Introduction To Accounting (Etagenehu)

UNIT 1.
ACCOUNTING CAREERS AND CONCEPTS
Contents
1.0 Aims & Objectives
1.1 Introduction
1.2 Accounting Defined
1.3 Job Opportunities in Accounting
1.4 Differences Between Accounting and Bookkeeping
1.5 Forms of Business Organizations
1.5.1 Sole-Proprietorship
1.5.2 Partnership
1.5.3 Corporation
1.6 Types of Business Activities Performed by Business Organizations
1.7 Users of Accounting Information
1.8 Accounting Concepts
1.9 Summary
1.10 Glossary
1.11 Answer to Check Your Progress Questions
1.12 Model Exam Questions
1.0 AIMS & OBJECTIVES
After studying this unit you should be able to:

a) identify and describe the functions performed by accountants.
b) identify the career opportunities in accounting
c) identify and describe the three basic forms of business organizations.
d) identify and describe the users of accounting information.
e) identify application of accounting concepts
1.1 INTRODUCTION
Throughout their lives, people make many important decisions to make living. The study of
accounting is the most useful knowledge in making both business and financial decisions.
Accounting information is used by every profit seeking business organization that has
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economic resources such as money, machinery, equipment and buildings. While accounting
has been called language of business, it also serves as the language that provides financial
information about not – for – profit organizations such as governments, churches, charities,
fraternities and hospitals. This text concentrates on the use of accounting as it relates to the
business firm.
1.2 ACCOUNTING DEFINED
Managers and owners of business organizations need good financial information to make
good business decision. Orderly records of a business financial activities are called
accounting records.
records. Accounting is the process of identifying, measuring and communicating
financial and economic information to permit informed judgments and decisions by the users
of the information.
Specifically, the accounting process (also called accounting cycle) consists of the following
group of functions.
1. Accountants observe many events and identify and measure in financial terms those
events considered evidence of economic activity.
2. The economic events are recorded, classified in to meaningful groups, and
summarized for conciseness.
3. Accountants report on a business activity by preparing financial statements and special
reports. Often accountants are asked to interpret these statements and reports for
various groups such as management and creditors.
1.3 JOB OPPORTUNITIES IN ACCOUNTING.
Accounting is an old profession. Records of business transactions have been prepared for
centuries. However, only during the last half-century has accounting been accepted as a
profession with the same importance as medical and legal professions. Today several millions
are employed in accounting and accounting related fields all over the world. Typically,
accounting jobs can be grouped in to four major categories.
a) Accountants: Persons who plan, summarize, analyze, and interpret financial

information. They also prepare various accounting reports and assist owners and
managers in making financial decisions. Accountants also supervise the work of other
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accounting workers, which includes checking the accuracy of recorded financial
information.
b) Bookkeepers:
Bookkeepers: Persons who do general accounting works plus some summarizing and
analyzing work. In some businesses, bookkeepers may supervise accounting clerks. In
small to medium size businesses, bookkeepers may also help owners and managers
interpret accounting information. Bookkeepers in small firms may do additional
general office work. Many businesses require that bookkeepers have filling and typing
skills. These two office skills are needed for storing accounting records and preparing
accounting reports.
c) Accounting clerks:
clerks: Persons who record, sort and file accounting information. Some
businesses have large quantity of day-to-day accounting tasks to be done. These
businesses will not want their highly trained accountants and bookkeepers doing the
routine work. Instead, accounting clerks are assigned to do these day-to-day routine
accounting tasks. Accounting clerks job titles often show the accounting records on
which they work. For example, a clerk working inventory records is sometimes known
as inventory clerk.
d) General office clerks:

clerks: General office clerks generally do some works related to
accounting. For example, a secretary may be in charge of a small cash fund. A typist
may file accounting reports.
1.4 DIFFERENCE BETWEEN ACCOUNTING AND BOOKKEEPING
Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that

records a routine economic activity of a business. Accounting includes bookkeeping but goes
well beyond it in scope. Accountants analyze and interpret financial statements, conduct audit,
design accounting systems, prepare special business and financial studies, prepare forecasts
and budgets and provides tax services. However, bookkeeping, mostly deals with routine
accounting works like general accounting works, summarizing, sorting and filing accounting
records.
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1.5 FORMS OF BUSINESS ORGANIZATIONS
Accountants frequently refer to a business organization as an accounting entity or a business

entity. A business entity is any business organization, such as grocery store or supermarket
that exists as an economic unit. For accounting purposes, each business organization has an
existence separate from its owners, creditors, employees, customers, and other businesses.
This separate existence of the business organization is known as business entity concept.
Thus, in the accounting records of the business entity, the activity of each business should be
kept separate from other businesses and the personal financial activities of the owner.
As you will see in the discussion that follows on the three forms of business organization-
sole proprietorship, partnerships, and corporations- the business entity concept applies to all
forms of businesses. Thus, for accounting purposes, all three business forms are separate from
other business entities and from their owners.
1.5.1 Sole Proprietorship

A sole proprietorship is an unincorporated business owned by an individual and often
managed by the same individual. Sole proprietorship; include physicians, lawyers,
electricians, and other people who are in business for themselves. Many small service-type
businesses and retail establishments are sole proprietorship. No legal formalities are necessary
to organize such businesses, and usually only a limited investment is required to begin
operations.
In a sole proprietorship, the owner is held solely responsible for all debts of the business. For
accounting purpose, however, the business is a separate entity. Thus the financial activities of
the business, such as the receipt of fees from selling services to the public, are kept separate
from the personal financial activities of the owner. For example, the owner's personal house
or car payment should not be entered in financial records of the business.
1.5.2 Partnership
A partnership is an unincorporated business owned by two or more persons associated as
partners. The business is often managed by the same persons. Many small retail
establishments and professional practices, such as dentists, physicians, attorneys and other
professional firms, are organized as partnerships.
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Partnerships are created by a verbal or written agreement. A written agreement is preferred
because it provides a permanent record of the terms of the partnership. Included in the
agreement are such terms as the initial investment of each partner, the duties of each partner,
the means of dividing profits or losses between the partners each year, and the settlement to
be made up on the death or withdrawal of a partner. Each partner may be held liable for all the
debts of the partnership and for the actions of each partner with in the scope of the business.
However, as with in the sole proprietorship, for accounting purposes, the partnership is a
separate business entity.
1.5.3 Corporation
A corporation is a business incorporated under the law of the country and owned by a large
number of persons. Almost all large businesses are corporations. The corporation is unique in
that it is a legal business entity. The owners of the corporation are called stockholders or
shareholders. They buy shares of stock, which are unit of ownership in the corporation. The
personal assets of the owners are protected from the creditors of the corporation that is the
owners have limited liability.
The stockholders do not directly manage the corporation; they elect a board of directors to
represent their interests. The board of directors selects the officers such as the president and
vice presidents who manage the corporation for the stockholders.
1.6 TYPES OF BUSINESS ACTIVITIES PERFORMED BY BUSINESS

ORGANIZATIONS.
The forms of business entities discussed in the previous section are classified according the
type of ownership of the business entity. We can also group business entities by the type of
business activity they perform
1. Service companies
Service companies perform services for a fee. This group includes companies such as
accounting firms, law firms, repair shops and many others.
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2. Merchandising companies
Merchandising companies purchase goods that are ready for sale and sell them to customers.
Merchandising companies include such companies as auto dealership, clothing stores, and
supermarkets.
3. Manufacturing companies
Manufacturing companies buy materials, convert them into products, and then sell the
products to other companies or final consumers. Example of manufacturing companies are
cloth manufactures, auto manufacturers and flour factories.
1.7 USERS OF ACCOUNTING INFORMATION
An accounting information system provides data to help the decision making process of
individuals outside the business as well as inside the business. The decisions of individuals
outside the business are affected in some way by the performance of the business, while
decision-makers inside the business are responsible for the performance of the business.
There are several different groups of external users of accounting information. Each group has
different interests in the company and wants answer to different questions. The groups and
some of their possible questions are:
(a) Owners: Has the company had satisfactory income on its total investment? Should
additional investment be made in this company?
(b) Creditors and lenders: Should a loan be granted to the company? Will the company
be able to pay its debts as they become due?
(c) Employees and their unions: Does the company have the ability to pay increased
wages? Is the company financially able to provide permanent employment?
(d) Customers: Does the company offer useful products at fair prices? Will the company
survive long enough to honor its product warranties?
(e) Government units:
units: Is the local public utility charging a fair rate for its services?
(f) General Public: Is the company providing useful products and gainful employment
for citizens without causing serious environmental problems?
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Accounting information system also provides data to help the decision making process of
individuals inside the business (also called internal users). Managers are internal users of
accounting information. The kind of information used by managers range from broad, long-
range planning data to detail explanations of why actual costs varied from estimated cost. The
purpose of accounting information system is to generate information that a manager can use
to make sound internal decisions such as financial decisions, resource allocation decisions,
production, and marketing decisions.
1.8 ACCOUNTING CONCEPTS
Accounting professionals are guided by accounting concepts. The ten concepts described in
this unit are commonly accepted by all professional accountants. The following are
accounting concepts, which are used through this material.
1. Business entity concept

Business financial information is recorded and reported separately from the owner’s personal
financial information. This concept assumes that each business has an existence separate from
its owners, creditors, employees, customers, other interested parties, and other businesses.
The owner of the business may also own a personal houses and car. However, business
financial records should not include information about the owner’s personal belongings. That
is, a business exists as an entity separate from its owners.
2.Going concern (continuity)

Financial statements are prepared with the expectation that a business will remain in operation
indefinitely.
Any business is started with every expectation that it will be successful. Owners expect to
continue operating their business well into the future. This concept states that an entity will
continue to operate indefinitely unless strong evidence indicates that the entity will terminate.
3. Accounting period cycle

Changes in financial information are reported for a specific period of time in the form of
financial statements.
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Accounting records are summarized periodically and reported to business owners and
managers. The reports or statements are prepared to cover a specific period of time. The
period of time may cover a month, quarter of a year, six months, or a year.
4. Objective evidence
Each transaction is described by a business document that proves the transaction did occur.
A business transaction should be recorded only if it actually occurred. The amount recorded
must be accurate and true. Nearly all business transactions result in the preparation of a
business paper. For example, checks are prepared for cash payments. Receipts are prepared
for cash. Sales slips are prepared for items sold. One way to check the accuracy of specific
accounting information is to look at the business paper giving details of the transaction. Most
accounting entries are supported by business forms.
5. Unit of Measurement (Money measurement)

All business transactions are recorded in a common unit of measurement such as Birr or
Dollar instead of physical or other units of measurement.
The use of a particular monetary unit provides accountants with a common unit of
measurement to report economic activity. Without a monetary unit it would be impossible to
add such items as buildings, equipment and inventory on a balance sheet.
6. Realization of Revenue
“Revenue from business transactions is recorded at the time goods or services are sold.”
Revenue is the inflow of assets from the sale of goods and services to customers, measured by
the amount of cash expected to be received from customers. But when to record revenue is a
crucial question because some businesses sell goods or services for cash only, and other
businesses sell goods or services on one date and receive payment from customers on a later
date. The general answer to the previous question provided under the revenue realization
principle is that revenue should be earned and realized before it is recognized (recorded.)
7. Matching Expenses with Revenue

“Revenue from business activities and expenses associated with earning that revenue are
recorded in same accounting period".
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The logic underlying this principle is that when economic resources are used, some one wants
to know what was accomplished and at what cost. Every evaluation of economic activity will
involve matching benefits with sacrifice.
8. Historical cost
“The actual amount paid or received is the amount recorded in accounting records.”
For example, Habesha Co. bought a computer for Br. 8,000. The current selling price of the
computer is Br. 10,000.
9. Adequate disclosure
"Financial statements should contain all information necessary for a reader to understand a
business financial condition."
All users need a business’s financial information. All financial information must be reported
if good business decisions are to be made. A financial statement with incomplete information
is similar to a book with missing pages.
10. Consistent Reporting

In the preparation of financial statements, the same accounting concepts are applied in the
same way in each accounting period.
Consistency generally requires that a company use the same accounting principles and
reporting practices through time. This concept prohibits indiscriminate switching of principles
or methods, such as changing inventory methods every year. However, consistency does not
prohibit a change in accounting principles if the information needs of financial statement
users are better served by the change.
1.9 GLOSSARY
 Accounting:
Accounting: The process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by the user of the information.
information
 Accountants:
Accountants: Persons who plan, summarize, analyze and interpret accounting information.
 Bookkeepers:
Bookkeepers: Persons who do general accounting works plus some summarizing and
analyzing works.
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 Corporation:
Corporation: Business incorporated under the law of the country and owned by a large
number of persons.
 Manufacturing companies:
companies: Companies that buy materials convert them into products, and
then sell the products to other companies or to final customers.
 Merchandising companies:
companies: Companies that purchase finished goods and sell them to
customers.
 Partnership:
Partnership: An unincorporated business owned by two or more persons associated as
partners.
 Service companies:
companies: Companies that perform services for a fee.
 Sole proprietorship:
proprietorship: An unincorporated business owned by an individual and often
managed by that same individual.
 External users:
users: Persons using accounting information who are not directly involved in the
running of the organization; examples include shareholders (owners), customers,
Government etc.
 Internal users:
users: Persons using accounting information who are directly involved in
managing and operating an organization; example include managers and officers.
Check your progress Exercise 1
1. Habesha PLC starts a new business. Ato Habtamu, the owner uses his car in the
business with the expectation that later the business can buy a car. All expenses for
operating the car, including license plates, gasoline and new tires are paid for out of
business funds. Is this acceptable procedure? Explain.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
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1.10 ANSWER TO CHECK YOUR PROGRESS QUESTION
Check Your Progress 1

This procedure is not acceptable. Because, according to the business entity concept each
business has an existence separate from its owners. Therefore, the financial information of the
business (i.e. Habesha PLC) should be recorded and reported separately from the financial
information of the owner (that is Ato Habtamu’s). Hence, this procedure is not acceptable
because it does not follow the accounting concept of business entity.
1.11 MODEL EXAM QUESTIONS
1. Identify and briefly describe the three forms of business organizations.
2. Identify and briefly describe the three types of business.
3. Identify at least three external users of accounting information and indicate some
questions they might seek to answer through their use of accounting information.
4. (Case) Sami trading makes some sales for cash and some sales for credit (cash is not
received until a later date). Sami trading records sales only when cash is actually
received. Which accounting concept is not being followed? Explain your answer.
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UNIT 2. STARTING AN ACCOUNTING SYSTEM
Content
2.0 Aims and Objectives
2.1 Introduction
2.2 Accounting Equation
2.3 Financial Statements
2.4 Preparing a Beginning Balance Sheet
2.5 Recording the Opening Entry
2.5.1 A Journal
2.5.2 A Journal Entry
2.5.3 Checking an Entry for Accuracy
2.6 Posting the Opening Entry to a Leadger
2.7 Analyzing Changes Caused by Business Transactions
2.8 Reporting a Changed Accounting Equation on a Balance Sheet
2.9 Summary
2.10 Answer to Check Your Progress Questions
2.11 Model Exam Question
2.0 AIMS AND OBJECTIVES
After studying this unit, you will be able to: -

a. define accounting terms related to starting an accounting system for a service business
as a proprietorship.
b. identify basic accounting concepts and practices.
c. classify financial items, as assets, liabilities, or capital.
d. prepare a partial chart of account for a service business.
e. prepare a beginning balance sheet for a service business
f. record an opening entry in a journal.
g. open accounts in a general ledger using a chart of account.
h. post an opening entry from a journal to a general ledger.
i. analyze how transactions affect items on accounting equation.
j. prepare balance sheet after an equations is changed by a series of transactions.
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2.1 INTRODUCTION
Business owners and managers need accounting records in order to properly manage a
business and prepare financial reports. There are accounting concepts and practices to be
considered at the time a new business started and continued in business for indefinite period
of time. The kind of business and its size usually determine how its accounting record are
kept. Regardless of the accounting records kept, the concepts and principles are the same.
2.2 ACCOUNTING EQUATION
Accounting equation is the basic equation which you should remember, when you start an
accounting system and through out the system as well.
Accounting equation shows the relationship between three items, Assets, Liabilities and
Capital.
Assets.
Assets. A business owns things, such as cash, equipment, and supplies, which it uses to
conduct its activities. Any things, which have value, and owned by a business or individual is
called Asset.
Asset.
Financial right to the assets of a business are called equities.

equities. Equities to the assets of the
business are two,
1. Equity of a person to whom a business owes money. This is the financial right of the
person who lends money or sells property to the business on credit. Unless the
business pays the money back to the lender, the financial right of this person will not
stop. So the financial right of persons to whom a business owes money results in an
amount owed by a business called Liability.
Liability.
2. Equity of the owner. This is the financial right of the owner on the assets of his own,
invested in the business. The value of owner’s equity is called capital is also called
owner’s equity.
equity.
When a business is started, these three items are there, Assets, Liabilities and Capital.
Liabilities and capital are the two financial rights (equities) on assets of the business.
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Owner’s equity (Capital)
Assets
Creditors equity (Liability)
Assets value includes the value of capital and the value of liability, therefore:
Assets = Equities
The two equities are liabilities and capital:
Assets = Liabilities and Capital
OR
Assets = Liabilities + Capital
-An equation showing the relationship between the assets and equities (equity of a person
outside a business and equity of the owner of a business) is called accounting equation.
equation.
The basic accounting equation is written as:
ASSETS = EQUITIES
OR
ASSETS = LIABILITY + CAPITAL
Check your progress Exercise - 1

1. What are the two equities on the assets of the business?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2.3 FINANCIAL STATEMENTS
Financial Statements: are reports prepared about the status or financial position or progress
of a business after passing all the accounting processes.
When a new accounting system is started, the first financial statement to be prepared is a
balance sheet. Balance sheet reports about assets, liabilities and capital on a specific date.
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Assets, liabilities and capital reported on the accounting form, balance sheet, and talks about
the financial status of a business on a specific date.
2.4 PREPARING A BEGINNING BALANCE SHEET
Illustration 1.1
Ato Fitsum operates a professional service business, Dynaset. The business is a
proprietorship, which means, a business owned by one person. In this illustration the business,
Dynaset, is owned by Ato Fitsum. Dynaset gives professionals services like consultancy
service, management services, auditing services. Ato Fitsum expects the business to continue
and make money.
To start a new accounting system for his business, Ato Fitsum prepares a list of the business
assets and equities on December 1, 2002. The following are lists of assets and equities:
What is owned (assets) what is owed (Liabilities)

Cash on hand and in bank…………..1,200 Wegagen Bank………..Br.1, 300
* Supplies…………………………...1,500 Addis Bank…………… 2,000
**Prepaid insurance………………… 700
Building…………………………..3,000 Capital (Owner’s equity)
Equipment……………………….. 800 Fitsum Capital………… ?
* Small materials bought for use like stationary materials.

** Advance payment of insurance premium
Ato Fitsum places the total amount of assets liabilities in the accounting equation.
Asset = Liability + Capital

7,200 = 3,300 + ?
Ato Fitsum can figure his own capital by subtracting liabilities from assets.
Fitsum Capital = 7,200 – 3,300
Fitsum Capital = Br. 3,900
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Balance Sheet
An accounting equation must be maintained “in balance.” The total of assets is equal to the
total of liabilities and capital for Dynaset (7,200 = 7,200)
As it has been explained, balance sheet shows details about assets, liabilities and capital.
Accounting equation shows the relationship of the three items on the balance sheet.
Body of balance sheet

A balance sheet has three sections:
1. Assets listed on the left side.
2. Liabilities listed on the right side.
3. Capital also listed on the right side beneath the liabilities.
The right side of the balance sheet shows the equities of the business (Liabilities and Capital).
If the assets of the business were to be sold or distributed, the liabilities owed would be paid
first. This is the reason that liabilities are listed on the balance sheet before the owner’s
capital.
After the balance sheet is completed the total of the left side must be the same with the total of
the right side as it is shown using the accounting equation that total assets are the same with
the total liabilities and capital
Balance sheet
Total assets = Total Equities

7,200.00 Liabilities…… 3,300.00
Capital………. 3,900.00
7,200.00
Steps in preparing balance sheet
Five steps are followed in preparing balance sheet,
1.Write the heading on three lines, center each line. The heading consist of:
-Name of the business
-Name of the form
-Date of the form.
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2. Prepare the asset section on the left side.
 Write the word Assets in the center of the first line of the left line column.
 List the name of the assets and their amount and rule or draw single line under the
lists and draw double line under the total amount.
3. Prepare the liabilities section on the right side.
 Write the word Liabilities in the center of the right wide column.
 List the name and amount of all liabilities and rule or draw single line under the
listed amounts and the total amounts of liabilities.
4. Prepare the capital section below the liability section on the right side.
 Write the word Capital in the middle of the wide column on the next line.
 Write the name of the owner and the word Capital next and the amount of the
owner’s equity on the same line.
5. Determine that the balance sheet is “in
“in balance”
balance” and complete the form (the balance
sheet).
 The two columns total must be the same
 Write the word Total assets on the left side column on the same line as the total.
 Write the word Total Liabilities and capital on the right side column on the same
line as the total.
 Rule double line under the total amount of both sides.
* Ruling or drawing single line under amount is to mean that there is another amount to be
added or deducted from the amount.
* Ruling double line show that the work is completed nothing is going to be added or
deducted and the balance sheet is “in balance.”
- The following is the balance sheet prepared following the above five steps in preparing
balance sheet for Dynaset.
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Datas are taken from Illustration- 1.1
[DYNASET]
[BALANCE SHEET]
DECEMBER 1, 2002]
Assets Liabilities
Cash…………………………1,200 Wegagen bank…………………..1,300
Supplies…………………….. 1,500 Addis bank………………………2,000
bank………………………2,000
Prepaid insurance…………… 700 Total liabilities…………………..3,300
liabilities…………………..3,300
Building…………………….. 3,000 Capital
Equipment………………….. 800 Fitsum capital……………………3,900
capital……………………3,900
Total assets…………………. 7,200 Total liability and capital………...7,200
capital………...7,200
1. What does Balance sheet shows?

…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. Why a balance sheet is needed to be always in balance?

…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2.5 RECORDING THE OPENING ENTRY
Recording the opening entry is to mean that recording the beginning balance sheet. Balance
sheet is prepared for Dynaset at the time a new accounting system is started.
Financial information about a business is first recorded in chronological order. This means
that the information is recorded according to dates or in the order it happens. A beginning
balance sheet is the first information to be recorded in a new accounting system. It is only
when a new accounting system is started that beginning balance sheet is prepared and
recorded as the first information.
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2.5.1 A Journal
Somebody might wonder where to record the beginning balance sheet or the first financial
information. The form in which accounting information is recorded in chronological order is
called a Journal.
Journal. The first information to be recorded in the journal is opening entry (the
financial information in the beginning balance sheet). Each item recorded in a journal is called
an entry.
entry. An entry to record information from a beginning balance sheet is called opening
entry.
entry.
There are deferent kinds of journals. The nature of the business and the number of entries to
be recorded determine the kind of journal to be used. Now appropriate journal to be used for
Dynaset is General Journal.
General Journal: A Journal with two amount columns in which all kinds of entries can be
General Journal Page____
Post
Date Account title Ref. Debit Credit
recorded is called General Journal.

Journal. In the next chapters, the other Journal, cash Journal, will
be used for Dynaset.
Illustration 2-2
The Objective evidence one of the accounting concepts, mentions the need for source
documents at the time of recording an entry in a journal. Source document is a written
business form to support the entry in a Journal. Different businesses have deferent source
documents or business forms from which an entry is recorded. For example, the source
document for sales is sales invoice, for purchase; purchase invoice, for payments-check, and
for cash collections, -Receipt like the other business activities an opening entry has also a
source document from which it is recorded to the Journal. The source document for the
opening entry is the beginning balance sheet because it is the form from which the first
financial information (Opening entry) is recorded.
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Beginning balance sheet
Illustration 2 - 3
Asset Liabilities
and
Capital
General Journal
Debit Credit
Column Column
- The amounts on the left side of balance sheet are recorded in the left
or Debit column of a general Journal.
- The amount on the right side of balance sheet are recorded in the
right or credit column of general Journal as you can see above on the diagram (Illustration
2-3)
2.5.2 A Journal entry

Every Journal entry has four parts:
1. The date of the entry.
2. The debit part of the entry.
3. The credit part of the entry.
4. An explanation or source document number.
Ato Fitsum has already got the first financial information to be recorded on the Journal. So the
next step is to see how the opening entry is recorded following the above four parts:
1. Date of entry:
entry: first write the date of the opening entry in the date column of the
Journal. General Journal has many pages so the year and month are written only once
on a general Journal page in the date column.
 Date of opening for Dynaset is:
-Year- 2002
-Month-December
-Date- 1
2. Debit part of entry:
entry: write Debit part of the opening entry. The debit part of the
opening entry is the information, which is available on the left side of the beginning
balance sheet that is the amount of each asset. The name of each asset is written on the
left edge of the account title column.
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General Journal Page 1
Post
Debit part of 2002 Cash 1200 entry
December 1 Supplies 1500 On the
Prepaid insurance 700
Building 3000
Equipment 800
General Journal
3. Credit part of entry:

entry: write credit part of the opening entry. The credit part of the
opening entry is the information, which is available on the right side of the beginning
balance sheet that is the amount of liability and capital. The name of each liability and
capital is written on the right edge of the account title column.
General Journal Page 1

Post
Date Account title Ref Debit Credit
----------------------- ----- ----- *
----------------------- ----- ----- *
Credit part of entry on the general
----------------------- ----- ----- *
Journal
Wegagen Bank ----- ------------ --------1300
Addis Bank ----- ------------ --------2000
Fitsum capital ----- ------------ --------3900
4. Reason for entry:

entry: write the word Balance sheet, December 1, 2002 about one inch
from the left of the account title column under Liabilities and capital list. Writing the
reason for entry is all about indicating the source document or business form from
which the opening entry is recorded.
The following is the opening entry being recorded on page one of general Journal.
21
General Journal Page-1
Post
2001 Cash 1200 00
December 1 Supplies 1500 00
Prepaid insurance 700 00
Building 3000 00
Equipment 800 00
Wegagen Bank 1300 00
Addis Bank 2000 00
Fitsum Capital 3900 00
Balance sheet
December 1,2002

1. What is the first financial information recorded in the Journal? Why we call it that way?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. Where do we record the amounts on the left side of the balance sheet?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
3. Where do we record the amounts on the right side of the balance sheet?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2.5.3 Checking an entry for accuracy
22
As the total of the left and the right side of the balance sheet is equal; the debit total and the
credit total amount of the Journal must be equal. In the opening entry on [page one of the
general Journal the debit total is Birr 7,200, and the credit total is Birr 7,200, so that the debit
and the credit total is in balance which means the opening entry is accurate.
2.6 POSTING THE OPENING ENTRY TO A LEDGER
Those beginning balances for assets, liabilities and capital on December 1, will not remain as
they are even after on day business activity in the business (Dynaset). As a business conducts
daily activities, changes occur in the value of balance sheet items that is assets, liabilities and
capital. Each day goods and services are bought and sold. Cash is received. Cash is paid out.
Supplies are bought. For example Dynaset receives cash each time professional service are
given to customers. These changes must be shown using accounting records. A separate
record is kept of each assets, each liability and capital of a business to show change that
occur. Changes in each of these items must be brought together in one place.
place. This separate
record will show weather these items are increasing or decreasing. An accounting form used
to sort and summarize changes in a specific item of assets, liabilities, capital and other
accounting items is called Account.
Account. A group of accounts is called Ledger.
Ledger.
2.6.1 Chart of accounts

Each account in a ledger is given a name and a number.
number. A name given to separate ledger
account is called an account title.
title. A number given to an account, which shows the account’s
location in the ledger is called account number.
number. A list of account title and numbers showing
the location of the accounts in the ledger is called chart of account.
account.
The following is the partial chart of account for Dynaset.
Dynaset
Chart of account
*(1) Asset Account *(2) Liabilities Account
number number
Cash------------------------ 11** Wegagen bank-----------------21**
Supplies ------------------- 12 Addis bank-------------------- 22
Prepaid insurance ------- 13
Equipment-------------- 14 *(3) Capital
Building-----------------15 Fitsum capital---------------- 31**
23
The above chart of account for Dynaset is not complete. It is the partial chart of account.
* The first digit of each account number shows in which division of the ledger the account is
located (Assets division, Liabilities division or capital division). All assets account number
begins with 1 to show the account are in the first division. All liabilities account number
begins with 2 and the capitals with 3.
** The second digit of each account number shows the order in which the account is listed in
each division.
For example, in Dynaset’s chart of account, cash is numbered 11,

11, this is to mean that cash is
an asset and the second digit of this number shows that cash is the first account in the asset
division. The second digit for wegagen bank (21*) indicated that it is the first account in the
liability division. The second digit for Fitsum capital (31*) indicated that it is the first account
in the capital division. The above explanation applies on the following items assets, liabilities
and capital accordingly.
Check Your Progress Exercise - 4

1. What does the second digit for equipment and Addis Bank tells about?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2.6.2 Opening accounts in a ledger

The account form for Dynaset is below.
Account Cash Account No. 11
Balance
Post
Date Item Ref. Debit Credit Debit Credit
Writing an account title that is the name given to a separate ledger account, and account
number on the heading of an account form is called opening an account.
account.
24
On the account form of Dynaset above, an account name cash and account number 11 is
written on the heading so that an account cash is opened in ledger and the above account form
is ready to sort and summarize the change in cash because of diverse activities of the business.
The procedures to open an account in the ledger are:

1. Write the name of the account after the word Account.
2. Write the number of the account after the word Account No.
The above procedure is used in opening all accounts.
2.6.3 Posting an opening entry

You remember that opening entry is the first financial information on the beginning balance
sheet and was recorded in the general Journal. These opening entry amount now is going to be
transferred to the ledger, opened for each accounts to show and summarize the changes in
each account in the opening entry. Each amount in an opening entry is transferred to a ledger
account. Transferring information from the Journal entries to the ledger accounts is called
Posting.
Posting. Posting sorts the information so that all activities affecting a single account are
brought together in on place. For example, all information about changes in cash are brought
together in the cash account opened in the ledger.

1. What does opening an account mean?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. What is posting?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Posting the debit items of opening entry

When an entry is made on the left side of an account, it is referred to as a debit.
debit. An entry on
the right side is referred to a credit.
credit.
Posting the debit items of opening entry refers to the transferring of opening entry amounts
from the left side of the general Journal. (Only assets)
The steps in posting the debit items is as follows:
25
1. Write the amount in the debit column of the account.
2. Write the date of the Journal entry in the date column.
- The year and the month are written only once on the same side of the account.
The day is written once for each entry posted to an account.
3. Write the word Balance in the item column. Writing the word balance helps to
separate the beginning balances in the account from other entries posted later.
4. * Write the page number of the Journal under the post reference column of the ledger.
(G1 or page number 1 in the general Journal)
5. Write the account number in the Journal under the post reference column in front of
the posted entry
 Step number 4 and 5 are done to make sure that the entry is posted and to indicate
the page number from which the entry is posts.
Illustration 2-4
Post
2002 Cash 11 1200 00
December 1 Supplies 12 1500 00
Prepaid insurance 13 700 00
Building 14 3000 00
Equipment 15 800 00
Addis Bank 2000 00
Fitsum Bank 3900 00
Balance sheet
December 1, 2002
Illustration 2-5
Account- Cash Account No.11

Balance
Post
2002
December 1 Balance G1 1200 00 1200 00
26
Account- Supplies Account No. 12
Balance
Post
2002
Account- Prepaid insurance Account No.13

Balance
Post
2002
Account- Building Account No.14

Balance
Post
2002
Account- Equipment Account No.15

Balance
Post
2002
*The posting procedure of the debit item from the Journal is describes in Illustration 2-4 and
2-5 posting the credit item of the opening entry:
The credit items of the opening entry are entries on the right side of the general Journal.
27
* The same steps are used to post credit items of an opening entry as for debit items.
However, the items are posted to the credit side of the accounts involved.
Illustration 2-6
Post
2002
December 1 Cash 11 1200
Supplies 12 1500
Building 14 3000
Equipment 15 800
Addis Bank 22 2000
Fitsum Bank 31 3900
Illustration 2-7
Account- Wegagen Bank Account No.21
Balance
Post
2002
Account- Addis Bank Account No.22

Balance
Post
2002
28
Account- Fitsum capital Account No.31
Balance
Post
2002

1. What do we call an entry made on the left side of an account?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. What do we call an entry made on the right side of an account?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2.7 ANALIZING CHANGES CAUSED BY BUSINESS TRANSACTIONS.

TRANSACTIONS.
Business organizations are involved in different economic and financial activities when they
conduct their operations. These activities could be, selling goods or services, buying supplies,
paying for expenditures, borrowing money, lending money and paying for liability. These all
the above activities are taken as the normal business activities and they affect the balance
sheet items (assets, liabilities, capital). A normal business activities that causes changes on
assets, liabilities and capital is called Transaction.
Transaction. A transaction for sale of goods or services
results in an increase in capital and Asset (cash). An increase in capital resulting from the
operation of a business is called Revenue.
Revenue. A transaction to pay for services like electric bill
water bill for fuel, salary for employees and others results in a decrease in capital and assets
(cash). A decrease in capital resulting from the operation of a business is called an expense.
expense.
Business expenses are for those expenditures and services used to produce revenue. In each
accounting period revenue, and expenses incurred to earn these revenue are matched based on
Matching expenses with revenue concept.
29
How transactions change the accounting equation
Dynaset is a business organization that conducts normal business activities (Transactions) that
changes assets, liabilities and capital. Dynaset’s accounting equation on December 1, 2002,
described before is below.
ASSETS = LIABILITIES + CAPITAL
7,200 = 3,300 + 3,900
Each transaction makes at least two changes on the accounting equation, one from left side
and other from right side or from the same side (left or right) but in different direction. There
are transactions taken place in Dynaset, which causes changes in the details of accounting
equation (All asset, liabilities and capital).

1 What are Transactions?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. What do we call transactions for sale of goods and service?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
3. What do we call transactions to pay for service?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Illustration 2-8
The accounting equation can be expanded to show details of each of the item.

Beg. Cash Supplies Prepaid Building Equipment Wegagen Addis Fitsum
Balance insurance Bank Bank Capital
1200 1500 700 3000 800 1300 2000 3900
30
The amounts shown above are the beginning balances for Dynaset on December 1, 2002. In
this accounting equation the sum of the amounts on the left side is Br. 7,200, and the sum of
the amounts on the right side is Br. 7,200. Therefore, the accounting equation is in balance.
Bought supplies
Transaction 1.
Paid cash for supplies, Br.20
By the above transaction two assets are affected, supply and cash. Cash is decreased and
supplies increased, Br.20. Both are affected from the left side but in different direction. The
effect of transaction 1 is below.

Cash Supplies Prepaid Building Equipment Wegagen Addis Fitsum
insurance Bank Bank Capital
Beg.
Balance 1200 1500 700 3000 800 1300 2000 3900
Trans. 1 –20 +20 ------ ------ ----- ------ ------- ------
New bala. 1180 1520 700 3000 800 1300 2000 3900
The sum of the amounts on the left side is Br. 7,200. The sum of the amounts on the right side
is Br. 7,200. The accounting equation is still in balance but the equation changed.
Paid an amount owed to liability

Transaction 2. Paid cash to Wegagen bank for amount owed, Br.500.
Dynaset has paid its liability to Wegagen bank. Cash is decreased Br. 500, on the left side.
The amount owed to Wegagen bank decreased Br. 500. The effect of transaction 2 is as
follows:
Balance 1180 1520 700 3000 800 1300 2000 3900
Trans. 2 -500 ----- ----- ----- ----- -500 ------ ------
New bal. 680 1520 700 3000 800 800 2000 3900
Both sides of the accounting equation are changed by the same amount. The sum of the left
side balance is Br. 6,700.The sum of the right side balance is Br. 6,700. The equation is still in
balance.
31
Received Revenue
Transaction 3
Received cash from professional service given to customers, Br. 700
Revenue is received when Dynaset gets money from its main operation that is provision of
professional service. So that, whenever there is cash inflow from professional service it has to
be taken as Revenue. Revenue is an increase in capital resulting form the main operation of
the business.
By the above transaction, cash is increased, Br. 700, on the equation’s left side. Capital is
increased by the amount of revenue, Br. 700, on the equation’s right side. The effect of
transaction 3 is shown below.
Balance 680 1520 700 3000 800 800 2000 3900
Tran. 3 +700 ------ ----- ------ ---- ----- ------ +700
New bal. 1380 1520 700 3000 800 800 2000 4600
The sum of the left side balance equals the sum of the right side balance, Br. 7,400. Both side
of the accounting equation are changed. The accounting equation is still in balance.
Paid for insurance

Insurance premium must be paid in advance. For example, Ato Fitsum pays Br. 700 premium
on November 1 for two months’ automobile insurance. In return of this payment Ato Fitsum
could get insurance coverage if any accident happens with in these months. If the insurance is
canceled before the two months have passed, Ato Fitsum is entitled to receive a refund of
money covering the days that the insurance was not used. Because the premium can be
returned into cash until coverage is used, Prepaid insurance premium are something of value
and considered to be an asset.
Transaction 4.
Paid cash for insurance, Br.100
Cash is decreased, Br.100, and prepaid insurance is increased, Br. 100, both on the equation is
shown below.
32
Balance 1380 1520 700 3000 800 800 2000 4600

Tran. 4 -100 ------ +100 ------- ------ ----- ------ ------
New bal. 1280 1520 800 3000 800 800 2000 4600
The sum of the left-side balance equals the sum of the right-side balances, Br. 7400. The
equation is still in balance.
Paid an expense
Transaction 5
Paid cash for December rent for building, Br. 400
Expenses are incurred when Dynaset paid money for services at the time of earning revenue.
So that, whenever there is cash outflow at the time of earning revenue (amounts spent to get
revenue) it has to be taken as an expense. Expense is a decrease in capital resulting from the
main operation of the business.
Cash is decreased, Br. 400, on the equation’s left side, and capital is decreased, Br.400, on the
equation’s right side. The effect of the accounting equation is shown below.
Balance 1280 1520 800 3000 800 800 2000 4600

Tran. 5 -400 -400
New bal. 880 1520 800 3000 800 800 2000 4200
The sum of the left-side balances equals the sum of the right-side balances, Br. 7000. The
Other expense transaction might be for advertising equipment repairs, utilities (water bill,
Telephone bill, electric bill), and miscellaneous expenses (small expenditures). All expense
transaction have the same effect as transactions above.
33
Owner made an additional investment
Transaction 6
Received cash from the owner, Ato Fitsum, as an additional investment to the
business, Br. 500
It is not only revenue that increases owner’s equity or capital, when the owner makes
additional investment after the business activity has been started; the owner’s equity (capital)
also increases. Therefore, there are two items, which increase capital, revenue and additional
investment.
By the above transaction, cash is increases, Br. 500, on the left side, and capital increased,
Br.500, on the right side. The effect of transaction 6 on the equation is as follows:
Balance 880 1520 800 3000 800 800 2000 4200

Tran. 6 +500 ------ ---- ------ ----- ----- ------ +500
New bal. 1380 1520 800 3000 800 800 2000 4700
The sum of the left side balance equals the sum of the right side balances, Br. 7500. The
Owner’s withdrawal
Capital decreases when an amount is paid for service (expense). Capital is also decreased
when an owner withdraw cash or any assets from his business for his personal use. Assets
taken out of a business for the owner’s personal use are called withdrawals.
withdrawals. There are two
items, which decrease capital, expense and withdrawals.
Transaction 7
Paid cash to the owner, Ato Fitsum, for personal use Br. 100 cash is decreased,
Br.100, on the left side, and capital is decreased Br. 100, on the right side. The effect of
Transaction 7 is shown below
34
Balance 1380 1520 800 3000 800 800 2000 4700

Tran. 4 -100 ------ ----- ------- ------ ----- ------ -100
New bal. 1280 1520 800 3000 800 800 2000 4600
The sum of the left side equals the sum of the right side balances, Br. 7400. The equation is
still in balance.
Changes to the accounting equation caused by transaction 1 to 7 are summarized below:
Assets Liabilities + Capital

Beg.
Balance Br. 1200 1500 700 3000 800 1300 2000 3900
Tran. 1 -20 +20 ------ ------ ---- ------ ----- -----
Balance Br. 1180 1520 700 3000 800 1300 2000 3900
Tran. 2 -500 ----- ---- ----- ---- -500 ------ ------
Balance Br. 680 1520 700 3000 800 800 2000 3900
Tran. 3 +700 ----- ---- ------ ----- ----- ----- +700
Balance Br. 1380 1520 700 3000 800 800 2000 4600
Tran. 4 -100 ----- +100 ------ ----- ----- ----- -----
Balance Br. 1280 1520 800 3000 800 800 2000 4600
Tran. 5 -400 ----- ---- ------ ---- ---- ----- -400
Balance Br. 880 1520 800 3000 800 800 2000 4200
Tran. 6 +500 ----- ---- ----- ---- ---- ----- +500
Balance Br. 1380 1520 800 3000 800 800 2000 4700
Tran. 7 -100 ----- ---- ----- ---- ---- ------ -100
Balance Br. 1280 1520 800 3000 800 800 2000 4600
Transactions 3,5,6 and 7 changes the owner’s capital, Before Transaction 1 occurred, capital
was Br. 3,900. After transaction 7 occurred, capital is Br. 4,600. The difference, an increase of
Br. 700, is summarized below.
35
Change
Transactions Kind of transaction in capital
3 Revenue (service sold) +700
5 Expense (Rent) -400
6 Investment +500
7 Withdrawal -100
Net change in capital +700
Increase in capital from main operation of a business is called Revenue. Most increases in
capital are because of Revenue. An increase in capital from the additional investment of the
owner can not be said Revenue because an increase in capital because of an owner’s
investment is not a result of the business’ normal operation.
Decrease in capital from business’ operation are known as Expenses. Most decreases in
capital results from expenses. However, an owner occasionally may decrease capital by a
withdrawal. A decrease in capital because of an owner’s withdrawal is not a result of the
business’ normal operation. Therefore, withdrawal in not an expense.
2.8 REPORTING A CHANGED ACCOUNTING EQUATION ON A BALANCE

SHEET
The beginning balances of the assets, liabilities and capital on December 1, 2002 cannot be
found with their same balances after the previous transactions are taken place. Assume that
Ato Fitsum is in need of preparing a balance sheet on December 2, 2002 considering the
change caused by the 7 transactions. Information needed for December 2 balance sheet is on
the last line of the summary made for all transactions.

1. Decreases in capital from the operation of the business are called………?………….
called………?………….
2. Increases in capital from the operation of the business are called………?…………..
called………?…………..
The balance sheet is prepared following the steps describes and discussed before.
Dynaset
36
Balance sheet
December 2, 2002
Assets Liabilities
Cash--------------------------------1280 Wegagen Bank-------------------- 800
Supplies----------------------------1520 Addis Bank------------------------2000
Bank------------------------2000
Prepaid insurance----------------- 800 Total liabilities 2800
Building--------------------------- 3000 Capital
Equipment------------------------- 800 Fitsum capital---------------------4600
capital---------------------4600
Total assets------------------------7400
assets------------------------7400 Total liabilities and capital------7400
capital------7400
Comparison of the December 1 and December 2 balance sheet totals is shown below:
December 1 7200 3300 3900
December 2 7400 2800 4600
Net change +200 -500 +700
The balance sheet has a net change of + 200 on the left and net change of +200 (700 – 500) on
the right side.
2.9 SUMMARY OF AN ACCOUNTING SYSTEM AND CHANGES CAUSED BY
BUSINESS TRANSACTION
The steps involved in starting an accounting system are shown below.
1. Prepare a
Balance sheet
beginning
Assts Liabilities
And
Capital
37
balance sheet
2. Preparing a
Source document------------------------------- Memorandum
For opening entry
3. Record opening
Entry in a Journal--------------------------------------------- Journal
Debit Credit
4. Post to the Ledger
Cash
Debit Credit
Wegagen Bank
Debit Credit
1. Prepare a beginning balance sheet.

2. Prepare a source document
3. Record information on a beginning balance sheet as opening entry in a journal. The
assets are recorded as debits. The liabilities and capital are recorded as credits.
4. Post an opening entry to general ledger accounts
 Each transaction makes at least two changes in items on an accounting equation.
 When a transaction makes all changes in items on the equation’s left side (Assets),
items on the equation’s right side are not changed (liabilities or capital)
 When a transaction changes only one item on the equation’s left side (asset), at
least one item on the equation’s right side is also changed. (Liabilities or capital).
38
2.10 ANSWERS TO CHECK YOUR PROGRESS EXERCISESS

1.The two equities on the assets of the business are:
a. An equity of the person form whom a business owes money that is Liability.
b. An equity of the owner that is capital.

1. Balance sheet shows the details about assets, liabilities and capital.
2. Because balance sheet shows details of assets liabilities and capital in the form of
accounting equation, which maintain the equality of assets with liabilities and capital.

1. * The first financial information recorded in the Journal is
called opening entry.
* We call it opening entry because it is recorded referring the beginning balance sheet.
2. The amounts on the left side or the balance sheet are recorded in
the left or Debit column of a Journal.
3. Where do we record the amounts on the right side of the
balance sheet are recorded in the right or credit column of a Journal.

1. The second digit for equipment shows that it is the fourth account in the asset division. The
second digit for Addis Bank shows that it is the second account in the liabilities division.

1. Opening an account means writing the account title and account number. On the heading of
an account form opened for a separate ledger account, For example, cash and 11
2. Posting is transferring information from the Journal entries to the ledger account.

1. Debit.
2. Credit.
39
1. Transaction is a normal business activity that causes a change on assets, liabilities and
capital of the business.
2. Revenue Transaction.
3. Expense Transaction.

1. Expenses.
2. Revenue.
2.11 GLOSSARY
Asset: Anything of value that is owned is called asset.
Equities: Financial rights to the assets of a business are called equities.
Liability: An amount owed by a business is called liability.
Capital: The value of the owner's equity is called capital.
Accounting equation: an equation showing the relationship between assets, liabilities and
capital is called accounting equation.
Proprietorship: A business owned by one person is call proprietorship.
Balance Sheet: A financial statement that reports assets liabilities and capital is called
Balance sheet.
Journal: A form for recording information in chronological order is called a journal.
Entry: Each item recorded in a journal is called entry.
Opening Entry: An entry to record information from a beginning balance sheet is called an
opening entry.
Credit: An entry recorded in the credit column is called credit.

Debit: An entry recorded in the debit column is called debit.
40
Source Document: A business paper from which information is obtained for a journal entry
is called source document.
Account: An accounting form used to sort and summarize changes in a specific item is called
an account.
Ledger: A group of account is called ledger.
Posting: Transferring information from journal entries to ledger account is called posting.
Transaction: A normal business activity that changes assets, liabilities and capital is called
transaction.
Revenue: An increase in capital resulting from the operation of a business is called revenue.
Expense: A decrease in capital resulting from the operation of a business is called expense.
Withdrawals: Assets taken out of a business for the owner's personal use are called
withdrawals.
I. Multiple Choices
1. Financial information recorded from beginning balance sheet to
the journal referred as:
A. Journal entry B. Account Balance
C. Opening entry D. Double entry
2. Given:
a. Cash balance for the month shows Br. 3000
b. Supplies purchased for the month is found to be 1/3 of
cash
c. The value of building is twice of the amount owed to a
creditor
d. An amount owed to a creditor is amount to Br. 2000
The amount of owner's equity capital is:
A. 4000 B. 5000 C. 1500 D. 6000 E. 2000
41
3. If a credit to an account signify an increase in the account then
the account could be:
A. Expense B. Revenue C. Asset D. Drawing E. A and C
4. One of the following is a decrease in capital from the operation

of the business,
A. Withdrawal B. Revenue
C. Expense D. Additional investment E. A and C
5. Items reported at the right side of the balance sheet are

recorded:
A. In the credit column of the journal
B. In the debit column of the journal
C. In the account balance
D. None
II. Work out

Analyze the changes caused by the following transactions on accounting equation.
Asset-------------------- 10,000
Liabilities----------------- 2000
Capital--------------------- 8000
1. Paid cash for supplies, Br. 50

2. Paid an amount owed to Lem. Co. Br. 100
3. Paid cash to the owner for personal use, Br. 200
4. Received cash from the owner as additional investment, Br. 250
5. Paid cash for insurance, Br. 150
6. Paid cash for telephone bill, Br. 50
7. Received cash from daily sales of service, Br. 600
8. Paid cash to repair a typewriter, Br. 15
9. Paid cash for news paper advertising, Br. 45
10. Paid cash for month's rent, Br. 400
42
UNIT 3. ANALYZING TRANSACTIONS INTO DEBIT AND CREDIT PARTS
Contents
3.0 Aims and Objectives
3.1 Introduction
3.2 Account Balance
3.3 Balance Side of an account
3.4 T – Accounts
3.5 Analyzing Transactions
3.5.1 Analyzing Transactions Affecting Assets Liabilities and Capital
3.5.2 Transaction Affecting One Asset and one Liability
3.5.3 Transaction Affecting One Asset and One Capital
3.5.4 Analyzing Transaction Affecting Revenue and Expenses
3.6 Summary
3.7 Answers for Check Your Progress Exercises
3.8 Glossary
3.0 AIMS AND OBJECTIVES
After studying this chapter, you will be able to:

ii. define accounting terms related to analyzing transactions into debit and
credit parts.
iii. identify accounting concepts and practices related to analyzing
transactions into debit and credit parts.
iv. use T accounts to analyze transactions showing which accounts to be
debit or credited for each transaction.
v. Recognize and check that debits equal credits for each transaction.
3.1 INTRODUCTION
43
Using the accounting equation as the accounting record is not practical. The expanded
accounting equation is used, in chapter 2, only to show how transactions are affecting each
item of the equation, and to underline the fact that transactions affect items from the
accounting equation.
Changes in accounts are recorded first in the Journal and posted to the ledger. Opening entry,
in unit 2, was recorded in the Journal and posted to the ledger- like opening entry; all business
transactions must be recorded in the Journal and posted to the ledger. But before transactions
are recorded the information is analyzed to determine which accounts are affected and how.
(Into debits and credits).
3.2 ACCOUNT BALANCES
After entries are recorded in a Journal, the next step is to transfer each item to the ledger that
is posting. Those entries recorded on the debit column are posted to the debit and those entries
on the credit are posted to credit column. For each item posted on the ledger, there is a debit
as well as credit amount transferred. The difference between the totals of the amounts
recorded on the two sides of an account (Debit and Credit) is called Account Balance.
Balance. For
example, cash having Br.1000 beginning balance, Br. 500 is posted to the credit column. Cash
is recorded from the left side of the Journal so it is debit. However, there is a reason that cash
may be credited.
Cash
Left (Debit) Right (credit)
beg. bal.1000 500
500
Account balance.
The difference between the debit amount and the credit sides of cash gives, Br. 500 debit, this
remaining balance is account balance.
3.3 BALANCE SIDE OF AN ACCOUNT
44
Each asset account has a beginning balance on its debit side. Each liability account has a
beginning balance on the credit side. The capital account has a beginning balance on the
credit side.
The balance side of an account is determined by an accounts location on the balance sheet as
shown below.
Illustration 3-1
ANY BALANCE SHEET
ANY ASSET ACCOUNT ANY LIABILITY ACCOUNT

BALANCE BALANCE IS
IS A DEBIT A CREDIT
THE CAPITAL ACCOUNT

BALANCE IS
A CREDIT
The left side of an account is known as the debit side. The right side of an account is known
as the credit side. And entry made on the left side of an account is called Debit. An entry
made on the right side of an account is called Credit.
An account, for example, cash, has two columns headed Debit and Credit.
Credit. The purpose of the
debit and credit sides of an account is to show increases and decreases in account balances. If
an account, cash balance is increased; the amount is shown on the balance side the balance
side of cash is left that is debit. If an account balance, cash decreased, the amount is shown on
the side opposite to the balance side. The opposite side of the balance side of cash is credit. So
when cash is increased it is debited, and when it is decreased, it is credited.
ACCOUNT BALANCE SIDE INCREASE DECREASE

All assets Debit Debit Credit
All liabilities Credit Credit Debit
Capital Credit Credit Debit
All revenues Credit Credit Debit
45
All expenses Debit Debit Credit
Withdrawals Debit Debit Credit
 The account balance of all assets is debit when assets are increased, they are
debited. When assets are decreased, they credited.
 The account balance of all liabilities and capital is credit. When these accounts are
increased, they are credited. When they are decreased, they are debited.
 All accounts, which increase capital, have credit balance side. For example
Revenue increases capital. Thus, revenue account balance side is credit. When revenue
increased, it is credited. When it is decreased, it is debited.
 All accounts, which decrease capital, have debit balance side. Expenses and
withdrawals decrease capital. The balance side of these accounts is debit. When they
increased, they are debited. When they decreased, they are credited.

1. What is the account balance of assets, owner’s withdrawal and expense?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
2. What is the opposite side of the account balance for liabilities, capital and revenue?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
3.4 T - ACCOUNTS
A skeleton form of an account showing only the debit and credit column is called T- account.
account.
T account is used to analyze transaction into debit and credit before information is recorded in
a Journal. A T account is shown below.
Any account
Debit column Credit column
46
T accounts for assets, liabilities, and capital are shown below. The normal balance, increase,
and decrease columns are indicated for each kind of account.
Illustration 3-2
Any asset account Any liability account
Debit column Credit column Debit column Credit column
Normal balance Decrease Decrease Normal balance
Increase __ __ Increase
+ +
Capital account
Normal balance
Decrease Increase
__ +
Transactions change at least two account balances

Each transaction increases or decreases balances of at least two accounts. For example, Ato
Fitsum paid cash for supplies, Br. 20. The transaction affects two balances, cash balance and
supplies balance. Both are assets with balance side of debit.
Illustration 3.3
Cash Supplies
Debit column Credit column Debit column Credit column
Normal balance
Normal Balance Decrease -20 Increase +20
The transaction decreases the cash account balance. Therefore the effect on cash is recorded
as a credit. The transaction increases the supplies account balance. Therefore, the effect on
supplies is recorded as a debit.
3.5 ANALYZING TRANSACTIONS
47
Each transaction is recorded in a Journal before it is posted to the ledger account. Before
transactions are recorded in a journal, the transactions are analyzed into debit and credit parts
using T accounts. When analyzing transaction, three questions are answered.
1. What are the names of the account affected?

2. What is each accounts classification? Asset accounts? Liability accounts? Capital
accounts? …
3. How is each accounts affected? Is the accounts decreased or increased? It is done by a
debit or a credit.
3.5.1 Analyzing Transactions affecting assets, liabilities and capital

Each transaction is analyzed to see how assets, liabilities and capital accounts are affected.
Transaction affecting two assets
December 1, 2002
Paid cash for supplies, Br. 30
The above transaction is analyzed, raising the following questions.

1. Accounts affected? Supplies and cash
2. Accounts classification? Supplies and cash are asset accounts with a normal account
side of debit.
3. How affected? Supplies increased by a debit, Br. 30. Cash is decreased by a credit, Br.
30.
Ato Fitsum has bought supplies for cash. Therefore supplies increased, Br. 30 and cash is
given to the seller, so that, it is decreased, Br. 30.
Supplies
The debit and credit parts of an entry Debit Credit
are always equal. The debit to supplies, Br.30, Increase

is equal to the credit to cash, Br. 30. The +30
equality of debit and credit is maintained. Cash

Debit Credit
Decrease
-30
48
December 1, 2002
Paid cash for insurance, Br.100
1. Accounts affected? Prepaid insurance and cash.
2. Accounts classification? Prepaid insurance and cash are asset accounts with a normal
account side debit balance.
3. How affected? Prepaid insurance is increased by a debit, Br.100. Cash is decreased by
a credit, Br.100
Prepaid insurance
Ato Fitsum has paid cash in advance Debit Credit
to the insurance company to get Increase
insurance coverage at the time of +100
accident. The increase in prepaid- Cash
insurance is debited, Br. 100 decrease Debit Credit
in cash recorded as a credit, Br. 100. Decrease
The two sides are equal. -100
3.5.2 Transaction affecting one asset and one liability

December 1, 2002
Paid cash to Addis bank for amount owed, Br. 200.
1. Accounts affected? Addis Bank (liability) and cash.
2. Accounts classification? Addis bank is a liability account with a normal balance side
credit. Cash is an asset account with a normal balance side debit.
3. How affected? Addis Bank is decreased by a debit, Br. 200 and cash decreased by a
credit, Br. 200.
Addis bank
There was an amount of money borrowed Debit Credit
From Addis Bank, for Dynaset, the business. Decrease
Now, Ato Fitsum paid, Br. 200 to Addis Bank. -200
The liability is recorded as a debit, Br. 200,
because it is decreased. The decrease in cash Cash
account is recorded as a credit, Br. 200. The Debit Credit
49
equality of the debit and credit is maintained. Decreased
-200
3.5.3 Transaction affecting one asset and capital
December 1, 2002
Received cash from the owner, Ato Fitsum, as an additional investment in the
business, Br. 400
1. Accounts affected? Cash and Fitsum, capital.
2. Accounts classification? Cash is an asset with a normal account balance side debit.
Fitsum capital is a capital account with a normal credit balance.
3. How affected? Cash is increased by a debit, Br. 400. the capital account is increased
by a credit, Br. 400.
Additional investment increases the owner capital as well as
cash at the same time. The increase Fitsum capital
in cash is debited to Br. 400. The Debit Credit
increase in capital is credited to Increase
Br. 400. +400
Cash
Debit Credit
Increase
+400
December 1, 2002
-Paid cash to the owner, Ato Fitsum, for his personal use, Br. 150.
Asset taken out of a business for personal use is known as withdrawal. Any asset taken out of
a business decreases capital of the owner. The value of withdrawal could be recorded as a
debit to capital account directly. However, common accounting practice is to record
withdrawals in a separate account titled Drawing.
Drawing. The drawing account’s balance shows the
total asset taken out of the business by the owner. Dynaset has an account Fitsum Drawing
for recording withdrawals.
1. Accounts affected? Fitsum Drawing and cash.
2. Accounts classification? Fitsum Drawing is a capital account with a normal debit
balance. Cash is an asset with a normal balance debit.
50
3. How affected? The drawing account is increased by a debit, Br. 150. The cash account
is decreases by a credit Br. 150.
A drawing account shows decreases Fitsum Drawing

in an owner’s capital account. Thus a Debit Credit
drawing account has a normal debit
balance. Increase
+150
A drawing account balance in
increased by debit and decreased by Cash
credit. The decrease in cash is
Debit Credit
recorded as a credit, Br. 150. The
increase in Fitsum drawing is Decrease
recorded as a debit, Br. 150.
-150
3.5.4 Analyzing transactions affecting revenue and expenses

All revenue transaction increases capital. When cash is received from sales of goods or
service, the amount of revenue increases. Revenue increases the total amount of assets. When
total assets increase, an equity (capital) is also increased. Revenue accounts show an increase
in owner’s capital any time they appear. Changes in an owner’s capital, caused by revenue
could be recorded directly in the capital account. However, recording all the changes directly
in the capital account does not show clearly what caused the change because there is another
transaction, which increases capital i.e., additional investment. Until the end of the accounting
period, when the financial statements prepared, an increase in capital account is accumulated
through revenue account and at last the effect will be transferred to the capital account.
Revenue accumulates the change in capital until definite period of time, so that it is called
temporary capital account.
Expenses decrease the total amount of assets. When total assets decrease, an equity (capital) is
also decreased. Expenses accounts show decrease in an owner’s capital. Changes caused by
expenses could be recorded directly in the capital account. However, recording all the changes
directly in the capital account does not show clearly what caused the change because there is
withdrawal also which causes decrease in capital.
The relationship of revenue and expense accounts to owner’s capital account is shown below.
51
Illustration 4.4
THE OWNER’S CAPITAL ACCOUNT
LEFT OR DEBIT COLUMN RIGHT or CREDIT COLUMN
DECREASE NORMAL BALANCE

INCREASE
- +
Any Expense Account Any Revenue Account
LEFT OR RIGHT OR LEFT OR RIGHT OR

DEBIT COLUMN CREDIT COLUMN DEBIT COLUMN CREDIT COLUMN
Normal Balance Normal Balance
INCREASE DECREASE DECREASE INCREASE
+ - - +
Decrease in an owner’s capital account is recorded in the debit column. Expense represents
decrease in capital. Therefore, expense accounts have normal debit balance. Increases in
capital account are recorded in the credit column. Revenue represents increase in capital.
Therefore, revenue accounts have normal credit balances.
Transaction affecting revenue

December 1, 2002
Received cash from daily professional service given, Br. 500
1. Accounts affected? Cash and fees revenue. Fees revenue is a revenue account, which
represents revenue earned out of service sold.
2. Accounts classifications? Cash is asset account with a normal account balance debit.
Fees revenue is a revenue account with a normal account balance credit.
3. How affected? Cash is increased by a debit, Br. 500. fees revenue increased by a
credit, Br. 500.
Cash Fees revenue

Debit Credit Debit Credit
Increase Decrease Decrease Increase
52
+500 - +500
The equality of debit and credit is maintained.

Transaction affecting expenses
December 1, 2002
Paid cash for July rent, Br.300
1. Accounts affected? Rent expense and cash.
2. Accounts classification? Rent expense is an expense account with a normal account
balance debit. Cash is an asset account with a normal account balance debit.
3. How affected? Rent expense is increased by a debit, Br.300. Cash is decreased by a
credit, Br. 300
Rent expense Cash

Increase Decrease Increase Decrease
+300 - + -300
The equality of debit and credit is maintained

December 2, 2002
Paid cash for telephone bill, Br. 25
1. Accounts affected? Cash and utility expense. Payments for water bill, telephone bill
and electric bill are recorded through an expense account known as utility expense.
2. Account classification? Utilities expense is an expense account with a normal debit
balance. Cash is an asset account with a normal debit balance.
3. How affected? Utilities expense is increased by a debit, Br. 25. cash is decreased by a
credit, Br. 25.
Cash Utility expense
+ -25 +25 -

December 2, 2002
53
Paid cash to repair a broken window, Br. 10.
Some expense transactions are having small amounts and occur so infrequently. Such kinds of
expense transactions are recorded through Miscellaneous Expense account.
1. Account affected? Miscellaneous expense and cash.
2. Account classification? Miscellaneous expense is expense account with a normal
account balance debit. Cash is an asset account with a normal account balance debit.
3. How affected? Miscellaneous expense is increased by a debit, Br. 10. Cash is
decreased by a credit, Br.10.
Miscellaneous expense Cash

+10 -10
3.6 SUMMARY OF HOW DEBITS AND CREDITS CHANGE ACCOUNT BALANCE
Dynaset’s general ledger accounts have two amount columns, Debit and Credit. Each account
has a normal balance that is either a debit or a credit. Increases in an account’s balance are
recorded in the same amount column as its normal balance. Decreases in account balance are
recorded in the column opposite to the account’s normal balance.
Changes in assets account balances

An asset has an account balance debit. Increases in asset account balances are recorded in the
debit column. Decreases are recorded in the credit column.
Any assets account
Normal balance
+ -
Changes in liability account balances

Liability accounts have normal credit balances. Increases are recorded in the credit column.
Decreases are recorded in the debit column.
54
Any liability Account
- +
Normal Balance
Changes in capital account balances

An owner’s capital account has a normal credit balance. Increases are recorded in the credit
column. Decreases are recorded in the debit column.
Owner’s capital Account
- +
Normal Balance
Withdrawals represent decreases in an owner’s capital. However, withdrawals are recorded in

a separate drawing account instead of in the capital account. The owner’s drawing account has
a normal debit balance. Increases are recorded in the debit column. Decreases are recorded in
the credit column.
Owner’s Drawing Account

+ -
Normal Balance
Changes in Revenue account balances

The owner’s capital account is increased by revenue. However, revenue is recorded in a
separate revenue account instead of in the owner’s capital account.
Revenue accounts have normal credit balances. Increases are recorded in the credit column.
Decreases are recorded in the debit column.
Revenue Account
- +
Normal Balance
55
Changes in expense account balances
Expenses represent decreases in an owner’s capital. However, expenses are recorded in
separate expense accounts instead of in the capital account.
Expense accounts have normal debit balances. Increases are recorded in the debit column.
Decreases are recorded in the credit column.
Any Expense Account
+ -
Normal Balance
Maintaining equality
Maintaining balances or equality is an important foundation of accounting system. Equality or
balance is present in several places.
1. An accounting equation.
equation. The total amounts on the equation’s left side must be equal
to the total amounts on the right side.
2. A balance sheet.
sheet. The total assets must be equal to the total liabilities and capital on a
balance sheet.
3. A transaction.
transaction Each transaction has a debit part and a credit part. The debit part must
be equal to the credit part in the T account analysis for each transaction.
Any account Any account

Column Column Column Column
100 100
3.7 ANSWER FOR CHECK YOUR PROGRESS QUESTIONS

1. *The account balance of all assets, owner’s withdrawals and all expenses is Debit.
*These three accounts are recorded in the debit balance, only when they are increased.
2. *The opposite side of the account balance for liabilities, capital and revenue is Debit.
56
*These three accounts are recorded in the Debit balance side, only when they are
decreased.
3.8 GLOSSARY
Account Balance: The different between the total amounts in the account's Debit and Credit
columns is called account balance.
T – Account: A skeleton form of account showing only the debit and credit columns is called
T-account.
Temporary Capital Accounts: Accounts used to sort information until transferred to the
capital account are called temporary capital accounts.
I. Multiple Choice
1. If a debit to an account signify an increase in that accounts, then the account could be;
A. Expense B. Revenue C. Additional Investment
D. Net Income E. B and D
2. An account with its normal balance is recorded, when it is:

A. Decreased B. Increased C. Debited
D. Credited E. None
3. Which of the following is true?

A. An increase in capital is directly recorded to capital account
B. Withdrawal is a decrease in capital resulted from the main operation of the
business
C. An increase or decrease in capital is accumulated through temporary capital
account till the end of the fiscal period
D. Both revenue and additional investment are increased in capital resulted from
the main operation of the business.
II. Workout
Analyze the following transactions into debits and credit using T-account.
57
1. Paid cash for telephone bill, Br. 50
2. Received cash from daily service given, Br. 500
3. Paid cash for TV – advertising Br. 100
4. Received cash from the owner as an additional investment in the business, Br. 1000
6. Paid cash for insurance, Br. 100
8. Paid cash for the owner for personal use, Br. 150
9. Paid cash for month's rent, Br. 400
10. Paid cash for suppliers, Br. 25
58
UNIT 4. JOURNALIZING BUSINESS TRANSACTIONS
Contents
4.1 Introduction
4.2 Recording Transactions in a Journal
4.3 Proving and Ruling a Journal
4.4 Completing a Journal at the End of Month
4.5 Proving Cash
4.6 Making Corrections in a Journal Entries
4.7 Answer to Check Your Progress Exercises
4.8 Glossary
After studding the unit, you will be able to:

a. define accounting terms related to journalizing.
b. record transaction in a multi-column cash Journal.
c. prove cash and equality of debit and credit in a cash Journal
d. total, rule, and forward totals from one page to another in a cash Journal.
e. rule a cash Journal.
4.1 INTRODUCTION
Before transactions are recorded in the Journal, they have to be analyzed into debit and credit.
The procedure in analyzing transactions is discussed in the last unit. After each transaction is
analyzed into debit and credit parts, the transaction is recorded in a Journal. Recording
business transactions in a Journal is called Journalizing.
4.2 RECORDING TRANSACTIONS IN A JOURNAL
59
Transactions could be recorded in an accounting equation. However, recording transactions in
an accounting equation does not provide a permanent record for business transactions.
Generally accepted accounting practices include making a more permanent record of each
transaction. The first permanent record on which transactions are recorded is a journal.
Transactions could be recorded first in general ledger account. However, there are reasons not
to record transactions first in a general ledger account directly. These are:
1. Accuracy:
Accuracy: A journal entry includes the debit and credit parts of each transaction in
one place. Equality of debit and credit can be checked easily by looking at a journal
entry. General ledger does not include the two parts of transaction (Debit, credit) in
one place. It shows only part of a transaction; as a result the accuracy of debit and
credit cannot be checked looking at general ledger account. Errors in recording a
transaction can be corrected in a journal before transferring the information to general
ledger accounts.
2. Chronological record: Transactions are recorded in a Journal by date i.e.,

chronological record. Day-to-day activities of a business are listed in the order they
occur. When, weeks or months later, all the facts are needed about a specific
transaction, a Journal is an easy source to check because it includes full information
about a specific transaction. The debit and credit part of transactions are recorded in a
different general ledger accounts. If transactions were recorded directly in general
ledger accounts, information about any single transaction would be difficult to find in
one place.
3. Double-entry accounting:
accounting: The recording of debit and credit parts of a transaction is
called double entry accounting.
accounting. The debit and credit part of a transaction are recorded
in a journal not in a general ledger. Double-entry accounting provides complete record
of each transaction complete accounting is double-entry accounting.
4.2.1. Using a Journal

A portion of Dynaset’s journal is described in the last chapter. The description included how
to record opening entry in a journal’s general debit and credit columns. Using only a two
column general journal has a disadvantage i.e., much space and time is required to record
60
many transactions in a two-column general Journal. To save time and space, Ato Fitsum uses
a cash journal for his business records. Each financial activity usually creates an entry to be
recorded in a journal.

1. What are the three reasons to record transactions first in the Journal?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. What is the disadvantage of a General Journal?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Journal form
The complete cash journal used by Dynaset, Ato Fitsum’s business is shown below in
illustration 4-1.
Illustration 4-1
Cash Journal Page ___
Doc Post General Sales Cash

Date Account title No. Ref. Debit Credit Credit Debit Credit
1 1
2 2
3 3
4 4
Dynaset’s Journal has five amount columns. Two amount columns are headed General Debit
and General Credit. The three other amount columns have account titles in the heading. A
Journal amount column headed with an account title [sales credit, cash (debit credit)] is called
a special amount column. A special amount column is provided in a journal for each account
in which many monthly entries will be made. For example, most of Dynaset’s transactions
61
affect the cash account. For this reason, Dynaset’s Journal has special amount columns for
cash Debit and cash credit.
Source documents
A business paper, known as a source document is prepared describing each transaction in
detail. Dynaset uses four kinds of source documents.
1. Check.
Check. A business form ordering a bank to pay cash from a depositor’s bank account
is called check.
check. A source document for all cash payment is check.
2. Receipt.
Receipt. A business form giving written acknowledgement for cash received is called
a receipt. When cash is received from sources other than revenue i.e., money collected
out of professional service, Dynaset prepares a hand written receipt.
3. Adding Machine tape.
tape. Cash is collected as service is rendered to each customer. At
the end of each day, Dynaset uses an adding machine to total the amount of cash
received.
4. Memorandum.
Memorandum. For all other transactions apart from cash receipt and cash payment,
memorandum is prepared. Details of an entry are described on a memorandum.
4.2.2 Journalizing transitions

Before a transaction is recorded in a journal, the transaction is analyzed into its debit and
credit parts. The procedure for analyzing transactions is described in unit 3.
Journalizing a cash payment for an asset

Dynaset makes cash payment entries affecting the asset accounts, supplies and prepaid
insurance.
December 1, 2002
Paid cash for supplies, Br. 30.Check No
No. 1
The source document for this entry is check (cash payment). For this transaction, the asset
supplies is debited (increased) for Br. 30. The asset cash is credited (decreased) for Br. 30.
Cash is a special column account and a supply is general amount column account.
The steps in recording the four parts of this entry is below:
62
1. Write the date, 2002, December 1, in the date column. The entry is recorded on the
first page. Neither the year nor the month is written again on the same page.
2. Debit part of entry.
entry. Write the title of the account debited, supplies in the account title
column. Write the debit amount, Br. 30, in the General Debit column. The General
Debit column is used because there is no special amount column headed supplies
debit.
3. Credit part of entry.
entry. Write the credit amount, Br. 30, on the cash credit column. The
account title is not written because it is included in the special amount column heading.
4. Source document.
document. Write the source document number, C1, it means check No. 1, in
the source document no. Column.
* The entry to record the transaction is shown below in illustration 4-2

1. What is a special amount column?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. The source document for cash collection and payment are ………….. and …………………
Illustration 4-2
Cash Journal Page 1___
Doc. Post General Sales Cash

1 2002
Dec. 1 Supplies C1 30 00 30 00
December 1, 2002
Paid cash for insurance, Br. 100. Check No. 2.
The source document for this entry is check No.2. The T-account analysis for this transaction
is described unit 3.
63
The steps in recording the four parts of this entry are below.
1. Date. Write the day of the month, 1, in the Date column
2. Debit.
Debit. Write the title of the account debited prepaid insurance, in the Account title
column. Write the debit amount, Br. 100, in the General Debit column.
3. Credit.
Credit. Write the credit amount, Br. 100 in the cash credit column.
4. Source Document.
Document. Write the source document number, C2, in the Doc. No. column.
* The entry to record the transaction is shown below in illustration 4-3
Illustration 4-3

2 1 Prepaid C2 100 00 100 00

insurance
Journalizing a cash payment of liability

December 1, 2002
Paid cash to Addis Bank for amount owed, Br. 200. Check
The source document for this transaction is check No. 3. The T account analyzed for this
transaction is described in unit 3.
The steps in recording the four part of this entry are:

1. Date. Write the day of the month, 1, in the Date column.
2. Debit. Write the title of the account debited, Addis Bank, in the account title column.
Write the debit amount, Br. 200, in the General debit column.
3. Credit. Write the credit amount, Br. 200, in the cash credit column.
4. Source Document. Write the source document number, C3, in the Doc. No column.
64
Illustration 4-4

200
3 00 1 Addis Bank C3 200 00
Journalizing transactions affecting capital accounts

Dynaset has two kinds of transactions that affect the owner equity account. The one is when
cash is received from the owner, Ato Fitsum, as an additional investment in the business. The
other occurs when the owner, Ato Fitsum, takes cash out of the business for personal use.
December 1, 2002
Received cash from the owner, Ato Fitsum, as an additional investment. The
source document for this transaction is Receipt No.1. The T - account analysis for this entry is
described in unit 3.
1. Date.
Date. Write the date, 1, in the Date column.
2. Debit.
Debit. Write the debit amount, Br. 400, in the cash debit column.
3. Credit.
Credit. Write the title of the account credited, Fitsum capital in the Account title
column. Write the credit amount Br.400 in the General credit column.
4. Source Document.
Document. Write the source document number, R1, to mean that Receipt
number 1.
The entry for this transaction is shown below in illustration 4-5
65
Illustration 4-5

4 1 Fitsum capital R1 400 00 400 00
December 1, 2002
Paid cash to the owner, Ato Fitsum, for personal use, Br. 150 Check No. 4
The source document for this transaction is check No. 4. The T account analysis for this
transaction is described in unit 3.
The steps in recording the four parts of this entry are below
1. Date.
Date. Write the date, 1, in the date column.
2. Debit. Write the title of the account debited, Fitsum, Drawing, in the Account title
4. Source Document.
Document. Write the source document number, C4 in the Doc. No. column.
The entry for this transaction is shown below in illustration 4-6

Illustration 4-6

66
5 1 Fitsum Drawing C4 150 00 150 00
Journalizing a revenue transaction

Dynaset uses an adding machine to total all cash received from sales on a single day.
day
December 1, 2002
Received cash from daily professional service given (sales of service), Br. 500
The source document for this transaction is Adding Machine Tape No. 1, prepared to
summarize all the December 1 sales revenue. The T account analysis for this entry is
described in unit 3 using a revenue account for sales of service, Fees revenue.
The four steps in recording the four parts of this entry are below.
1. Date. Write the date, 1, in the date column.
2. Debit. Write the debit amount, Br. 500, in the cash Debit column.
3. Credit.
Credit. Write the credit amount, Br. 500, in the sales credit column.
Both the debit and the credit amounts are written in the special column amount. Nothing is
written in the account title column to show that no account title is written, a check mark
() is placed in the account title column.
4. Source Document. Write the source document number, T1, in the Doc. No. Column. T
indicates that the source document is Adding Machine tape. The number 1 indicated
the day of the month for which the tape is prepared.
Illustration 4-7

6 1  T1 500 500
67
1. When the owner takes money out of his business for his personal use, it is debited to
Drawing account. Why?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. Why do we place a check mark (

() under the account title column and when?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Journalizing an expense transaction

Dynaset has several cash payment transactions affecting expenses. These transactions
typically affect Advertising expense, Miscellaneous expense, Rent expense, Utilities expense
and so on.
December 1, 2002
Paid cash for December rent Br. 300. Check No. 5
The source document for this transaction is check No. 5. The T account analysis for this entry
is described unit 3.
1. Date.
Date. Write the date, 1, in the Date column.
2. Debit.
Debit. Write the title of the account debited, Rent expense, in the Account title
3. Credit.
Credit. Write the credit amount, Br. 300, in the cash credit column.
4. Source Document.
Document. Write the source document number, C5, in the Doc. No. column
68
ILLUSTRATION 4-8

7 1 Rent expense C5 300 00 300

December 2, 2002
Paid cash for telephone bill, Br. 25. Check No. 6
The source document for this entry is described unit 3.
1. Date.
Date. Write the date, 2 in the Date column.
2. Debit.
Debit. Write the title of the account debited, utilities expense in the Account title
column. Write the debit amount, Br. 25, in the General Debit column. Utility expense
is an expense account used to record payments for water bill, electric bill and water
bill.
3. Credit.
Credit. Write the credit amount, Br. 25, in the cash credit column.
4. Source Document.
Document. Write the source document, C6, in the Doc. No. Column. The
entry for the transaction is shown below in illustration 4-9
Illustration 4-9

8 2 Utilities expense C6 25 00 25
69
December 2, 2002
Paid cash to repair a broken window, Br. 10 check No. 7
The source document for this transaction is check No. 7.
The T-account analysis for this entry is described in unit 3.
The steps in recording the four parts of this entry are:

1. Date. Write the date, 2, in the Date column.
2. Debit. Write the title of the account debited, Miscellaneous expense, in the account
title column. Write the debit amount, Br. 10, in the General Debit column.
Illustration 4-10

9 2 Miscellaneous C7 10 00 10 00
expense
4.3 PROVING AND RULING A JOURNAL
The following is the complete cash Journal for Dynaset including transactions recorded from
December 2 to 13, filled on page 1 of the cash Journal. The transactions are recorded
following the same step described before.
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CASH JOURN PAGE- 1

Date Account Title No. Ref. Debit Credit Credit Debit Credit
1 2002
Dec. 1 Supplies C1 30 00 30 00
2 1 Prepaid insurance C2 100 00 100 00
3 1 Addis Bank C3 200 00 200 00
4 1 Fitsum, Capital R1 400 00 400 00 00
5 1 Fitsum, Drawing C4 150 00 150 00
6 1  T1 500 00 500 00
7 1 Rent expense C5 300 00 300 00
8 2 Utilities expense C6 25 00 25 00
9 2 Miscellaneous Expense C7 10 00 10 00
10 3  T2  300 00 300 00
11 7 Advertising Expenses C8 40 00 40 00
12 9  T3 250 00 250 00
13 10  T4  300 00 300 00
14 11 Supplies C9 50 00 50 00
15 13 Equipment repair C10 15 00 15 00
Expense 
13 
16 T5 100 00 100 00
17 13 Carried forward  920 00 400 00 1450 00 1850 00 920 00
Illustration 4-11
Proving a Journal Page

To prove or to make sure that the total debits equals the total credits, on that page (page 1)
Dynaset checks the two parts total amount.
The following steps are followed to prove a journal.

1. Add each of the amount columns. (The General Debits and credit, sales credit and
cash Debit and Credit). Use an adding machine, a calculator or any other means to add
the numbers.
2. Add the debit column totals and the credit column totals. The figures for Dynaset’s
Journal, page 1, are below.
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Column Debit Credit
General--------------------- Br. 920 -------------------------Br. 400
Sales----------------------------------------------------------------1450
Cash-----------------------------1850
Cash-----------------------------1850-----------------------------
----------------------------- 920
Totals------------------------ Br. 2770 ----------------------Br. 2770
3. Check the debit and credit totals to be certain that they are the same. The total
debits and total credits are the same, Br. 2770. The equality of debits and credits on page 1
of Dynaset’s cash journal has been maintained. The Journal page is proved.
proved.
4.3.1 Ruling a Journal page

After a Journal page is proved, the page is ruled as shown on the completed Journal on page
1.
The steps in ruling the Journal are below.
1. Rule a single line across all amount columns below the last entry.
2. Below the next line write the day, 13, in the Date column.
3. Write the word carried forward in the account title column.
4. Place a check mark, (
(), in the post reference column to show that nothing needs to be
posted from this line.
5. Write the column totals below the single line.
6. Rule double lines below the column totals and across all amount columns to show that
the work is complete.
4.3.2 Starting a new Journal page

A new Journal page is started to continue recording Dynaset’s December entries.
To start a new Journal page, Dynaset completes the following steps.

1. Write the page number, 2, in the heading after the word page.
2. Write the year, month, and day, 2002, December 13, in the Date column.
3. Write the word Brought forward in the account title column.
4. Record the column totals from the bottom line of Journal’s page 1
5. Place a check mark (
() in the post Ref. Column to show that nothing needs to be
posted from this line.
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The following shows how to start page 2 of Dynaset’s Journal.
Illustration 4-12
CASH JOURNAL PAGE- 2

2002
Dec. 13 Brought forward  920 00 400 00 1450 00 1850 00 920 00
4.4 COMPLETING A JOURNAL AT THE END OF A MONTH
Dynaset always proves (check the equality of debits and credits) and rules (complete the
Journal) at the end of each month. This procedure prepares the Journal for posting.
The completed page 2 of the Journal which includes transactions (December 13-31) is shown
next. The total debits and the total credits are the same; equality of debits and credits is
maintained in the Journal. The Journal is proved.
Column Debit Credit

General--------------
General--------------Br.
Br. 1177-----------------
1177-----------------Br.
Br. 400
Sales--------------------
Sales-------------------- ------------------- 2130
Cash------------------
Cash------------------ 2530-----------------
2530----------------- 1177
Total-----------------
Total-----------------Br.
Br. 3707----------------
3707---------------- 3707
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1 2002
Dec. 13 Brought forward  920 00 400 00 1450 00 1850 00 920 00
2 15  T6  90 00 90 00
4 19  T7  110 00 110 00
5 21 Utilities Expense C12 35 00 35 00
6 22  T8  100 00 100 00
7 25 Fitsum, Drawing C13 50 00 50 00
8 27 Supplies C14 65 00 65 00
9 28  T9  70 00 70 00
11 29 Fitsum, Drawing C16 80 00 80 00
12 30  T10  100 00 100 00
13 31  T11  210 00 210 00
14 31 Total 1177 00 400 00 2130 00 2530 00 1177 00
Illustration 4-13
4.5 PROVING CASH
Cash is proved at the end of the month in Dynaset. Determining that cash on hand agrees with
the accounting records is called Proving cash.
cash.
Dynaset proves cash by completing the steps below.
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1. Determine cash on hand at the end of the month.
- Cash on hand at the beginning of the month---------------------Br. 1200
(Beginning balance of cash account in the ledger)
Plus: total cash received during the month------------------------- +2530
(Total of Journal’s cash debit column) ________
Total---------------------------------------------------------------------Br. 3730
Less: total cash paid during the month------------------------------- 1177
(Total of Journal’s cash credit column)------------------------_________
Equals: Cash on hand at the end of the month-------------------- Br. 2553
2. Compare the cash on hand, December 31, Br.2553, with the balance shown in the
checkbook after the last check. If the two figures are the same, Cash is proved.
Fortunately Dynaset’s check Book shows the same amount. The two figures are the same
and cash is proved.
4.6 MAKING CORRECTIONS IN A JOURNAL ENTRIES
Sometimes errors are made in writing date, an account title, a source document number, or an
amount. If an error is made on the Journal, cancel the error by neatly drawing a line through
the incorrect item. Then write the correct item immediately above the canceled item.
Examples of corrections in Journal entries are shown below.
Illustration 4-14
CASH JOURNAL
PAGE- 2

9  T9  200 00 200 00
9 Supplies C16 1500 00 1500 00
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1. * Chronological order
* Accuracy
* Double entry system
2. The disadvantage of general journal is, it needs much space and time to record many
transactions in a two- column general Journal

1. *A Journal amount column headed with an account titles in the heading is called a special
amount column. (Cash Debit and Credit, Sales credit)
*A special amount column is provided in a Journal for each account in which many
monthly entries will be made. For example, cash and sales are affected frequently within a
month.
2. Receipt and check

1. * Because, when the owner takes money out of his business, asset (cash) and capital are
decreased. To show the decrease in capital there should be another accounts that is Drawing
to be debited.
* When capital increases it is credited when it decreases it is debited.
2. * We place a check mark under the account title column to show that no account title is
written under that column.
* When both the debit and credit amounts are written in the special column amount.
4.8 GLOSSARY
Journalizing: Recording business transactions in a journal is called journalizing.

Double-entry Accounting: The recording of debit and credit parts of a transaction is called
double entry accounting.
A special Amount Column: A journal amount column headed with an account title is called
a special amount column.
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Check: A business form ordering a bank to pay cash from a depositor's bank account is called
check.
Receipt: A business form giving written acknowledgement for cash received is called a
receipt.
Proving Cash: Determining that the amount of cash on hand agrees with the accounting
record is called proving cash.
I. Multiple Choices
1. All of the following are advantages of a cash journal over a general journal except.
A. Save time and facilities during posting
B. The equality of debits and credits could easily be proved
C. Saves time during recording
D. Saves space required for recording
E. None of the above
2. Which accounting concept supports the need for source documents for journal entry?
A. Cost concept
B. Objective concept
C. Matching principle
D. Memorandum
E. Going concern
3. The reasons for recording transaction first in the journal and then posting to the ledger
are:
A. Accuracy
B. Chronological recording
C. Doubl-entry accounting
D. All
E. None of the above
4. An expense account used to record small amount and infrequent transaction is called:
A. Utility expense
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B. Miscellaneous expense
C. Repair expense
D. Supplies expense
E. Advertising expense
5. Cash journal columns used to record frequently happening transactions are called:
A. Special columns
B. Debit columns
C. Credit columns
D. General debit and credit columns
6. Which of the following is true?

A. Year and month are written once on a page in the Date column of the cash journal.
B. Transactions are recorded chronologically i.e., by their order of occurrence.
C. The two parts of a transaction is recorded in the cash journal as a result the accuracy of
debit and credit can be checked easily.
D. All of the above
II. Workout
Record the following transactions in the cash journal, Page – 1.
August 3. Paid cash for August rent, Br. 400. C1

5. Paid cash for insurance, Br. 100. C2
7. Received cash from weekly service given, Br. 450. T1
10. Paid cash for repair of broken window Br. 20. C3
13. Paid cash for advertising in local newspaper Br. 50. C4
14. Received cash from weekly service given Br. 500. T2
18. Paid cash for telephone bill Br. 20. C5
21. Received cash from the owner as an additional investment in the business Br. 600.
R1
26. Paid cash for supplies Br. 100. C6
28. Paid cash to Zur stationary for amount owed Br. 110. C7
31. Received cash from weekly service given Br. 600. T3
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31. Paid cash to the owner for personal use Br. 200. C8
UNIT 5. POSTING TO A GENERAL LEDGER
Contents:
5.1 Introduction
5.2 Arranging Accounts in a General Ledger
5.3 Posting From a Cash Journal
5.3.1 Posting General Amount Column
5.3.2 Completing the Posting of the General Columns of a Journal
5.3.3 Posting Special Amount Columns of a Journal
5.4 A Cash Journal After Posting has been Completed
5.5 A General Ledger After Posting From Cash Journal has been Completed
5.6 Summary
5.7 Answer for Check Your Progress Exercises
5.8 Glossary
After studding this unit, you will be able to:

b. Define accounting terms related to posting from a Journal.
c. Identify accounting practices related to posting.
d. Prepare a chart of account for a small service business organization as a
proprietorship.
e. Post amounts from a Journal to a general ledger.
5.1 INTRODUCTION
Dynaset records transactions in a cash journal as described before in unit 4. A Journal does
not show Account balance or the deference between debit and credit of a specific account. For
example, cash, on a specific date. To show changes to specific account balances, information
is posted from a journal to a general ledger. The debits and the credits posted to accounts are
used to determine new account balances.
79
5.2 ARRANGING ACCOUNTS IN A GENERAL LEDGER
Accounts in a general ledger are arranged in the same order as they appear on financial
reports. Because the order is the same, information is easily transferred from general ledger
accounts to financial statements. Accounts with the same classification are placed together in
one division of a general ledger. For example, all asset accounts are in one division, and all
expense accounts are in another division. Dynaset’s accounts classifications are listed in the
order they appear in the general ledger.
A list of account title and number showing location of accounts in a general ledger is called
chart of account.
account. Dynaset’s complete chart of account is shown in the following table.
Dynaset
Chart of account
(1) Assets (2) Liabilities (4) Revenue
11 Cash 21 Wegagen Bank 41 Sales
12 Supplies 22 Addis Bank (5) Expenses
13 Prepaid insurance (3) Capital 51 Rent expense
14 Building 31 Fitsum capital 52 Utilities expense
15 Equipments 32 Fitsum Drawing 53 Miscellaneous expense
33 Income Summary 54 Advertising expense
55 Equipment repair expense
56 Supplies expense
57 Insurance expense
5.3 POSTING FROM A CASH JOURNAL
Transferring information from a Journal to ledger accounts is known as Posting.

Posting.
5.3.1 Posting general amount columns

For each amount in a Journal’s General Debit or General credit column, an account title is
written in the account title column. (Refer the cash Journal for Dynaset). The amount is
posted to the account written in the account title column.
80
Posting from a Journal’s General Debit column.
column.
Supplies are posted next from line one of the cash Journal. The amount in the General debit
column is Br. 30. The steps in posting the debit amount on line 1 are below:
1. Write the date, 1, in the date column of the general ledger account, supplies.
 The month and the year are written only once on each general ledger page.
2. Write the Journal page number,1, in the account’s. Post Ref. Column.
3. Write the debit amount, Br. 30, in the account’s Debit column.
4. Figure the new account balance. The previous debit balance posted from the beginning
balance sheet, Br. 1,500 plus the Br. 30 debit equals the new debit balance, Br. 1,530.
Write the new account balance, Br. 1530, in the account’s debit balance column.
5. Return to the Journal and write the account number, 12, in the Journal’s post. Ref.
Column. Writing the account number is the last step in the posting procedure and it
means that the entry in the Journal is posted to the general ledger account.
81

3 5
1 1 Supplies C1 12 30 00 30
Account title- Supplies Account No. 12

1
Post Balance
2002
Dec. 1 1 1500 00 1500 00
1 1 30 00 4 1530
Account balance
Posting from a Journal’s General Credit Column.

Column.
Fitsum capital is posted next from line 4 of the cash Journal. The amount in the General credit
column, Br. 400 is posted. The steps in posting the credit amount on line 4 are below.
1. Write the date, 1, in the Date column of the general ledger account.
82
2. Write the Journal page number, 1, in the post reference column.
3. Write the credit amount, Br. 400, in the account’s credit column.
4. Figure the new account balance. The previous credit balance posted from the
beginning balance sheet, Br. 3,900 plus the credit balance, Br. 400 credit, equals the
new credit balance, Br. 4,300. Write the new account balance, Br. 4,300, in the
accounts credit balance column.
5. Return to the Journal and write the account number,31, in the journal’s post. Ref.
Column.

2 5
4 1 R1 31 400
Account-Fitsum, capital 3 Account No. 31

1
Post Balance
2002
Dec. 1 1 3900 00 3900 00
1 1 400 00 4 4300 00
83
5.3.1 Completing the posting of the two General columns of a Journal
Each amount in cash journal’s General Debit column is posted as described for supplies (for
line 1 of the cash journal). Each amount in cash journal’s General credit column is posted as
described for Fitsum, capital (for line 4 of the cash journal).
Posting for General Debit and General credit amount is made on each date transaction is
recorded on the journal. Frequent posting keeps accounts up to date and avoids doing all the
posting at the end of a month.
Separate amounts in a journal’s General debit and credit columns are posted individually.
Each amount, on each line, for General debit and credit column are posted. Therefore, the
totals of a Journal’s General amount columns are not posted. A cheek mark, (), is placed
under each General amount column total. The check mark shows that the total of column is
not posted. The following figure shows the rule for posting Journal’s amount column totals.

14 31 Totals 1177 00 400 00 2130 00 2530 00 1177
General amount Special amount

Column are not posted Column total are
posted
1. Why do we post information from the Journal to the ledger?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
84
2. Why do we place a check mark () under each General debit and credit total amount?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
5.3.3 Posting special amount columns of a Journal

Dynaset’s cash journal has three special amount column, sales credit column, cash debit, and
credit column. The amounts written in these special amount columns are not posted
individually. Each amount, on each line of the special column are not posted separately. Only
the totals of special amount columns are posted. This procedure saves time in posting.
Each special amount column total is posted to the account listed in the column heading, (sales,
cash). The total of sales credit column is posted as a credit to sales. The total of cash debit
column is posted as a debit to cash. The total of the cash credit column is posted as a credit to
cash.
Posting the Sales Credit column total.

The steps in posting the sales credit column total are below.
1. Write the date, 2002, December 31, in the account Date column.
2. Write the Journal page number, 2, in the account post. Ref. Column.
3. Write the column total, Br. 2130, in the account credit column.
4. Figure the new account balance. The previous balance, Zero, plus the Br. 2130, credit
equal the new credit balance, Br. 2130. Write the new account balance, Br. 2130, in
the account’s credit Balance column.
5. Return to the Journal, and write the account number, 41, below the sales credit column
total.
Cash Journal Page 2

85
14 31 Total 1177 00 400 2130 2530 1177
( ) ( ) (41)
1 5
Account-Sales 3 Account No.41. 31
Post Balance
2002
Dec. 31 2 2130 4 2130 00
2
Posting the cash Debit column total

The steps in posting the cash Debit column total are below.
1. Write the date, 31, in the accounts Date column.
2. Write the Journal page number, 2, in the account’s post. Ref. Column.
3. Write the column total, Br. 2530, in the account’s Debit column
4. Figure the new account balance. The previous debit balance, Br. 1200, plus the Br.
2530 debit equal the new debit balance, Br. 3730. Write the new account balance,
Br.3730, in the account’s Debit balance column.
5. Return to the Journal, and write the account number, 11, below the cash Debit column
total.
Cash Journal Page 2

1 2 5
31 Total 1177 00 400 2130 2530 1177
( ) ( ) (41) (11)
86
Account-Cash Account No.11. 31
3
Post Balance
2002
Dec. 1 1 1200 00 1200 00
31 2 2530 00 4 3730 00
Posting the cash credit column total

The steps in posting the cash credit column total are below.
1. Write the date, 31, in the account’s Date column.
2. Write the Journal page number, 2, in the account’s post. Ref. Column.
3. Write the column total, Br. 1177, in the account’s column.
4. Figure the new account balance. The previous debit balance, Br. 3730 minus the Br.
1177 credit equals the new debit balance, Br. 2193. write the new account balance, Br.
2193, in the account’s Debit Balance column.
5. Return to the Journal, and write the account number, 11, below the cash credit column
total.
Cash Journal Page 2

Account-Cash Account No.11. 312

3
1
Post Balance 5
31 Total 1177 00 400 2130 2530 1177
( ) ( ) (41) (11) (11)
2002
Dec. 1 1 1200 00 1200 00 1200 00
31 2 2530 00 3730 00 3730 00
87
31 2 1177 2193 00
4
5.4 A CASH JOURNAL AFTER POSTING HAS BEEN COMPLETED
Page 1 and page 2 of Dynaset’s December cash Journal, after a posting has been completed, is
shown on the following page.

2002
1 Dec. 1 Supplies C1 12 30 00 30 00
2 1 Prepaid insurance C2 13 100 00 100 00
3 1 Addis Bank C3 22 200 00 200 00
4 1 Fitsum, Capital R1 31 400 00 400 00
5 1 Fitsum, Drawing C4 32 150 00 150 00
6 1  T1  500 00 500 00
7 1 Rent expense C5 51 300 00 300 00
8 2 Utilities expense C6 52 25 00 25 00
9 2 Miscellaneous expense C7 53 10 00 10 00
10 3  T2  300 00 300 00
11 7 Advertising expense C8 54 40 00 40 00
12 9  T3  250 00 250 00
13 10  T4  300 00 300 00
14 11 Supplies C9 12 50 00 50 00
15 13 Equipment repair expe. C10 55 15 00 15 00
16 13  T5  100 00 100 00
88
17 13 Carried forward  920 00 400 00 1450 00 1850 00 920 00
()
( ) ()
( )
*The check mark () in the post Ref. Column shows that those individual amounts are not
posted.
*The check mark () below the General Debit and credit column shows that those total
amounts are not posted.
*The account number written in the post Ref. Column shows those individual amounts are
posted.

2002
1 Dec. 13 Brought Forward  920 00 400 00 1450 00 1850 00 920 00
2 15  T6  90 00 90 00
4 19  T7  110 00 110 00
5 21 Utilities expense C12 52 35 00 35 00
6 22  T8  100 00 100 00
7 25 Fistum, Drawing C13 32 50 00 50 00
8 27 Supplies C14 12 65 00 65 00
9 28  T9  70 00 70 00
11 29 Fitsum, Drawing C16 32 80 00 80 00
12 30  T10  100 00 100 00
13 31  T11  210 00 210 00
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14 31 Total 1177 00 400 00 2130 00 2530 00 1177 00
()
( ) ()) (41) (11) (11)
Not Not Posted Posted Posted

Posted Post
ed

1. Why do we place a check mark (
() under the post reference column?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
5.5 A GENERAL LEDGER AFTER POSTING FROM A CASH JOURNAL HAS

BEEN COMPLETED
Dynaset’s general ledger, after all posting from the December Journal has been completed, is
show below.
Account title- Cash Account No. 11
Date Item Post Balance

Ref. Debit Credit Debit Credit
2002
Dec. 1 1 1200 00 1200 00
31 2 2530 3730 00
31 2 1177 00 2553 00
Account title- Supplies Account No. 12

90
2002
Dec. 1 1 1500 00 1500 00
1 1 30 00 1530 00
11 1 50 00 1580 00
27 2 65 00 1645 00
Account title- Prepaid insurance Account No. 13

2002
Dec. 1 1 700 00 700 00
1 1 100 00 800 00
Account title- Building Account No. 14

2002
Dec. 1 1 3000 00 3000 00
Account title-Equipment Account No. 15

2002
Dec. 1 1 800 00 800 00
91
Account title- Wegagen Bank Account No. 21

2002
Dec. 1 1 1300 00 1300 00
Account title- Addis Bank Account No. 22

2002
Dec. 1 1 2000 00 2000 00
1 1 200 00 1800 00
Account title- Fitsum, Capital Account No. 31

2002
Dec. 1 1 3900 00 3900 00
1 1 400 00 4300 00
92
Account title- Fistum, Drawing Account No. 32

2002
Dec. 1 1 150 00 150 00
25 2 50 00 200 00
29 2 80 00 280 00
Account title- Income Summary Account No. 33

* The use of income summary account will be discussed.
Account title- Sales Account No. 41

2002
Dec. 31 2 2130 00 2130 00
Account title- Rent expense Account No. 51
93
2002
Dec. 1 1 300 00 300 00
Account title- Utilities expense Account No. 52

2002
Dec. 2 1 25 00 25 00
21 2 35 00 60 00
Account title- Miscellaneous expense Account No. 53

2002
Dec. 2 1 10 00 10 00
17 2 10 00 20 00
94
28 2 17 00 37 00
Account title- Advertising expense Account No. 54

2002
Dec. 7 1 40 00 40 00
Account title- Equipment repair expense Account No. 55

2002
Dec. 13 1 15 00 15 00
Account title- Supplies expense Account No. 56

95
Account title- Insurance expense Account No. 57

* The use of supplies and Insurance expense account will be explained later.
5.6 SUMMARY OF PROCEDURES FOR POSTING FROM A JOURNAL TO A

GENERAL LEDGER
Posting from a journal’s General amount columns

1. Separate amounts in General debit and credit columns ARE posted individually to
accounts listed in the Journal’s account title column. An account number is written in
the Journal’s post Ref. Column. This number shows to which account the amount was
posted.
2. The total of Journal’s General debit and credit columns ARE NOT posted. Check
mark are placed below both general amount column totals to show that the column
totals are not posted.
Posting from a Journal’s special amount columns

1. Separate amounts in a Journal’s special amount column ARE NOT posted
individually. A check mark is placed in the Journal’s post Ref. Column to show the
separate amounts are not posted.
2. The totals of Journal’s special amount columns ARE posted to the accounts listed in
the column headings. An account number is written below a special amount column
total after the total is posted. This account number shows to which account the total
was posted.
1. To show changes to specific account balances information is posted form a Journal to

a general ledger.
96
1. Because, the totals of the debit and credit column of the general debit and credit column
are not posted. It is the separate amount in a Journals General debit and credit columns
are posted individually.
2. We put a check mark under the post reference column, to show that those individual
amounts are not posted.
-It is the total amount posted for a special column.
5.8 GLOSSARY
General Amount Columns: Columns in the cash journal for which account title is written in
the Account Title columns are called General amount columns.
Special Amount Columns: Columns in the cash journal for which account title is written on
the heading are called special amount columns.
Posting: Transferring information from the journal to the ledger is called posting.
5.9 MODEL EXAMINATION QUESTIONS
Say "True" or "False" for each of the following statements.
1. General ledger contains all accounts needed to prepare financial statements.
2. The journal page number written in the post reference column of the general ledger
indicate that posting is completed.
3. Accounts in a general ledger are arranged in the same order as they appear on financial
reports.
4. Chart of account shows the list of account title only.
5. Each amount in cash journal's General debit and credit column is posted to the ledger.
6. An account number written in the journal's post reference column shows to which
account the amount was posted.
7. A check mark () placed under the General column total amount indicates that the
amounts are posted.
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UNIT 6. WORKSHEET FOR A SERVICE BUSINESS
Contents
6.1 Introduction
6.2 Work Sheet
6.2.1 Worksheet Heading
6.2.2 Trial Balance on a Worksheet
6.2.3 Adjustment on a Worksheet
6.2.4 Financial Statement Information on a Worksheet
6.2.5 Completing a Worksheet
6.3 Summary
6.4 Answer for Check Your Progress Exercises
6.5 Glossary
98
After studding this unit you will be able to:
a. define accounting terms related to work sheet.
b. identify accounting concepts and practices related to a work sheet.
c. plan adjustments for supplies and prepaid insurance.
d. complete a work sheet for a service business organized as a proprietorship.
6.1 INTRODUCTION
Financial reports are mostly prepared at the end of a fiscal year that is at the end of one year.
It is not necessary to wait to the end of a fiscal year to prepare financial reports. Financial
statements can be prepared any time the business would like to prepare. Each business
chooses a fiscal period length that meets its own needs. Some businesses, such as Dynaset,
use a one-month fiscal period. Other business may use a three-month, six-month, or one year
fiscal period. To prepare accurate financial statements at the end of fiscal period (Accounting
period), information necessary to prepare the reports must be planed and analyzed on a
temporary paper called worksheet.
worksheet.
6.2 WORK SHEET
Before financial reports are prepared, general ledger accounts are summarized. A columnar
accounting form, which contains eight columns, on which the financial condition of a
business is summarized, is called Work sheet.
sheet. A work sheet helps to plan the information,
which is to be reported on financial statements. The information is taken from the general
ledger that is the account balance of each item. Work sheet is a temporary paper unlike
journal and general ledger, used to plan financial information. Therefore, pencil can be used
to prepare work sheet.
The preparation of Dynaset’s work sheet achieves four objectives:

1. Summarize general ledger information on trial balance.
2. Plan needed adjustments to general ledger accounts.
3. Sort general ledger information according to reports to be prepared.
4. Figure the amount of net income or net loss for a fiscal period.
6.2.1 Work sheet heading
99
A work sheet heading, consisting of three lines, is similar to heading of any accounting report.
The heading for Dynaset’s work sheet prepared on December 31, 2002, is shown in
Illustration 6-1
Illustration 6-1
1. Name of the business Dynaset
2. Name of the report Work sheet
3. Date of the report For the month ended December 31,2002
The date shows that the work sheet covers 31 days from December 1 through December 31,
2002. The work sheet is for a one-month fiscal period ended December 31, 2002.
6.2.2 Trial balance on a work sheet

A proof of the equality of debits and credits in a general ledger is called a Trial balance.
balance.
Information for a trial balance are taken from the general ledger accounts. The general ledger
accounts are described in chapter five. All general ledger accounts title are listed on a trial
balance even if some accounts, such as Income summary, supplies expense, and insurance
expense, have no balances. Account balances are written in either the trial balance debit or
credit columns. The column in which an account balance is recorded shows whether the
account has a debit balance or a credit balance. For example, all assets have debit balance. All
liabilities credit and all expenses debit.
The steps in preparing a trial balance on the work sheet are below.
1. Write the general ledger account title in the Account Title column.
2. Write the account balances in either the Trial Balance debit or credit column.
3. Check the trial balance for equality of debits and credits.
 Rule a single line across the two Trial balance columns below the last line on
which an account title is written. The single line indicates that the two columns
(debit and credit) are to be added.
 Add both the Trial balance debit and credit column.
 Rule double line after making sure that the debit total equals the credit total. If the
two totals are in balance check the work sheet to find error.
100
Dynaset’s December 31, 2002, trial balance on the work sheet is shown in Illustration 6-2
Illustration 6-2
Dynaset
Work sheet
For month ended, December 31, 2002
Trial balance
Account Title Debit Credit
Cash 2553 00
Supplies 1645 00
Building 3000 00
Equipment 800 00
Addis Bank 1800 00
Fitsum Capital 4300 00
Fitsum Drawing 280 00
Income summary
Sales 2130 00
101
Rent expense 300 00
Utilities expense 60 00
Miscellaneous expense 37 00
Advertising expense 40 00
Equipment repair expense 15 00
Supplies expense
Insurance expense
9530 00 9530 00

1. What is the form on which general ledger accounts are summarized?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
2. What is the purpose of having Trial balance column on the worksheet?

…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
6.2.3 Adjustment on a work sheet

Some general ledger accounts do not show, up-to-date balance at the end of a fiscal period.
The accounts must be brought up-to-date. Changes recorded to up-to-date general ledger
accounts at the end of a fiscal period are called ADJUSTMENTS.
ADJUSTMENTS. The two accounts of
Dynaset, which need adjustment, are supplies and prepaid insurance.
insurance.
Dynaset debits supplies only when supplies are bought. These supplies are bought for use. So
every day Dynaset uses those supplies, which are bought for this purpose. However, the used
or consumed supplies value is not removed or separated from the unused supplies value at the
end of December. On December 31, supplies value needs an adjustment to separate these two
parts, the used supplies value and the unused supplies value. This adjustment is made on the
work sheet adjustment column. An account must be decreased by an amount equal to the
supplies used during the month. The values of supplies used during the period are expenses.
102
Analyzing supplies adjustment. On December 31, 2002 before adjustment, Dynaset’s
supplies account has a balance of Br. 1645. The general accounts used for supplies adjustment
are supplies and supplies expense account. Supplies expense account shows the amount of
supplies used and changed to expense accounts.
On December 31, 2002, Dynaset counts the supplies still on hand. The value of supplies on
that date is Br. 1,000. So the value of supplies used during the month is Br. 645, as shown
below.
Supplies account balance, December 31---------------Br. 1,645
Less: Supplies on hand, December 31----------------------1,000
31----------------------1,000
Equals: Supplies used during December Br. 645
The adjustment for supplies is shown using T account

Before adjustment
Supplies Supplies expense
Dec. 31, Balance 1645
After adjustment
Based on the December 31 count, the supplies true balance on this date is Br. 1,000. The
remaining Br. 645 represents the supplies value used during the month. So when the
adjustment made, supplies expense account must be increased (debited) by the used value of
supplies, Br. 645, and supplies must be decreased (credited) by the same amount, Br. 645.
Supplies Supplies expense

December 31, Bal. 1645 Adju. 645 Adju. 645
Adjusted Bal. 1,000
103
Recording the supplies adjustment on a work sheet
The steps are the following
1. Write the amount, Br. 645, in the adjustment Debit column on the line with the
account title supplies expense. (Line 17)
2. Write the amount, Br. 645, in the adjustment credit column on the line with the
account title supplies. (Line 2)
3. Label the two parts of this adjustment with small letter “a”. This letter identifies the
debit and the credit part of the adjustment.
Dynaset’s supplies adjustment on December 31, 2002 is shown below.
ILLUSTRATION 6-3
1 2 3 4
Trial balance Adjustment
Account title Debit Credit Debit Credit
1 Cash
2 Supplies 645 00 645(a) 00
(a)
17 Supplies expense 645 00
The prepaid insurance balance also needs to be adjusted. The amount paid for insurance.
Premium is debited to prepaid insurance at the time of payment. At the end of fiscal period,
the prepaid insurance account must be decreased by the value of insurance coverage used. The
value of insurance coverage used is an expense so must be debited to insurance expense
account.
104
Analyzing the prepaid insurance adjustment.
adjustment. The portion of prepaid insurance not used
during an accounting period is an asset.
asset. The portion of prepaid insurance used during the
accounting period is an expense.
expense.
On December 31, 2002, before adjustment, prepaid insurance have value of Br. 800. A review
of Dynaset’s insurance shows that Br. 150 of the prepaid insurance is used therefore expired
during December. The remaining prepaid insurance coverage is Br. 650 as shown below.
Prepaid insurance account balance, December 31-------------Br. 800

Less: Prepaid insurance used during December ------------- 150
Equals: Prepaid insurance remaining, December 31--------- Br.
Br. 650
The adjustment for prepaid insurance is shown using T account.

Before adjustment
Prepaid insurance Insurance expense
December 31, Bal. 800
After adjustment
The prepaid insurance coverage used is debited to Insurance expense account to increase the
account to increase the account. The same amount is credited to prepaid insurance account to
decrease the account.
Prepaid insurance Insurance expense

December 31, Bal. 800 Adju. 150 Adjusted 150
Adjusted Bal. 650

1. What is the purpose of having Adjustment column in the worksheet?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
105
2. At the time of making an adjustment for supplies and prepaid insurance, which portion is
recorded as an expense?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Recording the prepaid insurance adjustment on a work sheet.

The steps are the following.
1. Write the amount, Br. 150, in the adjustment debit column on the line with the account
title Insurance expense (Line 18)
2. Write the amount, Br. 150, in the adjustment credit column on the line with the
account title prepaid Insurance. (Line 3)
3. Label the two parts of this adjustment with a small letter “b”
Illustration 6-4
1 2 3 4
Trial balance Adjustment
Account title Debit Credit Debit Credit
(a)
645 00
2 Supplies 645 00
(b)
150 00
3 Prepaid insurance 800 00
(a)
17 Supplies expense 645 00
18 Insurance expense (b)
150 00
795 00 795 00
106
Proving a work sheet Adjustment column. After the adjustment are recorded on a work sheet,
the equality of debit and credits for the adjustment column is proved as shown above in
illustration 6-4.
6.2.4 Financial statement information on a work sheet

Dynaset prepares two financial statements from information on a work sheet. A financial
statement showing the value of assets, liabilities, and capital is known as balance sheet. A
financial statement showing the revenue and expenses for a fiscal period is called income
statement. Up to date or adjusted balances are sorted on a worksheet according to the financial
statement on which the account will appear.
Extending balance sheet account balances

The balance sheet accounts are asset, liability, and capital accounts. All up to date balance
sheet account balances are extended to the worksheet balance sheet debit and credit column.
The extension of account balances is shown in illustration 6-5.
Extending Income statement Account balances

Dynaset’s income statement accounts are the revenue and expense accounts. All up-to-date
income statement account balances are extended to the worksheet income statement debit and
credit column. The extension of income statement account balances is shown in illustration
6.6
Illustration 6-5
Trial Balance Adjustment Income Statement Balance sheet

Account title Debit Credit Debit Credit Debit Credit Debit Credit
107
1 Cash 2553 00 2553 00
2 Supplies 1645 00 645 (a)
1000 00
3 Prepaid insurance 800 00 150(b) 650 00
4 Building 3000 00 3000 00
5 Equipment 800 00 800 00
6 Wegagen Bank 1300 00 1300 00
7 Addis Bank 1800 00 1800 00
8 Fitsum Capital 4300 00 4300 00
9 Fitsum Drawing 280 00 280 00
 Supplies up-to-date balance is Br. 1000 (1645 Dr - 645 cr.).

 Prepaid insurance up-to-date balance is Br. 650 (800 Dr – 150 cr.)
10 Income summary
11 Sales 2130 00 2130 00
12 Rent expense 300 00 300 00
13 Utilities expense 60 00 60 00
14 Miscellaneous 37 00 37 00
expense
15 Advertising Exp. 40 00 40 00
16 Equipment repair 15 00 15 00
expense
17 Supplies expense 645(a) 645 00
18 Insurance expense 150 (b)
150 00
 Supplies expense account balance is Br. 645 after adjustment.

 Insurance expense account balance is Br. 150 after adjustment.
6.2.5 Completing a work sheet

A work sheet is completed by figuring the net income or net loss and doing the final totaling
and ruling.
108
Dynaset’s completed work sheet is shown in Illustration 6-7.
Figuring and recording net income on a work sheet

The difference between total revenue and total expenses when total revenue is greater is
called net income. The steps in figuring and recording net income on a work sheet are below.
1. Rule a single line across the Income statement and Balance sheet columns.
2. Add both the income statement and the Balance sheet columns. Write each column
total below the single line.
3. Figure the net income or net loss. Dynaset’s net income is figured as below.
Income statement credit column total---------------------Br. 2130

Less: Income statement Debit column total------------------1247
total------------------1247
Equals: Net income-------------------------------------------Br. 883
Dynaset’s worksheet shows a net income for December 2002. The income statement
credit column total (revenue), Br. 2130, is larger than the income statement debit
column total (1247), expense.
4. Write the amount of net income, Br. 883, below the income statement Debit column
total. Write the word net income on the same line in the Account Title column.
5. Extend the amount of net income, Br. 883, to the balance sheet credit column. Write
this amount on the same line as the word Net income.
Business might have a net loss. The deference between total revenue and total expenses total
expense when total expenses are greater is called Net loss.
loss. Net loss is treated on the work
sheet in the same way as Net income except that the net loss is written below the income
statement credit column. The net loss is also written below the balance sheet debit column.
109
Illustration 6-7
Dynaset Work sheet
For month ended, December 31,2002
1 2 3 4 5 6 7 8
Trial Balance Adjustment Income Statement Balance sheet

Account title Debit Credit Debit Credit Debit Credit Debit Credit
1 Cash 2553 00 2553 00
2 Supplies 1645 00 645 (a) 0 1000 00
0
3 Prepaid insurance 800 00 150(b) 650 00
4 Building 3000 00 3000 00
5 Equipment 800 00 800 00
6 Wegagen Bank 1300 00 1300 00
7 Addis Bank 1800 00 1800 00
8 Fitsum Capital 4300 00 4300 00
9 Fitsum Drawing 280 00 795 280 00
10 Income Summary
11 Sales 2130 00 2130 00
12 Rent expense 300 00 300 00
13 Utilities expense 60 00 60 00
14 Miscellaneous Exp. 37 00 37 00
15 Advertising Exp. 40 00 40 00
16 Equip. repair Exp. 15 00 15 00
17 Supplies expense 645 (a)
645 00
18 Insurance expense 150 (b)
150 00
19 9530 00 9530 00 795 1247 00 2130 00 8283 00 7400 00
20 Net income 883 883 00
21
2130 00 2130 00 8283 00 8283 00
6. 3 SUMMARY OF STEPS IN PREPARING A WORKSHEET
1. Write the heading

2. Record the trial balance.
 Write the general ledger accounts titles in the account title column.
 Write the account balances in either the Trial balance debit or credit column.
 Rule a single line across the Trial balance column.
 Add the trial balance columns and compare the totals.
110
 Rule double line across both the Trial balance columns.
3. Record the supplies adjustment.

 Write the debit amount in the adjustment debit column on the line with the account
supplies expense.
 Write the credit amount in the adjustment credit column on the line with the account
supplies.
 Label the adjustment (a).
4. Record the prepaid insurance adjustment.

 Write the debit amount in the adjustment debit column on the line with the account
Insurance expense.
 Write the credit amount in the adjustment credit column on the line with the account
prepaid insurance.
 Label this adjustment (b).
5. Prove the adjustment column.
6. Extend all balance sheet account balances after adjustment to the balance sheet columns.
 Extend up-to-date assets, liabilities and capital accounts.
7. Extend all income statement account balances after adjustment to the income statement
columns.
 Extend up-to-date revenue and expense accounts.
8. Figure and record the net income (net loss)

 Rule a single line across the income statement and the balance sheet columns.
 Add the columns and write the totals below the single line.
 Subtract the smaller total from the larger total of the income statement column to
figure net income (or net loss).
 Write the amount of net income (or net loss) below the smaller of the two income
statement column totals. Write the words net income (Net loss) on the same line in
the Account Title column.
111
 Extend the net income (Net loss) to the balance sheet columns. Write the amount of
net income (or net loss) under the smaller of the two totals. Write the amount on the
same line as the word net income (or net loss).
9. Total and rule the Income statement and Balance sheet columns.
6.4 ANSWERS FOR CHECK YOUR PROGRESS QUESTIONS

1. Work sheet is the form on which general ledger accounts are summarized before financial
statement prepared.
2. To proof the equality of debits and credits in a general ledger account.

1. Adjustment column is required to record changes made to up to date general ledger
accounts at the end of a fiscal period. For example, supplies and prepared insurance.
2. The portion of supplies and prepaid insurance used during the period is recorded as an
expense while the unused amount remains as an asset.
6.5 GLOSSARY
Fiscal Period: The length of time for which a business analyzes financial information is called
fiscal period. (One year, 6 month, 3 month, 1 month).
Worksheet: A columnar accounting form on which the financial condition of a business

summarized is called a worksheet.
Trial Balance: A proof of the equality of debits and credits is called trial balance.
Adjustments: Changes recorded to update general ledger accounts at the end of a fiscal period is
called adjustments.
Adjusting entries: Journal entries made to bring general ledger accounts up to date are called
adjusting entries.
112
Part I. Multiple Choices

1. In any pre-closing trial balance, the balance of capital account is
A. beginning balance
B. ending balance
C. beginning balance + net income
D. beginning balance + change in capital
E. beginning balance + additional investment
2. One of the following form is not permanent paper;

A. General ledger
B. Worksheet
C. Journal
D. Balance sheet
E. Trial balance
3. The debit and credit column of the income statement column in the worksheet are Br.
65,000 and Br. 90,000 respectively. If the credit total of the balance sheet is Br. 110,000,
then what will be the credit total of the balance sheet column before net income/net loss is
recorded?
A. Br. 135,000 B. Br. 155,000
C. Br. 85,000 D. Br. 90,000 E. None of the above
4. Which of the following statement is "not true"?

A. An adjustment made on the worksheet made up to date general ledger accounts
after it is recorded in the journal and posted in the ledger.
B. Worksheet sort and summarize general ledge amounts to plan information for
financial statements.
C. The portion of prepaid insurance used during the accounting period is an asset.
D. Amounts transferred to the balance sheet column of the work sheet are balances
after adjustment.
113
II. Workout
Mela Co.
Trial Balance
For the month ended December 31, 20x4
Account Title Debit Credit

Cash 3000
Equipment 4000
Supplies 600
Prepaid insurance 2000
Furniture 1500
Kuru Plc. (creditor) 5000
Zelalem Co. (crditor) 2500
Mela, Capital ?
Mela, Drawing 700
Sales ?
Commission Revenue ?
Advertising Expense 1600
Salary Expense 2700
Rent Expense 800
Miscellaneous Expense 500
Additional Information
 Revenue includes two accounts, sales and commission revenue
 Prepaid insurance used during the month of December, Br. 800
 Supplies as per the count made on December 31, Br. 200
 Total revenue is 125% of the total expense for the month
 Commission Revenue is 70% of sale.
Required
a) Record the necessary adjusting entries
b) Prepare the worksheet for the month ended December 31, 20x4.
114

Introduction To Accounting (Etagenehu)

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Introduction To Accounting (Etagenehu)

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UNIT 1.

ACCOUNTING CAREERS AND CONCEPTS

1.0 AIMS & OBJECTIVES

After studying this unit you should be able to:

1.2 ACCOUNTING DEFINED

1.3 JOB OPPORTUNITIES IN ACCOUNTING.

a) Accountants: Persons who plan, summarize, analyze, and interpret financial

d) General office clerks:

1.4 DIFFERENCE BETWEEN ACCOUNTING AND BOOKKEEPING

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that

Accountants frequently refer to a business organization as an accounting entity or a business

1.5.1 Sole Proprietorship

1.6 TYPES OF BUSINESS ACTIVITIES PERFORMED BY BUSINESS

1.7 USERS OF ACCOUNTING INFORMATION

1.8 ACCOUNTING CONCEPTS

1. Business entity concept

2.Going concern (continuity)

3. Accounting period cycle

5. Unit of Measurement (Money measurement)

7. Matching Expenses with Revenue

10. Consistent Reporting

Check your progress Exercise 1

Check Your Progress 1

1.11 MODEL EXAM QUESTIONS

1. Identify and briefly describe the three forms of business organizations.

2. Identify and briefly describe the three types of business.

2.0 AIMS AND OBJECTIVES

After studying this unit, you will be able to: -

2.2 ACCOUNTING EQUATION

Financial right to the assets of a business are called equities.

The basic accounting equation is written as:

Check your progress Exercise - 1

2.3 FINANCIAL STATEMENTS

2.4 PREPARING A BEGINNING BALANCE SHEET

What is owned (assets) what is owed (Liabilities)

* Small materials bought for use like stationary materials.

Asset = Liability + Capital

Body of balance sheet

Total assets = Total Equities

Check your progress Exercise - 2

1. What does Balance sheet shows?

2. Why a balance sheet is needed to be always in balance?

2.5 RECORDING THE OPENING ENTRY

recorded is called General Journal.

2.5.2 A Journal entry

3. Credit part of entry:

General Journal Page 1

4. Reason for entry:

Check your progress Exercise - 3

2.5.3 Checking an entry for accuracy

2.6 POSTING THE OPENING ENTRY TO A LEDGER

2.6.1 Chart of accounts

For example, in Dynaset’s chart of account, cash is numbered 11,

Check Your Progress Exercise - 4

2.6.2 Opening accounts in a ledger

The procedures to open an account in the ledger are:

2.6.3 Posting an opening entry

Check Your Progress Exercise - 5

Posting the debit items of opening entry

Account- Cash Account No.11

Account- Prepaid insurance Account No.13

Account- Building Account No.14

Account- Equipment Account No.15