Roble and Rahel, the two outstanding New Millennium College 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
There were no liabilities received.
The beginning capital of 2 R lovers shop service is Br. 20,650 (7,500 + 900+ 1,250 + 11,000-0)
which is computed using the accounting equation A = L +C ,C = Asset – Liability
The transactions occurred during the month were summarized as follows:
January
1. Paid three-month’s rent in advance Br. 2250 Prepaid rent.
2. Paid the premiums on property and casualty insurance policies, Br. 1,740 prepaid
insurance.
4. Purchased additional service equipment on a accounts from Omedad Br. 2,500
6. Received cash from customers on account Br. 500
9. Paid cash for a newspaper advertisement, Br. 110
11. Paid Omedad for the part of liability incurred on January 4, Br. 1, 250
12. Record service revenue on account? Br. 1000
1. Paid laborers for two weeks’ salary Br. 500
17. Recorded cash from cash customers for service revenue earned during the first half of
January Br. 1, 100
17. Purchased supplies for cash Br. 950
20. Recorded service revenue on account for the period January 13- 20, Br. 700
24. Recorded cash from customers for service revenue earned for the period January 17-
24 Br. 1, 850
27. Received cash from customers on account, Br. 1,200
27. Paid laborers for two weeks’ salary Br. 500
30. Paid telephone bill for January Br. 75
30. Paid electricity bill for January Br. 140
30. Recorded cash from cash customers for services revenues earned for the period
January 25- 30, Br. 950
30. Recorded sales on account for the remainder of January, Br. 800
30. Rahel and Robel withdrew Br. 1,500 for their personal use
Instructions:
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
5. Prepares an income statement, a statement of owners’ equity, balance sheet to the
organization
6. Journalize and post the adjusting entries
7. Journalize and post the closing entries
8. Prepare a post-closing trial balance
Procedure /steps: 1. Collecting data about economic events
Business transactions are economic events that they need recording. Bills, invoices etc. could be
used as source documents to record the transaction. The transactions involved from
January1 - January 31 in the example, above, are the data for the economic events.
Procedure / step 2 single analyzing the data about economic events
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

Step 3 Journalizing: is the process of recording transactions in a business book called journal.
This recording transaction in a chronological order is done, after collecting the source documents
and annualizing the transaction
d.
e. The following is called a two – column Journal used to record transactions
f. Journal Page 1
Date Description Post Ref Debit Credit Used to
Year/month Date record the
credit
account
amount

g.
Used to write the Used to Refers Used to
h. (year, month
date describe the where the record the
and
i. date) the items to be transaction debited
transaction is recorded is posted accounts
involved amount
Journal page 1
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
Three lines are requiring in recording a transaction in a journal:
1. For recording debit part
2. For recording credit part
3. Reason for recording the transaction
Journal page 2
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

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
Used to write
A four-column account form is depicted below the account ID
Account title Account No
Date Item Post ref Debit Credit Balance
Debit Credit

To record the Description about the

item
Refers from Used to record the
increase/decease on the
Used to show the debit
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

Cash account no 11
Post ref Balance
Date Item Debit Credit Debit Credit
2002 Balance 7500 00
Jan 1 1 2250 00 5270 00
2 1 1740 00 3510 00
6 1 500 00 4010 00
9 1 110 00 3900 00
11 1 1250 00 2650 00
13 1 500 00 2150 00
17 1 1100 00 3250 00
17 1 950 00 2300 00
24 1 1850 00 4150 00
27 1 1200 00 5350 00
27 2 500 00 4850 00
27 2 75 00 4775 00
30 2 140 00 4635 00
30 2 950 00 5585 00
30 1500 00 4085 00
Ending balance 4085 00
Account receivable 12
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002 Balance 900
Jan 1 500 400
6 1 1000 1400
12 1 700 2100
20 2 1200 9000
27 2 800 1700
30
Ending balance 1700
Supplies 14
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
2002 Balance 1250 ent
Jan 17 1 950 2200 balance
31 Adjusting entry 2 680 1520

1520

After adjustment
Prepaid Rent 15
Balance

Date Item Post ref Debit Credit Dr. Cr. Before

2002 2250 adjustm
Jan 1 1 2250 750 1500 ent
31 Adjusting entry 2 balance
1500

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
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002 Balance 11,000
Jan 4 Purchase of equip. 1 2500 13,500
145

Ending balance 13500

Accumulated depreciation service equipment 19

Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan Adjusting entry 2 100 100

Accounts payable 21
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 4 1 2500 2500
11 1250 1250
1250

Salary Payable 22
Date Item Post ref Debit Credit Balance
Dr. Cr.
2002 31 Adjusting entry 2 100 100
Jan 100

2R - Capital 31
Balance

Date Item Post Debit Credit Dr. Cr.

ref
2002 Balance 20650
Jan 31 Closing Drawings 3 1500 1700
31 Closing net income 3 3200
22350
2R drawing 32
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 33 2 1500 1500
31 Closing entry 3 1500 -

Income summary 33
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 31 Closing expense 3 3200 3200
31 Closing revenue 3 6400 3200
31 Closing net income 3 3200
(Income summary)

Service revenue 41
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002 12 1 1000 1000
Jan 17 1 1100 2100
20 1 700 2800
24 1 1850 4650
30 2 950 5600
30 2 800 6400
31 Closing entry 3 6400

Salary Expense 51
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002 13 Payment 1 500 500
Jan 27 payment 2 500 1000
31 Adjusting entry 2 100 1100
31 Closing entry 3 1100 -
Rent expense 52
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 31 Adjusting entry 2 750 750
31 Closing entry 3 750 _

Supplies expense 53
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 31 Adjusting entry 2 680 680
31 Closing entry 3 680 _

Depreciation expense- service equipment 54

Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 31 Adjusting entry 2 100 100
31 Closing entry 3 100

Insurance expense 55
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 31 Adjusting entry 2 145 145
31 Closing entry 3 145 _
Miscellaneous expense 59
Balance

Date Item Post ref Debit Credit Dr. Cr.

2002
Jan 6 1 110 110
30 2 75 185
30 2 140 325
31 Closing entry 3 325 _

Procedure/ step 5: preparation of a trial balance

The equality of debits and credits in a ledger must be proved at the end of each accounting period. This
is made by preparing a trial balance. Trial balance is a list of tittles and related balances of the accounts
in the ledger.

Trial balance
On January 31, 2002
Title Debit Credit
Cash 4085 00
Accounts receivable 1700 00
Supplies 2200 00
Prepaid rent 2250 00
Prepaid insurance 1740 00
Service equipment 13500 00
Accounts payable 1250 00
2R- lovers capital 20650 00
2R- drawing 1500 00
Service revenue 6400 00
Salary expense 1000 00
Miscellaneous expense 325 00
Total 28,300 00 28,300 00
(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
 Error in computing account balance such as:
 Omitting to add/deduct a given figure
 Entering account balance to wrong column
 Error in posting such as
 Posting wrong debit or credit
 Posting debit as credit or vice versa
 Omitting debit /credit entry
 Error in Journalizing such as
 Journalize wrong debit /credit figure
 Journalizing a debit as a credit or vice versa
 Omitting debit/credit entry
The following errors cannot be detected by the trial balance
 Failure to record or post a transaction
 Journalizing or posting erroneous but equal amounts of debit and credit
 Recording the same transaction more than one
 Posting a part of a transaction correctly as a debit or credit but to the wrong accounts
Note: two other common types of errors are known as transpositions and slides. Transportation is the
erroneous rearrangement of digits, such as writing Br. 625 as Br. 265 or Br. 652. In a slid error type the
entire number is erroneously moved one or more spaces to the right or the left, such as writing Br. 625
as Br. 62.50 or 6.25
Detecting errors: There are no standard rules for searching errors. Errors can be detected by trial and
error, by auditing, by chance, etc.
Some of the procedures used to locate an error include the following
 Recalculate the debit and credit totals of the trial balance
 Compare amounts in the trial balance with the balance of accounts in the general ledger
 Recalculate the balance of accounts
 Check postings from the journal
 Check the equality of debit and credit entries in the journal
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
-For incorrect Journal entry which is posted or for posting to the wrong account journalizing and posting
a correcting entry.
Procedure / step 6: adjusting process
Before directly involving in to the adjusting procedure and the adjusting entries it is important to
introduce some basic concepts such as the following:
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
entries. By their nature, all adjusting entries affect at least one income statement and one balance sheet
account. Thus, an adjusting entry will always involve revenue or an expense account and an asset or a
liability account.
Some items that require adjusting entries include the following
Prepaid expenses (deferred expenses):- initially recorded as assets but are expected to become
expenses over time in the business. Examples include prepaid rent, prepaid insurance, supplies etc
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
2R shopping service
Worksheet
For the month ended January 31, 2002

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
Service. Equip. 13500 13,500 13500
Acc. Payable 1250 1250 1250
2R-capital
20,650 20,650 20650
2R,drawing 1500 1500 1500
Service Revenue 6400 6400 6400
Salary expense 1000 d) 100 1100 1100
Misce. Expense 325 325 325

Total 28,30 28,300

0

Insurance Expe. a) 145 145 145

Supplies. Exp. b) 680 680 680
Deprecation Exp. 100
c) 100 100
Accumulated dep. 100 100
c) 100
Salary payable d) 100 100 100
Rent expense e) 750 750 750
3,200 6,400 25,400 22,200
28,500 3,200 3,200

1875 1875 6,400 6,400 25,400 25,400

28,500
Adjustment
b) Supplies used Br. 650 (2200-1520)
a) Insurance expired Br. 145
e) Rent expired Br. 750
d) Salary accrued but not paid Br. 100
c) Depreciation of service equipment Br. 100
Explanation for the adjustment column:
Cross-referencing the debit and credit of each adjustment by letters is useful in reviewing the
worksheet.
If the tittles of some of the accounts to be adjusted do not appear in the trial balance, they should be
inserted in the account title column, below the trial balance totals, as needed. On the adjustment
column let’s see the adjustment given by letter
a) Prepaid insurance: The prepaid insurance as of January the beginning of the month has a balance of
Br. 1,740, which represents advance payment for the year. For the month of January out of the total
balance Br. 145 was expired. Therefore as January 31 of the total balance 145 was expensed but the
remaining 1595 (1740-145) is entered by writing (a) insurance expenses in the account title column and
(a) in the adjustments debit column
b) Supplies: The supplies account including the purchase has a balance of Br. 2200. But after physical
inventory or count the supplies on hand was found Br. 1520, therefore, Br. 680 (2200-1520) i.e. the
expired or consumed amount which is supplies expense. The adjustment is entered by writing (b) Br.
680 in the adjustments debit column on the same line as supplies expense ad (b) Br. 680 in the line as
supplies
c) Depreciation expense: Depreciation for the equipment for the month is Br. 100. The adjustment is
entered by writing(c) depreciation expense in the account title column Br. 100 adjustment debit column
the same line as depreciation expense but accumulated depreciation in the account title column Br. 100
in the adjustment credit column on the same line as accumulated depreciation
d) Accrued salary: The amount Br. 100 for January is an increase in expense and increase in liabilities.
The adjustment is entered by writing (d) Br. 100 in the adjustments debit column on the same line as
salary expenses (d) salary payable in the account title column, and (d) Br. 100 in the adjustment credit
column on the same line as salary payable.
e) Prepaid rent: Of the total amount paid in advance for three months Br. 750 (2250/3) is expired, rent
expense. The adjustment is entered as rent expense Br. 750 in the same line in the debit side of the
adjustment column and (e) Br. 750 in the credit side of the adjustment column the same line as the
prepaid rent line moth adjustment column
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
Note: The adjusted trial balance amounts are determined by extending the trial balance amounts plus or
minus the adjustments. For example, supplies account debit balance Br. 1520 on the adjusted trial
balance is the trial balance amount of Br. 2200 minus the Br.680 of the adjustment credit. Accordingly,
the worksheet is completed as shown in the worksheet. (Procedure 7 is completed)
Procedures /step 8: financial statements preparation.. The statements are, therefore, prepared as
follows
2R- shopping service
Income statement
For the month ended January 31, 2002
Service revenue ------------------------------------------------Br. 6400
Less: Expenses
Salary expenses Br. 1100
Insurance expense 145
Supplies expense 680
Rent expense 750
Depreciation expense 100
Miscellanies expense 325 3200
Net income Br. 3200
2R shopping service
Statement of owner’s equity
For month ended January 31, 2002
2R- capital, January 2002 ------------------Br. 20650
Add. Net income for the month 3200
Less with drawl 1500
Increase in capital 1700
2R –capital, January 31,2002 22,350
2R- shopping service
Balance sheet
On January 31, 2002
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
Liabilities and capital:
Account payable 1250
Salary payable 100
Total liability 1350
2R- capital 22,350
Total liab& capital 23,700
Procedure /step 9: closing entries
Revenues, expenses and drawing /dividend account are temporary accounts used to accumulated
effects of some transaction on owner’s equity account for a specific period. At the end of the accounting
period the balances of revenue and expense accounts are summarized in one another temporary
account called the income summary. The balance in the income summary is transferred/closed to the
capital (owner’s equity) account. The balance on the drawing /divided account is directly closed to the
capital (retained earnings account).
The process of transferring balances of temporary accounts to the capital account is called closing entry;
and these entries should be posted to the respective ledgers after journalization.
This closing of accounts is used to transfer net income or net loss and drawing /dividend to
capital/retained earning, account. Moreover; it is used to reduce the balance of temporary accounts to
zero so that they will be ready for the next accounting period.
For our example, 2R-shopping service, the closing entries are journalized on the journal and posted to
the respective ledgers. See them on the journal and on their respective ledgers.
2002 Closing entries:
Jan 31 Income summary 33 3100 00
Insurance expense 55 145 00
Supplies expense 53 680 00
Rent expense 52 750 00
Dep. Exp. Store eq 54 100 00
Salary expense 51 1100 00
Miscene. Expense 59 325 00
To close expenses
Service Revenue 41 6400 00
Income summary 33 6400 00
To close revenue
2R capital 31 1500
2R drawing 32 1500 00
To close drawing
Income summary 33 3200 00
2R – capital 31 3200 00
To close income sum.
(Net income of the period)

Procedure / step 10: post closing trial balance: It is a trial balance prepared after all adjusting and
closing entries are posted. It is prepared to check the equality of the total debit and the total credit of
the balance of the real accounts. It is the last step on the accounting cycle/ process the post-closing trial
balance for the 2R-shopping service is prepared and presented as follows.
2R- shopping service
Post closing trial balance
On January 31, 2002

Account title Debit Credit

Cash Br.4085
Accounts receivable 1700
Supplies 1520
Prepaid rent 1500
Prepaid insurance 1595
200
Service equipment 13500 1250
Accumulated dep. Service 100
Accounts payable
22,350
23,800
Salary payable
2R- capital 23,800
Total