KARDAN UNIVERSITY

BSc Economics
Prepared By: Sajad Ahmad

The system under which the double effect
of every transaction is recorded is called
double entry system.

A

device which contains a systematic
record of increase or decrease in an item
during a particular period.

 It

has three parts:

A

title name of the accounts
 Left hand side which is usually called Debit
side
 Right hand side which is usually called Credit
side.

All the accounts maintained by a business
can be divided into two categories.
1.Real Accounts
2.Nominal accounts

1- Real Accounts :
 These

are the accounts of assets, liabilities
and owner’s equity.
OR
 These accounts have their existence even
after the close of a year.
Examples
Land, building, A/P, Owner’s Capital

2- Nominal Accounts:
 These

are the accounts of revenues and
expenses.
OR
 These accounts are closed at the end of an
year.

Examples
 Salaries, rent, revenues etc2

As an account has two parts i.e. Debit (Dr)
left hand side and credit (Cr) right hand
side.

When we write an amount on left hand side
it is called as debiting an account and
when we write an amount on the right
hand side it is called as crediting an
account.






Increase in assets
Decrease in Liability
Decrease in Owner Equity
Decrease in Revenue
Increase in expense
Increase in withdrawals






Decrease in assets
Increase in liabilities
Increase in owner equity
Increase in revenue
Decrease in expense
Decrease in withdrawals

When increase in assets is debited the decrease in assets must be
credited.

When increase in assets is debited the increase in liability must be
credited and hence decrease in liability must be debited.

Owner Equity is also regarded as claim against assets hence increase
in capital is credited and decrease in capital is debited.

When income increases owners equity also increases, when income
decrease owners equity decreases therefore increase in income
must be credited and decrease in income must be debited.

When expenses increases the owners equity decreases as such
increase in expense is debited and decrease in expense is credited.

Assets, Expenses
and withdrawals

Increase ---Debit

 Decrease---Credit

 Liability,

Capital
and Revenues

 Increase---Credit
 Decrease---Debit

Any dealing between two or more person for goods and
services which effect the financial position of a business
and also can be measured in terms of money is called
business transactions.
Example:
Business purchased land for $52,000 and pay cash for it.
Here business is receiving land which is an asset but for
acquiring one asset it gives another asset cash and
amount of transaction is $52,000.

There are two types of Transactions:

Cash

Transactions
Credit Transactions

 The

transaction where immediate cash
receipts or payments is involved is called
cash transaction.
 For Example
 Owner invest $80,000 in business.
 Business pay $200 salary to an employee.

The transaction where cash collection or payments are
made at some future time is called credit transaction.
Examples.
1.The business sells merchandise of price $400 and the
amount will be received after 15 days.
2.The business purchased computer at $300 and
promise that amount will be paid after 20 days.

 The

sequence of accounting procedures used to
record, classify and summarize accounting
information is termed as accounting cycle.
 Journal
 Ledger
 Trial Balance
 Adjustment
 Adjusted Trial Balance
 Financial Statements
 Closing Entries
 After Closing Trial Balance

 Journal

is a book containing the original
record of a transaction in order of
occurrence.
 OR
 Journal is a chronological (day-by-day)
record of business transactions.
 The simplest type of journal is called general
journal and is shown as follow

Date

2006
Mar1
2

Description

Post
Reference

Debit Credit
$
$

The process of recording the transaction in
general journal is called as journalizing or
making an entry. The following is the procedure
for recording transactions in general journal.
 Date column.
In this column the date on which transaction is
completed, is recorded. year of account is
written at the top and month below it. the
month is written only on the top of the page

 The

dates are recorded in smaller column for
every transaction.
 Description column.
 In this column the account to be debited is
inserted at the extreme left, and account to
be credited below it after providing some
space on left side. Brief explanation of entry
is also recorded in this column, generally
known as narration.

Post reference column.
 This account is completed when postings are
made into ledger. the students are advised
to insert a tick mark while posting the
entries from journal to ledger.
 Amounts column.
 Two amounts column are provided in
journal. The amount of transaction is
recorded in the debit column against the
account to be debited and the amount of
the account(s) to be credited are recorded
in credit column.

If we are given a business transaction and want to
find accounts to debited and accounts to be credited
in that particular transaction we have to proceed as
under.

By the analysis of transaction find out the two or
more accounts which are involved in that transaction.

The account so found are classified in to assets,
liabilities, capital, Revenue expense or withdrawals.
Increase and decrease in account(s) are determine.

Finally rule is applied.

QUESTION

1

NO







Nov 1: Assad started business by depositing $80,000 in a
company bank account.
Nov 3: Purchase land for $52,000 by paying cash.
Nov 5: Purchased a building for $36,000 paying$6,000 in cash
and issuing a note payable for the remaining $30,000 .
Nov 17: Purchased tools and equipments on account for $13,800
Nov 20; sold some of the tools at the price equal to their cost
$1800 collectable within 45 days.
Nov 25: Received $600 in partial collection of the account
receivable from the sale of the tools.
Nov 26: Paid $6,800 in partial payment of an account payable

Date

Accounts
involved

Classificat Increase or Debit or
ion
Decrease
Credit

2006
NOV1

Cash
Asset
Asad capital owner
equity

Increase
increase

Dr
Cr

3

Land
cash

Asset
asset

Increase
decrease

Dr
Cr

5

Building
Cash
Notes
payable

Asset
Asset
liability

Increase
Decrease
Increase

Dr
Cr
Cr

NOV
17

Tools &
equipment
Account
payable

Asset

Increase

Dr

liability

increase

Cr

Tools &
equipment
Account
receivable

Asset

Decrease Cr

asset

increase

25

Cash
Account
receivable

Asset
asset

Increase Dr
decrease Cr

26

Cash
Account
payable

Asset
liability

Decrease Cr
decrease Dr

20

Dr

JOURNAL

OF QI

ENTRIES

Date

Accounts title
Explanation

2006 Cash
Nov 1

Debit
$
80,000

Assad Capital
owner invested cash in
the business

”3

Land

80,000

52,000

Cash
Purchased land for business
”5

Building
Cash
Notes Payable
Purchased building paid part
Cash,balance payable within 90
days

Credit
$

52,000

36,000
6,000
30,000

” 17

” 20

” 25

Tools and Equipments
Accounts Payable
Purchased tools and
equipments on credit

Accounts Receivable
Tools
and Equipments
Sold unused tools and
equipment at cost
Cash

13,800
13,800

1,800
1,800

600

Accounts Receivable
Collected part of account
receivable
” 26

Accounts Payable
Cash
Made partial payment of
accounts payable

600

6,800
6,800

Oct 1. The owner Fahad invested an additional $80,000 cash
in the business.
Oct 5. Purchased a plot for $102,000 of which $30600 was
paid in cash , a note payable was issued for balance.
Oct15.Issued a check for $976 in full payment of an account
payable.
Oct18.Borrowed $30,000 cash from the bank by signing a 90
day note payable.
Oct23. Collected an account receivable of $2900 from
customer
Oct30. Acquired office equipment for $6200 made a cash
down payment of $1500,balance to be paid with in 30
days.

Date

Accounts
involved

Classificatio Increase
n
or
Decrease

Debit or
Credit

2007
Oct1

Cash
Fahad
capital

Asset
owner
equity

Increase
increase

Dr
Cr

Land
Cash
Notes
payable

Asset
Asset
liability

Increase
Decrease
Increase

Dr
Cr
Cr

5

Oct15

Account
payable
Cash

Liability

Decrease Dr

Asset

Decrease Cr

18

Cash
Notes
payable

Asset
Liability

Increase
increase

23

Cash
Asset
Account
asset
receivable

Increase Dr
decrease Cr

30

Office
Asset
Equipment
Cash
asset
Account
liability
payable

increase

Dr
Cr

Dr

Decrease Cr
Increase Cr

Solution of
Question 2

Date

Description

2007
Oct 1

Cash
80,000
Fahad Capital
Owner invested additional
cash in the business

5

Land
cash
Notes payable
Purchased land paid a
part in cash & issue a
note payable

Debit
$

Credit
$

80,000

102,000
30,600
71,400

Oct 15

18

23

Accounts payable
cash
Paid accounts payable

976

Cash
30,000
Notes payable
Borrowed from bank on
90 days note
Cash
2,900
Account Receivable
Collected account
receivable from
customer

976

30,000

2,900

Oct 30

Office Equipment
Cash
Account payable
Acquired office
equipment

6,200
1,500
4,700

Ledger is a book in which every account is
allotted a separate page , and all the
transactions relating to that account are
written on that page in a summary form.
 OR
 Ledger is a book which contains a condensed
record of all the business transaction.

 Transactions

are1st recorded in journal, and
then it is posted to ledger.
 Posting simply means updating the ledger
accounts for the effect of transactions
recorded in journal.


JOURNAL

OF QI

ENTRIES

Date

Accounts title
Explanation

2006 Cash
Nov 1

Debit
$
80,000

Assad Capital
owner invested cash in
the business

”3

Land

80,000

52,000

Cash
Purchased land for business
”5

Building
Cash
Notes Payable
Purchased building paid part
Cash,balance payable within 90
days

Credit
$

52,000

36,000
6,000
30,000

” 17

” 20

” 25

Tools and Equipments
Accounts Payable
Purchased tools and
equipments on credit

Accounts Receivable
Tools and Equipments
Sold unused tools and
equipment at cost
Cash

13,800
13,800

1,800
1,800

600

Accounts Receivable
Collected part of account
receivable
” 26

Accounts Payable
Cash
Made partial payment of
accounts payable

600

6,800
6,800

Nov 30: Recorded $2,200 of sale revenue received
in cash.
 Nov 30: Paid $1,400 of operating expenses in cash,
$200 for utilities and $1200 for wages.
 Here revenue is more than expenses and business
is making profit, profit is added to owner equity
and if it is received in cash, it increase asset
(cash).
 Profit = Revenues – Expenses
 Profit = 2200 – 1400
 Profit = $800
 Because of $800 profit the cash and capital
balances for the month of Nov will increase by
$800.


LEDGER

ACCOUNTS OF
Q1

Date
2006
NOV. 1
3
5
25
26
30

Debit
$

Credit
$

80,000
52,000
6,000
600
6,800
800

Balance
$
80,000
28,000
22,000
22,600
15,800
16,600

 This

format is known as a running balance
format.
 This form does not shows that the balance is
either debit or credit.
 But we know that assets normally have debit
balance and liability and owner equity’s has
credit balances.

Date
2006
NOV. 20
25

Debit
$

Credit
$

1,800
600

Balance
$
1,800
1,200

Date
2006
NOV.

Debit
$
3

52,000

Credit
$

Balance
$
52,000

Date
2006
NOV. 5

Debit
$
36,000

Credit
$

Balance
$
36,000

Date
2006
NOV. 17
20

Debit
$

Credit
$

Balance
$

1,800

13,800
12,000

13,800

Date
2006
NOV. 5

Debit
$

Credit
$

Balance
$

30,000

30,000

Date

Debit
$

2006
NOV. 17
6,800

Credit
$

Balance
$

13,800

13,800
7,000

Date
2006
NOV. 1
30

Debit
$

Credit
$

Balance
$

80,000
800

80,000
80,800

The time period for which a business measures its profit and
loss is called accounting period.
OR
The period of time covered by an income statement of a
business is called accounting period.
If a business measure its revenue and expenses for 3 months
its accounting period will be 3 months.
If a business measure its revenue and expenses for one year
then its accounting period will be one year.

One year accounting period is known as a fiscal
year.

 The

price of goods sold or services rendered is
called revenue.
 For Example If business sell 1000 pens @ 5 per pen
then 5000 is its revenue.
 If 20 patient comes to a Doctor and he charge 200
fee from every patient then 20 * 200 =4000 is its
revenue.
 Revenue increases owner equity ,because when
business sell goods or provide services it either
receive cash or generate Account receivable both
are assets and on the right side liability do not
increases so it increase owner equity.

 Repair

service revenue

 Sales
 Fee

earned
 Commission earned
 Interest revenue

 Realization

principle indicates that revenues
should be recognized at the time goods sold
or services are rendered.

The cost of doing business is called expense.
OR
 The cost of goods and services used up in the
process of earning revenue is called expense.
 Examples. salaries, utility bills, rent etc
 An expense always causes a decrease in owner
equity.
 Expense will decrease assets or increase
liability, if expenses are paid in cash (asset) it
will decreases and if it will not be paid until
later it increase liability.

 Matching

principle says that revenue should
be offset (match) by all the expenses
incurred in producing that revenue.

 Many

expenditures made by a business
benefit more than one accounting period.
 Let suppose car benefit a business for 10
years. If business prepares annual income
statement a portion of the cost of the car
should be recorded as a depreciation
expense.
 If the car cost $4000 then( 4000/10=400) will
be the depreciation expense of car for one
year.

 The

policy of recognizing revenue in the
accounting records when it is earned and
recognizing expenses when the related goods
are services are used is called Accrual basis
of Accounting.
 The Accrual basis of Accounting measures the
profitability of the business for the period of
time

 The

policy of recognizing revenue in the
accounting records when cash is collected
from the customer and recognizing expenses
when it is paid is called the Cash basis of
Accounting.
 The Cash basis of Accounting measures cash
receipts and payments during a period.

 Withdrawals

of owner means when owner
withdraw some cash or assets from the
business for personal use.
 Withdrawal reduce assets and owner equity
of the business.
 Withdrawals are not expenses because
expenses are incurred for the purpose of
generating revenue and withdrawals of
owner do not serve this purpose.
 Drawings decrease owner equity so it is
recorded by debit.

 The

excess amount of revenue over the
expense of a business is called Profit.
 For Example if a revenue is $ 100 and
expense is $ 80 then profit is $ 20.
 As income statement covers a period of time,
so income must be related to a period of
time.
 Profit is added with owner equity.

 The

excess amount of expenses over the
revenue of a business is called loss.
 Example. If revenue is $100 and expenses are
$130 then $30 is loss.
 Loss is subtracted from owner equity.

 Dec.

1; Paid Daily Tribune $360 cash for news paper
advertising to be run during December.
 Dec. 2; Purchased radio advertising from KRAM to
be aired in December. The cost was $470 , payable
within 30 days.
 Dec. 4;Purchased various shop supplies cost $1,400,
due in 30 days. These supplies are expected to
meet overnight’s needs for three or four months.

 Dec.

15; Collected $4,980 cash for repairs
made to vehicles.
 Dec. 23;Asad the owner , withdrew $3,100
cash from the company’s bank account for
his personal use.
 Dec. 29;Asad found that he did not need all
of the cash he had withdrawn on Dec 23, so
he redeposit $1000 in Overnight’s (business)
bank account.

 Dec.

31;Billed Harbor Cab Co. $5,400 for
maintenance and repair services rendered
during December. The agreement with
Harbor Cab calls for payment to be received
by January 10.
 Dec. 31;Paid all employees wages for
December ,$4,900

Date

Accounts
involved

Dec1

Cash
Asset
Advertiseme expense
nt

Decrease
increase

Cr
Dr

2

Advertiseme expense
nt
A/P
Liability

Increase

Dr

increase

Cr

supplies
account
payable

Increase
Increase

Dr
Cr

4

Classificat Increase or Debit or
ion
Decrease
Credit

Asset
liability

Date

Accounts
involved

Dec15 Cash
Revenue
23 Withdrawal
Cash
29 Cash
Owner
equity

Classificat Increase or Debit or
ion
Decrease
Credit
Asset
Revenue

increase
increase

Dr
Cr

Withdraw Increase
al
Asset
decrease

Dr

Asset
Owner
equity

Dr
Cr

Increase
Increase

Cr

Date

Accounts
involved

Dec31 A/R
Revenue
31 wages
Cash

Classificat Increase or Debit or
ion
Decrease
Credit
Asset
Revenue

increase
increase

Dr
Cr

expense
Asset

Increase
decrease

Dr
Cr

Date

Description

Debit
$

2006
Dec 1

Advertising expense
360
Cash
Purchased newspaper
advertising & pay cash

2

Advertising expense
470
Account payable
Purchased radio
advertising on account

Credit
$
360

470

Date

Description

Debit
$

2006
Dec 4

Shop supplies
Account payable
Purchased shop
supplies on account

1,400

15

Cash
4,980
Repair service Rev
Repair services
rendered

Credit
$
1,400

4,980

Date

Description

2006
Asad drawings
Dec 23
Cash
Owner withdrew cash
29

Cash
Asad capital
Owner invested cash

Debit
$

Credit
$

3,100
3,100

1,000
1,000

Date

Description

2006
Account receivable
Dec 31
Repair service Rev
Billed Harbor cab for
services rendered
31

Wages expenses
Cash
Paid wages

Debit
$

Credit
$

5,400
5,400

4,900
4,900

Date
2006
NOV. 30
DEC.
1
15
23
29
31

Debit
$

Credit
$

16,600
360
4,980
3,100
1,000
4,900

Balance
$
16,600
16,240
21,220
18,120
19,120
14,220

Date
2006
NOV. 30
DEC. 31

Debit
$
1,200
5,400

Credit
$

Balance
$
1,200
6,600

Date
2006
DEC.

Debit
$
4

1,400

Credit
$

Balance
$
1,400

Date
2006
NOV.

Debit
$
30

52,000

Credit
$

Balance
$
52,000

Date
2006
NOV. 30

Debit
$
36,000

Credit
$

Balance
$
36,000

Date
2006
NOV. 30

Debit
$
12,000

Credit
$

Balance
$
12,000

Date
2006
NOV. 30

Debit
$

Credit
$

Balance
$

30,000

30,000

Date
2006
NOV. 30
DEC. 2
4

Debit
$

Credit
$

Balance
$

7,000
470
1,400

7,000
7,470
8,870

Date
2006
NOV. 30
DEC. 29

Debit
$

Credit
$

Balance
$

1,000

80,800
81,800

Date
2006
DEC. 23

Debit
$
3,100

Credit
$

Balance
$
3,100

Date
2006
DEC. 15
31

Debit
$

Credit
$

Balance
$

4,980
5,400

4,980
10,380

Date
2006
DEC. 1
2

Debit
$
360
470

Credit
$

Balance
$
360
830

Date
2006
DEC. 31

Debit
$
4,900

Credit
$

Balance
$
4,900

 The

proof of the equality of Debit and Credit
balances is called Trial Balance.
 A Trial Balance is a two column schedule listing
the names and balances of all the accounts in the
order in which they appear in the ledger; the debit
balances are listed in the left hand column and the
credit balances in the right hand side column. The
total of two columns should agree. Trial balance
contains Income statement as well as Balance
sheet accounts.
 A Trial balance taken from Overnight’s ledger
follows

OVERNIGHT AUTO SERVICE
Trial Balance
December 31, 2006
Description

Debit Balance
$

Cash
Account Receivable
Shop Supplies
Land
Building
Tools and Equipment
Notes Payable
Account Payable
Asad Capital
Asad Drawing
Repair Service Revenue
Advertising Expense
Wages Expense

14,220
6,600
1,400
52,000
36,000
12,000

TOTAL

$131,050

Credit Balance
$

30,000
8,870
81,800
3,100
10,380
830
4,900

$131,050

 Many

transactions affects the revenues or
expenses of two or more accounting periods.
e.g depreciable assets, supplies, insurance
policy, prepaid expenses etc
 Initially the costs of such items are recorded
as assets, because they will benefit the
business in future accounting periods.
Overtime these assets are used up, and their
cost becomes expenses of the periods in
which the goods are services are used.

 Business

allocate the costs of such assets to
expenses over a span of several accounting
period by making adjusting entries at the
end of each accounting period.
 The purpose of these entries is to assign to
each accounting period the appropriate
amount of revenue and expenses.
 These entries “adjust” the balances of
various ledger accounts, therefore it is
known as a adjusting entries.

A

business can make dozen of adjusting
entries, but here we assume that Overnight’s
account require only three adjusting entries
at December 31.

On December 4,Overnight purchased for $1400 a
quantity of shop supplies expected to last for 3 or 4
months. At the date of purchase, this $1400 cost was
debited to an asset account (shop supplies), because
it was expected to benefit future accounting periods.
 But as these supplies are used this asset gradually
becomes an expense.
 Assume that during December, $400 worth of
Overnight’s shop supplies was used in business
operations and that approximately $1000 worth
remains on hand available for use in future periods.
 The $400 of supplies used during December should be
recognized as expense in that month; the $1000 in
supplies still on hand should appear in the Dec 31
balance sheet as an asset.

GENERAL JOURNAL
Date

Account Titles and
Explanation

Debit
$

2006
Supplies expense
400
Dec 31
Shop supplies
To recognize as
expense the cost of
shop supplies used in
December

Credit
$
400

 Depreciable

assets are all those assets which
have a limited useful life. e.g Building, Car,
Machinery and Furniture etc
 They are not physically consumed but their
economic values diminishes overtime.
 Each period a portion of a depreciable assets
usefulness expires. Therefore, a
corresponding portion of its cost is
recognized as depreciation expense.

 The

systematic allocation of the cost of a
depreciable asset to expense over the asset
useful life is called depreciation.
 The appropriate amount of depreciation
expense is only an estimate. Because we
cannot look at a building or a piece of
equipment and determine precisely how
much of its economic usefulness has expired
during the current period.

 The

most widely used method of calculating
depreciation is “Straight line depreciation
method”. Under the straight line approach,
an equal portion of the asset’s cost is
allocated to depreciation expense in every
period of the asset’s estimated useful life.
The formula for calculating depreciation
expense by the straight line method is:

Depreciation expense (per period) = Cost of the asset/Estimated useful
life

 Overnight

purchased its building for
$36000.And Asad owner estimate that its
useful life is 20 years. Annual depreciation
expense of the building is equal to
(36000/20)=$1800 and per month
depreciation expense is equal to
(1800/12)=$150.
 The adjusting entry to record depreciation
on this building for the month of December
appears below

GENERAL JOURNAL
Date

Account Titles and Explanation

2006
Dec 31

Depreciation Expense; Building
Accumulated Depreciation; Building
To record one month’s depreciation on
building

Dr
$

Cr
$

150
150

 The

depreciation expense account will
appear in Overnight’s income statement for
December, along with other expenses for the
month.
 The accumulated depreciation account will
appear in the balance sheet as a deduction
from the balance of the building account as
shown below;

OVERNIGHT AUTO SERVICE
Partial Balance Sheet
December 31 ,2006
Assets
Cash ………………………………………………… $14,220
Account Receivable ………………………………
6,600
Shop supplies ……………………………………..
1,000
Land ………………......................................... 52,000
Building …………………………….......$36,000
Less; Accumulated Depreciation…...
150 35,850

 Overnight

also must record depreciation on
its tools and equipment. These assets cost
$12,000, and management estimates that
they will remain in service for about 5 years.
 Thus per year depreciation expense is equal
to (12000/5)=$2400 and monthly
depreciation expense is equal to
(2400/12)=$200.
 The adjusting entry to recognize this monthly
expense is;

GENERAL JOURNAL
Date

Account Titles and Explanation

Dr
$

Cr
$

2006
Dec 31

200
Depreciation Expense; Tools & Equip
Accumulated Depreciation; Tools & Equip
To record one month’s depreciation on tools

200

and equipment

 Similar

adjusting entries to recognize
depreciation expense on the building and
tools and equipment will be made each
month through out the assets useful lives.
 Depreciation begins when the assets are
placed in use for business purpose. Once
these assets have become fully depreciated
that is, their total cost has been recognized
as depreciation expense, the recognition of
depreciation will stop.

LEDGER

ACCOUNTS

AFTER
ADJUSTING

ENTRIES

Date
2006
NOV. 30
DEC.
1
15
23
29
31

Debit
$

Credit
$

16,600
360
4,980
3,100
1,000
4,900

Balance
$
16,600
16,240
21,220
18,120
19,120
14,220

Date
2006
NOV. 30
DEC. 31

Debit
$
1,200
5,400

Credit
$

Balance
$
1,200
6,600

Date
2006
DEC.

Debit
$
4
31

Credit
$

Balance
$

400

1,400
1,000

1,400

Date
2006
NOV.

Debit
$
30

52,000

Credit
$

Balance
$
52,000

Date
2006
NOV. 30

Debit
$
36,000

Credit
$

Balance
$
36,000

Date
2006
DEC. 31

Debit
$

Credit
$

Balance
$

150

150

Date
2006
NOV. 30

Debit
$
12,000

Credit
$

Balance
$
12,000

Date
2006
DEC. 31

Debit
$

Credit
$

Balance
$

200

200

Date
2006
NOV. 30

Debit
$

Credit
$

Balance
$

30,000

30,000

Date
2006
NOV. 30
DEC. 2
4

Debit
$

Credit
$

Balance
$

7,000
470
1,400

7,000
7,470
8,870

Date
2006
NOV. 30
DEC. 29

Debit
$

Credit
$

Balance
$

1,000

80,800
81,800

Date
2006
DEC. 23

Debit
$
3,100

Credit
$

Balance
$
3,100

Date
2006
DEC. 15
31

Debit
$

Credit
$

Balance
$

4,980
5,400

4,980
10,380

Date
2006
DEC. 1
2

Debit
$
360
470

Credit
$

Balance
$
360
830

Date
2006
DEC. 31

Debit
$
4,900

Credit
$

Balance
$
4,900

Date
2006
DEC. 31

Debit
$
400

Credit
$

Balance
$
400

Date
2006
DEC. 31

Debit
$
150

Credit
$

Balance
$
150

Date
2006
DEC. 31

Debit
$
200

Credit
$

Balance
$
200

 After

all the necessary adjusting entries have
been journalized and posted, an adjusted
trial balance is prepared to prove that the
ledger is still in balance.
 It also provide a complete listing of the
account balances to be used in preparing the
financial statements.
 The following is the adjusted trial balance of
Overnight Auto Service.

OVERNIGHT AUTO SERVICE
Adjusted Trial Balance
December 31, 2006
Description

Debit Balance Credit Balance
$
$

Cash
Account Receivable
Shop Supplies
Land
Building
Accumulated Depreciation; Building
Tools and Equipment
Accumulated Depreciation; Tools & Equipment
Notes Payable
Account Payable
Asad Capital
Asad Drawing
Repair Service Revenue
Advertising Expense
Wages Expense
Supplies Expense
Depreciation Expense; Building
Depreciation Expense ;tools & equipment

14,220
6,600
1,000
52,000
36,000
150
12,000
200
30,000
8,870
81,800
3,100
10,380
830
4,900
400
150
200

 Standard

Format
 Share information
 Stake holder
 Monetary information
 OR
 It is a set of different report which is provided by a
business to interested parties. OR
It is simply a declaration of what is believed to be
true communicated in terms of monetary unit.

 Financial

statements prepared for shorter than one
year is called interim financial statements.

 1.

The Income Statement
 2. The Statement of Owner’s Equity
 3. The Balance Sheet
 4. The Statement of Cash Flows

OVERNIGHT AUTO SERVICE
Income Statement
For the Month ended December 31 ,2006
Revenue:
Repair Service Revenue ………………………………. $ 10,380
Expenses:
Advertising expense ………………. $
830
Wages Expense ……………………
4,900
Supplies Expense …………………..
400
Depreciation Expense: Building …
150
Depreciation Expense: Tools & Equip
200
6,480
Net Income ……………………………………………………. $3,900
Net Income increase owner’s equity. so owner equity will
increase by an amount of $3900 because of this profit.

The Statement of Owner’s Equity summarize
the increases and decreases in the amount of
owner’s equity during the accounting period.
 Increases result from earning net profit and
from additional investment by the owner.
 Decreases result from losses and from of
assets by the owner

OVERNIGHT AUTO SERVICE
Statement of Owner’s Equity
For the Month ended December 31 ,2006
Asad, Capital, Nov. 30, 2006 …………………………….. $ 80,800
Add: Net Income for December …………………………..
3,900
Additional investment by owner ……………………….
1,000
Subtotal …………………………………………………….. $ 85,700
Less: Withdrawals by owner ………………………………..
3,100
Asad, Capital, December 31, 2006 ………………………. $ 82,600
The ending balance of owner’s equity ($82,600) appears in
balance sheet.

 The

statement which shows that what business has
and what it has to pay at a particular time is called
balance sheet.
 The statement which list the assets liabilities and
owner equity of a business is called Balance sheet.

1= Current Assets.
The assets utilized or that gives benefits within one
accounting period.
Examples
Cash , accounts receivable ,Notes receivable ,
inventory ,supplies etc.

Account receivable (A/R):
The amounts due from customer.
Example. You have sold 10 marker @ 5 per maker and you
haven't received the amount. so 50 is your account
receivable
Notes receivable:
A note or bill receivable from some one.
Example. You have given $ 500 to some one and has taken
written promise from him that he will pay the amount
after 90 days.

Inventory:
Merchandise on hand that is goods remaining unsold.
You purchase merchandise of worth $1000 at the
start of the month and on the day of preparing
balance sheet the remaining goods worth $200 so
inventory is of $200.
Supplies:
The small materials used in the business operation.
Like markers , papers etc in kardan university

 2=Fixed

Assets or Long Term asset:
 Those assets which we utilize in more than one
accounting period .
 Land ,building, furniture, machinery ,car etc

 3=Tangible

Assets:
 Those assets which we can touch.
 Or
 Those assets which have a physical existence are
called tangible assets.
 Examples
 Inventory ,land, car etc

 TYPES

OF TANGIBLE ASSETS.
 1.Depreciable assets.
 Those assets which have a limited useful life.
 Examples
 Building ,car ,furniture ,machinery etc
 2.Non depreciable assets.
 Those assets which have an unlimited useful life.
 Example LAND

1.Current Liability:
 The obligation payable with in one accounting
period.
 Examples
 Accounts payable , notes payable ,salaries
payable ,interest payable, utility bills payable ,
accrued expenses etc
Accrued expenses:
The expenses incurred but not yet paid.
Salaries payable, rent payable ,interest payable etc

Accounts payable:
The amounts payable to supplier.
You have purchased goods of worth $400 and you
haven’t pay for it so 400 is your accounts payable.
Notes payable:
A written promise to repay the amount to some one
by a particular date.
Like if you have received $800 from some one and
you have made a written promise that I will pay the
amount after 60 days .so $800 is your Notes payable

2.Long term liability:
 The obligations payable in more than one
accounting period.
 Example
 Long term loan payable

OWNER’S EQUITY
The residual claim of the owner on the assets of the
business.
Owner equity increases from
1.Investment of cash or other assets by the owner
2.Earnings from profitable operation of the business.
Owner Equity.
Owner equity decreases from
1.Withdrawl of cash or other assets by the owner
2.Losses from unprofitable operation of the business.

 The

heading of balance sheet communicate three
things
 1.The name of the business
 2.The name of the financial statement
 3.Date

Assets
Cash……………
Account receivable

OVERNIGHT AUTO SERVICE
Balance Sheet
December 31 ,2006
$ 14,220
6,600

Supplies
1,000
Land …………...
52,000
Building ……….
36,000
Less: Accumulated Dep …
150 35,850
Tools & Equipment
12,000
Less: Accumulated Dep
200 11,800
Total Assets …………..
$121,470

Liabilities & Owner ‘s equity
Liabilities;
Notes payable …….
$ 30,000
Accounts payable
Total liabilities
Owner ‘s equity;

8,870
$ 38,870

Asad Capital
Total liabilities & O.Eq

82,600
$121,470

OVERNIGHT AUTO SERVICE
Statement of Cash Flows
For the Month Ended December 31 ,2006
Cash flows from operating activities;
Cash received from revenue transactions …………..
$ 4,980
Cash paid for Advertising expenses …………………
(360)
Cash paid for wages expenses ……………………….
(4,900)
Net cash provided (used) by operating activities …………..
Cash flows from investing activities; ………………………….
Cash flows from financing activities;
Cash Invested by Asad, owner …………………………
1,000
Cash withdrawn by Asad, owner ………………………
(3,100)
Net cash provided (used) by financing activities
Net increased (decreased) in cash for the month of December
Add: Cash balance, December 1 , 2006 …………………………………
Cash balance on , December 31, 2006 ………………………………..

$( 280)
0

$ (2,100)
$ ( 2,380)
16,600
$ 14,220

THE CASH BALANCE ON DECEMBER, 31, 2006 APPEARS IN BALANCE SHEET .
THE RELATIONSHIP BETWEEN FINANCIAL STATEMENT IS CALLED “ARTICULATION”.

The revenues, expenses and drawings accounts are
called temporary accounts or nominal accounts,
Because we close it at the end of every accounting
period.
 Revenues increases owner’s equity, expenses and
drawing decreases owner’s equity.
 The process of transferring the balances of
temporary accounts into the owner’s capital
account is called closing the accounts.
 The journal entries made for the purpose of closing
the temporary accounts are called closing entries.

 Revenues

and expenses accounts are closed
at the end of each accounting period by
transferring their balances to a summary
account called income summary.
 If the revenues (credit balances) exceed the
expenses (debit balances) the income
summary account will have a credit balance
representing net profit.
 Conversely, if expenses exceed revenue, the
income summary account will have debit
balance representing loss.

 Revenue

accounts have credit balances,
therefore closing a revenue account means
transferring its credit balance to the income
summary account.
 This transfer is accomplished by a journal
entry debiting revenue account in an amount
equal to its credit balance, with an offsetting
credit to the income summary account.

GENERAL JOURNAL
Date

Account Titles and Explanation

2006
Dec 31

Repair Service Revenue
Income Summary
To close the repair service revenue
account.

Dr
$

Cr
$

10,380
10,380

 After

this closing entry has been posted,
repair service revenue will have a zero
balance, whereas income summary will have
a credit balance of $10,380.

 Expense

accounts have debit balances,
therefore closing an expense account means
transferring its debit balance to the income
summary account.
 This transfer is accomplished by a journal
entry crediting expense account in an
amount equal to its debit balance, with an
offsetting debit to the income summary
account.

GENERAL JOURNAL
Date

Account Titles and Explanation

2006
Dec 31

Income Summary
Advertising Expense
Wages Expense
Supplies Expense
Depreciation Expense: Building
Depreciation Expense: Tools &
Equipment
To close the expense accounts.

Dr
$

Cr
$

6,480
830
4,900
400
150
200

 After

this closing entry has been posted, the
income summary account has a credit
balance of $3,900 ($10,380-$6,480), and the
five expenses accounts have zero balances.

 The

net income (Revenue-Expenses) $3,900
(10,380-6,480) earned during December
causes the owner’s equity to increase.
 The credit balance of the income summary
account is, therefore transferred to the
owner’s equity account, by debiting income
summary account for $3,900 and crediting
Asad capital account for $3,900.

GENERAL JOURNAL
Date

Account Titles and Explanation

2006
Dec 31

Income Summary
Asad Capital
To close the Income summary account
for December by transferring the net
income to the owner’s capital account.

Dr
$

Cr
$

3,900
3,900

 After

this closing entry has been posted, the
income summary account has a zero balance,
and the net income for December will appear
as an increase or credit entry in the owner’s
capital account.

 If

the Expenses of a business are more than
its revenue, the income summary account
will have a debit balance, representing a loss
for the Accounting Period.
 In that case, the closing of the income
summary account requires a debit to owner’s
capital account and an offsetting credit to
income summary account.
 The owner’s Equity will of course, be
reduced by the amount of the loss debited to
the capital account.

 Drawings

by the owner do not constitute an
expense, the owner’s drawing account is not
closed into the income summary account,
but it is closed directly to the owner’s
capital account.
 The following is the closing entry for owner’s
drawing account,

GENERAL JOURNAL
Date

Account Titles and Explanation

2006
Dec 31

Asad Capital
Asad Drawing
To close the owner Drawing account.

Dr
$

Cr
$

3,100
3,100

 After

this closing entry has been posted, the
drawing account will have zero balance, and
the amount withdrawn by owner Asad during
December will appear as a deduction or debit
entry in his Capital account.

LEDGER
ACCOUNTS
AFTER
CLOSING ENTRIES

Date
2006
NOV. 30
DEC.
1
15
23
29
31

Debit
$

Credit
$

16,600
360
4,980
3,100
1,000
4,900

Balance
$
16,600
16,240
21,220
18,120
19,120
14,220

Date
2006
NOV. 30
DEC. 31

Debit
$
1,200
5,400

Credit
$

Balance
$
1,200
6,600

Date
2006
DEC.

Debit
$
4
31

Credit
$

Balance
$

400

1,400
1,000

1,400

Date
2006
NOV.

Debit
$
30

52,000

Credit
$

Balance
$
52,000

Date
2006
NOV. 30

Debit
$
36,000

Credit
$

Balance
$
36,000

Date
2006
DEC. 31

Debit
$

Credit
$

Balance
$

150

150

Date
2006
NOV. 30

Debit
$
12,000

Credit
$

Balance
$
12,000

Date
2006
DEC. 31

Debit
$

Credit
$

Balance
$

200

200

Date
2006
NOV. 30

Debit
$

Credit
$

Balance
$

30,000

30,000

Date
2006
NOV. 30
DEC. 2
4

Debit
$

Credit
$

Balance
$

7,000
470
1,400

7,000
7,470
8,870

Date
2006
NOV. 30
DEC. 29
31
31

Debit
$

3,100

Credit
$

Balance
$

1,000
3,900

80,800
81,800
85,700
82,600

Date
2006
DEC. 23
31

Debit
$

Credit
$

Balance
$

3,100

3,100
0

3,100

Date
2006
DEC. 15
31
31

Debit
$

10,380

Credit
$

Balance
$

4,980
5,400

4,980
10,380
0

Date
2006
DEC. 1
2
31

Debit
$

Credit
$

Balance
$

830

360
830
0

360
470

Date
2006
DEC. 31
31

Debit
$

Credit
$

Balance
$

4,900

4,900
0

4,900

Date
2006
DEC. 31
31

Debit
$

Credit
$

Balance
$

400

400
0

400

Date
2006
DEC. 31
31

Debit
$

Credit
$

Balance
$

150

150
0

150

Date
2006
DEC. 31
31

Debit
$

Credit
$

Balance
$

200

200
0

200

Date
2006
DEC. 31
31
31

Debit
$

6,480
3,900

Credit
$

Balance
$

10,380

10,380
3,900
0




1. Close the various revenue accounts by transferring their
balances into the income summary account.
2. Close the various expense accounts by transferring their
balances into the income summary account.
3. Close the Income summary account by transferring its
balance into the owner’s capital account.
4. Close the owner’s Drawing account into the owner’s
capital account. (The balance of the owner’s capital
account in the ledger will now be the same as the amount
of owner’s equity appearing in the Balance Sheet)

 After

the revenue and expense accounts have been
closed, it is desirable to prepare an after closing
trial balance, which will consist of balance sheet
accounts only.
 The after closing trial balance is prepared from the
ledger.
 The after closing trial balance gives assurance that
the accounts are in balance and ready for the
recording of the transactions of the new
accounting period.
 The following is the after closing trial balance of
Overnight Auto Service,

OVERNIGHT AUTO SERVICE
After Closing Trial Balance
December 31, 2006
Description

Debit Balance Credit Balance
$
$

Cash
Account Receivable
Shop Supplies
Land
Building
Accumulated Depreciation; Building
Tools and Equipment
Accumulated Depreciation; Tools & Equipment
Notes Payable
Account Payable
Asad Capital

14,220
6,600
1,000
52,000
36,000

TOTAL

$121,820

150
12,000
200
30,000
8,870
82,600

$121,820

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