Accounting Consist of three activities
 Identify economic events relevant to its business
 Record these events in order to provide a history of its financial
activities
 Communicate the collected information to interested users by means
of accounting reports (Financial statements) For analysis
Who uses accounting data
 Internal users Who plan, organize, and run the business(finance,
Marketing, and Management)
 External users (Investors, Creditors, and Taxing Authorities)
Ethic of financial reporting
Generally accepted Accounting principles
Assumptions
 Monetary unit
 Economic entity the business is separate from its owner, and
separate from other firms may be owned by the owner
(proprietorship, Partnership, and Corporation)
Balance sheet Equation
Assets
=
Liabilities + Owner’s Equity
What the company owns
What the company owes
1
1- Ray Neal decides to open a computer programming service, which he
names Softbyte. On September1, 2005 he invests $15000 in cash in
the business.
2- Softbyte purchases computer equipment for $7000 in cash.
3- Softbyte purchases on credit for $1600, from Acme supply company,
computer paper and other supplies.
4- Softbyte receives $1200 cash from customers for programming
services it has provided.
5- Softbyte receives a bill for $250 from Daily News for advertising, and
it will be paid later.
6- Softbyte provides $3500 of programming services for customer. Cash
of $1500 is received from customers, and the balance of $2000 is
billed on account.
7- Expenses paid in cash for Sept, are store rent of $600, salaries of
employees $900, and utilities $200.
8- Softbyte pays its $250 Daily News advertising bill in cash.
9- The sum of $600 in cash received from customers who have been
previously billed for services.
10Ray Neal withdrews$1300 in cash from business for his
personal use.
Required
Analyze the above transactions
2
Transaction Analysis
ASSETS
Cash
A/R
+
Supplies
Expenses = Liab. + O.E + Revenue
Equip. Expense A /P
Capital Revenue
.
12N.Bal.
3N.Bal.
4N.Bal.
5N.Bal.
6N.Bal.
7N.Bal.
8N.Bal.
9N.Bal.
10N.Bal.
3
Transact.
ASSETS
CASH +
A/R
+ Expenses =Liab. +
Supplies+
Equip.
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
-13
-14
-15
4
Exp.
A/Payable
O.E + Revenue
Capital
Rev.
The following events and transactions occurred in Dennis business:
1- Dennis invested $100000 cash in the company.
2- Hired two employees to work in the warehouse. They will be paid
each $2000.
3- Purchased equipment costing $30000. The cash payment of $15000
was made immediately; the remainder will be paid later.
4- Paid $4000 for telephone bill.
5- Purchased office supplies for $7000 on credit.
6- Total revenues earned were $12000; $7000 cash and $5000 on
account.
7- Paid suppliers $2000 for accounts payable due.
8- Received $4000 from customers in payments of accounts receivable.
9- Paid monthly salaries of two employees, totaling $8000.
10 Owner withdrew $7000 in cash for his own personal use.
11 Received $11000 cash for services completed.
12 Received a $9000 equipment from customer for providing him with
service.
13 Received $3000 cash for fees earned.
14 Paid advertising expenses $2500.
15 Invested worth of $11000 equipment in the company.
Required
Analyze the above transactions
5
The following events and transactions occurred in Dennis business:
1- Dennis invested $80000 cash in the company.
2- Hired two employees to work in the warehouse. They are paid each $2000.
As prepaid salaries.
3- Purchased equipment costing $40000. The cash payment of $25000 was made
immediately; the remainder will be paid later.
4- Paid $1000 for water bill.
5- Purchased supplies for $3000 on credit.
6- Total services provided to a customer were $15000; $9000 cash and $6000 on
account.
7- Paid suppliers $1000 for accounts payable due.
8- Received $6000 from customers in payments of accounts receivable.
9- Paid monthly salaries of two employees, totaling $8000.
10 Owner withdraw $4000 in cash for his own personal use.
11 Received $12000 cash for services completed.
12 Received a $10000 copy machine from customer for providing him with
service.
13 Received $2000 cash for fees earned.
14 Paid advertising expenses $4000.
15 Invested worth of $40000 delivery car in the company.
Required
Analyze the above transactions
6
Mr. Sam opened his repair shop during the month of September of 2005and
provided you with the following data:
Sept 1,2005 invested $8000 in his business.
Sept. 4 Purchased $500 of supplies for cash.
Sept. 7 Purchased $4000 of equipment on account.
Sept. 12 Paid salaries of $800.
Sept. 15 Paid $1000 owed to creditor.
Sept. 17 Received $6000 for services provided.(repairing customer’s
car).
Sept. 20 Owner withdrew $2000 from the business for his personal use.
Sept. 23 Purchased equipment for $12000 paying $3000 and will pay the
Balance later.
Sept. 28 Repaired Salem’s car and send him a bill for the amount of
$2000
Required
1-Analyze the above transactions and break down to its component.
2- Prepare journal entries required.
3- post the journal entries to its accounts.
4- Prepare a trial balance.
7
Income Statement
For the month ended
Revenues
Total Revenues
Less Expenses
Total Expenses
Net Income (Net Loss)
Assets
Assets
Balance Sheet
September 30, 2005
Liabilities and Owner’s Equity
Liabilities
Total Liabilities
Owner’s Equity
Total Owner’s Equity
Liabilities & O.E
Total Assets
8
ASSETS + EXPENSES
=
Assume that its normal
balance is DEBIT
Any account in the above
categories
Shall record the increase
of its balance in the debit
side of the entry.
LIABILITIES + OWNER EQUITY +
REVENUES
Assume that its normal balance is
CREDIT
Any account in the above categories
Shall record the increase of its balance
in the Credit side of the entry.
9
Date
1-
Accounting Name& Explanation
2-
3-
4-
5-
6-
7-
8-
9-
10-
11-
12-
13-
14
15-
10
Ref
Debit
Credit
Instructions
Indicate by letter CA, LTI, PPE, IA, CL. LTL
and OE in the column.
Name of Account
Name of Account
Cash
Parking lot owned by
the firm
Delivery car
Accounts Receivable
Office Supplies
Prepaid Expense
Trade Accounts
Payable
Advance from a
customer
Note Payable
Accrued Revenue
Accrued Expense
Finished Goods
Taxes Payable
Raw materials
Unearned Revenue
Petty cash
Short term Loan
Note Receivable
Expense Payable
Land
Bonds Payable
Equipment
Mortgage Payable
Office Equipment
Long term loan
Office Furniture
Capital
Machinery
Owner’s withdrawal
Merchandise Inventory
Building
Accumulated
Depreciation
Copy-right
Patent
Trade mark
Goodwill
Trade Name
Short term investment
Franchise
11
General Journal
Date
Accounting Name& Explanation
12
Page 1
Ref
Debit
Credit
Capital
Date
Service Revenue
Ref Debit Credit Bal.
Date
Cash
Date
Accounts Receivable
Ref Debit Credit Bal.
Date
Office Equipment
Date
Ref Debit Credit Bal.
ACCOUNTS PAYABLE
Ref Debit Credit Bal.
Date
Supplies
Date
Ref Debit Credit Bal.
Ref Debit Credit Bal.
Withdrawal
Ref Debit Credit Bal.
Date
Rent Expense
Ref Debit Credit Bal.
Salaries Expense
13
Ref Debit Credit Bal
Ref Debit Credit Bal
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
14
Trial Balance
Account
Debit
Balances
Totals
15
Credit
Balances
Trial Balance for the period ended
Account Name
Debit
Balances
Cash
Capital
Computer Equipment
Supplies
Accounts Payable
Revenues
Advertising Expense
Accounts Receivable
Store Rent Expense
Salaries Expense
Utilities Expense
Withdrawal
Totals
16
/
/
Credit
Balances
Time Period assumption. Accountant divide the economic life of a business
into artificial time periods. Many business transactions affect more than one of these
arbitrary time periods.
Fiscal and calendar Years
Accounting time Periods are generally a month, a quarter, or a year. Monthly
and quarterly time periods are called interim periods, an accounting time
period that is one year in length is referred to as a fiscal year.
Accrual vs. Cash- basis Accounting
Under the accrual basis, transactions that change a company’s financial
statements are recorded in the period in which the event occur (example
recognizing revenues when earned rather than when the cash is received) in
other words when services are performed or the goods are sold. Recognizing
expenses when incurred (rather than when paid).
Under cash basis accounting, revenue is recorded when cash is received and
expenses is recorded when cash is paid, it is not in accordance with
generally accepted accounting principle(GAAP).
Adjusting Entries
They are needed to ensure that the revenue recognition and matching
principle are followed.
Revenue recognition: Revenue is recognized when(1) realized or when the
products, merchandise, or other assets are exchanged for cash or claims to
cash.(2) and revenues are considered earned when the entity has
substantially accomplished what it must do to be entitled to the benefit. In a
service enterprise, revenue is considered to be earned at the time the service
is performed.
Matching principle
Expenses should be matched with accomplishment (revenue) whenever it
is reasonable and practicable to do so. It dictates that efforts (expenses) be
matched with accomplishments.
Adjusting entries are required every time financial statements are prepared
because:
1- Some events are not journalized because it is inexpedient to do
so(consumption of supplies).
2- Some costs are not journalized during accounting period because they
expire with passage of time(rent and insurance)
3- Some items may be unrecorded. An example is a utility service bill
will not be received until the next accounting period.
17
Types of Adjusting Entries
Prepayments
1- Prepaid expenses. Expenses paid in cash and recorded as assets
before they are used or consumed(e.g supplies) or with the passage of
time (e.g., rent and insurance.
2- Unearned Revenues. Cash received and recorded as liabilities before
revenue is earned.
Accruals
1- Accrued revenues. Revenues earned but not yet received in cash or
recorded.
2- Accrued Expenses. Expenses incurred but not yet paid in cash or
recorded.
18
The following trial balance is prepared for Pioneer Advertising Agency on October
31, 2005
Debit
Credit
Cash
15200
Advertising Supplies
2500
Prepaid Insurance
600
Office Equipment
5000
Notes Payable
5000
Account Payable
2500
Unearned Revenue
1200
C.R. Byrd, Capital
10000
C. R. Byrd, Drawing
500
Service Revenue
10000
Salaries Expense
4000
Rent Expense
900
28700
28700
Other data:
1- An inventory count at the close of business on October 31 reveals that $1000
of supplies are still on hand.
2- On October 1, Pioneer Advertising Agency paid $600 for a one-year fire
insurance policy.
3- Office equipment depreciation is estimated to be $480 a year. Or $40 per
month.
4- Pioneer Advertising Agency received $1200 on October 1, from R.Knox for
advertising services expected to be completed by December 31. Analysis
reveals that $400 of those fees was earned in October.
5- In October Pioneer Advertising Agency earned $200 for advertising services
that have not been recorded.
6- At October 31, the salaries for the last three days of the month $1200 has not
been paid or recorded.
Instruction
1- Prepare Adjusted Entries prepared on October 31.
2- Show the accounts after the adjusting entries is posted
Date Name of Account & Explanation
Ref Debit
Credit
12345619
CASH
Date
Advertising SUPPLIES
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
15200
2500
PREPAID INSURANCE
Date
Office Equipment
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
600
5000
Notes Payable
Date
ACCOUNTS PAYABLE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
5000
2500
UNEARNED REVENUE
Date
CAPITAL
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
1200
10000
Service REVENUE
DRAWING
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
500
10000
SALARIES EXPENSE
Date
RENT EXPENSE
Ref Debit Credit Bal.
Date
4000
Ref Debit Credit Bal.
900
20
SUPPLIES EXPENSE
Date
ADVERTISING EXPENSES
Ref Debit Credit Bal.
Date
ACCOUNTS RECEIVABLE
Date
Ref Debit Credit Bal.
INSURANCE EXPENSE
Date
ACCUMULATED DEPRECIATION
Date
Ref Debit Credit Bal.
Ref Debit Credit Bal.
DEPRECIATION EXPENSE
Ref Debit Credit Bal.
Date
SALARIES PAYABLE
Ref Debit Credit Bal.
ACCOUNTS RECEIVABLE
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
21
Massi Started his own consulting firm, Massi Company on June 1, 2008. The trial
balance at June 30, 2008 as follow
Massi Company
Trial Balance
June 30, 2008
Account
Debit
Credit
Cash
7150
Accounts Receivable
6000
Supplies
2000
Prepaid Insurance
3000
Office Equipment
15000
Accounts Payable
4500
Unearned Revenue
4000
Massi, Capital
21750
Service Revenues
7900
Salaries Expense
4000
Rent Expense
1000
Totals
38150
38150
Other data:
1- Supplies on hand at June 30 are $600.
2- A utility bill for $150 has not been recorded and will not be paid until July 5.
3- The insurance policy is for a year.
4- The $2500 of unearned service revenue has been earned at the end of the
month.
5- Salaries of $2000 are accrued at June 30. (was not paid or recorded)
6- The depreciation expense for office equipment is $250 per month.
7- Invoices representing $1000 of services performed during the month have not
been recorded as of June 30.
Instructions Prepare the adjusting entries for the month of June.
22
CASH
Date
SUPPLIES
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
7150
2000
PREPAID INSURANCE
Date
Office Equipment
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
3000
15000
UNEARNED REVENUE
Date
ACCOUNTS PAYABLE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
4000
4500
CAPITAL
Date
SALARIES EXPENSE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
21750
4000
Service REVENUE
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
7900
RENT EXPENSE
Date
ACCOUNTS RECEIVABLE
Ref Debit Credit Bal.
Date
1000
Ref Debit Credit Bal.
6000
23
SUPPLIES EXPENSE
Date
UTILITY PAYABLE
Ref Debit Credit Bal.
Date
SALARIES PAYABLE
Date
Ref Debit Credit Bal.
INSURANCE EXPENSE
Ref Debit Credit Bal.
Date
ACCUMULATED DEPRECIATION
Ref Debit Credit Bal.
DEPRECIATION EXPENSE
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
24
The following trial balance is prepared for ABC Company on August 31, 2004 For
the month of August
Debit
Credit
Cash
19600
Supplies
3300
Prepaid Insurance
6000
Land
25000
Cottage
151000
Account Payable
6500
Unearned Rent (Revenue)
7400
Mortgage Payable
80000
Capital
100000
Owner Withdrawal
5000
Rent Revenue
80000
Salaries Expense
51000
Utilities Expense
9400
Repair Expense
3600
$273900
273900
Other data:
1- Insurance Expires at the rate of $400 per month.
2- A count on August 31 shows $900 of supplies on hand.
3- Annual depreciation is estimated to be $3600 on cottage.
4- Unearned Rent of $4100 was earned during the month of August.
5- Rentals of $800 were due from tenants at August 31.
6- At August 31, the salaries for the last three days of the month $400 has not been
paid or recorded.
7- The mortgage interest rate is 9%. (The mortgage were taken out on August1)
Instruction
1- Prepare Adjusted Entries prepared on August31.
2- Show the accounts after the adjusting entries is posted.
3- Prepare an Adjusted trial balance on August 31
Date Name of Account & Explanation
Ref Debit
Credit
123456725
CASH
Date
SUPPLIES
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
19600
3300
PREPAID INSURANCE
Date
Land
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
6000
COTTAGE
Date
25000
ACCOUNTS PAYABLE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
151000
6500
UNEARNED REVENUE
Date
CAPITAL
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
7400
100000
DRAWING
Date
RENT REVENUE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
5000
80000
SALARIES EXPENSE
Date
REPAIR EXPENSE
Ref Debit Credit Bal.
Date
51000
26
Ref Debit Credit Bal.
3600
UTILITIES EXPENSE
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
9400
MORTGAGE PAYABLE
Date
INSURANCE EXPENSE
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
80000
ACCUMULATED DEPRECIATION
DEPRECIATION EXPENSE
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
Date
Ref Debit Credit Bal.
ACCOUNTS RECEIVABLE
Date
SALARIES PAYABLE
Ref Debit Credit Bal.
Date
27
Ref Debit Credit Bal.
Medo Company
Balance sheet
December 31,200
Assets
Current Assets
Cash
Short-term investments
Accounts receivable
Notes receivable
Inventories
Office supplies
Prepaid insurance
Accrued Revenues
Total current assets
Long-term investments
Investment in stock of Dina company
Investment in real state
Property, plant, and equipment
Land
Office equipment
Less: Accumulated depreciation
Furniture
Less: Accumulated depreciation
Building
Less: Accumulated depreciation
Intangible assets
Patents
Goodwill
Copy right
Trade name
Franchise
Total assets
Liabilities and Owner’s Equity
Current Liabilities
Notes payable
Accounts payable
Unearned Revenue
Accrued expense
Short-term Loan
28
Interest payable
Total current liabilities
Long-term liabilities
Mortgage note payable
Bonds payable
Owner’s Equity
Capital beginning of the period
+Net profit for the year
Or – Net loss for the year
+ Additional investment in the company
Or - Owner withdrawals
Total Owner’s Equity
Total liabilities and owner’s equity
29
CLOSING ENTRIES
Date Account title & Explanation
Ref
REVENEUE
INCOME SUMMARY
TO CLOSE OUT ALL
REVENUES ACCOUNTS
INCOME SUMMARY
RENT EXPNSE
UTILITY EXPENSE
SALARIES EXPENSE
TELEPHONE EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXPENSE
INTEREST EXPENSE
ADVERTISING EXPENSE
MISC. EXPENSE
TO CLOSE OUT EXPENSE
ACCOUNTS
INCOME SUMMARY
CAPITAL
TO CLOSE OUT INCOME
SUMMARY IN CASE OF
PROFIT
CAPITAL
INCOME SUMMARY
TO CLOSE OUT EXPENSE
ACCOUNTS IN CASE OF
LOSS
CAPITAL
OWNER’S WITHDRAWAL
30
Debit
XXXXX
Credit
XXXXX
XXXX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XXX
XXX
XX
XX
XX
XX
Correcting Entries
Case 1
On May 10, a $50 cash collection on account from a customer is journalized
and posted as follow
May 10
Cash
50
Service revenue
50
The correcting entry should be
Case 2
On May 18, Delivery equipment costing $450 is purchased on account. The
transaction is journalized as follow
May 18
Delivery Equipment
405
Account Payable
405
The correcting entry should be
31
Exercises on correcting entries
1- On January 1, a $2000 cash payment to Note Payable is Journalized
and posted as follow
Jan 1
Accounts Payable
2000
Cash
2000
The correcting entry should be
2- On April 20, Office Supplies costing $5000 is purchased on account.
The transaction is Journalized as follow
April 20 Office Supplies
500
Accounts Receivable
500
The correcting entry should be
3- On June 30 a payment on account of $900 to creditor. The transaction
is journalized as follow
June 30 Account receivable
900
Cash
900
The correcting entry should be
4- On Sept. 19 a $4000 withdrawal of cash for the owner of a company.
The transaction is journalized as follow
Sept, 19 Salaries expense
400
Cash
400
The correcting entry should be
32
ALI Company
Income Statement
For the year ended December 31, 2012
Sales Revenues
Less: Sales Returns and allowances
Sales discount
Net Sales
Less: Cost of Goods Sold
Gross Profit
Less :Operating Expenses
Selling Expenses
Store Salaries Expense
Advertising Expense
Depreciation Expense Store-Equipment
Freight-out
Total Selling Expense
Administrative Expense
Salaries Expense
Utilities Expense
Insurance Expense
33 Total Administrative Expenses
Total Operating expenses
Income from operation
Add: Other Revenues and Gains
Interest Revenue
Gain on sale on equipment
Less: Other expenses and Losses
Interest expense
Casualty Loss from vandalism
Net Income for the Year
33
You were given the following information Pertain to Ali company about
the year ended 31/12/2012
Gross sales $480000, Sales returns and allowances $12000, Sales discount
$8000, Store salaries expense $45000, Advertising expense $16000,
Depreciation expense Store equipment $8000, Freight –out $7000, Salaries
Expense $19000, Utilities expense $17000, Insurance expense $2000,
Interest revenue $3000, Gain on sale of equipment $600, Interest expense
$1800, Casualty loss from vandalism $200, and Cost of Goods Sold
$316000.
Required
Prepare Income Statement using Multiple-step format.
Prepare Income Statement using Single-Step format.
34
 On 1/1/2009 Salem Firm purchased on credit from Ahmed firm
merchandise worth 100000 Riyals. Credit term is 5/10, n/30.
 On 2/1 Salem firm paid $200 as freight costs in cash to transport the
merchandise purchased above.
 On 3/1 Salem firm returned goods worth 5000 Riyals (do not meet
required specification).
 On 7/1 Salem paid the balance due in cash.
Required
Record the above transactions in Salem Books
35
1- Purchased 40 suitcases on account for $30- each from Ali company
terms 2/10, n/30
2- Paid Ali company in full within discount period.
3- Purchased 20 suitcases for cash $600 from Zaki
4- Paid $200 freight.
5- Received refund ($60) from supplier Zaki for returned two suitcases.
6- Purchased 100 Suitcase for $35
7- from Naser on credit terms 3/5,n/30.
8- Paid Nasser in full within discount period.
Required
Prepare journal entries for the above transactions in the Purchaser
book
36
Prepare journal entries to record the following merchandising transactions of
Medo Company which applies perpetual inventory system.
1- July 1 purchased Merchandise from Arch Co. For $6400 under credit
terms 1/10,n/30 FOB shipping point.
2- Paid $130 cash for freight charges on July 1.
3- Purchased merchandise from Kew Co. for $2200 under credit terms
of 1/15,n,60, FOB destination, invoice dated July 9.
4- Received a $200 credit memorandum from Kew Co. for the return of
part of the merchandise purchased on July 9.
5- Paid the balance due to Arch Co. within the discount period.
6- Paid Kew Co. the balance due after deducting the discount.
7- Purchased merchandise from Pearl Co. for $6600 under credit terms
3/10,n30, invoice dated July 10.
8- Paid the balance due to Pearl Co. on July 24.
37



On 1/1/2009 Medo company sold on credit to Salem firm merchandise worth 100000
Riyals. Credit term is 10/7, n/30. (The cost of Goods Sold is 70000 Riyals)
On 3/1 Salem firm returned goods worth 10000 Riyals (do not meet required
specification). (The cost of Goods returned is 6000 Riyals)
On 7/1 Salem paid the balance due in cash.
Required
Record the above transactions in Medo’s Books
38
Prepare journal entries to record the following merchandising transactions of
Medo Company which applies perpetual inventory system.
1- Sold Merchandise To Driver Co. for $900 under terms 1/10,n/60. FOB
Shipping point, its cost $600.
2- Sold Merchandise that has a cost $2000 for $4000 in cash.
3- Received the balance due on Driver Co. within discount period.
4- Sold merchandise that cost $5000 to Ahmed Co, under credit terms
1/10,n30 FOB destination. For 6500. Medo co paid freight $300.
5- Issued a $300 credit memorandum to Ahmed Co. for purchase
returned on no.4. Its cost $200.
6- Received the balance due from Ahmed Co after discount period.
39
Ali firm had on hand 500calculators at a cost of $20 each. The company
uses a perpetual inventory system. During September, the following
transactions occurred
1- Sold 20 calculators at $25 each from Sami co for cash.
2- Paid the amount of $50 to Sami for returned two calculators.
3- Sold 60 calculators for $30 each to Saad co term 5/10,n/30.
4- Granted credit of $90 Saad for the return of 3 calculators that
were not ordered.
5- Sold on credit to Sam company 40 calculators for $32 each term
3/5,n/30.
6- Saad paid the balance due within discount period.
7- Sam Paid the balance due after the discount period.
Required
Prepare journal entries for the above transactions in the Ali’s
book
40
First-in, First-out(FIFO)
This method assumes that earliest goods purchased are the first to be sold. Under this
method the cost of the earliest goods purchased are the first to be recognized as cost of
goods sold.
Example
The following are inventory movement for product “Y” in Ali’s firm during the fiscal
period ending 31/12/2004
Date
Explanation
Units
Unit cost
Total cost
January 1
Beginning Inventory 700
$4
$
April 7
Purchases
500
3
June 20
Purchases
2400
5
October 5
Purchases
300
8
The Ending inventory consisted of 600 units
Step 1 Calculate the cost of Ending Inventory
Date
Units
Unit cost
Total cost
Step 2: Calculate cost of goods sold
Cost of goods available for sales
Less cost of ending inventory (calculated in step 1)
Cost of Goods sold
Note that ending inventory is based on the latest units purchased. That is under FIFO the
cost of ending inventory is found by taking the unit cost of the most recent purchase and
working backward until all units of inventory are costed.
We can verify the accuracy of the goods sold by recognizing the fist units acquired are
the first units sold. The computation for the 2300 units sold are as follow
Date
Units
Unit cost
Total cost
Total
41
Last –in, First-out (LIFO)
The LIFO method assumes that the latest goods purchased are the first to be sold. LIFO
seldom coincides with actual physical flow of inventory.
Example
The following are inventory movement for product “Y” in Ali’s firm during the fiscal
period ending 31/12/2004
Date
Explanation
Units
Unit cost
Total cost
January 1
Beginning Inventory 700
$4
$
April 7
Purchases
500
3
June 20
Purchases
2400
5
October 5
Purchases
300
8
Total
The Ending inventory consisted of 600 units
Step 1 Calculate the cost of Ending Inventory
Date
Units
Unit cost
Total cost
Step 2: Calculate cost of goods sold
Cost of goods available for sales
Less cost of ending inventory (calculated in step 1)
Cost of Goods sold
We can verify the accuracy of the goods sold by recognizing the fist units acquired are
the first units sold. The computation for the 2300 units sold are as follow
Date
Units
Unit cost
Total cost
Total
42
Average Cost
The average cost method assumes that the goods available for sale have the same average
cost per unit. Generally such goods are identical. Under this method, the cost of goods
available for sale is allocated on the basis of weighted- average unit cost.
Example
The following are inventory movement for product “Y” in Ali’s firm during the fiscal
period ending 31/12/2004
Date
Explanation
Units
Unit cost
Total cost
January 1
Beginning Inventory 700
$4
$
April 7
Purchases
500
3
June 20
Purchases
2400
5
October 5
Purchases
300
8
Total
The Ending inventory consisted of 600 units
The formula and sample computation of the weighted-average unit cost as follows
Cost of Goods available for sale / Total units available for
sale
Cost of Ending Inventory = Weighted average unit cost X Number of ending
inventory units
Cost of Goods Sold = Weighted average unit cost X Number of units sold
Valuing Inventory at the lower of Cost or Market (LCM)
ABC Company has the following lines of merchandise with cost and market value as
indicated. LCM produces the following result in this example
Cost
Market
Lower of cost or market
value
$12,000
$ 11,000
Item A
60,000
65,000
Item B
90,000
86,000
Item C
$270,000
$261,000
Total
LCM is applied in the items of inventory after one of the costing methods has been
applied to determine cost
43
Exercise 1
Ali Sell toys. Below is information relating to the purchase of toys during
the month of September. During the same month 121 toys were sold Ali
company uses a periodic inventory system
Date
Explanation
units
Unit cost
Total costs
Sept. 1
Inventory
26
97
12
Purchases
45
102
19
Purchases
20
104
26
Purchases
50
105
Total
141
Instructions
Compute the ending Inventory at Sept. 30 and cost of goods sold using FIFO
method.
Exercise 2
Medo Company reports the following for the month of June
Date
Explanation
units
Unit cost
June 1
Inventory
250
7
12
Purchases
325
8
23
Purchases
475
9
Total costs
Total
Ending Inventory 130 units.
Instructions
Compute the cost of ending inventory and the cost of goods sold under FIFO
method.
44
Ali Sell toys. Below is information relating to the purchase of toys during
the month of September. During the same month 121 toys were sold Ali
company uses a periodic inventory system
Date
Explanation
units
Unit cost
Total costs
Sept. 1
Inventory
26
97
12
Purchases
45
102
19
Purchases
20
104
26
Purchases
50
105
Total
141
Instructions
Compute the ending Inventory at Sept. 30 and cost of goods sold using LIFO
method.
Exercise 2
Medo Company reports the following for the month of June
Date
Explanation
units
Unit cost
June 1
Inventory
250
7
12
Purchases
325
8
23
Purchases
475
9
Total costs
Total
Ending Inventory 130 units.
Instructions
Compute the cost of ending inventory and the cost of goods sold under LIFO
method.
45
Ali Sell toys. Below is information relating to the purchase of toys during
the month of September. During the same month 121 toys were sold Ali
company uses a periodic inventory system
Date
Explanation
units
Unit cost
Total costs
Sept. 1
Inventory
26
97
12
Purchases
45
102
19
Purchases
20
104
26
Purchases
50
105
Total
141
Instructions
Compute the ending Inventory at Sept. 30 and cost of goods sold using
Average method.
46
Petty Cash Fund
Establishing the fund
If ABC Company decides to establish a $300 Fund on April 1, by issuing a
check for the amount of $300 to the custodian, the entry in general journal is
April 1.
Increasing the fund
On May 1, the company decided to increase the fund by $200 the entry
would be
May 1.
Replenishing the fund
Assume that on June 15, Petty cash custodian requests a check for $450. The
fund contains $50 cash and petty cash receipts for postage $200, Freightout$150, and miscellaneous expenses $100. The general journal to record
the check is:
June 15.
Decreasing the Fund
On June 20, assume the company decided to decrease the fund by $100 the
entry in general journal would be
June 20.
Eliminating the fund
On June 30, assume that the company decided to eliminate the fund. The
fund contains $400 cash, the journal entry would be
June 30.
47
Internal Control
Internal control consists of all the related methods and measures adopted
within organization to:
1- Safeguard its assets, 2- Enhance the accuracy and reliability of its
accounting records
Principles of Internal Control
Establishment of responsibility. Control is most effective when only one person is
responsible for given task.
Segregation of duties. There are two common applications of this principle
1-Different individuals should be responsible for related activities
The responsibility for record keeping for an asset should be separate from
the physical custody of that asset.
Related Activities. Making one individual responsible for all of related
activities increases the potential for errors and irregularities.
Record Keeping separate from Physical custody. The custodian of the asset s not
likely to convert the asset to personnel use when one employee maintains the record of
the asset and different employee has physical custody of the asset.
Documentation Procedures, Prenumbered , documents, and all documents should
be accounted for.
The control system should require that employees promptly forward source
documents for accounting entries to the accounting department
Physical, Mechanical, and Electronic Controls
Independent Internal Verification
1- Companies should verify records periodically or on surprise basis.
2- An employee who is independent of the personnel responsible for
the information should make the verification
3- Discrepancies and exceptions should be reported to a management
level that can take appropriate action.
Other Controls
1- Bond employees who handle cash.
2- Rotate employees’ duties and require employees to take vacations
3- Conduct thorough background checks
48
Monthly Bank Statement
Beginning balance (the first of the month
Deposits during the month (Add)
Bank service charge (subtract)
40000
50000
90000
60000
30000
15000
45000
1000
NSF check (subtract)
Cash balance End of the month
44000
5000
39000
Checks withdrawn during the month (subtract)
Proceeds collected in behalf of the customer (N.R) (add)
49
Bank Reconciliation
The Following information pertains to ABC Company (monthly B.S
next page)
1-Balance per bank statement as of July 31 $39000
2 Balance per books (Ledger) as of July 31, $29090.
3 Bank service charge not yet recorded by the depositor $1000.
4 Deposit in transit, $7000.
5 Bank collected $15000 note receivable in behalf of the company, and
not yet recorded in the company’s book.
6 A debit memo for $5000 listed as NSF check. The check had been
received from its customer Sami.
7 Outstanding checks as of July 31, $8000.
8 It was found that check number 36 was correctly drawn to its creditor
Ahmad for $540 but was recorded in error in the disbursement book as
it were $450.
Required
1- Prepare bank reconciliation as of July 31.
2- Prepare adjusting entries required.
50
Balance Per Ledger
Bank Reconciliation as of
Balance Per Bank Statement
Subtract
Add: Deposit in transit
Bank service charge
Subtract: Outstanding check
NSF check
Add
*Any Proceeds collected
By bank in behalf of
client
Subtract or Add any
Error in recording check
In company’s books
Subtract or Add any
Error in recording check
In Bank’s records
Corrected Balance
Corrected Balance
51