700
Enkopa's Capital 58,730
Total 86,930 86,930

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