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Content




Part one

Introduction – Flowchart – Analyzes Transactions
– Classifies Accounts
– Journalize – Post – Trial balance


Part two

Adjusting Entries – Adjusted Trial Balance
– Financial Statements – Closing entries
– Post Closing Trial Balance
– Sample of Accounting Voucher


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Part one
Introduction:
Accounting is the art of recording, summarizing, classifying and reporting financial
transactions and other events of an enterprise.

The following flowchart shows the steps in the accounting cycle. These are the
accounting procedures normally used by enterprises to record transactions and prepare
financial statements.

































(1) Transactions
Analyze and
(2) Classify
(3) Journalize

General Journal
(4) Posting

General Ledger
Post Closing
Trial Balance
(10)
(9) Closing

(Nominal
Accounts)
Financial
s ent Statem
(8) Preparation
Income
Statement
Balance Sheet
Trial Balance
(5) Preparation
(6) Adjusting Entries
Accruals
Prepayments
Estimated items
(7) alance B l i ra T Adjusted
THE
ACCOUNTING
CYCLE
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Below, the flowchart steps have been explained in detail:

1. Transaction:
The processing of accounting data begins with an economic transaction, where two or
more parties engage in an exchange of goods or services for some form of
consideration. Evidence of this happening is the receipt of some form of a source
document. Common examples of such a source document include:

• A sales receipt - this can be in a variety of forms.
• A purchase invoice.
• A debit/credit memorandum.
• A copy of a contract entered into.
• A billing statement.
• A remittance statement.

There are a multitude of source documents, in type, shapes, and format used to record
the significant data. It is these documents, which become the basis for data input to the
accounting processing. But, prior to the actual data entry, the documents must be
subjected to a series of analysis and classification.

2. Analyze and classify:

2.1. Analyze:
This phase of the accounting process includes the application of several of the
accounting principles, namely:

The Entity Concept - This is probably the most basic of all concepts in accounting.
As applied here in this phase of the accounting process, the analysis must determine
that the transaction in question, first relates to the entity in question. If not it must be
rejected and not allowed to continue through the process.

Monetary Concept - In addition the analysis must determine that the transaction can
be measured in terms of a monetary basis. Those transactions, which cannot be
measured in terms of amount (for e.g., Saudi Riyals), are eliminated from further
consideration for inclusion in the accounting process.

Cost Principle - All transactions are recorded at cost and not at current market value.
Cost is determined from the source documents used as evidence of the transaction.



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2.2. Classify:
Once past the analysis phase, the transaction is then properly classified in
preparation for entry into the accounting database, commonly using a Chart of
Accounts.

Chart of Accounts - The design of a good accounting system begins with the Chart
of Accounts. This is a list of the accounts, which comprise the particular accounting
system (it is designed with the particular company and its needs for information).
Accounts are grouped according to their relationship in the accounting equation
(i.e., assets, liabilities, owner's equity, revenues and expenses). The numberings
scheme assigns a block of numbers to the respective groups. A typical assignment
of numbers might be as follows:

Assets 100-199
Liabilities 200-299
Owner’s Equity 300-399
Revenues 400-499
Expenses 500-599

The numbering blocks should provide a convenient manner for adding new accounts
without having to renumber the accounts. Sometimes the account numbers are
designed to provide additional information as to location, cost codes, etc. In any
event they assist in arranging the accounts for convenience of financial statement
preparation, account location, and category identification.

The next consideration is that of determining whether this transaction when
recorded in the account will cause the balance of that account to be increased or
decreased. Depending upon the type of account and what side of the accounting
equation it appears, this means it must be reported as a debit or a credit. Of course
the basic rule of having debits and credits equal must be followed. That means each
transaction will require at lease one debit and one credit identity to be recorded
correctly. Finally, a transaction can affect multiple accounts, requiring more than
one debit and/or one credit in order to properly record it in the accounting process.

3. Journalize:
This step in the accounting cycle represents the first time that the transaction enters the
accounting database. It is the data entry phase. Here the transaction, having been
analyzed and classified, is recorded in the Accounting Voucher.

In entering the transaction, various types of vouchers depending on the type of
organization are used.

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- ٦ -
Sometimes, accounting vouchers are not prepared and transactions are directly entered
into Journals and this is for this reason that the journal is referred to as the "book of
original entry." The journal can be likened to a diary in which events are recorded in
chronological order of their occurrence. In the accounting process, two types of
journals are used:

3.1. General Journal
In the General Journal, transactions are recorded as they were analyzed and
classified. First the event is dated as to when it actually happened. Then the debit
side of the transaction is recorded first by itemizing the account(s) that must be
debited. The amount(s) to be debited are then entered in the column to the left. This
process is continued until all of the debits have been recorded. The recording shifts
to the account(s) to be credited. The recording(s) for the credits are indented to
offset them from the debit recording(s). After recording the account(s) to be
credited, the amounts are then entered into the column to the left of that of the
debits.

If the transaction required only one debit and one credit, this is referred to as a
simple entry. On the other hand, it is requires more than one debit and/or credit; it is
referred to as a compound entry.

3.2. Special Journals
As their name implies, these journals are used to record uniquely classified types of
transactions by use of specially designed journals. They are designed to meet the
needs of the specific entity, which uses them. There is no common format for their
design, as this is determined by the individual entities. However, the most
commonly used special journals are as follows:

• Sales Journals - generally used to record all credit sales of merchandise
inventory items.
• Purchases Journals - generally used to record all credit purchases of
merchandise inventory items.
• Cash Receipts Journals - generally used to record all inflows of cash.
• Cash Payments (Disbursement) Journals - generally used to record all
outflows of cash.
• NOTE: The check register is sometimes used in place of the Cash Receipts
and Cash Payments Journals.




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- ٧ -
4. Posting:
Posting refers to the process of transferring or transcribing the information contained in
the journal entries to the appropriate accounts in the general ledger. During this process
debits in the journal entry are posted as debits in the ledger, and credits in the journal
entry are posted as credits in the ledger. Along with the debits and credits, the
information transferred includes the date of the journal entry and the voucher reference.
This cross-reference is the audit trail by which a transaction can be traced from its
entrance into the system via the journal/voucher to the final destination in the general
ledger. This is an important part of the processing of accounting data.

General Ledger
The general ledger is the heart of any accounting system. It is the permanent record of
the consequences resulting from the accumulation of transaction throughout the life of
the entity. Each account in the accounting system has its separate page in the general
ledger. In addition each account has its unique identification in the form of an account
number as specified in the Chart of Accounts.

Subsidiary Ledger
An enterprise constantly needs detailed information about its dealings with individual
customers and creditors. To provide this information, companies with several thousand
customers and creditors, use a subsidiary ledger to keep track of individual balances.
Thus a typical merchandising enterprise has subsidiary ledgers containing accounts
with customers (customers’ ledger) and creditors (creditors’ ledger). An account in the
general ledger is maintained that summarizes the details in the accounts receivable and
accounts payable ledgers. This summary account in the general ledger is called a
control account, because the summary account controls the subsidiary ledger.

5. Trial balance:
Simply defined, a Trial Balance is a list of all of the general ledger accounts having a
balance amount as of that date. It contains the following columns:
• Account Number (from chart of accounts)
• Account Title(s).
• Applicable debit amounts.
• Applicable credit balance.

A trial balance provides a check on the accuracy of the postings, which occurred during
the period by showing that the total debits posted equals the total credits posted. It is
prepared at any time, following the posting of all journal entries. However, it is
routinely prepared at the end of the accounting period, prior to making any adjustments
to the books. Thus, the trial balance is a test of the mathematical equality of debits and
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- ٨ -
credits after all postings have been completed. Its preparation is essential to the
processing events leading up to the preparation of the financial statements.

6. Adjusting entries:
Throughout an accounting period, an entity will continue to be engaged in a variety of
economic transactions. Some of those will affect the current period, while some of
them will affect future periods throughout the life of the entity. At the time that they
occur, each of these transactions, are supported by a source document (see step 1
above). If they are applicable to the current period, their flow through the accounting
system is straight forward and without the need for any special handling or
considerations.

However, those transactions, which effect the present and future accounting periods,
will at some future date require special considerations and handling. The special
considerations are caused by absence of a source document, which gives cause to their
existence. Keep in minds that these transaction either happened in a prior period or
have not yet happened The special handling is a continuation of the special
consideration, in that these transaction must be dealt with in a manner which adjusts
their effects in the current period, by means of special journal entries. Many have
already been recorded in the accounting system. What is needed then is to ensure that
their consequences are applied to the proper accounting period. Some of the examples
of adjusting entries are:

• Accruals
• Amortization of prepayments and intangibles
• Deferred revenues and expenses

Also some, balances have to be reclassified from one account to another for the
purpose of proper presentation in the financial statements. Some of the examples of
such transactions are as follows:

• Reclassification of current portion of long-term loan from long term liability
to current liability
• Reclassification of debit balances in creditors account
• Reclassification of credit balances in debtors account


This, then, is accomplished through the use of Adjusting Entries and Reclassifying
entries.


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- ٩ -

7. Adjusted trial balance:
After all Adjusting Entries and Reclassifying Entries have been journalized and
posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. It
shows the balance of all accounts, including those that have been adjusted, at the end of
the accounting period. The purpose of an adjusted trial balance is to show the effects
of all financial events that have occurred during the accounting period. The financial
statements are usually prepared from this trial balance.



8. Financial statements:
The following are the basic financial statements, which are prepared at the end of each
accounting period. Each portrays a different representation of the entities financial
status and results of activities. All of them are linked together in a manner, which
presents the financial position and results of economic activities, and therefore all three
must always be presented together.

Income Statement
Income statement:
• Presents the results of economic activities, which occurred during the
specific accounting period.
• Bridges the balance sheet of the previous accounting period with that
of the current accounting period. Therefore, it covers a period of time.
• Develops the net income for the current accounting period. This is used
to reflect the profitability of that period.
• is linked to the balance sheet via the net income amount, which appears
in both of those statements.

Statement of Changes in Owner’s Equity
Presents the changes that have occurred in the owner's equity as a result of the current
period's activities. Therefore its results represent what occurred within a period of time.
It is linked to the balance sheet via the capital account, retained earnings, and any
reserves.

Balance Sheet
Sometimes referred to as the statement of financial position, reports the assets,
liabilities, and owner’s equity of an enterprise at a specific date.

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- ١٠ -
Statement of Cash Flows
The basic purpose of a statement of cash flows is to provide relevant information about
the cash receipts and cash payments of an enterprise during a period. To achieve this
purpose, the statement of cash flows reports the cash effects of:
• Operations during a period
• Investing transactions
• Financing transactions; and
• Net increase or decrease in cash during the period

9. Closing entries:
Closing an account means to "bring the balance to zero". We close what we call the
temporary (or nominal) accounts. In the closing process all of the revenue and expense
account balances (income statement items) are transferred to a clearing or suspense
account called Income Summary (or Income for the year), which is used only at the end
of each accounting period (yearly). Revenues and Expenses are matched in the Income
Summary account and the net result of this matching, which represents the net income
or net loss for the period, is then transferred to an owners’ equity account i.e., retained
earnings. All closing entries are posted to the appropriate general ledger accounts.

10. Post closing trial balance:
A trial balance is prepared after all temporary accounts have been closed. The accounts,
which remain open are called real accounts and include: Asset accounts, Liability
accounts and the Capital account. In other words, the balance sheet accounts remain
open.

















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- ١١ -

Practical Session:

Although, an attempt has been made above to explain how an accounting cycle works, but
in order to make the students understand the whole process of flow of transactions from
beginning till the financial statements are produced, a practical session including the
following steps is recommended:

• A chart of accounts should be created keeping in view requirements of a
service enterprise.
• Accounting vouchers must be prepared for transactions affecting all aspects
of the financial statements.
• Vouchers must be posted to their individual General Ledger Accounts.
• A trial balance should be prepared using the final balances in general ledger.
• Adjusting and reclassifying entries must be prepared and then posted to
general ledger.
• Adjusted trial balance should be prepared.
• Financial statements should be prepared from the adjusted trial balance.
• Closing process should be performed.
• A post closing trial balance should be prepared.
• Opening of a new accounting period in the books should be demonstrated
using the post closing trial balance.







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- ١٢ -
Exercise
1. What are the classification of accounts, and give one example for each?
2. What closing an account means?
3. What are the nominal accounts, and what are the real accounts?
4. Mention three of financial statements?
5. Mention two of special journals?
6. What simple entry and compound entry referred to?


Answers:
(1) Assets (cash), Liabilities (accounts payable), Owner’s equity (capital), Expenses
(salaries and wages), and Revenues (sales).
(2) It means to bring the balance to zero.
(3) Nominal accounts are expenses and revenues, and real accounts are the assets,
liabilities, and owner’s equity.
(4) Income statement, balance sheet, and statement of cash flows.
(5) Sales journals, purchases journals, and cash receipt journals.
(6) Simple entry referred to the entry requires only one debit and one credit; and,
compound entry referred to the entry requires more than one debit and/or credit.






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- ١٤ -





Contents



Part One
Classification of Accounts - Debits & Credits


Part Two
General Journal - Journalizing


Part Three
General Ledger - Posting to the Accounts -
Preparation of Trail Balance





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- ١٥ -

Part one

Classification of accounts
Two types of accounts:

First: Accounts belong to the Balance Sheet and represent the basic accounting equation.
These accounts are (see Appendix 2):


1. Assets 2. Liabilities 3.Owners Equity





(Assets must be equal to the sum of Liabilities and Owners equity)





1. Assets
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Assets are the cash and non cash resources owned by a business and have economic value,
and used in carrying out future services or benefits to the entity using them.

Classification of assets:
- Current assets
Current assets are cash and other types of assets that are reasonably expected to be
converted into cash, sold, or used up during the normal operating year.

Examples of current assets include:
Cash, Bank, Inventory, Accounts Receivable, Notes Receivable, Prepaid expenses,
Marketable securities, etc.

- Fixed assets
Fixed assets are those assets that are used in the normal operations of the entity to
produce and sell goods or perform services for customers. Fixed assets are
expected to service for a number of years are not for re-sale.

Examples of fixed assets include:
Land, cars, buildings, equipment, furniture, etc.

- Intangible assets
Intangible assets are those assets that have no physical substance but they are
expected to provide benefits to the entity for several years.

Examples of intangible assets include:
Patents, trademarks, copyrights, goodwill, franchise fees, and trade name.


2. Liabilities
Liabilities are claims against assets.

Classification of Liabilities:
- Short-term Liabilities
Short-term liabilities are obligations of the entity that are reasonably expected to be
paid or settled in the next year or the normal operating cycle.


Examples of short-term liabilities include:
Short-term notes payable, accounts payable, salaries and wages payable and other
types of accrued liabilities for services received but not yet paid for.
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- Long-term Liabilities
Long-term liabilities are those obligations that do not require payment within the
next year or the normal operating cycle. In other words, liabilities not classified as
short-term are reported in the Long-term liabilities section of the balance sheet.

Examples of long-term liabilities include:
Loan, bonds, and any other obligation that mature in a period more than one year
beyond the balance sheet date is reported as long-term.

3. Owner’s Equity
Owner’s equity represents the owner’s interest in the assets of the entity. It is equal to
total assets minus total liabilities.

There are two main sources of owner’s equity:
(1) Amounts contributed by the owner (Capital), and (2) Amount earned by the entity
but not yet taken by the owner.


Second: Accounts belong to the Income Statement and involve in the determination of
net income or net loss of a business entity for a specific period of time. These accounts
are:
1. Expenses 2. Revenues

1. Expenses
Expenses are the cost of assets consumed or services used in the process of earning
revenues. In other words, expenses are outflows or other uses of assets resulting from the
sale or delivery of goods or the provision of services by the entity during specific time
period.

Examples of expenses include:
Utility expenses (electric and water), telephone bill, rent expense, wages and salaries
expense, advertisement expense, depreciation expense, etc (see Appendix 1).

2. Revenues
Revenues are cash in-flow result from the sale of goods or the rendered of services.
Basic Accounting Equation:


Assets = Liabilities + Owner’s Equity
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Expanded Accounting Equation:


Assets + Expenses = Liabilities + Capital + Revenues



Assets and expenses are debit, and if they increased also they will become debit, and if
they decreased they will become credit.

Liabilities, capital and revenues are credit, and if they increased also they will become
credit, and if they decreased they will become debit.

Example

This example illustrates the effect of the financial transactions on the expanded basic
equation as follows:

Transaction (1) Investment by owner. July 10, 2008. Saleh started his workshop by
investing SR 100,000, he deposited it in the bank as a capital.


Assets + Expenses = Liabilities + Revenue + Owner’s equity

Bank Capital
(1) +100,000 + 0 = 0 + 0 + 100,000




Transaction (2) purchase of equipment for cheque. at July 15, 2008. Saleh purchased a
computers for SR 20,000 paid by cheque.
Assets + Expenses = Liabilities + Revenue + Owner’s equity

(Bank + Computer) + 0 = 0 + 0 + Capital
100,000 (Old balance) 100,000

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(2) -20,000 + 20,000

New balance
80,000 + 20,000 = _______
100,000 100,000


Debits and Credits
The terms debit and credit mean left and right, respectively, the abbreviation of these two
words as follows:

* Debit Dr. * Credit Cr.

* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).




Double Entry System

As you have learned, every recorded transaction affects at least two accounts. This dual
effect is known as double-entry accounting. Note, however, that the term “double entry”
does not mean that a transaction must affect each side of the transaction, it may affects
one.


Example

Transaction (2) – illustrated earlier – purchase of equipment for cheque – Saleh
purchased computers for SR 20,000 paid by cheque. This transaction results in an equal
increase and decrease in total assets, though the composition of assets is changed: Bank is
decreased by SR 20,000 and the assets Equipment is increased by SR 20,000.



Before You Go, Do the Following Exercises

Exercise 1
1. What are the classifications of accounts?
2. Give an example for each classified account?
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- ٢٠ -

3. What are the accounts that belong to the income statement, and what are those
belong to the Balance sheet?
4. What do the term debit and credit mean?
5. What are the debit and credit effects on assets, liabilities, owner’s equity, expenses
and revenues?
6. What does double entry mean?


Exercise 2
Place the missing items in the following statements:
1. the accounting equation is _________ = ________ + _______
2. the accounting elements are documents ________ , ________
3. Items required by an entity that have monitory value are known as _______.
4. _________ is the interest of the owners in Business.
5. Financial events that occur in an entity are termed ________.
6. An investment in the entity increase ________ and _______.
7. To purchase “on account” is to create a _________.
8. When the words “paid on account” occur, it means a reduction of the assets
________ and reduction of the liability ________.
9. The left side of the account is known as the ________, where as the right side
is the ___________.
10. The balance sheet contains ____________, __________, and __________.


Answers: 1. assets, liabilities, owner’s equity; 2. accounting records, financial report; 3.
assets; 4. owner’s equity; 5. transactions; 6. assets, owner’s equity; 7. liability; 8.
cash or bank, accounts payable; 9. debit side, credit side; 10. assets, liabilities and
owner’s equity.

Exercise 3

Place the missing items in the following statements:

1. The four phases of accounting are __________ , __________ , ________ , and
_____________.
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- ٢١ -

2. The accounting equation is _________ = __________ + ___________.
3. Items owned by a business that have monetary value are known as
________________.
4. ___________ is the interest of the owners in a business.
5. Money owed to an outsider is a(n) ______________.
6. The difference between assets and liabilities is _____________.
7. Financial events that occur in a business are termed ______________.
8. An investment in the business increases ________ and ______________.
9. To purchase “on account” is to create a(n) ____________.
10. When the words “paid on account” occur, it means a reduction of the asset
__________ and reduction of the liability _____________.
11. Income increases net assets and also ___________.
12. A withdrawal of cash reduces cash and ____________.




Answers: 1. recording, classifying, summarizing, reporting; 2. assets, liabilities,
owner’s equity; 3. assets; 4. owner’s equity; 5. liability; 6. owner’s equity; 7.
transactions; 8. assets, owner’s equity; 9. liability; 10. cash, Accounts Payable; 11.
owner’s equity; 12. capital.




Exercise 4 Transactions completed by Saleh work shop, appear below. Indicate
increase (+), decrease (─), or no change (0) in.

Expenses Revenues Assets Liabilities
Owner’s
Equity
a. Invested 100,000 SR, and
deposit it in a bank

b. Paid rent expense for the
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month
c. Transfer money from the
bank to the cash

d. Cash collected for the
week revenue

e. Bought mechanic
equipment paying cash

f. Bought equipment on
account

g. Paid a creditor (liability)
money owned


Solution

Expenses Revenues Assets Liabilities
Owner’s
Equity
a. Increase of bank and
capital
0 0 + 0 +
b. Reduction of bank and
increase expenses
+ 0 ─ 0 0
c. Increase of cash and
decrease of bank
0 0 ± 0 0
d. Increase of cash and
revenues
0 + + 0 0
e. Increase of equipment and
decrease of cash
0 0 ± 0 0
f. Increase of equipment and
in accounts payable
0 0 + + 0
g. Decrease in cash and
accounts payable
0 0 ─ ─ 0
Part Two

General Journal

General Journal is the first book in which financial transactions are recorded in
chronological order. It has spaces for date, accounts titles & explanations, entry number,
references, and two money columns, as illustrated below:

General Journal J1
Date Title & explanation E.N P.R Debit Credit
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2008
Dec. 1

3


Journalizing

Entering transaction data into Journal is known as Journalizing.

Steps for journalizing a transaction
- Analyze the transaction to determine which accounts are affected.
- Analyze the accounts to determine which account is the debit part and which one is
the credit part.
- Record the transaction following the example illustrated below.

General Journal J1
Date Title & Explanation E.N P.R Debit Credit
2008
Nov. 25 Bank 1 100,000
Capital 100,000
(Investment in workshop business)
Dec. 01 Rent expense
Bank
(Payment of office rent, cheque
No.12)

2
10,000
10,000


Note: The date should be entered in the date column.
- The year and the month are not repeated until the start of a new page or a new
month.
- The title of the account to be debited is entered against the left margin of the title &
explanation column.
- The amount to be debited to each account is entered in the debit column on the same
line as the account title.
- The account to be credited follows the same steps except being in the credit side.
- An explanation of the transaction may be entered on the next line below the journal
entry.
- The posting reference column is left blank till the transaction is being posted.


The components of the general journal could be summarized as follows:

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1. Date. The year, month, and day of the entry are written in the date column.
The year and month do not have to be repeated for additional entries until a
new month occurs or a new page is needed.
2. Description. The account title to be debited is entered on the first line, next
to the date column. The name of the account to be credited is entered on the
line below and indented.
3. Entry Number (E. N.). There should be serial numbers for entries. The first
entry on the first day of the fiscal year has the number one and so on until the
last entry at the end of the fiscal year has the last serial number.
4. Posting Reference (P. R.). Nothing is entered in this column until the
particular entry is posted, that is, until the amounts are transferred to the
related ledger accounts. The posting process will be described in Sec. 4.4.
5. Debit. The debit amount for each account is entered in this column adjacent
to the left margin. Generally there is only one item, but there can be two or
more separate items.
6. Credit. The credit amount for each account is indented and entered in this
column. Here again, there is generally only one account, but two or more
accounts with different amounts can be involved. When there is more than
one debit or credit in a single entry, the transaction is known as a compound
entry.
7. Explanation. A brief description of the transaction is usually made on the line
below the credit. Some accountants feel that if the transaction is obvious, the
explanation may be omitted. Generally a blank line is left between the
explanation and the next entry.


Example 1

The following transactions occurred during the month of January 2008 at Mr.
Al-Rashed, lawyer.

Jan. 4 Mr. AL-Rashed invested SR50,000 cash in his law practice.
4 Bough office supplies for cash, SR3000.
4 Bought office equipment from Al-aamer Furniture Company on account SR25000.
15 Received SR20,000 in cash fees earned during the month.
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30 Paid office rent in cash for January SR5000.
30 Paid salary for part-time help SR2000 in cash.
30 Completed a consultation to one of his friends for SR 15000 received in cash.
31 Paid SR10000 in cash to Al-aamer Furniture Company, part of the transaction on
account on January 4.

Required
Prepare the general journal for the above transactions.













Solution
AL-Rashed Lawyer Office
General Journal for January 2008

General Journal J1
Date Title & explanation E.N P.R Dr. Cr.
2008
Jan. 4 Cash 1 50000
Capital
( Investment in law practice)
50000

4




Office supplies
Cash
(Bought supplies for cash)


2









3000





3000


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- ٢٦ -


4


Office equipment
Accounts Payable (Al-aamer)
(Bought equipment from Al-aamer)

3






25000




25000



15




Cash
Income fees
(Received payment for services)

4









20000





20000



30


Rent Expense
Cash
(Paid rent for month)

5






5000




5000



30


Salaries Expense
Cash
(Paid salaries of part-time help)

6




2000


2000


Cash 15000
30 Consultation fees
(Cash received for consultation)

7


15000

31
Accounts Payable (Al-aamer)
Cash
(Payment on account to Al-aamer)

8
10000
10000
Example 2

Prepare a general journal for Tehama International Company based on the following
transactions which occurred during the month of March, 2008:
1. The company started its business by SR 800000 in a bank, and 200000 in
cash as capital in 1/3/2008.
2. On 3/3 purchased furniture from Al-aamer Furniture Company for SR
50000 half in cash, and the remainder to be paid after three weeks.
3. On 6/3 Purchased goods from Adnan on credit with a bill of exchange for
SR 40000.
4. On 15/3 sold goods to Ali for SR 173000. The term of the agreement
provided for SR 23000 to be received in cash, and the remainder on credit
with a bill of exchange to be received on 23/3.
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- ٢٧ -

5. On 18/3 paid the amount of the bill of exchange to Adnan in cash.
6. On 20/3 published an advertisement in MBC for one week for SR 7000 to
be paid after one month of that date.
7. On 23/3 received the amount of the bill of exchange from Ali by cheque.
8. On 24/3 paid the amount owed to Al-aamer in cash.
9. On 25/3 paid salaries and wages of SR 12000 by cheque.
10. On 28/3 signed an agreement with two employees from Egypt to work with
company for a monthly salary of SR 3500 each.

Required
Prepare the general journal for the above transactions.








Solution
Tehama International Company
General Journal for March 2008

General Journal J1
Date Title & explanation E.N P.R Dr. Cr.
2008

March

1
Bank
Cash
1 800000
200000


Capital
( Investment in commercial business)
1000000

3
Furniture
Cash
Accounts payable (Al-aamer)
(Bought furniture from Al-aamer)

2








50000
25000
25000
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- ٢٨ -


6
Purchases
Notes Payable (Adnan)
(Purchases from Adnan on credit)

3




40000
40000

15

Cash
Notes receivable (Ali)
Sales
(Sales to Ali part in cash & part with a bill
of exchange)

4









23000
150000



173000


18
Notes payable (Adnan)
Cash
(Payment of the bill of exchange to Adnan
in cash)

5






40000
40000

20
Advertisement expense
Accounts payable (MBC)
(Publishing an advertisement in MBC)

6




7000
7000
Bank 150000
23 Notes receivable (Ali)
(Receiving the amount of the bill of
exchange from Ali by cheque)

7


150000

24


Accounts Payable (Al-aamer)
Cash
(Payment on account to Al-aamer)


8






25000




25000



25


Salaries and wages
Bank
(Paid salaries and wages by cheque)


9






12000




12000



28

No Entry


-

-

-

-



Ledger

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The process of transferring information from the journal to the ledger for the purpose of
summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in
the following steps (depending on the journal of Al- Rashid):

1. Record the amount and date. The date and the amounts of the debits and credits
are entered in the appropriate accounts.



General Journal Page J-1
Date Description E.N P.R. Dr. Cr.

Jan. 4

Cash



50,000

Capital 50,000


Cash Capital
Jan.4 50,000 Jan. 4 50,000


2. Record the posting reference in the account. The number of the journal page is
entered in the account.
3. Record the posting in the journal. For cross-referencing, the code number of the
account is now entered in the P.R. column of the journal (solid line).

General Journal Page J-1
Date Description E.N P.R. Dr. Cr.

Jan. 4

Cash



11

50,000

Capital 31 50,000

Cash 11 Capital 31
J-1 50,000 J-1 50,000




The results of the posting from the journal of AL-rashid appear below.
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Dr Cash Cr
(1) capital 50,000 3,000 supplies (2)
(4) incom fees 20,000 5,000 rent exp (5)
(7) consul fees 15,000

2,000 salary exp (6)
10,000 acc. payable (8)
65,000 Balance
85,000 85,000




Dr Capital Cr
50,000 cash (1)
Balance 50,000
50,000 50,000

Dr Consultation fees Cr
15,000 cash (7)
Balance 15,000
15,000 15,000



Dr Income Fees Cr
(4) cash 20,000
20,000 Balance
20,000 20,000



Dr Supplies Cr
(2) cash 3,000
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3,000 Balance
3,000 3,000


Dr Equipment Cr
(3) Acc payable 25,000
25,000 Balance
25,000 25,000


Dr Rent Expense Cr
(5) Cash 5,000
5,000 Balance
5,000 5,000




Dr Salaries Expense Cr
(6) Cash 2,000
2,000 Balance
2,000 2,000


Dr Accounts Payable Cr
(8) Cash 10,000 25,000 Equipment (3)
Balance 15,000

25,000 25,000





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- ٣٢ -

Trail Balance
As every transaction results in an equal amount of debits and credits in the ledger, the total
of all debit entries in the ledger should equal the total of all credit entries. At the end of the
accounting period we check this equality by preparing a schedule called a Trial Balance,
which compares the total of all Debit Balances with the total of all Credit Balances. The
procedure is as follows:

1. List account titles in the first column.
2. Record the balance of each account, entering debit balances in the debit
column and credit balances in the credit column. (Note: Asset and expense
accounts are debited for increases and would normally have debit
balances. Liability, capital, and revenue accounts are credited for
increases and would normally have credit balances).
3. Record the total of each column.
4. Compare the totals. They must both be the same.



If the totals agree, the trial balance is in balance, indicating the equality of the debits and
credits for the hundreds or thousands of transactions entered in the ledger. Although the
trial balance provides arithmetic proof of the accuracy of the records, it does not provide
theoretical proof. For example, if the purchase of Equipment was incorrectly charged to
Expense, the trial balance columns may agree, but theoretically the accounts would be
wrong, as Expense would be overstated and Equipment understated. In addition to
providing proof of arithmetic accuracy in accounts, the trial balance facilitates the
preparation of the periodic financial statements.


Account Title Dr Cr
Cash 65000
Supplies 3000
Equipment 25000
Accounts payable 15000
Capital 50000
Consultation fees 15000
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- ٣٣ -

Income fees 20000
Rent expense 5000
Salaries expense 2000
TOTAL SR 100000 100000

The accounts in Trail Balance could be classified into two groups nominal accounts
(expenses and revenues) and these should be transferred to the Income Statement, and; real
accounts (assets, liabilities and owner’s equity) and these should be transferred to the
Balance Sheet. The preparation of these financial statements will be discussed in the next
section.







- ٣٤ -

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Contents




Part One

Close the Nominal Accounts into
the Profit & Loss Account



Part Two

Preparation of Financial Reports:
Income Statement
Balance Sheet
Cash Flows Statement
Bank Reconciliation Statement













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Preparing Closing Entries

At the end of the accounting fiscal year, the balances of the nominal accounts are to be
transferred from the trial balance to the profit and loss account through closing entries.
These entries produce a zero balance in each nominal account.

Journalizing and posting closing entries is an essential step in the accounting cycle.

Separate closing entries could be prepared for each nominal account as follows:

1. Debit each revenue account for its balance and credit profit and loss account for
total revenues.

2. Credit each expense account for its balance and debit profit and loss account for
total expenses.

Example

To illustrate the journalizing and posting of closing entries, we will assume that
Al-Rashed, lawyer closes his books monthly. The closing entries at December 31 are
shown in the following illustration.

General Journal
Date Title and explanation E.N P.R Debit Credit

Dec., 31 Income fees 1 20,000
Profit and loss account 20,000

31 Consultation fees 2 15,000
Profit and loss account 15,000

31 Profit and loss account 3 7,000
Office rent 5,000
Salaries expense 2,000

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Posting of closing entries

The posting of the closing entries are shown in the following accounts, all the nominal
accounts have zero balances.


Consultation Income Fees
Dr Cr Dr Cr
15,000 20,000
15,000 20,000
15,000 15,000 20,000 20,000




Office rent Salaries expense
Dr Cr Dr Cr
5,000 2,000
5,000 2,000
5,000 5,000 2,000 2,000




Al-Rashed Lawyer Office
Profit and loss account


Dr Cr
Office rent 5,000 Income fees 20,000
Salaries expense 2,000 Consultation fees 15,000
Net Profit 28,000

35,000 35,000

* Note that profit and loss account is used only in closing at the end of a period of time.
No entries are journalized and posted to this account during the year.

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Preparation of Income Statement and Balance Sheet

Different companies in the UK, the USA and in many other countries throughout the
world have a legal obligation to publish annually four basic financial statements. These
financial statements are: (1) income statement; (2) statement of owner’s equity; (3)
balance sheet, and; (4) statement of cash flows.
Income Statement

The income statement presents a summary of an entity’s revenues and expenses for a
specific period of time, such as a month, a quarter, or a year. The income statement, also
called the statement of earnings, or statement of operations presents a moving financial
picture of business operations during the period (See Appendix 1).

The heading of the income statement indicates the name of the business, the name of the
statement, and the time period covered by the statement.
Note that:
1. Revenues are defined as inflows of assets either from the sale of goods or the
performance of services.
2. Expenses are defined as outflows or other uses of assets to produce revenue.
3. Net income is defined as the excess of revenues over expenses (net loss for the
period is defined as the excess of expenses over revenues), and will be transferred
to the owner’s equity in the balance sheet as either profit or loss.

Income Statement
SR
Revenues (Cr)
SR
Expenses (Dr)
Inventory 31.12 Inventory 1.1
Sales Purchases
Marketable securities revenues Salaries and Wages
Rent revenue Rent expense
Consultation revenues Advertisement expense
Other revenues Telephone bill
Electricity bill
Fax and post expense
Maintenance expense
Selling expenses
Insurance expense
Bad debts
Office supplies
Other expenses
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Balance Sheet

The balance sheet reports the financial position of a business at a specific date, usually the
end of a month or a year. Consequently, it is often called the “Statement of Financial
position”. Financial position is reflected by the amount of the business’ assets (resources),
the amount of its liabilities (debts owed), and the amount of its owners’ equity (assets
minus liabilities).

The balance sheet heading indicates the name of business, the name of the statement, and
the date of the statement. The assets of the business are listed on the left side and the
liabilities and the owners’ equity are listed on the right side. Note that the totals on each
side of the balance sheet should be equal. This equality must exist because the left side
lists the assets of the business and the right side shows the sources of the assets (See
Appendix 2).

Left side Right side
Assets = Liabilities + Owners’ equity






















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Balance Sheet
Liabilities and Owner's Equity Assets
Short-Term Liabilities: Current Assets:

Accounts Payable Cash

Notes Payable Bank

Short-Term Loans Inventory (stock)

Pre-collected Revenues Accounts Receivable

Accrual Expenses Notes Receivable

Marketable Securities

Prepaid Expenses

Accrual Revenues

Long-Term Liabilities: Fixed Assets:

Long-Term Loans Land

Buildings

Cars

Furniture

Equipment

Machines

Owner's Equity
Intangible Assets:

Capital Goodwill

(+) Net Profit Trade Mark

Or (-) Net Loss Copyrights

Patent


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Example for Income Statement and Balance Sheet

The following is the Trail Balance of the Red Sea Company as at December 31, 2007

Account Name Dr Cr
Cash 20000
Accounts Receivable 60000
Notes Receivable 15000
Merchandise Inventory 1-1-2007 16000
Marketable Securities 13000
Land 40000
Buildings 90000
Equipment 22000
Accounts Payable 23000
Notes Payable 23000
Long-Term Loan 85000
Owner’s Capital 121000
Sales 130000
Rent expense 7000
Advertisement expense 1000
Purchases 80000
Marketable Securities Revenues 2000
Other Revenues 1000
Salaries and Wages 12000
Telephone and Electricity expenses 9000
Total 385000 385000

Required

1. Prepare the Income Statement for the Company if you know that the Merchandise
Inventory 31-12-2007 is SR 14000.
2. Prepare the Balance Sheet for the Company as at 31-12-2007.









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Solution
The Red Sea Company
Income Statement
For the Period ended December 31, 2007

Expenses Revenues
Inventory 1.1 16000 Inventory 31-12 14000
Purchases 80000 Sales 130000
Rent expense 7000 Marketable securities revenue 2000
Advertisement expense 1000 Other revenues 1000
Salaries and wages 12000
Telephone and Electricity expenses 9000
Net Profit 22000
TOTAL 147000 147000




The Red Sea Company
Balance Sheet as at
December 31, 2007

Assets Liabilities and Owner’s Equity
Current Assets: Short-term liabilities:
Cash 20000 Accounts payable 23000
Accounts receivable 60000 Notes payable 23000
Notes receivable 15000 TOTAL 46000
inventory 14000 Long-term liabilities:
Marketable securities 13000 Long-term loan 85000
TOTAL 122000
Owner’s Equity:
Fixed Assets: Owner’s capital 121000
Land 40000 Net profit 22000
Buildings 90000 TOTAL 143000
equipment 22000
TOTAL 152000
274000 274000



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Statement of Cash Flows

Different companies in the UK, the USA and in many other countries throughout the
world have a legal obligation to publish annually four basic financial statements. These
financial statements are: (1) income statement; (2) statement of owner’s equity; (3)
balance sheet, and; (4) statement of cash flows.

In July 1990, the Accounting Standard Board in the UK issued the Financial Reporting
Standard 1 (FRS1) which requires certain companies to publish a cash-flow statement as
part of the final accounts. In the USA in November 1987, the Financial Accounting
Standard Board (FASB) published its Statement No. 95 regarding statement of cash
flows.
1



Definition and Purpose of the Statement of Cash Flows

The statement of cash flows, a required financial statement, reports the amount of cash
coming in (cash receipts) and the amount of cash going out (cash payments or
disbursements) during a period of time. The statement of cash flows shows the net
increase or net decrease in cash during the period and the cash balance at the end of the
period. Like the income statement, the statement of cash flows covers a period of time.

The main purpose of the statement of cash flows is to provide investors, creditors, and
other financial statements users with information about the cash flows of a company for a
specific period of time. The information provided by the statement of cash flows is
intended to help users assess:
1. The ability of a company to generate future positive net cash inflows. Past cash
receipts and payments are good predictors of future cash flows.
2. The ability of a company to pay its debts, dividends, and interest.
3. The effects of cash and non-cash transactions on the company’s financial position.
4. The wisdom of the management decisions. Wise decisions result in strong cash
flows and good profit.
5. The relationship between the income and cash flows.

In addition, the information provided by the statement of cash flows will assist the
management in proper planning for future activities of the entity.




(
1
) Financial Accounting Standard Board, “Statement of Cash Flows”, Statement No. 95, (Stamford,
Conn: FASB, 1987), Par. 4-6.
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Distinctions between Cash Flows Statement and Income Statement

An important distinction between the statement of cash flows and the income statement is
that the income statement includes adjustments in respect of accrued expenses and
revenues in calculating the net income of the period, whereas the other statement excludes
such adjustments. The largest item of difference between the two statements is the
depreciation expense which includes in the income statement and exclude in the other.


Cash and Cash Equivalents

FASB Statement No. 95 requires that the statement of cash flows explain the change in
cash and cash equivalents. Cash includes all accounts for which deposits and withdrawals
can be made at any time without prior notice or penalty. Cash equivalents are short-term,
highly liquid investments that can be converted into cash at will, and with an original
maturity of three months or less. The rule of the three-month maturity is intended to
exclude investments that place capital at significant risk of price fluctuation. Examples are
money-market investments, commercial paper, and Treasury notes. These investments
have essentially the same liquidity as cash.


Classification of Cash Flows

All cash inflows and outflows are classified into one of three categories in the statement of
cash flows as follows:
• Operating activities.
• Investing activities.
• Financing activities.

Operation activities are the most important for the business and should be the main source
of cash. Investing activities are less important than operations, but are generally more
important to the business than financing activities. That is because what a company invests
in is more important than how it finances the acquisition.








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Operating Activities

Operating activities consist of buying and selling merchandise or rendering services to
earn revenue. Cash flows from operating activities generally include the cash receipts and
disbursements from transactions and other events that enter into the determination of net
income. Cash inflows in operating activities include (1) the collection of cash from
customers for selling of goods or providing of services (it is the largest source of cash
inflow from operations), and (2) the receipt of interest and dividends on investments. Cash
outflows include (1) payments to suppliers, (2) payment for interest on debt, and (3) other
payments for other costs of doing business.

Note that dividends received from investments are operating cash inflows, but dividends
paid by the entity to its shareholders are financing cash outflows. Interest paid and
received are operating cash flows. Interest paid and received, and dividends received,
affect net income and therefore are operational flows. In contrast, dividends paid are
financing activities because they go to the entity’s shareholders who finance the business.


Investing Activities

Investing activities are the acquisition and disposition of assets used in operations. These
activities include (1) acquiring and selling long-term assets, (2) acquiring and selling
securities that are not considered to be cash equivalents and; (3) lending money to others
(making loans) and collecting on the principal amounts of these loans.

Purchases of plant assets and engaging in different investments are a good sign for future
expansion. An entity that invests in long-term assets appears stronger than one that is
selling off its income-producing assets.


Financing Activities

Financing activities are related to obtaining cash needed from investors and lenders and
paying them back. These activities include (1) obtaining resources from owners (issuing
stock), (2) paying dividends to the stockholders, (3) buying or selling treasury stock, (4)
borrowing money from creditors and (5) payment of principal amounts borrowed.
Payment of interest to creditors is an operating activity and is appear on the income
statement.

Financing activities explain whether the company is borrowing heavily which is strong
indication for the downfall of many companies.
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The table below illustrates the cash inflows and cash outflows resulted from operations
activities, investing activities, and; financing activities.


Activity Cash Receipts Cash Payments

Operating
Activities
(1) Collection from customers (1) Payments to supplier
(2) Receipts of interest and
dividends
(2) Payments of interest and
income tax
(3) Other operating receipts (3) Payments of wages and
salaries
(4) Other operating payments


Investing
Activities

(1) Sale of plant assets

(1) Purchase of plant assets
(2) Sale of investment
securities that are not
cash equivalents
(2) Purchase of investment
securities that are not
cash equivalents
(3) Collection of loans
made by the entity
(3) Making loans


Financing
Activities

(1) Issuing stock

(1) Payment of dividends
(2) Selling treasury stock (2) Purchase of treasury
stock
(3) Borrowing money (3) Payment of principal
amounts of debts


Reporting Cash Flows from Operating Activities

The FASB Statement No. 95 approves two formats for reporting cash flows from operating
activities, direct method and indirect method. Although the FASB permits companies to
use either of the two methods, it has a clear preference for the direct method. The Saudi
Organization for Certified Public Accountants has the same preference.
2
The preference
of direct method is stem from many reasons (1) it reports where cash came from and how
it was spent on operating activities, (2) it is easier to understand, (3) it provides better
information for decisions.

The direct method lists cash receipts and cash payments from operating activities, and the
difference is the net cash provided by, or used in, operating activities. On the other hand,

2
Saudi Organization for Certified Public Accountants, Financial Accounting Standards, Riyadh, Saudi
Arabia, Ramadan 1419, P. 185.
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the indirect method starts with net income or net loss as reported on the income statement
and adjusts it for revenues and expenses that did not cause changes in cash in the current
period.

The two methods of presenting the statement of cash flows, direct method and indirect
method, result in the same subtotals and the same change in cash for the current period.
The two methods differ only in the manner of reporting operating activities, and no
difference exists for reporting investing or financing activities.

For the above reasons, the training in this course will be devoted only to the direct method.


The Direct Method

Under the direct method, the items of cash receipts and cash payments are shown under
cash flows from operating activities, and the difference is the net cash provided by, or used
in, operating activities.

As a minimum, the following items of operating cash receipts and cash payments should
be separately disclosed when the direct method is used:

(1) Operating Activities
Cash Receipts
1. Cash collections from customers: this includes cash sales and cash collections from
sales on account.
2. Cash receipts of interest: interest revenue is earned on notes receivable. Not all
interest revenue accrued is appear on the statement of cash flows, but only the cash
interest received is appear as cash flows.
3. Cash receipts of dividends: these revenues are earned on investments in stock.

Cash Payments
1. Payments to suppliers: suppliers are the companies and other bodies that provide the
entity with inventory and essential services. Services include advertisement,
utilities, etc. Payments to suppliers include all cash payments for inventory and
most operating expenses.
2. Payments to employees: these include salaries, wages, commissions,
compensations, etc.
3. Payments for interest expense.
4. Income tax expense.

It should be noted that depreciation, depletion, and amortization expense are not listed on
the statement of cash flows because they do not affect cash.
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(2) Investing Activities
Cash Receipts
1. Cash proceeds from the sale of plant assets. The book value and the gain or loss on
the sale of plant assets are not reported on the statement of cash flows. Only the
cash proceeds from the sale of plant assets are reported as cash flows.
2. Cash proceeds from the sale of investments that are not cash equivalents.
3. Collections of loans.

Cash Payments
1. Cash payments to acquire plant assets such as land, buildings, and equipment.
2. Cash payments to purchase investments that are not cash equivalents.
3. Payments of loans to other companies.


(3) Financing Activities
Cash Receipts
1. Proceeds from issuance of common or preferred stock.
2. Proceeds from issuance of long-term notes payable.

Cash Payments
1. Payments of long-term notes payable.
2. Purchases of the entity’s own stock such as the purchases of treasury stock and
payments to retire the entity’s stock.
3. Declaration and payment of cash dividends.






Example (1)
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The Middle East Corporation’s accounting records show the following information for the
year ended December 31, 2007:
Credit sales ……………… 398000 Loan to another company 50000
Collections from customers 370000 Cash proceeds from sale of
investments (include 15000
gain)

25000
Cash sales ……………… 80000 Cash proceeds from sale of
plant assets (include 1000 loss)
21000
Interest revenue on notes
receivable ………………

16000
Collection of loans ……… 49000
Collection of interest on notes
receivable ………

12000
Cash proceeds from issuance of
short-term notes payable …

40000
Declaration and payment of
cash dividends …………

30000
Cash proceeds from issuance of
common stock

30000
Cash receipt of dividend
revenue on investments …

8000
Payments of long-term notes
payable ………

60000
Payments to suppliers …… 330000 Amortization expense ….. 8000
Payments of salaries …… 100000 Purchases of inventory on
credit
300000
Payments of interest expense 10000 Cost of goods sold …… 310000
Income tax expense …… 20000 Cash balance December 31
2006
80000
Depreciation expense …… 40000 Cash balance December 31
2007
???
Payment to acquire plant
assets
100000

Required
Prepare the Middle East Corporation’s statement of cash flows for the year ended
December 31, 2007?


Solution The Middle East Corporation
Statement of Cash Flows
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Year ended December 31, 2007
Cash Flows from Operating Activities: SR SR
Receipts:
Collections from customers (370000 + 80000) 450000
Interest revenue on notes receivable 12000
Cash receipt of dividend revenue on investments 8000
Total cash receipts 470000
Payments:
Payments to suppliers (330000)
Payments of salaries (100000)
Payments of interest expense (10000)
Income tax expense (20000)
Total cash payments (460000)
Net cash inflow from operating activities 10000
Cash Flows from Investing Activities:

Payment to acquire plant assets (100000)
Loan to another company (50000)
Cash proceeds from sale of investments 25000
Cash proceeds from sale of plant assets 21000
Collection of loans 49000
Net cash outflow from investing activities (55000)
Cash Flows from Financing Activities:

Proceeds from issuance of short-term notes payable 40000
Cash proceeds from issuance of common stock 30000
Payments of long-term notes payable (60000)
Payments of cash dividends (30000)
Net cash outflow from financing activities (20000)
Increase (decrease) in cash (65000)
Cash balance December 31, 2006 80000
Cash balance December 31, 2007 15000






Example (2)

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Below are the financial statements for the Green Land International Company for the year
ended December 31, 2007. The company commences its operations activities on January
1, 2007.

Green Land International Company
Income Statement
For the Year Ended December 31, 2007

Sales revenue 560000
Cost of goods sold (300000)
Gross profit 260000
Operating expenses:
Salaries expense 100000
Rent expense 72000
Depreciation expense 20000
Total operating expenses (192000)
Profit before tax 68000
Income tax expense (24000)
Profit after tax (net profit for 2007) 44000





Green Land International Company
Statement of Retained Earnings
For the Year Ended December 31, 2007

Retained earnings, January 1, 2007 SR 0
Add: Net profit for 2007 44000
Deduct: Dividends declared and paid (10000)
Retained earnings, December 31, 2007 34000







Green Land International Company
Statement of Financial Position
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December 31, 2007
Assets SR SR
Current Assets:
Cash 46000
Accounts receivable 360000
Inventory December 31 100000
Prepaid rent 36000
Total Current Assets 542000
Plant Assets:
Machinery 160000
Less: accumulated depreciation (20000)
Total Plant Assets 140000
Total Assets 682000

Liabilities and Stockholders’ Equity
Short-term Liabilities:
Accounts payable 140000
Accrued salaries 8000
Total Short-term Liabilities 148000
Stockholders’ Equity:
Common stock (10000 shares x SR50) 500000
Retained earnings 34000
Total Stockholders’ Equity 534000
Total Liabilities and Stockholders’ Equity 682000

Additional information:
1. Income tax during 2007 amounting to SR24000 paid in cash.
2. Declaration and payment of cash dividends on the common stock during 2007
amounting to SR10000.
3. Common stock issued on January 1, 2007.
4. Machinery was purchased on January 1, 2007 for SR160000 cash. The machinery
has an estimated useful life of 8 years, no estimated salvage value, and is
depreciable on the straight line method.
Required
Prepare the Green Land International Company’s statement of cash flows for the year
ended December 31, 2007 using the direct method in the operating activities section?
Solution
The Green Land International Company
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Statement of Cash Flows
Year ended December 31, 2007
Cash Flows from Operating Activities: SR SR
Receipts:
Collections from customers 200000
Total cash receipts 200000
Payments:
Payments to suppliers (260000)
Payments of salaries (92000)
Payments of rent (108000)
Payments of income taxes (24000)
Total cash payments (484000)
Net cash outflow from operating activities (284000)
Cash Flows from Investing Activities:

Payment to acquire machinery (160000)
Net cash outflow from investing activities (160000)
Cash Flows from Financing Activities:

Cash proceeds from issuance of common stock 500000
Payments of cash dividends (10000)
Net cash inflow from financing activities 490000
Increase (decrease) in cash 46000
Cash balance at January 1, 2007 0
Cash balance at December 31, 2007 46000
NOTES on Solution
(1) Total sales for the first year of operations were SR560000. Uncollected accounts
receivable at the end of 2007 are 360000. Therefore, the cash received from
customers for 2007 (operating cash inflow) is 200000 (560000 – 360000). Since
the year 2007 was the first year of operation, there were no collections during
2005 from the previous year’s sales.
(2) Total purchases during 2007 was SR400000 (300000 cost of goods sold +
100000 ending inventory). Unpaid accounts payable at the end of 2007 are
140000, therefore, the cash paid to suppliers was 260000 (operating cash
outflow).
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(3) Salaries expense for the year 2007 is SR100000 as appear on the income
statement. However, an amount of 8000 remains unpaid at the end of 2007.
Therefore, the cash paid to employees was 92000 (operating cash outflow).
(4) Rent expense for the year 2007 is SR72000 as appear on the income statement.
However, an additional amount of 36000 was paid in cash for the first 6 months
of 2008. Thus, the amount of cash paid for rent during 2007 was 108000
(operating cash outflow).
(5) Income tax expense for the year 2007 is 24000 which were paid in cash
(operating cash outflow).
(6) An amount of SR160000 was paid in cash for the acquisition of new machinery
(investing cash outflow). Depreciation is a non-cash expense, and thus, it has no
effect on the statement of cash flows.
(7) An amount of SR500000 (10000 shares x SR50 per share) was provided by the
sale of common stock (financing cash inflow).
(8) Cash payments for dividends were SR10000 (financing cash outflow).
(9) The net increase in cash of SR46000 during 2007 is a result of (1) net cash used
in operating activities of SR284000, (2) cash used by investing activities of
SR16000, and (3) net cash provided by financing activities of SR490000. Since
there was no beginning cash balance, an amount of SR46000 is also appears as
cash balance on the balance sheet on December 31, 2007.



Formula to Convert Accrual Basis to Cash Basis

Under the direct method, the amount of each item that affects cash in the income statement
has to be converted from the accrual basis to cash basis. This process involves analyzing
the changes in the balance sheet accounts that are related to each item in the income
statement.

The balance sheet accounts related to the operating activities are the current assets and
short-term liabilities accounts. The important accounts related to each others are (1) the
sales revenue which is related to the accounts receivable, and (2) cost of goods sold which
is related to ending inventory and accounts payable.
The general formula to convert the accrual basis to the cash basis is illustrated below.


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Accrual Basis
Income
statement item

Adjustment to Convert to Cash Basis
Cash
Consequence

Sales


(+) Decrease in accounts receivable
or
(-) Increase in accounts receivable
Cash received
from
customers

Cost of Goods
Sold

(+) Increase in
inventory
or
(-) Decrease in
inventory


and
(+) Decrease in
accounts payable
or
(-) Increase in
accounts payable


Cash
payments to
suppliers


Other revenues
that affect cash
(+) Decrease in
accrued
revenue item
or
(-) Increase in
accrued
revenue item




and
(+) Increase in
unearned revenue
item
or
(-) Decrease in
unearned revenue
item
Cash received
from
other revenue
sources

Other expenses
that affect cash

(+) Decrease in
accrued
expense item
or
(-) Increase in
accrued
expense item


and

(+) Increase in
prepaid expense item
or
(-) Decrease in
prepaid expense item

Cash
payments for
other expense
items

Example (3)

Using the above formula, compute cash consequences of income statement revenues and
expenses for the Green Land International Company to reach the net cash used in
operating activities for 2007?

Solution
1. Sales – increase in accounts receivable (560000 - 360000) = SR200000 (cash received
from customers).
2. Cost of goods sold + increase in inventory – increase in accounts payable (300000 +
100000 – 140000) = SR 260000 (payments to suppliers).
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- ٥٦ -
3. Salaries expense – increase in salaries payable (100000 – 8000) = SR92000 (payments
to employees).
4. Rent expense + increase in prepaid rent (72000 + 36000) = SR108000 (cash payments
for rent).
5. Income tax expense = SR24000 (no change in related balance sheet account).

Net cash used in operating activities can be computed as:
SR200000 – (260000 + 92000 + 108000 + 24000) = SR284000.




Example (4)
Below are the financial statements for the White Rock Corporation for the year ended
December 31, 2007.

The White Rock Corporation
Income Statement
For the Year Ended December 31, 2007

Sales revenue 1350000
Cost of goods sold (810000)
Gross profit 540000
Operating expenses:
Interest expense 40000
Amortization of intangibles 10000
Depreciation expense 240000
Administrative and marketing expenses 160000
Total operating expenses (450000)
Net income for 2007 90000







The White Rock Corporation
Statement of Financial Position
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December 31, 2007

2006 2007 Change
Assets
Cash 28000 136000 +108000
Accounts receivable 42000 62000 +20000
Provision for doubtful debts (2000) (2000) -
Inventory December 31 200000 160000 - 40000
Property, plant and equipment 700000 920000 +220000
Less: accumulated depreciation (360000) (520000) +160000
Intangible assets 160000 150000 - 10000
Total assets 768000 906000 -
Liabilities
Accounts payable 20000 34000 +14000
Bonds payable 200000 280000 +80000
Total Liabilities 220000 314000 -
Owner’s Equity
Common stock 382000 424000 +42000
Retained earnings 166000 168000 +2000
Total Owner’s Equity 548000 592000 -
Total Liabilities and owner’s
Equity
768000 906000 -

Additional information for the year 2007:
1. Equipment was acquired for SR200000 cash.
2. Land was acquired for cash.
3. A building was sold for its carrying amount (original cost 240000 and accumulated
depreciation 80000).
4. Bad debts for 2007 were 2000 and are included in administrative and marketing
expenses.
Required
Prepare the statement of cash flows for the White Rock Corporation for the year ended
December 31, 2007 using the direct method in the operating activities section?




Solution
The White Rock Corporation
Statement of Cash Flows
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Year ended December 31, 2007
Cash Flows from Operating Activities: SR SR
Receipts:
Collections from customers 1328000
Total cash receipts 1328000
Payments:
Payments to suppliers (756000)
Interest payments (40000)
Administrative and marketing payments (158000)
Total cash payments (954000)
Net cash inflow from operating activities 374000
Cash Flows from Investing Activities:

Payment to acquire equipment (200000)
Payment to acquire land (260000)
Proceeds from sale of building 160000
Net cash outflow from investing activities (300000)
Cash Flows from Financing Activities:

Cash proceeds from issuance of common stock 42000
Cash proceeds from issuance of bonds 80000
Payments of cash dividends (88000)
Net cash inflow from financing activities 34000
Net increase in cash 108000
Cash balance at January 1, 2006 28000
Cash balance at December 31, 2007 136000

NOTES on Solution

Different items that affecting cash could be explained below:
1. Total sales of operations for the year 2007 were SR 1,350,000. The accounts related to
these sales are (1) accounts receivable which increase 20,000; (2) provision for
doubtful debts which did not change; and (3) bad debt which was 2000 included in
administrative and marketing expenses.
2. Cash collection from customers is 1,328,000 (sales 1,350,000 – 20,000 change in
accounts receivable – 2000 provision for doubtful debts) (operating cash inflow).
3. Net administrative and marketing is 158,000 (160,000 – 2000) (operating cash
outflow).
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4. Accounts related to cost of goods sold are (1) ending inventory which decreased by
40000; and accounts payable which increased by 14000. Therefore, cash payments to
suppliers are 756000 (810000 – 40000 – 14000) (operating cash outflow).
5. Because no interest was payable or accrued in the balance sheet, then all interest
(40000) was paid in cash (operating cash outflow).
6. Net income for the year 2007 was 90000, and the retained earnings increased only
2000, then it is clear that there is a payment of dividends which computed as 166000 +
90000 - 168000 = 88000 (financing cash outflow).
7. Proceeds from sale of building is 160000 (240000 – 80000) (investing cash inflow).
8. Payment to acquire equipment is 200000 (investing cash outflow).
9. Payment to acquire land is 260000 (investing cash outflow). The purchase price of land
could be computed as follows:


Balance January 1, 2007 of plant assets 700000
Plus: purchase price of equipment 200000
Less: sale price of a building (240000)
Net 660000
Plus: purchase price of land ??
Balance December 31, 2007 of plant assets 920000




















Bank Reconciliation Statement
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Banks usually send a monthly bank statement to every depositor together with the
cancelled cheques and notices of bank charges and credits. The bank statement shows the
month’s cash transactions conducted through the bank on the depositor’s account. The
statement shows the following items, at a minimum:
1. Beginning cash balance for the month.
2. Deposits received.
3. Cheques paid.
4. Bank’s fee and other charges and credits to the account.
5. Ending balance.

The company’s cash transactions conducted through the bank are affected two records:
first, the company’s cash account in its general ledger. Second, the depositor’s account at
the bank which appears in the form of the bank statement, which shows the actual amount
of cash the company has in the bank. Although, the company’s cash records and the
depositor’s account at the bank is always reverse and has to be the same, they usually
show different amounts, yet both be correct. The reasons behind that could be: (a) some
items might appear on one record but not on the other because of the time lag in recording
deposits and checks; (b) bank charges and credits of which the depositor is unaware, or;
(c) errors or irregularities in the accounts.

To ensure accuracy of the financial records and to strengthen internal control over cash,
the company’s designated accountant must reconcile the two balances, the balance on the
company’s cash records and that on the bank statement. The result of this process is called
Bank Reconciliation.

The most common items which cause differences between two balances could be
summarized below:

First: items recorded by the company but not yet recorded by the bank in the period for
which it sent the statement, such as:
a) Deposits made too late in the month. These deposits are called deposits in transit.
The company has recorded them, but they are too late to be credited by the bank on
the current statement.
b) Cheques that have not been presented by the payees to the bank for payment. These
cheques are called outstanding cheques. The company has recorded them, but the
bank has not yet paid or recorded them.




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Second: items recorded by the bank and appear in the bank statement but not yet recorded
by the company due to the lack of information, such as:
a) Money collected by the bank on behalf of the depositor, and direct deposits by
customers of the depositor to his bank account. An example is an interest on notes
receivable.
b) Money received or paid by the bank, on behalf of the depositor, through the system
of electronic funds transfer (EFT). EFT system is used by most companies today
to pay salaries to their employees, to pay rent or insurance instalments through prior
arrangement with their bank. The bank statement lists EFT deposits and EFT
payments.
c) Cost of service (service charge). It is the bank’s fee charged if the customer’s
account reached below a specified minimum balance (in alrajhi bank, for example,
this minimum is SR1000). Sometimes, the bank makes charges for the collection of
outstanding cheques.
d) Dividends and rent collected by the bank. The depositor may entrust the task of
collecting dividends on investment and rent on properties to the bank. After the
collection of these incomes, which may be at the end of the month, the bank will
recorded them whereas there may be no entry in the company’s cash book.
e) Nonsufficient funds (NSF) cheques. These are cheques that have been deposited but
can not be collected because of insufficient funds in the account of the drawer of the
cheques (the one who writes the cheque). The bank then issues a debit memorandum
charging the depositor’s account.
f) Returned cheques for reasons other NSF. The bank may return cheques to the payee
(the one to whom the cheque is to be paid) for some reasons such as: (a) the
drawer’s account has closed, (b) the signature is not authorized, (c) there a
difference between the amount in figures and words.

Third: errors by the company or the bank. Any errors in the depositor’s records or the
bank’s records should be listed and corrected as a part of the bank reconciliation.


Procedure for Preparation of Bank Reconciliation

The following is the steps for the preparation of bank reconciliation statement:
1. Start with the two balances, the balance in the company’s cash account and the
balance on the bank statement.
2. Add deposits in transit to the bank balance. These are the cash receipts that listed
on the company’s records but not listed on the bank statement.
3. Subtract outstanding cheques from the bank balance. These cheques show up cash
payments that listed on the company’s records but not listed on the bank statement.
4. Add (a) money collected by the bank; (b) EFT cash receipts, and, (c) dividends on
investment and rent collected by the bank to the balance in the company’s cash
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- ٦٢ -
account. These items are the cash receipts that listed on the bank statement but not
listed on the company’s records.
5. Subtract (a) EFT cash payments, (b) service charges, and; (c) NSF cheques from
the balance in the company’s cash account. These items were subtracted on the
bank statement but not listed as cash payments on the company’s records.
6. Correct all errors in the company’s records. Bank errors should be brought to the
attention of the bank to correct them.
7. Compute the adjusted bank balance and the adjusted company’s book balance. The
two adjusted balances should be equal.
8. Make journal entries for those items in steps (4) and (5) above. These items must
be recorded on the company’s records because they are not recorded before.


Example

The bank statement sent from Riyadh Bank to Al-Israa Corporation indicates that the May
31, 2008 bank balance of the Corporation is SR83020.50. However, the Corporation’s
cash book has a balance of SR75336.20. The following information indicate the reasons
for difference between the two balances:

1. The deposit in transit of SR5680.40 on May 30 does not appear on the bank
statement.
2. The bank erroneously charged to Al-Israa Corporation account a SR1000 the cheque
No. 1147 written by Al-Israa International Company.
3. The Corporation issued three cheques late in May and recorded in the Corporation’s
cash payments journal. These cheques have not yet been presented to the bank for
payment until May 31. These outstanding cheques as follows:

Cheque No. 1133 dated May 25, with an amount SR2450.10
Cheque No. 1134 dated May 27, with an amount SR3818.70
Cheque No. 1135 dated May 30, with an amount SR3100

4. The bank received SR1500 rent revenue of May by EFT on behalf of the
Corporation.
5. The bank statement includes an amount of SR1015.80 marketable securities revenue
collected by the bank on behalf of the Corporation.
6. The bank collected on behalf of the Corporation a note receivable of SR6227.
7. Cheque No. 1130 for SR3500 paid to Red Sea Company on account was recorded as
a cash payment of SR5300.
8. The bank statement shows a NSF cheque for SR5165. The cheque was received
from customer Hamadan.
9. The bank service charge for the month was SR22.20.
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10. The monthly fire insurance installment paid by EFT is SR360. This EFT has not
been recorded by the Corporation.

Required

1. Prepare bank reconciliation for Al-Israa Corporation at May 31, 2008.
2. Record the journal entries necessary to bring the Corporation’s cash book up to
date.


Solution
Al-Israa Corporation
Bank Reconciliation
May 31, 2008

Bank Corporation’s Books
SR SR SR SR
Balance, May 31, 2005 83020.50 Balance, May 31, 2005 75336.50
Add: Add:
1- Deposit in transit 5680.40 4- EFT receipt of rent 1500
2- Correction of bank
error (cheque No. 1147)
1000 5- Marketable securities
revenue
1015.80
TOTAL 89700.90 6- Bank collection of
notes receivable
6227
Less: 7- Correction of cheque
No. 1130

1800
3- Outstanding cheques: TOTAL 85879.30
Cheque No. 1133 2450.10 Less:
Cheque No. 1134 3818.70 8- NSF cheque 5165
Cheque No. 1135 3100 9- Service charge 22.20
TOTAL (9368.80) 10- EFT payment of
insurance
360 (5547.20)
Adjusted
bank balance

80332.10
Adjusted
Corporation’s book

80332.10

After reconciliation, it is clear that the two balances are the same.





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The journal entries in the Corporation’s books are as follows:

Date Explanation Debit Credit
2008
May
31 Cash in bank
Rent revenue
“Receipt of monthly rent”
1500
1500
31 Cash in bank
Marketable securities revenue
“Revenue earned on marketable
securities”
1015.80
1015.80
31 Cash in bank
Notes receivable
“Notes receivable collected by bank”
6227
6227
31 Cash in bank
Accounts payable
“Correction of cheque No. 1130”
1800
1800
31 Accounts receivable (Hamadan)
Cash in bank
“NSF cheque returned by bank”
5165
5165
31 Service charge
Cash in bank
“Bank service charge”
22.20
22.20
31 Fire insurance expense
Cash in bank
“Payment of monthly fire insurance”
360
360

Only reconciling items in the Corporation’s section are to be recorded on the books. The
reconciling items in the bank section have already been recorded on the Corporation’s
books and merely have not yet reached the bank until May 31. They will probably be
included in the bank statement of June, the next month.










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Solved Problems

First Problem

The following balances were extracted from the Ledger of Cairo International Company as
at 31 December 2007:

Account Name Balance Dr Cr
Capital 20500
Purchases 46500
Sales 60900
Telephone expense 848
Rent expense 950
Other revenues 318
Equipment 10000
Bank 540
Furniture 1460
Wages and salaries 8606
Notes receivables 1061
Notes payable 814
Insurance expense 248
Cash 2400
Bad debts 359
Advertisement expense 140
Accounts receivable 5213
Accounts payable 4035
Other expenses 1586
Inventory 1 January 6300
Total

Required

1. Using the above balances, prepare the trail balance for the company.
2. Prepare the Balance sheet for the Company if you know that the Merchandise
Inventory 31-12-2006 is SR 14000, and the net profit is SR 9681.




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- ٦٦ -
Solution Cairo International Company
Trail Balance
Account Name Balance Dr Cr
Capital 20500 20500
Purchases 46500 46500
Sales 60900 60900
Telephone expense 848 848
Rent expense 950 950
Other revenues 318 318
Equipment 10000 10000
Bank 540 540
Furniture 1460 1460
Wages and salaries 8606 8606
Notes receivables 1417 1417
Notes payable 814 814
Insurance expense 248 248
Cash 2400 2400
Bad debts 359 359
Advertisement expense 140 140
Accounts receivable 5213 5213
Accounts payable 4035 4035
Other expenses 1586 1586
Inventory 1 January 6300 6300
Total 86567 86567

Cairo International Company
Balance Sheet as at 31-12-2007
Assets Liabilities and Owner’s Equity
Current Assets: Short-term liabilities:
Cash 2400 Accounts payable 4035
Bank 540 Notes payable 814
Accounts receivables 5213 TOTAL 4849
Notes receivable 1417
Inventory 14000 Long-term liabilities: - -
TOTAL 23570
Fixed Assets: Owner’s equity:
Equipment 10000 Capital 20500
Furniture 1460 Net profit 9681
TOTAL 11460 TOTAL 30181
35030 35030

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Second Problem

Below are the financial statements for the Red Sea Mountains Company for the year ended
December 31, 2007.

The Red Sea Mountains Company
Income Statement
For the Year Ended December 31, 2007

Sales revenue 6,900,000
Cost of goods sold (4,700,000)
Gross profit 2,200,000
Depreciation expense (50,000)
Administrative expense (650,000)
Selling expenses (450,000)
Total expenses (1,150,000)
Net income 1,050,000























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The Red Sea Mountains Company
Statement of Financial Position
For the Year Ended December 31, 2007

2006 2007 Change
Assets
Cash 1,150,000 1,700,000 +550,000
Accounts receivable 1,300,000 1,750,000 +450,000
Inventory 1,900,000 1,650,000 -250,000
Long-term investments 1,400,000 1,300,000 -100,000
Plant and equipment 1,700,000 1,950,000 +250,000
Accumulated depreciation (1,150,000) (1,200,000) +(50,000)
Total Assets 6,300,000 7,150,000 -
Liabilities
Accounts payable 900,000 1,200,000 +300,000
Bonds payable 1,500,000 1,200,000 -300,000
Accrued liabilities 300,000 400,000 +100,000
Total Liabilities 2,700,000 2,800,000 -
Owner’s Equity
Capital 1,700,000 1,900,000 +200,000
Retained earnings 1,900,000 2,450,000 +550,000
Total Owner’s Equity

3,600,000 4,350,000 -

Total Liabilities & owners’
equity
6,300,000 7,150,000 -

Additional information

1. Long-term investments were sold with their original cost of SR100,000.
2. Plant and equipment was acquired during 2007 for SR250,000 cash.
3. Common stock issued for SR200,000.
4. Cash payments of Bonds SR300,000.

Required

Prepare a statement of cash flows, using the direct method in the Operating Activities
section.



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Solution
The Red Sea Mountains Company
Statement of Cash Flows
For Year Ended December 31, 2007
Cash Flows from Operating Activities: SR SR
Receipts:
Collections from customers 6,450,000
Total cash receipts 6,450,000
Payments:
Payments to suppliers (4,150,000)
Payments of administrative expenses (650,000)
Payments of selling expenses (450,000)
Accrued liabilities 100,000
Net cash payments 5,150,000
Net cash inflow from operating activities 1,300,000
Cash Flows from Investing Activities:

Payment to acquire plant and equipment (250,000)
Proceeds from sale of long-term investments 100,000
Net cash outflow from investing activities (150,000)
Cash Flows from Financing Activities:

Cash proceeds from issuance of shares 200,000
Cash payments of bonds (300,000)
Payments of cash dividends (500,000)
Net cash outflow from financing activities (600,000)
Net cash inflows for the period 550,000
Plus cash balance at January 1, 2007 1,150,000
Cash balance at December 31, 2007 1,700,000











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- ٧٠ -
NOTES on Solution

1. Cash collection from customers is SR6,450,000 (sales 6,900,000 – 450,000 change in
accounts receivable) (operating cash inflow).
2. Accounts related to cost of goods sold are (1) ending inventory which decreased by
250,000; and accounts payable which increased by 300,000. Therefore, cash payments
to suppliers are 4,150,000 (4,700,000 – 250,000 – 300,000) (operating cash outflow).
3. Because no administrative and selling expenses were payable or accrued on the balance
sheet, then all administrative and selling expenses appeared on the income statement
were operating cash outflow.
4. Increase in accrued liabilities of SR100,000 is operating cash inflow.
5. Net income for the year 2005 was 1,050,000, and the retained earnings increased only
550,000, then it is clear that there is a payment of dividends which computed as
1,900,000 + 1,050,000 - 2,450,000 = 500,000 (financing cash outflow).


























Third Problem
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- ٧١ -
The Gulf International Company’s cash records show the followings receipts and the
payments for July 2008:

Cash Receipts Cash Payments
Date Cash Debit Cheque No. Cash Credit
July 3, 2005 SR 27100 940 SR 14690
July 8 5500 941 10000
July 10 16570 942 4000
July 13 8940 943 580
July 18 3670 944 7750
July 26 8900 945 880
July 31 20380 946 41260
947 9700
948 2000
949 22670
Total 91060 Total 113530

The cash account of the company shows the balance on July 1, 2008 was SR121880.

On July 31, 2008, Gulf International Company received the bank statement as follows:

Beginning Balance 121880
Deposits and other Credits:
July 2 6250 (EFT)
July 5 27100
July 9 5500
July 11 16570
July 16 8940
July 19 3670
July 26 8900
July 31 10000 (BC)
Total deposits and credits 86930
Cheques and other Debits: Cheques No. SR
July 9 - 4410 (NSF)
July 10 940 14690
July 14 941 10000
July 15 942 4000
July 16 943 580
July 20 - 3400 (EFT)
July 23 944 7750
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- ٧٢ -
July 29 945 880
July 31 946 42160
July 31 - 250 (SC)
Total amounts of cheques (88120)
Ending Balance 120690

Explanations: BC- bank collection, EFT – electronic funds transfer,
NSF – nonsufficient funds cheques, SC – service charge.

Additional data for bank reconciliation:

1. The EFT deposit was a receipt of rent.
2. The EFT debit was payment of fire insurance.
3. The NSF cheque was received late in June from Aljazeera Corporation.
4. The SR10000 bank collection was a note receivable.
5. The correct amount of cheque number 946, a payment on account, is SR42160 was
made to ISC. The Gulf International Company accountant mistakenly recorded the
cheque for SR41260.

Required
1. Prepare the bank reconciliation for the Gulf International Company at July 31, 2008.
2. Record the journal entries necessary to bring the Company’s cash book up to date.


















Solution Gulf International Company
Bank Reconciliation
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- ٧٣ -
July 31, 2008

Bank Company’s Books
SR SR SR SR
Balance July 31, 2005 120690 Balance July 31, 2005 99410
Add: Add:
Deposit in transit 20380 EFT receipt of rent 6250
Bank collection of
notes receivable
10000
TOTAL 141070 TOTAL 115660
Less: Less:
Outstanding cheques: Correction of cheque
No. 946
900
Cheque No. 947 9700 NSF cheque-Aljazeera 4410
Cheque No. 948 2000 EFT payment of fire
insurance
3400
Cheque No. 949 22670 Service charge 250
TOTAL (34370) TOTAL (8960)
Adjusted
bank balance

106700
Adjusted company’s
book

106700

Computing the company’s ending balance as follows:
Balance July 1 (+) total cash receipts (-) total cash payments.
SR 121880 (+) 91060 (–) 113530 = SR 99410.

After reconciliation, it is clear that the two balances are the same.















The journal entries in the Corporation’s books are as follows:

Date Explanation Debit Credit
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- ٧٤ -
2008
July
31 Cash in bank
Rent revenue
“Receipt of rent revenue”
6250
6250
31 Cash in bank
Notes receivable
“Notes receivable collected by bank”
10000
10000
31 Accounts receivable (Aljazeera Corp)
Cash in bank
“NSF cheque returned by bank”
4410
4410
31 Accounts payable (ISC)
Cash in bank
“Correction of cheque No. 946 ”
900
900
31 Fire insurance expense
Cash in bank
“Payment of fire insurance”
3400
3400
31 Service charge
Cash in bank
“Bank service charge”
250
250














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- ٧٥ -
¿,א¸tא
«,,¸stא ¿,א¸tא :

١ , ،_._.:א ..- .א.,. ,...א . .,..·¸ .,:,.,. ¸¸.א .¸,א

٢ , ،¸¸.א .¸,א ،L.,.:א ,...א ،_.א¸ _... ..- ) _.¸¸:א . ¸,,..:א _..,א
,..-.:: (




«,,.,vא ¿,א¸tא :

1. Eldon S. Hendriksen, Accounting Theory, (Illinois: Richard D. Irwin, Inc.,
1990).

2. Kieso, D. and Weygandit, J. Financial Accounting (New York: John Wiley,
Third Edition).

3. Joel Lerner and James A. Cashin, Theory and Problems of Principles of
Accounting-I, Fifth Edition).


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Appendix (١)
ﻞﺧﺪﻟا ﺔﻤﺋﺎﻗ Income Statement

تﺎﻓوﺮﺼﻤﻟا Expenses تاداﺮﻳﻹا Revenues
ةﺪﻤﻟا لوأ ﺔﻋﺎﻀﺑ Inventory 1.1 ةﺪﻤﻟا ﺮﺧﺁ ﺔﻋﺎﻀﺑ Inventory 31.12
تﺎﻳﺮﺘﺸﻤﻟا Purchases تﺎﻌﻴﺒﻤﻟا Sales
تﺎﺒﺗﺮﻤﻟاو رﻮﺟﻷا Salaries and Wages ﺔﻴﻟﺎﻣ قاروأ تاداﺮﻳإ Marketable securities
revenues
رﺎﺠﻳﻹا فوﺮﺼﻣ Rent expense رﺎﺠﻳإ داﺮﻳإ Rent revenue
ﺔﻳﺎﻋﺪﻟا فوﺮﺼﻣ
نﻼﻋﻹاو
Advertisement expense تارﺎﺸﺘﺳا تاداﺮﻳإ Consultation
revenues
ﻒﺗﺎﻬﻟا ةرﻮﺗﺎﻓ Telephone bill ىﺮﺧأ تاداﺮﻳإ Other revenues
ةرﻮﺗﺎﻓ ءﺎﺑﺮﻬﻜﻟا Electricity bill
ﺪﻳﺮﺒﻟاو ﺲآﺎﻔﻟا مﻮﺳر Fax and post expense
ﺔﻧﺎﻴﺻ تﺎﻓوﺮﺼﻣ Maintenance expense
ﺔﻴﻘﻳﻮﺴﺗ تﺎﻓوﺮﺼﻣ Selling expenses
ﻦﻴﻣﺄﺗ تﺎﻓوﺮﺼﻣ Insurance expense
ﺔﻣوﺪﻌﻣ نﻮﻳد Bad debts
ﺔﺘﺑﺎﺜﻟا لﻮﺻﻷا كﻼهإ Depreciation
ﺒﺘﻜﻣ تﺎﻣﺰﻠﺘﺴﻣ ﺔﻴ Office supplies
ىﺮﺧأ تﺎﻓوﺮﺼﻣ Other expenses











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Appendix (2)
ﺔﻴﻣﻮﻤﻌﻟا ﺔﻴﻧاﺰﻴﻤﻟا Balance Sheet
ﻲﻟﺎﻤﻟا ﺰآﺮﻤﻟا ﺔﻤﺋﺎﻗ Statement of Financial Position
لﻮﺻﻷا Assets قﻮﻘﺣو مﻮﺼﺨﻟا
ﺔﻴﻜﻠﻤﻟا
Liabilities and
Owner's Equity
ﺔﻟواﺪﺘﻤﻟا لﻮﺻﻷا : Current Assets: ﻞﺟﻷا ةﺮﻴﺼﻗ مﻮﺼﺨﻟا : Short-Term Liabilities:
قوﺪﻨﺼﻟا Cash نﻮﻨﺋاﺪﻟا Accounts Payable
ﻚﻨﺒﻟا Bank ﻊﻓﺪﻟا قاروأ Notes Payable
ﻲﻌﻠﺴﻟا نوﺰﺨﻤﻟا Inventory (stock) ﻞﺟﻷا ةﺮﻴﺼﻗ ضوﺮﻘﻟا Short-Term Loans
نﻮﻨﻳﺪﻤﻟا Accounts Receivable ً ﺎﻣﺪﻘﻣ ﺔﻠﺼﺤﻤﻟا تاداﺮﻳﻹا Pre-collected Revenues
ﺾﺒﻘﻟا قاروأ Notes Receivable ﺔﻘﺤﺘﺴﻤﻟا تﺎﻓوﺮﺼﻤﻟا Accrual Expenses
ﺔﻴﻟﺎﻤﻟا قاروﻷا Marketable Securities
ً ﺎﻣﺪﻘﻣ ﺔﻋﻮﻓﺪﻤﻟا تﺎﻓوﺮﺼﻤﻟا Prepaid Expenses
ﻞﺟﻷا ﺔﻠﻳﻮﻃ مﻮﺼﺨﻟا : Long-Term Liabilities:
ﺔﻘﺤﺘﺴﻤﻟا تاداﺮﻳﻹا Accrual Revenues
ﻘﻟا ﻞﺟﻷا ﺔﻠﻳﻮﻃ ضوﺮ Long-Term Loans
ﺔﺘﺑﺎﺜﻟا لﻮﺻﻷا : Fixed Assets:

ﻲﺿارﻷا Land
ﺔﻴﻜﻠﻤﻟا قﻮﻘﺣ Owner's Equity
ﻲﻧﺎﺒﻤﻟا Buildings لﺎﻤﻟا سأر Capital
تارﺎﻴﺴﻟا Cars (+) ﺢﺑﺮﻟا ﻲﻓﺎﺻ (+) Net Profit
ثﺎﺛﻷا Furniture وأ ) - ( ةرﺎﺴﺨﻟا ﻲﻓﺎﺻ Or (-) Net Loss
اﺪﻌﻤﻟا ت Equipment
تﺎﻨﻴآﺎﻤﻟاو تﻻﻵا Machines

ﺔﺳﻮﻤﻠﻣ ﺮﻴﻐﻟا لﻮﺻﻷا : Intangible Assets:
ﻞﺤﻤﻟا ةﺮﻬﺷ Goodwill
ﺔﻳرﺎﺠﺘﻟا ﺔﻣﻼﻌﻟا Trade Mark
ﺮﺸﻨﻟاو ﻒﻴﻟﺄﺘﻟاو ﺦﺴﻨﻟا قﻮﻘﺣ Copyrights
عاﺮﺘﺧﻹا قﻮﻘﺣ Patent



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Appendix (3)
öta.aatא Terminologies
Above ……..……………………………..... ……………...……….;.·
Accept ……..………………………… ..……………………._,.¸
Accepted….……………………………………………………….¸,,..
Accompanied….………………………………………………….,-...
Accounting …. ………………………...…………………… ,..-
Accounting cycle ……………………………….………………_,...א :¸¸.:א
Accounting equation……….……………………………………._,...א :,..:א
Accounts payable…...…………………..……………………….._,.:א,
Accounts receivable……… …………….…………………………._,.¸..
Acquire……………………….……………..……………………. · ¸,, _..¸ ¸
Add………………………….……………..…………………… _.¸ · ._.¸ ¸
Additional………….……………………………………………....;
Adjust…………………………….………………………………_,.¸
Adjusted trial balance ………………...…………………±.¸,..:א .., .,א¸:א _א¸_.
Adjusting entries …………………………………………….±.¸,..:א ,,_.
Advertise…………….…………....…………………………………_:.¸
Advertisement………….………….………………………………_;.;
Affect…………… …….………….………………………………..¸:,¸
Agree ………………….………….………………………………_.א,¸
Agreement…………….……………..…………………………….¸..:;
Amount …… ……………………………………………..…… _:,. · _.=¸
Annually …………………………………………………………...……._,..
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Appear ………………………………………………………………..…….¸,L¸
Apply………………………………….…………………………….………_,L¸
Application………………………………………………………..…..…….__,L:
Arrangements……………………………………………….…...……....±א,א....א
Assets……………………………………………………………………… ¸,.·
Auditing …………………………………………………………….…....,א¸:א
Available ………………………………………………….…...……...……_...
Bad debt…………………………………………..…………………….¸... _,¸,
Balance …………………………………………………………………..…._.¸
Balance sheet …………………………………………………….………_.א¸_:א
Bank reconciliation ………………………………………….…±.,:א ¸,.: :¸=..
Bank statement …………………………………..………….…±.,:א ,..- .±=
Based on ……………………………………………………………..…¸:. ....` .
Beginning ………………………………………………………...…………¸א.,
Below……………………………………………………………………...…...,·
Bill ………………………………………………………….………………:¸,:..
Blanks ………………………………………………..……………………±..א¸.
Book value ………………………………………………..…………¸,..:א ._.:א
Budget ………………………………………………….………….………_.א¸_.
Building …………………………………………………………..…………¸.,.
Business ………………………………………………….…………_¸., ¡¸¸±.
Buy …………………………………………………………………...……_,±¸
Buyer ……………………………………………………………...………_,±.
Calculate ……………………………………………………..……………,.,
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Capital ……………………………………………………….…………¸.:א _·¸
Capital expenditure ……………………………………….……_:..·¸ .¸¸...
Cash …………………………………………………………………………¸...
Cash basis…………………………………………..…………………_...:א _...א
Cheque…………………………………………………………………..……±_±
Circle…………..……………………………………………...…………:¸:א, _.
Classify…………………………………………………………....…...¸ ¸· ,,,¸
Closing entries …………………………………………………...……¸...,א ,,_.
Collect……………………………………………………………...………_.,
Collections………………………………………………………...………__..
Combination……………………………………………………………..…±_:-
Commissions………………………………………………………..……±v,..
Complete…………………………………………………………….…_.=· ¸· ,.:
Compute……………………………………………………………...……,.-א
Concept……………………………………………………………………,,,..
Consist……………………………………………………………..………_,=.¸
Continue………………………………………………………..….………¸...¸
Copyrights………………………………………………………………_..:א ¸,.-
Correct……………………………………………………..…………….…_-.¸
Corrected balance ……………………………………........………__-.:א ._.¸:א
Cost…………………………………………………………………...…….:=.:א
Count………………………………………………………………………,.,
Credit………………………………………………………………..………_:א,
Creditor……………………………………………………………...………_:א,
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Currency……………………………………………………………………:..
Current……………………………………………………………………_¸.,א
Current assets…………………………………….……..…………:¸א..:א ¸,..א
Current liabilities…………………………………..………….……:¸א..:א ,,..א
Customer……………...……………………………………………………__..
Cycle…………………………………...……………………………………:¸¸,
Date…………………………………………………..……………………_¸¸..:א
Data ………………………………………………………………..………±..._,
Debit…………………...……………………………………………………_¸..
Decide………………………………….…………………………………… ¸ ¸¸.
Decision………………………………………………...……………………¸א¸.
Decrease …………………………………………………..………_.-.¸ ¸· _..¸
Deduct ……………………………………….……………………_L...¸ ¸· ,.,
Delivery……………………………………………………………………__.,:
Deposit …………………………………...…………………………….¸,¸ ¡,,¸
Determine …………………………………………………………………_....¸
Difference …………………………………………………..………………¸¸.¸
Double entry system……………………………………….………_¸,¸:א ._.:א ,.L.
Each ………………………………………...…………………………_=
Earn ……………………………………………..……………………,..=¸
Economic entity …………………....………………..……… vא :.-,:א ,,,.. ¸,....
Effect…………………………………………………...……………………¸:,¸
Elements……………..……………………………………………………¸....
Employ…………………………….………………………….…………….L,¸
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Employee …………………………..………………………….… · .L,. ,.-... ¸
Enclosed……………………………………………………….……………_.¸.
Enough ……………………………………………………………………_.=¸
Enterprise……………………………………...…………………………¡¸¸±.
Entry………………………………………………………….………………._.
Equal……………..…………………………………………………………_¸...
Equation ……………………...……………………………………………:,...
Equipment…………………………………………………………………±א...
Equivalent………………………………………….………………………¸,...
Error………………………………………………………………………….L-
Essential………….………………………………………………………_¸¸¸.
Estimate……………………..………………………………………………¸..` ¸
Estimation……………………………..……………………………………¸¸..:
Event………………………………………………...………………………±.-
Exceed………………………………………………………..……………¸¸.,.¸
Expansion……………………………………………..……………………_.,:
Expect………………………………………………………………………_.,.¸
Expense …………..………………………………………………..…….¸¸..
Expenditure………………..……………………………………..……….¸¸..
Factors……………………………………..………………………………_.א,.
Fees……………………………………………………….…………………,..:·
Fill…………………………………………………….……………………… ; ;.
Finance …………………………………………..…………………………_¸,.
Financial statements………………………………..…….……………_:.:א ,:א,.:א
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Fiscal…………………………………………………………………...…… _:..
Fiscal year ………………………………………………………………_:.. ..
Fixed assets…………………………………………………..………….,.: ¸,.·
Future ………………………………………………………………..……_,...:א
Furniture ………………………………………………………….………… · ±.:
General ………………….……………………………………………………,..
General journal…………….………………………………..……… ,., ,..:א _.,_:א |
General ledger …………………...………………………………… ,., ,..:א ,....א
Goodwill……………………………………..………………...……………:¸,±:א
Important…………………..………………………………….……………… ,....
Income statement ……………………………..……………….………_-.:א .:..
Include…………………………………………………….……..…………_...¸
Increase…………………………………………………………..…..………,א,¸¸
Intangible assets…..……………………….……………….……...,.:. _. ¸,.·
Interest……………………………………………………………………… :.:..
Invest…………………………………………………………………..……¸....¸
Investments…………………………………………….…………………..¸.....א
Invoice………………………………………………………………..…..…:¸,:..
Issue……………………...…………………………………………………¸..` ¸
Item …………………………………………...………………………………..,
Journal …………………………………………………..………………_.,¸
Journalize………..……………………………………………….……_.,_:., _,.` ¸
Know………………………….…………………………………….……….¸.¸
Known ………………………………….……………………………...….¸¸..
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Land……………………………………………………...………………..…_¸·
Legal …………………………………………….………………………… ,... _.
Less……………………………………………………..………..…… ¸· _.· ) _¸L (
Liabilities ……………………………………………………..……..……,,.-
List……………………..…………………………………………………….:..
Loan…………………………………...……………………………………_¸.
Long-term liabilities ……………………………………………_,.א :¸,L ,,.-
Maintenance expense ………………………….…….……..……….._. .¸¸...
Minus……………………………………………………….………………_...
Month…………………..……………………………………………………¸,±
Necessary ……………………...………………………………...………_¸¸¸.
Need …………………………………...…………………………… ¸· ,.- _..,
Net…………………………………………………………..………………,..
Net income ……………………………………………………….…..._,¸:א ,..
Nominal accounts…………..…………………………………………_.א ±.,..-
None……………………………………...……………………………… ± v¸ _ .
Normal………………………………………………...……………………_,..
Note payable………………………………………………..…………_..:א ¸א¸¸·
Note receivable……………………………………………………… א ¸א¸¸· _,.:
Obligation……………………………………………..……………………,א¸.:א
Obtain…………………………………………………………………¸:. _.-.¸
Occur……………………………………………….………………………±.,
Offer…………………………….…………...………………………_¸. ¸· ,..¸
Office ………………………………………………………..……………,.=.
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Office supplies …………………………………………………..… ,, _,.=. ±א¸_
On account………………………………………………...……………,...א ¸:.
On credit………………………………………...…………………..………_,..,
Operating expenses …………………………...………………….._:_.±: .¸¸...
Outstanding checks ……………………………………….……..…….:.. ±.=_±
Owner’s equity……………………………...………………....………_=::א ¸,.-
Owe…………………………………………………………..………………_¸.¸
Own…………………….……………………………………………………±:,
Patent ………………………………..…………………………………¡א,-א _-
Pay………………………………………………………...…………………_..¸
Payee …………………………………………………..……………..……._...:א
Payments………………………………………………………...……..… ... ±..,
Payrol l…………………...……………………………………..…………,:א¸¸
Per …………………………...…………………………….……….., ¸· ,.- ¸:.
Percentage…………………………….……………………….…………¸,.. ,..
Period…………………………………………………..…………..…………:,.
Petty cash ……………………………...……….….……..…¸¸..:א .¸¸..:א ¸¸...
Physical………………………………………….………...………… _,.. . _,.-
Plus……………………………………………………………...…………….:א¸
Point………………………………………………………………………….....L..
Policy………………………….…………………………………………… ....._.
Possible ……………………………………..……………………………_=.
Post ………………………………………………………….………………_-¸¸
Prepare…………………………………………………………………...……..` ¸
Preparation…………………………………………………………..………,א..;
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Present…………………………….………………………………….………,..¸
Previous…………………………………...………………………………_,..:א
Price ……………………………………………..……………………._. ¸· ¸..
Principal…………………………………………………..…………………·.,.
Problem ……………………………………………………………_¸¸. ¸· :=±.
Process……………………………………………………………...………_:..
Produce………………...……………………………………………………_..` ¸
Production……………………………..……………………………………_...;
Promise……………………………………...………………………… א..¸ _L.¸
Property………………………………………………..……………………¸...
Provide………………………………………………………………………¸.,¸
Purchases………………………………………….………………………_,±¸
Real accounts………………………………………………………_._..א ±.,...א
Receive………………………………………………………...……………,:..¸
Receipts …...…………………………………………………………,;..; ±א...
Record……………...………………………………………………………_,.¸
Records……………………………………………………………………±;,.
Related …………………………………………………………………., .;. «:
Rent…………………………………………………………………………¸.¸;
Repair………………………………………………………………………_:.¸
Report………………………………………………………………………¸¸¸.:
Require…………….………………………………………………………,:L.¸
Respectively……………...…………………………………...…………¸ ¸א,.:א ¸:.
Resources …………………………..………………………………………,¸א,.
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Revenues…………………………………………………………….….…±א,א¸¸;
Rights ………………………………………………………...……………¸,.-
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Steps………………………………………………………………………±א,L-
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

 ٢٠٧ ‫א‬

‫א‬ 

 
 W،،‫א‬‫א‬،‫א‬   ‫א‬ ‫א‬ ‫א‬ ‫א‬‫א‬  ‫א‬ ‫א‬  ‫א‬ ‫א‬ 

  

  

‫א‬‫א‬‫א‬،‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬W‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬  K‫א‬‫א‬  

‫א‬،‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬،‫א‬ ? ?   ? ‫א‬    ? ‫א‬ ‫א‬  

‫א‬  ‫א‬ ‫א‬ ‫א‬ ‫א‬ ‫א‬   ‫א‬    ،  

  ‫א‬        ،‫א‬ ‫א‬‫א‬  

‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬  K‫א‬‫א‬،‫א‬

‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬

 K‫א‬‫א‬ 

،‫א‬،‫א‬‫א‬‫א‬‫א‬    W    ‫א‬ ‫א‬  ‫א‬    ‫א‬  K‫א‬‫א‬‫א‬‫א‬‫א‬

 K‫א‬  

‫א‬‫א‬‫א‬‫א‬

 



 ٢٠٧ ‫א‬

‫א‬ 


‫א‬‫א‬‫א‬‫א‬‫א‬KE١F‫א‬‫א‬ ‫א‬‫א‬‫א‬ ‫א‬ ‫א‬‫א‬ ‫א‬‫א‬‫א‬‫א‬‫א‬ ،‫א‬‫א‬‫א‬‫א‬‫א‬

 K‫א‬  

 W‫א‬‫א‬‫א‬‫א‬  

‫א‬ Accounting Cycle Steps‫א‬‫א‬‫א‬

 W‫א‬‫א‬

 

 K Flow Chart ‫א‬‫א‬  W‫א‬‫א‬

 

Ledger‫א‬Posting‫א‬GeneralJournal‫א‬Journalizing  KTrial Balance‫א‬‫א‬‫א‬‫א‬Balance‫א‬‫א‬  

‫א‬ ‫א‬  ‫א‬   Accounting Records ‫א‬  

‫א‬  ‫א‬   ‫א‬   Financial Statements ‫א‬ ‫א‬‫א‬ ‫א‬   K‫א‬،‫א‬‫א‬،‫א‬‫א‬،‫א‬

 W‫א‬‫א‬

‫א‬ ( Accounting cycle steps) ‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬  Accounting cycle steps ١ -٤- .

E٦F W‫א‬‫א‬   ‫א‬  ‫א‬  ‫א‬    ‫א‬    W‫א‬‫א‬ ‫א‬  K‫א‬‫א‬‫א‬‫א‬‫א‬ J  W‫א‬‫א‬ KE١F ‫א‬‫א‬‫א‬ J KE‫א‬‫א‬‫א‬F‫א‬‫א‬‫א‬ J -١-  K‫א‬‫א‬‫א‬‫א‬ J .٣ W‫א‬‫א‬‫א‬  K80%‫א‬‫א‬‫א‬ .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬   ‫א‬‫א‬‫א‬W‫א‬‫א‬‫א‬  W‫א‬‫א‬  K‫א‬‫א‬‫ א‬ K‫א‬‫א‬‫א‬‫ א‬ W‫א‬‫א‬  W‫א‬‫א‬‫א‬  K‫א‬‫א‬‫א‬‫א‬‫ א‬K٢ KFlow chart ‫א‬‫א‬ K١ K‫א‬ - K‫א‬‫א‬‫א‬‫א‬ .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Content Part one Introduction – Flowchart – Analyzes Transactions – Classifies Accounts – Journalize – Post – Trial balance Part two Adjusting Entries – Adjusted Trial Balance – Financial Statements – Closing entries – Post Closing Trial Balance – Sample of Accounting Voucher -٢- .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Part one Introduction: Accounting is the art of recording. summarizing. Transactions (1) Post Closing Trial Balance (10) Analyze and Classify (2) Journalize (3) Closing (9) (Nominal Accounts) THE ACCOUNTING CYCLE General Journal Posting (4) General Ledger Financial Statements Preparation (8) Income Statement Balance Sheet Trial Balance Preparation (5) Adjusting Entries (6) Accruals Prepayments Estimated items Adjusted Trail Balance (7) -٣- . classifying and reporting financial transactions and other events of an enterprise. The following flowchart shows the steps in the accounting cycle. These are the accounting procedures normally used by enterprises to record transactions and prepare financial statements.

g. the flowchart steps have been explained in detail: 1. where two or more parties engage in an exchange of goods or services for some form of consideration. are eliminated from further consideration for inclusion in the accounting process. If not it must be rejected and not allowed to continue through the process.This is probably the most basic of all concepts in accounting. which become the basis for data input to the accounting processing. the analysis must determine that the transaction in question. 2. prior to the actual data entry. namely: The Entity Concept . in type. Common examples of such a source document include: • • • • • • A sales receipt .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Below. Evidence of this happening is the receipt of some form of a source document.1. Analyze: This phase of the accounting process includes the application of several of the accounting principles. the documents must be subjected to a series of analysis and classification. Transaction: The processing of accounting data begins with an economic transaction. But. -٤- . A debit/credit memorandum.this can be in a variety of forms.. Analyze and classify: 2. There are a multitude of source documents. and format used to record the significant data. It is these documents. A billing statement.All transactions are recorded at cost and not at current market value. A remittance statement. which cannot be measured in terms of amount (for e. Saudi Riyals). Cost Principle . As applied here in this phase of the accounting process. Monetary Concept . A copy of a contract entered into. first relates to the entity in question. shapes.In addition the analysis must determine that the transaction can be measured in terms of a monetary basis. Cost is determined from the source documents used as evidence of the transaction. A purchase invoice. Those transactions.

commonly using a Chart of Accounts. the transaction is then properly classified in preparation for entry into the accounting database.. Journalize: This step in the accounting cycle represents the first time that the transaction enters the accounting database.The design of a good accounting system begins with the Chart of Accounts. etc. liabilities. requiring more than one debit and/or one credit in order to properly record it in the accounting process. This is a list of the accounts. this means it must be reported as a debit or a credit. The next consideration is that of determining whether this transaction when recorded in the account will cause the balance of that account to be increased or decreased. Of course the basic rule of having debits and credits equal must be followed. various types of vouchers depending on the type of organization are used. and category identification. owner's equity. a transaction can affect multiple accounts. revenues and expenses). account location. assets. The numberings scheme assigns a block of numbers to the respective groups.2. -٥- . A typical assignment of numbers might be as follows: Assets Liabilities Owner’s Equity Revenues Expenses 100-199 200-299 300-399 400-499 500-599 The numbering blocks should provide a convenient manner for adding new accounts without having to renumber the accounts. Here the transaction. In any event they assist in arranging the accounts for convenience of financial statement preparation. Chart of Accounts . having been analyzed and classified. Accounts are grouped according to their relationship in the accounting equation (i. is recorded in the Accounting Voucher. Depending upon the type of account and what side of the accounting equation it appears. 3. Classify: Once past the analysis phase. which comprise the particular accounting system (it is designed with the particular company and its needs for information).‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  2. That means each transaction will require at lease one debit and one credit identity to be recorded correctly.e. Sometimes the account numbers are designed to provide additional information as to location. It is the data entry phase. cost codes. Finally. In entering the transaction.

Special Journals As their name implies. They are designed to meet the needs of the specific entity. the most commonly used special journals are as follows: • Sales Journals . If the transaction required only one debit and one credit.1. which uses them. However. The recording(s) for the credits are indented to offset them from the debit recording(s).generally used to record all credit sales of merchandise inventory items. this is referred to as a simple entry.generally used to record all outflows of cash. two types of journals are used: 3. -٦- .2. The recording shifts to the account(s) to be credited. transactions are recorded as they were analyzed and classified. 3. First the event is dated as to when it actually happened. • NOTE: The check register is sometimes used in place of the Cash Receipts and Cash Payments Journals. • Purchases Journals ." The journal can be likened to a diary in which events are recorded in chronological order of their occurrence. these journals are used to record uniquely classified types of transactions by use of specially designed journals. There is no common format for their design. as this is determined by the individual entities. In the accounting process. This process is continued until all of the debits have been recorded. • Cash Receipts Journals . Then the debit side of the transaction is recorded first by itemizing the account(s) that must be debited. • Cash Payments (Disbursement) Journals . it is requires more than one debit and/or credit.generally used to record all credit purchases of merchandise inventory items. it is referred to as a compound entry. After recording the account(s) to be credited. accounting vouchers are not prepared and transactions are directly entered into Journals and this is for this reason that the journal is referred to as the "book of original entry. The amount(s) to be debited are then entered in the column to the left. General Journal In the General Journal.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Sometimes. On the other hand. the amounts are then entered into the column to the left of that of the debits.generally used to record all inflows of cash.

This is an important part of the processing of accounting data. • Applicable credit balance. In addition each account has its unique identification in the form of an account number as specified in the Chart of Accounts. It is the permanent record of the consequences resulting from the accumulation of transaction throughout the life of the entity. A trial balance provides a check on the accuracy of the postings. companies with several thousand customers and creditors. Along with the debits and credits. Trial balance: Simply defined. This summary account in the general ledger is called a control account. 5. Each account in the accounting system has its separate page in the general ledger. However. To provide this information. An account in the general ledger is maintained that summarizes the details in the accounts receivable and accounts payable ledgers. Thus a typical merchandising enterprise has subsidiary ledgers containing accounts with customers (customers’ ledger) and creditors (creditors’ ledger). It contains the following columns: • Account Number (from chart of accounts) • Account Title(s). the information transferred includes the date of the journal entry and the voucher reference.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  4. General Ledger The general ledger is the heart of any accounting system. it is routinely prepared at the end of the accounting period. It is prepared at any time. use a subsidiary ledger to keep track of individual balances. • Applicable debit amounts. the trial balance is a test of the mathematical equality of debits and -٧- . Subsidiary Ledger An enterprise constantly needs detailed information about its dealings with individual customers and creditors. This cross-reference is the audit trail by which a transaction can be traced from its entrance into the system via the journal/voucher to the final destination in the general ledger. a Trial Balance is a list of all of the general ledger accounts having a balance amount as of that date. following the posting of all journal entries. Thus. Posting: Posting refers to the process of transferring or transcribing the information contained in the journal entries to the appropriate accounts in the general ledger. prior to making any adjustments to the books. During this process debits in the journal entry are posted as debits in the ledger. which occurred during the period by showing that the total debits posted equals the total credits posted. because the summary account controls the subsidiary ledger. and credits in the journal entry are posted as credits in the ledger.

then. Its preparation is essential to the processing events leading up to the preparation of the financial statements. by means of special journal entries. However. What is needed then is to ensure that their consequences are applied to the proper accounting period. in that these transaction must be dealt with in a manner which adjusts their effects in the current period. will at some future date require special considerations and handling. while some of them will affect future periods throughout the life of the entity. those transactions. Adjusting entries: Throughout an accounting period. which gives cause to their existence. The special considerations are caused by absence of a source document. Some of the examples of such transactions are as follows: • Reclassification of current portion of long-term loan from long term liability to current liability • Reclassification of debit balances in creditors account • Reclassification of credit balances in debtors account This. Some of the examples of adjusting entries are: • Accruals • Amortization of prepayments and intangibles • Deferred revenues and expenses Also some. an entity will continue to be engaged in a variety of economic transactions.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  credits after all postings have been completed. -٨- . At the time that they occur. Some of those will affect the current period. Many have already been recorded in the accounting system. Keep in minds that these transaction either happened in a prior period or have not yet happened The special handling is a continuation of the special consideration. which effect the present and future accounting periods. their flow through the accounting system is straight forward and without the need for any special handling or considerations. If they are applicable to the current period. are supported by a source document (see step 1 above). each of these transactions. balances have to be reclassified from one account to another for the purpose of proper presentation in the financial statements. is accomplished through the use of Adjusting Entries and Reclassifying entries. 6.

Therefore its results represent what occurred within a period of time. Income Statement Income statement: • Presents the results of economic activities. It is linked to the balance sheet via the capital account. and any reserves. which presents the financial position and results of economic activities. It shows the balance of all accounts. Therefore. The financial statements are usually prepared from this trial balance. 8. and therefore all three must always be presented together. Statement of Changes in Owner’s Equity Presents the changes that have occurred in the owner's equity as a result of the current period's activities. Balance Sheet Sometimes referred to as the statement of financial position. This is used to reflect the profitability of that period. and owner’s equity of an enterprise at a specific date. • is linked to the balance sheet via the net income amount. All of them are linked together in a manner. which are prepared at the end of each accounting period. -٩- . liabilities. retained earnings.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  7. • Develops the net income for the current accounting period. Each portrays a different representation of the entities financial status and results of activities. including those that have been adjusted. it covers a period of time. reports the assets. • Bridges the balance sheet of the previous accounting period with that of the current accounting period. which occurred during the specific accounting period. which appears in both of those statements. Adjusted trial balance: After all Adjusting Entries and Reclassifying Entries have been journalized and posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. at the end of the accounting period. Financial statements: The following are the basic financial statements.

10. the balance sheet accounts remain open. retained earnings. Liability accounts and the Capital account. which remain open are called real accounts and include: Asset accounts. The accounts. In other words. and Net increase or decrease in cash during the period 9.e. .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Statement of Cash Flows The basic purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period. is then transferred to an owners’ equity account i. We close what we call the temporary (or nominal) accounts. the statement of cash flows reports the cash effects of: • • • • Operations during a period Investing transactions Financing transactions. Post closing trial balance: A trial balance is prepared after all temporary accounts have been closed. Closing entries: Closing an account means to "bring the balance to zero". All closing entries are posted to the appropriate general ledger accounts. To achieve this purpose. which is used only at the end of each accounting period (yearly).١٠ - . Revenues and Expenses are matched in the Income Summary account and the net result of this matching. which represents the net income or net loss for the period. In the closing process all of the revenue and expense account balances (income statement items) are transferred to a clearing or suspense account called Income Summary (or Income for the year)..

an attempt has been made above to explain how an accounting cycle works. • Adjusting and reclassifying entries must be prepared and then posted to general ledger.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Practical Session: Although. • Closing process should be performed. . • A trial balance should be prepared using the final balances in general ledger. • Accounting vouchers must be prepared for transactions affecting all aspects of the financial statements. • Adjusted trial balance should be prepared. • Financial statements should be prepared from the adjusted trial balance. • Opening of a new accounting period in the books should be demonstrated using the post closing trial balance. • Vouchers must be posted to their individual General Ledger Accounts. • A post closing trial balance should be prepared.١١ - . a practical session including the following steps is recommended: • A chart of accounts should be created keeping in view requirements of a service enterprise. but in order to make the students understand the whole process of flow of transactions from beginning till the financial statements are produced.

(6) Simple entry referred to the entry requires only one debit and one credit. (3) Nominal accounts are expenses and revenues. What simple entry and compound entry referred to? Answers: (1) Assets (cash). (2) It means to bring the balance to zero. and owner’s equity.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Exercise 1. (5) Sales journals. purchases journals. . What closing an account means? 3. and statement of cash flows. What are the classification of accounts. and Revenues (sales). (4) Income statement. and. Mention three of financial statements? 5. Mention two of special journals? 6. compound entry referred to the entry requires more than one debit and/or credit. Liabilities (accounts payable). liabilities. and what are the real accounts? 4. What are the nominal accounts. and cash receipt journals. and real accounts are the assets. Owner’s equity (capital). balance sheet. Expenses (salaries and wages).١٢ - . and give one example for each? 2.

‫א‬ ‫א‬‫א‬ 2  ‫א‬‫א‬ .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬     ‫א‬‫א‬W‫א‬‫א‬‫א‬  W‫א‬‫א‬  W‫א‬‫א‬‫א‬‫א‬‫א‬ J  K‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬‫א‬ J  W‫א‬‫א‬  W‫א‬‫א‬‫א‬  K‫א‬‫א‬‫א‬‫א‬‫א‬ K٢ K‫א‬‫א‬‫ א‬K٤  K‫א‬‫א‬‫א‬‫א‬ K٥  K‫א‬‫א‬ K٣  K‫א‬ K١  K‫א‬‫א‬ J .١٣ -  JW‫א‬‫א‬  KE 1 F‫א‬‫א‬‫א‬ J .90%‫א‬‫א‬‫א‬W‫א‬‫א‬‫א‬ KE ١٤ FW‫א‬‫א‬ ‫א‬      ‫א‬ ‫א‬  ‫א‬    ‫א‬   ‫א‬  ‫א‬  W‫א‬‫א‬ K‫א‬‫א‬‫א‬‫א‬‫א‬ J    .

١٤ - .Debits & Credits Part Two General Journal .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Contents Part One Classification of Accounts .Journalizing Part Three General Ledger .Posting to the Accounts Preparation of Trail Balance .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Part one Classification of accounts Two types of accounts: First: Accounts belong to the Balance Sheet and represent the basic accounting equation. These accounts are (see Appendix 2): 1. Assets 2.Owners Equity (Assets must be equal to the sum of Liabilities and Owners equity) 1.١٥ - . Liabilities 3. Assets .

etc. Examples of fixed assets include: Land. buildings. cars. . Examples of short-term liabilities include: Short-term notes payable. trademarks. etc.Fixed assets Fixed assets are those assets that are used in the normal operations of the entity to produce and sell goods or perform services for customers. sold. Inventory. Marketable securities.Short-term Liabilities Short-term liabilities are obligations of the entity that are reasonably expected to be paid or settled in the next year or the normal operating cycle. Examples of intangible assets include: Patents. Accounts Receivable. and used in carrying out future services or benefits to the entity using them. goodwill. salaries and wages payable and other types of accrued liabilities for services received but not yet paid for. Liabilities Liabilities are claims against assets. . accounts payable.١٦ - . Prepaid expenses. furniture.Current assets Current assets are cash and other types of assets that are reasonably expected to be converted into cash. 2. equipment. copyrights. franchise fees. or used up during the normal operating year. Examples of current assets include: Cash. Notes Receivable. Bank. and trade name. Fixed assets are expected to service for a number of years are not for re-sale. . Classification of assets: .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Assets are the cash and non cash resources owned by a business and have economic value.Intangible assets Intangible assets are those assets that have no physical substance but they are expected to provide benefits to the entity for several years. Classification of Liabilities: .

expenses are outflows or other uses of assets resulting from the sale or delivery of goods or the provision of services by the entity during specific time period.Long-term Liabilities Long-term liabilities are those obligations that do not require payment within the next year or the normal operating cycle. and any other obligation that mature in a period more than one year beyond the balance sheet date is reported as long-term. liabilities not classified as short-term are reported in the Long-term liabilities section of the balance sheet. Expenses 2. telephone bill. rent expense. Examples of expenses include: Utility expenses (electric and water). depreciation expense. Revenues Expenses are the cost of assets consumed or services used in the process of earning revenues. Second: Accounts belong to the Income Statement and involve in the determination of net income or net loss of a business entity for a specific period of time. There are two main sources of owner’s equity: (1) Amounts contributed by the owner (Capital). Examples of long-term liabilities include: Loan. Expenses 1. 3. advertisement expense. In other words. It is equal to total assets minus total liabilities. 2. etc (see Appendix 1).‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    . and (2) Amount earned by the entity but not yet taken by the owner.١٧ - Owner’s Equity . In other words. bonds. These accounts are: 1. Owner’s Equity Owner’s equity represents the owner’s interest in the assets of the entity. Revenues Revenues are cash in-flow result from the sale of goods or the rendered of services. wages and salaries expense. Basic Accounting Equation: Assets = Liabilities + .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Expanded Accounting Equation: Assets + Expenses = Liabilities + Capital + Revenues Assets and expenses are debit.000 (Old balance) . Saleh started his workshop by investing SR 100. he deposited it in the bank as a capital. and if they increased also they will become credit. capital and revenues are credit. July 10. and if they increased also they will become debit. Example This example illustrates the effect of the financial transactions on the expanded basic equation as follows: Transaction (1) Investment by owner.000. at July 15.000 + 0 = = Liabilities 0 + Revenue + Owner’s equity + 0 Capital + 100. and if they decreased they will become debit. 2008.000 paid by cheque.١٨ - . Assets + Expenses Bank (1) +100. Saleh purchased a computers for SR 20.000 (Bank + Computer) + 0 100.000 Transaction (2) purchase of equipment for cheque. Assets + Expenses = = Liabilities 0 + Revenue + Owner’s equity + 0 + Capital 100. and if they decreased they will become credit. Liabilities. 2008.

000 Debits and Credits The terms debit and credit mean left and right.000 and the assets Equipment is increased by SR 20. Give an example for each classified account? .000 = _______ 100. This dual effect is known as double-entry accounting. respectively. the abbreviation of these two words as follows: * Debit Dr.000 + 20.) and credere (Cr. it may affects one.000. Double Entry System As you have learned.١٩ - . What are the classifications of accounts? 2. Do the Following Exercises Exercise 1 1.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    (2) -20. Example Transaction (2) – illustrated earlier – purchase of equipment for cheque – Saleh purchased computers for SR 20.000 paid by cheque. however. This transaction results in an equal increase and decrease in total assets. * These abbreviations come from the Latin words debere (Dr. Before You Go. * Credit Cr. though the composition of assets is changed: Bank is decreased by SR 20.).000 New balance 80.000 + 20.000 100. that the term “double entry” does not mean that a transaction must affect each side of the transaction. Note. every recorded transaction affects at least two accounts.

it means a reduction of the assets ________ and reduction of the liability ________. liabilities. ________ . __________. and __________. Exercise 3 Place the missing items in the following statements: 1. cash or bank. 6. owner’s equity. 2. accounting records. What do the term debit and credit mean? 5. The balance sheet contains ____________. Items required by an entity that have monitory value are known as _______. assets. 8. financial report. The left side of the account is known as the ________. Answers: 1. When the words “paid on account” occur. 4. ________ 3. . 9. __________ . accounts payable. 10. and _____________. 3. What are the debit and credit effects on assets. What are the accounts that belong to the income statement. owner’s equity. 10. assets. An investment in the entity increase ________ and _______. the accounting elements are documents ________ . liabilities. and what are those belong to the Balance sheet? 4. expenses and revenues? 6. The four phases of accounting are __________ . owner’s equity. where as the right side is the ___________. 6. To purchase “on account” is to create a _________. 9. owner’s equity. transactions. 4. 7. credit side. What does double entry mean? Exercise 2 Place the missing items in the following statements: 1. _________ is the interest of the owners in Business. assets.٢٠ - .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    3. assets. 8. debit side. 7. liability. 5. 5. liabilities and owner’s equity. Financial events that occur in an entity are termed ________. the accounting equation is _________ = ________ + _______ 2.

8. capital. liabilities. 6. An investment in the business increases ________ and ______________. Indicate increase (+). 7. Invested 100. assets. 5. or no change (0) in. 4. decrease (─). 5. ___________ is the interest of the owners in a business. A withdrawal of cash reduces cash and ____________. The accounting equation is _________ = __________ + ___________. b. transactions. cash. owner’s equity. owner’s equity. 3. owner’s equity. assets. liability. owner’s equity. 9. Items owned by a business that have monetary value are known as ________________. 7. Financial events that occur in a business are termed ______________. appear below.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    2. Expenses Revenues Assets Liabilities Owner’s Equity a. 12. classifying. liability. Income increases net assets and also ___________. The difference between assets and liabilities is _____________. Accounts Payable. Money owed to an outsider is a(n) ______________. Answers: 1. 4. When the words “paid on account” occur. 6. __________ and reduction of the liability _____________. 10. 8. reporting. 12.٢١ - . To purchase “on account” is to create a(n) ____________. assets. 11. 9. 2. recording. it means a reduction of the asset 11. summarizing. 10. owner’s equity. Exercise 4 Transactions completed by Saleh work shop.000 SR. 3. and deposit it in a bank Paid rent expense for the .

d. as illustrated below: Date General Journal Title & explanation E. d. c. and two money columns. references. Transfer money from the bank to the cash Cash collected for the week revenue Bought mechanic equipment paying cash Bought account equipment on Paid a creditor (liability) money owned Solution Expenses Revenues Assets Liabilities of bank and 0 + 0 0 0 0 0 0 0 0 + 0 0 0 + ─ ± + ± + ─ 0 0 0 0 0 + ─ Owner’s Equity + 0 0 0 0 0 0 a. g.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    month c. e. It has spaces for date. f. entry number.N . Increase capital Reduction of bank and increase expenses Increase of cash decrease of bank Increase of revenues cash and and Increase of equipment and decrease of cash Increase of equipment and in accounts payable Decrease in cash accounts payable and Part Two General Journal General Journal is the first book in which financial transactions are recorded in chronological order. g.R Debit Credit . e. f. b.٢٢ - J1 P. accounts titles & explanations.

25 Dec.The title of the account to be debited is entered against the left margin of the title & explanation column. The components of the general journal could be summarized as follows: .Analyze the accounts to determine which account is the debit part and which one is the credit part.The amount to be debited to each account is entered in the debit column on the same line as the account title.000 10. . . 01 General Journal Title & Explanation Bank Capital (Investment in workshop business) Rent expense Bank (Payment of office rent.Analyze the transaction to determine which accounts are affected. .An explanation of the transaction may be entered on the next line below the journal entry.000 2 10. .The posting reference column is left blank till the transaction is being posted.Record the transaction following the example illustrated below.000 Credit Note: The date should be entered in the date column. cheque No.12) E.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    2008 Dec.The account to be credited follows the same steps except being in the credit side. . 1 3 Journalizing Entering transaction data into Journal is known as Journalizing. . Date 2008 Nov.٢٣ - . Steps for journalizing a transaction .000 100. .N 1 P. .R J1 Debit 100.The year and the month are not repeated until the start of a new page or a new month.

month. The posting process will be described in Sec. Generally a blank line is left between the explanation and the next entry. A brief description of the transaction is usually made on the line below the credit. Credit. 4 Bough office supplies for cash.٢٤ - . next to the date column.). The name of the account to be credited is entered on the line below and indented. and day of the entry are written in the date column. SR3000.000 in cash fees earned during the month. The debit amount for each account is entered in this column adjacent to the left margin. Posting Reference (P. Debit. but there can be two or more separate items. The credit amount for each account is indented and entered in this column. The year. 2. Some accountants feel that if the transaction is obvious. The account title to be debited is entered on the first line. The year and month do not have to be repeated for additional entries until a new month occurs or a new page is needed. 3. Generally there is only one item. When there is more than one debit or credit in a single entry.). 5. lawyer. 15 Received SR20. There should be serial numbers for entries. 4. Example 1 The following transactions occurred during the month of January 2008 at Mr. R. 7. AL-Rashed invested SR50. 4 Mr. Al-Rashed.4. the transaction is known as a compound entry. Entry Number (E. there is generally only one account. Explanation. Here again.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    1. 4. 6. . The first entry on the first day of the fiscal year has the number one and so on until the last entry at the end of the fiscal year has the last serial number.000 cash in his law practice. N. 4 Bought office equipment from Al-aamer Furniture Company on account SR25000. Description. Jan. the explanation may be omitted. until the amounts are transferred to the related ledger accounts. that is. but two or more accounts with different amounts can be involved. Nothing is entered in this column until the particular entry is posted. Date.

Solution AL-Rashed Lawyer Office General Journal for January 2008 General Journal Date 2008 Jan.R J1 Dr. part of the transaction on account on January 4.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    30 Paid office rent in cash for January SR5000. Cash Capital ( Investment in law practice) Office supplies Cash (Bought supplies for cash) 4 2 3000 3000 . Required Prepare the general journal for the above transactions. 30 Completed a consultation to one of his friends for SR 15000 received in cash.٢٥ - . 50000 50000 Cr. 31 Paid SR10000 in cash to Al-aamer Furniture Company. 30 Paid salary for part-time help SR2000 in cash. 4 Title & explanation E.N 1 P.

The term of the agreement provided for SR 23000 to be received in cash. On 3/3 purchased furniture from Al-aamer Furniture Company for SR 50000 half in cash. 4. and 200000 in cash as capital in 1/3/2008. On 6/3 Purchased goods from Adnan on credit with a bill of exchange for SR 40000. and the remainder to be paid after three weeks. . 2. 3. The company started its business by SR 800000 in a bank.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    4 Office equipment Accounts Payable (Al-aamer) (Bought equipment from Al-aamer) Cash Income fees (Received payment for services) 25000 3 25000 15 4 20000 20000 5000 30 Rent Expense Cash (Paid rent for month) 5 2000 6 15000 7 5000 Salaries Expense 30 Cash (Paid salaries of part-time help) Cash 30 Consultation fees (Cash received for consultation) Accounts Payable (Al-aamer) 31 Cash (Payment on account to Al-aamer) 2000 15000 10000 8 10000 Example 2 Prepare a general journal for Tehama International Company based on the following transactions which occurred during the month of March. On 15/3 sold goods to Ali for SR 173000. and the remainder on credit with a bill of exchange to be received on 23/3. 2008: 1.٢٦ - .

‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    5. 10. On 28/3 signed an agreement with two employees from Egypt to work with company for a monthly salary of SR 3500 each.N 1 P. On 20/3 published an advertisement in MBC for one week for SR 7000 to be paid after one month of that date. 6. Bank Cash Capital ( Investment in commercial business) 3 Furniture Cash Accounts payable (Al-aamer) (Bought furniture from Al-aamer) . 9. On 25/3 paid salaries and wages of SR 12000 by cheque.R J1 Dr. Solution Tehama International Company General Journal for March 2008 General Journal Date 2008 March 1 Title & explanation E. 800000 200000 1000000 50000 2 25000 25000 Cr. 7. 8. On 18/3 paid the amount of the bill of exchange to Adnan in cash.٢٧ - . On 24/3 paid the amount owed to Al-aamer in cash. On 23/3 received the amount of the bill of exchange from Ali by cheque. Required Prepare the general journal for the above transactions.

٢٨ - .‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    6 Purchases Notes Payable (Adnan) (Purchases from Adnan on credit) 40000 3 40000 15 Cash Notes receivable (Ali) Sales (Sales to Ali part in cash & part with a bill of exchange) 4 23000 150000 173000 Notes payable (Adnan) 18 Cash (Payment of the bill of exchange to Adnan in cash) 40000 5 40000 Advertisement expense 20 Accounts payable (MBC) (Publishing an advertisement in MBC) 7000 6 150000 7 150000 7000 Bank 23 Notes receivable (Ali) (Receiving the amount of the bill of exchange from Ali by cheque) Accounts Payable (Al-aamer) 24 Cash (Payment on account to Al-aamer) Salaries and wages 25 Bank (Paid salaries and wages by cheque) 28 25000 8 25000 12000 9 12000 No Entry - - - - Ledger .

Record the posting in the journal.٢٩ - .R.R.Rashid): 1. 3. 11 31 Dr.000 Capital Jan. 4 Description Cash Capital E. Record the posting reference in the account.000 Cr. Page J-1 Dr. Primarily a clerical task. 50. The results of the posting from the journal of AL-rashid appear below. Cash Jan. . 50. posting is ordinarily carried out in the following steps (depending on the journal of Al. Record the amount and date. the code number of the account is now entered in the P.000 50.N P. General Journal Date Jan.000 2.N Page J-1 P. 4 50.000 Cr. 4 Description Cash Capital Cash J-1 50.000 Capital J-1 31 50.000 11 E.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    The process of transferring information from the journal to the ledger for the purpose of summarizing is called posting. The number of the journal page is entered in the account. column of the journal (solid line). General Journal Date Jan.000 50. The date and the amounts of the debits and credits are entered in the appropriate accounts.R. For cross-referencing.4 50.

000 supplies (4) incom fees 20.000 Dr Supplies .000 Balance 85.000 5.000 50.000 Cr 15.000 cash (7) Balance 15.000 salary exp 10.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Dr (1) capital Cash Cr (2) (5) (6) 50.000 20.000 Balance (4) cash 20.000 85.000 Dr Capital Cr 50.000 20.000 rent exp (7) consul fees 15.000 2.000 acc.٣٠ - Cr (2) cash 3.000 Dr Consultation fees 50.000 15.000 .000 15.000 3.000 Dr Income Fees Cr 20.000 cash (1) Balance 50. payable (8) 65.

000 2.000 Dr Salaries Expense Cr (6) Cash 2.000 5.000 Balance 3.000 3.000 Balance (5) Cash 5.000 25.000 Dr Accounts Payable Cr (8) Cash 10.000 Balance (3) Acc payable 25.000 25.000 25.000 Equipment (3) Balance 2.000 Dr Equipment Cr 25.000 Balance 15.000 Dr Rent Expense Cr 5.000 2.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    3.000 5.000 25.000 25.000 .٣١ - .

Record the balance of each account. which compares the total of all Debit Balances with the total of all Credit Balances. Although the trial balance provides arithmetic proof of the accuracy of the records. Liability. 4. entering debit balances in the debit column and credit balances in the credit column. the total of all debit entries in the ledger should equal the total of all credit entries. List account titles in the first column. They must both be the same. the trial balance facilitates the preparation of the periodic financial statements. and revenue accounts are credited for increases and would normally have credit balances). 2. At the end of the accounting period we check this equality by preparing a schedule called a Trial Balance. Record the total of each column.٣٢ - Dr 65000 3000 25000 Cr 15000 50000 15000 . Account Title Cash Supplies Equipment Accounts payable Capital Consultation fees . If the totals agree. In addition to providing proof of arithmetic accuracy in accounts. capital. (Note: Asset and expense accounts are debited for increases and would normally have debit balances. it does not provide theoretical proof. For example. if the purchase of Equipment was incorrectly charged to Expense. as Expense would be overstated and Equipment understated. The procedure is as follows: 1. the trial balance columns may agree. Compare the totals. indicating the equality of the debits and credits for the hundreds or thousands of transactions entered in the ledger. but theoretically the accounts would be wrong. 3.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Trail Balance As every transaction results in an equal amount of debits and credits in the ledger. the trial balance is in balance.

٣٣ - . liabilities and owner’s equity) and these should be transferred to the Balance Sheet. and. real accounts (assets.‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬ ‫א‬    Income fees Rent expense Salaries expense TOTAL 5000 2000 SR 100000 20000 100000 The accounts in Trail Balance could be classified into two groups nominal accounts (expenses and revenues) and these should be transferred to the Income Statement. . The preparation of these financial statements will be discussed in the next section.

٣٤- .‫א‬ ‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٣ .

‫א‬‫א‬ K٥ K‫א‬‫א‬‫א‬ K٤   .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬   ‫א‬‫א‬‫א‬W‫א‬‫א‬‫א‬ ‫א‬‫א‬‫א‬ W ‫א‬‫א‬  W‫א‬‫א‬  W‫א‬‫א‬‫א‬   K‫א‬‫א‬ K٢ K‫א‬‫א‬‫א‬‫א‬ K١  KE‫א‬‫א‬F‫א‬‫א‬‫א‬‫א‬ K٣  .٣٤- .80%‫א‬‫א‬‫א‬‫א‬ W‫א‬‫א‬‫א‬  KE25F W‫א‬‫א‬  W‫א‬‫א‬ ‫א‬    ‫א‬     ‫א‬   ‫א‬  ‫א‬  K‫א‬‫א‬‫א‬‫א‬‫א‬ J  W‫א‬‫א‬  KE 1 F‫א‬‫א‬‫ א‬ J .

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Contents Part One Close the Nominal Accounts into the Profit & Loss Account Part Two Preparation of Financial Reports: Income Statement Balance Sheet Cash Flows Statement Bank Reconciliation Statement .٣٥- .

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬

٢٠٧

‫א‬

 ‫א‬ 

Preparing Closing Entries
At the end of the accounting fiscal year, the balances of the nominal accounts are to be transferred from the trial balance to the profit and loss account through closing entries. These entries produce a zero balance in each nominal account. Journalizing and posting closing entries is an essential step in the accounting cycle. Separate closing entries could be prepared for each nominal account as follows: 1. 2. Debit each revenue account for its balance and credit profit and loss account for total revenues. Credit each expense account for its balance and debit profit and loss account for total expenses.

Example To illustrate the journalizing and posting of closing entries, we will assume that Al-Rashed, lawyer closes his books monthly. The closing entries at December 31 are shown in the following illustration.

General Journal
Date Dec., 31 31 31 Title and explanation Income fees Profit and loss account Consultation fees Profit and loss account Profit and loss account Office rent Salaries expense E.N 1 2 3 P.R Debit 20,000 20,000 15,000 15,000 7,000 5,000 2,000 Credit

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‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬

٢٠٧

‫א‬

 ‫א‬ 

Posting of closing entries
The posting of the closing entries are shown in the following accounts, all the nominal accounts have zero balances.

Consultation Dr 15,000 15,000 15,000 15,000 Cr Dr

Income Fees Cr 20,000 20,000 20,000 20,000

Office rent Dr 5,000 5,000 5,000 5,000 Cr

Salaries expense Dr Cr 2,000 2,000 2,000 2,000

Al-Rashed Lawyer Office Profit and loss account Dr Office rent Net Profit 5,000 28,000 35,000
*

Cr Income fees Consultation fees 20,000 15,000

Salaries expense 2,000

35,000

Note that profit and loss account is used only in closing at the end of a period of time. No entries are journalized and posted to this account during the year.

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‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬

٢٠٧

‫א‬

 ‫א‬ 

Preparation of Income Statement and Balance Sheet
Different companies in the UK, the USA and in many other countries throughout the world have a legal obligation to publish annually four basic financial statements. These financial statements are: (1) income statement; (2) statement of owner’s equity; (3) balance sheet, and; (4) statement of cash flows.

Income Statement
The income statement presents a summary of an entity’s revenues and expenses for a specific period of time, such as a month, a quarter, or a year. The income statement, also called the statement of earnings, or statement of operations presents a moving financial picture of business operations during the period (See Appendix 1). The heading of the income statement indicates the name of the business, the name of the statement, and the time period covered by the statement. Note that: 1. Revenues are defined as inflows of assets either from the sale of goods or the performance of services. 2. Expenses are defined as outflows or other uses of assets to produce revenue. 3. Net income is defined as the excess of revenues over expenses (net loss for the period is defined as the excess of expenses over revenues), and will be transferred to the owner’s equity in the balance sheet as either profit or loss.

Expenses (Dr)
Inventory 1.1 Purchases Salaries and Wages Rent expense Advertisement expense Telephone bill Electricity bill Fax and post expense Maintenance expense Selling expenses Insurance expense Bad debts Office supplies Other expenses

Income Statement SR Revenues (Cr)
Inventory 31.12 Sales Marketable securities revenues Rent revenue Consultation revenues Other revenues

SR

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The assets of the business are listed on the left side and the liabilities and the owners’ equity are listed on the right side. usually the end of a month or a year.٣٩- . and the amount of its owners’ equity (assets minus liabilities). and the date of the statement. the name of the statement. This equality must exist because the left side lists the assets of the business and the right side shows the sources of the assets (See Appendix 2). Financial position is reflected by the amount of the business’ assets (resources). The balance sheet heading indicates the name of business. Left side Right side Assets = Liabilities + Owners’ equity . it is often called the “Statement of Financial position”. Note that the totals on each side of the balance sheet should be equal. the amount of its liabilities (debts owed). Consequently.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Balance Sheet The balance sheet reports the financial position of a business at a specific date.

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Assets Current Assets: Cash Bank Inventory (stock) Accounts Receivable Notes Receivable Marketable Securities Prepaid Expenses Accrual Revenues Balance Sheet Liabilities and Owner's Equity Short-Term Liabilities: Accounts Payable Notes Payable Short-Term Loans Pre-collected Revenues Accrual Expenses Fixed Assets: Land Buildings Cars Furniture Equipment Machines Intangible Assets: Goodwill Trade Mark Copyrights Patent Long-Term Liabilities: Long-Term Loans Owner's Equity Capital (+) Net Profit Or (-) Net Loss .٤٠- .

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Example for Income Statement and Balance Sheet The following is the Trail Balance of the Red Sea Company as at December 31.٤١- . Dr 20000 60000 15000 16000 13000 40000 90000 22000 Cr 23000 23000 85000 121000 130000 7000 1000 80000 2000 1000 12000 9000 385000 385000 . 2007 Account Name Cash Accounts Receivable Notes Receivable Merchandise Inventory 1-1-2007 Marketable Securities Land Buildings Equipment Accounts Payable Notes Payable Long-Term Loan Owner’s Capital Sales Rent expense Advertisement expense Purchases Marketable Securities Revenues Other Revenues Salaries and Wages Telephone and Electricity expenses Total Required 1. Prepare the Balance Sheet for the Company as at 31-12-2007. 2. Prepare the Income Statement for the Company if you know that the Merchandise Inventory 31-12-2007 is SR 14000.

2007 Expenses Inventory 1.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Solution The Red Sea Company Income Statement For the Period ended December 31.1 Purchases Rent expense Advertisement expense Salaries and wages Telephone and Electricity expenses Net Profit TOTAL Revenues Inventory 31-12 Sales 16000 80000 7000 Marketable securities revenue 1000 Other revenues 12000 9000 22000 147000 14000 130000 2000 1000 147000 The Red Sea Company Balance Sheet as at December 31. 2007 Assets Current Assets: Cash Accounts receivable Notes receivable inventory Marketable securities TOTAL Fixed Assets: Land Buildings equipment TOTAL 20000 60000 15000 14000 13000 122000 40000 90000 22000 152000 274000 Owner’s Equity: Owner’s capital Net profit TOTAL 121000 22000 143000 Liabilities and Owner’s Equity Short-term liabilities: Accounts payable 23000 Notes payable 23000 TOTAL 46000 Long-term liabilities: Long-term loan 85000 274000 .٤٢- .

“Statement of Cash Flows”.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Statement of Cash Flows Different companies in the UK. The ability of a company to pay its debts. (Stamford. 4. These financial statements are: (1) income statement. Conn: FASB. and interest. 2. (4) statement of cash flows. the statement of cash flows covers a period of time. 95 regarding statement of cash flows. The relationship between the income and cash flows. the USA and in many other countries throughout the world have a legal obligation to publish annually four basic financial statements. a required financial statement. In the USA in November 1987. Like the income statement. and other financial statements users with information about the cash flows of a company for a specific period of time. 1987). creditors. 95. 5. (3) balance sheet. (2) statement of owner’s equity. and. The statement of cash flows shows the net increase or net decrease in cash during the period and the cash balance at the end of the period. 3. The wisdom of the management decisions. the Accounting Standard Board in the UK issued the Financial Reporting Standard 1 (FRS1) which requires certain companies to publish a cash-flow statement as part of the final accounts. The information provided by the statement of cash flows is intended to help users assess: 1. Statement No. The main purpose of the statement of cash flows is to provide investors.1 Definition and Purpose of the Statement of Cash Flows The statement of cash flows.٤٣- . Wise decisions result in strong cash flows and good profit. Par. (1) Financial Accounting Standard Board. In July 1990. In addition. 4-6. the Financial Accounting Standard Board (FASB) published its Statement No. Past cash receipts and payments are good predictors of future cash flows. . dividends. The effects of cash and non-cash transactions on the company’s financial position. reports the amount of cash coming in (cash receipts) and the amount of cash going out (cash payments or disbursements) during a period of time. The ability of a company to generate future positive net cash inflows. the information provided by the statement of cash flows will assist the management in proper planning for future activities of the entity.

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Distinctions between Cash Flows Statement and Income Statement An important distinction between the statement of cash flows and the income statement is that the income statement includes adjustments in respect of accrued expenses and revenues in calculating the net income of the period. That is because what a company invests in is more important than how it finances the acquisition. The largest item of difference between the two statements is the depreciation expense which includes in the income statement and exclude in the other. commercial paper. • Financing activities. . Examples are money-market investments. These investments have essentially the same liquidity as cash. but are generally more important to the business than financing activities. Cash and Cash Equivalents FASB Statement No. and with an original maturity of three months or less. 95 requires that the statement of cash flows explain the change in cash and cash equivalents. highly liquid investments that can be converted into cash at will. and Treasury notes. Operation activities are the most important for the business and should be the main source of cash. Classification of Cash Flows All cash inflows and outflows are classified into one of three categories in the statement of cash flows as follows: • Operating activities. • Investing activities. whereas the other statement excludes such adjustments. Investing activities are less important than operations. Cash equivalents are short-term.٤٤- . The rule of the three-month maturity is intended to exclude investments that place capital at significant risk of price fluctuation. Cash includes all accounts for which deposits and withdrawals can be made at any time without prior notice or penalty.

but dividends paid by the entity to its shareholders are financing cash outflows. In contrast. (2) acquiring and selling securities that are not considered to be cash equivalents and. Interest paid and received. Purchases of plant assets and engaging in different investments are a good sign for future expansion. Cash flows from operating activities generally include the cash receipts and disbursements from transactions and other events that enter into the determination of net income. and dividends received. Cash outflows include (1) payments to suppliers. Financing activities explain whether the company is borrowing heavily which is strong indication for the downfall of many companies. . (3) lending money to others (making loans) and collecting on the principal amounts of these loans. Note that dividends received from investments are operating cash inflows. dividends paid are financing activities because they go to the entity’s shareholders who finance the business. (2) paying dividends to the stockholders. (2) payment for interest on debt. Financing Activities Financing activities are related to obtaining cash needed from investors and lenders and paying them back. An entity that invests in long-term assets appears stronger than one that is selling off its income-producing assets. and (3) other payments for other costs of doing business.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Operating Activities Operating activities consist of buying and selling merchandise or rendering services to earn revenue. These activities include (1) acquiring and selling long-term assets.٤٥- . Cash inflows in operating activities include (1) the collection of cash from customers for selling of goods or providing of services (it is the largest source of cash inflow from operations). Payment of interest to creditors is an operating activity and is appear on the income statement. Investing Activities Investing activities are the acquisition and disposition of assets used in operations. affect net income and therefore are operational flows. (4) borrowing money from creditors and (5) payment of principal amounts borrowed. These activities include (1) obtaining resources from owners (issuing stock). Interest paid and received are operating cash flows. and (2) the receipt of interest and dividends on investments. (3) buying or selling treasury stock.

P. Financial Accounting Standards. investing activities. 2 Saudi Organization for Certified Public Accountants. 95 approves two formats for reporting cash flows from operating activities. financing activities. or used in.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  The table below illustrates the cash inflows and cash outflows resulted from operations activities. (2) it is easier to understand. Saudi Arabia. The Saudi Organization for Certified Public Accountants has the same preference.٤٦- . and the difference is the net cash provided by. 185. direct method and indirect method. (3) it provides better information for decisions. . Ramadan 1419. The direct method lists cash receipts and cash payments from operating activities.2 The preference of direct method is stem from many reasons (1) it reports where cash came from and how it was spent on operating activities. operating activities. Riyadh. Activity Operating Activities Cash Receipts Cash Payments (1) Collection from customers (1) Payments to supplier (2) Receipts of interest and (2) Payments of interest and dividends income tax (3) Other operating receipts (3) Payments of wages and salaries (4) Other operating payments (1) Sale of plant assets (2) Sale of investment securities that are not cash equivalents (3) Collection of loans made by the entity (1) Issuing stock (2) Selling treasury stock (3) Borrowing money (1) Purchase of plant assets (2) Purchase of investment securities that are not cash equivalents (3) Making loans (1) Payment of dividends (2) Purchase of treasury stock (3) Payment of principal amounts of debts Investing Activities Financing Activities Reporting Cash Flows from Operating Activities The FASB Statement No. and. it has a clear preference for the direct method. On the other hand. Although the FASB permits companies to use either of the two methods.

operating activities. result in the same subtotals and the same change in cash for the current period. the training in this course will be devoted only to the direct method. direct method and indirect method. Income tax expense. etc. and amortization expense are not listed on the statement of cash flows because they do not affect cash. It should be noted that depreciation. Cash Payments 1. 3. 2. commissions. 4. Cash collections from customers: this includes cash sales and cash collections from sales on account. Payments to employees: these include salaries. Payments to suppliers include all cash payments for inventory and most operating expenses. but only the cash interest received is appear as cash flows. etc.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  the indirect method starts with net income or net loss as reported on the income statement and adjusts it for revenues and expenses that did not cause changes in cash in the current period. and the difference is the net cash provided by. 2. utilities. . depletion. and no difference exists for reporting investing or financing activities. 3. The two methods of presenting the statement of cash flows. Cash receipts of interest: interest revenue is earned on notes receivable. the following items of operating cash receipts and cash payments should be separately disclosed when the direct method is used: (1) Operating Activities Cash Receipts 1.٤٧- . Not all interest revenue accrued is appear on the statement of cash flows. Services include advertisement. Payments for interest expense. or used in. The Direct Method Under the direct method. The two methods differ only in the manner of reporting operating activities. As a minimum. Payments to suppliers: suppliers are the companies and other bodies that provide the entity with inventory and essential services. the items of cash receipts and cash payments are shown under cash flows from operating activities. Cash receipts of dividends: these revenues are earned on investments in stock. wages. For the above reasons. compensations.

Cash Payments 1.٤٨- .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  (2) Investing Activities Cash Receipts 1. Proceeds from issuance of long-term notes payable. Example (1) . 2. Cash payments to acquire plant assets such as land. Cash Payments 1. and equipment. Payments of loans to other companies. Proceeds from issuance of common or preferred stock. Purchases of the entity’s own stock such as the purchases of treasury stock and payments to retire the entity’s stock. Only the cash proceeds from the sale of plant assets are reported as cash flows. buildings. 3. Cash proceeds from the sale of plant assets. The book value and the gain or loss on the sale of plant assets are not reported on the statement of cash flows. Payments of long-term notes payable. Declaration and payment of cash dividends. Collections of loans. 3. (3) Financing Activities Cash Receipts 1. 3. Cash proceeds from the sale of investments that are not cash equivalents. 2. 2. 2. Cash payments to purchase investments that are not cash equivalents.

٤٩- Solution .. 100000 Purchases credit 10000 20000 40000 of inventory Cost of goods sold …… Cash balance December 31 2006 Cash balance December 31 2007 plant 100000 Required Prepare the Middle East Corporation’s statement of cash flows for the year ended December 31. 2007? The Middle East Corporation Statement of Cash Flows .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  The Middle East Corporation’s accounting records show the following information for the year ended December 31. 2007: Credit sales ……………… Collections from customers 398000 Loan to another company 370000 Cash proceeds from sale of investments (include 15000 gain) 80000 Cash proceeds from sale of plant assets (include 1000 loss) Collection of loans ……… 16000 12000 30000 8000 Cash proceeds from issuance of short-term notes payable … Cash proceeds from issuance of common stock Payments of long-term notes payable ……… 40000 30000 60000 8000 on 300000 310000 80000 ??? 50000 25000 21000 49000 Cash sales ……………… Interest revenue on notes receivable ……………… Collection of interest on notes receivable ……… Declaration and payment of cash dividends ………… Cash receipt of dividend revenue on investments … Payments to suppliers …… Payments of salaries …… Payments of interest expense Income tax expense …… Depreciation expense …… Payment assets to acquire 330000 Amortization expense ….

٥٠- . 2007 SR 450000 12000 8000 470000 (330000) (100000) (10000) (20000) (460000) 10000 (100000) (50000) 25000 21000 49000 (55000) 40000 30000 (60000) (30000) (20000) (65000) 80000 15000 SR Example (2) .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Year ended December 31. 2006 Cash balance December 31. 2007 Cash Flows from Operating Activities: Receipts: Collections from customers (370000 + 80000) Interest revenue on notes receivable Cash receipt of dividend revenue on investments Total cash receipts Payments: Payments to suppliers Payments of salaries Payments of interest expense Income tax expense Total cash payments Net cash inflow from operating activities Cash Flows from Investing Activities: Payment to acquire plant assets Loan to another company Cash proceeds from sale of investments Cash proceeds from sale of plant assets Collection of loans Net cash outflow from investing activities Cash Flows from Financing Activities: Proceeds from issuance of short-term notes payable Cash proceeds from issuance of common stock Payments of long-term notes payable Payments of cash dividends Net cash outflow from financing activities Increase (decrease) in cash Cash balance December 31.

2007 Add: Net profit for 2007 Deduct: Dividends declared and paid Retained earnings. 2007 Sales revenue Cost of goods sold Gross profit Operating expenses: Salaries expense Rent expense Depreciation expense Total operating expenses Profit before tax Income tax expense Profit after tax (net profit for 2007) 560000 (300000) 260000 100000 72000 20000 (192000) 68000 (24000) 44000 Green Land International Company Statement of Retained Earnings For the Year Ended December 31. The company commences its operations activities on January 1.٥١- .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Below are the financial statements for the Green Land International Company for the year ended December 31. January 1. Green Land International Company Income Statement For the Year Ended December 31. 2007 SR 0 44000 (10000) 34000 Green Land International Company Statement of Financial Position . 2007. 2007. December 31. 2007 Retained earnings.

Income tax during 2007 amounting to SR24000 paid in cash. Declaration and payment of cash dividends on the common stock during 2007 amounting to SR10000. 2007. Machinery was purchased on January 1. no estimated salvage value. Required Prepare the Green Land International Company’s statement of cash flows for the year ended December 31. 2007 Assets Current Assets: Cash Accounts receivable Inventory December 31 Prepaid rent Total Current Assets Plant Assets: Machinery Less: accumulated depreciation Total Plant Assets Total Assets Liabilities and Stockholders’ Equity Short-term Liabilities: Accounts payable Accrued salaries Total Short-term Liabilities Stockholders’ Equity: Common stock (10000 shares x SR50) Retained earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity SR 46000 360000 100000 36000 542000 160000 (20000) 140000 682000 SR 140000 8000 148000 500000 34000 534000 682000 Additional information: 1.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  December 31. Common stock issued on January 1. 3.٥٢- . and is depreciable on the straight line method. 4. 2007 for SR160000 cash. 2007 using the direct method in the operating activities section? Solution The Green Land International Company . The machinery has an estimated useful life of 8 years. 2.

(2) Total purchases during 2007 was SR400000 (300000 cost of goods sold + 100000 ending inventory). therefore. the cash paid to suppliers was 260000 (operating cash outflow).٥٣- . 2007 Cash Flows from Operating Activities: Receipts: Collections from customers Total cash receipts Payments: Payments to suppliers Payments of salaries Payments of rent Payments of income taxes Total cash payments Net cash outflow from operating activities Cash Flows from Investing Activities: Payment to acquire machinery Net cash outflow from investing activities Cash Flows from Financing Activities: Cash proceeds from issuance of common stock Payments of cash dividends Net cash inflow from financing activities Increase (decrease) in cash Cash balance at January 1. Unpaid accounts payable at the end of 2007 are 140000. SR 200000 200000 (260000) (92000) (108000) (24000) (484000) (284000) (160000) (160000) 500000 (10000) 490000 46000 0 46000 SR . there were no collections during 2005 from the previous year’s sales. 2007 Cash balance at December 31. 2007 NOTES on Solution (1) Total sales for the first year of operations were SR560000.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Statement of Cash Flows Year ended December 31. Therefore. Since the year 2007 was the first year of operation. the cash received from customers for 2007 (operating cash inflow) is 200000 (560000 – 360000). Uncollected accounts receivable at the end of 2007 are 360000.

The balance sheet accounts related to the operating activities are the current assets and short-term liabilities accounts. Therefore. an amount of SR46000 is also appears as cash balance on the balance sheet on December 31. and thus. (7) An amount of SR500000 (10000 shares x SR50 per share) was provided by the sale of common stock (financing cash inflow). 2007. the cash paid to employees was 92000 (operating cash outflow). (4) Rent expense for the year 2007 is SR72000 as appear on the income statement. Depreciation is a non-cash expense. an additional amount of 36000 was paid in cash for the first 6 months of 2008. and (3) net cash provided by financing activities of SR490000. The general formula to convert the accrual basis to the cash basis is illustrated below.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  (3) Salaries expense for the year 2007 is SR100000 as appear on the income statement. (6) An amount of SR160000 was paid in cash for the acquisition of new machinery (investing cash outflow). (2) cash used by investing activities of SR16000. the amount of cash paid for rent during 2007 was 108000 (operating cash outflow). and (2) cost of goods sold which is related to ending inventory and accounts payable. Since there was no beginning cash balance. (5) Income tax expense for the year 2007 is 24000 which were paid in cash (operating cash outflow). The important accounts related to each others are (1) the sales revenue which is related to the accounts receivable. an amount of 8000 remains unpaid at the end of 2007. . Thus. (8) Cash payments for dividends were SR10000 (financing cash outflow). it has no effect on the statement of cash flows. This process involves analyzing the changes in the balance sheet accounts that are related to each item in the income statement. However. (9) The net increase in cash of SR46000 during 2007 is a result of (1) net cash used in operating activities of SR284000. Formula to Convert Accrual Basis to Cash Basis Under the direct method. the amount of each item that affects cash in the income statement has to be converted from the accrual basis to cash basis.٥٤- . However.

٥٥- .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Accrual Basis Income statement item Sales Adjustment to Convert to Cash Basis (+) Decrease in accounts receivable or (-) Increase in accounts receivable (+) Decrease in accounts payable or (-) Increase in accounts payable (+) Increase in unearned revenue item or (-) Decrease in unearned revenue item (+) Increase in prepaid expense item or (-) Decrease in prepaid expense item Cash Consequence Cash received from customers (+) Increase in inventory Cost of Goods and Sold or (-) Decrease in inventory (+) Decrease in accrued Other revenues revenue item and that affect cash or (-) Increase in accrued revenue item (+) Decrease in accrued Other expenses that affect cash expense item and or (-) Increase in accrued expense item Cash payments to suppliers Cash received from other revenue sources Cash payments for other expense items Example (3) Using the above formula. 2. Cost of goods sold + increase in inventory – increase in accounts payable (300000 + 100000 – 140000) = SR 260000 (payments to suppliers).360000) = SR200000 (cash received from customers). . Sales – increase in accounts receivable (560000 . compute cash consequences of income statement revenues and expenses for the Green Land International Company to reach the net cash used in operating activities for 2007? Solution 1.

Salaries expense – increase in salaries payable (100000 – 8000) = SR92000 (payments to employees). Rent expense + increase in prepaid rent (72000 + 36000) = SR108000 (cash payments for rent). Example (4) Below are the financial statements for the White Rock Corporation for the year ended December 31.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  3. 2007 Sales revenue Cost of goods sold Gross profit Operating expenses: Interest expense Amortization of intangibles Depreciation expense Administrative and marketing expenses Total operating expenses Net income for 2007 1350000 (810000) 540000 40000 10000 240000 160000 (450000) 90000 The White Rock Corporation Statement of Financial Position . 2007. Income tax expense = SR24000 (no change in related balance sheet account). 5. 4. The White Rock Corporation Income Statement For the Year Ended December 31. Net cash used in operating activities can be computed as: SR200000 – (260000 + 92000 + 108000 + 24000) = SR284000.٥٦- .

Equipment was acquired for SR200000 cash. Land was acquired for cash. 3. Required Prepare the statement of cash flows for the White Rock Corporation for the year ended December 31.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  December 31.10000 906000 34000 280000 314000 424000 168000 592000 906000 +14000 +80000 +42000 +2000 2007 Change Additional information for the year 2007: 1. A building was sold for its carrying amount (original cost 240000 and accumulated depreciation 80000). 2007 using the direct method in the operating activities section? Solution The White Rock Corporation Statement of Cash Flows .40000 920000 +220000 (520000) +160000 150000 . 4. 2007 2006 Assets Cash Accounts receivable Provision for doubtful debts Inventory December 31 Property. Bad debts for 2007 were 2000 and are included in administrative and marketing expenses. 2. plant and equipment Less: accumulated depreciation Intangible assets Total assets Liabilities Accounts payable Bonds payable Total Liabilities Owner’s Equity Common stock Retained earnings Total Owner’s Equity Total Liabilities and owner’s Equity 28000 42000 (2000) 200000 700000 (360000) 160000 768000 20000 200000 220000 382000 166000 548000 768000 136000 +108000 62000 +20000 (2000) 160000 .٥٧- .

2.000. 3. 2007 Cash Flows from Operating Activities: Receipts: Collections from customers Total cash receipts Payments: Payments to suppliers Interest payments Administrative and marketing payments Total cash payments Net cash inflow from operating activities Cash Flows from Investing Activities: Payment to acquire equipment Payment to acquire land Proceeds from sale of building Net cash outflow from investing activities Cash Flows from Financing Activities: Cash proceeds from issuance of common stock Cash proceeds from issuance of bonds Payments of cash dividends Net cash inflow from financing activities Net increase in cash Cash balance at January 1.000 change in accounts receivable – 2000 provision for doubtful debts) (operating cash inflow).328.000 – 2000) (operating cash outflow).350. (2) provision for doubtful debts which did not change.000 – 20. Total sales of operations for the year 2007 were SR 1. and (3) bad debt which was 2000 included in administrative and marketing expenses.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Year ended December 31. Cash collection from customers is 1. 2007 SR 1328000 1328000 (756000) (40000) (158000) (954000) 374000 (200000) (260000) 160000 (300000) 42000 80000 (88000) 34000 108000 28000 136000 SR NOTES on Solution Different items that affecting cash could be explained below: 1.350.000. .٥٨- . The accounts related to these sales are (1) accounts receivable which increase 20. 2006 Cash balance at December 31. Net administrative and marketing is 158.000 (sales 1.000 (160.

Net income for the year 2007 was 90000. 2007 of plant assets Plus: purchase price of equipment Less: sale price of a building Net Plus: purchase price of land Balance December 31. cash payments to suppliers are 756000 (810000 – 40000 – 14000) (operating cash outflow). 5. The purchase price of land could be computed as follows: Balance January 1. 8. Payment to acquire equipment is 200000 (investing cash outflow). Because no interest was payable or accrued in the balance sheet. 2007 of plant assets 700000 200000 (240000) 660000 ?? 920000 Bank Reconciliation Statement .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  4. Therefore. Payment to acquire land is 260000 (investing cash outflow).٥٩- . then it is clear that there is a payment of dividends which computed as 166000 + 90000 . Proceeds from sale of building is 160000 (240000 – 80000) (investing cash inflow). 9. 7. and accounts payable which increased by 14000. then all interest (40000) was paid in cash (operating cash outflow). 6. and the retained earnings increased only 2000.168000 = 88000 (financing cash outflow). Accounts related to cost of goods sold are (1) ending inventory which decreased by 40000.

٦٠- . (c) errors or irregularities in the accounts. which shows the actual amount of cash the company has in the bank. at a minimum: 1. Although. Ending balance. 3. they usually show different amounts. the depositor’s account at the bank which appears in the form of the bank statement. The company has recorded them. To ensure accuracy of the financial records and to strengthen internal control over cash.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Banks usually send a monthly bank statement to every depositor together with the cancelled cheques and notices of bank charges and credits. Beginning cash balance for the month. the company’s cash records and the depositor’s account at the bank is always reverse and has to be the same. or. These deposits are called deposits in transit. but the bank has not yet paid or recorded them. These cheques are called outstanding cheques. b) Cheques that have not been presented by the payees to the bank for payment. the company’s designated accountant must reconcile the two balances. The reasons behind that could be: (a) some items might appear on one record but not on the other because of the time lag in recording deposits and checks. Cheques paid. but they are too late to be credited by the bank on the current statement. The company’s cash transactions conducted through the bank are affected two records: first. Second. 2. . (b) bank charges and credits of which the depositor is unaware. yet both be correct. The company has recorded them. The bank statement shows the month’s cash transactions conducted through the bank on the depositor’s account. 5. The most common items which cause differences between two balances could be summarized below: First: items recorded by the company but not yet recorded by the bank in the period for which it sent the statement. The statement shows the following items. Deposits received. the company’s cash account in its general ledger. the balance on the company’s cash records and that on the bank statement. 4. The result of this process is called Bank Reconciliation. Bank’s fee and other charges and credits to the account. such as: a) Deposits made too late in the month.

It is the bank’s fee charged if the customer’s account reached below a specified minimum balance (in alrajhi bank. this minimum is SR1000). and direct deposits by customers of the depositor to his bank account. such as: a) Money collected by the bank on behalf of the depositor. These cheques show up cash payments that listed on the company’s records but not listed on the bank statement. Sometimes. the bank makes charges for the collection of outstanding cheques. (c) there a difference between the amount in figures and words. b) Money received or paid by the bank.٦١- . the balance in the company’s cash account and the balance on the bank statement. Subtract outstanding cheques from the bank balance. Third: errors by the company or the bank. through the system of electronic funds transfer (EFT). the bank will recorded them whereas there may be no entry in the company’s cash book. EFT system is used by most companies today to pay salaries to their employees. Procedure for Preparation of Bank Reconciliation The following is the steps for the preparation of bank reconciliation statement: 1. d) Dividends and rent collected by the bank. After the collection of these incomes. (b) the signature is not authorized. These are the cash receipts that listed on the company’s records but not listed on the bank statement. which may be at the end of the month. An example is an interest on notes receivable. 4. 2. The depositor may entrust the task of collecting dividends on investment and rent on properties to the bank. c) Cost of service (service charge). Add (a) money collected by the bank. for example. The bank may return cheques to the payee (the one to whom the cheque is to be paid) for some reasons such as: (a) the drawer’s account has closed. (b) EFT cash receipts. to pay rent or insurance instalments through prior arrangement with their bank. e) Nonsufficient funds (NSF) cheques. Add deposits in transit to the bank balance. Start with the two balances. and. The bank statement lists EFT deposits and EFT payments.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Second: items recorded by the bank and appear in the bank statement but not yet recorded by the company due to the lack of information. Any errors in the depositor’s records or the bank’s records should be listed and corrected as a part of the bank reconciliation. 3. f) Returned cheques for reasons other NSF. on behalf of the depositor. These are cheques that have been deposited but can not be collected because of insufficient funds in the account of the drawer of the cheques (the one who writes the cheque). The bank then issues a debit memorandum charging the depositor’s account. (c) dividends on investment and rent collected by the bank to the balance in the company’s cash .

1147 written by Al-Israa International Company. (c) NSF cheques from the balance in the company’s cash account. Bank errors should be brought to the attention of the bank to correct them. The bank service charge for the month was SR22. account. 5. 2008 bank balance of the Corporation is SR83020. These items were subtracted on the bank statement but not listed as cash payments on the company’s records. The bank collected on behalf of the Corporation a note receivable of SR6227.70 Cheque No. These cheques have not yet been presented to the bank for payment until May 31. 3.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  5. 1133 dated May 25. with an amount SR2450. with an amount SR3818. The cheque was received from customer Hamadan. The bank erroneously charged to Al-Israa Corporation account a SR1000 the cheque No.40 on May 30 does not appear on the bank statement. 1135 dated May 30. The following information indicate the reasons for difference between the two balances: 1. and. The bank received SR1500 rent revenue of May by EFT on behalf of the Corporation. (b) service charges. 8. The deposit in transit of SR5680. Example The bank statement sent from Riyadh Bank to Al-Israa Corporation indicates that the May 31. Cheque No. 1130 for SR3500 paid to Red Sea Company on account was recorded as a cash payment of SR5300. 7. The two adjusted balances should be equal.20. These outstanding cheques as follows: Cheque No. Compute the adjusted bank balance and the adjusted company’s book balance. Make journal entries for those items in steps (4) and (5) above. The bank statement includes an amount of SR1015. 9. 8. 6. . 6. 1134 dated May 27.80 marketable securities revenue collected by the bank on behalf of the Corporation. with an amount SR3100 4.٦٢- . These items must be recorded on the company’s records because they are not recorded before.20. Subtract (a) EFT cash payments. However.50. The Corporation issued three cheques late in May and recorded in the Corporation’s cash payments journal.10 Cheque No. 7. These items are the cash receipts that listed on the bank statement but not listed on the company’s records. the Corporation’s cash book has a balance of SR75336. The bank statement shows a NSF cheque for SR5165. Correct all errors in the company’s records. 2.

Record the journal entries necessary to bring the Corporation’s cash book up to date. The monthly fire insurance installment paid by EFT is SR360.Service charge 10.Bank collection of notes receivable 7.30 5165 22.80) 80332.Correction of cheque No. 2005 Add: 1. 2. 2008. 2008 Bank SR Balance.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  10. May 31.10 3818.EFT payment of insurance Adjusted Corporation’s book SR 75336.٦٣- .50 1500 1015.Correction of bank error (cheque No. . Solution Al-Israa Corporation Bank Reconciliation May 31.50 5680. 1147) TOTAL Less: 3.90 Corporation’s Books SR Balance. it is clear that the two balances are the same.Marketable securities revenue 6. 1130 TOTAL Less: 8.10 SR 83020.20 360 (5547. 1135 TOTAL Adjusted bank balance 2450.Outstanding cheques: Cheque No.70 3100 (9368.80 6227 1800 85879. Prepare bank reconciliation for Al-Israa Corporation at May 31.NSF cheque 9. 2005 Add: 4. 1133 Cheque No. Required 1.EFT receipt of rent 5.40 1000 89700. 1134 Cheque No.10 After reconciliation.20) 80332.Deposit in transit 2. This EFT has not been recorded by the Corporation. May 31.

20 22.80 1015.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  The journal entries in the Corporation’s books are as follows: Date Explanation 2008 31 Cash in bank May Rent revenue “Receipt of monthly rent” 31 Cash in bank Marketable securities revenue “Revenue earned on marketable securities” 31 Cash in bank Notes receivable “Notes receivable collected by bank” 31 Cash in bank Accounts payable “Correction of cheque No. They will probably be included in the bank statement of June. 1130” 31 Accounts receivable (Hamadan) Cash in bank “NSF cheque returned by bank” 31 Service charge Cash in bank “Bank service charge” 31 Fire insurance expense Cash in bank “Payment of monthly fire insurance” Debit 1500 1015.٦٤- .80 6227 6227 1800 1800 5165 5165 22.20 360 360 Credit 1500 Only reconciling items in the Corporation’s section are to be recorded on the books. the next month. . The reconciling items in the bank section have already been recorded on the Corporation’s books and merely have not yet reached the bank until May 31.

and the net profit is SR 9681. 2. Balance 20500 46500 60900 848 950 318 10000 540 1460 8606 1061 814 248 2400 359 140 5213 4035 1586 6300 Dr Cr . Prepare the Balance sheet for the Company if you know that the Merchandise Inventory 31-12-2006 is SR 14000.٦٥- . Using the above balances. prepare the trail balance for the company.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Solved Problems First Problem The following balances were extracted from the Ledger of Cairo International Company as at 31 December 2007: Account Name Capital Purchases Sales Telephone expense Rent expense Other revenues Equipment Bank Furniture Wages and salaries Notes receivables Notes payable Insurance expense Cash Bad debts Advertisement expense Accounts receivable Accounts payable Other expenses Inventory 1 January Total Required 1.

٦٦- .‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Solution Cairo International Company Trail Balance Account Name Balance Dr Capital 20500 Purchases 46500 46500 Sales 60900 Telephone expense 848 848 Rent expense 950 950 Other revenues 318 Equipment 10000 10000 Bank 540 540 Furniture 1460 1460 Wages and salaries 8606 8606 Notes receivables 1417 1417 Notes payable 814 Insurance expense 248 248 Cash 2400 2400 Bad debts 359 359 Advertisement expense 140 140 Accounts receivable 5213 5213 Accounts payable 4035 Other expenses 1586 1586 Inventory 1 January 6300 6300 Total 86567 Cr 20500 60900 318 814 4035 86567 Cairo International Company Balance Sheet as at 31-12-2007 Assets Liabilities and Owner’s Equity Current Assets: Short-term liabilities: Cash 2400 Accounts payable 4035 Bank 540 Notes payable 814 Accounts receivables 5213 TOTAL 4849 Notes receivable 1417 Inventory 14000 Long-term liabilities: TOTAL 23570 Fixed Assets: Owner’s equity: Equipment 10000 Capital 20500 Furniture 1460 Net profit 9681 TOTAL 11460 TOTAL 30181 35030 35030 .

٦٧- .000) (450.000) 1.200. The Red Sea Mountains Company Income Statement For the Year Ended December 31.000 (50. 2007.150.000) (1.000 .050. 2007 Sales revenue Cost of goods sold Gross profit Depreciation expense Administrative expense Selling expenses Total expenses Net income 6.000) (650.000) 2.000 (4.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Second Problem Below are the financial statements for the Red Sea Mountains Company for the year ended December 31.900.700.

000 2.650.000 +(50.000 1.000 6.000 -300.000 1.700.000 +250.150.300.000 +450.000) 6.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  The Red Sea Mountains Company Statement of Financial Position For the Year Ended December 31.000 1. Long-term investments were sold with their original cost of SR100.700.000 (1.000 400.900.950. 2007 2006 Assets Cash Accounts receivable Inventory Long-term investments Plant and equipment Accumulated depreciation Total Assets Liabilities Accounts payable Bonds payable Accrued liabilities Total Liabilities Owner’s Equity Capital Retained earnings Total Owner’s Equity Total Liabilities & owners’ equity Additional information 1.150. 3. using the direct method in the Operating Activities section. 2.000 3. 1.000 7.700. 4.200.800.000 1.600.000 1. Common stock issued for SR200.000 300.300.000) +300.000 +100.000 1.000 1.000 1.300.000 +550. Plant and equipment was acquired during 2007 for SR250.000 cash.000 1.300.000 1.150.900.200.000 +550.350.900.000.٦٨- .000 1.500.000 +200.000.000) 7.000 1. .200.750.000 -100.000 2.000 -250.000 2007 Change Required Prepare a statement of cash flows.700.000 1.000 2.000 1.150.450.000 1.000 (1.000 900.000. Cash payments of Bonds SR300.400.000 4.

٦٩- .300.450.000) (450.000 5.000 (250.000) (500. 2007 SR 6.000 1.000) 200.000 (300.150.000 6.150.000 (4.700.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  Solution The Red Sea Mountains Company Statement of Cash Flows For Year Ended December 31.000) 550.000) (600.000) 100.450.150.000 (150. 2007 Cash Flows from Operating Activities: Receipts: Collections from customers Total cash receipts Payments: Payments to suppliers Payments of administrative expenses Payments of selling expenses Accrued liabilities Net cash payments Net cash inflow from operating activities Cash Flows from Investing Activities: Payment to acquire plant and equipment Proceeds from sale of long-term investments Net cash outflow from investing activities Cash Flows from Financing Activities: Cash proceeds from issuance of shares Cash payments of bonds Payments of cash dividends Net cash outflow from financing activities Net cash inflows for the period Plus cash balance at January 1.000) (650.000) 100.000 1.000 1.000 SR . 2007 Cash balance at December 31.

cash payments to suppliers are 4. and the retained earnings increased only 550. and accounts payable which increased by 300.050.000 .000.900.000 + 1. Because no administrative and selling expenses were payable or accrued on the balance sheet. then all administrative and selling expenses appeared on the income statement were operating cash outflow. Accounts related to cost of goods sold are (1) ending inventory which decreased by 250.2. 5.٧٠- . 2.000 is operating cash inflow.000 (sales 6.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  NOTES on Solution 1.000 change in accounts receivable) (operating cash inflow).900. then it is clear that there is a payment of dividends which computed as 1.000.000 (financing cash outflow).000 (4.150.450. 4.450. Therefore.000 – 450. Increase in accrued liabilities of SR100.000 = 500.000. Cash collection from customers is SR6.700. Third Problem . 3. Net income for the year 2005 was 1.000) (operating cash outflow).000 – 300.000 – 250.000.050.

On July 31. Cash Credit 940 SR 14690 941 10000 942 4000 943 580 944 7750 945 880 946 41260 947 9700 948 2000 949 22670 Total 113530 Total 91060 The cash account of the company shows the balance on July 1.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  The Gulf International Company’s cash records show the followings receipts and the payments for July 2008: Cash Receipts Date Cash Debit July 3. SR July 9 4410 (NSF) July 10 940 14690 July 14 941 10000 July 15 942 4000 July 16 943 580 July 20 3400 (EFT) July 23 944 7750 . Gulf International Company received the bank statement as follows: Beginning Balance Deposits and other Credits: July 2 6250 (EFT) July 5 27100 July 9 5500 July 11 16570 July 16 8940 July 19 3670 July 26 8900 July 31 10000 (BC) Total deposits and credits Cheques and other Debits: Cheques No.٧١- 121880 86930 . 2008 was SR121880. 2008. 2005 SR 27100 July 8 5500 July 10 16570 July 13 8940 July 18 3670 July 26 8900 July 31 20380 Cash Payments Cheque No.

٧٢- . Required 1. The EFT debit was payment of fire insurance.‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  July 29 July 31 July 31 Total amounts of cheques Ending Balance 945 946 - 880 42160 250 (SC) (88120) 120690 Explanations: BC. The NSF cheque was received late in June from Aljazeera Corporation. The Gulf International Company accountant mistakenly recorded the cheque for SR41260. NSF – nonsufficient funds cheques. 2. 2008. The EFT deposit was a receipt of rent. 5. EFT – electronic funds transfer. Record the journal entries necessary to bring the Company’s cash book up to date. The SR10000 bank collection was a note receivable. a payment on account. Prepare the bank reconciliation for the Gulf International Company at July 31. The correct amount of cheque number 946. Additional data for bank reconciliation: 1.bank collection. 3. 4. Solution Gulf International Company Bank Reconciliation . is SR42160 was made to ISC. 2. SC – service charge.

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  July 31. 2008 Bank SR Balance July 31. 2005 Add: EFT receipt of rent Bank collection of notes receivable TOTAL Less: Correction of cheque 900 No. it is clear that the two balances are the same. After reconciliation. 947 Cheque No. 946 NSF cheque-Aljazeera 4410 EFT payment of fire 3400 insurance Service charge 250 TOTAL Adjusted company’s book SR 99410 6250 10000 115660 TOTAL Less: Outstanding cheques: Cheque No. The journal entries in the Corporation’s books are as follows: Date Explanation . 948 Cheque No. 949 TOTAL Adjusted bank balance 9700 2000 22670 141070 (34370) 106700 (8960) 106700 Computing the company’s ending balance as follows: Balance July 1 (+) total cash receipts (-) total cash payments. SR 121880 (+) 91060 (–) 113530 = SR 99410. 2005 Add: Deposit in transit SR 120690 20380 Company’s Books SR Balance July 31.٧٣- Debit Credit .

‫א‬‫א‬‫א‬  ‫א‬‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬  2008 31 Cash in bank July Rent revenue “Receipt of rent revenue” 31 Cash in bank Notes receivable “Notes receivable collected by bank” 31 Accounts receivable (Aljazeera Corp) Cash in bank “NSF cheque returned by bank” 31 Accounts payable (ISC) Cash in bank “Correction of cheque No. 946 ” 31 Fire insurance expense Cash in bank “Payment of fire insurance” 31 Service charge Cash in bank “Bank service charge” 6250 6250 10000 10000 4410 4410 900 900 3400 3400 250 250 .٧٤- .

Theory and Problems of Principles of Accounting-I. 3. Hendriksen. (Illinois: Richard D. Eldon S. Inc. Irwin. Kieso. D. Cashin. Financial Accounting (New York: John Wiley. Accounting Theory. and Weygandit. . Fifth Edition).. 2. J. 1990). Joel Lerner and James A. Third Edition).‫א‬‫א‬ ٢٠٧ ‫א‬  ‫א‬   ‫א‬‫א‬ W‫א‬‫א‬‫א‬ K‫א‬‫א‬?W‫?א‬،‫א‬‫א‬K  J١ ‫א‬‫א‬W‫א‬F،‫א‬‫א‬،‫א‬‫א‬،‫א‬K  J٢ KE  W‫א‬‫א‬‫א‬ 1.٧٥- .

1 ‫ اﻟﻤﺒﻴﻌﺎت‬Purchases ‫ إﻳﺮادات أوراق ﻣﺎﻟﻴﺔ‬Salaries and Wages ‫ إﻳﺮاد إﻳﺠﺎر‬Rent expense ‫ إﻳﺮادات اﺳﺘﺸﺎرات‬Advertisement expense ‫ﺔ‬ ‫ إﻳﺮادات أﺧﺮى‬Telephone bill Electricity bill Fax and post expense Maintenance expense Selling expenses Insurance expense Bad debts Depreciation Office supplies Other expenses .12 Sales Marketable securities revenues Rent revenue Consultation revenues Other revenues ‫اﻹﻳﺮادات‬ Expenses ‫اﻟﻤﺼﺮوﻓﺎت‬ ‫ﺑﻀﺎﻋﺔ أول اﻟﻤﺪة‬ ‫اﻟﻤﺸﺘﺮﻳﺎت‬ ‫اﻷﺟﻮر واﻟﻤﺮﺗﺒﺎت‬ ‫ﻣﺼﺮوف اﻹﻳﺠﺎر‬ ‫ﻣﺼ ﺮوف اﻟﺪﻋﺎﻳ‬ ‫واﻹﻋﻼن‬ ‫ﻓﺎﺗﻮرة اﻟﻬﺎﺗﻒ‬ ‫ﻓﺎﺗﻮرة اﻟﻜﻬﺮﺑﺎء‬ ‫رﺳﻮم اﻟﻔﺎآﺲ واﻟﺒﺮﻳﺪ‬ ‫ﻣﺼﺮوﻓﺎت ﺻﻴﺎﻧﺔ‬ ‫ﻣﺼﺮوﻓﺎت ﺗﺴﻮﻳﻘﻴﺔ‬ ‫ﻣﺼﺮوﻓﺎت ﺗﺄﻣﻴﻦ‬ ‫دﻳﻮن ﻣﻌﺪوﻣﺔ‬ ‫إهﻼك اﻷﺻﻮل اﻟﺜﺎﺑﺘﺔ‬ ‫ﻣﺴﺘﻠﺰﻣﺎت ﻣﻜﺘﺒﻴﺔ‬ ‫ﻣﺼﺮوﻓﺎت أﺧﺮى‬ ‫ ﺑﻀﺎﻋﺔ ﺁﺧﺮ اﻟﻤﺪة‬Inventory 1.‫א‬ ٢٠٧ ‫א‬ ‫א‬  Appendix (١) Income Statement ‫ﻗﺎﺋﻤﺔ اﻟﺪﺧﻞ‬ Revenues Inventory 31.

‫א‬ ٢٠٧ ‫א‬ ‫א‬  Appendix (2) Balance Sheet ‫اﻟﻤﻴﺰاﻧﻴﺔ اﻟﻌﻤﻮﻣﻴﺔ‬ Statement of Financial Position ‫ﻗﺎﺋﻤﺔ اﻟﻤﺮآﺰ اﻟﻤﺎﻟﻲ‬ Liabilities and ‫اﻟﺨﺼﻮم وﺣﻘﻮق‬ Assets ‫اﻷﺻﻮل‬ Owner's Equity ‫اﻟﻤﻠﻜﻴﺔ‬ Short-Term Liabilities: Accounts Payable Notes Payable Short-Term Loans Pre-collected Revenues Accrual Expenses :‫ اﻟﺨﺼﻮم ﻗﺼﻴﺮة اﻷﺟﻞ‬Current Assets: ‫ اﻟﺪاﺋﻨﻮن‬Cash ‫ أوراق اﻟﺪﻓﻊ‬Bank ‫ اﻟﻘﺮوض ﻗﺼﻴﺮة اﻷﺟﻞ‬Inventory (stock) ‫ اﻹﻳﺮادات اﻟﻤﺤﺼﻠﺔ ﻣﻘﺪﻣﺎ‬Accounts Receivable ً ‫ اﻟﻤﺼﺮوﻓﺎت اﻟﻤﺴﺘﺤﻘﺔ‬Notes Receivable Marketable Securities Prepaid Expenses Accrual Revenues :‫اﻷﺻﻮل اﻟﻤﺘﺪاوﻟﺔ‬ ‫اﻟﺼﻨﺪوق‬ ‫اﻟﺒﻨﻚ‬ ‫اﻟﻤﺨﺰون اﻟﺴﻠﻌﻲ‬ ‫اﻟﻤﺪﻳﻨﻮن‬ ‫أوراق اﻟﻘﺒﺾ‬ ‫اﻷوراق اﻟﻤﺎﻟﻴﺔ‬ ‫اﻟﻤﺼﺮوﻓﺎت اﻟﻤﺪﻓﻮﻋﺔ ﻣﻘﺪﻣﺎ‬ ً ‫اﻹﻳﺮادات اﻟﻤﺴﺘﺤﻘﺔ‬ Long-Term Liabilities: Long-Term Loans :‫اﻟﺨﺼﻮم ﻃﻮﻳﻠﺔ اﻷﺟﻞ‬ ‫اﻟﻘﺮوض ﻃﻮﻳﻠﺔ اﻷﺟﻞ‬ Fixed Assets: Owner's Equity Capital (+) Net Profit Or (-) Net Loss :‫اﻷﺻﻮل اﻟﺜﺎﺑﺘﺔ‬ ‫اﻷراﺿﻲ‬ ‫اﻟﻤﺒﺎﻧﻲ‬ ‫اﻟﺴﻴﺎرات‬ ‫اﻷﺛﺎث‬ ‫اﻟﻤﻌﺪات‬ ‫اﻵﻻت واﻟﻤﺎآﻴﻨﺎت‬ ‫ﺣﻘﻮق اﻟﻤﻠﻜﻴﺔ‬ Land ‫ رأس اﻟﻤﺎل‬Buildings ‫ )+( ﺻﺎﻓﻲ اﻟﺮﺑﺢ‬Cars ‫ أو )-( ﺻﺎﻓﻲ اﻟﺨﺴﺎرة‬Furniture Equipment Machines Intangible Assets: Goodwill Trade Mark Copyrights Patent :‫اﻷﺻﻮل اﻟﻐﻴﺮ ﻣﻠﻤﻮﺳﺔ‬ ‫ﺷﻬﺮة اﻟﻤﺤﻞ‬ ‫اﻟﻌﻼﻣﺔ اﻟﺘﺠﺎرﻳﺔ‬ ‫ﺣﻘﻮق اﻟﻨﺴﺦ واﻟﺘﺄﻟﻴﻒ واﻟﻨﺸﺮ‬ ‫ﺣﻘﻮق اﻹﺧﺘﺮاع‬ .

……………K…………………KKKKKKKKKKKKKKKK………………………...‫א‬ Advertise…………KKKKKKKKKKKKKKK….…… …………………………………………………………..…………………‫א‬‫א‬‫א‬‫א‬ Adjusting entries …KKKKKKKKKK…………………………………………..KKKKKKKKKKKK…………………..‫א‬ Accounts receivable………KKKKKKKKKKKKKK……………..…………………………………….………….………………‫א‬‫א‬ Accounting equation…KKK…K….. Accompanied….………….KKKKKKKKKKKKKKKK………………………..KKKKKKKKKKKKKKKK……………....………………………………‫א‬ …… ……………………………………………..…………………………. Adjust………KKKKKKKKKKKKKKKKKKK……………………. Agree Amount Annually ……KKKKKKKKKKK……………. Accepted….…………………… …KK…K…………………………...……………………………… Affect……………KKKKKKKKKKKKKKKKKK…….…………………………….……………. Acquire………………………KKKK..……………………………KKKKK..……… Accept ……..…………………… Additional…KKKKKKKKKKKKKKKKKKK……….……. Add…………………………KKKKKKK.………………………. Accounting Accounting cycle …K.. Agreement…KKKKKKKKKKKKKKKKKK…………...……………………………… Adjusted trial balance …KKK…………….…………………………KKKKKKKKKKKKKKK……………………….……………………………….‫א‬‫א‬ Accounts payable…KKKKKK.………….………………………………… Advertisement……KKKKKKKKKKKKKKKKK…….…………………………KKKKKKKKKKKKKKKKKKKKKKK.KKKKK……………………..…………………………………………….... ..…………………….………….……………..‫א‬ ٢٠٧ ‫א‬ ‫א‬  Appendix (3) ‫ א‬Terminologies Above …….KK……………..

…….………‫א‬‫א‬ Bank reconciliation ………………………………………….………… Business ………………………………………………….…….….…………‫א‬‫א‬ Budget ………………………………………………….……………………………. Apply………………………………….……..‫א‬‫א‬ Available …………………………………………………...… Beginning ……………………………………………………….… Balance sheet ……………………………………………………......….…… Bad debt………………………………………….…………… .…………………… Balance ………………………………………………………………….……………… Blanks ………………………………………………..…‫א‬ Based on ……………………………………………………………..……………………‫א‬ Book value ………………………………………………...………‫א‬ Building ………………………………………………………….………….… Bill ………………………………………………………….. Arrangements………………………………………………....…….‫א‬ ٢٠٧ ‫א‬ ‫א‬  Appear ……………………………………………………………….‫א‬‫א‬‫א‬ Assets……………………………………………………………………… Auditing ……………………………………………………………...…… Buyer ……………………………………………………………...…....…………‫א‬ Below…………………………………………………………………….………… Buy ………………………………………………………………….....…‫א‬ Bank statement ………………………………….……… Calculate ……………………………………………………..……… Application………………………………………………………..…………..….

… Commissions………………………………………………………......… Closing entries …………………………………………………..…………‫א‬ Classify………………………………………………………….........…………………………………………….....… Corrected balance ……………………………………....……‫א‬ Count……………………………………………………………………… Credit……………………………………………………………….……‫א‬ Collect…………………………………………………………….…………………‫א‬‫א‬ Cheque…………………………………………………………………...………‫א‬‫א‬ Cost………………………………………………………………….……… Combination…………………………………………………………….…… Cash ………………………………………………………………………… Cash basis………………………………………….… Compute…………………………………………………………….……… Collections……………………………………………………….……… Copyrights………………………………………………………………‫א‬ Correct…………………………………………………….………‫א‬ Creditor…………………………………………………………….‫א‬ ٢٠٧ ‫א‬ ‫א‬  Capital ………………………………………………………...…… Complete……………………………………………………………...….…… Circle………….………‫א‬ ..…………‫א‬ Capital expenditure ………………………………………...……… Continue……………………………………………………….……‫א‬ Concept…………………………………………………………………… Consist…………………………………………………………….……………....

……………………‫א‬ Data ……………………………………………………………….…….....………………………… Earn ……………………………………………...…………………………………………………… Decide…………………………………..‫א‬ ٢٠٧ ‫א‬ ‫א‬  Currency…………………………………………………………………… Current……………………………………………………………………‫א‬ Current assets…………………………………….……………………‫א‬ Decrease …………………………………………………....…………………… Delivery…………………………………………………………………… Deposit …………………………………..…………………………… Determine ………………………………………………………………… Difference ………………………………………………….………………………….…………………… Economic entity ………………….……… Deduct ……………………………………….…………………………………… Decision……………………………………………….……‫א‬‫א‬‫א‬ Customer……………..………‫א‬‫א‬ Each ……………………………………….....…………………………………………………… Employ…………………………….…………………………………… Date…………………………………………………..…………… .…………………… Elements…………….....…………………………………………………… Cycle………………………………….……… Debit………………….………………..…………‫א‬‫א‬‫א‬ Current liabilities…………………………………..………‫א‬‫א‬ Effect…………………………………………………..……………… Double entry system………………………………………...………….

‫א‬

٢٠٧ ‫א‬

‫א‬ 

Employee …………………………..………………………….… Enclosed……………………………………………………….…………… Enough …………………………………………………………………… Enterprise……………………………………...………………………… Entry………………………………………………………….……………… Equal……………..………………………………………………………… Equation ……………………...…………………………………………… Equipment…………………………………………………………………‫א‬ Equivalent………………………………………….……………………… Error………………………………………………………………………… Essential………….……………………………………………………… Estimate……………………..……………………………………………… Estimation……………………………..…………………………………… Event………………………………………………...……………………… Exceed………………………………………………………..…………… Expansion……………………………………………..…………………… Expect……………………………………………………………………… Expense …………..………………………………………………..…… Expenditure………………..……………………………………..……… Factors……………………………………..………………………………‫א‬ Fees……………………………………………………….………………… Fill…………………………………………………….……………………… Finance …………………………………………..………………………… Financial statements………………………………..…….……………‫א‬‫א‬‫א‬

‫א‬

٢٠٧ ‫א‬

‫א‬ 

Fiscal…………………………………………………………………...…… Fiscal year ……………………………………………………………… Fixed assets…………………………………………………..………… Future ………………………………………………………………..……‫א‬ Furniture ………………………………………………………….………… General ………………….…………………………………………………… General journal…………….………………………………..………‫א‬‫א‬ General ledger …………………...…………………………………‫א‬‫א‬ Goodwill……………………………………..………………...……………‫א‬
 Important…………………..………………………………….……………… Income statement ……………………………..……………….………‫א‬

Include…………………………………………………….……..………… Increase…………………………………………………………..…..………‫א‬ Intangible assets…..……………………….……………….…….. Interest………………………………………………………………………KKK Invest…………………………………………………………………..…… Investments…………………………………………….…………………..‫א‬ Invoice………………………………………………………………..…..… Issue……………………...………………………………………………… Item …………………………………………...……………………………… Journal …………………………………………………..……………… Journalize………..……………………………………………….…… Know………………………….…………………………………….……… Known………………………………….……………………………...…

‫א‬

٢٠٧ ‫א‬

‫א‬ 

Land……………………………………………………...………………..… Legal…………………………………………….………………………… Less……………………………………………………..………..……EF Liabilities……………………………………………………..……..…… List……………………..…………………………………………………… Loan…………………………………...…………………………………… Long-term liabilities  ……………………………………………‫א‬ Maintenance expense ………………………….…….……..……… Minus……………………………………………………….……………… Month…………………..…………………………………………………… Necessary ……………………...………………………………...……… Need …………………………………...…………………………… Net…………………………………………………………..……………… Net income ……………………………………………………….…...‫א‬ Nominal accounts…………..…………………………………………‫א‬ None……………………………………...……………………………… Normal………………………………………………...…………………… Note payable………………………………………………..…………‫א‬‫א‬ Note receivable………………………………………………………‫א‬‫א‬ Obligation……………………………………………..……………………‫א‬‫א‬ Obtain………………………………………………………………… Occur……………………………………………….……………………… Offer…………………………….…………...……………………… Office ………………………………………………………..……………

……..……………..……… Operating expenses …………………………...…………………...……………………………..... Outstanding checks ……………………………………….………….………… Petty cash ……………………………..……………… Prepare…………………………………………………………………...…………‫א‬ Per ………………………….…....…………………...……………………………………………  Possible ……………………………………..‫א‬ ٢٠٧ ‫א‬ ‫א‬  Office supplies …………………………………………………...………‫א‬ ..………..……………… Own…………………….....………‫א‬ Owe………………………………………………………….……… Percentage……………………………..……………….………………………..……………‫א‬ On credit………………………………………..…………………………………….…‫א‬‫א‬ Physical…………………………………………..…………………………………‫א‬‫א‬ Pay………………………………………………………......…………………………… Post ………………………………………………………….……‫א‬ Payments……………………………………………………….…… Owner’s equity……………………………..……..…‫א‬ On account……………………………………………….………… Period…………………………………………………..…… Preparation………………………………………………………….……………‫א‬ Point………………………………………………………………………… Policy…………………………...…………L Plus……………………………………………………………..…………………………………………………… Patent ……………………………….… Payrol l………………….…….……….………………… Payee ………………………………………………….

…………………………………… Promise…………………………………….…………………… Provide……………………………………………………………………… Purchases………………………………………….…………………………………...………………… Problem …………………………………………………………… Process……………………………………………………………....…………………………………………………… Production……………………………..……… Previous………………………………….……………………………………………………… Respectively…………….......‫א‬ ٢٠٧ ‫א‬ ‫א‬  Present……………………………..……… Produce………………..…………………………………………………………‫א‬ Record…………….…………………… Principal…………………………………………………...……………………………………………………… Records…………………………………………………………………… Related ………………………………………………………………… Rent………………………………………………………………………… Repair……………………………………………………………………… Report……………………………………………………………………… Require……………....………………………………………‫א‬ ...…………………………‫א‬ Property……………………………………………….……………………… Real accounts………………………………………………………‫א‬‫א‬ Receive……………………………………………………….…………… Receipts …..…………‫א‬‫א‬  Resources …………………………..………………………………….………………………………‫א‬ Price …………………………………………….

…………… Salary(salaries) …………….‫א‬ ٢٠٧ ‫א‬ ‫א‬  Result…………………………………………….………… Return……………………………………………………….……………………… Spend / spent…………………………………………………....… Suitable…………………………………………………………………… Sum ………………………………………………………………………… .…‫א‬‫א‬ Rights ……………………………………………………….…………………………… Show……………………………………………………..………………………………… Schedule …………………………………………………..…‫א‬‫א‬‫א‬ Steps………………………………………………………………………‫א‬ Store…………………………………...………‫א‬ Specific……………………………………………......……………………………………………………‫א‬‫א‬ Sell…………………………………………………………………………… Service………………………………………...………………………… Retained earnings………………………………………….………………… Space………………………………………………………………..… Selections………….………… Revenues……………………………………………………………....………………………………………………‫א‬ Sales…………………………………….…………………………… Subtract……………………………………………….…………………… Such as……………………………………………………………………...………‫א‬L Statement of cash flows…………………………………………‫א‬‫א‬ Statement of changes in owner’s equity…………….....….………………… Select…………………………………………………………………….

…………………… Supplies…………………………………………………………………… System……………..………………………………… Wish…………………………………………………..…………‫א‬ Value……………………………………………………………….……… Trade name………………………………………………………………‫א‬ Transaction.……………………… Units…………….……… Valuation…………………………………………………………………… Wages…………………………………….……………………… Use…………………………………….………………………………………….……………………… Trade mark…………………………………………….…………….…………………………………………………………‫א‬ Until………………………………………………….……...… Types………………………………………………….………………………………… Term ………………………………………………………………… Total……………………………………………….…………….………………………………………………………… Table…………………………... ……………………………………………………….………..………‫א‬ Understand………………………………………….……………………  Usually……………………………………………………………………… Utility expense…………………………………….……………….‫א‬ ٢٠٧ ‫א‬ ‫א‬  Summarize………………………………………….....………‫א‬‫א‬‫א‬ True…………………………………………………….… Tangible assets……………………..…….…….… Trial balance ………………………………………….…………………… Withdraw…………………………………………………………………… .

‫א‬ ٢٠٧ ‫א‬ ‫א‬   ‫א‬  ‫א‬   J   J  ١  ١٤  ٣٥  ٧٥  ٧٦  ‫א‬  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK   KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK‫א‬‫א‬‫א‬  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK‫א‬‫א‬‫א‬  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK‫א‬‫א‬‫א‬  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK ‫א‬‫א‬  KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK‫א‬   .

                    .