accounting cycle bsc economics kardan

8/14/2019 Accounting Cycle Bsc Economics Kardan

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KARDAN UNIVERSITY

Sc EconomicsPrepared By: Sajad Ahmad


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The system under which the double effectof every transaction is recorded is called

double entry system.


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A device which contains a systematicrecord of increase or decrease in an itemduring a particular period.

It has three parts:A title name of the accountsLeft hand side which is usually called Debit

sideRight hand side which is usually called Credit

side.


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All the accounts maintained by a businesscan be divided into two categories.

1.Real Accounts

2.Nominal accounts


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1- Real Accounts :

These are the accounts of assets, liabilitiesand owners equity.

ORThese accounts have their existence even

after the close of a year.

Examples

Land, building, A/P, Owners Capital


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2- Nominal Accounts:

These are the accounts of revenues andexpenses.

ORThese accounts are closed at the end of an

year.

ExamplesSalaries, rent, revenues etc2


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As an account has two parts i.e. Debit (Dr)left hand side and credit (Cr) right handside.

When we write an amount on left hand sideit is called as debiting an account andwhen we write an amount on the righthand side it is called as crediting an

account.


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Increase in assets Decrease in Liability Decrease in Owner Equity

Decrease in Revenue Increase in expense Increase in withdrawals


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Decrease in assets Increase in liabilities Increase in owner equity

Increase in revenue Decrease in expense Decrease in withdrawals


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When increase in assets is debited the decrease in assets must becredited.

When increase in assets is debited the increase in liability must becredited and hence decrease in liability must be debited.

Owner Equity is also regarded as claim against assets hence increasein capital is credited and decrease in capital is debited.

When income increases owners equity also increases, when incomedecrease owners equity decreases therefore increase in income

must be credited and decrease in income must be debited.

When expenses increases the owners equity decreases as suchincrease in expense is debited and decrease in expense is credited.


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Any dealing between two or more person for goods andservices which effect the financial position of a businessand also can be measured in terms of money is called

business transactions.

Example:

Business purchased land for $52,000 and pay cash for it.

Here business is receiving land which is an asset but foracquiring one asset it gives another asset cash andamount of transaction is $52,000.


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There are two types of Transactions:

Cash TransactionsCredit Transactions


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The transaction where immediate cashreceipts or payments is involved is calledcash transaction.

For ExampleOwner invest $80,000 in business.Business pay $200 salary to an employee.


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The transaction where cash collection or payments aremade at some future time is called credit transaction.

Examples.

1.The business sells merchandise of price $400 and theamount will be received after 15 days.

2.The business purchased computer at $300 andpromise that amount will be paid after 20 days.


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The sequence of accounting procedures used torecord, classify and summarize accountinginformation is termed as accounting cycle.

Journal

LedgerTrial Balance

Adjustment

Adjusted Trial Balance

Financial Statements

Closing Entries

After Closing Trial Balance


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Journal is a book containing the originalrecord of a transaction in order ofoccurrence.

ORJournal is a chronological (day-by-day)

record of business transactions.The simplest type of journal is called general

journal and is shown as follow


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Date Description PostReference

Debit$

Credit$

2006

Mar1

2


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The process of recording the transaction ingeneral journal is called as journalizing ormaking an entry. The following is the procedurefor recording transactions in general journal.

Date column.In this column the date on which transaction is

completed, is recorded. year of account iswritten at the top and month below it. themonth is written only on the top of the page


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The dates are recorded in smaller column forevery transaction.

Description column.

In this column the account to be debited isinserted at the extreme left, and account tobe credited below it after providing somespace on left side. Brief explanation of entry

is also recorded in this column, generallyknown as narration.


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Post reference column. This account is completed when postings are

made into ledger. the students are advisedto insert a tick mark while posting the

entries from journal to ledger. Amounts column. Two amounts column are provided in

journal. The amount of transaction is

recorded in the debit column against theaccount to be debited and the amount ofthe account(s) to be credited are recordedin credit column.


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If we are given a business transaction and want tofind accounts to debited and accounts to be creditedin that particular transaction we have to proceed asunder.

By the analysis of transaction find out the two ormore accounts which are involved in that transaction.

The account so found are classified in to assets,liabilities, capital, Revenue expense or withdrawals.Increase and decrease in account(s) are determine.

Finally rule is applied.


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QUESTION NO1


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Nov 1: Assad started business by depositing $80,000 in acompany bank account.

Nov 3: Purchase land for $52,000 by paying cash. Nov 5: Purchased a building for $36,000 paying$6,000 in cash

and issuing a note payable for the remaining $30,000 .

Nov 17: Purchased tools and equipments on account for $13,800 Nov 20; sold some of the tools at the price equal to their cost

$1800 collectable within 45 days. Nov 25: Received $600 in partial collection of the account

receivable from the sale of the tools. Nov 26: Paid $6,800 in partial payment of an account payable


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Date Accountsinvolved

Classification

Increase orDecrease

Debit orCredit

2006

NOV1

Cash

Asad capital

Asset

ownerequity

Increase

increase

Dr

Cr

3 Land

cash

Asset

asset

Increase

decrease

Dr

Cr

5 BuildingCash

Notespayable

AssetAsset

liability

IncreaseDecrease

Increase

DrCr

Cr


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NOV

17

Tools &equipment

Accountpayable

Asset

liability

Increase

increase

Dr

Cr

20 Tools &

equipment

Accountreceivable

Asset

asset

Decrease

increase

Cr

Dr

25 Cash

Accountreceivable

Asset

asset

Increase

decrease

Dr

Cr

26 Cash

Account

payable

Asset

liability

Decrease

decrease

Cr

Dr


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JOURNAL ENTRIESOF QI


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Date Accounts titleExplanation

Debit$

Credit$

2006Nov 1

CashAssad Capital

owner invested cash inthe business

80,00080,000

3 LandCash

Purchased land for business

52,00052,000

5 BuildingCash

Notes PayablePurchased building paid partCash,balance payable within 90days

36,0006,000

30,000


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17 Tools and EquipmentsAccounts Payable

Purchased tools andequipments on credit

13,80013,800

20 Accounts Receivable Tools

and EquipmentsSold unused tools andequipment at cost

1,800

1,800

25 CashAccounts Receivable

Collected part of accountreceivable

600600

26 Accounts PayableCash

Made partial payment ofaccounts payable

6,8006,800


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Oct 1. The owner Fahad invested an additional $80,000 cashin the business.

Oct 5. Purchased a plot for $102,000 of which $30600 waspaid in cash , a note payable was issued for balance.

Oct15.Issued a check for $976 in full payment of an accountpayable.

Oct18.Borrowed $30,000 cash from the bank by signing a 90day note payable.

Oct23. Collected an account receivable of $2900 from

customerOct30. Acquired office equipment for $6200 made a cash

down payment of $1500,balance to be paid with in 30days.


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Date Accountsinvolved

Classification

IncreaseorDecrease

Debit orCredit

2007

Oct1

Cash

Fahadcapital

Asset

ownerequity

Increase

increase

Dr

Cr

5 Land

Cash

Notespayable

Asset

Asset

liability

Increase

Decrease

Increase

Dr

Cr

Cr

Oct15 Account Liability Decrease Dr


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Oct15 Accountpayable

Cash

Liability

Asset

Decrease

Decrease

Dr

Cr

18 Cash

Notespayable

Asset

Liability

Increase

increase

Dr

Cr

23 CashAccountreceivable

Assetasset

Increasedecrease

DrCr

30 Office

EquipmentCash

Accountpayable

Asset

asset

liability

increase

Decrease

Increase

Dr

Cr

Cr


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Solution ofQuestion 2


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Date Description Debit

$

Credit

$

2007

Oct 1

Cash

Fahad Capital

Owner invested additionalcash in the business

80,000

80,000

5 Landcash

Notes payable

Purchased land paid apart in cash & issue a

note payable

102,00030,600

71,400


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Oct 15 Accounts payablecash

Paid accounts payable

976976

18 Cash

Notes payableBorrowed from bank on90 days note

30,000

30,000

23 Cash

Account ReceivableCollected accountreceivable fromcustomer

2,900

2,900


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Oct 30 Office EquipmentCash

Account payable

Acquired office

equipment

6,2001,500

4,700


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Ledger is a book in which every account isallotted a separate page , and all thetransactions relating to that account arewritten on that page in a summary form.

ORLedger is a book which contains a condensed

record of all the business transaction.


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Transactions are1st recorded in journal, andthen it is posted to ledger.

Posting simply means updating the ledgeraccounts for the effect of transactionsrecorded in journal.


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JOURNAL ENTRIES

OF QI


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Date Accounts titleExplanation

Debit$

Credit$

2006Nov 1

CashAssad Capital

owner invested cash inthe business

80,00080,000

3 LandCash

Purchased land for business

52,00052,000

5 BuildingCash

Notes PayablePurchased building paid partCash,balance payable within 90days

36,0006,000

30,000


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17 Tools and EquipmentsAccounts PayablePurchased tools andequipments on credit

13,800 13,800

20 Accounts Receivable

Tools and EquipmentsSold unused tools andequipment at cost

1,800

1,800

25 CashAccounts Receivable

Collected part of accountreceivable

600600

26 Accounts PayableCash

Made partial payment ofaccounts payable

6,8006,800


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Nov 30: Recorded $2,200 of sale revenue receivedin cash.

Nov 30: Paid $1,400 of operating expenses in cash,$200 for utilities and $1200 for wages.

Here revenue is more than expenses and businessis making profit, profit is added to owner equityand if it is received in cash, it increase asset(cash).

Profit = Revenues Expenses Profit = 2200 1400 Profit = $800 Because of $800 profit the cash and capital

balances for the month of Nov will increase by$800.


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LEDGER

ACCOUNTS OF

Q1


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Date Debit$

Credit$

Balance$

2006

NOV. 1

35

25

26

30

80,000

600

800

52,0006,000

6,800

80,000

28,00022,000

22,600

15,800

16,600


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This format is known as a running balanceformat.

This form does not shows that the balance iseither debit or credit.

But we know that assets normally have debitbalance and liability and owner equitys hascredit balances.


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Date Debit$

Credit$

Balance$

2006

NOV. 20

25

1,800

600

1,800

1,200


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Date Debit$

Credit$

Balance$

2006

NOV. 3 52,000 52,000


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Date Debit$

Credit$

Balance$

2006

NOV. 5 36,000 36,000


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Date Debit$

Credit$

Balance$

2006

NOV. 17

20

13,800

1,800

13,800

12,000


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Date Debit$

Credit$

Balance$

2006

NOV. 5 30,000 30,000


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Date Debit$

Credit$

Balance$

2006

NOV. 17

6,800

13,800 13,800

7,000


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Date Debit$

Credit$

Balance$

2006

NOV. 1

30

80,000

800

80,000

80,800


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The time period for which a business measures its profit andloss is called accounting period.

OR

The period of time covered by an income statement of abusiness is called accounting period.

If a business measure its revenue and expenses for 3 monthsits accounting period will be 3 months.

If a business measure its revenue and expenses for one year

then its accounting period will be one year.One year accounting period is known as a fiscalyear.


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The price of goods sold or services rendered iscalled revenue.

For Example If business sell 1000 pens @ 5 per penthen 5000 is its revenue.

If 20 patient comes to a Doctor and he charge 200fee from every patient then 20 * 200 =4000 is itsrevenue.

Revenue increases owner equity ,because when

business sell goods or provide services it eitherreceive cash or generate Account receivable bothare assets and on the right side liability do notincreases so it increase owner equity.


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Repair service revenueSalesFee earned

Commission earned Interest revenue


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Realization principle indicates that revenuesshould be recognized at the time goods soldor services are rendered.


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The cost of doing business is called expense.OR

The cost of goods and services used up in theprocess of earning revenue is called expense.

Examples. salaries, utility bills, rent etcAn expense always causes a decrease in owner

equity.Expense will decrease assets or increase

liability, if expenses are paid in cash (asset) it

will decreases and if it will not be paid untillater it increase liability.


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Matching principle says that revenue shouldbe offset (match) by all the expensesincurred in producing that revenue.


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Many expenditures made by a businessbenefit more than one accounting period.

Let suppose car benefit a business for 10years. If business prepares annual incomestatement a portion of the cost of the carshould be recorded as a depreciationexpense.

If the car cost $4000 then( 4000/10=400) willbe the depreciation expense of car for oneyear.


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The policy of recognizing revenue in theaccounting records when it is earned andrecognizing expenses when the related goodsare services are used is called Accrual basis

of Accounting.The Accrual basis of Accounting measures the

profitability of the business for the period oftime


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The policy of recognizing revenue in theaccounting records when cash is collectedfrom the customer and recognizing expenseswhen it is paid is called the Cash basis of

Accounting.The Cash basis of Accounting measures cash

receipts and payments during a period.


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Withdrawals of owner means when ownerwithdraw some cash or assets from thebusiness for personal use.

Withdrawal reduce assets and owner equity

of the business.Withdrawals are not expenses because

expenses are incurred for the purpose ofgenerating revenue and withdrawals of

owner do not serve this purpose.Drawings decrease owner equity so it isrecorded by debit.


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The excess amount of revenue over theexpense of a business is called Profit.

For Example if a revenue is $ 100 andexpense is $ 80 then profit is $ 20.

As income statement covers a period of time,so income must be related to a period oftime.

Profit is added with owner equity.


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The excess amount of expenses over therevenue of a business is called loss.

Example. If revenue is $100 and expenses are$130 then $30 is loss.

Loss is subtracted from owner equity.


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Dec. 1; Paid Daily Tribune $360 cash for news paperadvertising to be run during December. Dec. 2; Purchased radio advertising from KRAM to

be aired in December. The cost was $470 , payable

within 30 days.Dec. 4;Purchased various shop supplies cost $1,400,

due in 30 days. These supplies are expected tomeet overnights needs for three or four months.


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Dec. 15; Collected $4,980 cash for repairsmade to vehicles.

Dec. 23;Asad the owner , withdrew $3,100cash from the companys bank account forhis personal use.

Dec. 29;Asad found that he did not need allof the cash he had withdrawn on Dec 23, sohe redeposit $1000 in Overnights (business)bank account.


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Dec. 31;Billed Harbor Cab Co. $5,400 formaintenance and repair services renderedduring December. The agreement withHarbor Cab calls for payment to be received

by January 10. Dec. 31;Paid all employees wages for

December ,$4,900


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Date Accountsinvolved Classification Increase orDecrease Debit orCredit

Dec1 Cash

Advertisement

Asset

expense

Decrease

increase

Cr

Dr

2 Advertisement

A/P

expense

Liability

Increase

increase

Dr

Cr4 supplies

accountpayable

Asset

liability

Increase

Increase

Dr

Cr


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Dec15 Cash

Revenue

Asset

Revenue

increase

increase

Dr

Cr

23 Withdrawal

Cash

Withdrawal

Asset

Increase

decrease

Dr

Cr29 Cash

Ownerequity

Asset

Ownerequity

Increase

Increase

Dr

Cr


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Dec31 A/R

Revenue

Asset

Revenue

increase

increase

Dr

Cr

31 wages

Cash

expense

Asset

Increase

decrease

Dr

Cr


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Date Description Debit$

Credit$

2006

Dec 1

Advertising expense

Cash

Purchased newspaperadvertising & pay cash

360

360

2 Advertising expense

Account payablePurchased radioadvertising on account

470

470


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Credit$

2006

Dec 4

Shop supplies

Account payable

Purchased shopsupplies on account

1,400

1,400

15 Cash

Repair service Rev

Repair servicesrendered

4,980

4,980


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Credit$

2006

Dec 23

Asad drawings

Cash

Owner withdrew cash

3,100

3,100

29 Cash

Asad capital

Owner invested cash

1,000

1,000


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Credit$

2006

Dec 31

Account receivable

Repair service Rev

Billed Harbor cab forservices rendered

5,400

5,400

31 Wages expenses

Cash

Paid wages

4,900

4,900


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Date Debit$

Credit$

Balance$

2006

NOV. 30

DEC. 115

23

29

31

16,600

4,980

1,000

360

3,100

4,900

16,600

16,24021,220

18,120

19,120

14,220


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Date Debit$ Credit$ Balance$

2006

NOV. 30

DEC. 31

1,200

5,400

1,200

6,600


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Date Debit$

Credit$

Balance$

2006

DEC. 4 1,400 1,400


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Date Debit$

Credit$

Balance$

2006

NOV. 30 52,000 52,000


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Date Debit$

Credit$

Balance$

2006

NOV. 30 36,000 36,000


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Date Debit$

Credit$

Balance$

2006

NOV. 30 12,000 12,000


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Date Debit$

Credit$

Balance$

2006

NOV. 30 30,000 30,000


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Date Debit$

Credit$

Balance$

2006

NOV. 30

DEC. 24

7,000

4701,400

7,000

7,4708,870


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Date Debit$

Credit$

Balance$

2006

DEC. 23 3,100 3,100


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Date Debit$

Credit$

Balance$

2006

DEC. 15

31

4,980

5,400

4,980

10,380


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2006

DEC. 1

2

360

470

360

830


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2006

DEC. 31 4,900 4,900


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The proof of the equality of Debit and Creditbalances is called Trial Balance.

A Trial Balance is a two column schedule listingthe names and balances of all the accounts in the

order in which they appear in the ledger; the debitbalances are listed in the left hand column and thecredit balances in the right hand side column. Thetotal of two columns should agree. Trial balancecontains Income statement as well as Balance

sheet accounts. A Trial balance taken from Overnights ledger

follows

OVERNIGHT AUTO SERVICETrial Balance


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December 31, 2006

Description Debit Balance

$

Credit Balance

$

Cash

Account Receivable

Shop Supplies

Land

Building

Tools and EquipmentNotes Payable

Account Payable

Asad Capital

Asad Drawing

Repair Service Revenue

Advertising ExpenseWages Expense

14,220

6,600

1,400

52,000

36,000

12,000

3,100

8304,900

30,000

8,870

81,800

10,380

TOTAL $131,050 $131,050


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Many transactions affects the revenues orexpenses of two or more accounting periods.e.g depreciable assets, supplies, insurancepolicy, prepaid expenses etc

Initially the costs of such items are recordedas assets, because they will benefit thebusiness in future accounting periods.Overtime these assets are used up, and their

cost becomes expenses of the periods inwhich the goods are services are used.


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Business allocate the costs of such assets toexpenses over a span of several accountingperiod by making adjusting entries at theend of each accounting period.

The purpose of these entries is to assign toeach accounting period the appropriateamount of revenue and expenses.

These entries adjust the balances ofvarious ledger accounts, therefore it isknown as a adjusting entries.


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A business can make dozen of adjustingentries, but here we assume that Overnightsaccount require only three adjusting entriesat December 31.


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On December 4,Overnight purchased for $1400 aquantity of shop supplies expected to last for 3 or 4months. At the date of purchase, this $1400 cost wasdebited to an asset account (shop supplies), becauseit was expected to benefit future accounting periods.

But as these supplies are used this asset graduallybecomes an expense.

Assume that during December, $400 worth ofOvernights shop supplies was used in businessoperations and that approximately $1000 worthremains on hand available for use in future periods.

The $400 of supplies used during December should berecognized as expense in that month; the $1000 insupplies still on hand should appear in the Dec 31balance sheet as an asset.


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GENERAL JOURNALDate Account Titles and

ExplanationDebit

$

Credit

$

2006

Dec 31

Supplies expense

Shop supplies

To recognize asexpense the cost ofshop supplies used in

December

400

400


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Depreciable assets are all those assets whichhave a limited useful life. e.g Building, Car,Machinery and Furniture etc

They are not physically consumed but their

economic values diminishes overtime.Each period a portion of a depreciable assets

usefulness expires. Therefore, acorresponding portion of its cost is

recognized as depreciation expense.


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The systematic allocation of the cost of adepreciable asset to expense over the assetuseful life is called depreciation.

The appropriate amount of depreciation

expense is only an estimate. Because wecannot look at a building or a piece ofequipment and determine precisely howmuch of its economic usefulness has expired

during the current period.


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The most widely used method of calculatingdepreciation is Straight line depreciationmethod. Under the straight line approach,an equal portion of the assets cost is

allocated to depreciation expense in everyperiod of the assets estimated useful life.The formula for calculating depreciationexpense by the straight line method is:

Depreciation expense (per period) = Cost of the asset/Estimated usefullife


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Overnight purchased its building for$36000.And Asad owner estimate that itsuseful life is 20 years. Annual depreciationexpense of the building is equal to

(36000/20)=$1800 and per monthdepreciation expense is equal to(1800/12)=$150.

The adjusting entry to record depreciation

on this building for the month of Decemberappears below


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GENERAL JOURNAL

Date Account Titles and Explanation Dr

$

Cr

$

2006

Dec 31

Depreciation Expense; Building

Accumulated Depreciation; Building

To record one months depreciation onbuilding

150

150


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The depreciation expense account willappear in Overnights income statement forDecember, along with other expenses for themonth.

The accumulated depreciation account willappear in the balance sheet as a deductionfrom the balance of the building account asshown below;

OVERNIGHT AUTO SERVICEPartial Balance SheetDecember 31 ,2006


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AssetsCash $14,220Account Receivable 6,600Shop supplies .. 1,000Land ......................................... 52,000Building .......$36,000Less; Accumulated Depreciation... 150 35,850


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Overnight also must record depreciation onits tools and equipment. These assets cost$12,000, and management estimates thatthey will remain in service for about 5 years.

Thus per year depreciation expense is equalto (12000/5)=$2400 and monthlydepreciation expense is equal to(2400/12)=$200.

The adjusting entry to recognize this monthlyexpense is;


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GENERAL JOURNAL


$

Cr

$

2006

Dec 31

Depreciation Expense; Tools & Equip

Accumulated Depreciation; Tools & Equip

To record one months depreciation on toolsand equipment

200

200


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Similar adjusting entries to recognizedepreciation expense on the building andtools and equipment will be made eachmonth through out the assets useful lives.

Depreciation begins when the assets areplaced in use for business purpose. Oncethese assets have become fully depreciatedthat is, their total cost has been recognized

as depreciation expense, the recognition ofdepreciation will stop.


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LEDGER ACCOUNTSAFTERADJUSTING

ENTRIES


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 115

23

29

31

16,600

4,980

1,000

360

3,100

4,900

16,600

16,24021,220

18,120

19,120

14,220


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 31

1,200

5,400

1,200

6,600


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 4

31

1,400

400

1,400

1,000


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 52,000 52,000


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 36,000 36,000


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 150 150


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 12,000 12,000


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 200 200


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 30,000 30,000


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 2

4

7,000

470

1,400

7,000

7,470

8,870


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 29 1,000

80,800

81,800


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 23 3,100 3,100


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 15

31

4,980

5,400

4,98010,380


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 1

2

360

470

360

830


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 4,900 4,900


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 400 400


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 150 150


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 200 200


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After all the necessary adjusting entries havebeen journalized and posted, an adjustedtrial balance is prepared to prove that theledger is still in balance.

It also provide a complete listing of theaccount balances to be used in preparing thefinancial statements.

The following is the adjusted trial balance of

Overnight Auto Service.

OVERNIGHT AUTO SERVICEAdjusted Trial Balance

December 31, 2006


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$

Credit Balance

$

Cash

Account Receivable

Shop Supplies

Land

Building

Accumulated Depreciation; BuildingTools and Equipment

Accumulated Depreciation; Tools & Equipment

Notes Payable

Account Payable

Asad Capital

Asad Drawing


Advertising Expense

Wages Expense

Supplies Expense

Depreciation Expense; Building

Depreciation Expense ;tools & equipment

14,220

6,600

1,000

52,000

36,000

12,000

3,100

830

4,900

400

150

200

150

200

30,000

8,870

81,800

10,380


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Standard FormatShare informationStake holderMonetary informationOR It is a set of different report which is provided by a

business to interested parties. OR

It is simply a declaration of what is believed to betrue communicated in terms of monetary unit.


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Financial statements prepared for shorter than oneyear is called interim financial statements.


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1. The Income Statement2. The Statement of Owners Equity3. The Balance Sheet4. The Statement of Cash Flows


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OVERNIGHT AUTO SERVICEI St t t


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Income StatementFor the Month ended December 31 ,2006

Revenue:Repair Service Revenue . $ 10,380

Expenses:Advertising expense . $ 830

Wages Expense 4,900Supplies Expense .. 400Depreciation Expense: Building 150Depreciation Expense: Tools & Equip 200 6,480

Net Income . $3,900Net Income increase owners equity. so owner equity will

increase by an amount of $3900 because of this profit.


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The Statement of Owners Equity summarizethe increases and decreases in the amount ofowners equity during the accounting period.

Increases result from earning net profit and

from additional investment by the owner.Decreases result from losses and from of

assets by the owner

OVERNIGHT AUTO SERVICESt t t f O E it


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Statement of Owners EquityFor the Month ended December 31 ,2006

Asad, Capital, Nov. 30, 2006 .. $ 80,800Add: Net Income for December .. 3,900

Additional investment by owner . 1,000Subtotal .. $ 85,700

Less: Withdrawals by owner .. 3,100Asad, Capital, December 31, 2006 . $ 82,600

The ending balance of owners equity ($82,600) appears inbalance sheet.


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The statement which shows that what business hasand what it has to pay at a particular time is calledbalance sheet.

The statement which list the assets liabilities and

owner equity of a business is called Balance sheet.


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1= Current Assets.The assets utilized or that gives benefits within oneaccounting period.

Examples

Cash , accounts receivable ,Notes receivable ,inventory ,supplies etc.


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Account receivable (A/R):The amounts due from customer.

Example. You have sold 10 marker @ 5 per maker and youhaven't received the amount. so 50 is your accountreceivable

Notes receivable:

A note or bill receivable from some one.

Example. You have given $ 500 to some one and has taken

written promise from him that he will pay the amountafter 90 days.


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Inventory:Merchandise on hand that is goods remaining unsold.

You purchase merchandise of worth $1000 at thestart of the month and on the day of preparing

balance sheet the remaining goods worth $200 soinventory is of $200.

Supplies:

The small materials used in the business operation.

Like markers , papers etc in kardan university


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2=Fixed Assets or Long Term asset:Those assets which we utilize in more than one

accounting period .Land ,building, furniture, machinery ,car etc


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3=Tangible Assets:Those assets which we can touch.OrThose assets which have a physical existence are

called tangible assets.Examples Inventory ,land, car etc


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TYPES OF TANGIBLE ASSETS.1.Depreciable assets.Those assets which have a limited useful life.ExamplesBuilding ,car ,furniture ,machinery etc2.Non depreciable assets.Those assets which have an unlimited useful life.

Example LAND


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1.Current Liability:

The obligation payable with in one accountingperiod.

Examples

Accounts payable , notes payable ,salariespayable ,interest payable, utility bills payable ,accrued expenses etc

Accrued expenses:

The expenses incurred but not yet paid.

Salaries payable, rent payable ,interest payable etc


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Accounts payable:The amounts payable to supplier.

You have purchased goods of worth $400 and youhavent pay for it so 400 is your accounts payable.

Notes payable:A written promise to repay the amount to some one

by a particular date.

Like if you have received $800 from some one andyou have made a written promise that I will pay theamount after 60 days .so $800 is your Notes payable


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2.Long term liability:

The obligations payable in more than oneaccounting period.

Example

Long term loan payable

The residual claim of the owner on the assets of the

OWNERS EQUITY


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The residual claim of the owner on the assets of thebusiness.

Owner equity increases from

1.Investment of cash or other assets by the owner

2.Earnings from profitable operation of the business.

Owner equity decreases from

1.Withdrawl of cash or other assets by the owner

2.Losses from unprofitable operation of the business.

Owner Equity.


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The heading of balance sheet communicate threethings1.The name of the business2.The name of the financial statement

3.Date

OVERNIGHT AUTO SERVICEBalance Sheet

December 31 ,2006

A Li bili i & O i


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Assets Liabilities & Owner s equityCash $ 14,220 Liabilities;Account receivable 6,600 Notes payable . $ 30,000

Supplies 1,000 Accounts payable 8,870Land ... 52,000 Total liabilities $ 38,870Building . 36,000 Owner s equity;Less: Accumulated Dep 150 35,850

Tools & Equipment 12,000Less: Accumulated Dep 200 11,800 Asad Capital 82,600

Total Assets .. $121,470 Total liabilities & O.Eq $121,470


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OVERNIGHT AUTO SERVICE

Statement of Cash FlowsFor the Month Ended December 31 ,2006

Cash flows from operating activities;Cash received from revenue transactions .. $ 4,980


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Cash paid for Advertising expenses (360)Cash paid for wages expenses . (4,900)

Net cash provided (used) by operating activities .. $( 280)Cash flows from investing activities; . 0Cash flows from financing activities;

Cash Invested by Asad, owner 1,000Cash withdrawn by Asad, owner (3,100)

Net cash provided (used) by financing activities $ (2,100)Net increased (decreased) in cash for the month of December $ ( 2,380)

Add: Cash balance, December 1 , 2006 16,600Cash balance on , December 31, 2006 .. $ 14,220

THE CASH BALANCE ON DECEMBER, 31, 2006 APPEARS IN BALANCE SHEET .THE RELATIONSHIP BETWEEN FINANCIAL STATEMENT IS CALLED ARTICULATION.


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The revenues, expenses and drawings accounts arecalled temporary accounts or nominal accounts,Because we close it at the end of every accountingperiod.

Revenues increases owners equity, expenses and

drawing decreases owners equity. The process of transferring the balances of

temporary accounts into the owners capitalaccount is called closing the accounts.

The journal entries made for the purpose of closingthe temporary accounts are called closing entries.


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Revenues and expenses accounts are closedat the end of each accounting period bytransferring their balances to a summaryaccount called income summary.

If the revenues (credit balances) exceed theexpenses (debit balances) the incomesummary account will have a credit balancerepresenting net profit.

Conversely, if expenses exceed revenue, the

income summary account will have debitbalance representing loss.


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Revenue accounts have credit balances,therefore closing a revenue account meanstransferring its credit balance to the incomesummary account.

This transfer is accomplished by a journalentry debiting revenue account in an amountequal to its credit balance, with an offsettingcredit to the income summary account.


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GENERAL JOURNAL


$

Cr

$

2006

Dec 31


Income Summary

To close the repair service revenueaccount.

10,380

10,380


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After this closing entry has been posted,repair service revenue will have a zerobalance, whereas income summary will havea credit balance of $10,380.


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Expense accounts have debit balances,therefore closing an expense account meanstransferring its debit balance to the incomesummary account.

This transfer is accomplished by a journalentry crediting expense account in anamount equal to its debit balance, with anoffsetting debit to the income summary

account.


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GENERAL JOURNAL


$

Cr

$

2006

Dec 31

Income Summary

Advertising Expense

Wages ExpenseSupplies Expense

Depreciation Expense: Building

Depreciation Expense: Tools &Equipment

To close the expense accounts.

6,480

830

4,900400

150

200


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After this closing entry has been posted, theincome summary account has a creditbalance of $3,900 ($10,380-$6,480), and thefive expenses accounts have zero balances.


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The net income (Revenue-Expenses) $3,900(10,380-6,480) earned during Decembercauses the owners equity to increase.

The credit balance of the income summary

account is, therefore transferred to theowners equity account, by debiting incomesummary account for $3,900 and creditingAsad capital account for $3,900.


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GENERAL JOURNAL


$

Cr

$

2006

Dec 31

Income Summary

Asad Capital

To close the Income summary accountfor December by transferring the netincome to the owners capital account.

3,900

3,900


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After this closing entry has been posted, theincome summary account has a zero balance,and the net income for December will appearas an increase or credit entry in the owners

capital account.


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If the Expenses of a business are more thanits revenue, the income summary accountwill have a debit balance, representing a lossfor the Accounting Period.

In that case, the closing of the incomesummary account requires a debit to ownerscapital account and an offsetting credit toincome summary account.

The owners Equity will of course, be

reduced by the amount of the loss debited tothe capital account.


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Drawings by the owner do not constitute anexpense, the owners drawing account is notclosed into the income summary account,but it is closed directly to the owners

capital account.The following is the closing entry for owners

drawing account,


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GENERAL JOURNAL


$

Cr

$

2006

Dec 31

Asad Capital

Asad Drawing

To close the owner Drawing account.

3,100

3,100


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After this closing entry has been posted, thedrawing account will have zero balance, andthe amount withdrawn by owner Asad duringDecember will appear as a deduction or debit

entry in his Capital account.


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LEDGERACCOUNTSAFTERCLOSING ENTRIES


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 1

15

23

29

31

16,600

4,980

1,000

360

3,100

4,900

16,600

16,240

21,220

18,120

19,120

14,220


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 31

1,200

5,400

1,200

6,600


175/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 4

31

1,400

400

1,400

1,000


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177/194

Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 36,000 36,000


178/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 150 150


179/194

Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 12,000 12,000

bi C di l


180/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31 200 200

D t D bit C dit B l


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30 30,000 30,000

D t D bit C dit B l


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 2

4

7,000

470

1,400

7,000

7,470

8,870

D t D bit C dit B l


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Date Debit

$

Credit

$

Balance

$

2006

NOV. 30

DEC. 29

31

31 3,100

1,000

3,900

80,800

81,800

85,700

82,600

D t D bit C dit B l


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 23

31

3,100

3,100

3,100

0

D t D bit C dit B l


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Date Debit

$

Credit

$

Balance

$

2006

DEC. 15

31

31 10,380

4,980

5,400

4,98010,380

0

Date Debit Credit Balance


186/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 1

2

31

360

470

830

360

830

0



187/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31

31

4,900

4,900

4,900

0


188/194



189/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31

31

150

150

150

0



190/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31

31

200

200

200

0



191/194

Date Debit

$

Credit

$

Balance

$

2006

DEC. 31

31

31

6,480

3,900

10,380 10,380

3,900

0


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1. Close the various revenue accounts by transferring theirbalances into the income summary account.

2. Close the various expense accounts by transferring theirbalances into the income summary account.

3. Close the Income summary account by transferring itsbalance into the owners capital account.

4. Close the owners Drawing account into the ownerscapital account. (The balance of the owners capitalaccount in the ledger will now be the same as the amountof owners equity appearing in the Balance Sheet)


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After the revenue and expense accounts have beenclosed, it is desirable to prepare an after closingtrial balance, which will consist of balance sheetaccounts only.

The after closing trial balance is prepared from the

ledger. The after closing trial balance gives assurance that

the accounts are in balance and ready for therecording of the transactions of the newaccounting period.

The following is the after closing trial balance ofOvernight Auto Service,

OVERNIGHT AUTO SERVICEAfter Closing Trial BalanceDecember 31, 2006


$

Credit Balance

$


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Cash

Account Receivable

Shop Supplies

Land

Building

Accumulated Depreciation; Building

Tools and Equipment

Accumulated Depreciation; Tools & Equipment

Notes Payable

Account Payable

Asad Capital

14,220

6,600

1,000

52,000

36,000

12,000

150

200

30,000

8,870

82,600

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