Process Financial TNXN TTLM Nigussie B

ACCOUNTS AND BUDGET SUPPORT LEVEL III
Learning Guide
Unit of Competence: Process Financial Transactions and Extract Interim
Reports
Module Title: Processing Financial Transactions and Extract
Interim Reports
LG Code: BUF ACB3 01 0812

TTLM Code: BUF ACB3 M 01 0812
Compiled by: Nigussie B.

INTRODUCTION
Welcome to the module “Processing Financial Transactions and Extract Interim

Reports”. This learner’s guide was prepared to help you achieve the required competence
in “Accounts and Budget Support Level III ”. This will be the source of information for you
to acquire knowledge attitude and skills in this particular occupation with minimum
supervision or help from your trainer.
Summary of Learning Outcomes
After completing this learning guide, you should be able to:

Lo1:- Check and verify supporting documentation
Lo2:- Prepare and process banking and petty cash documents
Lo3:- Prepare and process invoices for payment to creditors and for debtors
Lo4:- Prepare journals and batch monetary items
Lo5:- Post journals to ledger
Lo6:- Enter data into system
Lo7:- Prepare deposit facility and lodge flows
Lo8:- Extract a trial balance and interim reports
How to Use this TTLM
o Read through the Learning Guide carefully. It is divided into sections that
cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each
section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask
your trainer to show you the correct way to do things or talk to more
experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

Definition - Accounting is defined as an information system concerned with collection, analysis and
communication of financial information useful for decision-making. For it is used as a means to
exchange information among interested parties concerning the financial performance, financial position
and related issues of an organization, it is also commonly known as the “language of business”.
As an information system, process of collecting, analyzing and communicating information, it
involves the following steps:
 Identifying - tracing and collecting recordable economic activities. Accounting does not
record and report all economic activities of an organization. Rather, it records and reports
only those economic activities of the organization which can be expressed in terms of money.
 Analyzing and Measuring - This involves determining whether the economic activities bring
changes (increase/decrease) assets, liabilities, capital, revenues, and/or expenses (these terms
will be defined in subsequent sections) of an organization and expressing the changes in
monetary terms.
 Recording - make, in a systematic way, a record of the effects of economic activities on
assets, liabilities, capital, revenues and expenses.
 Classifying - grouping recorded effects of economic activities into meaningful classes.
 Summarizing - gathering and arranging data needed for preparation of reports and
statements.
 Reporting - preparing statements and reports in a manner that suits the need of users so as to
communicate information useful for decision making.
 Interpreting - provide explanation on reported information so that users can understand and
use the information as a basis for decision making.
2. Importance/purpose - Accounting can be seen as an important part of the total information
system of an organization. People, both inside and outside the business, have to make decisions
concerning the allocation of scarce resources. To ensure that these resources are allocated in an
efficient and effective manner, users require economic information on which to base decisions. It
is the role of the accounting system to provide that information and the ultimate purpose of
accounting is to give people better information on which to base their decisions. Some of the
uses of accounting information in relation to the users of the information are discussed below.

3. Users of Accounting Information - Accounting seeks to satisfy the needs of a wide rage of
users. In relation to a particular business, there may be various groups of users which are likely
to have an interest in financial aspects of it. The major users of financial information are
commonly grouped as internal and external users.
i. Internal users are mainly management personnel of an organization who have direct
involvement and control over and who are responsible for the day-to-day affairs of the
organization. They need and use the financial information to make decisions and plans for
the business activities including finance, human resource, production and marketing, and
exercise control to try to ensure that plans come to fruition. Management people use
accounting information to
o Formulate long-, medium- and short-term plans
o Control and evaluate operation and performance, and
o Make other major decisions related to financing and investment, product costing and
pricing, selecting product mix and allocating scarce resources.
ii. External users on the other hand, refer to users outside an organization who are not directly
involved in the day-to-day affairs of the organization but have some interest in the financial
and related affairs of the organization.
External users include:
 Existing and potential owners/investors who want to assess how effectively managers are
running the business and to make judgments about the likely levels of risk and return
associated with investment in the business and decide to invest or de-invest.
 Existing and potential suppliers and creditors who need to assess the ability of the business
to pay for goods and services supplied or to be supplied to it and to meet its obligations when
due.
 Potential employees (non-managers) and labor unions that need to assess the ability of the
business to continue providing them with employment opportunities and better reward for
services they rendered or may render to the organization.
 Government agencies who need to assess how much tax the business should pay, whether it
complies with approved pricing policies, protect the public from excessive price charges by
monopolies, and so on.

 Existing and potential customers who want to assess the ability of the entity to continue in
business to supply them with the necessary goods and services and to know their outstanding
balances.
 Investment analysts and consultants who want to assess the likely risks and returns
associated with investment in an organization in order to determine investment potentials and
advise their clients accordingly.
 Community representatives who need to assess the ability of the entity to continue providing
employment opportunities for the community, use community resources, to support
environmental improvements and so on.
 Competitors who need to assess the threat posed by the business to their market share and
profitability, and need for a benchmark by which to compare efficiency and performance.
1.1 Generally Accepted Accounting Principles

1. What is generally Accepted Accounting Principles (GAAP)? GAAP refer to specific
fundamental beliefs, which, on the basis of reasons, demonstrated performance and general
acceptance are generally essential to guide the practices of accounting and reporting for the
financial affairs of an economic entity including governmental, non-governmental, business and
non-business organizations. Regardless of the nature of the economic entity they affect, these
principles are collectively known as Generally Accepted Accounting Principles (GAAP). GAAP
include general concepts, assumptions, principles as well as specific accounting and reporting
procedures, policies and methods such as inventory valuation, revenue recognition, depreciation
computation, etc.
GAAP are not universally accepted and static principles like principles of natural sciences. They
are generally accepted by accounting practitioners and theoreticians, and other concerned parties,
in a given country or continent, as guidelines for accounting and reporting the financial affairs of
economic entities operating in the same country or continent.
Accounting standards are influenced by the economic, political, legal and social environment in
which they are established and applied, thus, subject to revision or change in line with the
changes in the previously mentioned environmental factors. Members of the accounting
profession, through associations and individual input into the process, have over time worked to

establish accounting principles accepted by both the accounting profession and the public that
relies on the profession's expertise.
The following sections discuss some of the basic accounting assumptions, principles, and
concepts that guide the accounting and reporting practices for the financial affairs of commercial
economic entities.
2. Economic Entity Assumption - According to this assumption, each economic entity exists
separate from and independent of its owner/s and other economic entities under the same or
different owner/s. Thus, economic events can be identified with a particular unit of
accountability. And the economic activities of an accounting entity can be and should be kept
separate and distinct from its owner/s and all other entities. For instance, records and reports of
particular business should not reflect its owner’s personal economic activities, assets and
liabilities and that of another business other than its own economic affairs. This assumption
establishes limit/boundary as to what information to include in the accounting records and
reports of an economic entity and thus makes the financial accounting and reporting practices
manageable. The accounting entity concept, however, does not necessarily refer to a legal entity.
For instance, accounting assumes all types of business organizations (i.e. sole proprietorship,
partnership and corporation) as separate and independent economic entities. However, it is only
corporation that is legally treated as separate and independent entity.
3. Going Concern/Continuity Assumption - This assumption states that, in the absence of

information to the contrary, the life of an economic entity is indeterminate and the economic
entity will continue in operation long enough to carry out its existing objectives and
commitments. This assumption serves as a basis for other principles such as the historical cost
principle and affects classification of assets and liabilities as current and non-current for
reporting purposes. Because of this assumption, liquidation values of assets and liabilities are not
relevant for recording and reporting the financial affairs of an economic entity.
4. Accrual Concept - This concept requires that financial affairs of an economic entity should be
recognized (i.e. recorded and reported) as they occur regardless of the timing of the in/out flows
of cash associated with the economic events. According to this principle, for instance, revenue
should be recorded and reported when goods are delivered or services are rendered to customers,
and expenses should be recognized when goods and services are consumed. The timing of the

in/out flows of associated cash, which may happen in advance, immediately or sometime in the
future, should not determine the period in which the revenues and expenses should be recorded
and reported. This concept avoids distortion of information on financial performance and
position of an economic entity that arises as a result of mismatch of costs/expenses and revenues
when the timing of cash flows is treated as a basis for recording and reporting the financial
affairs of an economic entity.
5. Objectivity Principle - According to this principle, an economic entity’s financial affairs to be
recorded in its accounting records and reported on its financial statements must be supported by
objectively determinable evidences known as source documents. This helps to enhance the
reliability of information reported by the entity and the confidence of users in relying on the
reported accounting information for making economic decisions. Objective evidences (source
documents) include such things as invoices, vouchers, checks, contracts and physical counts of
resources.
Evidences supporting the financial affairs of an entity are not always conclusive. Keeping
accounting records and preparing reports may rely on judgments, estimates and other subjective
factors. In such cases, the records and reports should be based on the most objective evidence
available and be kept in such a way that an independent individual (e.g. an auditor) could verify
their accuracy or reliability. This means that the independent individual should be able to arrive
at the same information using the bases the information is recorded in the accounting records and
reported on the financial statements.
6. Historical Cost Principle - This principle states that goods and services purchased or sold
should be recorded in the accounting records and then reported on the financial statements at the
initial amount of cash or cash equivalent given up to acquire them or received in exchange for
selling them rather than on an estimated/appraised/assessed or market value. Such amount is
retained in the accounting records until such time that the goods and services are consumed, sold
or liquidated and removed. The justification for using the historical cost as a basis for recording
and reporting financial affairs is the fact that it is the most reliable figure usually supported by
objectively determinable evidences.
7. Unit of Measurement Assumption - According to this assumption, the national currency

(money) should be used as a unit of measure or common denominator for recording and

reporting the economic affairs of an economic entity operating in a given country. Besides, the
unit of measure is assumed to remain constant over time despite the fact that the purchasing
power of money changes over time.
According to this assumption, only those economic activities capable of being expressed in terms
of money should be recorded in the accounting records and ultimately reported on the financial
reports of an economic entity. However, many factors affecting economic activities and future
prospects of an economic entity cannot be expressed in monetary terms. For instance, such
factors as the capabilities, dedication and trust of employees including management,
environmental impact (costs and benefits) of the existence of the economic entity, and the
relative strengths and weaknesses of competitors cannot be expressed in monetary terms.
Although such matters are important to and highly affect the operations and performances of an
economic entity, at the present time, accountancy does not assume responsibility for recording
and reporting information of such kind. Besides, accountancy does not assume responsibility for
recording and reporting the effects of changes in purchasing power of money on previously
recorded values of goods and services.
2.1 Nature and Classification of Accounts

1. Definition - an account is the basic storage unit for accounting data. It is used to classify transactions
in terms of their effects on specific asset, liability, capital, revenue and expense items. Thus, a
separate account is kept to record and accumulate/store monetary effects of transactions on such
specific items that appear on the financial statements as Cash, Supplies, Accounts Payable, Bank
Loan Payable, Alemu-Capital, Fees Earned, Rent Income, Salary Expense and Supplies Expense.
2. Nature of an Account - The simplest form of an account is called “T” account. It is so named
because it looks like the capital letter "T" as shown in the figure below. In its most elementary form,
an account (i.e. T account)has three parts:
o the account title - used to write the name of the account such as Cash
o the left (debit) side - a place to record increases or decreases in the account in monetary terms
o the right (credit) side - a place to record increases or decreases in the account in monetary terms
Account Title
Left (Debit) Side Right (Credit) Side

If monetary increases in an account are recorded in the debit/credit side, then the decreases in the
same account are recorded in the credit/debit side.
Business organizations practically use the so-called two-column, three-column (see an example of
this account form on page-23) or four-column accounts for recording and storing business
transactions. The purpose of the first two columns is to separately record the increases and decreases
(debits and credits) in the account and that of the additional columns is to keep running (debit or
credit) balance of an account. For pictorial representation of and for more information on the two-
and four-column accounts,
3. Classification of Accounts - accounts may be classified into two major root categories: balance
sheet and income statement accounts.
i. Balance sheet accounts - refer to accounts that appear on the balance sheet. They include assets,
liabilities and owner's equity accounts. These accounts (except drawing and income summary
accounts) are also called permanent or real accounts. They are so named because their balances
will not be closed at the end of each accounting period rather are carried forward from period to
period so long as business activities continue.
a. Assets - include any tangible and intangible items that have monetary value to and owned by a
business. Assets are further divided into current and non-current.
o Current assets - include cash and other assets that are expected to be converted into cash,
sold or consumed within a very short period of time usually one year or less. Examples
include
 Cash - coins and paper money on hand or deposited at bank.
 Accounts Receivable - claims against customers (debtors) for goods and services sold on
credit. They are based on oral promise or good faith rather than supported by written
evidences.
 Notes Receivable - claims against customers supported by written evidences.
 Merchandise Inventory - finished goods held for resale.
 Prepaid Expenses (assets) - include consumable items such as supplies and advance
payments for such items as insurance (Prepaid Insurance) and rent (Prepaid Rent).

o Non-current assets - also called fixed/plant assets refer to assets with the potential to provide
benefit to the business for relatively long period of time, at least more than a year. They
include land, buildings, vehicles, machinery, equipment, patent, furniture, fixtures and long-
term receivables. All non-current assets held for use in operations, except land held for
purposes other than agriculture, lose their usefulness with the passage of time or as a result of
usage. Such decline in usefulness is called depreciation or amortization and is a business
expense identified as Depreciation or Amortization Expense.
b. Liabilities - refer to obligations of a business to pay cash, perform service or deliver goods to its
creditor. Liabilities are further divided into current and non-current.
o Current liabilities - refer to obligations that must be paid/settled within one year or less.
They include Accounts Payable, Notes Payable, Salary Payable, Income/Sales Tax Payable
and Rent Payable.
o Non-current liabilities - also called long-term liabilities refer to obligations that are expected
to be settled over an extended period of time usually more than a year. Examples include
Mortgage Notes Payable and Bonds Payable. A part of a long-term debt, which is due within
a year or less, is reclassified and reported as current liability.
c. Owner’s Equity - refers to residual claim of the owner against the assets of a business. For sole
proprietorship and partnership forms of businesses, owner’s equity accounts include:
o Capital - used to accumulate investments made by the owner/partner and profit earned by the
business but not withdrawn by the owner/partner. Capital account is identified by the name
of the owner/partner and the word capital. E.g. Alemu, Capital.
o Drawing - used to accumulate money or other assets taken out of the business by the
owner/partner for personal consumption. Drawing decreases capital of a business. Like
capital, drawing account is identified by the name of the owner/partner and the word
drawing. E.g. Alemu, Drawing.
o Income Summary - used to summarize effects of revenues and expenses on the capital of
business.
ii. Income statement accounts - refer to accounts that appear on the income statement. They
include revenue and expense accounts. These accounts are used to temporarily accumulate

effects of revenue and expense transactions on capital of a business. These accounts, together
with drawing and income summary accounts, are also called temporary or nominal accounts.
They are so named because their balances will be closed to zero by the end of an accounting
period thus will not be carried forward from period to period. By the end of the accounting
period, balances of such accounts are summarized and transferred to the capital account. Thus,
these accounts exist for only one accounting period.
a. Revenues - refer to gross increases in owner’s equity as a result of inflows of cash or any other
assets in exchange for inventories sold, services rendered, properties leased, money lend or any
other activity performed by the business to generate income. Revenues include:
o Sales - from sales of inventories
o Fees Earned - from performing services
o Rent/Royalty Income - from letting others use one’s own properties such as building and
machinery
o Interest Income - from lending money
b. Expenses - refer to expired cost of goods and services consumed in generating revenues or
carrying out the day-to-day affairs of a business. Expenses include:
o Cost of Goods Sold - expired cost of inventories sold to customers
o Salary/Wages Expense - cost of services received from employees
o Utilities Expenses - cost of utility services consumed, such as telephone, electricity and
water services.
o Depreciation Expense - expired cost of tangible non-current assets as a result of usage or
passage of time.
4. Rules of Debit and Credit - are conventions/principles (part of the GAAP) for recording increases
and decreases in an account. According to these principles
o Increases in an asset account are recorded on the debit side while decreases are recorded on the
credit side.
o Increases in a liability account are recorded on the credit side while decreases are recorded on
the debit side.
o Increases in an owner’s equity account are recorded on the credit side while decreases are
recorded on the debit side.

o For revenues represent increases in owner’s equity, increases in a revenue account are recorded
on the credit side while decreases, if any, are recorded on the debit side.
o For expenses and drawings represent decreases in owner’s equity, increases in expense and
drawing accounts are recorded in the debit side while decreases, if any, are recorded in the
credit side.
5. Normal balance of an Account - Account balance refers to the difference between total increase
and total decrease recorded in an account. Total increase recorded in an account is usually greater
than the total decrease recorded in the same account. Thus, the usual (normal) balance of an account
is positive. This implies that the normal balance of an asset, an expense or a drawing account is
debit while that of a liability, capital or revenue account is credit.
The following table summarizes the rules of debit and credit and the normal balances of accounts.
Normal
Account Type Increases Decreases
balance
Balance Sheet Accounts
Asset Debit Credit Debit
Liability Credit Debit Credit
Owner’s Equity
Capital Credit Debit Credit
Drawing Debit Credit Debit
Income Summary May have a credit/debit balance for income/loss
Income Statement Accounts
Revenue Credit Debit Credit
Expense Debit Credit Debit
6. Chart of Accounts - refers to the list of the titles and related identification numbers of all general
ledger (to be discussed in the next sections) accounts a business uses for recording its financial
affairs. Below is an example of chart of accounts for a certain business.
Account 221 Mortgage Notes Payable

Numbe Name 300 Owner’s Equity
r
301 Alemu, Capital
Balance Sheet Accounts
302 Alemu, Drawing
100 Asset
111 Cash 303 Income Summary
112 Accounts Receivable
121 Buildings Income Statement Accounts
400 Revenue
200 Liability 401 Fees Earned
211 Accounts Payable 402 Interest Income
500 Expense

501 Salary Expense 502 Utility Expense
Business Transactions - are economic activities of a business that bring monetary changes in its assets,
liabilities, capital, revenues and expenses and should be recorded in the accounting records of the
business. They include buying and selling goods and services and collecting and paying money.
Business transactions are raw materials or inputs to the accounting process.
Business transactions may be categorized as external and internal transactions.

 External transactions - refer to exchanges of goods and services between a business
organization and an outside party such as individuals and/or other organizations. E.g. buying
telephone services from ETC, selling goods to a customer, purchasing vehicle from Nyala
Motors, etc.
 Internal transactions - refer to consumptions of goods and services within a business entity,
which do not affect external party. E.g. use of previously purchased stationery materials, fuel,
office machine, etc
2.2 Journals
1. Definition - Journal, also called the book of original entry, refers to a business document where
effects of business transactions on specific elements of the financial statements are recorded in or
copied from source documents.
Transactions are recorded in the journal chronologically (i.e. in order of their occurrence) based on
the rules of debits and credits and the double-entry accounting system. Double-entry accounting
refers to the system of recording the dual, called debit and credit, effects of business transactions. As
a result, recording transactions initially in the journal helps, among other things, to
 Ensure that all effects of a business transaction are recorded
 Have in one place a complete information about a recorded transaction
 Easily identify recording errors, and
 Have an historical record of transactions.
1. Types - two types of journals: general and special.

o General journal - a two-column form used to record any kind of business transaction (see
sample on page-20).

o Special journal - a journal designed to record frequently occurring identical transactions.
An organization may use only general journal or both general and special journals depending up on
the volume and similarities of its business transactions.
2.3 Ledgers
1. Definition - Ledger refers to a kind of folder/ring binder used to arrange and put in one place all
accounts used by a business. Accounts are placed in the ledger in sequence and each account may
take one or more pages of the ledger.
2. Types - two types of ledgers: general and subsidiary.
o General ledger - a ledger that contains all accounts that appear on the balance sheet and income
statement of a business. General ledger accounts are called controlling accounts because they
show the total balance of a certain element of the financial statements such as Accounts
Receivable and Accounts Payable regardless of the amount of money expected to be collected
from each credit customer and the amount of money payable to each creditor, respectively.
Controlling accounts are assigned with and identified by their respective account numbers.
According they are placed in the general ledger according to their numerical orders.
o Subsidiary ledger - a ledger that contains accounts showing details of controlling accounts. For
example, Accounts Receivable Ledger, also called customers’ ledger, contains accounts of
individual credit customers showing the amount of money due from each credit customer.
Subsidiary ledger accounts are identified by the name of the credit customer or creditor and are
accordingly arranged alphabetically.
Note that a business may set up both general and subsidiary ledgers not only for Accounts Receivable
and Accounts Payable but also for any account for which the business wants to have detailed
information about.
2.4 Accounting Cycle

1. Definition - Accounting cycle refers to the procedures (steps) for gathering business transactions,
processing and converting them into useful accounting information that will be communicated to
users to serve as a basis for investment, credit and similar economic decisions.
2. Procedures/Steps in the Accounting Cycle - The accounting cycle consists of the following
specific procedures:
 Analyzing business documents and transactions

 Journalizing business transactions
 Posting journal entries to accounts
 Preparing unadjusted trial balance
 Journalizing and posting adjusting entries
 Preparing adjusted trial balance
 Preparing financial statements
 Journalizing and posting closing entries
 Preparing post-closing trial balance
 Journalizing and posting reversing entries (optional)
Unadjusted
Source Analyzing Journalizing Posting trial balance
3.
Adjusting
entries
Adjusted
Post closing Closing Financial trial balance
trial balance entries statements
2.5 Journalizing
2. Definition - Journalizing refers to the process of recording business transactions in journals.
3. Steps - The following steps may be carried out to journalize business transactions:
 Collect source documents - Source documents show that a transaction has really occurred and
give complete information about the transaction such as date of the transaction, parties and
amount of money involved, terms of payment, etc.
 Analyze transactions - This involves determining specific accounts affected (cash, fees earned,
etc) by the transaction, classification of the accounts affected (asset, liability, etc), direction of
the effect (increase or decrease), monetary amount of the effect ($400, $100, etc) and how to
record the increase and decrease (debit or credit).
Journalize - Record the dual effects of transactions in chronological order using the rules of debits and
credits. Below are sample general journal and additional steps needed to journalize business
transactions.

Training, Teaching and Learning Materials
General Journal ii Page -8-

Date Description PR Debit Credit
Year Date Name of Account to be Debited Monetary Dr
Month Name of Account to be Credited Monetary Cr
Brief explanation about the transaction
i
iii
iv v vi
Note the following when journalizing transactions.

i. Write the year, month and date of the transaction in the date column. The year and
month need not be repeated for subsequent entries until a new page or a new
month/year begins while the date may be repeated in as much as the number of
independent entries to be recorded.
ii. Write the name of the account to be debited on the first line customarily placed at
the extreme left of the description column. Enter the corresponding debit amount
on the same line in the extreme left of the debit column. An entry which includes
more than one debit or more than one credit is called a compound journal entry.
Regardless of how many debits or credits are contained in a compound journal
entry, all the debits are entered before any credit.
iii. Write the name of the account to be credited on the line below the debit entry
somehow indented i.e. placed about 1 inch in to the right side of the description
column. Enter the corresponding credit amount on the same line in the extreme left
of the credit column.
iv. Write a brief explanation of the transaction on the line immediately below the last
account credited. This explanation includes any data needed to identify the
transaction, such as the name of the customer or supplier. The explanation needs not
to be indented.
v. Leave a blank line below each entry. This spacing causes each journal entry to stand
out clearly as a separate unit and makes the journal easier to read.
vi. Leave the PR (which stands for posting reference) column blank at the time of
making the journal entry. When the debits and credits are later transferred to
accounts in the ledger, the identification numbers of the accounts which the entries
are posted to will be listed in this column to provide a cross reference with the
ledger.
Whether a transaction results in single or compound entry, equal dollar amounts of

debits and credits should be recorded.
2.6 Posting
1. Definition - Posting refers to the process transferring monetary amounts of debit and credit
entries from the general journal to the accounts in the ledger which are affected by the debit
and credit entries. Posting is necessary to classify and group similar business transactions in
terms of their effects on specific asset, liability, capital, revenue and expense items.
2.7 . Trial Balance

1. Definition - Trial balance refers to list of all general ledger accounts and their respective
balances.
2. Types - Three types:
o Unadjusted Trial Balance - prepared before account balances are adjusted
o Adjusted Trial Balance - prepared after account balances are adjusted
o Post-closing Trial Balance - prepared after temporary accounts are closed.
3. Purpose - Regardless of its type, trial balance is prepared in order to check whether total
dollar amounts of debits and credits recorded in the general ledger accounts are equal. If the
total debit and total credit are equal, the ledger is said to be in balance. The agreement of the
debit and credit totals of the trial balance gives assurance that:
 Equal debits and credits have been recorded for each internal and external
transaction.
 The debit or credit balance of each account has been correctly calculated.
 The determination of total debit and credit balances of the trial balance has been
correctly performed.
Illustration: - on the debits and credits of the accounts. (Analyzing and summarizing
transaction)
Every business transaction affects a business’s financial statements (the accounting equation)
and at least two accounts. In chapter one, the effect of each transaction was stated in terms of the
increases (+) and decreases (-). In this chapter, you are introduced what debits and credits are.
Hence, the effects of a business transaction on the accounts will be stated in terms of debits and
credits using examples.
To illustrate the accounting procedures / steps consider the following example
Roble and Rahel, the two outstanding New Millennium College students and the first batch
graduates of the accounting department had operated a super snak in Rahel’s parents’ home on
their extra time. As of January 2002, after graduation, they decided to open a new metal and
wood work shop and moved to rented campus and to devote full time to the business, which is to
be known as “2 R lovers shaping” service. Assume a fiscal /accounting year of January to
December and entered the following transitions during January
January 1 the following assets were received (transferred) from the super snak to the shop
Cash --------------------------------------------Br. 7500
Accounts receivable -------------------------------900
Supplies ---------------------------------------------1,250
Service equipment---------------------------------11,000
There were no liabilities received.

The beginning capital of 2 R lovers shop service is Br. 20,650 (7,500 + 900+ 1,250 + 11,000-0)
which is computed using the accounting equation A = L +C
C = Asset – Liability
The transactions occurred during the month were summarized as follows:
January
1. Paid three-month’s rent in advance Br. 2250 Prepaid rent.
2. Paid the premiums on property and casualty insurance policies, Br. 1,740 prepaid
insurance.
4. Purchased additional service equipment on a accounts from Omedad Br. 2,500
6. Received cash from customers on account Br. 500
9. Paid cash for a news paper advertisement, Br. 110
11. Paid Omedad for the part of liability incurred on January 4, Br. 1, 250
12. Record service revenue on account? Br. 1000
1. Paid laborers for two weeks salary Br. 500
17. Recorded cash from cash customers for service revenue earned during the first half of
January Br. 1, 100
17. Purchased supplies for cash Br. 950
20. Recorded service revenue on account for the period January 13- 20, Br. 700
24. Recorded cash from customers for service revenue earned for the period January 17-
24 Br. 1, 850
27. Received cash from customers on account, Br. 1,200
27. Paid laborers for two weeks salary Br. 500

30. Paid telephone bill for January Br. 75
30. Paid electricity bill for January Br. 140
30. Recorded cash from cash customers for services revenues earned for the period
January 25- 30, Br. 950
30. Recorded sales on account for the remainder of January, Br. 800
30. Rahel and Robel withdrew Br. 1,500 for their personal use
Instructions:
1. Open a ledger of four- column for accounts of “2R – lovers shopping service” using the
following titles and account numbers;
Cash, 11; accounts receivable, 12; supplies 14; prepaid rent15; prepaid insurance, 16; service
equipment, 18; accumulated depreciation, 19; accounts payable, 21; salaries payable, 22; 2R-
lovers, capital, 31; 2R lovers Drawing, 32; income summary, 33, service revenue. 41; salary
expense, 51; Rent expense, 52; supplies expense, 53; depreciation expense, 54’ insurance
expense, 55; miscellaneous expense, 59.
2. Record the transactions in a two-column journal
3. Post the journal to the ledger, extending the month-end balances to the appropriate
balance columns after all posting is completed
4. Prepare a trial balance as of January 31, on a ten-column work sheet, listing all the
accounts in the order given in the ledger. Complete the worksheet, using the following
adjustment data:
a. Insurance expired during January ---------------Br. 145
b. Inventory of supplies on January31-------------1520
c. Depreciation of service equipment for January 100
d. Accrued salary on January 31 ------------------ 100
e. Rent expired during September ------------------- 750
5. Prepares an income statement, a statement of owners’ equity, balance sheet to the
organization
6. Journalize and post the adjusting entries
7. Journalize and post the closing entries
8. Prepare a post closing trial balance
Solution: Dear learner! The answers for the problem are presented step-by-step by explaining
the accounting procedures involved in the accounting cycle. Therefore, the steps, the answers
depending on the steps are illustrated as follows
After these steps using the forms (General Journal and a ledger) let’s return back to the
transactions and record and post them. To do that first let us open the ledgers given and use a
general journal.
Journal page 1
Post
Date Description Ref Debit Credit
2002
Jan 1 Prepaid rent 15 Br.2250 00
Cash 11 2250 00
2 Prepaid insurance 16 1740 00
Cash 11 1740 00
4 Service equipment 18 2500 00
Accounts payable 21 2500 00
6 Cash 11 500 00
Accounts receivable 12 500 00
9 Miscellaneous expe. 59 110 00
Cash 11 110 00
11 Accounts payable 21 1250 00
Cash 11 1250 00
12 Accounts receivable 12 1000 00 1000 00

Service revenue 41
00
13 Salary expense 51 500
Cash 11 500 00
00
17 Cash 11 1100 00
Service revenue 41 00 1100
17 Supplies 14 950 00
Cash 11 00 950
20 Accounts receivable 12 700 00
24 Cash 11 1850 00
Service revenue 41 1850
Post
Date Description Ref Debit Credit
2002
Jan 27 Cash 11 1200 00
Accounts receivable 12 1200 00
27 Salary expense 51 500 00
Cash 11 500 00
30 Miscellaneous expense 59 75 00
Cash 11 75 00
30 Miscellaneous expense 59 140 00
Cash 11 140 00
30 Cash 11 950 00
30 Account receivable 12 800 00
30 2R- Drawing 32 1500 00
Cash 11 1500 00
31 Adjusting entries
Insurance expense 55 145 00
Prepaid insurance 16 145 00
Supplies expense 53 680 00
Supplies 14 680 00
Depreciation ex. Stor.eq. 54 100 00
Accumulated dep.exp. 19 100 00
Salary expense 51 100 00
Salary payable 22 100 00
Rent expense 750 00
Prepaid rent 15 750 00
(The above Journal shows an answer to question # 2 which is journalizing transaction in a

Journal)
This is a general journal of 2R- shopping service consisting all the transaction occurred and
recorded during the month of January
The debit and credit section shows the amount debited and credited and the post reference
represents where the amount is posted to (the account number)
These accounts which are described in the following few pages are answers to question # 1 and
3 opening an account and posting. All are completed accounts at the end of the month after the
adjusting and the closing entries are posted.
Cash account no. 11

Post ref Balance
Date Item Debit Credit Debit Credit
2002 Balance 7500 00
Jan 1 1 2250 00 5270 00
2 1 1740 00 3510 00
6 1 500 00 4010 00
9 1 110 00 3900 00
11 1 1250 00 2650 00
13 1 500 00 2150 00
17 1 1100 00 3250 00
17 1 950 00 2300 00
24 1 1850 00 4150 00
27 1 1200 00 5350 00
27 2 500 00 4850 00
27 2 75 00 4775 00
30 2 140 00 4635 00
30 2 950 00 5585 00
30 1500 00 4085 00
Ending Balance 4085 00
Account receivable 12
Balance
Date Item Post ref Debit Credit Dr. Cr.

2002 Balance 900
Jan 1 500 400
6 1 1000 1400
12 1 700 2100
20 2 1200 9000
27 2 800 1700
30
Ending balance 1700
Supplies 14
Balance

Before
2002 Balance 1250 adjustm
Jan 17 1 950 2200 ent
31 Adjusting entry 2 680 1520 balance
1520
After adjustment
Prepaid Rent 15
Balance
Date Item Post ref Debit Credit Dr. Cr. Before

2002 2250 adjustm
Jan 1 1 2250 750 1500 ent
31 Adjusting entry 2 balance
1500
After adjustment
Prepaid insurance 16
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
ent
2002
balance
Jan 2 1 1740 1740
31 Adjusting entry 145 1595
1595
After adjustment
Service equipment 18
Balance

2002 Balance 11,000
Jan 4 Purchase of equip. 1 2500 13,500
145
Ending balance 13500
Accumulated depreciation service equipment 19

Balance

2002
Jan Adjusting entry 2 100 100
Accounts payable 21
Balance

2002
Jan 4 1 2500 2500
11 1250 1250
1250
Salary Payable 22
Balance

2002
Jan 31 Adjusting entry 2 100 100
100
2R - Capital 31
Balance
Date Item Post Debit Credit Dr. Cr.

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

2002
Jan 33 2 1500 1500
31 Closing entry 3 1500 -
Income summary 33
Balance

2002
Jan 31 Closing expense 3 3200 3200
31 Closing revenue 3 6400 3200
31 Closing net income 3 3200
(Income summary)
Service revenue 41
Balance

2002 12 1 1000 1000
Jan 17 1 1100 2100
20 1 700 2800
24 1 1850 4650
30 2 950 5600
30 2 800 6400
31 Closing entry 3 6400
Salary Expense 51
Balance

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

2002
31 Closing entry 3 750 _
Supplies expense 53
Balance

2002
Depreciation expense- service equipment 54

Balance

2002
31 Closing entry 3 100
Insurance expense 55
Balance

2002
Miscellaneous expense 59
Balance

2002
Jan 6 1 110 110
30 2 75 185
30 2 140 325
Procedure/ step 5: preparation of a trial balance

The equality of debits and credits in a ledger must be proved at the end of each accounting
period. This is made by preparing a trial balance. Trial balance is a list of tittles and related
balances of the accounts in the ledger.
After posting all the entries, including adjusting and closing, the end balances and tittles of 2R-
shopping service using the trial balance is shown as below.
2R –shopping service
Trial balance
On January 31, 2002
Title Debit Credit
Cash 4085 00
Accounts receivable 1700 00
Supplies 2200 00
Prepaid rent 2250 00
Prepaid insurance 1740 00
Service equipment 13500 00
Accounts payable 1250 00
2R- lovers capital 20650 00
2R- drawing 1500 00
Service revenue 6400 00
Salary expense 1000 00
Miscellaneous expense 325 00
Total 28,300 00 28,300 00
(The above trial balance which is computed and completed is answer to question # 4)
The trial balance does not provide the complete proof of accuracy of the ledger. It indicates only
that debits and credits are equal.
If the two totals of the trial balance are not equal it is probably due to the following errors.
 Errors in preparing the trial balance was incorrectly added: it may be due to one of the
following activates
 One of the columns of the trial balance may be incorrectly determined
 Omitting balance of an account
 Incorrect listing of an account
 Error in computing account balance such as:

 Omitting to add/deduct a given figure
 Entering account balance to wrong column
 Error in posting such as
 Posting wrong debit or credit
 Posting debit as credit or vice versa
 Omitting debit /credit entry
 Error in Journalizing such as

 Journalize wrong debit /credit figure
 Journalizing a debit as a credit or vice versa
 Omitting debit/credit entry
The following errors cannot be detected by the trial balance
 Failure to record or post a transaction
 Journalizing or posting erroneous but equal amounts of debit and credit
 Recording the same transaction more than one
 Posting a part of a transaction correctly as a debit or credit but to the wrong accounts
Note: two other common types of errors are known as transpositions and slides. Transportation
is the erroneous rearrangement of digits, such as writing Br. 625 as Br. 265 or Br. 652. In a slid
error type the entire number is erroneously moved one or more spaces to the right or the left,
such as writing Br. 625 as Br. 62.50 or 6.25
Procedure / step 6: adjusting process

Before directly involving in to the adjusting procedure and the adjusting entries it is important to
introduce some basic concepts such as the following:
i. Accounting period concept: according to this concept reports should be prepared at

periodic intervals such as monthly, quarterly or yearly called accounting periods. The
annual accounting period adopted by a business enterprise is called fiscal/ accounting
year. Financial statements prepared for less than one-year period are called interim
financial statements
ii. Accrual concept: there are two revenue and expense recording methods
 Cash basis: under this method revenues are recorded and reported in which cash is
collected; and expenses are recorded and reported in the period in which cash is paid
 Accrual basis: under this method of accounting revenues are recorded and reported in
the period in which they are earned (goods are sold or services are performed regardless
of collection of cash). Expenses are recorded and reported in the period in which they are
incurred (assets are consumed or expired; services are received regardless of payment of
cash).
Activity one: an enterprise has provided services to a customer in March and the customer paid
for the service in April. When should the revenue be recorded and reported using cash basis? Or
Accrual basis?
iii. Matching principle: this principle states that in determining net income / net loss for a given
period, all expenses incurred in that period should be deducted from the revenues earned in that
period, i.e. the income statement should match the revenues earned and the expenses incurred in
a certain period to determine net income/ net loss of that period.
At the end of an accounting period, many of the balances of accounts in the ledger can be
reported, with out change, in the financial statements. Some accounts in the ledger, however,
require updating. The process of updating the balances of accounts by recording unrecorded
transactions at the end of the accounting period is called an adjusting process; and the journal
entries needed are called adjusting entries. By their nature, all adjusting entries affect at least
one income statement and one balance sheet account. Thus, an adjusting entry will always
involve revenue or an expense account and an asset or a liability account.
Some items that require adjusting entries include the following :

 Prepaid expenses (deferred expenses):- initially recorded as assets but are expected to
become expenses over time in the business. Examples include prepaid rent, prepaid
insurance, supplies etc
 Accruals: are created by failure to record an expense that has been incurred or revenue
that has been earned. Examples include unrecorded wage (accrued expense/ accrued
liabilities) and unrecorded fees earned (accrued revenue often called accrued assets)
Plant assets: the expired cost of plant assets due to usage and passage of time is called
depreciation.
‘Accumulated depreciation’ is a contra plant asset account whose balance must be deducted from
the original cost of a plant asset.
 Unearned revenues: are liabilities created by receiving cash in advance for provision of
goods or services
Note: deferrals are cash received or paid in the current period but revenues or expanse recorded
in the future period
-Accruals are revenues or expenses recorded in the current period but cash received or paid is the
future period.
- Journalizing and posting adjusting entries is used to bring the balance of accounts in the general
ledger in to agreement with the balances shown on the financial statements, i.e. to update
balances. The entries should be recorded on the Journal and posted to the respective ledgers.
For the example given above, 2R- shopping service the adjustment data is given. From the
adjustment data adjusting entries are recorded on the journal at the end of the month (January 31)
and posted to the respected ledgers on that time. Let’s see the effect, of the adjusting entries
using a worksheet
Adjustment data:
b) Supplies used Br. 650 (2200-1520)
a) Insurance expired Br. 145
e) Rent expired Br. 750
d) Salary accrued but not paid Br. 100
c) Depreciation of service equipment Br. 100
Explanation for the adjustment column:

Cross-referencing the debit and credit of each adjustment by letters is useful in reviewing the
worksheet.
If the tittles of some of the accounts to be adjusted do not appear in the trial balance, they should
be inserted in the account title column, below the trial balance totals, as needed. On the
adjustment column let’s see the adjustment given by letter
a) Prepaid insurance: The prepaid insurance as of January the beginning of the month has a
balance of Br. 1,740, which represents advance payment for the year. For the month of January
out of the total balance Br. 145 was expired. Therefore as January 31 of the total balance 145
was expensed but the remaining 1595 (1740-145) is entered by writing (a) insurance expenses in
the account title column and (a) in the adjustments debit column
b) Supplies: The supplies account including the purchase has a balance of Br. 2200. But after
physical inventory or count the supplies on hand was found Br. 1520, therefore, Br. 680 (2200-
1520) i.e. the expired or consumed amount which is supplies expense. The adjustment is entered
by writing (b) Br. 680 in the adjustments debit column on the same line as supplies expense ad
(b) Br. 680 in the line as supplies
c) Depreciation expense: Depreciation for the equipment for the month is Br. 100. The
adjustment is entered by writing(c) depreciation expense in the account title column Br. 100
adjustment debit column the same line as depreciation expense but accumulated depreciation in
the account title column Br. 100 in the adjustment credit column on the same line as accumulated
depreciation
d) Accrued salary: The amount Br. 100 for January is an increase in expense and increase in
liabilities. The adjustment is entered by writing (d) Br. 100 in the adjustments debit column on
the same line as salary expenses (d) salary payable in the account title column, and (d) Br. 100 in
the adjustment credit column on the same line as salary payable.
e) Prepaid rent: Of the total amount paid in advance for three months Br. 750 (2250/3) is
expired, rent expense. The adjustment is entered as rent expense Br. 750 in the same line in the
debit side of the adjustment column and (e) Br. 750 in the credit side of the adjustment column
the same line as the prepaid rent line moth adjustment column
The adjustment columns are totaled to verify the mathematical accuracy of the adjustment data.
The total of the debit column must equal the total of the credit column
Note: The adjusted trial balance amounts are determined by extending the trial balance amounts
plus or minus the adjustments. For example, supplies account debit balance Br. 1520 on the
adjusted trial balance is the trial balance amount of Br. 2200 minus the Br.680 of the adjustment
credit. Accordingly, the worksheet is completed as shown in the worksheet. (Procedure 7 is
completed)
Procedures /step 7: financial statements preparation. The financial statements are directly
derived from the work sheet. The statements are, therefore, prepared as follows
2R- shopping service

Income statement
For the month ended January 31, 2002
Service revenue ------------------------------------------------Br. 6400
Less: Expenses
Salary expenses....................Br. 1100
Insurance expense..................... 145
Supplies expense ...................... 680
Rent expense .............................750
Depreciation expense ...............100
Miscellanies expense ................325
Total expenses......................................... (3200)
Net income .......................................Br.3200
2R shopping service
Statement of owner’s equity
For month ended January 31, 2002
2R- capital, January 2002 ..................................................................Br. 20650
Add. Net income for the month........................................................... 3200
Increase in capital..................................................................... 23,850
Less with drawl ...................................................................... (1500)
2R –capital, January 31,2002............................................ 22,350


Balance sheet
On January 31, 2002
Assets:
Current assets:
Cash .....................Br.4085
A/R ...........................1700
Supplies..................... 1520
Prepaid rent................ 1500
Prepaid insurance....... 1595
Total current assets Br. 10400
Plane assets:
Service equipment ......13,500
Less: accumulate depreciation ( 200)..............13300
Total assets ....................................... 23,700
Liabilities and capital:
Account payable ...............................1250
Salary payable ...................................100
Total liability.....................................1350
2R- capital ...................................... 22,350
Total liab& capital ..................................... 23,700
Procedure /step 8: closing entries
Revenues, expenses and drawing /dividend account are temporary accounts used to accumulated
effects of some transaction on owner’s equity account for a specific period. At the end of the
accounting period the balances of revenue and expense accounts are summarized in one another
temporary account called the income summary. The balance in the income summary is
transferred/closed to the capital (owner’s equity) account. The balance on the drawing /divided
account is directly closed to the capital (retained earnings account).
The process of transferring balances of temporary accounts to the capital account is called
closing entry; and these entries should be posted to the respective ledgers after journalization.
This closing of accounts is used to transfer net income or net loss and drawing /dividend to
capital/retained earning, account. Moreover; it is used to reduce the balance of temporary
accounts to zero so that they will be ready for the next accounting period.
For our example, 2R-shopping service, the closing entries are journalized on the journal and
posted to the respective ledgers. See them on the journal and on their respective ledgers.
Procedure / step 9: post closing trial balance: It is a trial balance prepared after all adjusting
and closing entries are posted. It is prepared to check the equality of the total debit and the total
credit of the balance of the real accounts. It is the last step on the accounting cycle/ process the
post-closing trial balance for the 2R-shopping service is prepared and presented as follows.

Post closing trial balance
On January 31, 2002
Account title Debit Credit

Cash ..................................... Br.4085
Accounts receivable............. 1700
Supplies ........................ 1520
Prepaid rent ....................... 1500
Prepaid insurance ............. 1595
Service equipment ........... 13500
Accumulated dep. Service ………………. 200
……………….. 1250
Accounts payable ..............
Salary payable................. ………………. 100
2R- capital .................... ……………….. 22,350
Total 23,800 23,800
Activity-
1. If the supplies account, before adjustment on May 31, indicated a balance of Br. 2,250 and
an inventory of supplies on hand at May 31, totaled Br. 950, the adjusting entry would be:
A. debit supplies, Br. 950; credit supplies Expense, Br. 950.
B. debit supplies, Br. 1,300; credit supplies Expense, Br. 1,300.
C. debit supplies, Expense, Br. 950; credit supplies, Br. 950.

D. debit supplies, Expense, Br. 1,300; credit supplies, Br. 1,300.
2. If the estimated amount of depreciation on equipment for a period is Br. 2,000 the adjusting
entry to record depreciation would be:
A. debit depreciation Expense, Br. 2,000; credit Equipment, Br. 2,000
B. debit Equipment, Br. 2,000; credit depreciation Expense, Br. 2,000
C. debit depreciation Expense, Br. 2,000; credit Accumulated Depreciation, Br. 2,000
D. debit Accumulated Depreciation, Br. 2,000; credit depreciation Expense, Br. 2,000
3. If the equipment account has a balance of Br. 22,500 and its accumulated depreciation
account has a balance of Br. 14,000, the book value of the equipment is:
A. Br. 36, 500 C. Br. 14, 000
B. Br. 22,500 D. Br. 8,500
4. Which of the following accounts would be closed to the income summary account at the end
of a period?
A. sales C. both sales and salary expense
B. salary Expense D. Neither sales nor salary expense
5. The post closing trial balance would include which of the following accounts?
A. cash C. salary expense
B. sales D. all of the above
Self Test-2
1. Why are adjusting entries needed at the end of the accounting period? Why are closing entries
needs?
2. How are revenues & expenses reported on the income statement under?
a) Cash basis accounting?
b) Accrual basis accounting?
3. Define deferrals & accruals
4. What is the nature of the balance in the prepaid insurance account at the end of the accounting
period?
a) Before adjustment?
b) After adjustment?
5. If the worksheet a substitute for the financial statements? Discuss.
6. In accounting for depreciation on equipment, what is the name of the account that would be
referred to as a contra asset account?
7. Which of the following accounts in the ledger of a corporation will ordinarily appear in the
post closing trial balance?
a) Accounts Receivable g) equipment
b) Accumulated depreciation h) Retained earnings
c) Cash i) Dividends
d) Supplies j) Capital stock
e) Depreciation expense k) wages expense
f) Wages payable l) Sales
8. A business enterprise pays weekly salaries of Br.12, 000 on Friday for a five-day week ending
on that day, Journalize the necessary adjusting entry at the end of the fiscal period, assuming
that the fiscal period ends. (a) On Monday (b) On Wednesday
9. The balance in the supplies account, before adjustment at the end of the year, is Br.2, 750. The
inventory of supplies at the end of the year was determined to be Br.600. The estimated
depreciation on equipment used during the year is Br.1, 600. Journalize the adjusting entries
required at the end of the year to recognize a) supplies used during the year and b)
depreciation expense for the year.
10. The trial balance of west side Laundromat at July 31, 1991, the end of the fiscal year, and the
data needed to determine year-end adjustments are as follows.
Westside Laundromat
Trial balance
July 31, 1991
Account Title Debit Credit
Cash Br. 7,790

Laundry supplies 4,750
Prepaid insurance 2,825
Laundry equipment 85,600
Accumulated depreciation Br. 55,700
Accounts payable 4,950
Ana Perez, capital 30,900
Ana Perez, Drawing 18,000
Laundry Revenue 76,900
Wages expense 24,500
Rent expense 15,575
Utilities expense 8,500
Miscellaneous expense 910
Total Br. 168,450 Br. 168,450
Adjustment data:
(a) Inventory of Laundry supplies at July 31 ............................................. Br. 1,840
(b) Insurance premiums expired during the year ....................................... 1,500
(c) Depreciation on equipment during the year .......................................... 5,720
(d) Wages accrued but not paid at July 31 .................................................. 850
Instructions:
1. Record the trial balance on a ten-column worksheet and complete the worksheet.
2. Prepare an income statement, a statement of owner’s equity and a balance sheet. (No
additional investments were made during the year).
3. On the basis of the adjustment data in the worksheet, journalize the adjusting & closing
entries.
11. J. F. M. D. Outz has been practicing as a cardio list for three years. During April Outz
completed the following transactions in her practice of cardiology.
April 1. Paid office rent for April, Br.800
3. Purchase equipment on account, Br.2,100
5. Received cash on account from patients, Br.3,150
8. Purchase X-ray film and other supplies on account, Br.245
9. One of the item of equipment purchase on April 3 was defective. If was returned with
the permission of the supplier, who agreed to reduce the account for the amount
charged for the item, Br.325.
12. Paid cash to creditors on account, Br.1,250.
17. Paid cash for renewal of a six-month property Insurance policy, Br.370.
20. Discovered that the balances of the cash account and of the accounts payable account
as of April were overstated by Br.200. A payment of that amount of creditor in
March had not been recorded. Journalize the Br.200 payment as of April 20.
24. Paid cash for laboratory analysis, Br.545
27. Paid cash for business bank account for personal and family expense. Br.1,250..
30. Recorded the cash received in payment of service (on a cash basis) to patients during
April, Br.1,720.
30. Paid salaries of receptionist and nurses, Br.1,725.
30. Paid various utility expenses, Br.260.
30. Recorded fees charge to patients on account for service performed in April,
Br.5,145.
30. Paid miscellaneous expenses, Br.132.
Outz’s account title, members and business as of April 1 (all normal balances) are listed as
follows:
Cash, 11, Br.4,123; Accounts Receivable, 12, Br.6,725; Supplies, 13, Br.290; Prepaid Insurance,
14, Br.465; Equipment, 18, Br.19,745; Accounts payable, 22, Br.765; J.F. outz, Capital, 31,
Br.30,583, J.F. Outz, Drawing, 32, Professional Fees, 41, Salary expense, 51, Rent Expense, 53,
Laboratory expense, 55, Utility expense, 56, Miscellaneous Expense,, 59.
Instructions
5. Open a ledger of standard four-column accounts for Dr. Outz as of April 1 of the current year.
Enter the balances in the appropriate balance columns and place a check mark () in the
posting reference column. (it is advisable to verify the equality of the debit and credit
balances in the ledger before proceeding with the next instruction).
6. Journalize each transaction in a two-column journal.
7. Post the journal to the ledger, extending the month-end balance to the appropriate balances
columns after each posting.
8. Prepare a trial balance as of April 30.

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ACCOUNTS AND BUDGET SUPPORT LEVEL III

LG Code: BUF ACB3 01 0812

Compiled by: Nigussie B.

Welcome to the module “Processing Financial Transactions and Extract Interim

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

How to Use this TTLM

Compiled by: Nigussie B.

Compiled by: Nigussie B.

Compiled by: Nigussie B.

1.1 Generally Accepted Accounting Principles

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3. Going Concern/Continuity Assumption - This assumption states that, in the absence of

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7. Unit of Measurement Assumption - According to this assumption, the national currency

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2.1 Nature and Classification of Accounts

Left (Debit) Side Right (Credit) Side

Compiled by: Nigussie B.

Compiled by: Nigussie B.

Compiled by: Nigussie B.

Compiled by: Nigussie B.

Account 221 Mortgage Notes Payable

Compiled by: Nigussie B.

Business transactions may be categorized as external and internal transactions.

1. Types - two types of journals: general and special.

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2.4 Accounting Cycle

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Compiled by: Nigussie B.

General Journal ii Page -8-

Note the following when journalizing transactions.

Whether a transaction results in single or compound entry, equal dollar amounts of

2.7 . Trial Balance

To illustrate the accounting procedures / steps consider the following example

There were no liabilities received.

27. Paid laborers for two weeks salary Br. 500

12 Accounts receivable 12 1000 00 1000 00

(The above Journal shows an answer to question # 2 which is journalizing transaction in a

Cash account no. 11

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr. Before

Date Item Post ref Debit Credit Dr. Cr.

Ending balance 13500

Accumulated depreciation service equipment 19

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Depreciation expense- service equipment 54

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Procedure/ step 5: preparation of a trial balance

 Error in computing account balance such as:

 Error in Journalizing such as