Ultimate Business & IT

Training Solution

ACCOUNTING PRINCIPLES AND PRACTICES

A training material on
short term course

Basic Accounting & Bookkeeping

Ultimate Business & IT Training Solution
4/30/2024 0922-73-44-73
 Course Objectives

At end of this course, the trainees will be

able to
 Define what accounting is and explain the
activities
 understand and explain the basic
accounting principles
 Demonstrate the accounting activities
 Record and post business transactions
and prepare financial statements for
service and trading business
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 Course Outline
 Nature of Accounting • Business Transactions and the
 What is accounting Accounting Equation
 Forms of business • Financial Statements

 Types of business • The accounting cycle

 Why an Accounting system is • Types of Accounts
an important? • The Rules of Debit and
 Bookkeeping Vs Accounting Credit
 Users of accounting • Journalizing transactions
information
• Posting entries to ledger
 The Elements of Financial
Statement -Accounting • Trial balance & adjustments
Reports • Closing
 Basic Accounting Equation • Accounting for
 Generally Accepted merchandising business
Accounting Principles
(GAAP)
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Nature of Accounting
 What is Accounting?: It is the process of collecting,
analyzing, recording, summarizing, and interpreting
financial activities to permit individuals and
organization to make informed judgments and
decisions.
it’s a “language of business”
Collecting: gathering relevant source documents
Analyzing: examining these reports by breaking them
down in order to determine financial success or
failure.
Recording: making written records of events
Summarizing: the process of combining these written
records
Interpreting: involves the use of financial data to make
sound decision.
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Forms of business
There are different forms of business
organizations:
 Sole Proprietorship—owned by one
person
 Partnership—co-owned by two or more
persons(partners)
 Corporation—owned by many investors
called stockholders (The business—not the
owners—are responsible for the company’s
obligations.)
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Types of Business
 There are different types of business
organizations:
 Service business: render/provide services to
customers. Eg. doctors, lawyers, barber shop,
etc.
 Merchandising business—purchases goods
for resale purpose (buying and selling business)
 Manufacturing business—produces a
product to sell
 Constructions – build capital facilities like
real-estate, road bridge and etc
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Why an Accounting system is an
important?
 An effective accounting system captures
large amounts of data and organizes it into
understandable and useful information.
 This information is used within & outside the
organization for a variety of purposes.
 Internally
 Development of Business Strategy
 Identification of Areas of Risk
 Budgeting
 Trend Analysis
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Why…
 Externally
 To people outside of the organization,
accounting system used for purposes such
as:
 Prospective Investing
 Creditworthiness
 Tax Liability Determination
 Regulatory Compliance

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 Bookkeeping Vs. Accounting
 Bookkeeping: Emphasizes on record
keeping activities.
 Bookkeepers are supervised by accountant.
 The work of bookkeeper can be replaced by
computer.
 Accounting: Accounting deals with
designing (establishing) a record keeping
system and review the accounting records.

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Users of accounting information
1. Internal users:
 Internal users are parties inside the reporting entity
(company) who are interested in the accounting
information.
Eg. managers-for controlling, monitoring and planning,
officers, internal auditors, sales managers, budget officer,
other internal decision maker.
2. External users are parties outside the reporting
entity (company) who are interested in the accounting
information
 lenders(banks and financial companies
 shareholders(investors)
 External auditors
 Employee
 Regulators
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The Elements of Financial Statement
( Accounting Reports)
There are 10 elements to report
“ Period of time”
“ Moment in time” Investment by
Assets owners
Distribution to
Liabilities
owners
Equity Comprehensive
income
Revenue
Expenses
Gains
Losses
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Elements…
1. Assets
 Are items with money value that are owned /controlled
by a business.
 Right to use, some thing that will provide services/ benefits
to the business
 Example: cash, accounts receivable, supplies, inventories,
equipment, land buildings etc
2. Liabilities:
 Debts owed by the business-obligation of a business.
 Example: accounts payable, notes payable, Loans, interest
payable, wages payable, tax payable
3. Owner’s Equity:
 Owners contribution to initiate or support the business
 It is the excess of assets over liabilities. A-L= OE
 Also called capital, proprietorship, net worth, and net
asset.
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Elements:
Assets:
 Current Assets: Assets with short life (less than one
year).
- Either used up in operations or converted to other types of
assets with a period of one year.
[Link]: cash in custody, cash in bank, check, CPO,
[Link]: amount to collect from customers / others arising from
sales made on credit; loans & advances.
eg. A/R, Interest/R, loan/R Note/R
[Link]: Items of expense that are paid for prior to usage.
4. Inventory: items of asset held for resale purpose.
Assets held for use as input for production
manufactured goods that are ready for sale
eg. Supplies, rent, insurance, subscriptions
 Fixed Assets (Property Plant & Equipment): assets of longer life
more than 1 year.
Eg. Furniture, office Equipment, Machineries, vehicles, Building, Land

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Elements:
Liabilities:
 Current Liabilities: Liabilities that are to paid out
(payable) within a period of one year.
Eg. Tax payable, A/P, N/P, wage payable, interest payable
 Long term Liabilities: Liabilities that are payable
over long period of more than one year.
Eg. Loan, lease
Capital
 Owners’ equity: Capital Contributed by owner.
(common stock, preferred stock)
 Retained Earnings: Profit or loss that has been
accumulated over years since company’s
establishment.
 Legal reserve: A reserve legally required to be kept
aside from the company’s profit.
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Elements…
 Revenues:
 Revenues are increases in capital due to inflow
of resources from business operations such as,
provision of services or sales of goods.
 Expenses:
 Expenses are decrease in capital due to outflow
of resources for the purpose of business
operations.
 Drawings: An owner may withdraw cash or
other assets during the accounting period for
personal use. These withdrawals could be
recorded as a direct decrease of owner’s equity
and recorded in drawings account.
 Drawings decrease total owner’s equity.
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Elements:
Revenue: income obtained from operations.
 Sales revenue: sales of goods bought or
manufactured
 Service revenue: sales of services like
transportation, legal, hospital, training, consulting
 Rent revenue: rent of building, rent of
machineries, rent of equipment, Materials rent
 Others: interest revenue, commission revenue,
investment income, gain from sales of fixed assets
& investment assets.
Expenses: value of expired or used up assets in
the process of revenue generation.
Eg. Salary expense, rent expense, transportation
expense, interest expense, utilities expense,
Miscellaneous expenses. Ultimate Business & IT Training Solution
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 Basic Accounting Equation
The equation is an expression of the
relationship among the Financial reports
elements.
Assets = Equities
Equities are of two:
 Creditors' claims that are called liabilities
 Owners' claims that are called owners equity
 Assets = Liabilities + Owner’s Equity
 A= L + OE
If a company goes bankrupt, liabilities are paid
off first to creditors, while owner’s equity is the
last to be distributed. Therefore, owners' equity
is also called residual equity.
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Generally Accepted Accounting
Principles (GAAP)
 Accounting principles are guidelines to be followed by
the accountant when measuring and recording
financial activities of a firm.
1. Business entity concept (Economic Entity
Concept or Separate Entity)
 - a business should be separate and distinct in record
from the owner and other business.
2. Cost principle
 Resource (assets) purchased by an entity should be
recorded at cost.
3. Unit of measurement (monetary unit)
 Accounting records only things (transactions) that are
expressed in terms of money. It does not record
things that are measured in other units of
measurement like meter, kilogram, liter etc
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GAAP
4. Going Concern - company to last long enough to
fulfill objectives and commitments.
5. Periodicity - company can divide its economic
activities into time periods.
- generally occurs (1) when
6. Revenue Recognition
realized or realizable and (2) when earned.
 Accrual basis of accounting
Revenue is recorded when earned & expense is
recorded when incurred.
 Exceptions:
During Production.
At End of Production
Upon Receipt of Cash
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GAAP
7. Matching - efforts (expenses) should be
matched with accomplishment (revenues) whenever
it is reasonable and practicable to do so. “Let the
expense follow the revenues.”
No revenue can be obtained without expenses are
incurred. So the expenses should be presented as
deductions from the revenue to determine the profit.
8. Full Disclosure – providing information that is
of sufficient importance to influence the judgment
and decisions of an informed user.
 Provided through:
Financial Statements;
Notes to the Financial Statements & Supplementary information
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GAAP
[Link] Benefit – the cost of providing the
information must be weighed against the benefits
that can be derived from using it.
[Link] - an item is material if its inclusion
or omission would influence or change the
judgment of a reasonable person.
11. Industry Practice - the peculiar nature of
some industries and business concerns sometimes
requires departure from basic accounting theory. 12.
12. Conservatism – when in doubt, choose the
solution that will be least likely to overstate assets
and income. Ultimate Business & IT Training Solution
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Business Transactions and Accounting
Equation
What is a transaction?
Its any activity that changes the value of assets, liabilities, owner’s
equity, revenue or expenses
 Business transaction is an exchange of economic consideration
between two parties/event of occurrence or condition that must be
recorded.
 E.g. hiring an employee does not change the value of any assets,
liabilities and owner’s equity, so it is not a transaction.
 Transaction can be created internally or external.
 Internal transaction: internally created
 E.g. Salary payment, Depreciation, Supplies, Allowance for
uncollectible
 External transaction: transaction related to outsiders
 Example: purchase of asset on account, cash payment to a creditor,
receipt of cash for service rendered, payment of rent and collection
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Financial Statements
Four Major Statements
1. Income statement:
 Describes a company’s revenues and expenses along with the
resulting net income or net loss over a period of time.
 An income statement is also called Statement of
Operations, Earnings Statement, or Profit and Loss
Statement (P/L).
 When revenue exceeds expenses, there is a net income.
 When expenses exceed revenue, there is a net loss.
2. Statement of Owner’s equity:
 Explains changes in equity due to items such as net income, net
loss, owner’s investment, and owner’s withdrawal over a period
of time.
 Expenses & owner’s withdrawal decreases the Owners equity
of a business.
 Revenues & owner’s investment increases the Owners equity
of a business.
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Financial Statements…
3. Balance sheet:
 A listing of a firm’s assets, liabilities and
owner’s equity at a specific date.
 A balance sheet is also called Statement
of Financial Position.
4. Cash flow statement
It summarized cash inflow & cash outflow
of an entity over period in its three sections.
 Cash flow from operating activities
 Cash flow from financing activities
 Cash flow from investing activities
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The accounting cycle
 Accounting Cycle – is the sequence of
procedures used to record, classify and
summarize accounting information in
financial reports, on a regular basis.
 Journalizing
 Posting
 Trial balance
 Adjusting & correcting
 Work sheet (optional)
 Closing
 Financial reports Ultimate Business & IT Training Solution
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 Types of Accounts
1. Assets: any physical thing (tangible) or right (intangible) that has
a value is an asset.
A. Current asset: asset that may reasonably be expected to be
realized in cash or sold or used up usually within one year or
less.
Example: cash, account receivable, supplies, inventory, short term
notes receivable.
B. Plant assets (fixed assets) tangible asset used in the business
that are of a permanent or relatively fixed nature. Fixed assets
include: equipment, machinery, buildings, and land.
2. Liabilities: debts owed to outsiders (creditors)
A. Current liabilities: liabilities due within a short time (usually
one year or less) and that are to be paid out of current assets.
Example: account payable, short note payable, salaries payable,
interest payable, tax payable, unearned revenue.
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Types…
B. Long term liability: liability that will not be due for a
comparatively long time (usually more than one year) or
company’s obligations not expected to be paid within one
year (or a longer operating cycle). Example: long term
notes payable, bonds payable, lease liabilities.
3. Owner’s equity: residual claim against the business
asset after the total liabilities are deducted.
4. Revenues: gross increase in owner’s equity as a result
of the sale of merchandize, performance of service to
customer, rental of property, lending of money, and other
business and professional activities.
5. Expenses/Cost: costs that have been consumed in the
process of producing revenue are expired costs or
expenses.
Drawings: drawings represent the amount of withdrawals
made by the owner of business.
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The Rules of Debit and Credit
 Depending on the nature of account affected debit
or credit may be either decrease or increase.
 Debit can signify either increase or decrease
 Credit can signify either increase or decrease
Account Increase side Decrease side Normal Balance

Any Asset Debit Credit Debit

Any Liability Credit Debit Credit

Owner’s equity (Capital) Credit Debit Credit

Any Revenue Credit Debit Credit
Any Expense Debit Credit Debit

Owner’s drawing Debit Credit Debit

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Double entry Accounting
The Equality of Debits and Credits
 The double entry system of accounting
takes its name from the fact that every
business transaction is recorded by two
types of entries:
 Debit entries to one or more accounts and
 Credit entries to one or more accounts.
 In recording any transaction, the total dollar
(birr) amount of the debit entries must
equal the total dollar (birr) amount of the
credit entries.
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The accounting cycle
1. Journal:
 Is the book in which the records of business
are written.
 It is a chronological record of events.
 Two column journal
Date Account Title (Description) P/R Debit Credit

year accounts affected by a transaction amount amount

Month
Date

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Cycle…
General Journal: Used to record transactions
that can not be entered on special journals
Special Journal: A journal in which only one kind
of business transaction is recorded.
There are such special journals
 Sales journal: used to record only sales of
merchandized/ services on account.
 Purchase journal: used to record purchases
on account
 Cash receipt journal: use to record cash
receipt (cash collection)
 Cash payment journal: used to record
payment of cash.
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 Cycle…
Steps in journalizing
 Record the date(year, month, and date)
 Record the debit part(title of account and amount)
 Record the credit part(title of account and amount)
 Write an explanation in the description column.
Before recoding each transaction, you should
decide:
 what accounts are affected by the transaction
 Whether there is an increase or decrease in the
accounts
 How to increase or decrease (debit or credit) the
accounts involved.
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Cycle…
Assume Mr Tadelle has established a business with the
name of “ TD Consulting Engineers’ & engaged in the
following transactions
during October 2020
[Link] invested Br.10, 000 cash in to his business to get it started.
3. Purchased office equipment for Br3,000 on account (without paying &
to pay it in the future)
4. Purchased office supplies ( papers) for cash Br125
6. Paid Br500 on equipment purchased in transaction(2)
7. Paid first three-month rent Br 1,200
15. Provided a building design service & received cash from a customer
Br 5,800. It has also collected 12,000 in advance by promising to
provide services in the future.
20. Consulted a customer & charged it Br 1,400 on account (no cash at
the moment, the customer promised to pay in the future)
28. Mr. Tadelle withdrew Br800 cash from the business for personal use.
( he bought a shoe for 500 & a shirt for 300 for his own)
30. Collected cash of Br 1000 from credit customer for services rendered
on October 20 Ultimate Business & IT Training Solution
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GENERAL JOURNAL

Date Account Titles and Explanation P/R. Debit Credit

2020 1 Cash 10,000

Oct Tadelle, Capital 10,000

3 Office Equipment 7,000

Account payable 7,000
4 Office supplies 125
Cash 125

6 Account payable 500

Cash 500
7 Prepaid rent 1200
Cash 1200
15 Cash 12,000
unearned revenue 12,000

15 Cash 5,800
Service revenue 5,800

20 Account receivable 1,400

Service revenue 1,400
28 Tadelle, Drawing 800
Cash 800
30 Cash 1000
Account receivable Ultimate Business & IT Training Solution
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Cycle…
2. Posting: transferring entries from journal to ledgers
( respective accounts)
Ledger: is the secondary book
Two types of ledger
1. General (control) ledger
used to prepare financial reports
Presents summary of transactions
2. Subsidiary ledgers
contained detail of effects of transactions on accounts

Date Description PR Debit Credit balance

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Cycle…
Steps in Posting
 Step 1 Write the amount in the debit column
or in the credit column of the account in the
ledger.
 Step 2 Take the account balance of the debit
column or credit column of the balance to the
balance column of the account.
 Step 3 Write the date of the journal entry in
the Date column of the ledger (account).
 Step 4 Write the Journal page number in the
posting reference column of the account.
 Step 5 Come back to the journal and write in
the P/R column of the journal, the account
number of the ledger (account)
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 Account name: Cash Account No. 1100
Date Item Post. Debit Credit Debit
Ref. Balance
2020 10,000 00
Oct 1 Balance  10,000 00

4 125 00 9875 00
6 500 00 9,375 00
7 1200 00 8175 00
15 5,800 00 13,975 00
15 12000 00 25,975 00
28 800 00 25,175 00
30 1000 00 26,175 00

Account name: Account Receivable Account No. 1120

Date Item Post. Debit Credit Debit
Ref. Balance
2020 Oct 20 1,400 00 1,400 00
30 1000 00 400 00

Account name: Office Supplies Account No. 1130

Date Item Post. Debit Credit Debit
Ref. Balance
2020 Oct 4 125 00 125 00

Account name: Prepaid Rent Account No. 1140

Date Item Post. Debit Credit Debit
Ref. Balance
2020 Oct 7 12,000 00 12,000 00

Account name: Office Equipment Account No. 1200

Date Item Post. Debit Credit Debit
Ref. Ultimate Business & IT Training Solution
Balance
2020 Oct 3 4/30/2024
7,000 00 0922-73-44-73 7,000 00
Account title: Account Payable Acct No.2100
Date item PR Dr Cr Cr balance
2020 Oct 3 7,000 00 7,000 00
6 500 00 6,500 00

Account title: Tadelle Capital Acct No.3100

Date item PR Dr Cr Cr balance

2020 Oct 1 10,000 00 10,000 00

Account title: Service revenue Acct No.4100

Date item PR Dr Cr Cr balance
2020 Oct 15 5,800 00 5,800 00

20 1,400 00 7,200 00

Account title: Unearned revenue Acct No. 2200

Date item PR Dr Cr Dr balance

2020 Oct 7 12,000 00

Account title: Tadelle, Drawing Acct No.3200

Date item PR Dr Cr Dr balance

2020 Oct 28 800 00

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[Link] Trial Balance
Trial balance is a list of accounts and their balances at a given time.
It is tools used to check the equality of total debits and total credit
balances of ledgers
Customarily, a trial balance is prepared at the end of an accounting period.
TD Consulting Engineers
Trial balance
For the month of Oct 2020
Accounts Dr. Cr.
Cash 26,175
Accounts receivable 400
Office supplies 125
Prepaid Rent 1200
Office Equipment 7,000
Account Payable 6,500
Unearned revenue 12,000
Tadelle Capital 10,000
Tadelle Drawing 800
Service revenue 7,200
35,700 35,700
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 Cycle…
4. Adjusting : to bring the balances of accounts that do not show
their true balance to the true balance to be reported on the
financial reports
The Need of Adjusting Entries
 To report all revenues earned during the
accounting period.
 To report all expenses incurred to produce the
revenues earned in the same accounting
period.
 To accurately report the assets on the balance
sheet date. Some assets may have been used up
during the accounting period.
 To accurately report the liabilities on the
balance sheet date. (Expenses may have been
incurred, but not yet paid.) Ultimate Business & IT Training Solution
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Cycle…
 Types of Adjusting Entries
 Converting assets to expenses
 Converting liabilities to revenue
 Accruing unpaid expenses, and
 Accruing uncollected revenue
 Deferrals:
 Deferrals are previously recorded assets, liabilities, revenues, or
expenses that need to be adjusted. Eg. prepaid insurance, prepaid
rent, office supplies, depreciation, and unearned revenue.
Deferral adjustments are of two types:
1. Prepaid expense (Assets/expense) adjustments
 Transfer amounts from asset accounts to expense accounts
2. Unearned revenue (deferred Revenue) Liability/revenue adjustments
 Transferring amounts from liability to revenue accounts.

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Cycle…
 Example 1: Assume that on Oct 7, the TD Engineering
Consult paid Br 1,200 for Three months of rent coverage
(from October to December). This results in Br 400
coverage each full month.
As of October 30, 1/3rd (400) of the prepaid rent asset has
expired. We therefore, convert 400 to expense through
adjusting.
Oct 30: Adjusting:
Rent Expense 400
prepaid Rent 400
Assume that out of Br 125 supplies purchased on Oct 4,
supplies with value of Br 80 has been used up during
October
Oct [Link]: Supplies expense 80
Office supplies 80
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Cycle…
 Converting liabilities to Revenue (Unearned
Revenue) Adjustments:
These are cash received before providing products or
services. The cash received is debited against the
liability account when it is received. Revenues are
recorded when the work is done.
On Oct 15, TD Consulting Engineers collected cash of
Br 12,000 promising to consult a customer for six
months. Assume also that service for one month has
been rendered and a one month of this amount has
been earned.
Oct 30: Adjusting:
Unearned revenue 1,000*
Revenue 1,000
*12,000/6 = 2,000/2 = 1,000
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Cycle…
ACCRUAL ADJUSTMENTS
 Accruals are revenues that have been earned
and expenses that have been incurred by the
end of the current accounting period, but that
will be collected or paid in a future accounting
period.
 [Link], interest, utilities etc
 Accruing uncollected Revenue (Accrued
Revenue):
Assume TD Consult was employed to supervise
& evaluate a construction for 3 days for Br 1,350
(Oct 28 t- 30) and no cash was received until
Nov 5.
Oct [Link]: A/R 1,350
Revenue ,1350
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Cycle…
 Accruing unpaid Expenses (Accrued
Expense):
 Accrued expenses are expenses incurred, but
not yet paid or recorded.
Such as employee salaries and commissions,
& Utilities are paid for after the services have
been performed.
Assume TD Consult has incurred utilities for
Br 320 due.
Oct 30. Adjusting:
Utilities Expense 320
Utilities payable 320
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Cycle…
 Depreciation
is a gradual allocation of fixed assets’ cost in
to expense.
Eg. Assume Equipment of TD consult is
depreciated on straight line for 7 years.
Deprecation/ year = 7,000/7 = 1000
Depreciation/month = 1000/12 = 83.3
Oct 30 Adjusting:
Depreciation expense….83.3
Accumulated dep. 83.3
The undepreciated portion of cost of fixed asset
is called book value.
Book Value = cost – accumulated depreciation
7,000 – 83.3 = 6,916.7
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Cycle…
 Adjusted Trial balance
To prepare adjusted trial balance, we need to post the adjusting entries:
Account Name: rent Expense Acct No.5410

Date Item PR Dr Cr Dr balance

2020 Oct 30 400 00 400 00

Account Name: Prepaid Rent Acct No.1140

Date Item PR Dr Cr Dr balance

2020 Oct 7 1200 00 1200 00

30 400 00 800 00

Account Name: Supplies Expense Acct No.5320

Date Item PR Dr Cr Dr balance

2020 Oct 30 80 00 80 00

Account Name: Office Supplies Acct No.1130

Date Item PR Dr Cr Dr balance

2020 Oct 4 125 00 125 00
30 Ultimate80Business & IT
00Training
45Solution 00
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Cycle…
Unearned revenue Acct No. 2200

Date Item PR Dr Cr Cr balance

2020 Oct 15 12,000 00 12,000 00

30 1000 00 11,000 00

Service revenue Acct No.4100

Date Item PR Dr Cr Cr balance
2020 Oct 15 5800 00 5800 00
20 1400 00 7200 00
30 1000 00 8200 00
30 1350 00 9550 00

A/R Acct No.1120

Date Item PR Dr Cr Cr balance

2020 Oct 20 1400 00 1400 00

30 1000 00 400 00
30 1350 00 1750 00

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Cycle…
Utilities Expense Acct No 5210
Date item PR Dr Cr Dr balance
2020 Oct 30 320 00 320 00

Utilities Payable Acct No 2210

Date item PR Dr Cr Cr balance
2020 Oct 30 320 320 00

Depreciation expense Acct No 5220

Date item PR Dr Cr Dr balance
2020 Oct 30 83 33 83 33

Accumulated Depreciation Acct No 1201

Date item PR Dr Cr Cr balance
2020 Oct 30 83 33 83 33

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 TD consulting engineers
Adjusted trial balance
As of Oct 30, 2020
Accounts Dr. Cr.
Cash 26,175
A/R 1750
Supplies 45
Prepaid Rent 800
Office Equipment 7,000
Accumulated Deprn. 83.33
Account payable 6,500
Unearned revenue 11,000
Utilities payable 320
Tadelle capital 10,000
Drawing 800
Service Revenue 9,550
Rent Expense 400
Supplies Expense 80
Utilities expense 320
Depreciation expense 83.33Ultimate Business & IT Training Solution
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TOTAL 37,453.33 37,453.33
 Closing & Closing Entries
For the purpose of closing, accounts are divided
in to two:
1. Temporary accounts: accounts that begin a
new period with zero balance.
- Such accounts are closed end of every
year. They are closed & get zero in their
balance
- All income statement accounts & drawing/
dividends are temporary
2. Permanent accounts: accounts that carry
current balances forward to begin a new period.
- Such accounts are not closed
- All balance sheet accounts are permanent
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Closing Entries
1. Revenues are closed to Income summary
Revenue………… ………..xx
income summary…………………….xx
2. Expenses are closed to income summary
Income summary …… .......xx
rent expense……………….xx
Salary expense………………xx
3. Income summary is closed to Retained Earnings (R/Es)
If profit
income summary….xx
R/Es……..xx
If Loss
R/Es………………….xx
Income summary……….xx
4. Dividends is closed to R/Es
R/Es………………….xx
Income summary……….xx
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Closing for TD Consulting
1. Close Service Revenue Dr Cr
Service revenue 9,550
R/Es 9,550
2. Close Expenses
R/Es 883.33
Rent Expense 400
Supplies Expense 80
Utilities expense 320
Depreciation expense 83.33
3. Close drawing
R/Es 800
Drawing 800
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 Posting the closing entries
Account name: Retained Earnings Account No 3300
Date Items PR Dr Cr Cr Balance
2020 Oct 30 9,550 00 9,550 00
30 883 33 8,716 67
30 800 00 7,916 67

Account name: Service revenue Account No 4100

Date Items PR Dr Cr Cr Balance
2020 Oct 15 5800 00 5800 00
20 1400 7200 00
30 1000 8200 00
30 1350 9,550 00
30 9,550 00 00 00

Account name: Rent Expense Account No 5410

Date Items PR Dr Cr Dr Balance
2020 Oct 30 400 00 400 00
30 400 00 00
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Posting…
Account Name: Utilities Expense Account No 5210
Date Item PR Dr Cr Dr balance
2020 Oct 30 320 00 320 00
30 320 00 00 00

Account Name: Supplies Expense Account No 5320

Date Item PR Dr Cr Dr balance
2020 Oct 30 80 00 80 00
30 80 00 00 00

Account Name: Depreciation Expense Account No 5220

Date Item PR Dr Cr Dr balance
2020 Oct 30 80 00 80 00
30 80 00 00 00

Account Name: Drawing Account No 3200

Date Item PR Dr Cr Dr balance
2020 Oct 30 80 00 80 00
30 80 00 00 00

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Financial Statements
DT Consulting Engineers
Income statement
For the month ended Oct 30, 2020
ETB
Service Revenue 9,550
Less: Operating Expenses:
Rent Expense 400
Utilities Expense 320
Supplies Expense 80
Depreciation Expense 83.33 883.33
Operating Profit (net income) 8,666.67

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 DT Consulting Engineers
Statement of Retained Earnings
For the month of Oct 2020

Beginning Retained Earnings 00.00

Add:
Net Income 8,666.67 8,666.67
Sub total 8,666.67
Less: Withdrawal (dividends) 800
Ending Retained Earnings balance 7,866.67

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 TD Consulting Engineers
Balance sheet
As of Oct 30, 2020
Assets:
Current Assets:
Liabilities:
Cash 26,175 Current Liab.
A/R 1750 Account payable 6,500
Supplies 45 Unearned revenue 11,000
Prepaid Rent 800 Utilities payable 320
Total current assets 28,770 Total current Liab. 17,820
Fixed Assets: Owners’ Equity:
Office Equipment 7,000 Tadelle capital 10,000
Accumulated Deprn. (83.33) Retained Earnings 7,866.67
Net Fixed assets 6,916.67 Total Owners’ equity 17,866.67
Total Assets 35,686.67 Total liab. & Owner. Eq. 35,686.67
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 Merchandising Enterprises
Merchandising enterprises are businesses that are
engaged in buying & selling of goods.
- ‘Cost’ is buying value while ‘Price’ is selling
value
- When goods are purchased for resale purpose,
either inventory or purchase account is
recorded as debit & cash or A/P is credited
- When goods are sold, either cash or A/R is
debited & sales revenue is credited for the
total selling price.
- When goods are sold, the cost at which the
goods sold were purchased for is recorded as
‘cost of goods sold’.
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Merchandising…
Sales tax:
- If the sales tax applied is 15% VAT, it is not
included in the cost
- If the sale tax is other than VAT, it is then
included in the cost computation
- Gross profit is the difference between gross
sales revenue & cost of goods sold.

Gross Profit = sales – COGS

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Example
Assume TD Trading (a VAT registered) is a boutique selling
shoe & male fashions. It has the following transactions
during Sept. 2020
1. Purchases 50 pair of shoes for Br 400 each with 2%
sales tax. It paid 320 for transportation {20,720}
2. Sold 24 pair of shoes for 820 each plus VAT
{19,680+2952}
3. Purchases 12 jeans trousers for 320 each with 15% VAT
& paid 80 for transportation {3920+576}
4. It purchases 30 jeans trousers for 350 each with 15%
sales tax & paid 140 for transportation {10640+1575}
5. Sold 22 trousers for Br 560 each plus VAT
{12320+1848}
6. Sold 6 trousers for Br 540 each plus VAT {3240 +486}
7. During the month its expenses are:
salary & wage Br 6,100, rent Br 5,500 Utilities Br 360 &
others Br 125.
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General Journal

Date Descriptions PR Dr Cr

2020 Purchases 20,720 00

Spt cash 00
20,720
Cash 22,632 00
sales 19,680 00
VAT payable 2,952 00

Purchases 3920 00
VAT payable 576 00
cash 4,496 00

Purchases 10,640 00
VAT payable 1575 00
cash 12,215 00

Cash 14,168 00
sales 12,320 00
VAT payable 1,848 00

Cash 3,726 00
sales 3240 00
VAT payable 486
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 Posting to Ledgers
Account Name: Purchases Account No
Date Items Dr Cr Dr Balance
2020 1 20,720 00 20,720 00
Sept
3 3920 00 24,640 00
4 10,640 00 35,280 00

Account Name: Sales Account No

Date Items Dr Cr Cr Balance
2020 2 19,680 00 19,680 00
Sept
5 12,320 00 32,000 00
6 3240 00 35,240 00

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How to determine COGS?
Let us compute average unit cost for each product:
 Shoe: Br 20,720/50 = 414.40
 Trousers: Br 14,780/42 = 351.90
Total units Purchased:
 shoe = 50
 Trousers = 42
Quantity sold & left on hand:
 shoe = 24 left = 26
 trousers = 28 left = 14
Cost of units left on hand: (ending Inventory)
shoe: 26 x 414.40 = 10,774.40
trousers: 14 x 351.90 = 4, 926.60
total cost of goods on hand 15,701

COGS = BI + Purchase - EI
COGS = 0 + 35,280 – 15,701= 19,579
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 TD Trading
Income statement
For the month ended Sept 31,2020
Sales Revenue 35,240
Less: COGS: (19, 579)
Gross profit 15,661
Less: Operating Expenses:
Salary expense 6,100
Rent Expense 5,500
Utilities Expense 360
Other Expense 125 (12,085)
Operating profit ( net income) 3,576

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