Principles Of Financial Accounting By Mahmoud Ramadan

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 Principles Of Financial Accounting By Mahmoud Ramadan

First of all , we cannot rely on recording the transactions in the form of a tables with
the plus and subtraction signs , but there is an accounting cycle that we must follow.

The Accounting Cycle

1. Identify The Transaction ( Analyzing )
2. General Journal Or ( Journal entries) Or (Journalizing)
3. Posting (Ledger)
4. Trial Balance
5. Work Sheet
6. Adjusting Entries
7. Financial Statemets
8. Closing the books

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 Principles Of Financial Accounting By Mahmoud Ramadan

2nd Journalizing ( Journal entries)

The general journal is part of the accounting bookkeeping system (Accounting
Cycle) When an event occurs we need to record it.
We call this event a transaction and record it in general journal

OR

A book of original entry that requires that both the account being debited and the
account being credited be listed along with the respective amounts.

The journal consists of raw accounting entries that record business transactions, in
sequential order by date.

Transactions and daily entries are recorded by a system called the

(double-entry system)

Some entries involve only two accounts, one debit and one credit This type of entry
is called a (Simple entry).

Some transactions, however, require more than two accounts in journalizing.

An entry that requires three or more accounts is called a (Compound entry).

The general form of the accounting recording system

1. The date of the transaction is entered in the Date column.

2. The debit account title (that is, the account to be debited) is entered fi rst at
theextreme left margin of the column headed “Account Titles and
Explanation,”and the amount of the debit is recorded in the Debit column.

3. The credit account title (that is, the account to be credited) is indented and
entered on the next line in the column headed “Account Titles and
Explanation,” and the amount of the credit is recorded in the Credit column

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4. A brief explanation of the transaction appears on the line below the credit
account title. A space is left between journal entries. The blank space account
title. A space is left between journal entries. The blank account title. A space
is left between journal entries. The blank space separates individual journal
entries and makes the entire journal easier to read

5. The column titled Ref. (which stands for Reference) is left blank when the
journal entry is made. This column is used later when the journal entries are
transferred to the ledger accounts.

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3rd Posting ( General Ledger) Called T-Account

Is the entire group of accounts maintained by a company is the ledger.

The ledger provides the balance in each of the accounts as well as keeps track of
changes in these balances.
Companies may use various kinds of ledgers, but every company has a general
ledger.
A general ledger contains all the asset, liability, and owner’s equity

Companies arrange the ledger in the sequence in which they present the accounts in
the financial statements,.First in order are the asset accounts, followed by liability
accounts, owner’s capital,owner’s drawings, revenues, and expenses. Each account
is numbered for easier identification.

The ledger provides the balance in each of the accounts. For example, the
Cash account shows the amount of cash available to meet current obligations.
The Accounts Receivable account shows amounts due from customers. Accounts
Payable shows amounts owed to creditors

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Question
Judi Salem opened a law office on July 1, 2017. On July 31, the balance sheet
showed:
Cash $5,000, Accounts Receivable $1,500, Supplies $500, Equipment $6,000,
Accounts Payable $4,200, and Owner's Capital $8,800.During August, the following
transactions occurred

1- Collected $1,200 of accounts receivable

2- Paid $2,800 cash on accounts payable.
3- Recognized revenue of $7,500 of which $3,000 is collected in cash and the
balance is due in September.
4- purchased additional equipment for $2,000, paying $400 in cash and the
balance on account.
5- Paid salaries $2,500, rent for August $900, and advertising expenses $400.
6- Withdrew $700 in cash for personal use.
7- Received $2,000 from Standard Federal Bank?money borrowed on a note
payable.
8- Incurred utility expenses for month on account $270.

Instructions
(a) Prepare a tabular analysis of the August transactions beginning with July 31
balances. The column headings should be as follows: Cash + Accounts Receivable +
Supplies + Equipment = Notes Payable + Accounts Payable + Owner?s Capital ?
Owner?s Drawings + Revenues ? Expenses.

(b) Prepare an income statement for August, an owner?s equity statement for
August, and a balance sheet at August 31

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Answer (A)
Debit Credit
Date Account title and Explanation
(Dr) (Cr)
Cash 1,200
Aug, 1
Accounts Receivable 1,200
Account Payable 2,800
Aug, 2
Cash 2,800
Cash 3,000
Accounts Receivable 4,500
Aug, 3
Revenue 7,500
Equipment 2,000
Aug, 4
Cash 400
Accounts Payable 1,600
Salaries 2,500
Rent Expense 900
Aug, 5 Advertising Expens 400

Cash 3,800
Owner’s Drawing 700
Aug, 6
Cash 700
Cash 2,000
Aug, 7
Notes Payable 2,000
Utilities Expense 270
Aug, 8
Account Payable 270

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Answer (B) Posting to Ledger

Cash
Dr Cr
Beg.Bal 5,000 Aug, 2 2,800
Aug, 1 1,200 Aug, 4 400
Aug, 3 3,000 Aug, 5 3,800
Aug, 7 2,000 Aug, 6 700
Ending Bal. 3,500
____________________________________________________________

Account Receivable
Dr Cr
Beg.Bal 1,500 Aug, 1 1,200
Aug, 3 4,500
Ending Bal. 4,800

_________________________________________________________

Supplies
Dr Cr
Beg.Bal 500

Ending Bal. 500

____________________________________________________________

Equipment
Dr Cr
Beg.Bal 6,000
Aug, 4 2,000
Ending Bal. 8,000

____________________________________________________________

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Accounts Payable
Dr Cr
Aug, 2 2,800
Beg. Bal. 4,200
Aug, 4 1,600
Aug, 8 270
Ending Bal. 3,270
____________________________________________________________

Notes Payable
Dr Cr
Beg. Bal. 0
Aug, 7 2,000
Ending Bal. 2000
____________________________________________________________

Owner’s Capital
Dr Cr
Beg. Bal. 8,800
Ending Bal. 8,800

____________________________________________________________

Owner’s Drawing
Dr Cr
Beg.Bal 0
Aug, 6 700
Ending Bal. 700
____________________________________________________________

Revenues
Dr Cr
Beg. Bal. 0
Aug, 3 7,500
Ending Bal. 7,500
____________________________________________________________

Salaries Expense
Dr Cr
Beg.Bal 0
Aug, 5 2,500
Ending Bal. 2,500

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Rent Expense
Dr Cr
Beg.Bal 0
Aug, 5 900
Ending Bal. 900
____________________________________________________________

Advertising Expense
Dr Cr
Beg.Bal 0
Aug, 5 400
Ending Bal. 400
____________________________________________________________

Utilities Expense
Dr Cr
Beg.Bal 0
Aug, 8 270
Ending Bal. 270
____________________________________________________________

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4th Trial Balance

A trial balance is a list of accounts and their balances at a given time.

Customarily,companies prepare a trial balance at the end of an accounting period.

They list accounts in the order in which they appear in the ledger. Debit balances
appear in the left column and credit balances in the right column.

The trial balance proves the mathematical equality of debits and credits after
posting.

Under the double-entry system, this equality occurs when the sum of the debit
account balances equals the sum of the credit account balances.

A trial balance may also uncover errors in journalizing and posting.

For example
a trial balance may well have detected the error at MF Global discussed in the
Feature Story. In addition, a trial balance is useful in the preparation of financial
statements, as we will explain in the next two chapters.

The steps for preparing a trial balance are:

1. List the account titles and their balances in the appropriate debit or credit
column.

2. Total the debit and credit columns.

3. Prove the equality of the two columns.

A trial balance is a necessary checkpoint for uncovering certain types of errors.

For example, if only the debit portion of a journal entry has been posted, the trial
balance would bring this error to light.

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Limitations of a Trial Balance

- A trial balance does not guarantee freedom from recording errors, however.

- Numerous errors may exist even though the totals of the trial balance columns
agree.

For example, the trial balance may balance even when:

1. A transaction is not journalized.

2. A correct journal entry is not posted.

3. A journal entry is posted twice

4. Incorrect accounts are used in journalizing or posting.

5. Offsetting errors are made in recording the amount of a transaction.

As long as equal debits and credits are posted, even to the wrong account or in the
wrong amount the total debits will equal the total credits.

The trial balance does not prove that the company has recorded all transactions or
that the ledger is correct

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