PURCHASE MERCHANDISE FOR CASH

RS.25,000
 Journal Entries

Trading Business Transactions

Purchase merchandise on credit from Mr. Amir Rs.6000,
Mr.Khalid Rs.12,000
Merchandise return to supplier and received
cash Rs.300
Merchandise return to Amir Rs.600
Paid to Amir Rs.5200 in final settlement of
his account.
Sold goods for cash Rs.25000
Sold goods on credit to Abid Rs.75,000
Merchandise return from customer Rs.200,
we paid cash to him
Merchandise return from Abid Rs.2000
Received cash Rs.72000 from Abid in final
settlement of his account
 MR A
TRIAL BALANCE
For the Year ended Dec.31,2020
No TITLE OF ACCOUNTS P/R Debit Credit
1 CASH Rs.59,500
2 RENT EXPENSE 7,500
3 OFFICE EQUIPMENT 10,000
4 SUPPLIES 400
5 SALAREIS EXPENSE 5,400
6 FURNITURE 3,200
7 DRAWING-A 3,000
8 A/C RECEIVABLE(NASIR) 7,500
9 CAPITAL-A 50,000
10 A/C PAYABLE(B & CO.) 7,000
11 SERVICE REVENUE 37,500
12 A/C PAYABLE(K & CO.) 2000
96,500 96,500
Adjustment at year end
 MR.A
INCOME STATEMENT

FOR THE YEAR ENDED DEC 31,2004

Service revenue 37500

LESS: EXPENSES
Rent expense 7500
Salaries expense 5400
Depreciation 2000 14900
Net Profit 22600
 Mr.A

BALANCE SHEET

AS AT DECEMBER 31,2004

Current Assets
Cash 59,500 A/c Payable 9000
A/c Receivable 7500
Supplies 400

Owner’s equity
67400 Capital 50,000
Net profit 22,600
Drawing (3000)
Fixed Assets
Equipment 10,000
Acc.dep. (2000) 8000
69,600
Furniture 3200
78,600
78,600
Adjustment
Effect on ledgers

Salaries expense

Balance -op 5400

1500
6900

Income st

Salaries payable

1500

Balance sh
liability
EFFECT ON INCOME STATEMENT
EFFECT ON BALANCE SHEET

Current liability
A/c Payable 9000
Salary payable 1500

Owner’s equity
Capital 50,000
Fixed Assets
Net profit 21,100
Equipment 10,000
Drawing (3000)
Acc.dep. (2000) 8000
Furniture 3200
68,100
78,600
78,600
ADJUSTMENT
Effect on ledgers

Supplies

Balance-op 400 250

balance 150

B/S Supplies expense

250

I/ST
EFFECT ON INCOME STATEMENT
EFFECT ON BALANCE SHEET

Current liability
A/c Payable 9000
Salary payable 1500

67150 Owner’s equity

Capital 50,000
Fixed Assets Net profit 20,850
Equipment 10,000 Drawing (3000)
Acc.dep. (2000) 8000
Furniture 3200
67,850
78350 78,350
adjustment
Adjustment of Financial
Statement
Matching Principle

Requires that expenses be recorded in the same period in which the revenues they helped
produce are recorded
Accrual Basis Accounting
Adheres to the time period assumption and revenue recognition and matching principles
Revenue is recorded when earned, rather than when cash is received
Expense recorded when incurred, rather than when cash is paid
Accrual accounting records events when the economic event occurs

GAAP
Adjusting Entries
Types of Adjusting Entries

Prepayments
Prepaid expenses
Unearned revenues
Accruals
Accrued revenues
Accrued expenses
 Prepayments

Cash has been spent but the item acquired has not been used or consumed (prepaid expenses)
Cash has been collected but the revenue has not been earned (unearned revenues)
 Supplies

On January 5 the company paid $2,500 for advertising supplies.

Advertising Supplies Advertising Supplies Expense

Cash
Jan. 5 2,500 Jan. 5 2,500

GENERAL JOURNAL Debit Credit

Jan. 5 Advertising Supplies 2,500
Cash 2,500
Purchased advertising supplies
 Supplies

An inventory on January 31 reveals that $1,000 of supplies remain on hand; therefore, $1,500 of supplies
had been used. ($2,500 - $1,000) =$ 1,500

Advertising Supplies Advertising Supplies Expense

Cash

Jan. 5 2,500 Jan. 5 2,500 Jan. 31 1,500 Jan. 31 1,500

Bal. 1,000

GENERAL JOURNAL Debit Credit

Jan. 31 Advertising Supplies Expense 1,500
Advertising Supplies 1,500
To record advertising supplies consumed
 Prepaid Expenses

On February 4 the company paid $600 for a 1-year insurance policy; coverage began February 1.

Prepaid Insurance Insurance Expense

Cash

Feb. 4 600 Feb. 4 600

GENERAL JOURNAL Debit Credit

Feb. 4 Prepaid Insurance 600
Cash 600
Purchased one-year policy effective February 1
 Prepaid Expenses

On February 28, $50 ($600/12 months) of the insurance had been used or had expired.

Prepaid Insurance Insurance Expense

Cash

Feb. 4 600 Feb. 4 600 Feb. 28 50 Feb. 28 50

GENERAL JOURNAL Debit Credit

Feb. 28 Insurance Expense 50
Prepaid Insurance 50
Record insurance expense for the month
Amortization
How do you apply the matching principle to
the cost of a long-lived asset?
Depreciation

Allocate the cost of an asset to expense over its useful life

Depreciation is an allocation concept, not a valuation concept

Note: This is not an attempt to reflect the actual change in value of an asset.
Depreciation Example
Depreciation Example
Accumulated Dep-Office Equipment

Depreciation Expense
Office Equipment

Mar. 2 5,000 Mar. 31 40 Mar. 31 40

GENERAL JOURNAL Debit Credit

Mar. 31 Depreciation Expense 40

Accumulated depreciation– 40
Office Equipment
To record monthly depreciation
Accumulated depreciation is a contra asset account – an offset
(deduction) against the asset account.
Balance Sheet Presentation

Office equipment $5,000

Less: Accumulated depreciation 40

Net book value 4,960

Net book value

 Unearned Revenues

Received on August 2 $1,200 for advertising services expected to be completed by

December 31.

Unearned Service Revenue Service Revenue

Cash

Aug. 2 1,200 Aug. 2 1,200

GENERAL JOURNAL Debit Credit

Aug. 2 Cash 1,200

Unearned Service Revenue 1,200
Collected money for work to be performed by
December 31
 Unearned Revenues

During August, $400 of the revenue was earned.

Unearned Service Revenue Service Revenue

Cash

Aug. 2 1,200 Aug. 31 400 Aug. 2 1,200 Aug. 31 400

Bal. 800

GENERAL JOURNAL Debit Credit

Aug. 31 Unearned Service Revenue 400

Service Revenue 400
To record revenue earned
Accruals

Revenue has been earned, but not collected (accrued revenues)

Expenses were incurred, but not yet paid (accrued expenses)

Note: Entry has not yet been recorded!

Accrued Revenues
 Accrued Revenues

Earned $200 for advertising services to clients in October, but they were not billed until after
October 31.

Accounts Receivable Service Revenue

Oct. 31 200 Oct. 31 200

GENERAL JOURNAL Debit Credit

Oct . 31 Accounts Receivable 200

Service Revenue 200
Accrued Expenses

Expenses incurred but not yet paid or recorded at the end of period
 Accrued Interest Expense

Interest expense is the cost a company

incurs to use money. Information needed to
calculate interest expense:
• Face value of note
• Interest rate (always expressed in annual rate)
• The length of time note is outstanding
 Accrued Interest Expense

Formula for Calculating Interest

Face Value Annual Time

of Note Interest in Terms of Interest
Rate One Year

$ 5,000 X 12% X 1/12 = $50

 Accrued Interest Expense

Interest Expense Interest Payable

Oct. 31 50 Oct. 31 50

GENERAL JOURNAL Debit Credit

Oct. 31 Interest Expense 50

Interest Payable 50
Accrue interest expense for the month
Accrued Salaries Expense
Accrued Salaries Expense
(Salaries paid after the service has been performed)
 Accrued Salaries Expense

Salaries Expense Salaries Payable

Oct. 31 1,200 Oct. 31 1,200

GENERAL JOURNAL Debit Credit

Oct. 31 Salaries Expense 1,200

Salaries Payable 1,200
Accrue salary expense for the month
Adjusted Trial Balance
Closing the Books
 Illustration 4-17

Temporary Permanent

All revenue accounts All asset accounts

All expense accounts All liability accounts

Shareholders’ equity
Dividends account
accounts
Individual Expenses Individual Revenues

2 Income Summary 1

3 Retained Earnings
is a permanent
Retained Earnings account; the others
shown here
are temporary

4
Dividends
Required Steps in the Accounting Cycle

Analyse business transactions

Journalize the transactions
Post to general ledger accounts
Prepare a trial balance
Journalize and post adjusting entries (prepayments and accruals)
Required Steps in the Accounting Cycle

Prepare an adjusted trial balance

Prepare financial statements
Journalize and post closing entries
Prepare a post-closing trial balance