Mat

eri
alf
ort
he
Cour
sePr
inc
ipl
esof

Accounting
-II

Compiled By: Tesfaye Teshome

 Ta
bleofCont
ent
s

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 1
 Ta
bleofCont
ent
s
Cours
eOut l
ine
Chapt
erOne :Ge ne ra lI ntroduc tion
1.
1 De fini tionofAc c ount ing
1.
2 Evol ut i
onofAc c ount ing
1.
3 Pr of e ssionofAc c ount a nc y
Chapt
erTwo:Ac count ingPr incipl e sandPr actices
2.
1 Ac c ount ingAsI nf orma t i
onSys tems( Da taPr ocessi
ngMe thods
)
2.
2 Pr inc iplesAndPr ac t
ic es
2.
3 Bus ine ssTr a nsa ctionAndTheAc count i
ngEqua t
ion
2.
4 Fi na nc ialSt a teme nt s
Chapt
erThree:Ac c ount ingCyc lef orSe rviceRe nde ringBus inesses
3.
1 Na tur eAndCl a
ss ificatio no fAc count s
3.
2 Cha r tofAc count s
3.
3 Fl owofAc count ingDa ta
3.
4 Tr i
a lBa lanc e
3.
5 Adj us tingPr oc ess
3.
6 Wor ks he etsForFi na ncia lSta t
e me nts
3.
7 Fi na n cialSt ate me nt s
3.
8 J our na lizingAndPos tingAdj ust i
ng
3.
9 J our na lizinga ndPos t
ingCl osingEnt rie
s
3.
10Pos tCl os i
ngTr ialBa la nc e
Chapt
erFour:Ac count ingForMe rchandi s i
ngBus ines se
s
4.
1 Ac count ingForPur chas esa ndSa les
4.
2 Cr edi tTe rms ,Ca shDi s count sa ndRe t
urn&Al l
owa nces
4.
3 Tr adeDi scount ,Tr anspor ta
tionCos tsAndSa lesTax
4.
4 Wor ks he etsForMe r
cha ndisingBus inesses
4.
5 Fi na n cialSt ate me nt sForMe rcha ndisingBu s i
nesses
4.
6 Adj us ting,Cl osingAndRe ve rsingEnt ries
4.
7 Cor re ction sofEr ror s
Chapt
erFive:Ac count ingf orAc cr ualsa ndDe ferrals
5.
1 Ac cr ua ls-Ac c ruedAs se tsAndLi abi li
ti
es
5.
2 De fe rrals-Pr e paidExpe nsesAndUne arne dRe venue s
Chapt
erSix:Ac c ount ingSys temsDe sign
6.
1 Pr in cipl esOfAc c o untingSys tems
6.
2 Ac count ingSys t
e msI ns tall
ationAndRe vision
6.
3 I nterna lCont r olPr inc i
pl e sAn dSt ruc t
ures
6.
4 Spe c ialJ our na lsAndSubs i
dia ryLe dgers
Chapt
erSeven:Ac count ingForCa sha ndTe mpor a ryI nvestment
7.
1 Con trolOve rCa s h
7.
2 Ba nkRe c onc ili
ation
7.
3 I nterna lCont r olofCa shRe ceiptsa ndPa yme nt
s
7.
4 Shor tTe r mI n vestme nt
Chapt
er8:Ac count ingf orRe ceiva bles
8.
1 Cl assif i
ca tionofRe ceiva bles
8.
2 De ter mi na tiono fI ntere st,DueDa t
e ,andMa turit
yVa lue
8.
3 Not e sRe c eiva ble s
8.
4 Unc olle ctibleAc count s

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt I
 Cha
pte
rOne
:In
troduc
ti
ont
oAc
count
ing

Cha
pte
rOne
Ge
ner
alI
ntr
oduc
tiont
oAc
count
ing

1.
1) De
fini
ti
onOfAc
count
ing
Accoun tingi sde fineda st hepr oc essofi dentifying,me asuri
ng,r e cor ding,c lassi
fying,
summa riz ing,a nalyz i
ng a nd i nte r
pr eti
ng e conomi ce vents( f
inancia lt ransa c
tions)a nd
communi c atingt her e sultst he reoft ot hee ntit
iesinterestedins uchinforma tiont oena blethem
makei nfor me dj udgme nts .Thea na lys i
sthede fini
tioni sasfollows :
 I denti fying-t odi st
ingui sha ne ve ntorat r
ansactiont hatmus tber e
cor de d.
 Me as ur i
ng-qua nt i
fyi nga ne ve ntorat r
ansactioni .e.accountingde alswi thonl ythos e
tra
ns a ctionsa nde ve ntst ha tc anbee xpre s
sedint ermsofmone y.
 Re cor ding-t hisi st heba sicf unc t
ionofa ccount i
ng.I tise ssenti
allyc onc er
ne dwi thnot
onlye ns uringt ha ta llb us ines st r
a nsacti
onsoff inanc i
alcha r
acterarei nf actr ecordedbut
alsot ha tthe ya rer ecor de di na nor de r
lyma nner.
 Cl ass ifying-i tisc onc erne dwi tht hes ys t
ema t
ica na l
ysisoft herecor dedda tawi thavi ew
togr oupt rans actionsore nt r
ie sofonena t
ureatonepl ace.
 Summa rizi
ng- t
hisi nvol ve s pr esenting the c la
s si
fied da t
ai n a ma nnerwhi chi s
unde rs tanda blea ndus efult ot hei nternala swe llase xternalendus e r
sofa c counting
stat
e me ntsorot he ra cc ount i
ngi nf orma t
ion
 Ana lyz ing- me a
nsme thodi calc lassifi
c a
tionoft heda tagive ninthef ina ncialstateme nts
.
Fore xa mpl e,a llitemsr elati
ngt o“ currentasset
s”a r
eputa tonepl ace .
 I nterpr eting-e xpl ainingt heme aninga nds ignificanceoft heda tas os i
mpl ifi
eda nd
analyz e d
 Communi c
a ting-t hea cc ount ing i nforma ti
on a fterbe i
ng me aningf ullya nal
yz eda nd
int
e rpr etedha stobec ommuni c atedi napr operf orma ndma nnertot hepr operpe rson.
Ac
count
ing:TheLa
ngua
geofBus
ine
ss
Account
inghasright
lybeente
rme dast
hel a
nguageoft
hebus
ines
s.Ac
count
ingisusedto
communicat
efinanci
ali
nfor
mationtova
riouspar
tie
swhohavesomest
ake(i
nte
rest
)inthe
aff
air
softhebusi
ness
.

1.
2) Evol
uti
onofAc
count
ing
Similartome dic
ine,law,economics
,a nda c
countinghase volvedinr
esponsetothesoci
aland
economi cne e
dsofs oci
ety.Asbusine s
sa nds ociet
yha vebe comemor ecomplexoverthe
years
,ma nycomple xeconomicdevelopme ntands oci
alpr ogra
msc annotbeunde rt
akendue
toshor t
ageoff i
nanc i
alinfor
mati
on.The r
ef ore,accountingha sevolvedtode vel
opne w
conceptsa ndte
chniquestome ett
heeve rincr
easingneedsf orfi
nanci
alinfor
mati
on.

 Pr
imi
ti
veAc
count
ing
I
nt hecivil
iz
ati
onofhuma nbeing,vari
oustypesofr e
c ordsofbus ine
ssa cti
vit
ie
sha vebe e
n
maintai
ned.Oft hese
,theolde
s tknowni sClayTa ble
tr e
cordsoft hepa ymentofwa ge
sin
Babyloniaar
ound3600B. C.The r
ea r
enume rousevidenc e
sofr ecor
dke epingands yst
emsof
ac
countingcontrolinEgyptandGr eekCi t
ySt a
tes.InEngl i
s h,underthedi r
ecti
onofKi ng
t
h
Willi
amt he12 r e
cordswerecompile
dtoa sc
e r
tai
nthef inanc
ia lr
esour
cesoft hekingdom.

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 1
 Cha
pte
rOne
:In
troduc
ti
ont
oAc
count
ing
Dr
awbac
ksofthePrimit
iveAccount
ing:
I.Itdeal
twi t
hl imi
tedaspect
soft hefina
nci
alopera
ti
onsofpri
vat
eorgove rnme
nt
ent
erpr
ises
.
I
I.Ther
ewa snos yst
emati
caccounti
ngf oral
ltr
ans
act
ionofapa
rti
cul
aruni
ti.
e.onlyf
or
spe
cifi
ctypeorport
ionoftr
ansact
ion

 Doubl
eEnt
rySys
temAc
count
ing
Sincethepri
miti
veaccount
ingwasincomplet
e,theevol
uti
onofthesyste
mofr ec
ordkee pi
ng
whichwa ssaidtobec all
ed“DoubleEntrySys t
em”wa sstr
onglyinfl
uencedbyVe ne t
ia
n
me r
chants
.Doubleentr
ys ys
temist
her e
cordi
ngspr o
cessofatra
nsact
ionint
otwopa r
ts.The
fi
rstknowndescri
pti
onofthesys
temwa spubli
shedinIt
alyin1494byape rs
oncall
edLUCA
PACI OLI

DoubleEnt r
ySystempr ovides:
1.Fora llbusi
nesstransaction,r e
cordingi nas ystemati
cma nneri.e.toestabli
shina n
equilibri
um.Fore xampl e,ifabus i
ne ssborrowe dBr500f romaba nk,t
hea mountofthe
loani srecor
dedbotha sc ashofBr500a nda nob ligat
iontor e
pa yBr500.Eitheroft
heBr
500a mounti sbalancedbyt heothe rBr500a mount.I ndoubl ee nt
rysys t
em,every
tra
ns acti
onenter
edtwi ceint hebooksofa c
count sasme ansofc heckandcontrol
.
2.Fort hesetofint
egratedfina nci
alst
a t
eme nt
s,re portinginmone yt e
rms
Inspiteoft het r
emendousde vel
opme ntofbus ine ssope ra
tionssince1494,a nd t heever
inc
reasingc omplexi
ti
e sofbus i
nessandgove rnme n t
alorganizat
ions,thebasi
ce l
ement
sof
DoubleEnt r
ySystemha vec ont i
nuedvirt
ua l
lyunc ha nged.

Readi
ng Ass
ignme
nt:t
he c
ont
ri
but
ion ofi
ndus
tr
ialr
evol
uti
on t
othe de
vel
opme
ntof
ac
counti
ng

1.
3) Pr
ofe
ssi
onofAc
count
anc
y
Tos ayaf ie
ldofs t
udyi sapr ofes
sion,the
remus tbea c
cumul a
tedbodyofknowl edge
(s
cientif
ickn owledge)a nda ni ndivi
dualshouldengageinittoge tea
rningunlikehobby.
Basedont hesetwoc r
iteri
aa c
count
ingi sdefi
nit
el
yapr ofes
sion.Therea r
ee mpl oyment
opportuniti
esina ccounti
nga nda r
eexpe c
tedtoconti
nuetogrowa ndexpa ndasbus iness
es
aregrowi nga ndexpa ndingfr om t
imet oti
me.The r
ea r
ethr
eetypesofjoboppor tuniti
esin
accounting:
1.Pr i
vateAc counting
2.PublicAc c
ount i
ng
3.Ac countingI ns
tructi
on
Pr
iva
teAccounti
ng:acc
ountant
sempl oyedbyabus i
nessfirm ornotf orprofitorgani
zat
ion
ar
esai
dtobee ngagedi
nprivat
ea ccount
ing.Theseac c
ountantsprovidea c
c ounti
ngs e
rvi
ces
t
ooneorgani
zati
onas al
arybasi
sa nddoava ri
etyofwor kincludingfinancialacc
ounti
ng,
mana
gementandcostac
counti
ng,budgeti
ng,int
ernalaudit
ing,controll
erandot her
s.
PublicAc count
ing:ac
c ount
antsandtheirst
affwhopr ovideser
vi c
esonaf e
eba s
isar
es a
idto
bee ngagedinpublicaccount
ing.Publicaccounta
ntarei nde
pendentprof
essi
onalpe
rsonsand
provideaccounti
ngservicet
oma nycl
ients
.The yprov
ides er
vicesuchas:
1.Audi t
ing-pr
ovidi
nga nopinionastofai
rnessandtruth-ne
ssfinanc
ialr
eport
s

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 2
 Cha
pte
rOne
:In
troduc
ti
ont
oAc
count
ing
2.Ma na geme nta dvisor
ys e
rvices-
to of fe
rc ons t
ruct
ive sugge s
ti
ons f orimpr oving a
c ompa ny’sme thodofope rat
ions
3.Ac countingSys te mDe vel
opme nt-deve l
opinga nASapr ivat
eorpubl i
ce nter
pri
ses
Readi ngAs signme nt :speci
ali
zeda ccountingf i
e l
dss ucha sfinancialaccounti
ng,a udit
ing,
costa ccounting,ma nage
rialaccounting,t axa c
c ount
ing,a c
c ount
ing systems,budge tary
account ing,i nterna t
ionala cc
ounting,not -
for-profitaccounti
ng,s oci
ala ccounting a nd
account inginstruction
Acc ount ingInstruction–t hi
stoge templ oyme ntoppor t
unit
iesindi f
fere
ntPr i
vateandPubl i
c
Highe rIns ti
tuti
on

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 3
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es

Cha
pte
rTwo
Ac
count
ingPr
inc
ipl
esa
ndPr
act
ice
s

2.
1) Ac
count
inga
sInf
orma
tionSys
tems
I
nor dertoprovideinf
ormat
iona ne nt
it
ymus te st
a bl
is
hitsowna ccounti
ngsys
tem.An
a
c c
ounti
ngsystemc onsi
st
sofme t
hodsa ndde vic
esus edbya nenti
tyt okeeptra
ckits
f
inanci
alact
ivi
ti
esa ndsumma r
izeinama nne
rus efultodeci
si
onma kers.Thepr
ocessof
f
orminganaccounti
ngsyst
emtoprovideinf
ormationisperf
ormedasf
oll
ows :
I
dent
if
ica
ti
onofUs
ers

I
nfor
mat
ionne
edofus
ers

Ec
onomi
cDa
ta Ac
count
ingSys
tem Financ
ial Dec
isi
on
Repor
ts byuse
rs

Step-1:I dentif
ica tionofUs ersofAc c ountingI nf orma t
ion
Individua l
soror ga nizationswho/ whi chha ves ta ke( i
ntere
s t
)i na ccounti
ngi nformati
onofa
busines stoma kes oundde cisi
onsa rec al
le dus ersofa c count i
ngi nf
orma ti
on.The ywi ll
receivedi f
f e
r entr epor tsabus ines st oma kede c isiona ndarec l
as s
ifi
edintot wo:( 1)Int
ernal
usersa nd( 2)Ext e rna luse rs
1.I nte r
na lUs ers :a r
ei ndi vidua lswi t
hina nor ganiz
a t
ionorbus inesse nt
ityt hatne e
d
a ccount i
ngi nf or ma ti
onoft hebus i
ne ssf ort hea f
fai
rsoft hebus i
ness.Internaluser
sa re
re sponsiblef ort hea dmi nistrationoft hebus ine ssandinc ludet hefol
lowingma nagement,
BOD,de partme nthe a d,c orpo ra teof fi
ce rlikec hie
fe xecutiveof f
icer
sa ndchi e
fope r
ati
ng
of fic
e r
sa ndc hie ffina nc i
a loffic ers.Ma na ge me ntne e
da na ccounti
nginforma ti
on:
 Topl anf utureope rat
ion
 Toe va lua t
ea ndc ont rolc ur rentope ration
 Toknowt hepr ofitabilit
yofe achde pa rt
me nt
 Toknowt hec ompa ny’ sc ashpos it
ion
 Toknowt het re ndofe ar nings
 Toa sse sswhe t hers pe ndi ngke ptwi thint hebudge tl i
mi tornot(
e s
pec i
all
yinNGO
an dGove r
nme n talorga ni zati
on)
 Toa ss urewhe the re xpe ndi turea rea uthorize
dornot (gove r
nme ntalandnot -
for-
prof i
tor ganiza tion)
2.ExternalUsers
:arethoseindividua
lorinsti
tuti
onsins
ideorout
sideaneconomicentit
y
who/ whic
hne edacc
ounti
ngi nformati
onaboutthatent
it
yfort
heirownaff
air.Theyne e
d
accounti
ngi nf
ormat
ionf ortheirbenefi
t.Thisgroupincl
ude:ownersofthebus i
ness,
potenti
alinves
tor
s,bankers,suppli
ersandot hercr
edi
tors
,employee
sandl aborunion,
governmentalage
ncie
s,etc.

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 4
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
Owne rsne eda ccount ingi nfor ma ti
on:
 Toknowt heope ra tingr e sultsofthebus i
ness
 Toknowi tsf ina nc ialp os it
ion
Pote
nt ialinvestor
sne eda c count i
ngi nfor ma t
ionabus i
ne s
sto:
 As sesst her iskne s soft hei nves t
me nt
 Pr edic
ti tsf utur epr ospe ritie
s
Banke rsne eda cc
ount i
ngi nf or ma t
iont o
 Eva luatet hef ina nc i
a lsoundne s
sofabus i
nessorganizat
ion
 As sessr isksi nvol ve di ngi vingl oa ns
Suppliersne eda ccount ingi nf orma t
i ont o:
 De c i
dewhe the rtos e l
lornott os ellgoodsa ndservice
sonc re
ditbasi
s
Empl oye esandl aboruni onne e da c count i
ngi nfor
ma t
ionbe f
orebe gi
nningnegot
ia
ti
onoff
or
newl aborc ontractt oknow:
 Thef i
na nc i
a lpos itiono fabus iness es
 Thepr of i
tabi l
ityofabus ines s
 Thes t
a bilit
yofabus ines s
Gove rnme ntalAge ncie sne eda cc ount i
ngi nforma t
ionf orpurposeofdeter
miningi
ncomet
ax
payablea ndp ensionc ontr ibut ionofa ne mpl oye e

Step-2:Inf
ormati
onNe edofUs er
s
Thist odet
erminetheinfor
ma ti
onneedsofint
erna
luser
si.e
.thetypeofinf
ormat
ionne
eded
byi nter
nalore xter
nals t
akehol
der
ss houl
dbei dent
if
iedbyi nf
ormat
ionprovi
derbefor
e
inf
orma t
ionisprovi
dedtous e
rs.

St
ep-3:Infor
ma t
ionProc
essi
ng
Theinformati
onne e
dofus e
rsdet
erminet
heeconomicdat
atobegat
hereda
ndproce
sse
dby
acc
ountingsyst
em.The ntheacc
ounti
ngsyst
em gene
rat
erepor
tst
hatcommuni
cat
eesse
nti
al
i
nformationt
ous er
s

2.
2) Ac
count
ingPr
inc
ipl
esa
ndPr
act
ice
s
Expe ri
encedp rofess
ionalaccount
a ntscontri
butethe
irbe stthi
nkingt othesolut
ionofproblem
continual
lyc onf r
onti
ngt h
eirs t
affore mployees
.Pr ofess
ionala s
sociati
onpe ri
odic
allyissue
pronounceme ntsona cc
ountingpr inci
plesa ndconce pt
s.Ac counti
ngpr inci
plesorstandards
areconv e
ntiona lrul
esandregulat
ionst hatgovernactionsinunde r
takingaccounti
ngac t
ivit
ies
.
Conc ept
sa r
eba sicass
ump t
ionuponwhi c
ht hesci
en ceofa ccount
ingi sbased.Prac
ticesare
thea ppl
icat
ionofa ccounti
ngpr inc i
plesandc onceptstos pecif
ica ccount
ings i
tuat
ion.The
mos timport
a ntc once
ptsandpr i
nciplesa r
e:

TheBus inessEnti
tyConc ept
Itstat
edt hatt
hebus inessa ff
air
smustbes epara
te df r
om thea ffai
rsofowne r
sora nyother
busines
sr egar
dlessthef orm ofthebusine
ss.Tha tisa nybus i
ne s
sr ecordmus tbes epara
ted
from personalrecordora nyotherbusines
sre c
or d.Ins imila
rf ashiont her eport
sa ndthe
propert
ie
sofbus i
ne s
ss houldnotincl
udee i
the
rt her eport
sort hepr operti
e softheowne ror
anyotherbus i
ness.Ma kingthiswoul
ddi st
ortt
hef i
na ncia
linforma t
iona ndpr of
itabi
li
tyofthe
busines
s
Business
e sma yha vediffe
r e
ntformsowne r
shi
ps uc ha sSolePr opri
etorship,Partne
rshipand
Corporat
ion.Re gardl
essoft heformofthebusinesstheremus tbes eparati
onofbus i
nessfr
om

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 5
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
t
heown
ers
hip.

TheCos tPrinciple
Ther e cordsofpr opertiesands e
rvice
spur chasedbyabus i
nessarema i
nta
inedinacc
orda nc e
witht hec ostprinciple.Itrequiresthatmone ta
ryr ecordi
ngoftransa
cti
onbei nter
msofc os t
.
Tha tisf inancialtransac t
ionsmus tberecordedi ntermsofthea mountofmoneye xc
ha nge d.
Thi sist heva lueofe xchangeont heda t
eoft ransa
ction.Thepriceagre
eduponi ssuff
i c
ie nt
forr e
c ordingpur pos eina cc ount
ing.Fore xample,ifabuildi
ngise s
ti
ma t
edatBr100,000f or
proper t
yt axpur pos ea nda tBr2 00,000f orinsur
a ncepurposeandpur c
hasedatac ostof
Br150,000,t heBr150, 000i susedi nt hebuye r’saccounti
ngr ec
orda c
cordi
ngt oc ost
principlef orrecordingpur p ose.

Thereareals
odi f
fer
entaccountingprinciple
s,wh i
chwi l
lbedi scus
sedinPr inci
ple
sof
Account
ingPa r
tIIsucha sGoi ngConc ernConcept;Per
iodi
cit
yAs sumption;Mone t
ary
Assumpt
ion;andMatchi
ngPrinciple
.Acc ounti
ngPri
ncipl
esareneces
sarysothatt
heusersof
i
nformat
ioncancomparet
hefinancialc
ondi t
ionandopera
ti
ngresul
tsacr
osscompa ni
es.

2.
3) Busine
ssTr
ans
act
ionandt
heAc
count
ingEqua
tion
2.
3.1)Bus
ine
ssTr
ans
act
ion
Busines
st ransacti
onsa r
ee ventsorcondit
ionsthatmustber ecordedinte
rmsofmone yin
acc
ountingr e
c ords.
 Eve nts-payme nt
sorapr omi set
oma kepa ymentorre
c ei
ptsora c
cept
anceofapromiset
o
rec
eivec ashwi t
hinaspe c
ifie
dperi
odoft imeinexchangeforgoodsandservi
ces
 Condi ti
ons -thet e
ari
nga ndwe ar
ingoutofl onglivedpr oper
ti
esofabus ines
si .
e.
decr
e asei
nus ef
ulnes
so flongli
vedproperty.
Example:
 Mon thlyelectr
ici
tybil
lofBr100
 Thea cqui
s it
ionofal anda ndabuildi
ngf orBr250,
000

Na
tureofBus i
nessTr ansa
cti
on
 Businesst
ransac t
ioncoul
dbeSi mpl eorc ompl ex
 Businesst
ransac t
ioncoul
dbeI nternalore xte
rnal
 Businesst
ransac t
ionaff
ectsthefinancialposit
ionofabus inessanditsoperat
ingresult
sor
atleas
titaff
ectstwoi t
ems
 Businesstra
nsac t
ionmus tbes upportedbys ourcedocume nts(busine
s spaper
s )
.Source
docume nt
sincludes al
esinvoice
,r e
ceipts,checks,chec
ks t
ub,f r
ightbil
l,andetc.Busine
ss
docume nt
snorma ll
ycontaininformationa stoth emone t
a r
ya mounttober ec
orded,the
part
iesinvol
ved,t heter
moft r
ansacti
ona ndot herrel
evantinfor
ma ti
ons uchasnatureand
dateoftra
nsactions.

2.
3.2)TheAc
count
ingEqua
tion
Thewholeoff inancia
la ccount
ingi sbasedonave r
ys impleidea
.Thisi sc al
ledthe
acc
ounti
nge quat
ionwhi chsoundscompli
c at
edbuti
nfa
cteasytounder
sta
nd.Ifafir
mi stobe
se
tupo restabl
is
hedde fi
nitel
yitneedresource
s.I
nthefi
rstpla
celetusass
umet hati
tisthe
ownerofthebusine
s shassuppli
edalloft
her e
sour
ces
.Thiscanbeshown:
Re
sour
cesi
ntheBus
ine
ss=Re
sour
cesSuppl
iedbyt
heOwne
r

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 6
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
Inaccounti
ngtheter
m us
edtodes
cri
bet
heresour
cessuppl
ie
dtheowne
risc
all
edOwne r
’s
Equit
y.Thet e
rmus e
dtodes
cri
bet
heact
ualr
esour
ceinabusine
ssi
scal
le
dAsse
t.Thus
,the
acc
ountingequat
ioni
s:
As
set
s=Owne
r’sEqui
ty
Inthesecondplaceletusa
ssumet hatpeopleothe
rtha
nt heowne rhavesupplie
ds omeofthe
res
ources(mater
ialorfi
nan
cialresourc
es).Thus,
Resourc
esinaBus i
ness= Re sourc
esSuppl
ied + Re source
sSuppl i
ed
bytheOwne r byOthers
Liabi
li
tiesarethet e
rm gi
vent ot hea mountsofresourcesuppli
edpe opl
eot herthanthe
owners.Thisi
sa mountofass
e towe dtoother
sbythebusines
s.Thust heaccount
ingequat
ion
isnowc hange
dto
As
set
s=Owne
r’sEqui
ty+Li
abi
li
ti
es
However,lia
bil
iti
esa r
e pl
ace
d before
Owner’
sEquity,intheacc
ounti
ngequati
on,be
causecre
dit
orshavepre
fer
ent
ia
lri
ghtt
ot he
as
set
softhebusine
ss.Thus
,theac
count
ingequa
ti
onc a
nbes t
at
eda s
:
As
set
s=Li
abi
li
ti
es+Owne
r’sEqui
ty

2.
3.3)De finitionofTe r msUs edi nBus ine ssTr a nsac ti
onsa ndAc count ingEqua tion
 As sets-a repr ope rtie sofa llki ndss uc ha sbui ldings ,ma c hineri
es,mot orve hicles
,be nefit
s
(debtbyc us tome rsora ccountr ecei va bles)
,a nda mountofmone yonha ndori naba nk
account .
 Li abi li
ties-cons istsofmone yowi ngf orgoodsa nds er vicess uppl i
edt ot hef irma nd
expe ns esf orwhi cht hepa yme ntwa snotma de .I ta ls
oi nc ludedl oansma det othef irmby
othe rbus ine ssa ndf ina nc i
a lins t
ituti
on.
 Ca pital-isof te nc a l
le dt heowne r
se qui t
yorne twor th.Iti sthedi fferencebe t
we ena s
s et
s
andl iabi l
ities
 Ac count sr e cei vabl e-ismone yt obec ollect
e di nt hef ut
ur e.Itisa na ssetthata r
isesf rom
thes ellofgoodsa nds e r
vi cesonc r
e ditba s
isorona ccount .
 Ac countpa ya ble-ismone yt obepa idi nt hef ut ure.I ti sal iabilit
yt hata ri
s esf rom
purc hasinggoodsors ervice sona ccountba sis .
 Pr epa ide xpe ns es-a r
ea s setswhi c hr epre sentc ons uma blegoodspur chaseds uc ha s
supp lies,pr epa idr e nt,pr epa idi nsura nc e,pre pa i
di ntere s
t
 Re ve nue -
isage ner alte r
mt ha ts ta
ndsf ort hea mo untofc ha r
gea gains tcustome rforgoods
ors ervicess ol dt ot hem.Ba s
e dont hes our ceofr eve nue,i ti sc lassi
fiedi ntot wo:
Mi sce l
lane ousRe ve nuea ndPr incipa lRe venue .Re venuec anhavedi ffe
rentna me ss ucha s:
1.Roya ltie s-r eve nuef roms al
eoff ranchi se
2.Fa resr e ve nue -ar eve nuege ne ra t
edbypr ovi dingt ransportations ervice
3.Fe esr e ve nue -bypr ovi dingpr ofe ss
iona ls ervice
4.Sa les-r e ve nuef r
oms a le
sofgoodsa nds ervices
5.Re ntr e ve nue -f romr e ntingr ea l-est
atea ndot he re quipme nt
6.Tui tionf ee -r evenuef rompr ovi dinge duca ti
ona ls ervice
 Expe nses-r e pr ese ntt hec os tofa ss etsc ons ume dors ervicesus e
dupi nt hepr oc essof
earningorge ne rat
ingr eve nue .Fore xa mpl e,s alarye xpe ns e,supplie sexpe nses,insur ance
expe ns e,etc
 Ne tincome /ne tpr of i
t-isthee xc essofr evenuee arnedove rthee xpe nsesint hepr oce s
sof
gene ratingr e ve nue .

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 7
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
 Ne tloss-istheexcessofexpens
esove
rt hereve
nueear
nedduri
ngthepe ri
od
 Inve st
me nt-repr
esentt
hec as
horothe
ra sset
sputi
ntothebusi
nes
sbyt heownerofasole
propr i
et
or s
hip
 Wi thdrawa l(dra
wing)-
isthecashora
nya s
setwit
hdr
awn( t
akenaway)f r
omthebus
iness
byt heowne rforpe r
sonaluse.Withdrawalisrec
ordedina c
countingrec
ordoft he
business.

2.
3.4)Ac
count
ingEqua
tiona
ndBus
ine
ssTr
ans
act
ions
Thee ffectofbus ines str ansa ct
ionona ccount inge qua ti
onc anbede mons t
rat
edbyt aking
somety picaltr
a nsactions.
Ill
ust
ration:Mr .Ha r
ae stablishe daSol ePr opr ie
torshipBus i
nessknowna sHa raTaxion
August1,1995a ndde cide dt hef isc alye aroft hebus i
ne sst obef r
omSe ptember1t oAugust
31.Duringt hef ir
stmont hofope ra tiont hef ollowi ngt ransac ti
onsoccurred:
August1:Theowne rpur c hase dt wot axisa tBr100, 000e achforthebus iness
August2:Ha r
ade pos i
tedBr100, 000i naba nka ccounti nt hena meoft hebusiness.
August4:Pur cha sedal a nda saf ut urebui ldings it
e sforBr7, 500paidinc ash
August7:Pur chas edBr850ofga s oline,oi l,andot hers uppl i
esona ccountpr omisi
ngtopa y
inthefuture
August10:Pa i
dc r editorsona c cou ntBr400
August15:Ha raTa xie arnedf ar
e sr eve nueofBr4, 500r e ceivi
ngthea mounti ncash.
August21:Thebus i
ne sspa idt hef ol lowi nge xpe nsesinc a
s h:
 Wa gesexpe nse Br1, 200
 Re ntexpe ns e 850
 Ut ilit
iese xpe nse 150
 Mi scellaneouse xpe ns e 200
August23:Thebus i
ne ssc harge dc us t
ome r
sf ort het ranspor tat
ionservi
cepr ovidedonaccount
Br2,000
August28:Re ce i
ve dc ashf romc ustome rsona c countBr1, 500
August30:Mr .Ha rawi thdr awnBr1, 000f romt hebu sine ssinc a
shforpe r
sonaluse
August31:Att hee ndoft hemon tht hec ostofs uppl i
esl eftonha ndisBr50
Inst
ruct
ions:
1)Indi ca
te(s how)t hee ffec tofe achoft hea bovet rans a
c ti
onsona ccountingequati
on
2)Pr eparethea ccount i
ngs tateme nts

As
set
s = Li
abi
li
ti
es+Capi
ta
l
Account
s Ac
count
s Owne r'
s
Da
te Ca
sh Rec
eivabl
es Suppl
ies Ta
xi La
nd = Pa
yabl
es Equit
y
Augus
t1, +200,
000 +200,
000

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 8
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
Ba
lanc
e 200,
000 = 200,
000
August2, +100,
000 +100,
000
Balance 100,000 200,
000 = 300,
000
August4, - 75,
000 +75,
000  
Balance 25,
000 200,
000 75,
000 = 300,
000
August7, +850 +850  
Balance 25,
000 850 200,
000 75,
000 = 850 300,
000
August10, -
400 -400  
Balance 24,
600 850 200,
000 75,
000 = 450 300,
000
August15, +4, 500   +4,
500 F.
Reve
nue
Balance 29,
100 850 200,
000 75,
000 = 450 304,
500
August21, -2,
400 -1,
200 W.
Expe
nse
-
850 W.
Expe
nse
-
200 W.
Expe
nse
          -
150 W.
Expe
nse
Bal
ance 26,
700 850 200,000 75,000 = 450 302,
100
Augus
t23,   +2,000         +2,
000 F.
Reve
nue
Bal
ance 26,
700 2,
000 850 200,000 75,000 = 450 304,
100
Augus
t28, +1,500 - 1,
500          
Bal
ance 28,
200 500 850 200,000 75,000 = 450 304,
100
Augus
t30, -1,
000           -1,
000 Wi
thdr
awa
l
Bal
ance 27,
200 500 850 200,000 75,000 = 450 303,
100
Augus
t31,  
______ _____ -
800 _____ _____ ____ -
800 S.
Expe
nse

Ba
lanc
e 27,
200 500 50 200,
000 75,
000 = 450 302,
300

2.
4) Ac
count
ing(
Fina
nci
al)St
ate
ment
s
Ac c
ountingstateme ntsarediff
erents
ummari
esthatc
ommuni
cat
eac
count
ingi
nfor
mat
ionofa
busine
sst ousers.Andi nclude:
 I ncomes t
a t
eme nt
 St ateme ntofowne r
’sequit
y
 Ba la
nces hee t
 Ca shflows tat
e ment
Financi
als t
at
eme nt
sa reidenti
fi
edbythr
eeheadi
ngs:
 Thena meoft hebus ine
ss
 Thet it
leoft hes t
atement
 Thes pe ci
ficda t
eorpe ri
od

1.I ncomeSt ate

ment
Thiss t
at
e mentisasummaryofreve
nuesandexpe
nsesfort
hespeci
ficper
iodoft
ime
.The
procedureisthetot
ale
xpens
esarededuc
tedfr
omthetot
alofre
venuestodete
rmi
nene
tlos
s
ornetincome .Fore
xampl
e,i
ncomestat
ementf
orHaraTaxi

Ha
raTaxi
I
ncomeSta
tement
Fort
heYea
rEndedAugust31,1995
Fa
resRe
venue Br6,
500

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 9
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
Le
ss:Expens
es
Wa ge
sExpens
e 1,20
0
RentExpense 850
Util
it
ie
sExpense 200
Suppli
esExpens
e 800
Miscel
lane
ousExpens
e 150
Tota
lExpense (
3,200)
Ne
tIncome Br3,300

2.Ca pi
talStateme nt(Stateme ntOfOwne r’sEqui t
y)
Thisstat
eme nti sas umma rywhi c
hs howsc hangeinowne r
’se quit
yorc a
pital.ForHa r
aTaxi
thecapit
alstateme ntisasf oll
ows :
Ha r
aTa xi
Stat
eme ntofOwne r’
sEqui ty
Forthepe r
iode ndedAugus t31,1995
Ha raCa pit
al,Augus t1,1995 Br200,000
Add:Addi ti
ona lInvest
me nt Br100, 000
Add:Ne tIncome 3,300
Le ss
:Wi t
hdrawa l (1,000)
Ne tIncr
e aseInCa pit
al 102,300
Ha raCa pit
al,Augus t31,1995 Br302,300
3.BALANCESHEET
BalanceShe etisas tatementt hatshowst hef i
nanc i
alpos i
tionofabus i
nessonas peci
fi
cda
te.
Itlis
tsAs sets,Li abil
iti
esa ndCa pit
alona nys pecificda t
e ,whichi sthel astdateoft
he
accounti
ngpe riod.
Ha r
aTa xi
Ba lanceShe et
Augus t31,1995
As set
s: InBi rr Li a bil
iti
esa ndCa pi
tal I nBi r
r
Ca s
h 27, 200 Li abilit
ies:
A/Re ceivables 500 A/ Pa yables 450
Supplies 50
Land 75, 000 Ca pit
a l
:
Taxi 200, 00 Ha ra,Ca pit
al 302,30
0 0
TotalAs s
ets 302, 75 Tot a
ll i
abili
ties+OE 302,75
0 0

4.CashFlowsSta
tement
Cashf
lowssta
tementi
sas umma r
yofc ashinfl
ows(Cashrec
eipt
s)andCa
shout
fl
ows(
Cas
h
pa
yments)f
oraspeci
fi
cpe r
iodoft
ime .I
tisrepor
tedi
nthre
esecti
ons
:
 Cashfl
owsfromope ra
ti
ngact
ivit
ies
 Cashfl
owsfrominvesti
ngact
ivit
ies
 Cashfl
owsformfinanci
ngact
ivit
ies

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 10
 Cha
pte
rTwo:Ac
count
ingPr
inc
ipl
esa
ndPr
act
ic
es
HaraTaxi
Sta
te mentofCa s
hFlows
Fort heYe arendedAugust31,1995
Ca
shFlowsFromOpe ratingAc tiviti
es:
Ca
shinfl
owf r
omr evenue 6,000
Ca
shoutfl
owf orexpe nse (
2,800)
Netcashflowsf romope ra t
inga c
ti
vit
ies 3,200
Ca
shFlowsFromI nve st
ingAc t
ivitie
s:
Ca
shinfl
owf r
omi nves t
ing 0.00
Ca
shoutfl
owf orinve sti
ng (
75,000)
Netcashflowsf romi nvestingacti
vit
ie
s (
75,000)
Ca
shFlowsFromFi nancingAc tiviti
es:
Ca
shinfl
owf r
omf inancing 100,000
Ca
shoutfl
owf romf inanc i
ng (
1,000)
Netcashflowsf romf ina
nc inga c
ti
vit
ies 99,000
Ca
shBa l
anceonAugus t31,1995 Br27,200

Compi
le
dBy:Ka
ssa
hunB.
,Le
ctur
era
tAAU,Sc
hoolofComme
rce
,Ac
count
ingDe
par
tme
nt 11
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s

Cha
pte
rThr
ee
Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
3.
1) Na
tur
eandCl
ass
ifi
cat
ionofAc
count
s
3.
1.1)Na
tur
eofAc
count
s
Thes i
mpl estwa yofpr ovidinga c
count ingi nfor mationorpr epa r
ingf ina nci
als tat
e ment sisto
recorda nds umma ri
zet ran sacti
on sont hea cc ountinge qua ti
onf orma t
.Howe ver,thisf ormat
isa wkwa rda ndc umbe r
somef orre cordinga nda na lyzingt ent hous andsoft r
ans a
ctionst o
providei nfor ma ti
on.Thus ,ac countant sac c
umul a
tet hee ff
e ct
sofi ndivi dualtransactionona
separater ecor df ore ac hi temt ome ett hegoa lofpr ovidi
ngi nforma ti
on.The ses e par
a t
e
recordss how i ncreasesi nt hei t
e m,de creas esi ni tema ndba l
anc ei nitem.Thet ypeof
separaterec ordsus edf ort hepur pos eofr ecor dinga lltransacti
onsr e l
ate dtoi ndividuali te
mi s
call
e dAnAc count.Agr ou pofa c
count sisc a ll
e dledge r
.Thes imple stf ormofa na ccountha s
threepa r
ts:
 Ti tle-t hea cc
ountna me
 As pa ceforrec ordingt hea mountofi nc r
e as
e sini t
emi nt ermsofmone y
 As pa ceforrec ordingt hea mountofde creasesini te
mi ntermsofmone y
Thel eftsideofa na ccounti sc all
edDe bi tSidea ndt hewor d“ Cha rge”s ome ti
me sused
asas ynonym f orde bit.Amount se nteredi nt hel efts i
deofa na cc ountr ega r
dlessoft he
accountt it
lea rec all
edde bitandt hea c counti ss ai
dt obede bit
e d.Ther ightsideofa na ccount
iscalledc r
e dits i
dea ndt hea mounte nteredi nt herights ideofa nac counti sa l
s ocalledc redi
t
andt hea ccounti ss a
idt obec redited.

3.
1.2)Ge
ner
alRul
esofDe
bita
ndCr
edi
tforAc
count
s
 As s et
s-thei ncr
e a
sings i
deofa llasse t
sa cc
ountisthede bitsideandt hedecre
as eisthe
cre ditside .
 Lia bili
ties -
theincre
asesideofallliabil
iti
esist
hec redits
idea ndthedecrea
singsi
dei sthe
de bitside .
 Ca pi t
al- theincre
asesideofc a
pitalac c
ountisthecreditsi
dea ndthedecrea
singsideisthe
de bitside .
 Re ve nue -theincreasesideofa l
lRe venueaccountsisthec redi
tsideandthede cre
asing
sidei sthede bi
tside.
 Expe nses- theincrea
singsideofa l
le xpensesaccountisthede bi
tsideandthedec r
easeis
thec r
edi tside.
 Dr a wing-t heincreasi
ngs i
ded rawingi sthedebitsideandt hedecreas
es i
deisthec re
dit
side .

3.
1.3)Nor
malBa
lanc
eofAc
count
s
Thesum ofincreas
esrec
ordedinana c
countisusuallygre
ate
rthanore qua
ltothes um of
dec
rease
sr ec
ordedina nac c
ount
.Forthisreason,thenormalba l
anceofa l
laccount
si s
pos
iti
verathe
rthannegat
ive.Thu
s,thenor
ma lbalan
ceofa nyaccountist
heincr
eas
ings i
de.
Summa r
iesRulesofDebi
tandCredi
twithnor
ma lbalance
sofaccounts

12
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
It
ems I
ncr
eas
ingSide De
cre
asi
ngSide Nor
ma lBal
anc
e
Asset
s Debit Credi
t De bi
t
Lia
bili
ti
es Credi
t Debi
t Credi
t
Capit
al Credi
t Debi
t Credi
t
Drawing Debit Credi
t De bi
t
Revenues Debit Credi
t De bi
t
Expense
s Debit Credi
t De bi
t

3.
1.4)Cl
ass
ifi
cat
ionOfAc
count
s
Accoun
tsinal e
dge
ra r
ec la
ssi
fie
dba s
edonc
ommonc
har
act
eri
st
ic
sasaba
lanc
eshe
et
ac
count
sorinc
omest
ate
me ntacc
ounts

Bal
anceShe etAc counts
Bal
anceShe etAc countsf urt
he rc lassif
iedi ntot hre ea nda relis
tedint heledge rintheor derof
Ass
ets,Liabi l
itya ndOwne rsEqui t
y
A)As sets-
a sse tsareclassif
iedi nt het wogr oupsa sc urrentasset
sa ndpl antassets
1.Cur rentAs se t
s-ar
ea nya sse t
st ha tma yr easona blyber ealiz
edi nca shors oldorc onsume d
within ye a rorl ess pe riod .Fore xa mpl e:Ca sh,Ac counts Re ceivable,s upplies
,
commodi ties
2.PlantAs se ts-t
hesea reus e di nt hebus inessope rationsa nda reofpe rma nentna tur
e .For
exa mpleEqui pme nts,ma chine ry,building,f ur nit
ur e,land,etc
B)Liabilit
y-t het woc ategoriesoc c urr
ingmos tfre que ntl
ya re:
1.Cur rentlia bili
ties
-a reliabiliti
est hatwi llbeduewi t
hinshortpe r
iodoft imeus uallyaye ar
orle sstha tha vetobepa idoutc urr
enta s set
.Fore xampl e:sa
larypa yable,inter
estpaya ble
,
taxpa ya ble ,anda ccountspa yabl e
2.Longt erml i
abil
iti
es-a rel i
abi l
itiestha twi l
lnotbepa idordueorma t
uredc ompa rati
vely
forlongpe riodoft imeus uallymor et ha noneye ar.Fore xampl emor tgagepa yable,notes
paya ble
C)Owne r’sEqui ty-i
sar esi
dua lc la i
ma gainstt hea s setofthebus inessa ft
erl i
abil
it
yi sf ul
ly
dedu cted.Forac orporationowne rs ’e quityi sc al
leds t
oc khol der’se quit
y.Dr a wing
represent st hea mountofc as horot hera ss
e tst ake noutoft hebus i
nessf orpe r
sona luse
andi tisoneoft hec apit
a lac count s
.

Inc
omeSt ateme ntAc count
s
Inc
omeSt ateme ntAc count
sa recl a
ssif
iedintot
hre
eanda r
elis
tedi
ntheorderofr
eve
nuefir
st
andexpensese cond.
Re ve
nuei si
n creaseinc a
pit
a lbygr ossamountasares
ultof:
 Sa leofgoodsa ndservice
 Re nti
ngr eal
-est
ateandot herproperti
es
 Pr ovi
di ngprofessi
ona lservice
 Sa leofa sset
s
Expense
s–r epresentdecreasinginc api
talbygrossa
mounta sare
sultofbusi
nes
soper
ati
on.
Thatisa
sar es ultofconsuminga s s
etsorusingupofse
rvice
s.

13
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
3.
2) Cha
rtofAc
count
s
Accountsar es eque ntiall
ya rra
ngeda ndgi vennumbe rforus ea srefer
ences.Thelistof
ac
countsa l
ongwi t
ht heirnumbe r
ss howingthesequenceofa ccountintheledgeriscalled
ChartofAc c ounts.Ac cordi
ngtotheirorderinthef
inancialst
atementsassetcomesfir
sta nd
t
henf oll
owe dbyl i
a bili
ti
es,capit
al
,r eve
nue sandexpenses.Thec hartofa c
countofEt hio
MobileMa int e
na ncewhi chisowne dbyAt oSa mue
la ndma nagedbyhi swi f
eW/ oEthiopia
i
sfollows:
1.As se t
s
Cash 11
Acc ountsRe ce i
vabl
e s 12
Suppl i
es 13
Prepa i
dI nsur ance 14
OfficeEqui pme nt 17
Land 19
2.Li abili
ties
Acc ountsPa yable 21
Une arnedRe v enue 23
3.Ca pital
Samue l
,Ca pi t
a l 31
Samue l
,Dr a wing 32
Inc
omeSumma ry 33
4.Re ve nue s
FeesRe venue 41
RentI ncome 42
5.Expe nses
Sal
a ryExpe ns es 51
RentExpe ns e 52
Suppl i
esExpe nse 53
Uti
litiesExpe nse 54
Misc ell
ane ousExpe nse 59
Note:Af l
exibles yst
emofnumbe r
ingisdesire
d.Suc hs ys
temha stheadvant
ageofpe rmitt
ing
ofthel aterinsertionnewa ccountswithoutdisturbi
ngot heraccountnumber.I nthea bove
chartofa ccountsc ert
ai
nnumbe rs(15,16,18,a nd22,55- 58)havenotbe enassigned.These
numbe rsarehe ldi nres
ervesot hataddit
ionalaccountsc a
nbei nsert
edinthele
dge rinproper
sequencewhe neve rsuchac c
ountsbe comene cessary.Thenumbe rofdigi
tsgivenma yvary
from2t o30di gitsdependingupont hesizeandna t
ureofthebusiness
.Inthea bovecha r
tof
accounts,2di git
sa reass
igned.Thef irs
tdigitshowst hedivi
sionoftheiteminthel e
dge rand
theseconddi gitindicat
esthepos i
ti
onoft heite
mi nthedivis
ion.

3.
3) Fl
owofAc
count
ingDa
ta
Thef
lowofa
ccounti
ngdat
afr
omt
het
imeat
rans
act
ionoc
cur
stoi
tsr
ecor
dingi
nthel
edge
ris
di
agr
ammedasfol
lows:
Tr
ans
act
ion Doc
ument Tra
nsact
ion Tr
ans
acti
on Tr
ansa
cti
on
Occur
s Pre
par
ed Anal
yzed Rec
orded Post
ed
1.Tr
ans
act
ionOc
cur
s–t
her
emus
tbebus
ine
sst
rans
act
ion,bei
tint
erna
lore
xte
rna
l,t
o

14
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
i
ni t
iatet hef lowofAc c ount ingDa ta.
2.Doc ume ntPr epa re d–I fi ti se xte r
na ltrans ac ti
oni tmus tbes uppor tedbyt hene cessa r
y
sourc edoc ume nt s.
3.Ana lyz ingTr ans ac t
ion
Ana lysisofat rans a ctioni sat hr ees tepspr ocedur e:
 De te rmi ni ngt hea cc ount sa ff
ecte dbyt het ra nsac tion
 De te rmi ni ngt hee ffe ctofat r
ans actiona sinc r
e asesa ndde cr
ea se
s
 Ana lyz ingt hei nc r ea sesa ndde c reasesa sDe bita ndCr edi t
Exa mpl e:Theowne rofJ JAr tsCl ubi nveste dBr20, 000onJ anua ry1,2005
 Thea cc ount sa ffe cteda reCa sh( As set)a ndCa pital(Owne r’sEqui t
y)
 Ca s hi nc re asesa ndCa pita lalsoi nc reasesbyBr20000
 Ca s hi nc re asesi sDe bi ta ndCa pitalinc rea sesisCr e
di t
JJAr tsCl ubpur c ha sede lec tricgui tarf orBr8, 200i nCa shonJ a nua ry10,2005
 Thea cc ount sa ffe cteda reCa sha ndEqui pme nt
 Ca s hde c reas esa ndEqui pme nti ncrea s
e sbyBr8200
 Ca s hde c reas esi sde bi ta ndEqui pme ntinc rea sesi sCr edi t
4.Re cor dingTr ans ac t
ioni naJ our na l
Af t
era na lyz in gt ra nsa ction s ,the ya rer ecor dedi nabookc alle dj our nalina nor derlyma nne r.
Journa lpr ovi de sf ort rans ac tions :
 Pe r ma ne nc y-iti spe rma ne ntr e cordoft rans actionsf orr ef erenc e
 Or de rli
ne ssorc hr onol ogy- t
rans a ct
ionsa rer ecor de ds eque ntially
 Ac cur ac yorAppr ova l-be for et ransac t
ionsa rer ec orde di nt heira ccounta pprovalwi llbe
ma de
The rea ret wot ype sofj our na ls:
Ge ner a
lJ our na l-isaj our na lonwhi c ha nyt ypeoft rans actioni sr ecor dedupon.
Spe cialj our na l-t hi si saj our na lonwhi chonet ypeoft ra ns ac ti
onwi thr ecurrentna t
ur eis
recorde dupon.
Thepr o ce ssofr e cor dingt rans actioni naj our nali sc alle dj our nali
z i
nga ndt hes tepsi n
journa l
izinga rea sf ollows :
Step-1:Re cor dingt heDa te
 I ns ertingt heye ar
 I ns ertingt hemont h
 I ns ertingt heda te
Step-2:Re cor di ngt hea cc ountt itlet obede biteda tthee xtre mel eftoft hede script
ionc olumn
oftheGe ne ra lJ our na la nde nt e rthea mountofde bit
Step-3:Re cor dingt hea cc ountt it
let obec re ditedj ustbe low t hede bitentrymode r
a t
e l
y
indent eda nde nt ert hec red ita mount
Step-4:Wr itinga ne xpl a na tion
Wr it
ea ne xpl ana tionf ore ac ht ra nsa ctionorr epla cei twi thi tss ourc edoc ume ntnumbe rifi ti
s
selfe xpla nator yt rans a ction.Thea bovet woa na lyz edt ransa ct ionsa rerec or
dedi nt heGe ne ral
Journa la sf ollows :

Ge
ner
alJ
our
nal Pa
ge5

15
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
Da t
e Des
cri
pti
on P/
R De
bit Cr
edi
t
2005
Januar
y,1 Cas
h 20000
Capi
ta
l 20000
I
nvest
mentbyt
heowne
r

10 Equi
pment 8200
Cas
h 8200
Pur
chas
eofEqui
pme
nt

5.Pos ti
ngaTr ansaction
Theproc essi
n goft r
a nsferr
ingat rans
a ctiont oledgera ccountsisc al
ledpos ti
ng.The
rea r
e
di
ff
erenttype sofa ccounts:
 T- accountswhi chr esemblesac api
talle t
ter“T”
 Twoc olumna ccountwhi chc onsist
soft woda t
e,pos tr ef
erencing,de bi
tandcredi
t
c
olumns
 Fourc olumna ccountwhi chc onsist
sofoneda te,onepos tr ef
erencing,onedebi
t,one
c
reditandonede bita ndc r
editunde rba lancecolumn
 Thr eec olumna ccountwhi chc onsis
tsofoneda te,onepos trefe
rencing,onedebi
t,one
c
reditandoneba lanc ecolumn.Thea bnor ma lba l
anceiss howni nbracket.
Thestepsinpos ti
nga r
e :
St
ep-1:Re cordtheda tea ndPos tthede bitort hecredit
St
ep-2:Insertjournalpa genumbe rsinthepos tref
e r
encec olumnofl edgera cc
ounts
St
ep3:I nsertAc countnumbe rsinthepos trefere
nc ecolumnofGe neralJournal
Ac c
ountCa sh AccountNo11
Da t
e I tem P/ R De bit Cr edit Ba l
ance
2005
2000
Jan.1 0 20000
10 8200 11800

I
ll
ust
rat
iononJ
our
nal
izi
nga
ndPos
ti
ng
Thefol
lowingtransact
ionsarerela
tedtoEt hi
oMobi leMa int
ena
nce(EMM)whichi
sowne
dbyAt
o
Samuel
,forthefi
rstmont hopera
ti
one ndedDe ce
mbe r31,2004
December1:Thef ol
lowingasset
swe reinvest
edtothebusines
s:
Cash Br5,
900.
00
Supplies 550.
00
Land 10,
000.
00
Thel i
abil
it
iest
ransf
erre
dt othebusi
nesswa s 400.
00
De
c e
mbe r1:EMM paidapremiumofBr2, 400f orac ompre
hensivei
nsur
anc
epol
ic
ywhi
ch
wi
llcove
ra2ye a
rsper
iod
De
c e
mbe r1:EMM re
ceivedBr720forr
enti
ngt hela
ndf or3months
De
c e
mbe r2:EMM pai
dBr800f ort
herentoft hemo nt
hDe ce
mbe r.
De
c e
mbe r5:EMM Purcha
sedOffi
ceEquipme ntona cc
ountBr7,000
De
c e
mbe r7:EMM pai
dBr180f oradai
lyne wspa per

16
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
December11:EMM pa idBr400t oc redit
ors
December13:EMM pa idrecepti
onistandpa rt-t
imea s
sistantBr1, 250f ortwowe e
kssala
ry
s
t
December16:EMM r e
c ei
vedBr5, 000f romr evenuesea rnedfort he1 ha l
fofthemonth
December16:fe
esrevenueona ccountt ot
a l
edBr1, 750f or1stha lfofthemont h
December20:EMM pa idBr3, 500toc redit
or sontheBr7000de btowe dfr
omt heDecember
4tr
ansact
ion
December23:EMM Re ce i
vedBr1, 150f romc ustomersi npayme ntofthe i
raccount
s
December25:EMM pur chase
ds uppliesforBr1, 450inc as
h
December27:EMM pa idrecepti
onistandpa rt-t
imea s
sistantBr1, 250f ortwowe e
kssala
ry
December31:EMM pa i
dBr310a ndBr240t e
lephonea nde l
ectricbillforthemonth,
r
espect
ive
ly
December31:EMM r e
c ei
vedBr2, 750f romr evenuee arnedfort hes e
c ondha l
fofthemonth
December31:f ee
sr e
ve nuee ar
nedona ccounttotal
edBr1, 200f ort hesecondha l
fofthe
month
December31:t
heowne rwi t
hdrewBr1, 000f orhispersonalus e

I
nst
ruc
ti :An
ons a
lyz
eandJ
our
nal
iz
ethet
rans
act
ionf
ort
hemont
hDe
cembe
r2005i
ntwo
c
olumnjour nalass
umi ngthatt
hepoli
cyofthecompa nyistor
ecordmoneypa i
dfort
ele
phone,
e
lect
ri
ca ndwa t
era suti
li
ti
esexpens
ea ndforadver
tisi
ng,pos
tageandsta
mpa ndnewspa per
a
smi sc
ellaneouse xpense
.Postentr
iesfr
om journa
lt ole
dgeraccount
susingafourorthre
e
c
olumnle dgeraccount

J
our
nal
izi
ng:Recor
dingTr
ans
act
ionsi
nGe
ner
alJ
our
nal(
Ass
umet
rans
act
ionsf
romDe
c.1
t
o15a
ndDe
c.16t
o31a
rer
ecor
dedonpa
ge1a
nd2,r
espe
cti
vel
y)
Gener
a lJ
ourna
l Pa
ge1
Da
te De
s c
ripti
on P/
R De
bit Cre
dit
2005
Dec.1 Cash 5,900
Suppli
es 550
Land 1
0,000
AccountsPayabl
e 400
Samuel,Capit
al 16,
050
i
nvestmentbytheowne r

1 Pr
epai
dInsur
anc
e 2,
400
Cash 2,
400

1 Ca
sh 720
Une
arne
dRe
nt 720

2 Re
ntExpens
e 800
Cas
h 800

5 Of
fi
ceEqui
pment 7,
000
Ac
count
sPaya
ble 7,
000

7 Mi
sce
ll
ane
ousExp
ens
e 180

17
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
Ca
sh 180

11 Ac
count
sPa
yabl
e 400
Cas
h 400

13 Sa
lar
yExpe
nse 1,
250
Cas
h 1,
250
Tr
ans
act
ionsf
romDe
cembe
r16t
o31,2005
Gener
alJ
our
nal Pa
ge2
Date De
scri
pti
on P/
R De
bit Cre
dit
2005
Dec
.16 Ca
sh 5,
000
Ser
viceRe
venue 5,
000

16 Fe
esRece
iva
bles 1,
750
Se
rvi
ceRevenue 1,
750

20 Ac
count
sPa
yabl
e 3,
500
Cas
h 3,
500

23 Ca
sh 1,
150
Fe
esRe
cei
vabl
es 1,
150

25 Suppli
es 1,
450
Cash 1,
450

27 Sa
lar
yExpe
nse 1,
250
Cas
h 1,
250

Ut
il
it
ie
sExpe
nse

31 550
Ca
sh 550

31 Ca
sh 2,
750
Se
rvi
ceRe
venue 2,
750

31 Fe
esRece
iva
bles 1,
200
Se
rvi
ceRevenue 1,
200

31 Sa
muel
,Dra
wing 1,
000
Ca
sh 1,
000

Pos
ti
ng:
Tra
nsf
err
ingt
rans
act
ionsf
romGe
ner
alJ
our
nalt
ole
dge
rac
count
s
Account
:Ca
sh Acc
ountNo.11
Da t
e It
em P/
R De
bit Cr
edi
t Ba l
ance
2004
Dec.1 P.
1 5,
900 5,
900

18
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
P.
1 2,
400 3,
500
P.
1 720 4,
220
P.
1 800 3,
420
P.
1 180 3,
240
P.
1 400 2,
840
P.
1 1250 1,
590
P.
1 5000 6,
590
P.
1 3500 3,
090
P.
1 1150 4,
240
P.
1 1450 2,
790
P.
1 1250 1,
540
P.
1 550 990
P.
1 2750 3,
740
P.
1 1000 2,
740
Ca
shAc
countha
sade
bitba
lanc
eofBr2,
740.
Account
:Ac
count
sRecei
vabl
es Ac
countNo.12
Da t
e I
tem P/ R De bi
t Cr
edi
t Ba l
anc
e
2004
Dec.1 P.
1 1, 750 1,
750
1,
150 600
P.
1 1, 200 1,
800
Ac
coun
tsRe
cei
vabl
esGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr1,
800
Account:Suppl
ies Ac
countNo.13
Date I t
em P/ R De
bit Cr
edi
t Ba l
ance
2004
De c.1 P.
1 550 550
P.
1 1,
450 2,
000
Suppl
ie
sGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr2,
000
Ac c
ount:Pr
epai
dIns
uranc
e Ac
countNo.14
Date Ite
m P/R De bi
t Cr
edi
t Ba l
anc
e
2004
Dec.1 P.
1 2,400 2,
400

Pr
epa
idI
nsur
anc
eGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr2,
400
Ac
count:Equi
pment Ac
countNo.15
Date I
tem P/R De
bit Cr
edi
t Balanc
e
2004
De c.5 P.
1 7,
000 7,
000

Equi
pme
ntGe
ner
alLe
dge
rAc
cou
ntha
sade
bitba
lanc
eofBr7,
000
Ac
count:Ac
cumula
tedDepr
eci
ati
on Ac
countNo.16
Da t
e I
tem P/ R De bi
t Cr
edi
t Ba l
ance
2004
Not
rans
act
ioni
spos
tedt
oAc
cumul
at
edDe
pre
cia
ti
onGe
ner
alLe
dge
rAc
counts
ofa
r.
Account
:La
nd AccountNo.
Date It
em P/
R De
bit Cr
edit Ba l
anc
e
2004
Dec.1 P.
1 10,
000 10,
000
La
ndGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr10,
000

19
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
Account:Ac
count
sPa
yabl
e Ac
countNo.21
Date I t
em P/ R De bi
t Credi
t Ba l
ance
2004
De c.1 P.
1 400 400
P.
1 7,000 7,400
P.
1 400 7,000
P.
1 3, 500 3,500

Ac
coun
tsPa
yabl
eGe
ner
alLe
dge
rAc
countha
sac
redi
tba
lanc
eofBr3,
500
Account:Unea
rne
dRe nt AccountNo.23
Date I te
m P/ R Debi
t Credi
t Ba l
ance
2004
De c.1 P.
1 720 720

Une
arn
edRe
ntGe
ner
alLe
dge
rAc
countha
sac
redi
tba
lanc
eofBr720.
00
Account
:Sa
muelCapi
tal AccountNo.31
Date I tem P/ R Debi
t Credi
t Ba l
ance
2004
Dec.
1 P.1 16,
050 16, 050

Sa
mue
lCa
pit
alGe
ner
alLe
dge
rAc
countha
sac
redi
tba
lanc
eofBr
.16,
050
Account
:Samue
lDra
wing AccountNo32
Da t
e I tem P/ R De bi
t Cr
edi
t Ba la
nce
2004
Dec.31 P.1 1,000 1,
000

Sa
mue
lDr
awi
ngGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
.1,
000
Account
:Inc
omeSumma
ry AccountNo33
Date I t
em P/ R Debi
t Cr
edi
t Ba la
nce
2004
Dec.
Not
rans
act
ioni
spos
tedt
oInc
omeSumma
ryGe
ner
alLe
dge
rAc
count

Account:Se
rvi
ceReve
nue Ac
countNo.41
Date I t
em P/ R De bi
t Cr
edi
t Ba l
ance
2004
Dec.16 P.
1 5,
000 5,
000
16 P.
1 1,
750 6,
750
31 P.
1 2,
750 9,
500
31 P.
1 1200 10,700
Se
rvi
ceRe
ven
ueGe
ner
alLe
dge
rAc
countha
saCr
edi
tba
lanc
eofBr
.10,
700
Acc
ount
:Re
ntI
ncome Ac
countNo.42
Dat
e I t
em P/ R De
bit Cr
edi
t Ba l
ance

20
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
2004
Dec.

NoTr
ans
act
ioni
spos
tedt
oRe
ntI
ncomeGe
ner
alLe
dge
rAc
count
Account
:Sala
ryExpe
nse Acc
ountNo51
Date I
tem P/ R De bi
t Cr
edi
t Ba l
ance
2004
Dec.
13 P.
1 1, 250 1,250
27 1,
250 2,500
Sa
lar
yExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitb
ala
nceofBr
.2,
500
Account
:Suppl
iesExpe
nse Acc
ountNo.53
Date I
tem P/ R De bi
t Cr
edi
t Balanc
e
2004
Dec.

Suppl
ie
sExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
Account
:RentExpe
nse Ac
countNo.
56
Date I te
m P/ R Debi
t Cr
edi
t Ba lanc
e
2004
Dec.
2 P.
1 800 800

Re
ntExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
.800
Account
:Util
it
iesExpens
e Acc
ountNo52
Date I
tem P/ R De bi
t Cr
edi
t Balanc
e
2004
Dec.
31 P.1 550 550

Ut
il
it
ie
sExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
.550
Account
:Misc
ell
ane
ousExpe
nse Acc
ountNo.59
Date I te
m P/ R De bi
t Cr
edit Ba l
anc
e
2004
Dec.
7 P.
1 180 180
Mi
sce
ll
ane
ousExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
.180
Account
:Depr
eci
ati
onExpe
nse Acc
ountNo.55
Date I te
m P/ R De bit Cr
edi
t Ba l
anc
e
2004
Dec.
NoTr
ans
act
ioni
spos
tedt
oDe
pre
cia
ti
onExpe
nseGe
ner
alLe
dge
rAc
count
Account
:Insur
anc
eExpe
nse Acc
ountNo.54
Date I tem P/ R De bit Cr
edi
t Balanc
e
2004
Dec.

I
nsur
anc
eExpe
nseGe
ner
alLe
dge
rAc
countha
sade
bitba
lanc
eofBr
.

3.
4) Tr
ialBa
lanc
e
Befor
epre
pari
ngfina
ncia
lst
atement
s,thel
edgera
ccountba
lanc
e smus
tbeprove
da st
othe
equal
it
yofthetot
aldebi
tba
lance
sa ndthetot
alc
redi
tbala
nces.Thewor
kingpape
rwhich

21
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
providest hepr oofoft hee qua l
it
yofde bita ndc re
ditba l
ancesisc all
e dat ri
albalance.The
tri
albala nceisat woc olumns chedul elisti
ngt hena me sandba lancesofa l
laccountsint he
ledgeri.
e .debitba lanc esa rel i
st
e dint hel ef
tha ndc olumna ndthec reditba lance
sint heright
handc olumn.I tisawor kin gpa perwhi chisus efulonlytothea ccounta nt.Itisnotaf i
nanc i
al
stat
eme nta ndi ti snoti n t
e ndedf ordi st
ributi
ont otheus ersofa cc ountinginforma t
ion.
Prepari
ngat ri
alBa l
anc er equi re
sf ives teps
 De te
rmi net heba lan ceofe a cha ccount
 Li s
tthea c count swi thaba lanc eothertha nzero,thedebitsint hel eftcol
umna ndt he
credit
si nr ightc olu mn
 Addde bitba lanc es
 Addc r
e ditba lanc es
 Compa r ethes umoft hede bi tba l
anceswi ththesumoft hec r
editba lances
Instr
uction:Pre pareaTr i
a lBa l
anc ef orEMM
Ethi oMobi leMa i
ntenance
Tria
lBa lance
De cembe r31,2004
Ac countTi t
le Debit Cr e
dit
Ca sh 2,740
Ac c ountRe c eivables 1,800
Suppl ies 2,000
Pre paidI ns ura nce 2,400
Of ficeEqui pme nt 7,000
10,00
La nd 0
Ac c ountPa ya bles 3,500
Une arnedRe nt 720
Samue l
,Ca pita l 16, 050
Samue l
,Dr awi ng 1,000
Ser viceRe ve n ue 10, 700
Sala ryExpe nse 2,500
Re ntExpe nse 800
UtilitiesExpe nse 550
Mi sc ell
ane ousExpe ns e 180 _____
30,97
Tot al 0 30, 970

Use sofaTr i
a lBalanc e
At ria
lba l
anc eprovi desaprooft ha ttheledgerinaba lanceanditisal
soac orner
stonefor
preparati
onoff i
nanc ia
lstat
eme nts.Thef ollowingtypesofe r
ror
swi l
lcauset
het wot ot
alof
thetri
alba l
anc etoune qual
.
Errorinprepar i
ngthet ria
lbalances ucha s
:
 Oneoft hec olumnsoft heTBwa sinc or
rect
lyadded
 Thea mountofa naccountba lanceisincorrec
tl
yr ecor
dedonthetr
ialba
lance
 A de bitba lancewa sre cordedont het ri
albalanceasac re
ditorvice-ver
saort he
bal
ancewa se nti
rel
yomi tt
ed
Errorinde t
ermi ni
ngt hea c
countba lancessuc has:

22
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
 Aba la
nc ewa si
nc orrec
tlycomputed
 Aba la
nc ewa senteredinthewrongbala
ncecolumn
Er
rori
nre
cordingtrans
a cti
onint hel
edgersuc
ha s
 Ane rr
one ousamountwa spost
edtotheaccou
nt
 Ade bitentrywaspos tedasacredi
torvice
-ver
sa
 Ade bitandac r
e ditpost
ingwasomi t
te
d

Limi t
ati
onsofaTr i
alBalanc e
Thet ri
albalancedoe snotpr ovethattr
ansac t
ionsha vebe e
nc orr
ect
lyanal
yz edandrecor
ded
inthepr ope
ra c
countbe causethe r
earema nye rrorstha tdonotcauset
hetwot otal
softhetr
ial
bal
a ncet obeoutofba lance.Thef ol
lowi nge rror
sdonota ff
ectt
hee quali
tyoft hetwo
col
umnsoft hetria
lba l
ance :
 Fa i
luretorecordatransactionortopostat ransaction
 Re cordi
ngthes amee rr
one ousamountf orbot hde bitandcredi
tpart
sofat ra
nsact
ion
 Re cordi
ngthes amet r
ans acti
onmoretha nonc eforbot hpartsofatr
ansacti
on
 Pos tingapa r
tofat ransacti
onc or
rect
lya sade bitorac r
editbutt
othewr ongaccount

Discover
yofEr rors
Ift
het wototal
soft het ri
alba l
anc earenote qual,thee rr
orc a
nbedi scoveredint
hefoll
owing
manne r
:
 ByAudi tpr ocedures
 ByCha ncedi scover y
 Thr oughtheme diumoft hetria
lba l
anc e
Throughtheme diumoft het r
ialba l
ance,fi
rstde te
rmi nethedi f
fe r
encebe t
we e
nthedebi
ttota
l
andthecredi
ttotal.Thisgi vesthec l
ue
 Adi f
fer
enc eofBr 10,100,1000i sfreque ntl
yt heresultofa nerrori
na ddi
ti
on
 I fadifferencedi visi
blee venlyby2,t hee rrorise i
thert heomi ssi
onofade bi
tora
cre
ditorthepos ti
ngofde b i
tasac reditorvi ce-ver
sa
 I fthedi screpancyoft het wot ot
alsi se ve nlydivisibleby9,t hee r
roriseit
her
tr
ansposi
tionsors l
ide.
 Tr a nspositi
onse rr
oristhee r
rone ousr earr
angeme ntofdigit
s
 Sl idee rroristhee nti
renumbe rise rroneousl
ymove doneormor espac
estothe
ri
ghtort othel e
ft

3.
5) TheAdj
ust
ingPr
oce
ss
Revenuesa nde xpensesmi ghtbereportedont hei ncomes t
atementbyt hec ashbasisorthe
ac
crualba si
s .Inthec as
hba si
sofa ccounting,re venue sa r
er eporte
di nt hepe ri
odc ashis
r
eceiveda nde xpense
sa r
er eport
edi nt hepe riodwhe nc ashispa i
d.I nc ashba sisof
ac
counting,t hene ti ncomee qual
sc a
shr ec
eiptsmi nusc ash payme nt
s.Thi sba sisof
ac
countingi susedbyva riousprofes
sionalservi
cebu sinesses.Formos tbus i
ne ss
es,howe ver
,
i
tisnotc onsidere
da na ccepta
bleme t
hod.I nthea ctua lbasisofa ccounting,revenuesare
r
eportedint hepe ri
odi nwhi chtheya ree a
rneda nde xpensesa r
er eportedint hepe r
iodin
whichtheya reincurr
ed.Th us,accr
ualbasisofa c
c ount i
ngr equire
sa dj
us t
ingpr oces
sing.

Attheendoftheac
ctpe
riodmanyoft
heamount
slis
tedonthetr
ialbal
ancec a
nbetra
nsf
erre
d
wit
houtc ha
ngetothefi
nanci
alst
at
ement
s.Forexample
,c a
sh,note
spa yabl
e.Ontheother
ha
ndt her
ea r
es omeaccount
swhosebal
anceli
stedont hetri
albalanceshoul
dnotpa ss

23
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
direct
lyt ot hef i
na nc ialstat
eme nts.Fore xample ,thea mount sliste dforpr epaide xpensesare
norma ll
yove rstated.Ther easoni spa rtofthea mounti sc ons ume di nt heda yt oda yope rat
ion
ofthebus i
ne ssinge ne rat
ingreve nue s.Al soothe rda tane e dedf ort hef ina ncialsta tementma y
bee nti
re l
yomi t
tedf romt het r
ialba lancebe causer e
venue sore xpe nsesr elatedt ot hepe r
iod
hasnotbe e nr ecorde d.Fore xampl e ,s al
arye xpe nsesi nc ur r
edbe t
we ent hel astpa ydaya nd
thee ndoft h ea ccount ingpe ri
odwoul dnotor dina r
ilyber ecor de dint hea cc
ount sbecause
salari
esa rec us t
oma ril
yr ecordedonl ywhe nthe ya repa id.Thee ntrie
sr equireda ttheendof
thea ccountingpe r
iodt obr ingthea mount supt oda t
ea ndt oe ns uret hepr ope rma tchi
ngof
revenue sande xpe nse sa recall
eda djus ti
nge ntries.Adj us tinge ntr i
esa r einternalt ransact
ions
ma dea tthee ndoft hea ccounti
ngpe r i
od.
Ill
us t
rat
ionsofAdj us ti
ngEnt r
y
1.Adj us t
ingDe fe r
re dExpe nses( Pr epa i
dExpe nses )
A)Adj us t
ingSuppl ie s
Inat ri
alba lance ,thes upplie
sa cc ountha saba lanceofBr 2000onDe c embe r31,2004.
As sumingt ha tthei nve ntoryofs uppl i
e sonDe cembe r31,i sBr500,de termi net hea mountto
bet ra
ns f
e r
re dfroma s setaccount( suppl ies)tothee xpens ea c
count( suppl iese xpe nse)
Supp liesa va il
abledur i
ngt heye a r Br2, 000
Supp liesonha nd (500)
Supp liesus e d(a mountofa dj ust
me nt) 1,500
B)Adj us t
ingpr e paidi nsurance
Theba lanceofpr epa i
di n s
urancea c countha saba l
anc eofBr2400whi chwa spa idfor24
mont hs.Asar es ulte verymont hBr100i se xpired.Ot he re xampl esofpr e paide xpenseare
prepaida dve rt
ising,i nterest
,rent,etc

2.Adjust
ingDe f
erredRevenue(Unear
nedRevenue)
OnDe c
embe r31,thebal
anceintheunear
nedrentacc
ountisBr720.Thisbal
ancerepr
e s
ents
ther
ecei
ptofthreemonth’srent
.AttheendofDe ce
mber,theunearne
dr e
ntaccountshould
bedebi
te
d( decr
eased)byBr240a ndthere
ntincomeaccounts
houldbec r
edit
ed(incr
eased)
byBr240.

3.Adj ustingAc cruedExpe nses(Ac c

ruedLiabilit
ies
)
Somes e
rvic e
sa repa idf ora ftertheservi
cesha vebe enpe rfor
me d.Fore xampl e,Wa ges
expenseac cumulat
e dora c
c r
ue shourbyhoura ndda ybyda y,butpa yme ntma ybema deonl y
we e
kly,biwe ekl
y,ormont hly.Thea mountofs uc hana ccruedbutunpa iditema tthee ndof
theaccountingpe r
iodisbot hane xpenseandal i
a bil
ity.Forexampl e,a ttheendofDe c
embe r
accr
uedwa gesforEt hioMobi l
eMa i
ntena
ncewa sBr250.Thi sa mounti sa na ddit
ional
expenseofDe ce
mbe ra ndi sde bi
tedtothesal
arye xpe nseands ala
rypa yable
.I nthise xampl e
,
th t
h
De c
embe r1i sonSunda ya ndthef i
rstandthes econds ala
rypa yme nton13 a nd27 of
De c
embe r,respect
ivelyi fsalar
yi spai
donbi we eklyb asi
s.I
fpa yme ntf orthene xt10wor king
daysisBr1250t hea c
cr ueds al
a r
ywi l
lbeBr250

4.Adj usti
ngPl antAsset
s
Ast i
mepa ss e
s,thee qui
pme ntlose
si t
sa bi
li
tytop r
ovideus ef
uls e
rvices.Thisdecreasein
use
fulne ssiscall
e ddepre
ciat
ion.Allplant
,exceptl
and,losesthe
irusefulness.I
tisdif
fi
c ultt
o
obj
ective l
yme as
urethedecreaseinusef
ulnessofaplantass
et.Forthisreason,depr
eci
ationin
acc
ount ingist hes ys
temati
ca l
locat
ionofpl antas
set
sc osttotheus efullif
ea sanexpe nse.
Thisallocationoc cur
soverthea sse
t’sest
ima t
edli
feduringwhi chitise xpect
edtoge nerat
e

24
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
r
e venue.Theadj
ust
inge nt
r yisma debyde bi
tingade pre
c i
at
ionexpens
eaccountandcr
edit
ing
ana ccumulat
eddepreciat
iona ccountfoll
owe dbyt hes pec
ifi
cnameoft hatpl
antass
et.For
exampl e
,assumi
ngt hatthee sti
ma tedamountofde pre
c i
ati
onforthemonthisBr100,t he
adjust
inge nt
rydebits( i
nc r
eases)De preci
ationExpe nseby100a ndcredi
ts(inc
reas
e s
)
Ac cumulat
edDeprecia
tion-Equipme ntbythes ameamount .
 BookVa l
ue(BV)a nAs set=Cos t–Ac cumulat
edDe pre
cia
ti
on
 BookVa l
ueoft heEqui pme nt=Br7,000–100=Br6, 900

3.
6) Wor
kshe
etf
orFi
nanc
ialSt
ate
ment
s
A work i
ngpa pe rof tenusedbya cc
ountantstos umma rizea djust mentda t
aa ndassi
stin
pre
pari
ngt hef i
na nc i
alst
ate
me ntsiscal
ledthewor kshee
t.Itiside ntif
iedbyt hr
eeheadi
ngs
andhasf i
vec olumns :Tri
alBa l
anceColumn,Adj ustmentCol umn,Adj ust
edTr i
alBala
nce
Column,IncomeSt a t
ementColumn,andBa lanceShe etColumn.
UsesofWor kshe et:
1.I tRe duce sThePos s
ibil
it
yOfOve rlookingTheNe edForAnAdj ust
me nt
s
2.I tprovide sAConve nientMe a
nsOfVe ri
fyingAr i
thme ti
ca lAc curac
y
3.I tProvide sForTheAr r
angementOfDa t
aI sALogi calFor m
4.I tProvide sTheSour ceDataForTheFi nanc i
alState
me nts
Prepa
ringworks hee tbase
dont heaboveadjustmentdataforthes ervic erende
ringbusi
ness
.

Et
hiopiaMobil
eMaint
enance
WorkShe
et
ForTheYe a
rEndedDecember31,2004
Inc
ome Bala
nce
Tri
alBa
lance Adjus
tment Adjus
tedTB Stat
ement Sheet
Ti t
leofAc count
s Debit Cr e
dit De
bit Cre
dit Debit Cr e
dit De
bit Cr edi
t Debit Cr e
dit
Cash 2,
740 2,
740 2,
740
Acc ountRe c eivables 1,
800 1,
800 1,
800
Supplies 2,
000 A)1,
500 500 500
PrepaidIns ura nce 2,
400 B)100 2,300 2,
300
OfficeEqui pme nt 7,
000 7,
000 7,
000
Land 10,
000 10,
000 10,
000
Acc ountPa ya bles 3,
500 3,
500 3,
500
Une arnedRe nt 720 C)
240 480 480
Samue l
,Ca pita l 16,
050 16,
050 16,
050
Samue l
,Dr awi ng 1,
000 1,
000 1,
000
ServiceRe ve nue 10,
700 10,
700 10,
700
Sal
a ryExpe nse 2,
500 D)
250 2,
750 2,
750
RentExpe nse 800 800 800
Uti
litiesExpe nse 550 550 550
Misc ell
aneousExp. 180 _____ 180 180
30,
970 30,970
Suppl
iesExpe nse A)
1,500 1,
500 1,
500
Ins
uranceExpe nse B)100 100 100
RentIncome C)
240 240 240
Sal
aryPa yabl
e D)
250 250 250
Depreci
ationExpense E)100 100 100
Accum.De pr
ecia
ti
on-Equi
p. ______ E)100 ______ 100 100

25
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
2,
190 2,
190 31,
320 31,
320 5,
980 10,940 25,
340 20,
380
_____ _____
Ne
tInc
ome 4,
960 _ _ 4,
960
10,
940 10,940 25,
340 25,
340

3.
7) Pr
epa
rat
ionofFi
nanc
ialSt
ate
ment
s
Theworksheetisa na i
di npr e pa r
ingt hef i
nanci
alstat
eme ntna me l
yt heincomeSt
at
ement,
TheCapit
alSt a
teme nta ndt heBa lanceShe et.ForEthio-Mobi leMa inte
na nc
e,t
hefi
nanc
ial
st
at
ementsarepresenteda sf ollows :
1.TheIncomeSt at
eme nt
EthioMobi l
eMa i
ntenance
Inc omeStat
ement
ForTheYe arEnde dDe ce
mbe r31,2004
Re venues: InBi r
r I nBi r
r
ServiceRe ve nue 10, 70
0
Re ntIncome 240
TotalRe venue 10,940
Expe nses:
SalaryExpe ns e 2,750
Re ntExpe ns e 800
De precia
tionExpe nse 100
Utili
tiesExpe nse 550
Suppl i
esExpe nse 1,500
InsuranceExpe ns e 100
Mi scell
ane ousExpe nse 180
TotalOpe r
atin gExpe nse 5,980
Ne tIncome 4,960
2.Sta
teme ntofOwne r
’sEqui t
y
EthioMobi l
eMa i
ntenance
Stateme ntofOwne r
’sEquity
Fort heYe arEnde dDecembe r31,2004
Samue l
,Ca pitalDe cembe r1,2004 Br16, 050
Add:Ne tI nc ome( Ne tLos s) 4,960
Le ss
:Wi thdr a wa l (
1,000)
Ne tInc rea s
eI nCa pit
a l 3,960
Samue l
,Ca pitalDe cembe r31,2004 Br20, 010

3.TheBa
lanc
eShe
et

26
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
Et
hioMobi l
eMa int
enance
Bal
anceShe e
t
De ce
mbe r31,2004
Asset
s: InBirr Liabili
tiesandCa pit
al: I
nBi r
r
Cash 2,
740 Li abili
tie
s :
A/Re cei
vables 1,
800 Ac c ountsPa yabl
e 3,500
Supplies 500 Sa laryPa yable 250
PrepaidInsurance 2,
300 Une arnedRe nt 480
Tota
lCur rentAsse
ts 7,
340 Tot alCur rentLiabil
it
ies 4,230
OfficeEquipme nt: 7,000 LongTe rmLi abi
lit
ies 0.00
Less:Ac c.Depreci
ati
on ( 100) 6,900 TotalLi a
biliti
es 4,230
Land 10,000 Capi t
al:
Tota
lPl a
ntAs set
s 16,
900 Sa mue l
,Ca pit
al 20,010
TotalAsse t
s Br24,
240 Tot alLi a
b.a ndCa pit
al Br
24,240
Not
e:Fi
nanc
ials
tat
eme
ntsma
yannua
lori
nte
rim.St
at
eme
ntst
hata
repr
epa
redf
orape
riodofl
ess
t
hanoneye
arareca
ll
edi
nte
rims
tat
eme
nts
.Af
ina
nci
alr
epor
ttha
tispr
epa
reda
nnua
ll
yiss
aidt
obe
f
isc
alye
ars
tat
ement
.

3.
8) J
our
nal
izi
nga
ndPos
ti
ngAdj
ust
ingEnt
ri
es
Att hee ndo fthea c
counti
ngpe riod,thea dj
ustmentdataappeari
ngi nthewor ksheetare
r
e c
or dedint hej our
nalandpos tedt ot heledger
.Thi sprocedurebringst heledgerinto
agreementwi ththedatare
porte
dont hef i
nancia
lst
atements.Thea dj
usti
nge ntri
esaredared
asoft helastda yoftheperi
od,e venthought heyareusuall
yr e
cordeda tala t
erdate
.Ea ch
ent
ryma ybes uppor
tedbya ne xplanati
on,butas uit
ablecapti
ona bovethef irs
tadjust
ing
ent
ryi ss uff
icient
.TheAdj ust
ingEnt riesforEMM i spresent
edi naGe ne r
alJourna
la s
f
ollows :
Gene ra
lJournal Pa ge
Date De scri
pti
on P/R De bit Cr edi
t
Adjust
ingEnt ri
es
Dec ember31 Suppl i
esExpe nse 1,500.
00
Supplies 1,500.
00

31 I
nsur
anc
eExpe
nse 100.
00
Pr
epa
idI
nsur
anc
e 100.
00

31 Une
arne
dRe nt 240.
00
RentI
ncome 240.
00

31 Sa
lar
yExpens
e 250.
00
Sa
lar
yPaya
ble 250.
00

31 De
pre
c i
at
ionExpe
nse 100.
00
Accumulat
edDepr
eci
at
ion-E 100.
00

3.
9) J
our
nal
izi
nga
ndPos
ti
ngCl
osi
ngEnt
ri
es
Re
venue
s,e
xpe
nse
sanddr
awi
ngordi
vide
nda
ccount
sar
ete
mpor
arya
ccount
sus
edi
ncl
ass
ifyi
nga
nd

27
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
summa r
izi
ngc hangesint heowne r’
se quitydur inga c
counti
ngpe ri
od.Si nc ethesea ccountsa re
reporte
df ore achperi
od,theba l
ancesoft hes
ea cc
ountsshouldbez er
oa tthebe ginningoft hene xt
period.Be causethebalancesoft hesea ccountsa r
enotc arr
iedforward,theya r
es ome t
ime scalled
temporarya ccountsornomi nalaccounts.Theba l
a nc
esoftempor a
rya c
count sa ndpr e
paringthe se
accountsforus ei naccumul at
ingda t
af orthef oll
owi ngperi
odi saccomplishedbyr emovingt heir
balancesthroughc l
osi
nge ntrie
s.Closinge nt
ri
e sarema dewiththehelpofanot hertemporarya c
count
call
e dIncomeSumma ry.Thef oure nt
riesr equi
r edtoc l
osethet emporarya ccount
sofas ole
propriet
orshipattheendoft hea c
countingperioda r
e :
A.toc los ereve nuea c
c ounts-
ea c
hr evenuea ccounti sde bit
edf ortheamountofits
balanc eandt hei ncomes umma ryisc re dit
edfort ot
alrevenue
B.toc los eexpe nsea ccount s-
eache xpe nsea ccounti sc r
editedfortheamountofits
balanc eandi ncomes umma r
yi sde bit
e d
C.Incomes umma r
ymi ghth avede bit( ne tloss)orc redit(netincome)bal
anc
ea f
ter
revenue sande xpen sesa r
ec losed.I fi tisdebitba la
ncei ncomes ummaryi
scredi
te
d
andc a pit
alisde bit
e da ndifitisc r
e ditba la
ncei ncomes umma ryisdebi
te
dandcapit
al
iscredi t
ed.
D.Toc losedr awi nga ccount-
thedr awi nga c c
ounti sc redit
edf ortheamountofits
balanc eandt hec apit
a laccountisde bite dforthes amea mount.
Ge
nera
lJour
nal Pa
ge
Da
te Descr
ipt
ion P/
R De
bit Cr
edi
t
Closi
ngEntr
ies
De
cember31 Servi
ceRevenue 10,
700.
00
RentInc
ome 240.
00
I
ncomeSumma
ry 10,
940.
00

31 I
ncomeSumma r
y 5,
980.
00
Sal
aryExpe nse 2,
750.
00
RentExpe ns
e 800.
00
Ins
uranceExpe ns
e 100.
00
Suppli
esExpe nse 1,
500.
00
Uti
lit
iesExpense 550.
00
Deprecia
ti
onExpe nse 100.
00
Miscel
laneousExpense 180.
00

31 I
ncomeSummary 4,
960.
00
Samue
l,Capi
ta
l 4,
960.
00

31 Sa
mue
l,Capi
ta
l 1,
000.
00
Samuel
,Dra
wing 1,
000.
00

3.
10)Pos
tCl
osi
ngTr
ialBa
lanc
e
Thel
astandopti
ona lproce
dureofthea cc
ountingcycl
eist
heprepar
ati
onofatri
albal
anc
ea f
tera
llthe
t
emporar
ya c
countsha vebeenclosed.Thepurposeofthep
ostcl
osi
ngtri
alba
lanceist
oma kesur
ethat
t
hele
dgerisinbal
a ncea tt
hebeginningofthenewa cc
ounti
ngperi
od.

28
 Cha
pte
rThr
ee:Ac
count
ingf
orSe
rvi
ceRe
nde
ringBus
ine
sse
s
Ethi
oMobileMaint
enanc
e
PostCl
osi
ngTria
lBa l
anc
e
Dec
ember31,2004
Ac
countTi
tl
e De
bit Cr
edi
t
Cash
Acc ountRe ceivabl
es
Supplies
PrepaidInsuranc e
OfficeEqui pme nt
Acc umula t
edDe pr
eci
at
ion-Equi
pme
nt
Land
Acc ountPa yables
Une arnedRe nt
Sal
a ryPa yable
Samue l
,Ca pi
tal
Total

29
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s

Cha
pte
rFour
Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Intheprec
edingcha
pte
rsweha vei
ll
ust
rat
edtheaccount
ingcycleforor
ganiz
ati
onstha
t
re
nderser
vice
stothe
ircus
tome
rs.Me
rcha
ndisi
ngcompanie
s,incontr
ast
,ea
rnthei
rreve
nue
bysel
li
nggoods.
Abus ine s
st hatbuysa ndre s
ell
sgoodsi sc a l
ledMe rcha ndisi
ngBus i
ne ss
.Thegoodst hata
merchandi s
ing c ompa ny sel
lstoi t
sc us t
ome rsa rec a l
ledi nvent
or y( orme r
c handis
e).
Me r
cha ndisi
ngc ompa niesincl
udebothr etaile
rsandwhol esa
lers
.Thes ecompa ni
espur chas
e
re
adyma deorr eadyt os e
llgoodsandge ta l
le ar
ningorr eve nuebys el
lingthem.Me rchandis
e
mayi ncludea nyt hing,wh i
chame r
cha ndi si
ngbus i
nessc anbuyf orresel
lpurposea ndma y
var
yf ro m ne edletoa utomobiles
.Me r cha ndisi
nge nterprisescommonl yus et
hepr ocedures
desc
ribe dbe low.Howe ver,thesepr oc edur e
sma yve r
yf rom businesst obusiness.For
Exampl e:
 Pur chas e
sa nds el
lsma ybema def orc as
horonc reditbasis
 Di ff
e renta r
rangementma ybema def orma ki
ngpa yme ntonaccounts
 Pol i
ciesf orther e
turnofme r
cha ndis i
ngma ydif
fe rand
 Pol i
ciesf orthepa ymentoftr
ans por tati
oncostsma ya l
sova r
y

4.
1) Ac
count
ingForPur
cha
sesa
ndSa
les
Purchasesofme rchandis
eareusuall
yi dent
if
iedintheledgera spurchase
s.Ame rc
handisi
ng
busi
ne s
sc anaccumul at
einthepurchas e
saccountthecostofa l
lme rc
handi
sepurcha
sedfor
res
aled uri
ngt hea cc
ounti
ngpe r
iod.Thec ostofme r
c handisepurchasedisrecor
dedby
debi
tinga naccountc al
led“PURCHASES” .Pur c
hasescanbema deforcas
horona ccount.
Thes al
eofme rcha ndi
seduri
ngana ccounti
ngpe r
iodcre
di t
edt oana cc
ountcal
le
d“ SALES” .
Me r
c ha
ndisesma ybes ol
donc a
shorma yalsobesoldona ccount.
Il
lust
rat
ion4. 1:Mul uSupe rMa r
ketpur c
hases2000c ar
tonsofCa nne
dFishfrom Cent
ury
Tradi
ngHous eatac ostofBr50pe rc ar
tononc ash.Recordt hetra
nsact
ionf
orbotht
hebuyer
andthesell
er.
TheBuye r(Mul uSupe rMa r
ket
):
Purchases 100,000
Ca sh 100,000
Thesell
er(Ce nturyTra dingHouse)
:
Cash 100,000
Sa l
es 100,000
Il
lust
rat
ion4.2:Luc yCos moTradingCompa nysoldme rcha ndi
sesofBr5,700oncre
ditto
SelamCos met i
cs.Recor dthetr
ansact
ionforbothpa r
ti
es
TheBuye r:
Purchases 5,
700
Ac countsPa ya
ble 5,700
TheSe l
ler
:
Account sRe c
e ivabl
e 5,700
Sa l
es 5,
700

30
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Il
lustr
ati
on4. 3:As sumeAmba ss
elTr a
dingHous epur cha s
es10, 000c ar
tonsofExe r
cis
es
bookf r
om GunaTr adi ngEnt er
pri
seforBr150, 000wi thda wnpa yme ntof60%.Re c
ordthe
tr
a ns
acti
onint hebook’ soft hebuyerandthes el
ler
.
TheSe ll
er(GunaTr adingEnt er
pri
ses)
:
Cash 90,00
0
Account sRe ceivable 60,00
0
Sa l
es 150,000
TheBuye r(Amba sselTradingHous e)
:
Purcha se
s 150,000
Ca sh 60,00
0
Ac countsPa yable 90,00
0
Not e
:ThePur chasesa ccountisusedonlyf orme rchandis eforresaletocustome
rs.Thatis
,
otherasse
tspur chasedf orus einthebusinessarenotde bite
dt othepur c
hasesacc
ount.The
acquisi
ti
onoft hea s
se trecor
de dbydebit
ingthea ppr
o pri
a teasseta
c count

4.
2) Cr
edi
tTe
rms
,Ca
shDi
scount
sandRe
tur
n&Al
lowa
nce
s
1.Cr editTerms
Thea rrangeme ntsa gree duponbyt hebuye ra ndt hes elle
ra stowhe npa yment
sfor
me rchandisearetobema deisca l
ledthecreditt
erms .Ifthepa yme nti
srequi
reduponde l
ive
ry,
thet e
rmsa r
es aidtobe“ Cashte r
m”or“ Ne tcas
ht erm” .I
ft hepa ymentisnotrequir
edupon
delivery,thebuye risa llowe dac ertai
npe ri
odoft i
mef orpa yme nt;t
hetermi sknowna st
he
creditpe ri
od.Thec redi
tpe r
iodus uall
ybe ginswitht hedateoft hes a
leasshownbyt hedat
e
ofthei nvoiceort hebi l
l.Exa mpl e
sofCr e
ditPeri
odt e r
ms :
 n/ 30(i.
e.net30da ys )–pa yme ntwillbema deorduewi t
hin30da ysaf
terthedateoft
he
i
nvoice.
 n/ EOM ( i
.e.ne tendoft hemont h)–t hepa yme ntwillduebyt heendoft hemonthin
whichthes aleswa sma de.
 20/ EOM ( i.
e.20e ndoft hemont h)–Pa yme ntisdue20da ysa f
tert
hee ndofthemonth
i
nwhi chthes aleswa sma de
2.Ca shDi s
count
s
Asame a nsofenc
ouragi
ngpaymentbefor
ethee ndofthecre
ditpe
riod,thesell
ermayoff
era
di
s c
ountfortheea
rlypaymentofc
ash.Suchtypeofdeduct
ionordis
c ountisknown,a
sac a
sh
di
s c
ount.Iti
sadisc
ountforpromp
tpaymentma defromtheinvoi
cepr i
ce.
Il
lust
rat
ion4.4:As ellerma yofferabuye ra2 % discountifpa yme ntisrece
ived
wit
hin10daysofthei
nvoi
ceda
te.Fort
his
,thet
erm“
2/10,n/
30”c
anbeus
ed
an
ditmeanstha
t:
 Thec reditperi
odi snet30da ys
 Thepe rioddur i
ngwhi c hadiscounti
savail
abl
eiscal
le
dtheDiscountPer
iodi
.e
.ist
he
fi
rst10da ys
 Thebuye rwillgetade duct
ionof2%oft heamountoft
heinvoi
ceifi
tispai
dwit
hint
he
10da ysoft hecreditperi
od.

31
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s

Ca
shdi
scount
sca
nbePur
cha
sedi
scounta
ndSa
lesdi
scount
.
Purc
hasedisc
ount:thecashdis
counttakenbythebuye rforear
lyorpr omptpayme ntofa n
i
nvoiceiscal
ledpurchasedi
scounts
.Thebuye rr
ecordspur c
hasediscountbyc re
diti
ngt he
“PURCHASESDI SCOUNTS”a ccountandthe
ya r
eus uall
yviewe dasade duc
tionfromt he
amountini
ti
all
yrecorde
da sinpurchases
.Purc
hasediscountaccounti
sac ontra(offs
ett
ing)
acc
ounttoPurcha
sesaccount
.
Sal
esdi
scounts
:t hesel
lerre
fer
stothesamec as
hdi sc
ountstakenbythebuye
ras“SALES
DISCOUNT” .Itisre
cordedbydebi
tings
alesdi
scountaccountandconsi
der
edast
heamount
t
obededucte
df romtheamountsal
es.Sal
esdis
countisacontrasal
esacc
ount
.

Ill
ust
rat
ion4. 5:OnMa rch1,200 5assumeHe beshaTr a
di ngHousepur c
hasedreadyma de
clot
hesf r
om Kombol c
haTe xt
il
eFa ct
oryona ccountf orBr600, 000;terms2/ 10,
n/30.
Inst
ruct
ions:r e
cordthetr
ansacti
oninthebooksofbot ht
hebuye randthesell
erass
umi ngthat
(A)theBuye rset
tl
edthepayme ntwit
hinthedi
scoun tpe
riod,and(B)theBuye rdi
dnots ett
le
t
hepa yme ntwi t
hinthedis
countperi
od
A)Wi t
hint heDiscountPeri
od
TheBuye r:
Ma rch1,2005: Purc
hases 600,
000
AccountsPa
yable 600,
00
0

Ma
rch10,2005: Pur
chaseDis
count=600,
000*2%=12,000
Account
sPayabl
e 600,
000
Cash 588,
00
0
Purc
haseDisc
ount 120,
00
0
TheSe
lle
r:
Mar
ch1,2005: Ac
count
sRec
eiva
ble 600,
000
Sal
es 600,
00
0

Ma
rch10,2005: Sa
lesDi
scount=600,
000*2%=12,000
Cas
h 588,000
Sa
lesDi
scount 120,000
Ac
countsRece
iva
ble 600,
00
0

B)Aftert
heDis
countPer
iod
TheBuyer
:
Marc
h1,2005: Pur
chas
es 600,
000
Account
sPa
yabl
e 600,
00
0

Ma
rch10,2005: Ac
count
sPa
yabl
e 600,
000

32
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Ca
sh 600,
00
0
TheSe
lle
r:
Mar
ch1,2005: Ac
count
sRec
eiva
ble 600,
000
Sal
es 600,
00
0

Ma
rch10,2005: Ca
sh 600,
000
Ac
count
sRe
cei
vabl
e 600, 00
0
Note:Fr om t hebuye r’ss t
andpoi nt,itisi mpor t
antt ota kea dvantageofa llavail
able
disc
ount se ve nthoughi tma ybene cessa
rytobor rowmone ytoma kethepa yme nt.
Exampl e4. 6:onJ anuary1,2005Et hiopianEl ectr
icCompa nypur c
hase d20t ransf
ormers
fr
om Wa llaceEl ect
ronicSuppl ie
sa tBr200pe runit
;terms2/ 10,n/30.Thei nvoiceistobe
paidwi thint hedi sc
ountp eriodfromt heba nka t10% forrema ining20da ys.De t
erminethe
amountofne tsavingf orEthiopia
nEl ect
ricCompa ny
 Tot alinvoic eprice Br4, 000
 Ca shdi scount( Br4000*2%=80) (80)
 Thea mountt obebor rowe d Br3, 920
 I ntere s
tonmone ybor r
owe d(3920*10%*20/ 360) 21.80
 Ne ts aving( Br80-21. 80=) Br58. 20
Ne tsavingi st hedi f
fe r
encebe tweenthedi s
c ountrecei
veda ndt heinteresttobepa idforthe
20da ysi.e .ifthebus inessborrowedmone yands ett
ledtheli
a bil
itywi t
hinthedi sc
ountperi
od,
thebus i
ne ssc ans avea namountofBr58. 20
Exe r
cis
e4.1:OnNovember1,2004ABCCompa nypurc
hase
dme r
c ha
ndi
seonac r
edi
tte
rms
3/10,n/30andonNovembe r10,2004thecompa
nypa i
dBr9700.I ns
truc
ti
on:r
ecor
dthe
tr
a ns
act
ioninaj
our
nalatt
heda t
eofpurc
hase
sandonthedat
eofpayment

3.Re turna ndAll

owances
Me r
chandise purc
hasedf rom the suppl
ierma y be unsat
isf
act
ory,defe
ctive orwr ong
spec
ifi
cation.Int
hiscasethegoodsma yberetur
nedtothesuppli
er(
thisi
scall
e dReturns
)or
thebuyerma yre
quest
sf orapricereduct
ionoradjus
tment(thi
sisc a
ll
edAllowa nc
e s
).The
samere t
urna ndal
lowancei sr
efer
redbyt hebuyeraspurc
hasesret
urnsandallowancesand
bythesellerassa
lesre
turnsandall
owa nce
s.
Purchase
sRe t
urnsa ndAl l
owa nces(PRA) :Thebuye rsendsadebitmemot othesuppl
ierto
notif
ythati
tisdebitingthesell
er’saccount
.Itisrec
ordedbyc r
edi
ting“Purcha
sesRetur
na nd
Allowances
”or“ Purcha
s e
s”a ccount.Butma nagementne e
dsspecif
icinf
ormati
ona st
ot he
percent
ageofpur chase
sr eturna nd all
owa ncessot hatthey pre
ferthec re
ditgoest o
“Purchas
esReturnsa ndAllowanc es
”.
SalesRet
urnsandAl l
owances(SRA) :Theeff
e c
tofs al
esr
etur
nandall
owa nc
esisade ducti
on
insale
srevenueandar e
duc t
ioni noraccountre c
eiva
ble
.Theref
ore,exces
sivesal
e sret
urn
and all
owancess how therei sl os
si nr evenue,a naddi
ti
onalexpensea nd cus t
omer
dis
sati
sfa
cti
on.Iti
spossi
bletode bitt
hesal
esa ccounti
nst
eadofde
bit
ingthesale
sreturnsand
all
owancesaccount.Howe ver,debit
ingsal
esa ccountwil
lnotdi
scl
osethea mountofs al
es

33
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
r
etur
nsa
nda
ll
owa
nce
s.

Il
lust
rat
ion4.7:OnJ ul
y8,2005Gl obalTra di
ngEnt er
pri
sesoldme r
cha ndisesonaccountto
GYBCompa nyBr40, 000t erms3/ 10,n/eom.OnJ uly11,GYBRe t
ur nedBr 4000de f
ect
ive
me r
chandi
sestoGlobalwh ichispa rtofthes al
eofJ uly8.OnJ ul
y17,Gl obalrec
eivedcash
fr
omGYB.I nstr
uct
ion:recordthetransac
tionsinthebooksofthebuye randt hesel
ler.
TheBuye r
:
Jul
y8: Pur chas
es 40,00
0
AccountsPayable 40, 000
J y11: Ac
ul c
oun t
sPa yable 4,000
Purc
ha s
eRe t
urna ndAllowance 4, 000
J y17: Ac
ul c
oun t
sPa yable 36,00
0
Cash 34,920
PurchasesDisc ount 1,080

TheSe
lle
r:
J
uly8: Ac
count
sRe
cei
vabl
e 40,
00
0
Sa
les 40,
000
J
uly11: Sa
lesRet
urnandAllowanc
es 4,
000
Ac
count
sRec
eivabl
e 4,
000
J
uly17: Cas
h 34,92
0
Sa
lesdi
scount
s 1,080
Ac
count
sRe
cei
vabl
es 36,
000
Exerci
se4.2:AssumeGunaTr adi
ngEnt er
pri
sessoldme rchandi
seforcas
hf orBr80,000t o
GungoTr adi
ngCompa nyonAugus t10,2004.GunaTr a dingEnter
pri
sesrecei
vedsomeof
theme rc
handis
essoldtoGungobe ca
usetheya r
ef oundt obede f
ect
ive
.Thec ompa nyha s
giventhecashref
undofBr2500f orgoodsret
urnedbyt hebuyeronAugus t12.Ins
truct
ion:
Re c
ordthetr
ansact
ioni
nthebook’
softhebuyera ndtheseller

4.
3) Tr
adeDi
scount
s,Sa
lesTa
xes
,andTr
ans
por
tat
ionCos
ts
1.Tr adeDiscount s
Ma nywhol e
sa l
er sofme rchandi
sepubl i
s hpe ri
odicc a
talogst hatareus e
dbybuye r
si n
orderingme rchandise.Ra therthanupda t
ingt heircatal
ogsf r
e quentl
y,wholesal
erspublish
priceupda t
eswhi chma yi nvolvelargedi scountsfrom thelistpricesorsuggest
edpr ic
eor
grosspr i
ceint he i
rc at
alogs.Ina ddit
ion,t hese l
ler
sofferc er
tainc l
asse
sofbuye rssucha s
gove r
nme ntage nciesorb uyerswhoor derl ar
gequa nti
tie
s ,specialdis
counts
.Thes pecia
l
discountsordisc ountsforl ar
gequa nti
ti
e spurchas e
da r
ec all
edTr adediscount
s.Sell
ersa nd
buye r
sus ual
lydon’ trecordt heli
stpr i
cesa ndt herela
tedtradedi s
countsinthei
raccounting
records.Foraccount i
ngpu rposeonlythef inalpriceoragree
dpr iceisimporta
nt.
I
ll
ust
rat
ion4.
8:KOKETCompanypurc
hased600unit
sofmerc
handi
sesfr
om BBCompa ny
t
erms3/
10,n/
30.Theme
rcha
ndi
seha
sal i
stpr
iceofBr50pe
runitwi
ththet
radedi
scountof

34
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
20%,10% and5%.As sumingt hatKOKETCompa nyisalloweda l
lthesedis
countscomput
e
thei
nvoi
cepricef orthe600uni tsandma kethenecess
aryjournalEntriesint
herecordofbot
h
Companie
sa ssumi ngthatt
hebuye rpa
idwithinthedis
countpe r
iod.
 Lis
tprice(600uni ts*Br50) Br30, 000.00
 Tra
dedi scount(20%*30, 000) (6000.00)
 Bala
ncea fterthe20%TD Br24, 000.00
 Less
:TD( 10%*24, 000) (2,400.00)
 Bala
ncea fterthe10%TD Br21, 600.00
 Less
:TD( 5%*21, 600) (1,080.00)
 AgreedPr i
ceorI nvoiceprice Br20, 520.00
TheBuyer:
Dateof Purchase
s 20,520
Purcha s
es: Account
sPa yabl
e 20,
520

Dat
eofPa
yme nt
: Pur
chaseDiscount=20,520*3%=616
Account
sPaya ble 20,
520
Cash 19,
904
Purcha
seDi scount 616
TheSe
lle
r:
Dat
eofSa
les
: Account
sRe c
e iva
ble 20,
520
Sale
s 20,
520

Da
teofRe
cei
pts
: Sa
lesDi
scount=20,
520*3%=616
Cas
h 19,
904
Sa
lesDi
scount 616
Ac
countsRece
iva
ble 20,
520
2.Sa lesTaxes
Gove r
nme ntus ual
lylevi
esori mposestax on re
tails a
lesofmer
c ha
ndis
es.Sal
esof
me r
chandisethatwillberes
oldareusual
lynotta
xed.A s ale
sta
xisi
mpos edonthefi
nal
consume rbutthesell
ermustcoll
ectt
hetax,f
il
etaxre t
urnsatati
mespeci
fi
edbylawand
remitt
hec oll
ectedt
axontherepor
tedsal
estot
hegovernment.
Va lueAdde dTa x(VAT)o neofthesa l
esta xwhichchargedonthesupplyofmostgoodsa nd
service
sf ortheva l
uea dde doni t
.Somegoodsa renottaxabl
e.Fore xa
mple,posta
lservices
arenottaxa ble
.Ina dditi
on,s omepersonsa ndfir
msa reexempte
dfroms ale
stax-Amba ssador
andEmba ssyresidentsandCha r
it
iesorganizati
ons(ZeroRatedFir
ms).Na t
ureofthebusiness
als
oa f
fectsthes a
lestax.Aba nkforinstancedoe snothavetoaddVAToni t
sbankc harges
ands mallfirms,too.Ifs ma l
lfir
msdor e
gis t
erforVATt hentheywillhavetokeepfullVAT
r
e cordsina ddi
tiontoc hargingoutVAT.

Ac
count
ingForSa
lesTa
xbyt
heSe
lle
r
Thesell
e rr
ec ordssal
estaxcoll
ect
edbyc r
edit
ingsalesta
xpa yabl
eaccountatt
hetimeof
sa
leswh et
heritiscashsal
esorcre
ditsa
les
.
Il
lus
tra
tion4.9:a s
sumeBuildi
ngMa ter
ial
sSuppl yEnter
pri
sesold200KGsofna i
lsatBr10
perki
lo;600i ronsheet
satBr40pe rsheetand700c ansofTsedeyPai
ntatBr60percanon
Ja
nuary5,2004.Thegoodsa resubj
ecttosal
estaxattherat
eof15%.Recordthetr
ans
acti
on.

35
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Quant
ity Uni tpri
ce Tot
alprice Sal
esTax Sa l
esTa
xAmount
200 Br 10 Br2,000.
00 15% Br300.
00
600 40 24,
000.00 15% 3,
600.
00
700 60 42,
000.00 15% 6,
300.
00
Tot
alInvoi
cePr
ice Br68,000.00 Tot
alSalesTa
x Br10, 200.
00
Thej
our
nale
ntr
iesa
rea
sfol
lows
:
Ca
sh 78,
200
Sa
les 68,
000
Sa
lesTa
xPa
yabl
e 10,
200
Il
lus
tra
tion4.10:AssumeBui l
dingMa t
eri
alsSuppl
yEnter
pri
sesold500ca
nsofpai
ntatBir
r
60perca nt
oLa li
bel
aEngi nee
ringonaccount
,onJanua
ry10,2004.Thes
alewass
ubje
cttoa
sa
lestaxof1 5%.Journali
zethetra
nsacti
ona ndt
heremitt
anceoftaxpaya
bleamounton
Ja
nuary5a nd10,respect
ivel
y.

 TotalPr
ice(Br60*5 00cans) Br30, 000.00
 Sale
sTax( Br30000*15%) 4, 500.00
 TotalAmount Br3, 4500. 00
J
anua
ry5: Ac c
ountsRece
ivabl
e 34,
500
Sa
les 30,
000
Sa
lesTaxPayabl
e 4,
500

J
anua
ry10: Sa
lesTa
xPaya
ble 14,
700
Ca
sh 14,
700

AnAl ter
na ti
veAppr oachtoSa le
sTa x:
I
ns te
adofr ecordi
ngt hesalestaxli
abil
ityatthet imeofsale,somebusi
nes
sespr
efe
rt ocredi
t
t
hes ale
swi t
htheentireamountc ol
lect
edincludingt hesa
lestaxandtomakeanadj
ustmentat
t
hee ndofe a
chpe r
iodt ore
flectsal
estaxpaya ble
.
I
llustr
ati
on4. 11:suppos ethatthetota
la mountr ec
o r
dedtot hesal
esacc
ounti
ncludingthe
sal
e staxf orthepe ri
odwa sBr345000.I ft hes a
lestaxr a
teis15% ma ket
hene cess
ary
adjust
me nttorecor
dt hesalestaxli
abil
it
ya tthee ndofthepe r
iod.
 TotalAmount ---
- -Br345,000.00
 Sa l
esTax-----
--------
-15%
 Sa l
es+Sa l
esTa x=345, 000.00
 Sa l
es+(Sales*Sa lesTaxRa te)=345,
000.
00
 Sa l
es+15%Sa l
e s= 345, 000.00
 Sa l
es+0.15Sa les=345, 000.00
 1.15Sales=345, 000. 00
 Sa l
es=345,000. 00/1. 15
 Sa l
es=300,000.00
 Sa l
es+Sa l
esTa x=345, 000.00
 300000+Sa l
esTa x=345, 000.00
 Sa l
esTax=345000-300000
 Sa l
esTax=45, 000. 00
 Sa
les
:
Cas
h 345,
00

36
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
0
Sa
les 345,
000
 Adjus
ti
ngEntr
ies
:
Sal
es 4
5,000
Sa
lesTaxPa
yabl
e 45,
000
 Pa
yme
nt:
Sa
lesTa
xPaya
ble 45,
000
Ca
sh 45,
000
 TheBuye
r:
Pur
chas
es 345,
000
Cas
h 345,
00
0
3.Transport
ati
onCos t
s
Thete
rmsofa greementbetwee
nabuye randsel
le
rincl
udewhentheowne r
shi
pofthe
mer
chandisepassestothebuyera ndwhichpart
yistoabsor
bthecostofdeli
ver
ingt
he
mer
chandisetothebuyer
.Therearetwomostcommonter
mswithre
spe
cttothi
s:FOB(Fr
ee
onBoard)Shi
ppingPointandDest
inati
on.
FOBShippingPoi nt:underthister
mt hesel
lerpl
a c
esme rcha
ndise“Fr
eeOnBoa
rd”a
tthe
shi
ppi
ngpoint.Thus,
 Thebuyerpa ystra
nsportat
ioncost
s
 Ownershipistrans
ferr
eda tpoi
ntofshi
pme nt
 Thegoodsa r
et hepropert
yofthebuyeraft
erthepointofshi
pment
 Anyriskisabsorbedbyt hebuyerwhil
ethegoodsisintra
nsit
FOB Desti
nati
on:unde rthistermt hese l
le
rpl a
cesme rc
handis
e“ Fre
eOnBoa
rd”a
tthe
buye
r’sf
inaldes
ti
na t
ionbypa yingthedel
iverycost
s.Thus,
 Thesell
erpaysthetrans
por t
at
ioncosts
 Tit
leorownershiptothegoodsistransf
err
eda tt
hebuyer’
sloca
tion
 Thegoodsarethepropertyofthesell
erwhileintr
ansi
t
 Anyriskwhilethegoodsint r
ansi
tisabsor
bedbyt hesel
le
r
Whe nme r
chandi
seispurchas
edont ermsofFOBs hippingpoi
nt,t
hetra
ns por
tat
ioncost
spa i
d
bythebuyerisdebit
edtoTransport
at
ionInorFrei
ghtI norPurc
hasesaccount.I
ns omec a
ses,
thesel
le
rma yprepaythetra
nsporta
tioncos
tsanda ddt hemtothebuye r,eventhoughthe
agre
ementisstat
esthatt
hebuye rbearsuc
hcost
s(i.e
.termsFOBs hippi
ngpoi nt
).Thisisals
o
debi
tedtothesamea c
countsasabove.
Whe ntheagree
me nts t
atesthatthesell
eristobearthede li
verycosts(FOBDe sti
nati
on),the
amountpa i
dbyt hes ell
e rforde l
ive
ryofme r
chandiseisde bit
edt oTr ansportat
ionOutor
FreightOutorde l
ive r
yEx pens eorasimila
rlyti
tl
eda ccount.Thetotalofs uchc ost
sincurred
duringape ri
odisr eport
edont hesel
ler’
sincomes t
ate
me ntasase l
li
nge xpens eandwi llnot
beinc l
udedinthec ostofgoodss ol
d.
Il
lustra
tion4.12:onFe br uary1,2004RR Tr adingCompa nypur chasedme rchandis
eon
accountf r
omKKCompa nyf orBr12,000,t
ermsFOBs hippingpoint2/10,n/30a ndthebuye r
paidat r
anspor
tat
ionc ostofBr100t oXX Tr a
nsportati
onCompa ny.OnFe bruary12,RR

37
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Companypai
dca
sht
oKKCo.
Fe
brua
ry1: Purchases 12,000
Tra
nsport
at
ion-in 1,000
AccountsPaya
ble 12,000
Cash 1,000
OR: Pur
chases 13,
000
AccountsPaya
ble 12,000
Cash 1,000
Fe
brua
ry12: Account
sPaya bl
e 12,
000
Cash 12,
000

I
ll
ustr
ati
on4.13:OnMa r
ch5,MM Compa nyPurchas
e dme rc
ha ndi
sef
rom J
JCompanyon
a
ccountBr8500t erms1/ 10,n/30FOBs hippi
ngpoint.JJCompa nypa
ysthetr
ans
por
tat
ion
c
hargesofBr5000.I nstr
uctions:
 Att hedat
eofpur chase
 I fMM Co.r e
tur nedsomeme rc ha
ndisewhichhaveac ostBr500onMa rch9
 I fMM Co.pa idc ashtoJ JCo mpa nyonMa rc
h1 4
Ma rch5: Purcha s
es 8,500
Transportat
ion-in 500
Ac countsPaya ble 9,000
Ma rch9: Accoun tsPa yabl
e 500
Purcha seReturn&Al l
ow 500
Ma rch14: Ac coun tsPa yabl
e 8,500
Ca sh 8,420
Purcha seDiscount 80
Ill
ustr
ati
on4.13:onMa y1,2004Me la
tPri
vat
eLi mit
edCompa nysoldmercha
ndis
etoBelul
e
Privat
eLi mit
edCompa nyona c
countforBr90,000ter
msFOBde st
ina
ti
on2/10,n/
30.The
sel
lerpa i
dBr4, 000t oTT Tr a ns
portShar
eCo.a ndre c
eive
dt heamountonMa y10.
Instr
ucti
ons:j
our nali
z ethea bovet rans
act
ions :
Ma y1: Ac countsRe c
e i
vable 90,000
Deli
ve r
yExpe nse 4,000
Sa l
es 90,000
Ca sh 4,000
Ma y10: Ca sh 88,200
Sale
sDi scount 1,800
Ac countsReceivabl
e 90,000
Exerci
se4.3:MEWI T( Merchandi
seWhol eSa l
eandImportTradeEnterpri
se)soldtoBMSE
ona ccount
,l i
stpr
iceBr40000,tradediscount20%,sale
st ax5%,t erm 3/10,n/ 30,FOB
Shippi
ngPoi nt
.Thesell
erpaystranspor
tat
ioncostofBr1000a ndaddsi tt
ot heinvoiceand
thesel
leriss
uesthecre
ditme mora
ndumf orBr5000me r
chandi
s eret
urnedands ubsequent
ly
recei
vestheamountwit
hinthedisc
ountpe r
iod.Recor
dthetr
ansacti
onsforbothpa r
ties

4.
4) Pe ri
odi
cRepor
ti
nga
ndMe
rcha
ndi
seI
nve
ntor
ySys
tem
1.Pe
riodi
cRepor
ti
ng
Thes
eque
nceofye
are
ndpr
oce
dur
esma
ybec
hange
dsl
ight
ly,buti
nge
ner
alt
hef
oll
owi
ng

38
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
outl
inei
st ypical
:
1.Prepa r
eat r
ialba l
anceoft heledge ronawor kshe e
tf orm
2.Revie wthea ccountsandga thertheda t
are quiredf ortheadjus
tme
nt
3.Inserttheadjustmentsandc ompl etethewor ks heet
4.Prepa r
efinanci
a lst
a t
ement sfromt hedatai nthewor kshee
t
5.Journalizet
hea djusti
nge ntrie
sa ndposttot hel edger
6.Journalizet
hec losi
nge ntriesandpos ttothel edger
7.Prepa r
eapos tc l
osingtri
alba lanceofthele dger

2.Me
rcha
ndi
seI
nve
ntor
ySys
tems
Thes yst
emt hr
oughwhic
hyouc andet
ermineCGSa ndCostofEndi
ngInve
ntor
yiscal
led
inve
ntorysyste
m.Thetwoma i
nsyst
emsforaccount
ingformerc
handi
sehe
ldfors
alea
rethe
peri
odicinve
ntorys
yst
ema ndt
heper
pet
ualinve
ntorysyst
em.
 ThePe
riodi
cInve
ntor
ySys
tema
ndDe
ter
mina
tionofCos
tofMe
rcha
ndi
seSol
d
I
nthi
ssys
tem:
 Thepur cha s
eofme r
chandi seisdebi
tedtopurchas
esa c
count
 There venuef rom sale
si sr ecor
dedwhe natsal
ewa sma debutnoatt
emptisma deto
re
cordt hec ostofme r
cha ndisesol
d
 Thec ostofEndi ngInve ntoryisdete
rmine dbyta
kingaphys ica
linve
ntor
y(count
ingthe
mercha ndiseathandoruns oldandmul t
iplyi
ngbyitsunitpri
ce).
 Thec ostofme r
chandises old(CMS)i sdeter
minedasfollows:
Mer
cha
ndiseI nventory(Beginni ng) xxxxx
Add:Pu r
cha s
es xxxxx
Less
:Pur chaseReturn&Al l
ow (
xxxxx)
Less
:PD (xxxxx)
NetPur cha s
es xxxxx
Add:Fr eightin xxxxx
Costofmerchandi
sepur
chase
d xxxxx
CostofMe r
chandi
seAvail
abl
efors
ale
s(CMAS) xxxxx
Les
s :Endi
ngInvent
ory (xxxxx)
CostofMe r
chandi
seSold xxxxx

Adj
ust
ment
sinMe
rcha
ndi
si
ngBus
ine
ss
1.Adj ustingMe rcha ndiseInventory
Me rcha
ndis einventorya ccounts howe dtheinvent
orybalanc
ea tthebeginni
ngoft hepe r
iod
thr
oughouta na ccountingpe ri
odi fthebusinessisus ng Pe
i r
iodi
cI nventor
ySys t
em.
Purchasesa ndpurcha sesrelateda ccountarerecor
dedseparat
el
ydur ingtheye a
ra ndthusat
thee ndoft heperiodt woa djusti
nge nt
ri
esa r
erequir
edt oupda t
eme rchandiseinvent
ory
account.
A)Toa djustbeginningi nventory:
IncomeSumma r
y xxxxx
Me rchandiseI nventory xxxxx
B)Toa djustendingi nventory:
Me rc
ha ndiseInve nt
or y xxxxx

39
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Inc omeSumma r
y xxxxx
Ill
ust
rat
ion4.14:As sumef rom Janua r
y1,2004,theme r
chandis
einve nt
oryha
saba
lanc
eof
Br180, 000andt hee ndingi nventoryonDe cember31oft hesameye ari
sBr220,
000.
Inst
ruct
ion:j
ournalizethea djust
inge ntr
y
Adjust
ingBeginningI nventory
I
ncomeSumma r y 180,
00
0
Me rchandiseInventory 180,000
Adjust
ingEndingI nventory
Me r
cha ndiseInve nt
ory 220,
00
0
Inc omeSumma r
y 220,000
2.AdjustingDeferr
alsa
ndAccrual
s
Inmerchandis
ingbusine
ssinaddi
ti
ontome rc
handi
sei
nve
ntor
y,de
fer
ral
sanda
ccr
ual
sar
e
adj
ust
ed.Thiswillbedis
cus
sedinnextc
hapt
er.

4.
5) Wor
kshe
etsForMe
rcha
ndi
si
ngBus
ine
sse
s
Afte
rallt r
a ns a
c ti
onsf ort heye a r2004we rere cordeda ndpos te
d,theaccountsi nt hel edgerof
FarEastTr a dingCor por at
iona ppearedwi ththef ollowinguna djust
edbalance s .Se et heTr i
al
Bala
nceont hene xtPa ge .Theda taneededf oryeare nda dj
ustment
sonDe c
embe r31a r
ea sfoll
ows:
 Me rcha ndiseI nve ntoryonDe c e
mbe r31,2004 Br150, 500. 00
 I ns uranc ee xpireddur ingtheye ar 6, 400. 00
 St ores uppl i
e sinve ntoryonDe c
e mbe r31,2004 2, 150. 00
 De pr
e ciationf orthec urrentyear 19, 200. 00
 Ac cr
ue dSa lesSa la r
iesonDe cembe r31,2004 2, 800. 00
 Ac cr
ue dOf ficeSa l ar
iesonDe cembe r31,2004 1, 300. 00
Requir
e d:
1.Compl e tethewor ks he et
2.Pr epa r
eI nc omes tateme ntinSi ngle-ste pandMul ti
ple-st
epf or
ms
3.Pr epa r
eaRe tainede arningsSt a
teme nt
4.Pr epa r
eac lass i
fiedBa lances heet
,inaRe portform
5.Re cor dt hene c essaryye a renda dj
us t
inga ndc losi ngentri
esonge ne
raljour na lPa ge1
6.Pr epa r
eaPos t-c l
os ingt ri
alba l
ance

FarEas
tTradi
ngCor por
ati
on
Tr
ialBalance
Dece
mbe r31,2004
Ac
countTi
tl
e Dr. Cr
.
Cas
h 43,
750.
00  
AccountsReceivabl
e 96,
150.
00  
Merchandi
seInve nt
ory 145,
250.
00  
St
oreSupplies 8,
250.
00  
Pr
epaidInsura
nc e 12,
690.
00  
St
oreEquipme nt 89,
500.
00  
AccumulatedDe pre
cia
ti
on-
Stor
eEqui
pme
nt 25,
300.
00

40
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Ac countspa ya ble 44,
740.
00
Salarypa ya ble –
Ca pit
alSt oc k 180,
000.
00
Re ta
inedEa r
ni ng 81,
445.
00
Dividend 60,
000.
00
IncomeSumma ry – –
Sales 953,
500.
00
SalesDi scount 2,
500.
00
Salesretur nsa nda l
lowa nces 3,
000.
00
Pur c
ha s
e 610,
050.
00
Freightin 6,
000.
00
Pur c
ha s
eDi scou nt 6,
000.
00
SalesSa l
a riese xpe ns e 77,
400.
00
Adve rti
singe xpe nse 24,
800.
00
De preci
ationExp. -StoreEquipment
StoreSuppl iese xpe nse
De li
veryExpe ns e/ Fr e
ightOut/ 2,
000.
00
Mi scel
lane ousSe lli
ng–Exp ense 4,
400.
00
Off i
ceSa la ri
e sExpe nse 39,
845.
00
Re ntExpe ns e 40,
000.
00
He ati
nga ndl igh tingExpe nse 16,
100.
00
Taxe sexpe nse 8,
500.
00
Insurancee xpe ns e
Mi scel
lane ousGe neral–expens
e 3,
600.
00
Interes
tExpe ns e 1,
000.
00
¬ ¬
_ _
Ga
inondi
spos
alofe
qui
pme
nt _ _ 3,
800.
00
1,
294,
785.
0
Tot
al 0 1,
294,
785.
00

41
 Cha
pte
rFour
:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
FAREASTTRADI NGCORPORATI ON
WORKSHEET
FORTHEYEARENDEDDEC. 31,2004
  Unadj
ust
edT.
B Adjus
tment AdjustedT.B Inc omeSt
at
ement Bal
anceSheet
Ac
countTi
tl
e Dr. Cr. Dr
. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 43,
750       43,750       43,
750  
Acc ountsRe c eiva ble 96,
150       96,150       96,
150  
Me rchandi seI nve ntory 145,
250   150,
500 145, 250 150,500       150,
500  
StoreSuppl ies 8,
250     6,
100 2,150       2,
150  
PrepaidIns uranc e 12,
690     6,
400 6,290       6,
290  
StoreEqui pme nt 89,
500       89,500       89,
500  
Acc umula te dDe pr eciat
ion-SE 25,
300   19,
200   44,500       44,
500
Acc ountspa ya ble 44,
740       44,740       44,
740
SalaryPa ya ble   4,
100   4,100       4,
100
Capi t
alSt oc k 180,
000     180,000     180,
000
RetainedEa r
ni ngs 81,
445     81,445     81,
445
Dividend 60,
000     60,000     60,
000
IncomeSumma ry 145,
250 150, 500 145,250 150, 500 145,250 150,
500
Sales 953,
500     953,500 953,
500    
Salesdisc ount 2,
500     2,500 2,500    
Salesretur nsa nda l
lowa nces 3,
000     3,000 3,000    
Purcha s
e 610,
050     610,050 610,050    
Freightin 6,
000     6,000 6,000    
Purcha s
eDi scount 6,
000     6,000 6,
000    
SalesSa l
a riese xpe ns e 77,
400 2,
800   80,200 80,200    
Adve rti
singe xpe nse 24,
800     24,800 24,800    
Depr eci
ationExp. -StoreEqui p. 19,
200   19,200 19,200    
StoreSuppl iese xpe nse 6,
100   6,100 6,100    
DeliveryExpe ns e /
Fr ei
ghtout / 2,
000     2,000 2,000    
Mis cel
lane ousSe lli
ng-e xpense 4,
400     4,400 4,400    
OfficeSa la ri
e sEx pe nse 39,
845 1,
300   41,145 41,145    
RentExpe ns e 40,
000     40,000 40,000    
Hea ti
nga ndl ight ingExpe ns
e 16,
100     16,100 16,100    
Taxe sexpe nse 8,
500     8,500 8,500    
Ins
ur ancee xpe ns e 6,
400   6,400 6,400    
Mis cel
lane ousGe neral-expense 3,
600     3,600 3,600    
Int
e res
tExpe ns e 1,
000     1000 1000    
_______
Ga
inondi
spos
alofe
qui
pme
nt _______ 3,
800 _______ _ _______ 3,800 3,
800    
1,468,58
Tot
al 1,294,
785 1,294,
785 331,550 331, 550 1, 468,585 5 1,
020,
245 1,
113,
800 448,
340 354,
785

42
 Cha
pte
rFour
:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Ne
tInc
ome 93,
555  ________  ______ 93,
555
1,
113,
800 1,113,
800 448,
340 448,
340

43
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
4.
6) Fi
nanc
ialSt
ate
ment
sForMe
rcha
ndi
si
ngBus
ine
sse
s
1.Pr epa reI nc omeSt ateme ntInSi ngl
e -St
epAndMul tipl
e -StepFor ms
A.Mul tiple -St e pI nc omeSt ateme nt
FarEa stTra
dingCorpor at
ion
IncomeStat
eme nt
Fort heye arendedDecembe r31,2004
Re venue s : InETB InETB
Sales 953, 500. 00
Le ss:Sa lesDi sc ount 2,500.00
Le ss:Sa lesRe tur n& Al l
ow. 3,000.00 (5,500.00)
Ne tSa le s 948, 000.00
Cos tofMe rcha ndi seSol d:
Me rc handi s eI nve ntor y,J anua ry1 ,2004 145,250.00
Pur cha se 610, 050.00
Les s:Pur c ha seDi scount (6,000.00)
Ne tPur c ha se 604, 050.00
Add:Fr eighti n 6,000.00
Cos tofMe rcha ndi sePur cha sed 610,050.00
Cos tofMe rcha ndi seAva i
la bl
eForSa le 755,300.00
Les s:Me rc ha ndi s eI nve ntoryDe ce mber31,2004 (150,500.00)
Cos tofMe rcha ndiseSol d (
604, 800.00)
Gros sPr of it: 343, 200.00
Ope ra t
ingExpe ns es:
SellingExpe ns es :
SalesSa la ri
e sExpe ns e 80,200. 00
Adve rti
singExp ens e 24,800. 00
De pre ciationExp. -St oreEqui p . 19,200. 00
StoreSuppl ie sExp e nse 6
,100. 00
De li
ve ryExpe ns e /
Fr e i
ght -Out / 2
,000. 00
Mi sce l
lane ousSe llingExpe n se 4
,400. 00
Tot alSe llingExpe nse 36,700.00
Ge ne ralExpe ns e s:
Off i
c eSa lariesExpe ns e 41,145. 00
Re ntExpe ns e 40,000. 00
He atinga ndLi ght ingExpe ns e 16,100. 00
Taxe sExpe ns e 8
,500. 00
Insura nceExpe ns e 6
,400. 00
Mi sce l
lane ousGe ne ral-Expe n se 3,
60 0.00
Tot alGe ne ra lEx pe nse 115,715.00
Tot a lOp e rati
ngEx pense (
252, 445.00)
Incomef romOpe ration 90,755. 00
Othe rI nc ome :
Ga inonDi spos a lofEqui pme nt 3,800.00
Othe rExpe ns e:
InterestExpe ns e (
1,000.00) 2,800.00
Ne tInc ome 93,555.00

44
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s

B.Si
ngleSt e
pI nc omeSt ate me nt
Fa rEastTr adingCorpora t
ion
Inc omeSt ate
me nt
Fort heyea rende dDe c
embe r31, 2004
Re ve nue :    
Ne tSa les 948,000.
00
Ot herI nc ome 3,800.
00
Tota lRe ve nue 951,800.
00
Cos tsa ndExpe nses :  
604,800.0
Cos tofMe rcha ndiseSol d 0  
136,700.0
Se ll
ingExpe ns e 0  
115,745.0
Ge ne ralExpe ns e 0  
Ot herExpe nse 1,000.00  
Tota lExpe nse 858,245.
00
Ne tI ncome   93,555.
00
2.Pr
epareaRe tainedEa rningsSt at
eme nt
Fa rEastTr adingCorpora t
ion
Re t
ainedEa r
ningState
me nt
ForTheYe arEnde dDecembe r31,2004
Retaine de arn i
ng,J anua r
y1,2004 Br81,445.00
NetI ncomef ort heYe ar 93,555.00
Less:Di vide nds (60,000.00)
Increa sei nRe tainedEa rnings 33,
555.00
Retaine de arn i
ngsDe cemb er31,2004 Br115,000.00
3.Pr
epareaCl assifi
e dBa la nceShe et
Fa rEastTr adingCorpora t
ion
BalanceSheet
De cembe r31,2004
As set
s: I
nETB
CurrentAs sets:
Ca s
h 43,750.00
A/Re cei
va bles 96,150.00
Me rchandi s
eI nve nt
or y 150,500.00
Supplies 2,
150.00
PrepaidIns uranc e 6,
290.00
TotalCur r
e ntAs se ts 298,840.0
0
PlantAs sets:
StoreEqui pme nt: 89,500.00
Less:Ac cum.De prec iati
on–SE 44,500.00
TotalPl antAs sets 45,000.00

45
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
Tota
lAs sets 343,
840.
00
Liabili
tie
sa ndStoc
kholde
rs’Equi
ty:
Lia
bili
ti
es :
Account
sPa yable 44,740.00
Sal
aryPa yable 4,100.00
Tota
lLiabi l
iti
es 48,
840.
00
St
ockHol de rsEquit
y:
Capit
alStoc k 180,
000.
00
Reta
inedEa rn i
ngs 115,
000.
00
Tota
lStoc kho l
dersEquit
y 295,
000.
00
Tota
lLiabi l
iti
esandSt oc
kholde
rs'Equi
ty 343,
840.
00

4.
7) Adj
usti
ngandCl
osi
ngEnt
ri
es
1.Adj
ust
ingEnt
rie
s
Gene
ralJour
nal Page1
Dat
e De scr
iption P/
R De
bit Credi
t
1985   Adj ust
ingEnt ries      
DEC. 31 I ncomes umma ry   145,
250    
    Me rcha ndiseI nvent
ory       145,250  
              
  31 Me rchandiseI nve ntory   150,
500     
    IncomeSumma r
y       150,500  
              
  31 Insurancee xpe nse   6,
400     
    PrepaidI ns urance       6,
400  
              
  31 Store-suppliese xpe nse   6,
100     
    Store-Suppl ies       6,
100  
              
  31 De preciat
ione xpe ns e   19,
200     
    Ac cumul a
te dDe prec
iat
ion       19,
200  
              
  31 Saless al
a r
iese xpe nse   2,
800     
    Of fices ala
riese xpe nse   1,
300     
    Sa l
ari
e spa ya ble       4,
100  
              
2.Cl
osi
ngEnt
ri
es
Ge
ner
alJ
our
nal Pa
ge1
    Cl
osi
ngEnt
ri
es P/
R Deb
it Cr
edi
t
3
 
DEC. 1 Sal
es   953,
500    
    Purcha
seDiscount   6,
000    
    Gainondisposalofe
qui
pment   3,
800    
    I
ncomeSumma ry       963,
300
            
3
 1 I nc
omes umma ry   874,
995    

46
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
    Salesdi scount       2, 500
    Sa lesRe turn&Al low.       3, 000
    Pur cha se       610,
050
    Fr ei
ghti n       6, 000
    Sa lesSa la r
iese xpe nse       80,200
    Adve rti
singe xpe nse       24,800
    De pre ci
ationExp. -StoreEquip.       19,200
    StoreSuppl iese xpe nse       6, 100
    De li
ve ryExpe nse /
Fr ei
ghtout/       2, 000
    Mi sce l
lane ousSe lli
ng-e xpense       4, 400
    Off i
ceSa lari
e sExpe ns
e       41,145
    Re ntExpe nse       40,000
    He atinga ndl ightingEx pense       16,100
    Taxe se xpe nse       8, 500
    Insura ncee xpe nse       6, 400
Mi sce l
lane ousGe neral
-
    expe ns e       3,600
    InterestExpe nse       1000

3
Ma
rch 1 I
ncomes umma r
y   93,
555  
    Re ta
ine dEa r
nings       93,
555
            
3
  1 Ret
ai
nede ar
nings   60,
000    
    Di vi
de nd       60,
000
            
3.Pos
tCl
osi
ngTr
ialBa
lanc
e
FarEastTradi
ngCorporat
ion
PostClosi
ngTria
lBa l
ance
December31,2005
Ac c
ountTi t
le Dr. Cr
.
Cash 43,
750     
AccountsRe ceivabl
e 96,
150     
MerchandiseInve nt
ory 150,
500     
St
oreSuppl ies 2,
150     
Pre
paidIns ura
nc e 6,
290     
St
oreEqui pme nt 89,
500     
Accumula t
e dDe pre
ciati
on-StoreEqui
p.     44,500  
Accountspa yable     44,740  
Sal
aryPa yable     4, 100  
Capit
alStoc k     180,
000  
Reta
inedEa r
nings     115,
000  
Tota
l 388,
340   388,
340  

47
 Cha
pte
rFou
r:Ac
count
ingf
orMe
rcha
ndi
si
ngBus
ine
sse
s
4.
8) Cor
rec
tionsofEr
ror
s
I
fthereiser
rorinr ec
ordingtransac
ti
onsorposti
ngt oledgeraccount
s,itwil
lbecorr
ect
ed
t
hroughcorr
ect
inge nt
ries.Fore x
ampleade bi
tpurchasesaccountma ybedebit
edtopla
nt
a
ssetacc
ountwhilethecre di
tiscorr
ectl
yrec
orded.Thus,thecorr
ecti
ngwi l
ldebi
tpur
chas
es
a
ccountandcre
dittheplantasseta
ccountsot
hatt
hee r
rorwi l
lbecorrec
ted.

48
 Cha
pte
rFi
ve:Ac
count
ingf
orDe
fer
ral
sandAc
crua
ls

Cha
pte
rFi
ve
De
fer
ral
sandAc
crua
ls

5.
1) Adj
ust
ingf
orDe
fer
ral
s
Def e
rra
lsar
eanexpensethathasa
lrea
dybee npa idorrevenuethathasalr
eadybee
nrec
eived.
Def e
rra
lsarecre
atedwhe nwer ec
ordat ra ns
a ct
ionint hewa yt hatitdel
aysordefers
r
e cogni
ti
onofanexpenseal
readypai
dorreve nuea l
readyrecei
ved.De f
err
alsi
ncl
udede
ferr
ed
expense(pr
epa
idexpense)a
ndde f
err
edre
ve nue( unear
ne dreve
nue )
.

A)De fer
redExpense(PrepaidExpe ns
e)
De f
err
edExpe nseisane xpensethathasbeenpai
dbutdelayedf
orrec
ognit
ion.Atthet
imean
expenseispa i
d,itma ybede bite
de it
hertoanass
etac c
ountortoa nexpense
.Examples:
suppli
es,pre
paidinsur
a nce,prepai
dr e
nt,pr
epai
dint
ere
st,etc
.Defe
rredExpensema yi
nit
ia
ll
y
berecordedasana s
setora sane xpense
.

PrepaidExpens eI ni
ti
all
yRe cordedAsa nAs set
Adva ncepa yme nt sorpr epayme nt
sf orde f
err
ede xpens
eisr e
cor
deda sde
bitst
othe
appropri
atea sseta cc
ounte venthougha l
lorapa r
tpr e
paymenti
sexpec
tedt
obeusedor
consume dduringt heaccounti
ngpe ri
od.Thus,
 Thea djusti
nge ntr
yt ra
ns f
ersthea mountusedore xpi
reddur
ingtheper
iodt
othe
expenseac count
 Thea mountunus e
dr emainsinass
e tacc
ount
 Re versi
nge ntr
yisno tre
quired

Il
lustr
ation5. 1:a s
s umet ha ttheunexpiredi nsura
nceforOLYMPI CCompa nyonJ anuar
y1,
2003a mount edt oBr7, 0 00.OnJ anua r
y2,t heCompa nypurchaseda ddit
ionalins
urance
polic
yf orat otalofBr12, 000.As sumef urtherthatBr14,
000ofthepr emiumort heins
urance
polic
yi se xpi r
ed dur ing t heyea ra nd theCompa ny fol
lowst hes yst
e m ofr ec
ording
prepayme ntfo rinsurancea sa nass
e t
.Re cordt heTrans
act
ions
:
Init
ialRe cording: Pr epaidI nsurance 12,000
Janua r
y2,2003 Ca sh 12,000

Adj
ust
ing: I
nsur
anceExpense 14,
000
Dec
embe r31,2003 Pr
epai
dInsura
nce 14,
000

Cl
osi
ng: I
ncomeSumma r
y 14,
000
De
cember31,2003 I
nsur
anc
eExpe
nse 14,
000

Re
ver
sing: Re
ver
singi
snotr
equi
red

Prepa
idExpenseIni
ti
all
yRe cor
dedAsanExpense
Inthi
smethod:
 Pre
payme ntsf
ordefe
rredexpe
nsei
sdebi
tedtothee
xpe
nseaccount
s
 Thea dj
usti
ngentr
ytransf
erst
heamountunuse
dorunexpi
redfrom e
xpe
nsea
ccountt
o

49
 Cha
pte
rFi
ve:Ac
count
ingf
orDe
fer
ral
sandAc
crua
ls
t
heassetac
count
 Theamountexpi
redorusedre
mainsi
ntheexpens
eaccountandcl
osedatt
heend.
 Rever
singent
ryisrequi
red-ane
ntrywhic
hi smadea tt
hebe gi
nni
ngoftheperi
odt
o
compl
ywi t
htheini
ti
alre
cordi
ngsyst
emandtheexac
trevers
eoftheadj
ust
ingent
ry

I
ll
ust
rat
ion5.2:As sumea llthedataintheaboveillus
tra
tionexce
ptt
hatthebus i
nessfoll
ows
t
hesyst
em ofr e
cordingprepaidinsuranc
ea sane xpenseandthatt
heinsurancepolicytha
t
a
ppli
estothef ut
urepe r
iodisfoundtobeBr5, 000.Recordallt
henec
ess
arytransact
ions:
Init
ialRecording: I nsuranc
eExp ense 12,
000
January2,2003 Cash 12,000

Adj
ust
ing: Pr
epa
idIns
uranc
e 5,
000
Dec
embe r31,2003 Ins
uranc
eExpe
nse 5,
000

Cl
osi
ng: I
ncomeSumma r
y 14,
000
De
cember31,2003 I
nsur
anc
eExpe
nse 14,
000

Re ve
rsing: Insur
anceExp ense 5,000
January1,2004 Prepa
idInsura
nce 5,000
NOTE:I nthi
ss yst
emthea ss
etsaccountwillhaveaz er
oba l
ancewhereasthee xpe
nsewi l
l
haveabalance.Thisba
lanceisnota nexpenserat
heriti
sa nass
et.Rever
singe nt
ryt
ransf
ers
theamountunus edbac
kt oane xpensea c
counti.e
.thea mountinprepa
idins ur
anc
ea tthe
begi
nni
ngoft henewpe r
iodistr
ansferr
edtotheexpense.
B)De f
erre
dRe venue(Une a
rnedRent)
Defe
rredr e
ve nuei srevenuethathasbeenrece
ivedbutdelaye
df orrecognit
ion.De f
err
ed
r
evenuei ncl
ude smone yrecei
vedi nadva
nces uc
ha sma gazi
nes ubs
cript
ion,tuit
ionfee
r
evis
e dbysc hool,uni
ve r
sit
ie
sorc ol
le
ge,moneyrec
eive
dbya dver
ti
singcompa nies
.De f
err
ed
Revenueisiniti
allyre
cordedeit
herasanass
etorasanexpe
nse.
Def
err
edRe venueInitiall
yRe cordedAsaLi a bi
lit
y
I
fDefer
redRe venueisi nit
ial
lyrecordedasal ia
bilit
y,then:
 Thea djust
inge ntrytransf
ersthea mounte arned duri
ngtheperi
odf romthelia
bil
it
yt o
t
hereve nuea c
count
 Thea mountune a rnedrema i
nsinthelia
bi l
ityaccount
 Re versingentryi snotrequired
Def
err
edRe venueInitiall
yRe cordedAsa naRe venue
I
nthi
sme thod :
 Ca shr ecei
vedina dvanceiscredit
edtother evenuea c
counts
 Thea djusti
nge ntrytransf
e r
st heamountune arnedfrom there
ve nuea c
counttothe
l
ia
bilityaccount
 Thea mounte arne drema i
nsintheRe venuea ccountandclos
edatthee nd
 Re versingentryi srequir
ed

Il
lust
rat
ion5.
3:OnNovember1,2004OLYMPI C COMPANY r
ent
edthepor t
ionofit
s
buil
dingbyre
cei
vingBr1
200inadvanc
efort
hre
emonthst
ime
.Thefis
calpe
riodendson

50
 Cha
pte
rFi
ve:Ac
count
ingf
orDe
fer
ral
sandAc
crua
ls
De ce
mber31,2004Inst
ructi
on:Ma ket hene
ce s
saryjour
nalentr
iesas
sumingthatthes
yst
em
ofrecor
dingUnear
nedRe nti
nit
ial
lya sareve
nuea nda sl
ia
bil
ity:
AsaLi abi
li
ty AsaRe venue
Nov.1, Cash 1,200 Cash 1,20
2004 0
Unearne
dRe nt 1,200 RentIncome 1,
200

Dec.
31, Une
arne
dRent 800 Re
ntI
ncome 400
2004 Re
ntI
ncome 800 Unear
nedRe
nt 400

Dec.
31, Re
ntI
ncome 800 Re
ntI
ncome 800
2004 I
ncomeSumma
ry 800 I
ncomeSumma
ry 800

Jan.1, Re
ver
singi
snotr
equi
red Une
arne
dRent 400
2005 Re
ntI
ncome 400

5.
2) Adj
ust
ingf
orAc
crua
ls
Ana cc
rua
lisanexpe
nsetha
thasbe
enincur
redbutnotpa
idorreve
nuet
hathasbeenear
ned
butnotre
cei
ved.Accr
ual
sincl
udeacc
rue
de xpe
nse(accr
uedli
abil
it
y)a
nda c
crue
dr e
venue
(Accr
uedAsse
t).

A)Ac crue dExpe nseorAc c rue dLi a

bili
ty
Il
lus t
rat
ion5. 4:assumet hatonDe cembe r31,2003theendoffiscalyearsal
essal
aryexpense
andof fi
ces a l
aryexpe ns
ea ccountf orXYZPLCha vedebi
tbalancesofBr86,000and60,000,
respecti
vely.Fort her e
asont ha tpayme ntda t
eisd i
ff
ere
ntfrom thee ndofthea cc
ounting
period,thet otalsalaryaccrue di sBr10, 000outofwhi c
h4,000wa soffi
cesal
a r
yexpens e
.
Ass umet ha tthebus ine
sspa idBr20, 000onJ a
nuary15,2004outwhi c
hBr8, 000wa sfor
Offices alaryExpe nseincludi ngt hea ccruedsala
ry.Inst
ruc
tion:Re c
orda l
lthene ce
ssary
entrie
sa ssumi ngthatthebus ine ss:
A)Doe snotus ethepolic yofr eversi
nge ntr
y
B)Us e sthepol i
cyofre ve rsi
nge ntr
y

Wi
thoutRe
ver
singEnt
ry:
De
cembe
r31 Sa
lesSal
aryExpense 6,
000
Of
ficeSa
laryExpense 4,
000
Sal
aryPayable 10,
000

De
cembe
r31 I
ncomeSummary 156,
000
Sa
lesSal
aryExpense 92,
000
Of
ficeSa
laryExpens
e 64,
000

J
an.1,2004: NoRe
ver
singEnt
ry

J
an.15,2004: Sa
lesSalar
yExpense 6,000
Of
ficeSala
ryExpens
e 4,000
Sa
laryPayabl
e 10,000
Ca
sh 20,
000
Wi
thRe
ver
singEnt
ry:

51
 Cha
pte
rFi
ve:Ac
count
ingf
orDe
fer
ral
sandAc
crua
ls
De
cembe
r31 Sa
lesSal
aryExpense 6,
000
Of
ficeSa
laryExpense 4,
000
Sal
aryPayable 10,
000

De
cembe
r31 I
ncomeSummary 156,
000
Sa
lesSal
aryExpense 92,
000
Of
ficeSa
laryExpens
e 64,
000

J
an.1,2004: Sa
lar
yPayabl
e 10,
000
Sa
lesSal
aryExpense 6,
000
Of
ficeSal
aryExpens
e 4,
000

J
an.15,2004: Sa
lesSal
aryExpense 12,000
Of
ficeSa
laryExpens
e 8,000
Cash 20,
000

Il
lust
rat
ion5. 5:OnNove mber1,2003AACompa nyborr
owedBr60000f r
omCBEi ss
uinga
pr
omi ss
or yn otepa yableshowing12% i
nter
estwherebytheloanandint
e r
estwil
lbepa i
d
af
terfourmont hs(Ma rch1,2004).Thecompanyhasafisc
alperi
odtha
te ndsonDe c
ember
31a ndt hei nteres
te xpensea cc
ounthasaba l
anceofBr17000a tyeare nd.Makethe
necess
aryjour nalentr
iesfortheCompanyass
umingthatt
hecompany:
A)doe snotus ethereversi
ngentr
y
B) us et hepol ic
yr evers
ingentr
y
Wi t
hOutRe ve r
singEnt r
y:
Nov.1,2003 Cash 60,
000
Not
esPa
yabl
e 60,
000

De
c.31,2003 I
nte
res
tExpe
nse 1,
200
I
nte
res
tPa
yabl
e 1,
200

De
c.31,2003 I
ncomeSummary 18,
200
I
nte
res
tExpe
nse 18,
200

J
an.1,2004 NoRe
ver
singEnt
ry

Ma
rch1,2004 Not
esPa
yabl
es 60,000
I
nte
res
tPaya
ble 1,200
I
nte
res
tExpens
e 1,200
Ca
sh 62,
400
Wi
thOutRever
singEntry:
Nov.1,2003 Ca
sh 60,
000
Not
esPa
yabl
e 60,
000

De
c.31,2003 I
nte
res
tExpe
nse 1,
200
I
nte
res
tPa
yabl
e 1,
200

De
c.31,2003 I
ncomeSummary 18,
200
I
nte
res
tExpe
nse 18,
200

52
 Cha
pte
rFi
ve:Ac
count
ingf
orDe
fer
ral
sandAc
crua
ls
J
an.1,2004 I
nte
res
tPayabl
e 1,
200
I
nte
res
tExpe
nse 1,
200

Ma
rch1,2004 Not
esPa
yabl
es 60,000
I
nte
res
tExpe
nse 2,400
Ca
sh 62,
400
B) Ac cr
ue dRe ve nueorAc cr
uedAs set
s
The seareitemsofr evenuethathavebe enearneda ttheendofthea c
count
ingperiodbutnot
recordedbe causec ashisnotrecei
ved.Sincethebus inessr
ecogniz
ingbothr
e ve
nuea nda s
set
s
itissoca l
ledAc crue dRevenueorAc cruedAs set
s.
Ill
ustrat
ion5.6:OnSe ptember1,2000BBAudi tingFirme nte
redintoacontra
ctwi t
hDi re-
Da waFoodCompl e xtoprovideaudit
ings e
rvi
c efor6mont hsforatot
alofBr36,000Pa yabl
e
whe nthes er
vi c
ei sc omplet
ed.Thef e
e sinc
omea ccountofthefi
rmha sacr
e di
tbal
a nc
eofBr
126,000a ndt hatt hef ir
m ha saf i
scalyeare ndingonDe cember31.Ma kethene cessar
y
journalentr
iesfort hefirma s
sumingtha t
A)Re versi
ngEnt ryisnotUsed
B) Re versi
ngEnt ryIsUsed

Wi
thNoRe
ver
singEnt
ry:
De
c.31,2000 Fe
esRecei
vabl
es 24,
000
Fe
esRe v
enue 24,
000

De
c.31,2000 Fe
esRevenue
s 150,
000
I
ncomeSumma
ry 150,
000

J
an.1,2001 NoRe
ver
sing

Ma
rch1,2001 Ca
sh 36,
000
Fe
esRe
cei
vabl
es 24,
000
Fe
esRe
venue 12,
000

Wi
thRe
ver
singEnt
ry:
De
c.31,2000 Fe
esRecei
vabl
es 24,
000
Fe
esRe v
enue 24,
000

De
c.31,2000 Fe
esRevenue
s 150,
000
I
ncomeSumma
ry 150,
000

J
an.1,2001 Fe
esRevenue
s 24,
000
Fee
sRe c
eiva
ble
s 24,
000
Ma
rch1,2001 Cas
h 36,
000
Fee
sRe ve
nue 36,
000

53
 Cha
pte
rSi
x:Ac
count
ingSys
temsDe
sign

Cha
pte
rSi
x
Ac
count
ingSys
temsDe
sign
Account
ings yst
e mi sas yst
em whi chpr ovidesthei nf
orma t
ionf oruseinc onduct
ingthe
aff
air
soft hebus inessandinr eport
ingtoowne rs
,c r
edit
orsandot herint
eres
tedpa r
ti
es.Ina
gener
alsens e
,a na c
counti
ngs ystemincludesthee nti
renet
wor kofc ommunicati
onsusedbya
busi
nessor ganizati
ont oprovidene ededinforma t
ion.Itconsist
sofbus ines
spa per(sour
ce
document)
,r ecords(jour
nalsandl e
dge r
)andr eports(
fina
ncialsta
teme nt
s).

6.
1) Pr
inc
ipl
esofAc
count
ingSys
tems
Becaus
eofdiff
erenc
esinbusi
nesses
,innumbe roftr
ans
acti
onstobepr oc
essedandinthe
use
sma deofacc
ounti
ngdata
,a c
count
ingsyst
emswi l
lvar
yfrom busi
nesst
obus i
nes
s.How
eve
r,ther
eareanumbe rofbroadpri
nci
plesthata
redis
cusse
dasf ol
lowsa ndappl
ytoa l
l
sys
tems:
 Cos
t-Ef
fec
tive
nes
sBa
lanc
e
The majorcons
idera
ti
onsin devel
opi
ng ordes i
gni
ng a
na ccount
ing s
ystem ar
ecost
eff
ect
ive
ness
.Thatist
obal
anceth
ebe ne
fit
saga
instt
hecos
tinf
ormati
on.Costofi
nfor
mat
ion
atl
easts
houl
dbee qua
ltot
hebenefi
tofi
nfor
mati
on
 Fl
exi
bil
it
ytoMe
etFut
ureNe
eds
Ana c c
ount
ingsyste
m mus tbefl
e xi
blee noughtomeetcha
ngingdemandsoft
hebusi
nesse
s
world.Thebusines
smus tadaptt
ot hec onst
antl
ycha
ngingenvir
onmenti
nwhichi
topera
tes.
Fore xampl
e,changesinaccount
ingpr i
nc i
ple
sordat
aprocess
ingte
chnol
ogyorot
herf
actor
s
shouldcomplywiththegovernmentregulat
ions.
 AdequateI
nte
rnalCont
rols
Anac
count
ings
yste
m mustprovi
dei
nfor
mat
ionwhi
chhe
lpma
nage
menti
npl
anni
nga
nd
control
li
ngact
iviti
es.Thes
ystems houldai
dma na geme nti
ndi r
e c
ti
ngope r
ations
.Thedetai
le
d
poli
ciesandpr ocedure
su se
dt odi re
ctopera
tionsa ndpr oviderea
s onableassur
anc
et hat
enti
ty’sobj
ect
ive sareach
ieveda recall
edint
e rnalcont r
ols.Ana ccountingsyste
ms houl
d
showa nydevi
ationfromtheint
ernalcont
rol
sst
r uc t
ure
.
 Ef
fec
tiveRe
por
ti
ng
Whenr e
port
s(f
inancia
lInfor
ma t
ion)ar
epre
pared,ther
equi
reme
ntsandknowledgeofthe
use
rshoul
dberecogniz
ed.Forexample
,manage
me ntmaynee
ddetai
le
dbas
is,andregul
at
ory
age
ncie
soft
enre
qui r
eunif
ormda t
a.
 Ada
pta
tiont
oOr
gani
zat
iona
lSt
ruc
tur
e
Dif
fer
entbusi
ness
esma yhavedi
ff
erentorga
niz
ati
onalst
ructurea
ndl evelofmanage
me nt
.
Ther
efore
,anaccount
ings
yste
mthatgoeswit
htheorgani
zati
onals
truc
turemustbedes
igned
t
ome ett
heinf
ormati
onnee
dsofal
llevelofmana
gementatthelowes
tcost.

6.
2) Ac
count
ingSys
temI
nst
all
ati
ona
ndRe
vis
ion
Beforedes
igni
nga ndi ns t
alli
ngorr evie
winga nac c
ountingsystemf orane nterpri
se,the
designe
rmusthaveac ompl eteknowl edgeofthebus i
ne s
sope r
ati
ons.Thede signershould
recogni
zet
hatsomearea so fthesy s
tem,suchasthetypesa nddes
ignoftheformsne e
deda nd
thenumberandtit
le
soft hea ccountsrequi
red,maybea f
fec t
edbyfact
orsthatarenotknown
whe nabusi
nes
si sfi
rstor ganiz
e d.Asne winfor
ma t
iona boutabusine
ssisobtaineda ndasa

54
 Cha
pte
rSi
x:Ac
count
ingSys
temsDe
sign
ba
sins“
outgr
ows
”ore
xpa
ndst
one
wope
rat
iona
lar
eas
,thes
yst
emwi
llne
edt
ober
evi
sed.
Manylar
gebusines
sescont
inual
lyrevi
ewthei
ra c
counti
ngs ys
temandmayc ons
tantl
ybe
i
nvol
vedincha
ngingsomepa r
tofit
.Thejobofi
nstal
li
ngorchangi
nganac
counti
ngs ys
tem,
e
it
herini
tse
nti
retyoronl
yinpart
,ismadeupofthr
eephases
:
 Syst
emAnal
ysi
s
 Syst
emDes
ignand
I mpl
eme
nta
tion
1.Sys
temAna
lys
is
Thegoa lofs yst
em a nal
ysisisto deter
mi neinfor
mati
on needsa nd sourcesofsuch
inf
ormati
on,anddefi
ci
e nc
iesinproc
eduresandda t
aproce
ssi
ngme thodspre
s e
ntlyus
ed.The
syste
ma nal
ystshoul
dde t
erminema na
geme nt’
splansforchangesi noperat
ionssuc
ha s
volume,pr
oduct
s,t
erri
tori
es,et
c.
2.Sys
temDe
sign
Thisdeal
swit
hdet
ermini
ngthere
quir
ementoft
henewsys
temandc
hangi
ngitba
s e
dont
he
re
sultofthes
yst
ema nal
ysi
s.Inthi
ssta
geapropos
alf
orthenewsys
temisprepar
eda
nd
fi
nali
zed.
3.Sys
temI
mpl
eme
nta
tion
Thefi
nals tageofthec re
ati
onorr evisi
onofa na c
countingsystemi stoc a
rryout
,or
i
mpleme ntthepr oposa l
sfrothene ws yst
e m.Itincludes:
 Inst
a l
lingne worr evis
edfor ms,records,proceduresande quipme nt
 Training a nd s upe r
vis
ing a l
lpe r
sonne lr e
sponsiblef orope ra
ti
ng the sys
tem unt
il
s
ati
sfactoryef f
iciencyisac hi
eved.
 Theol ds yst
e mi sc hange dove rtimebyne ws yste
m.Thi sisdonegr a
duall
yoveran
e
xtende dpe r
iodr athert
hana llatonce .We aknessandc onfli
cti
ngorunne cess
aryel
ement
s
i
nthede s i
gnma ya ls
obe comea pparentdur i
ngt heimpleme nta
tion.

6.
3) I
nte
rna
lCont
rolPr
inc
ipl
esa
ndSt
ruc
tur
e
I
nter
na lcontr
ols t
ruct
ureconsi
stsoft hepoli
cie
sa ndproce
duresest
abl
ishe
dt oprovi
dere
asona
ble
a
ssurancethatthee nt
it
y’sobje
ctivewi l
lbeachie
ved.Thisint
erna
lcont
rolstr
uct
urecanbedivi
ded
i
ntothreee l
eme nt
s:(1)thecontr
olenvironment
,(2)thecontr
olproc
edures
,and(3)theac
count
ing
s
yste
m,e achofwhi chisdis
cussedasfoll
ows:

1.TheCont
rolEnvi
ronme
nt
Thec ont
rolenvi
ronme ntrepre
sentsanove r
allatt
it
udetowarda nda wa
renes
softheimporta
nceof
contr
olsbyma nageme ntandot heremployees.Fact
orsinf
luencingthecont
rolenvi
ronmentofan
ente
rpri
seincl
udema nage
me nt
’sphilos
ophya ndope r
ati
ngstyle
,t heor
gani
zati
onals
truc
tur
eofthe
ente
rpri
seandpersonnelpol
icie
sa ndpra
cti
ces.

2.TheCont
rolPr
oce
dur
es
Thegene
ralcont
rolpr
ocedur
es(st
rongi
nte
rna
lcont
rolgui
del
ine
s)whi
cha
ppl
ytoa
llor
gani
zat
ion
t
hrougha
na c
counti
ngsys
temare
:
 Compe
tentPe
rsonne
landRot
ati
onofDut
ies
Allacc
ount
ingsys
temr e
quir
espr
oce
durestoensur
ethatpeoplearea
bletope r
formt
hedut
iesto
whic
htheyarea
ssi
gned.I
tisal
soa
dvi
sabl
etorot
at
ec l
eri
calpe
rsonne
lper
iodi
cal
lyfromj
obt
ojob.
 As
signme
ntofr
espons
ibi
li
ty

55
 Cha
pte
rSi
x:Ac
count
ingSys
temsDe
sign
I
fempl
oye
esa
ret
owor
kef
fi
ci
ent
ly,t
hei
rre
spons
ibi
li
ti
esmus
tbec
lea
rlyde
fine
d
 Se
par
ati
onofr
espons
ibi
li
ty
Theresponsi
bili
tyforas equenceofrela
tedope r
ati
onsshouldbedivideda
mongt woormorepersons.
Forexample,noonei ndi
vidualshouldbea uthor
izedtoordermerchandi
se,ver
if
yt her
ecei
ptofthe
mercha
ndiseandpa yt hesuppli
er.Thatispurc
ha s
ing,r
ecei
vingandpa yments
houldbesepa
rat
ed.The
bus
inessdocume nt
spr eparedasar es
ultofthewor kofeachdepar
t mentmustfi
twithth
oseprepar
ed
bytheotherdepart
me nts
 Ade
qua
teDoc
ume
nta
tion
The
rei
scont
rolwi
thouta
dequa
tedoc
ume
nta
ti
on.
 Se
par
ati
onofa
ccount
inga
ndope
rat
ions
Theres
ponsi
bil
it
yf orma i
nta
iningtheaccount
ingre
cor
dsshouldbese
par
ate
df r
omtheres
ponsi
bil
it
y
fore
ngagi
nginthebusinesst
ransac
tionandforthec
ust
odyofthefi
rm’
sas
set.Acas
hie
rshoul
dbenot
havi
ngacce
sstothejournala
ndl e
dge r
.
 Pr
oof
sandSe
cur
it
yMe
asur
es
Thi
sc ont
rolproc
edurei
ncl
udest
heuseofbankac
countands
afe
keepi
ngmeasur
esforca
sha
ndot
her
val
uabledocuments
,cas
hregi
st
ersma
chinet
orec
orddail
ycas
hsale
sandf
ide
li
tyins
uranc
e.
I
nde
pende
ntRe
vie
w
Tode t
ermin
ewhe therint
ernalcontr
olpr
ocedur
esarebe
ingeffe
cti
velyappl
ied,the
cont
rolst
ruct
ureshouldbepe ri
odic
all
yrevi
ewedandeval
uat
edbyi nte
rnala
uditors
.
Int
erna
laudit
orss
houldreportanyweakne
ssandrec
ommendchangestocor
rec
tthem

3.TheAc
count
ingSys
tem
TheAc counti
ngs yste
mi sa nint
egra
lpa r
toft hei
nter
nalcont
rolst
ruct
ureofa n
ent
erpr
ise.Withouttheinf
ormat
iongener
ate
dbyt heacc
ounti
ngsyst
em,management
wouldla
c ktheabil
it
ytoplananddir
ectoper
ati
onsina
chievi
nggoal
sandobje
cti
ves
.

6.
4) Da
taPr
oce
ssi
ngMe
thods
:Spe
cia
lJour
nal
sandSubs
idi
aryLe
dge
rs
Depe
ndingupont hevari
et
ya ndthea mountofdat
aincludedinthedata
bas
e,va r
ious
pr
oces
singme t
hods-manualandcomput
eri
zedmaybeuse
d.The sepr
oce
ssi
ngmethodsma y
us
especia
ljour
nalsandsubsi
dia
ryle
dger
stoproc
essa
naccounti
ngdat
a.
Speci
alJour
nals:arejourna l
susedtore c
ordonl yonet ypeoftra
nsa
cti
on.I
tises
pecia
ll
y
use
fultoa c
cumula t
eat ra
nsacti
onwi t
hr ecur
rentnature.Thissa
vesti
mea ndc
osts
.For
exa
mple:mostbusinessesusethefol
lowingfourspec
ialjourna
ls:
 Pur c
hasesjournal
 Cas hpayme ntjournal
 Salesjournal
 Cas hrece
iptsjournal

Subs
idi
aryLe
dge
rs:l
edge
rst
hata
reus
edt
opr
ovi
dede
tai
linf
orma
ti
ona
bouta
ge
nera
lledgeraccounts
.Subsi
dia
ryledger
smayi
ncl
udeac
count
srece
iva
ble
s,a
ccount
pa
yabl
es,subsc
riber’
ssubsi
dia
ryledger
s,s
toc
ksu
bsi
dia
ryl
edger
s,e
tc.

56
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts

Cha
pte
rSe
ven
Ac
count
ingForCa
sha
ndTe
mpor
aryI
nve
stme
nts

7.
1) Cont
rol
sove
rCa
sh
Definit
ionofCa s
h:isame dium ofe xc
hanget hataba nka ccept
sf ordepos i
ta ndused
imme diat
ely.Aspe rthisde fi
nit
ion,cashincl
ude sthef oll
owingi te
ms :coins,currenci
es,
changef und,pett
yc a
s hf und,ba l
ancesi
nt heunr est
ri
cteds avingsac c
ounta ndc hecki
ng
acc
ount ,ba nkdebitcards,ba nkc re
ditcardssucha sma ste
ra ndvisac ardswhi cha r
e
acc
e pta
blebyt hecomme r
c i
albanks,moneyor der
s( pos
talorba nk),tr
avele
rsc hecks,CPO,
per
s onalchecks
,bankdrafts,undeposi
tedca
shre c
eipt(cas
honha nd).
Non- CashI te
ms :Eve nifallite msot hert hanc asha renon- cashone ssomenonc ashi t
emsa re
confusingwi thc asha ndt heya r
ewor thdi scussinga tthispoi ntint i
me .I ncludedi nthis
cate
gor ya re: NSFc heck-re
ceivabl
e,Pos tda t
edc hec k-r
ec e
ivable,pos t
ages ta mps-suppli
esor
inventory,I OUs -
receivabl
e ,t re asur
y bi lls
-receiva bles
,c e r
tif
icat
eofde posit
s-shortterm
invest
me nt
s,c ompe nsati
ng ba lanc e
s-someot he ra sset
,t ravela dvances-re c
eivable,bank
balancei ntheblockeda ccount -someot herasset,sa vinga ccountba l
ances-someot herasse
t,if
ithasgots omes ortofr e
str
ictionss ucha snotbea blet owi t
hdr a
w,s ay,Birr5, 000unl e
ssprior
noti
c eo f10da ysa r
es erve d.Howe ver ,savingsa ccountsa reus uall
yc lassi
fieda sc ash
alt
hought heba nkha st her ightt ode ma ndnot icebe forewi thdrawalint hatba nksrarely
exercisetheprivil
egeofpr iornot i
c e.
Obj
ect
ivesofCashma nageme ntandcontrol
:the
remustbes
trongcont
roloverca
shbec
ause:
 Ca shente
rsma nytransact
ionsintheformofp
ayingandrec
e i
vinganditi
svul
nera
ble
tomisa
ppropr
iati
ona nde mbezzle
me nt
 Ca shlac
ksidenti
fic
ationofowne rshi
p.
Toma intai
nt heoptimalamountofc ashi.
e .theamountofc as
hs houldbec ar
efull
yregulat
ed
sot hatne i
thertoomuc hnortool it
tl
eisa va i
la
blea tanytime.Ifthereisexce
ssitha stobe
investedt e
mpor aril
ytos ecur
edi vi
dends,i nte
restorot he
rform ofr evenue
.I fshort
ageis
predictedrelevantsour
cesoffinancingshoul dbee nvis
agedwe l
li nadvancefa
ilur
eofwhi ch
disruptstheope ra
tionofthebusi
ne ssorga
ni zat
ion,casesofil
l-l
iquidi
tyintheshortte
rma nd
insolvencyi nthelongter
mwhi chmi ghtle
a d,attimes,toli
qui
dation.
Cashistheasse
tmostlikel
ytobeus edimproper
lybye mpl
oyeessoitmustbeeffe
cti
vel
y
sa
feguar
dedbys pec
ialcontr
ol.Busi
ness
esus ediff
ere
nttec
hnique
stocontr
olcash.Some
t
hesecontr
olsareus
efultocontr
olovercas
hr ec
eipt
swhilesomeareuse
fultocont
rolove
r
ca
shpayme nt
s.

I
nte
rna
lcontr
olsovercas
hr e
cei
pts
 Us eofcashregi
st
erma c
hine
 Us eofpre-
numbe r
edandc onse
c ut
ivesal
esti
cket
s
 Twoormor epers
onsshouldope nandrecor
dthecas
hre
cei
ptst
hrought
hema
il
 Us eofElect
roni
cscanni
nge quipme nt
 Us eofChangefund
 Us eofBankSys t
em

57
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
 Us
eofCa
shShor
tandOve
rAc
count

I
nte
rna
lCont
rolsoverCashPayme nt
s
 UseofPe t
tyCa s
hFund
 UseofVouc herSyst
em
 UseofBa nkSystem
 TheNe tMe t
hodofrecor
dingPur
cha
sesa
soppos
edt
oGr
ossme
thod

A) Cas
hRegi
ste
r:Cas
hrec
eive
dove rt
hecount
ershoul
dber unguponaca
shregi
st
erso
t
hatt
hec
ust
omerwoul
dseet
hea mountr
ecor
ded.Ontheothe
rha ndt
heca
shi
err
ecor
dsthe
amounts imul t
a ne ous lyonac a shr egi s t
e rtape ,whi chi snota cc ess i
ble.Att hee ndofbus i
ne ss
ora tt hee ndoft heda y,thec ont rolle ri nwhos eha ndt heke yf ort hec ashr egistert apei ske pt
unloc kst hec ashr egi sterandc ompa re sthea ctualc a shc ountwi tht het ape .
B) Pr e- numbe re dSa lesTi cke ts:Att het imeofc ont roli fnumbe r( s
)is( is)mi ssing,i tmi ght
bea ni ndi ca tort ha ts omes ortofmi sa ppr opriationi sma dea ndt hec orrectiveme as ures houl d
bet ake ni nt hepr ope rtime .Anypa gebei tde fec t
ive ,voi de t
c.s houl dbeke ptint hepa d.
C) Twoormor ee mpl oye ess houl dope nt hema i
lt oge ther:thi sc ontrolt echni quer e duc es
thel ike lihoodofas ingledi s hone s te mpl oye es tea lingc ashunde t
e cted.The ypr epa rea
sche dul es howi ngt hena meoft hec ustome rss e nd ingmone y,t hepur pos ef orwhi c ht he
mone ywa ss enta ndt hea mountr ec e i
ve d.Onec opyi ss e nttot hec ashierwi thc a sha ndt he
secondc opyi ss e ntt ot hea cc oun tingde pa r
tme ntf orr ec ordingpur posea ndt het hirdc opyi s
fil
ed.Thec a shie rde pos i
tsthec ashi nt heba nka ss oona spos sibleda ily,i fnotpos sibl et he
nextda ymor ni ng.Thea c count i
n gde pa rt
me ntc r editsc us t
ome rsa ccounta ndma keot her
appr opr iatee ntr ies.La tera not he rindi vidua lc ompa rest hea mountde pos itedbyt hec a shier
witht het ota la mountc reditedt ov ariousa ccount s.Th e fta nde rror swi llber evealedwhe ne ver
theset woa mount sa renott hes a me .
D) El ec troni cSc anni ngEqui pme nt :Ma nyl arges upe rma r
ke tsha vea chi eve df asterc he ck
outl ine sa nds tronge ri nterna lc ont rolbyt hise qui pme ntt ore ada ndr ec ordt hepr iceofa l
l
groc eriespa s singt hec heckoutc ount ers.
E) Cha ngeFund:I tisaf unds etupt oma kec ha nge ss ot ha tt hec ashi err eceive sne ither
aboven orbe low t hes a l
es.I ti sus ua llyke ptwi tht heda ilys a l
e sr eceipt.Att hec l
os eofa
busine s sda yt hea mountofc ha ngef undi sre -kepti ndi fferentde nomi na t
ionsofc ur renc ya nd
coins .Theda ilys a lesr eceipta longwi tha nyc a shove ragei sba nke di nt act,da il
y
F) Ba nkSys te m
 Al lc a shr e ce i
ve dmus tbede pos itedi nt heba nka nda llpayme ntsmus tbema debyc hec ks
dra wnont heba nkunl esst hea mounti ssma ll.
 I ns omec ase s,aba nkma yr e
qui reabus ines st oma int a
ini naba nka c countami nimum
ca shba la nce ,c alledac ompe nsat ingba lanc e.
 Ther equi reme ntofc ompe nsatingba l
anc ei si mpos e dbyt heba nka sa pa rtofl oa n
agr ee me n t.
 I nBa nki ngSys temdi fferentf or msa reus e dbyd epos i
tors.Thef ormsus edi nc onne ction
wi thaba nka cc ount sare:-
1.Si gna tur eCa rd
Whe na na ccounti sope ned,a ni dent ifyingnumbe ri sa s signe dt ot hea ccount ,a nde achpe rs on
author ize dt os ignc hec ksd rawno nt hea ccountmus ts ignas igna tureca rd.Thec a rdi sus ed
byt heba nkt ode termi net hea ut he ntic ityoft hes igna tur eont hec he ckspr esente df orpa yme nt
.

58
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
2.De pos itTi cket/Slip
De positSl ip/Ti c
ke ti spr e pare di ndupl icate ,inwhi chca s
et hec opyi ss t
a mpedori nit
ialedby
theba nk’ st e llerandgi ve nt othede pos i
tora sar ec ei
pt.
3.Che c k
Ac hecki sawr it
teni ns trume nts igne dbyt hede posi
tor,or deri
ngt heba nktopa yac e
rta
in
sumofmone yt ot heor de rofade si
gna t
edpe rson.
The rea ret hr eepa r t
ie sre ga rdingc he ck:
1.Dr a we r:Theonewhos ignst hec hec k
2.Dr a we e:theba nkonwhi cht hec hec ki sdr awn
3.Pa ye e :-theonet owhos eor dert hec he cki sdr awn
 Thena mea ndt hea ddr es soft hede pos itora repr i
ntedone a
c hc hecka ndthec heckis
us ua llynumbe re di ns eque nc etof acilitatet hede positor’
si nt
e rnalcontr
ol
 Bus ine ssfirmsma ypr e pareac opyofe ac hc heckdr awna ndt heyus eitasaba si
sfor
rec odi ngt het rans a ctioni nthec ashpa yme ntjourna l
s.
4.Re cor dsofChe cksDr a wn:t hisc ashpa yme ntjourna linwhi cha llc ashpayme ntinc heck
isrec or de dupon.
5.Re mi ttanc eAdvi ce:Che cksi ssue dtoac re ditorona c counta reac compa nie
dbya
notifica tionc alledar emi t
tanc ea dvice .Thi sfor mnot ifiesthec reditortorecordthe
appr opr iatec redi tandi sse nta longwi thc he cks .
6.St opPa yme ntOr de r:th ef or mt ha tfor bidst heba nknott oma keforc he c
kspre s
e nt
ed
beca useofl os tche cksorc he atedc he cks.

7.
2) BankSys
tem:Ba
nkAc
count
;Ba
nkSt
ate
menta
ndBa
nkRe
conc
ili
ati
on
St
ate
ment
Ba
nkAcc
ount
 Cashi
nbankaccountinthedeposi
tor
’sle
dgeristhere
cipr
ocaloftheaccountwi
ththe
de
posit
ori
nthebank’sle
dger.
 Cashi
nbankinthedeposit
or’
sledgerisanass
etwithadebitbala
nce,a
ndt heac
count
wit
hthede
posi
torinthebank’
sl e
dgerisali
abil
it
ywi t
hacreditbal
ance
.
BankSt a
teme nt
Theba nks tateme nts howst hebe ginningba lance
,checksandothe
rcredit
s(addit
ionbyt
he
banks)
,che ck sandot he rde bits(deductionbyt hebankfromthedepos
itor’
saccount)a
ndt
he
bala
ncea tthee ndoft hepe riod.Theba nkc r e
ditst
hedeposi
tor
’sacc
ountfor:
 De pos i
tsbyc us tome r
 Re ceiptsfromnot esr ecei
va bleleftforcoll
ect
ion
 Loa nst othede pos i
tor
Thebankde bitst
hede positor ’
sacc ountfor:
 Pa idorc ancelle dc he cks
 Se rvic eCha rge s
 De pos i
tedChe c ksbutr et
urne dbe ca
us eofins
uff
ici
entf
unds(NSF)

Ba
nkRe
conc
ili
ati
onSt
ate
ment
WhyBa nkReconci
lia
tionSta
tement
?Aswedi scus
sed,t
herearedoubl
erecordsf
orthes a
me
cas
h,oneofwhichisma int
ai
nedbyt heBankandtheotheri
sma int
aine
dbyt heDe posi
tor
.
Thetworec
ordsshouldhaveequa
lbalanc
e,butt
heyarenotli
kelytobeequalonanys pe
cifi
c

59
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
dat
ebecauseof:
1.De la
ybye it
herpart
yi nrecor
di ngtr
ansa
cti
ons
2.Er r
orsbyeit
herpa r
tyinrecordingtr
ansac
ti
ons
Thus,t
ode te
rminetherea
sonsfora nydif
ferenceandtocorrec
tanyer
rorst
hatmayhavebeen
madebyt hebankort hedepos
itor,thedepositorr
ecor
dsshouldbereconc
il
edwiththebank
st
atementusingbankr ec
oncil
iati
ons ta
teme nt.BankRe conci
li
at
ionStat
ementisprepa
red
onceeachmonth.

El
eme
ntsofBa
nkRe
conc
ili
ati
on
1.De layi nRecordi ngTransacti
onsbyt heBa nk
A)Out st
a ndi
ngDe pos i
ts:
At i
mel agbe t
we ent hedateofthede positandt heda t
eitisrecordedbyt hebank.E.g.t
he
deposi
torma yma ilde posi
tstothebankorus et henightdeposi
tory.
B)Out st
a ndi
ngChe c ks:
At i
mel agofoneda yormor ebetweentheda teac he c
kiswr i
tte
na ndtheda t
eitispr
esent
ed
totheb ankforpa yme nt
.E.g.ont hebus ine
ssa ccount,checksa r
er e
cordedont hedateon
whichtheya r
eissue dbyc redi
tingcashthought heba nkdoesnotye tpa
yi t
.
Ac c ountsPayable xxx
CashinBa nk xxx
2.Dela
yinRe c
ordi
ngTransa
cti
onsbyt
heDeposi
tors
A)BankDebi
tMe mo
Thi
sdec
rea
sethecas
hinbankbalanc
eoft
hedepos
itorandi
ncl
ude
sit
emss
ucha
s:
 NotSuffi
ci
entFund(NSF)
 Ser
viceCharge
 CheckPri
nti
ng

Nots uff
icie
ntFund( NSF)
Itref
e r
stoa namountofmone yc ollectedfor
mac ust
omerint hef
ormofc hecka
nddepos
ite
d
t
ot hede posi
tor
sba nkc heckinga cc ountwhilethecust
ome rdidnothaveadequa
teba
lanc
eto
coverthea mountwr i
ttenont hech ec k.Example
SalesonAc c
ount:
AccountsRe ceivables–XCo. xxx
Sales xxx
Mone yCol le
ctedFormX- Compa nyi ntheFormofChe ck
Cash xxx
Acc ountsRe cei
vable
s–XCo xxx
Unfortunatel
y,noade quat
eba l
anc eofc ashincustomersac
c ount
AccountsRe ce
ivabl es–XCo. xxx
Cashi nBa nk xxx

B)Ba nkCredi
tMe mo
Iti
ncre
asest
hecashinbankbal
anc
eofthedeposi
tors
inc
ecashinba
nkha
sac
redi
tba
lanc
ein
banksl
edger
.Example:Pr
ocee
dsofnot
esrec
e i
vablea
ndint
ere
st
3.Er
rorscommit
tedeit
herbyt
heBa nkortheDepos
itor
Anye
rrort
hatha
sbe e
nma debythebankorbythedeposi
tora
ffe
ctst
het
wor
ecor
ds.Thus
,it

60
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
shoul
dbec onsidere
di nt heBa nkRe concil
ia
ti
onSt at
ement.
FormatofBa nkRe conc il
iati
onSt ateme nt
NameofTheCompa ny
Ba nkRe c
onci
li
ationSta
tement
Da t
e :Us ual
lyMont hofRe c
oncil
iat
ion
Balanceaspe rBa nkSt ateme nt xxx
Add:De positinTr ansi
t xxx
BankEr rors xxx xxx
Sub-Total xxx
Less:Outsta
ndi ngChe cks xxx
BankEr rors xxx (
xxx)
Adjuste
dCa s hBa lance xxx
BalanceperDe posi
torRe cords xxx
Add:Not esAndI nter
estCol lectedByBa nk xxx
DepositorEr r
or xxx xxx
SubTot al xxx
Less:NSF( NotSuf fi
cientFund) xxx
BankSe r
viceCha rge xxx
DepositorEr r
ors xxx (
xxx)
Adjuste
dCa s hBa lance xxx

Example7. 1:t hereconc i

lingi temsonFe bruary28,Ye a
r5,bankr e
concil
ia
tionofXYZ
Compa nywe rea sfoll
ows :
1.Ba lancei ntheba nks tateme nt,Feb28,ye ar5isBr16,600
2.Ba lancei nc a
shl edge ra c
c ount,Feb28,yea r5isBr11,060
3.Ba nks e r
vicec har
ge sf orFe bruary,year5isBr50
4.De posit-in-t
ransit
,Fe b28,ye ar5i nBr1,200
5.Er rori nXYZCo.r ecor di
ngofChe ckNo.654t ovendor,ABCc ompa ny(Br400
che ckr ecordedbyXYZa sBr40)
6.I nterestonnot er eceiva bl
ec ollect
edbyba nkforXYZCo.onFe b28,ye a
r5wa sBr
300
7.NSFc he cksforc ustome r
,Be llCompa ny,chargedbackbyba nkonFe b28,year5was
Br250.
8.Out standingc hecks( total)Feb28,ye a
r5isBr4, 100
9.Pr inc i
pa lofnot e
sr ece i
vabl ecollect
edbyba nkforXYZCo.onFe b28ye ar5wasBr
3,000
Requir
ed:Pr epa reBa nkRe c onciliat
ionSt a
tementforXYZCompa nya ndjournal
izet
he
neces
sarye ntries

XYZCompa ny
Ba
nkRe c
onci
li
ati
on
Fe
brua
ry28,Year5
Bala
nc easperBankSt
ate
ment Br16,
600
Add:De posi
tinTra
nsi
t 1,
200
Sub-Total 17,
800

61
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
Less:Out s
tandingChe c
ks (
4,100)
AdjustedCa shBa lance 13,700
Balancepe rtheDe posit
orRe cor
d 11,060
Add:Not esCol le
c t
edByBa nk 3
,000
Int
e r
estonNot eCollect
edByBank 300 3,3
00
Sub-Total 14,
360
Less:NSF( NotSuf fi
cientFund) 250
BankSe r
viceCha rge 50
ErrorinRe cordingCk.No.654(400–40) 360 (660)
AdjustedCa shBa lance 13,700
TheJ
ournalEnt r
iesBa sedonTheBa nkRec
oncil
iat
ioni
sasf
oll
ows
:
Feb.28,Ye ar5: Ca sh-
in-
Bank 3,
300
Note
sRece
ivabl
e 3,
00
0
I
nte
res
tInc
ome 300

Fe
b.28,Ye
ar5: Miscel
la
neousAdmi nist
rat
ionExpense 50
Account
sRe ceivable-BellCo 250
Account
sPa yable–ABCCo. 360
Cash-i
n- Bank 660
Not
e:Thedatane
ededforadj
ust
ingentri
esa reprovi
dedunderthede
pos
it
orse
cti
onofba
nk
Rec
onc
il
iat
ionSta
tement
.

7.
3) I
nte
rna
lCont
rolove
rCa
shRe
cei
ptsa
ndPa
yme
nts
I
nte
rna
lCont
rolPr
oce
dur
es
Thef
oll
owingfact
orsshouldbet a
kenintocons
ider
a t
ioninint
ernalcont
rol
 Isthepoolofcashprote
c te
dfromtheft
?
 Isthepoolofcashma nagedeffi
ci
entl
ytoavoidbot hs
hort
agea ndidl
ecash?
 Isther
eclosecontr
olove rcas
hdisburs
ementsforthetr
uepa yeeandcor
recta
mount
?
I
nte
rna
lCont
rolove
rCa
shPa
yme
nts
1.Al ldisburseme nts houldbema debyc he cksorf r
ompe tt
yc ash.
2.Al lcheckss houl dbes eri
all
ynumbe red,a nda cc e
ssesforc hecks houldbel i
mitedto
e
mpl oyeea uthor i
z edtowr i
tec he cks.
3.Thee mploye ewhoa ut
horizedpa yme ntofbi llshouldnotbea ll
owe dt osigncheeks.
4.Appr ove ddoc ume nt
sshouldber equiredt os uppor t
sallche ekissues.
5.Thee mploye ea uthoriz
ingc ashdi sbur seme ntss houldcertifythatpa ymentisfor
l
egit
ima tepur posea ndisma deoutf ort hee xa ctamounta ndt othepr operaim.
6.Theba nkrec onc i
liat
ionshou ldbepr epa redmont hly.
7.Thee mploye ewhowi l
lsigne dc heckss houldnotha veacc esstoc ancele
dc hecksand
s
houldnotpr epa rethebankr ec onc i
liati
on.
8.Thevouc hers ystems houldbeus ed.
9.Thene tpriceme t
hodofr ecordingpur cha sesshou l
dbeus ed.
10.Whe nliabili
ti
e sar epa i
dthedoc ume ntss uppor tingitshouldbes t
umpe d“pa i
d”under
quotesandt heda tenumbe rofc he cksi ssueds houl dbeindic at
ed.

I
nte
rna
lCont
rolPr
oce
dur
esove
rCa
shRe
cei
pts

62
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
1.Promptr e
cor
dingofalls
ortsofc
ashr
e c
eipts
2.De posi
ti
ngallcas
hrecei
ptsinba
nkpromptly
3.Sepa r
ati
onoftheres
ponsi
bili
tyf
orha
ndlingcas
hre
cei
ptsa
ndr
ecor
dingi
nthea
ccount
ing
system.

Ca shShor tandOve r
Thea mountofc asha ctuallyr e
c e
ivedduringada yoftendoe snota greewitht her e
cordof
cashr e c
eipts.Exa mple7. 2:Tot a
la mountofc oinsandpa permone yi nthec ashregis
ter
drawe risBr4, 997.60.Tot alamou ntofsaless hownont hec ashregiste
rtapeisBr5, 000.
 Sa l
esa sperCa shRe gist
erTa pe
s 5,000.
00
 Ca shinaDr awer 4,997.
60
 Ca shShortage 2.
40
Journa lEntry:
Cash-i
n-Ba nk 4,997.
6
0
CashShor t&Ove r 2.
40
Sa l
es 5,000. 0
0
Not e:Ifthereisade bitbalanc einthecashshor t&ov e
ra cc
ounta ttheendoft hepe ri
od,iti
s
tr
e at
e dase xpensea ndinclude din“ Misce
ll
a ne ousExpe nses”.Ifthereisacreditba l
ance,i
tis
revenuea ndl i
stedin“ OtherI ncomeSe cti
on” .I ftheb a
lancebe come sla
rgert
ha nt heexpect
ed
mi nore r
rors,mana geme ntshoul dtakecorr
ec t
iveme as
ures.
Ca shCha ngeFund
Bus inesst hatreceive sc as
hdi re
ctl
yf r om cus
tomersmus tma i
ntainaf undofc urr
encyand
coinsi nor dertoma kec hange.Exa mpl e7.3:Supposethec hangef unda mounttobeBr500a t
t
het imeofe stablis
hme nt.The ref
ore,ther ec
ordwillbe:
Ca shonha nd 500
Cas hinBank 50
0
As sumea tthee ndofbus i
ne s
sda ythea mountinthecashierdra we randont hec as
hregis
ter
t
a pei s7,680,sot hea mountofs al
esshoul dbe:
 Ca shinaDr awer 7,680.00
 Cha ngeFund (500.00)
 Sa l
es 7,180.00
Ca s
hi nBa nk 7,18
0
Sa l
es 7,
18
0
As sumea tthee ndofbus inessdayt hea mountinthec a s
hierdr awe ri s7,
677.40andt he
amountont hec ashr egiste
rt apeis7,180.Thea mountofca shreceive dfromsales=7,677.
40
–500. 00=Br7, 177. 40
 Sa l
esa sPe rtheRe gis
ter 7,180.00
 Ca shinaDr awer (7,177.40)
 Ca shShor t
age 2.60

63
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
Ca
shi
nBa
nk 7,
177.
4
0
Ca
shShor
t&Ove
r 2.
60
Sa
les 7,
180.
0
0

TheVouc
herSys
tem
Vouche
ri sas peci
alformonwhi chisrec
orde drele
vantda t
aaboutali
abi
li
tya ndthede t
ail
s
ofitspayme nt.Itispr epare
dbya c
countingde part
me ntont hebasi
sofi nvoic
eora
memorandum t hatservesa sproofofe xpe ndit
ure. Thi sisdonea ft
ert hef oll
owing
compar
isons:
1.Compa ri
sonoft heinvoic
ewi t
hac opyoft hepur cha
seordertove r
ifyqua nt
it
ies
,
price
sa ndterms.
2.Compa ri
sonoft heinvoic
ewi t
hther ec
eivi
ngr eportt
ove r
if
yr e
ceiptoft heitems
bill
ed
3.Ve ri
fi
c at
ionofthea r
it
hmeti
caccur
acyoft heinvoice.
TheVouc
herSys
tema
ndMa
nage
ment
Thevouchersys t
emnotonl ypr ovi
de se f
fect
iveaccount
ingcontrol
sbuta l
soaidsma nage
ment
indis
chargi
ngot herres
pon sibil
it
ie
s .Itgivesgre
a t
erass
urancethata l
lthepayme ntsaremade
onvali
dl i
abil
itie
s.Inaddition,currentinfor
ma t
ionisalwaysava i
labl
ef orus
ei nde te
rmini
ng
fut
urecashrequirement
swhi chres
ul t
sin:
 Ef fe
ctivecashma nage ment
 Ma i
ntaini
ngaf avorablecreditstandi
ngbyt aki
ngcashdis c
ounta ndotherinvoice
scan
bepaidont hefi
na ldayofc reditperi
od.
Pur
cha
seDi
scount
s:Ne
tMe
thodofRe
cor
dingPur
cha
ses
Inprev
iouschapters,purchaseofme r
cha ndis
ewe rerecorde dattheinvoic
epr ice( grossamount)and
cashdi
scountistakena tthetimeofpa yme ntbutt hi
sme thoddoe snotme as
ur ethec ostoffai
li
ngto
ta
kediscount
s( ma nageme nteffi
ci
ency).I fpur chas
eofme rchandiseisrecordeda tne tamount,i
t
measur
esthecos toffa i
lur
etoc ashdis
c ountsa ndgive sma nageme ntanoppor t
unityt otakeremedia
l
act
ions
.Exampl e7.4:OnNov1,ABCCompa nypurc has
e sme rchandi
sewitha ni nvoi c
epriceofbir
r
15000subjec
ttot e
rmsof2/ 10,n/3
0FOBs hippingpoint .Re q
uired:-
pas
st hej our nalentr
iestobe
madebyt hepurc hase
ra tat i
meofpu rchasea ndpa yme ntunde rthegrossa ndne tpriceme t
hodof
rec
ordi
ngpurchasea ssuming:
1.Pa
yme
ntwa
sma
deonNov
.11(Wit
hint
heDis
countPer
iod)
2.Pa
yme
ntwa
sma
deonNov
.30(Out
si
detheDi
scountPe
riod)
I)Att
heI nvoi
cePri
ce(
Gros
sMethod) II
)AtNe tAmount
Nov.
1 A)Atthetimeofpur
cha
se A)Att hetimeofpur
cha
se
Pur
cha
s e
s 15,000 Purc
has e
s 14,
700
A/Payabl
e 15,
000 A/Payabl
e 14,
70
0
Nov. B)Att heTimeofPa yme nt B)Att heTimeofPa yment
11 1)WithintheDisc
ountPe ri
od 1)WithintheDis
countPeri
od
A/Pa
ya bl
e 15,
000 A/Pa
ya bl
e 14,
700
Ca sh 14,
700 Ca sh 14,
70
0
Pur .Dis
count 300
2)Outs i
detheDiscountPeri
od 2)Outs i
detheDis
countPeri
od

64
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
Nov. A/
Payabl
e 15,
000 A/
Payable 15,
000
30 Cash 15,
000 Di
scountLos
t 300

Ca
sh 15,
00
0

Not
e:Anydi
scount
snott
ake
nar
ethe
nre
cor
dedi
nane
xpe
nsea
ccountc
all
edDi
scountl
ost
.
Pe
ttyCa
sh
Itisaf undofmoneythatiss
etforthepurposeofma kingpa ymentsfors
ma l
lexpendi
tureoc
curr
ing
veryf r
equent
lyandtha
tdonotjust
if
yt heuseofchecks,sincecheckshaspri
nti
ngc os
tsanddel
ayfor
approvalofchecks
.Inesta
bli
shi
ngape t
tycas
hf und,thefirs
ts t
epistoest
imatetheamountofcash
neede dfordi
sburs
ementsofrel
ati
velysma l
lamount sduringac erta
inperi
ods uchasawe ekora
mont h.
Pe
tt
yCa
sh xxxx
x
Cashi
nBa
nk xxxxx
 I
fvo
uche
rsyst
emisuse
d:
Pe
ttyCa
sh xxxx
x
Acc
ountsPa
yabl
e xxxxx
Ac
coun
tsPaya
ble xxxx
x
CashinBa nk xxxxx
Thefundisrepleni
shedwhe nthea mountofmoneyinthepe t
tycas
hf undisr educ
edtothe
pre
dete
rminedmi nimum amounta nda ttheendofanaccounti
ngperiod.Exa mple7.
5:On
December1,1993,ABCCo.e st
ablishe
dape t
tyca
shfundofBr450.
Pe t
tyCash 450.
0
0
CashinBa nk 450.00
December19,1993,be causethemone yinthefundisreducedtoBr93. 60,thefundis
re
pleni
shed.Thedisbur
sementsarea sf
oll
ows.
 De l
iveryExpense 112.
50
 Of f
iceSuppli
es 62.
28
 Ut i
li
tyExpense 180.
00
 Total 354.
78
ComputeCashShort
ageandOver
:
 Pet
tyCashBa l
ance 450.
00
 Tota
lExpendit
ure 354.
78
 Expect
edCa s
htobeonHand 95.
22
 Less
:Ac t
ualcas
honhand (93.
60)
 CashShort
age 1.
62
Jour
nalEnt
ry:
De
liver
yExpe n
se 112.
50
Of
fi
c eSuppl
ies 62.
00
Ut
il
ityExpense 180.
00
Ca
shSh ort&Over 1.
62
Cas
hinBank 356.
40

65
 Cha
pte
rSe
ven:Ac
coun
tingf
orCa
sha
ndTe
mpor
aryI
nve
stme
nts
De
c31,
1993,t
hec
ashi
nfun
disBr240.
75.Thef
undi
sre
ple
nis
hedt
oinc
ludepe
tt
yca
shpa
yme
ntof:
 Del
iver
yExpense 85.
50
 Off
iceSuppl
ie
s 123.
75
 Tot
al 209.
25
ComputeCashShorta ndOver
 Pet
tyCa shFund 450.00
 Less:TotalExpendit
ure 209.25
 Expecte
dCa sh 240.75
 ActualCashonHa nd 240.75
 CashShorta ndOve r ___0__
Jour
nalEnt
ryisasfollows:
De
li
ver
yExpe n
se 85.
50
Of
fi
ceSuppl
ies 123.
75
Ca s
hinBank 209.
25
Januar
y1,managementdeci
desthepet
tyca s
hfundmustbeincr
easedt
oBr675.
00
 NewPe tt
yCa sh 675.
00
 Alre
adyEs t
abli
shed 450.
00
 Inc
rementalPet
tyCash 225.
00
Thenthejour
nalentr
yi sdebi
ti
ngPe t
tyCa shandCre
diti
ngCa shinBankbyBr225.
00.I
f
pett
ycashisi
ncrea
sedbyBr675,t hejournale
ntr
ywil
lbede bit
ingPet
tyCas
hbyBr675.
00
andCredi
ti
ngCa s
hinBa nkbythesamea mount

7.
4)Tempor
aryI
nve
stme
nts
Abus inessma yhaveal a r
gea mountofc ashonha ndthatisnotne ededimme diat
el
y,insucha
cause;thebusine
ssma yputa llorpa r
tofitint
oinc omeyi eldinginvestmentsuchas:
 Ce rt
ifi
cat
esofde posit
ors
 Mone ymarke ts
 Tr eas
urybills
Inma nyc ases,t
hei dl
ec ashi sinveste
dins ecuriti
esthatc anbequi cklysol
dwhe nc a
shis
needed.Suc hs ecuriti
esa r
ekno wna sTe mpor ar
yi nves t
me ntsorma rket
ablesecur
iti
es.
Tempor aryinvest
me ntsi nsecurit
iesincludes tocksa ndbonds .Shor tter
mi nves
tmentis
accountedforunderl owe rofcostorma rketona ggregateba s
is.
Exampl e7.6:
Te mporary Unreal
ized
Investment Cost Ma r
ket Ga i
n(Los s)
Se curi
tyA 30,
500.00 28, 750.00 1, 750.00
Se curi
tyB 19,
200.00 22, 100.00 ( 2,
900.00)
Se curi
tyC 21,
600.00 23, 900.00 ( 2,
300.00)
Se curi
tyD 70,
300.00 65, 250.00 5, 050.00
To tal 141,
600.00 140, 000.00 1, 600.00
Mar
ket
abl
eequi
tysec
uri
ti
eswouldber
epor
tedinthec
urre
nta
sse
tse
cti
onoft
heba
lanc
e
s
hee
tatmar
ketval
ueof140,
000.Norec
ogni
tionofgai
n.

66
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es

Cha
pte
rEi
ght
Ac
count
ingf
orRe
cei
vabl
es
Recei
vable
sa r
ea mountsthata
ree
xpe
cte
dtobec
oll
ect
edf
rom di
ff
ere
nte
nti
ti
ess
ucha
s
cus
tomersandorga
nizat
ions

8.
1) Cl
ass
ifi
cat
ionofRe
cei
vabl
es
Bas
edthes ource ,r e
c eivable sa r
ec lassif
ie dastra dea ndnont ra
der e ce i
vables :
1)TradeRe ceiva bles–r ec eivab l
est hator igi
na tef rom t hema jorope rati
onoft hebus i
ness
sucha ss aleofgoodsors ervicesona ccount
2)Non- t
radeRe ceiva bles-r eceivablest hator igina t
ef rom mi sc e
lla neouss ourcer a
therthan
thema j
orope rat
ionoft hebus inessa ndi nclude slendingmone yt o:
 Out siders
 Empl oye esa sa dva nce
 Of f icers
Bas
edo nthena t ure,re ceivabl esa r
ec lassifi
edi nt otwoa sAc count sRe c ei
va bleandNot es
Rec
eivabl
es :
1)Ac c
ount sRe c ei
va ble:a rer e cei
va bl
e sba sedonnonwr it
tenoror alpr omi sestopa yfor
goodsa nds e rvicesonc r edit
.Ac countsr eceivable:
 Ar eope na ccount s
 Ar enor ma ll
yc ol l
ec t
iblewi thin60da ys
 Ar enoni nt er
es tbe ari
ng
2)NotesRe ceiva bl
e :i srece i
va blesba sedwr i
ttenpr omis estopa yc ert
ains umofmone yona
specif
iedf utur eda tetot hebe areroft henot e.Pr omiss oryNot e( Not esRe c e
ivables
):
 Not eisawr ittenpr omi setopa yas umofmo neyonde ma ndora tade finit
etime.
 Ar eus ua ll
yus edf orc reditpe r
iodsofmor etha n60da ysa ndf ortra nsacti
onof
relat
ive lyla rgea mount s.
 Ma ya ls obeus edins ettleme ntofa nope na ccount( Ac countr eceiva bl
es)andi n
borrowi ngorl endingmone y,s i
nc enot eisl egala ndforma linstr
ume nt.
Thisclas
sif
icat
ionisnotmutualexcl
usiverat
heriti
sa nover
lappingc l
assif
icat
ionbecausea
re
ceivabl
ec anbebot htradeanda ccountsrec
eivabl
eort r
adea ndnot esrecei
vabl
es.Al l
re
ceivabl
esthatareexpect
edtobereali
z edi
nc a
shwi t
hinaye ara repre
s e
ntedinthecurrent
ass
etssect
ionoftheba l
ancesheet
.Thos ere
cei
vablest
hatisnotc urre
ntl
yc oll
ecti
blesucha s
l
ong- t
ermloansshouldbeprese
ntedunde rt
hecapti
on“ I
nves
tme nts”belowthec urr
entasset
sec
tion.

Cha
rac
ter
ist
icsofNot
esRe
cei
vabl
es:
1.Notesre c
eivableismor eli
quidthanAc c ount sRe c
eivables
2.Notesre c
eivablec a
nbema deinte
restbe aringornoni nt
erestbear
ing.Anot ethatprovide
s
forthepa yme ntofi nt
eres
tforthepe riodbe tweent heissuancedatea ndthedueda t
eis
call
eda ninterestbeari
ngnot e
.Ifthenot ema kesnopr ovi
sionforinter
e s
t,itissai
dt obe
non-int
erestbearingnote.
3.Promi s
sorynot e
sha veas t
rongerlegalstatust hanope naccounts
.
4.Therea r
et wopa rti
esregar
dingnote s
:(1)Pa ye e–thepa r
tytowhi chtheorderednoteis
payable,and(2)TheMa ke
r–t hepa r
tywhi chi smakingthepr omise.

67
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
Exampl
e8.
1:OnMa y1,2005GGCopur cha
sedmerc
handi
seforBr5,000f
rom XYZCo
gi
vingawr
it
tenpromiset
opa ya
fte
r90da
ys.Dete
rmi
nethePaye
eandthemake
rofthenot
e
Payee:XYZCompa ny
Ma ke
r:GGCompa ny

8.
2) De
ter
mina
tionofI
nte
res
t,DueDa
te,a
ndMa
tur
it
yVa
lue
1.De t
erminationofInterest
Interest=Pr inci
pal@ Rate@ Time
Example8. 2:Comput et heinterestonBr10, 000,12%,90da yspromissorynote.
 I nter
est=10,000@ 12%@ 90/360
 I nter
est=Bi r
r300
2.De t
erminationofDueDa t
e
DueDa t
e( Ma t
urit
yDa te )
:ist heda teonwhi chthenotei stobepa i
d.Thet erm ofthenot
e
maybes t
a t
edi ntermsofs pecifi
ednumbe rofda ysormont hs.Whe nthete r
m ofanoteis
st
at
e dinda ys,thedueda t
ei sthes pecif
iednumbe rofdaysa f
terit
sissuance.Whe nthet
erm
ofanot ei ss t
atedasac ertainn umbe rofmont hsafte
rt heissuanceda t
e,thedueda t
eis
det
erminedbyc ount
ingt henumbe rofmont hsfromtheissuancedat
e .
Example8. 3:X Compa nyi ssued90da ys
,12%,Br10, 000not e,datedOc tober14toY
Corporat
ioni nsett
le
me ntofa nope nac c
ount.Deter
minethedueda teofthenote.
Sol
ution:
Te rms of the note 90Da ys

Daysr
emaini
nginOct
obe
r(31-
14) 17Da
ys
Daysi
nNove mber 30Da
ys
Daysi
nDe cember 31Da
ys
Tot
al 78Da
ys
DueDate
,Januar
y 12
Exa
mple8.4:W Companyis
sue
da60-da
y,12% Br1000,da
tedMay10,t
oLCor
por
ati
on.
Det
erminet
hedueda
teoft
henot
e?
Sol
uti
on:
Ter
ms of t
he not
e 60Da
ys

Daysremaini
nginMa y(31-
10) 21Days
DaysinJune 30Days
Tot
al 51Days
DueDa t
e,Jul
y 9
Example8.
5:TheMa tur
ityDateofa3monthsnot
edate
dJune5wouldbeonSe pt
embe
r5.
Onthosecase
sinwhi chther
ei snodatei
nthemonthofmatur
it
ythatcor
res
pondst
othe
i
ssuanc
edat
e,theduedatewil
lbethela
stda
yoftha
tmonth.
3.De
ter
minat
ionofMa t
uri
tyVal
ue
 Theamounttha
tisdueatt
hema t
urit
yordueda t
eiscal
le
dthematuri
tyval
ue
 Thematur
it
yva l
ueofanon-i
nte
restbea
ringnoteist
hefac
eamount.
 Thematuri
tyvalueofint
ere
st-
beari
ngnot eisthesum oft
hefa c
ea mounta
ndt
he

68
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
int
eres
t.
Exa
mple8. 6:W Co.issueda60da y,Bi
rr10,
000,12% i
ntere
stbea
ringnot
e,da
tedma
y19
t
oLCor por
ationonaccount.Det
erminet
heMa t
uri
tyValueoftheNote.
Sol
uti
on:
 Fa ceVa l
ue Br10,
000.
00
 Add:I nter
est(10,
000@ 12%@ 60/360) 200.
00
 Ma tur
it
yVa l
ue Br10,
200.
00

8.
3) Ac
count
ingForNot
esRe
cei
vabl
e
Ifthea
ccountsofacus
tomerbecomedel
inque
nt,t
hecredi
tormayinsis
tthatt
heacc
ountbe
conver
tedint
oanote.I
fthedebt
orisgi
venmoreti
mea ndthecredi
torneedsmor
efunds,t
he
notemaybee ndor
sedandtr
ansf
err
edtoabankorothe
rf i
nanc
ialagency.

Exa mpl e8. 7:ABCCopu rcha se dme rchandisef orBr 30,000onNov11,1995wi t

hterms
2/10,n /30f romXYZCor por ation.Howe ve r,asABCCompa nydidn’tpa yitsaccountt
oi t
s
creditor
sont hea greedda t
e( De c.11,1995)a ndXYZCor porati
oninsi
s t
e dthedebtortogivea
notei nthepl aceoft heope na ccount( A/R).Cons equently,ABCCompa nysignsaBr30,000,
12%,90 da ysi nter
e stbe aring not e da t
ed De cembe r11,1995.Re quir
e d:Re cor
dt he
appr opr
i atejour nalentryt obema debyXYZCor poration(seller
):
1.OnDe cembe r11,1995whe nthenotewa sreceived
2.OnDe cembe r31,1995,e ndoft hefiscalye ar
3.Atma turit
yda t
eoft henot e
A.As sumi ngr eversinge ntrywa sma deonJ an1,1996
B.As sumi ngr eversinge ntrywa snotma deonJ a
n1, 1996
Solut i
on:
1.Toc onve rtanope na ccountt oanot e
De c
.11,1995: Not e
sRe ceivable 10,000.0
0
Ac countsRe ceivable 10,000.
00
2.Tor ec orda ccruedi nteres tfor20da ys
 Fr omDe c.11t oDe c .31=20da ys
 Ac crue dInterest=30, 000@ 12%@ ( 20/360 )=Br200
De c.31,1995: I nt
e restRe cei
vable 200.00
Intere
stIncome 200.00
3.OnMa turityDa t
e
A.As s
umi ngRe ve r
singEnt rywa sma de
Te rms of t
he note 90Da ys

Da ysRema i
ningDe
cemb
er(
31-
11) 20Da
ys
Da ysi
nJa nuar
y 31Da
ys
Da ysi
nFe bruar
y 29Da
ys
Total 80Da
ys
DueDa te:Ma rc
h 10
Ma
rch10,1996:
Cas
h 30,
900.
0

69
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
0
NotesRecei
vabl
e 30,000.
00
Int
eres
tInc
ome 900.00
B.As
sumi
ngReve
rsi
ngEntrywasnotma
de
Cas
h 30,
900.
0
0
Not
esRecei
vabl
e 30,000.
00
I
nte
res
tRecei
vabl
e 700.00
I
nte
res
tInc
ome 900.00

Di
scount
ingofNot
esRe
cei
vabl
e
Discount i
ngofnot esreceivablere
f e
rstot hea ctofs el
linganoter e
c ei
vablebyac ompa nyt o
f
inanciali nst
itutionsbeforethema turit
yda teoft hen oteandgetne tca s
hproceedsinre t
urn.
Whe nac ompa nyi sinne edofc a s
h,i tma ytransferitsnotesr ecei
vabl
et oaba nkby
endorseme nt.
 Thedi sc ountchargedbyt heba nkisc omput edont hema t
uri
tyva lueoft
henot eforthe
periodoft i
met heba nkholdsthenot e.I.e.t
hetimet hatwil
lpa ssbetweent
heda teofthe
transfera ndthedueda te
 Thea mountoft hepr oceedspaidtot hee ndorseristheexce
ssoft hema t
uri
tyva l
ueove r
thedi scount
 The rea rethreeparti
es:(1)Ma ker:theonewhoma kesanote,(2)Endorser
:theonewho
takesthepr ocee
dsa nd(3)Pa yee:theba nkorot herFinanci
alInsti
tuti
onaccepti
ngt he
Not e.
Exampl
e8.8:XYZCor porat
iondi s
countedthe90da ys
,12%,Birr30,
000notesr
ece
ivabl
e
dat
edDecember11,1995onDe c
e mber21a ttherat
eof14%a tit
sloca
lbank.Re
quir
ed:
Dete
rmi
nethepr oc
eedsa ndrecordthejournalentr
iesa
tthet
imeofdiscount
ingt
henot
e .
Ne tCashProceeds =Ma turi
tyVa lue–BankDiscountAmount
WhereMaturi
tyVa l
ue=Pr incipal+Inter
est
BankDis
count=Ma t
urit
yVa lue@ Ba nkDi scountRat
e@ Time
Sol
uti
on:TheDi
scountPe
riod:(
Dec.21–Feb.9)=50da
ys
FaceVa
lueofNoteDa t
edDec.11 10,
000.
0
0
I
nte
res
t60,
000@ 12%@ 60/
360
200.00
Ma
tur
it
yVa
lue 10,200.0
0
Ba
nkDis
count=10,200@14%@ 50/
360 198.33
Ne
tCas
hProceeds 10,001.6
7
J
our
nalEnt
ry:
Dec
.21,1991: Ca
sh 10,
001.
6
7
Not
esRecei
vabl
e 10,
000.
00
I
nte
res
tInc
ome 1.
67

70
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es

Exampl e8.9:As sumet hea bovenot ei sdi

s c
ount e
da t15% i
nste
adof14%.De t
erminet
hene
t
cashproceedsa ndre cordthej ournalentr
y.
Soluti
on:
Fac eVa lueofNot eDa tedDe c.11 10,000.
0
0
Interes
t60, 000@ 12%@ 60/ 360
200.00
Ma turi
tyVa lue 10,200.
0
0
Ba nkDi scount=10, 200@14%@ 50/ 360
212.50
Ne tCa shPr oceeds 9,987.
50
JournalEntry:
Dec .21,1991: Ca sh 9,
987.50
InterestExpense 12.50
NotesRe ce
i va
ble 10,
000.0
0
Note:IftheCa shPr oc e
eds>Fa c
eVa lue,Int
er es
tIncomewillberecognize
d.IfCa s
h
Proceeds<Fa ceVa lue,Int
e restExpensewi l
lber ecogni
zed.
Di
shonor
edNot
esRe
cei
vabl
e
Ift
hema ke rofanot
ef a
ilstopaythedebtontheduedate
,thenotei
ssaidt
obedis
honor
e d.A
dis
honorednot erece
ivableisnol ongernegot
ia
ble,andforthatr
easonthehol
derusuall
y
tr
ansf
erst hec l
ai
m,i ncl
udinganyi nte
restdue.Atthisti
met hebankwi l
lgetthewhole
amountfrome ndors
er.Dishonor
ednotescanbe:
1.Be foreDi scount ingtheNot e
Exa mple8. 10:Ift heXYZCompa nyr ecei
veda10, 000,60da ys,12% not ea ndr ec
ordedon
De cembe r11,1995ha dbeendi shonoreda tma t
uri
ty,theentryt oc ha rget henot e,incl
uding
theinterestbackt ot hec us
tome r’
s( ABCc ompany)a c
countwoul dha vebe ena sfoll
ows :
Feb.9,1995: Ac countsRe ceivabl
e–ABCCo. 10, 200. 00
Not esRe ceiva
ble 10,000.0
0
I nte
restIncome 200.00
2.Af terDiscount ingTheNot e:
Exa mple8. 11:Br10, 000,60d ays,12% not esdi s
countedonDe ce mbe r21,ha dbe en
dishonoredbyt hema keronma tu r
it
y. Thene ces
saryjournale ntryi nt hebookofe ndor
ser
(XYZCompa ny)is :
Feb.9,1995: Ac countsRe ceivable–ABCCo. 10, 200. 0
0
Cas h 10,200.00
Ass umet heba nkc hargesendors erapr otestfe
eof10bi rra ndt hee ndorser,whoi nturn
chargesi ttothema ke roftheno tei nexa mple2,thej our
nale ntryi nt hebookofe ndor
ser
(XYZCompa ny)is :
Feb.9,1995: Ac countsRe ceivable–ABCCo. 10, 210. 0
0

71
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
Ca
sh 10,
210.
00

4) Ac
8. count
ingf
orUnc
oll
ect
ibl
eAc
count
s
Whe nmerc
handiseors e
rvicesaresol
dwi t
houttheimme diat
erecei
ptofc a s
h,apa r
toft he
cl
ai
msa gains
tc ust
ome rsi sprove
st obeunc ol
lec
tibl
e.Theope r
atinge xpenseincurred
bec
auseofthefail
uretoc olle
ctrec
e i
vabl
eiscal
ledane xpenseoralos sfrom uncol
lect
ible
ac
counts
,doubtfulac c
ount s
,orba dde bt
s.Therearet wome t
hods:( 1)TheAl l
owanc e
Methods
/Rese
rveMe thoda nd(2)Dire
ctWrit
eoffMethods/Dir
ectChargeoffMe thod

8.
4.1)Al
lowa
nceMe
thod:
Thisme thodma kesapr ovi si
onf orpos s
iblef utureunc ol
lect
ibl
ea mounti na dvance.This
procedurer e qui r
e syout oma kea nest
ima tea boutpos s
ibl
eunc ollecti
blea mountsa nd
recognizethisi nt her ecorda sa na djust
mentt oa ccountrecei
vableaccountatthee ndofevery
accountingpe riod.Thej our na le ntr
yf ort
hee stima t
eda mountis:
Unc oll
ec t
ibleAc countExpe nse . xxxxx
Al lowa nc eforDoubt fulAc counts xxxx
x
Not e
:Unc ollectiblea ccou ntse xp enseisge ne r
all
yr eporte
dont heincomes tat
e mentasa n
admi nis
trati
vee xpe nse.Al lowa nc efordoubt fulaccountsisthea mounttobede duct
edfrom
A/Rt ode ter
mi nene trea l
iza bleva lue .
Parti
a lBa l
anc eShe e tPrese ntation
Cur r
e ntAs s et
:
Ca sh xxxxx
Ac count sRe ce
iva ble xxxxx
Le s
s:Al lowa ncef orDoubt fulAccount s xxxxx xxxxx

Write-
offt otheAl lowa nceAc c ount
Duringtheye ar,asmor ea ccount sorpor tionsofa c c
ount sarede t
erminedtobeunc ollec
ti
ble,
iti
swr it
te noffa gainstallowa ncef ordoubt fula ccounts.Whe na naccountisbe l
ievedtobe
uncoll
ectible,i
ti swritt
enof faga instthea llowa nc esaccounta sf oll
ows
All
owa ncef orDoubt fulAc c ounts. xxxxx
Acc ountsRe c ei
va ble xxxx
x
 Thet otalamountwr it
tenof fa gainstthea l
lowa ncea ccountdur i
ngthepe r
iodwi l
lrare
lybe
equalt othea mounti nthea c counta tthebe ginningoft hepe riod
 Thea llowa nceaccountwi l
lha veac reditba lancea tthee ndoft heperiodifthewr i
teoff
s
duri
ngt hepe ri
oda mountt ol esstha nthebe ginningba lance
 I twillha veade bitbalancei fthewr i
tet hewr it
eoffse xce e
dt hebeginningba l
ance
 Af tertheye ar
-enda dj
us ti
nge n t
ryi srec orde dthea ll
owa ncea cc
ountwi l
lhaveac redi
t
bala
nc e
Rei
nsta
tementofWr it
e-offEntry
Ana c
countrecei
vablethatha sbe e
nwr it
tenoffagai
nsttheal
lowanc
ea ccountma
yla
terbe
col
le
cted.I
nsuchc as
es,thea c
c ountshoul
dber e
inst
ate
da s:
AccountsRe ce
iva bl
e xxxxx
Al lowanceforDoubtfulAccounts
. xxxx
x

72
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
Exampl e8.12:ABCCompa ny’saccountre ce
ivabl
eha saba lanceofBr25, 000attheendof
t
hepe riod.Bas edons t
udy,i ti
se sti
ma te
dt hatatot
alofBr2, 000wi llbeunc ol
lec
tibl
e.The
Adjust
ingEnt ryonDe c
embe r31
Unc ollecti
bleAc countExp ense. 2,000.
00
Allowa nceforDoubt fulAccounts 2,000.
0
0
Accoun tReceivable 25,000.00
Less:Al l
owanc efordoubt f
ula ccount 2000.00
NetRe ali
zableVa lueofa ccountre c
eivable 23,000.00
Assumi ngBr500oft her eceivable
si sbe li
evedtobeunc ol
lect
ibl
ea ndi swri
tt
e noffon
Ja
nua r
y10,t hee ntrywoul da sfoll
ows :
Allowa nceforDoubt f
ulAc count. 500.
00
AccountsRe ceivables 500.0
0
Accoun trec
eivable 24,500.00
Less:Al l
owanc eforDoubt fulAc count 1,500.00
NetRe ali
zableVa lueofAc countRe cei
vable 23,000.00
Note:thereisnoc ha ngeinne treali
zablevalueofaccountr e
ce i
vabl
e .

Fur
therass
umethatt
heBr500wr it
ten-
offinthepr ec
edi
ngj
ournalent
ryisla
terc
oll
ect
ed.
Theentr
ytore
ins
tat
etheaccountwouldbeasfoll
ows :
Acc
ountsRecei
vables 500.00
AllowanceforDoubtf
ulAc count
. 500.
0
0

Est
imati
ngUnc ol
lec
tible
Theest
imateofuncollect
ibl
eattheendoft hefis
calperi
odi sbas
edonpa s
texpe
rie
ncea
nd
for
eca
stsoffut
urebusines
sacti
vit
y.Thet womethodstoesti
ma t
euncol
le
cti
blea
re:
1.Es ti
ma teBasedonCreditSal
es
2.Es ti
ma teBasedonAnalysisAgeofRe c
eivabl
es

1.Es t
imateBa sedonCr editSales
Thepr obableamountoft hea ccountstha twillbeun coll
ect
iblei sest
ima tedbasedonc redi
t
sal
es.Thea mountoft hise s
tima t
ei sa dde dt owha teverba lancee xist
si nall
owa nc
ef or
doubtfulaccounts.
Exampl e8.13:As sumet hatthea l
lowanc ea ccountha sac reditba l
anc eofBr1, 500before
adj
us t
me nt
.Thec re
ditsalesfortheye a
ri sBr100, 000a nditisknownf r
ompa stexper
ience
1% oft hecreditsal
eswi l
lbeunc olle
c t
ible.The r
e f
ore,theadjustingamountwi l
lbe=1% @
100,000=Br1, 000
Unc oll
ecti
bleAc countExp ense. 1,000.00
Allowa nceforDoubt fulAc counts 1,000.
0
0
Afteradjust
inge nt
ryispos t
ed,allowa ncefordoubt fulaccountha sBr2, 500c r
edi
tba l
ance
.
I
ftheba
lanceofAll
owa ncef
orDo ubtf
ulAccountha
dbee
nade bi
tbal
anc
eofBr300,t
he
a
mountoftheadj
ust
me ntwouldsti
llhavebeenBr1,
000(
tha
tis1%@ 100,000)
Uncol
lect
ibleAccountExpense
. 1,
000.
00

73
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
Al
lowa
ncef
orDoubt
fulAc
count
s 1,000.
0
0
Aft
ertheadj
ust
inge nt
ryispost
ed,al
lowancefordoubtf
ulaccounthasBr700de bi
tbal
anc
e.
Note
:anewlyestablis
hedbusi
nessenter
pri
se,havi
ngnor e
cordofc r
edite
xpe r
ienc
e,may
obt
ai
nda t
afromtradea s
soci
at
ionjourna
lsandotherpubl
icat
ions.

2. Es
ti
mateBa se
donAna l
ysisofAgeofRe cei
vabl
es(AgingofRecei
vabl
es)
The
rear
esomes tepsina gi
ngofr ec
eivabl
esme t
hods:
1.Classif
ya c
c ountrec
eivablebyage(dayst
hatre
ceiva
blespa
stdue)
2.Providepercentageprovis
ionforuncoll
ect
ibi
li
ty
3.Applyt hepe r
centag
e
Exa
mple8.
14:
Amountof Est
.Pe rc
ent
age Amountof
AgeInt
e r
val Re ce
ivabl
e ofuncoll
ect
ibl
e Uncol
lec
ti
ble
Notdue 60,
000 1% 600
1–30da ys 15,
000 2% 300
31–60da ys 10,
000 10% 1,000
61–90da ys 8,
000 25% 2,000
TheEsti
ma t
eofUnc
oll
ect
ibl
e 3,900
Thee st
ima t
eofunc oll
e c
ti
blea ccounti s3,900.Thi sa mounti st hede si
redbalanc
eoft he
Al l
owa ncef orDoubt fulAc c
ounta ft
era djus t
ment.The re
fore,t hea djus
tmentwi l
lbe
determinedt akingi ntoa c
countt h
ee xisti
ngba l
anceoft heAl lowanc ef orDoubtfulAccount.
As sume ,theAl lowa nceforDou btfulAc c
ountha sac redi
tba lanc eofBr1, 500be fore
adjus t
ment.Thea djusti
nge nt
rywi llbebyBr2, 400(3,900–1, 500)
Unc ollecti
bleAc countExpe ns e. 2,400
Allowa nceforDoubt fulAc counts 2, 400
Af terpost
ingi sma de,theAl lowanc ef orDoubt fulAccountha sac re ditbala
nceofBr1,500+
2,400=Br3, 900.I ftherehadbe enade bitbalanceofBr300i ntheAl lowanceforDoubtful
Ac countbe f
or etheye arenda djust
me nt,thea mountofthea djustme ntwoul dhavebeen4,200
(3,900+3, 00=4, 200)
Unc ollecti
bleAc countExpe ns e. 4,200
Allowa nceforDoubt fulAc counts 4,20
0
Af terpost
ingi sma de,theAl l
owa nc ef orDoubt fulAccountha sac redi tbal
anceofBr3,900.
8.
4.2)Di
rec
tWr
it
e-of
fMe
thods
I
tisusefulwh e
n:
1.Apa rt
icul
arc ustome risknown
2.Ba nkruptcynot iceisavail
able
3.The reisac ontinuousc or
respondencewi t
hcust
ome rs
4.The reisdisappe ara
nc eofac ust
ome rthr
oughdeat
h
 Thee ntr
yt owr iteoffana ccountwhe nitisbel
ie
vedtobeunc oll
ecti
bleisasfol
lows:
Unc oll
e ct
ibleAc countExpe nse. xxxxx
Ac countsRe cei
vables xxxxx
 I fa
na ccountthatha sbe enwrit
tenoffiscolle
cte
dlate
r,theaccountshouldbereins
tat
ed.
 I ft
her ecove r
yi sinthes amef i
scalyearasthewrit
eoff,thee
ntrytoreinst
ateis
Ac countsRe c
e i
vables xxxxx
Unc olle
c t
ibl
eAc countExpe nse. xxxxx

74
 Cha
pte
rEi
ght
:Ac
count
ingf
orRe
cei
vabl
es
 I
fther
ecover
yisma deinthesubs
equentf
isc
alyear
,itmayber
eins
tat
edbyanentr
y
i
ll
ust
rat
edbel
ow:
Account
sRe ce
ivabl
es xxxxx
RecoveryofWr i
tt
en-
offUncol
lect
ibl
eAc c
ount
. xxxxx

75