Balance sheet

Chapter 4
 - Expenses are decreases in shareholders’ equity due to the cost of operating the
business.
- Increases in expenses are recorded on the left (debit) side of the account.
- Decreases in expenses are recorded on the right (credit) side.

Example 1:

What is the normal balance for the following accounts?

Cash
Accounts Payable
Accounts Receivable
Service Revenue
Share Capital
Salaries Expense
Dividends
Building
Taxes Payable
Unearned Revenues
Prepaid Insurance
Rent Expense
The Answer
Account Normal Balance
Cash Debit
Accounts Payable Credit
Accounts Receivable Debit
Service Revenue Credit
Share Capital Credit
Salaries Expense Debit
Dividends Debit
Building Debit
Taxes Payable Credit
Unearned Revenues Credit
Prepaid Insurance Debit
Rent Expense Debit

52
Example 2:
The following transactions occurred during the month of October, 2017 by El-Salam
Advertising Inc.:
1. El-Salam invested LE 10,000 Cash in business.
2. El-Salam issued (signed) a 3-month, 12%, LE 5,000 Note Payable to Misr Bank in
exchange for cash.
3. El-Salam acquired office equipment by paying LE 5,000 cash to Giza Co.
4. El-Salam received a LE 1,200 cash advance from Adel, (a customer).
5. El-Salam received LE 10,000 in cash from Al-Nasr Co. for advertising services
performed.
6. El-Salam paid its office rent in cash, LE 900.
7. El-Salam paid LE 600 for a one-year insurance policy that will expire next year.
8. El-Salam purchases advertising supplies on account from Metro Supply for LE
2,500.
9. El-Salam hired four new employees.
10. El-Salam paid a LE 500 dividend.
11. El-Salam Paid LE 4,000 salaries.

Instructions:

Record the journal entries for the above mentioned transactions.

The Answer
1 - El-Salam invested LE 10,000 Cash in business.

53
Date Account Titles and Explanations Dr. Cr.
2017 Cash 10,000
Oct. Share Capital 10,000
1 (Invested cash in business)
2– El-Salam issued (signed) a 3-month, 12%, LE 5,000 Note Payable to Misr Bank in
exchange for cash.

Date Account Titles and Explanations Dr. Cr.

2017 Cash 5,000
Oct. Notes Payable 5,000
2 (Issued note payable for cash)
3– El-Salam acquired office equipment by paying LE 5,000 cash to Giza Co.

Date Account Titles and Explanations Dr. Cr.

2017 Office Equipment 5,000
Oct. Cash 5,000
3 (Purchased office equipment for cash)

54
 4– El-Salam received a LE 1,200 cash advance from Adel, (a customer).

Date Account Titles and Explanations Dr. Cr.

2017 Cash 1,200
Oct. Unearned Revenue 1,200
4 (unearned revenue in cash)

5– El-Salam received LE 10,000 in cash from Al-Nasr Co. for advertising services
performed.

Date Account Titles and Explanations Dr. Cr.

2017 Cash 10,000
Oct. Service Revenue 10,000
5 (service revenue in cash)

55
 6– El-Salam paid its office rent in cash, LE 900.

Date Account Titles and Explanations Dr. Cr.

2017 Rent Expense 900
Oct. Cash 900
6 (Paid rent expense in cash)

7– El-Salam paid LE 600 for a one-year insurance policy that will expire next year.

Date Account Titles and Explanations Dr. Cr.

2017 Prepaid Insurance 600
Oct. Cash 600
7 (Paid prepaid insurance in cash)

8– El-Salam purchases advertising supplies on account from Metro Supply for LE 2,500.

56
Date Account Titles and Explanations Dr. Cr.
2017 Supplies 2,500
Oct. Accounts Payable 2,500
8 (Purchased supplies on account)

9– El-Salam hired four new employees.

10– El-Salam paid a LE 500 dividend.

Date Account Titles and Explanations Dr. Cr.

2017 Dividends 500
Oct. Cash 500
10 (Paid Dividends in cash)

57
 11– Paid LE 4,000 salaries.

Date Account Titles and Explanations Dr. Cr.

2017 Salaries Expense 4,000
Oct. Cash 4,000
11 (Paid salaries expense in cash)
The entries for the previous transactions will appear in the journal of El-Salam
Advertising Inc. as follows:
Date Account Titles and Explanations Dr. Cr.
2017 Cash 10,000
Oct. Share Capital 10,000
1 (Invested cash in business)
Cash 5,000
2 Notes Payable 5,000
(Issued note payable for cash)
Office Equipment 5,000
3 Cash 5,000
(Purchased office equipment for cash)
Cash 1,200
4 Unearned Revenue 1,200
(unearned revenue in cash)
Cash 10,000
5 Service Revenue 10,000
(service revenue in cash)

58
 Date Account Titles and Explanations Dr. Cr.
Rent Expense 900
6 Cash 900
(Paid rent expense in cash)
Prepaid Insurance 600
7 Cash 600
(Paid prepaid insurance in cash)
Supplies 2,500
8 Accounts Payable 2,500
(Purchased supplies on account)
Dividends 500
10 Cash 500
(Paid Dividends in cash)
Salaries Expense 4,000
11 Cash 4,000
(Paid salaries expense in cash)

Example 3:
On August 31, the balance sheet of Salem Corporation showed Cash LE 10,500, Accounts
Receivable LE 2,500, Office Equipment LE 6,000, Accounts Payable LE 4,400, Share
Capital LE 13,000, Supplies LE 600, and Retained Earnings LE 2,200, During September
the following transactions occurred.
1. Paid LE 3,100 cash on accounts payable.
2. Collected LE 1,500 of accounts receivable.
3. Purchased additional office equipment for LE 3,500, paying LE 800 in cash and
the balance on account.
4. Earned revenues of LE 7,800, of which LE 2,500 is in cash and the balance is due
in October.
5. Paid dividends of LE 800.
6. Paid salaries LE 700, rent for September LE 900, and advertising expense LE 200.
7. Incurred utility expenses for the month on account, LE 350.

59
 8. Received LE 6,000 from Alexandria Bank-money borrowed on a note payable.

Instructions: Prepare the journal entries for the above transactions.

The Answer
Date Account Titles and Explanations Dr. Cr.
1 Accounts Payable 3,100
Cash 3,100
(Paid accounts payable in cash)
2 Cash 1,500
Accounts Receivable 1,500
(Collected accounts receivable in cash)
3 Office Equipment 3,500
Cash 800
Accounts Payable 2,700
(Purchased office equipment)
4 Cash 2,500
Accounts Receivable 5,300
Service Revenue 7,800
(Provided service)
5 Dividends 800
Cash 800
(Paid dividends in cash)
6 Salaries Expense 700
Rent Expense 900
Advertising Expense 200
Cash 1,800
(Paid expenses in cash)

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 7 Utility Expense 350
Accounts Payable 350
(Incurred utility expense on account)
8 Cash 6,000
Notes Payable 6,000
(Borrowed cash on a note payable)

Example 4:
Cairo, Inc. completed the following transactions during its first month of operations:
a) Cairo, Inc opened a law firm by investing LE 15,000 cash
b) Paid monthly rent of LE 1,500.
c) Purchased office supplies on account, LE 800.
d) Paid employees’ salaries of LE 1,800.
e) Paid LE 400 of the account payable created in transaction c.
f) Performed legal service on account, LE 8,300.
g) Declared and paid dividends of LE 2,000.
Instructions: Record the transactions in the journal of Cairo, Inc.
The Answer
Date Account Titles and Explanations Dr. Cr.
Cash 15,000
a) Share Capital 15,000
(Invested cash in the business)
Rent Expense 1,500
b) Cash 1,500
(Paid monthly rent)
Office Supplies 800
c) Accounts Payable 800
(Purchased supplies on account)
Salary Expense 1,800
d) Cash 1,800
(Paid employees salaries)

61
 Accounts Payable 400
e) Cash 400
(Paid cash on accounts payable)
Accounts receivable 8,300
f) Service Revenue 8,300
(Performed services on account)
Dividends 2,000
g) Cash 2,000
(Paid dividends in cash)

Example 5:
During October, Samy Co. completed the following transactions:
1. Samy Co. received LE 50,000 cash and issued ordinary shares to the
shareholders.
2. Paid LE 10,000 cash and signed a LE 30,000 note payable to purchase land for an
office site.
3. Purchased supplies on account, LE 2,000.
4. Borrowed LE 20,000 from the bank for business use. Samy Co. signed a note
payable to the bank in the name of the business.
5. Service revenue earned during the month included LE 12,000 cash and LE 8,000
on account.
6. Paid LE 500 on account.
7. Paid employees’ salaries LE 2,500, advertising expense LE 1,500 and utilities
expense LE 500.
8. Declared and paid a cash dividend of LE 10,000.
Instructions:
Journalize each transaction of Samy Co. (Explanations are not required).

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The Posting Process

The next step after journalizing transactions in the journal is the posting.
The posting process describes transferring entries from the Journal to the
Ledger accounts.

The journal is a chronological record of all company transactions listed by date. But the
journal does not indicate how much cash or accounts receivable the business has. The
ledger is a grouping of all the accounts, with their balances. For example, the balance of
the Cash account shows how much cash the business has. The balance of Accounts
Receivable shows the amount due from customers. Accounts Payable shows how much
the business owes suppliers on open account, and so on. In the phrase “keeping the
books,” books refer to the accounts in the ledger. In most accounting systems, the
ledger is computerized.

The Ledger:

The entries from the journal are posted to the ledger.

Posting:
Transferring information from the journals to the ledger accounts.

The Account:
An account is an individual accounting record of increases and decreases in a specific
Asset, Liability, or Shareholders’ Equity item. Each account has three parts:
1. The Title of the account
2. A left or Debit side
3. A right or Credit side

69
Debits and Credits:

- Debit means left. Thus, entry on left side is debiting.

- Credit means right. Thus, entry on right side is crediting.

- Normal balance is the side the increase happens on.

The Trial Balance:

A trial balance lists all accounts with their balances—assets first, then liabilities and
shareholders’ equity. The trial balance summarizes all the account balances for the
financial statements and shows whether total debits equal total credits. A trial balance
may be taken at any time, but the most common time is at the end of the period. It
serves to prove the mathematical equality of debits and credits after posting. It helps in
the preparation of financial statements.

The Flow of Accounting Data:

Let’s continue the example of El-Salam Advertising Inc., and account for the same 11
transactions we illustrated earlier in chapter 3. Here we use the journal and the
accounts. Each journal entry posted to the accounts is keyed by date or by transaction
number. This linking allows you to locate any information you may need.
Example 1:
The following transactions occurred during the month of October, 2017 by El-Salam
Advertising Inc.:
1. El-Salam invested LE 10,000 Cash in business.
2. El-Salam issued (signed) a 3-month, 12%, LE 5,000 Note Payable to Misr Bank in
exchange for cash.
3. El-Salam acquired office equipment by paying LE 5,000 cash to Giza Co.
4. El-Salam received a LE 1,200 cash advance from Adel, (a customer).
5. El-Salam received LE 10,000 in cash from Al-Nasr Co. for advertising services
performed.
6. El-Salam paid its office rent in cash, LE 900.
7. El-Salam paid LE 600 for a one-year insurance policy that will expire next year.

70
 8. El-Salam purchases advertising supplies on account from Metro Supply for LE
2,500.
9. El-Salam hired four new employees.
10. El-Salam paid a LE 500 dividend.
11. El-Salam Paid LE 4,000 salaries.

Instructions:

1. Record the journal entries for the above mentioned transactions.

2. Post entries to the ledger accounts.
3. Prepare the trial balance
4. Prepare the income statement and the balance sheet.

The Answer
1. Record the journal entries for the above mentioned transactions:
Date Account Titles and Explanations Dr. Cr.
2017 Cash 10,000
Oct. Share Capital 10,000
1 (Invested cash in business)
Cash 5,000
2 Notes Payable 5,000
(Issued note payable for cash)
Office Equipment 5,000
3 Cash 5,000
(Purchased office equipment for cash)
Cash 1,200
4 Unearned Revenue 1,200
(unearned revenue in cash)
Cash 10,000
5 Service Revenue 10,000
(service revenue in cash)

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 Rent Expense 900
6 Cash 900
(Paid rent expense in cash)
Prepaid Insurance 600
7 Cash 600
(Paid prepaid insurance in cash)
Supplies 2,500
8 Accounts Payable 2,500
(Purchased supplies on account)
Dividends 500
10 Cash 500
(Paid Dividends in cash)
Salaries Expense 4,000
11 Cash 4,000
(Paid salaries expense in cash)
2. Post entries to the ledger accounts:
Cash
Dr. Cr.
Transaction No. (1) 10,000 Transaction No. (3) 5,000
Transaction No. (2) 5,000 Transaction No. (6) 900
Transaction No. (4) 1,200 Transaction No. (7) 600
Transaction No. (5) 10,000 Transaction No. (10) 500
Transaction No. (11) 4,000

Total Dr. 26,200

Total Cr. 11,000
Balance (Dr.) 15,200

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 Share Capital
Dr. Cr.
Transaction No. (1) 10000

Total Dr. 0
Total Cr. 10,000
Balance (Cr.) 10,000

Notes Payable
Dr. Cr.
Transaction No. (2) 5,000

Total Dr. 0
Total Cr. 5,000
Balance (Cr.) 5,000

Office Equipment
Dr. Cr.
Transaction No. (3) 5,000

Total Dr. 5000

Total Cr. 0
Balance (Dr.) 5000
Unearned Revenue
Dr. Cr.
Transaction No. (4) 1,200

Total Dr. 0
Total Cr. 1,200
Balance (Cr.) 1,200

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 Service Revenue
Dr. Cr.
Transaction No. (5) 10,000

Total Dr. 0
Total Cr. 10,000
Balance (Cr.) 10,000
Rent Expense
Dr. Cr.
Transaction No. (6) 900

Total Dr. 900

Total Cr. 0
Balance (Dr.) 900

Prepaid Insurance
Dr. Cr.
Transaction No. (7) 600

Total Dr. 600

Total Cr. 0
Balance (Dr.) 600

Supplies
Dr. Cr.
Transaction No. (8) 2,500

Total Dr. 2500

Total Cr. 0
Balance (Dr.) 2500

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 Acc. Payable
Dr. Cr.
Transaction No. (8) 2,500

Total Dr. 0
Total Cr. 2,500
Balance (Cr.) 2,500

Dividends
Dr. Cr.
Transaction No. (10) 500

Total Dr. 500

Total Cr. 0
Balance (Dr.) 500

Salaries Expense
Dr. Cr.
Transaction No. (11) 4,000

Total Dr. 4000

Total Cr. 0
Balance (Dr.) 4000

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3. Prepare the trial balance:
El-Salam Corporation
Trial Balance
October 31, 2017
Account Dr. Cr.
cash 15,200
supplies 2,500
prepaid insurance 600
office equipment 5,000
notes payable 5,000
accounts payable 2,500
unearned revenue 1,200
share capital 10,000
dividends 500
service revenue 10,000
rent expense 900
salaries expense 4,000
total 28,700 28,700

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4. Prepare the income statement and the balance sheet:
El-Salam Corporation
Income Statement
for the Month Ended Oct. 31, 2017
Revenues:
Service Revenues 10,000
Total Revenues 10,000
Expenses:
salaries Expense 4,000
Rent Expense 900
Total Expenses (4,900)
Net Income 5,100

Retained Earnings
Retained Earnings, 1/10/2017 0
Add: Net Income 5,100
Less: Dividends (500)
Retained Earnings, 31/10/2017 4,600

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 El-Salam Corporation
Balance Sheet
Oct. 31, 2017
Assets
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Total Assets 23,300
Liabilities and Shareholders' Equity
Liabilities:
Notes payable 5,000
accounts payable 2,500
Unearned Revenue 1,200
Total Liabilities 8,700
Shareholders' Equity:
Share Capital 10,000
Retained Earnings 4,600
Total Shareholders' Equity 14,600
Total Liabilities and Shareholders' Equity 23,300

Example 2:
On August 31, the balance sheet of Salem Corporation showed Cash LE 10,500, Accounts
Receivable LE 2,500, Office Equipment LE 6,000, Accounts Payable LE 4,400, Share
Capital LE 13,000, Supplies LE 600, and Retained Earnings LE 2,200, During September
the following transactions occurred.
1) Paid LE 3,100 cash on accounts payable.
2) Collected LE 1,500 of accounts receivable.

78
 3) Purchased additional office equipment for LE 3,500, paying LE 800 in cash and the
balance on account.
4) Earned revenues of LE 7,800, of which LE 2,500 is in cash and the balance is due in
October.
5) Paid dividends of LE 800.
6) Paid salaries LE 700, rent for September LE 900, and advertising expense LE 200.
7) Incurred utility expenses for the month on account, LE 350.
8) Received LE 6,000 from Alexandria Bank-money borrowed on a note payable.

Instructions:

a) Prepare the journal entries for the above transactions.

b) Post to the Cash T-account and calculate the ending balance.
c) Post to the Accounts Payable T-account and calculate the ending balance.

The Answer
a) Prepare the journal entries for the above transactions.
Date Account Titles and Explanations Dr. Cr.
1 Accounts Payable 3,100
Cash 3,100
(Paid accounts payable in cash)

2 Cash 1,500
Accounts Receivable 1,500
(Collected accounts receivable in cash)

3 Office Equipment 3,500

Cash 800
Accounts Payable 2,700
(Purchased office equipment)

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Date Account Titles and Explanations Dr. Cr.

4 Cash 2,500
Accounts Receivable 5,300
Service Revenue 7,800
(Provided service)
5 Dividends 800
Cash 800
(Paid dividends in cash)
6 Salaries Expense 700
Rent Expense 900
Advertising Expense 200
Cash 1,800
(Paid expenses in cash)
7 Utility Expense 350
Accounts Payable 350
(Incurred utility expense on account)
8 Cash 6,000
Notes Payable 6,000
(Borrowed cash on a note payable)
b) Post to the Cash T-account and calculate the ending balance.
Cash
Dr. Cr.
Beginning Balance 10,500
Transaction No. (2) 1,500 Transaction No. (1) 3,100
Transaction No. (4) 2,500 Transaction No. (3) 800
Transaction No. (8) 6,000 Transaction No. (5) 800
Transaction No. (6) 1,800
Total Dr. 20,500
Total Cr. 6,500
Balance (Dr.) 14,000

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c) Post to the Accounts Payable T-account and calculate the ending balance.

Accounts Payable
Dr. Cr.
Beginning Balance 4,400
Transaction No. (1) 3,100 Transaction No. (3) 2,700
Transaction No. (7) 350

Total Dr. 3,100

Total Cr. 7,450
Balance (Cr.) 4,350

Example 3:
Mohamed started his own delivery service, Cairo Deliveries, Inc. on June 1. The
following transactions occurred during the month of June.
1) Invested LE 25,000 cash in the business.
2) Purchased used office equipment for LE 13,000. Cairo Deliveries paid LE 2,000 cash
and signed a note payable for the remaining balance.
3) Paid LE 900 for office rent for the month.
4) Performed LE 3,000 of services on account.
5) Paid LE 200 in cash dividends.
6) Purchased supplies for LE 400 on account.
7) Received a cash payment of LE 750 for services provided in number 4 above.
8) Purchased gasoline (an expense) for LE 350 on account.
9) Received cash of LE 1,900 for services provided.
10) Made cash payment of LE 500 on the note payable.
11) Paid LE 450 for utilities.
12) Paid for the gasoline purchased on account in number 8 above.
13) Paid LE 600 for employee salaries
Instructions:
a) Prepare the journal entries for the above transactions.

81
8.1 Accounting Cycle
Accounting cycle refers to a group of steps that enable to prepare the whole set of
financial statements. These steps are cyclical in nature as they are repeated in each
accounting period (e.g. every year or every quarter). The implemented steps are also
related to each other and organized is a sequential order as shown below.

Exhibit 8-1 Accounting Cycle

First of all, accounting cycle starts with analyzing the economic transactions (event) such
purchasing a new asset or paying due expenses. These transactions will subsequently be
recorded in a proper journal. Once the entries have been recorded manually or
electronically, as in modern computerized systems, each entry will be automatically
posted to a corresponding account in the general ledger. Once all the ledger accounts

Analyze transactions

Prepare pos closing Journalize entries &

trial balance Post to the ledger

Close the temporary Prepare unadjusted

acconts trial balance

Prepare financial Report the adjusting

satements entries

Prepare adjusted
trial balance

are balanced, an unadjusted trial balance is prepared to match

the debit and credit accounts together. According to the accrual basis, adjusted entries
will be recorded at

176
the end of accounting period. Journalizing the adjusted entries and updating the related
accounts in the general ledger enable to match incurred expenses with revenues
generated during the same period of time. Eventually, the adjusted trial balance is
prepared in order to prepare the required financial statements to be submitted later to
end uses.

8.2 Completing the Accounting Cycle

The last step in the accounting cycle is closing temporary accounts to prepare the
company to start a new cycle for next accounting period. Accordingly, the closing
process normally takes place at the end of each accounting period and aims at
journalizing and posting the closing entries to the proper accounts.
The closing process ends up with closing the temporary accounts that have been
opened during the accounting period. Such accounts are opened to calculate the net
income (net loss) or to measure the drawings of the owner throughout the year. This
would enable the company to measure its net income for each year individually by
comparing the revenues generated with the expenses paid during the same period. The
closing process also updates the capital account with the drawing account.
8.3 Closing Temporary Accounts
During the closing process all temporary accounts are closed (zeroed out) in the income
summary. The temporary accounts are those accounts which are temporary opened
during the year to show all the revenue and expense accounts separately. The
temporary accounts are closed in on the other unlike the temporary accounts,
permanent accounts used to serve the company’s operations for more than a year and
hence their accounts are not closed. These permanent accounts are commonly known
as the balance sheet accounts which are Assets, liabilities and Owner’ equity. The

177
following diagram shows the main steps of the closing process. There are four steps in
closing the company’ books and they are:

Step 1: Close the revenue accounts in the Income Summary account. This closing entry
transfers the total revenues to the credit side of the Income Summary account.

Step 2: Close the expense accounts in the Income Summary account. This closing entry
transfers total expenses to the debit side of the Income summary account. The ending
results of the income Summary account can be either net income or net loss of the
period. If the closed revenues exceed the closed expenses, then the results will be net
income which will be transferred to the capital account credit side. However, if the
expenses exceed the revenues then the results will be net loss and hence will be closed
in the debit side of the capital account.

Step 3: Close the net income/net loss in the capital account.

Step 4: Transfer the ending results of the drawing account in the Capital account. This
will transfer the total balance of drawings in the debit side of the capital account.
The following example illustrates the journal entries of the closing process at the end of
the accounting period.
Example 1:
Ali has a car repair shop opened on January 1st, 2017. The following accounts are
extracted from Ali’s book at December 31st,2017 in (LE).

Service revenues ……………. 100,000 Salaries expense …………… 35,000

Rent Expense …………………… 20,000 Ali, Capital (1st Jan.2017) 74,000
Utilities expense………………... 15,000 Ali, Drawings …….……………. 24,000

178
Required:
Record the journal entries to close the temporary accounts in Ali’s book at December
31st, 2017.
Step 1: Close the revenue account in the Income Summary
2017 ACCOUNT Debit Credit
ST
31 , JAN Service Revenue (revenue -) 100,000
Income Summary 100,000

Step 2: Close the expense accounts in the Income Summary

2017 ACCOUNT Debit Credit

31ST, JAN Income Summary 70,000
Rent expense 20,000
Utility expense 15,000
Salaries expense 35,000
Step 3: Close the net income in Ali’s Capital

2017 ACCOUNT Debit Credit

31ST, JAN Income Summary (100,000-70,000) 30,000
Ali. Capital 30,000

Step 4: Close the drawings in Ali’s Capital

2017 ACCOUNT Debit Credit
ST
31 , JAN Ali. Capital 24,000
Ali, Drawings 24,000

Post-closing Trial balance

The accounting cycle can end with a post- closing trial balance. This optional step lists
the accounts and their adjusted balances after closing. The following trial balance
represents Ali’s accounts after closing the temporary accounts as in Example 1.

179
 Ali Car Repair Shop
Post-Closing Trial Balance
December 31, 2017
Debit Credit
Cash LE 30,000
Accounts Receivable 35,000
Supplies 25,000
Furniture 57,000
Building 33,000
Accumulated depreciation- Furniture 17000
Accumulated depreciation- Building 13000
Accounts payable 65,000
Interest payable 5,000
Ali’s capital 80,000
Total LE 180,000 LE 180,000

8.4 Classified Balance Sheet

This section describes a classified balance sheet which organizes assets and liabilities
into important subgroups that serve managers and other financial statement users to
take proper decisions. The classified balance sheet is composed of the main groups of
accounts; Assets, Liabilities and Equity.

The assets are further classified into two sub-groups based on the nature of the asset.
These sub-groups are Current assets and non-current assets or fixed assets. The
current assets represent the assets which are expected to be used or last for a year or
less such as cash, inventory, accounts receivables and office supplies. Non-current
assets are more expensive and durable than current assets. They are normally used for
more than a year. Therefore, depreciation is normally calculated for non-current assets

180
but not for current assets. Both types of assets help company keep its operating cycle
working smoothly. Operating cycle refers to the time elapses from paying cash to
acquire good/services to be used in operations till receiving cash from selling the
produced goods/services. Therefore, they are called operating assets to differentiate
them from other non-operating assets which are used for other purposes. The word
“operating” refers to conventional operations that the company is intended to perform
(e.g. producing cars, selling groceries, and fixing cars….etc.). Meanwhile, the word
“cycle” refers to the circular flow of cash used for company inputs and cash received
from its outputs. In some cases, operating cycle can be less than a year or could take
slightly more time. In the balance sheet, current assets are listed before non-current
assets and current liabilities are listed before non-current liabilities. This classification
considers how easily the account can be converted into cash.

As learned in the previous chapters, at the end of the accounting period, the company
prepares a set of financial statements; income statement, balance sheet, Owner’s
Equity statement, and cash flow statement. These statements are provided to either
internal or external users to take different types of decisions. In this chapter, we will
be focusing on one of these statements which is the balance sheet. Exhibit 8-2 below
provides an example for a classified balance sheet for a ABC company. Notice how the
balance sheet accounts have been presented and organized.

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 Exhibit 8-2. Classified Balance Sheet

ABC MINIMART
Balance Sheet
December 31,2017
Assets LE LE
Current Assets
Cash ………………………………………….. 35,000
Accounts receivables…………………………. 10,000
Prepaid expense ……………………………… 5000
Total current assets…………………………… 50,000
Long-term investments ………………………...…
Notes Receivable ……………………………
Plant assets
Equipment ……………………...…………… 216,000
less: accumulated depreciation ……………………. 16,000 200,000
Buildings……………………………………… 315,000
Less: Accumulated depreciation…………………. 15,000 300,000
Total plants Assets ………………………….. 500,000
Total assets 550,000
Liabilities & Equity
Current liabilities
Accounts payable ………………………………… 25,000
Wages payable …………………………………….. 33,000
Notes payable ……………………………………... 17,000
Total current liabilities 75,000
Long-term liabilities …………………………….. 125,000
Total liabilities …………………………………. 200,000
Equity
Ali’s capital ……………………………………… 350,000
Total liabilities and Equity ………………………. 550,000

Realize that the balance sheet accounts namely; Assets, Liabilities and Owner’s Equity
are those remained opened at the end of the year to show the company’s financial
position and the balances of these accounts will represent the opening balance for next
year.

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Example 2:
The following table represents the company ABC adjusted trial balance.

ABC Company
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash LE 34,000
Rent receivable 11,000
Accounts Receivable 20,000
Supplies 54,000
Furniture & fixtures 116,000
Building 195,000
Accumulated depreciation- Furniture 56000
Accumulated depreciation- Building 85000
Accounts payable 42,000
Interest payable 54,000
Salaries payable 20,000
ABC, capital 150,000
ABC, drawings 10,000
Service revenue 118,000
Salary expense 34,000
Supplies expense 30,000
Advertising expense 21,000
Total LE 525,000 LE525,000

Required
a. Prepare the closing entries at December, 31st 2016.
b. Prepare Post- Closing Trial balance
c. Prepare classified balance sheet at December,31st 2016.
a. Closing the temporary accounts:
The revenue and expenses accounts related to the current accounting period will be
closed in the summary account. Then the ending results of the income summary

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 account will be closed in the capital account by (debiting) crediting it based on
whether the results are profit or loss. Eventually, the drawing account will be closed
by debiting the capital account.

Step 1: Close the revenue account in the Income Summary

2017 ACCOUNT Debit Credit

31ST, JAN Service Revenue (revenue -) 118,000
Income Summary 118,000
Step 2: Close the expense accounts in the Income Summary

2017 ACCOUNT Debit Credit

31ST, JAN Income Summary 85,000
Salaries expense 34,000
Supplies expense 30,000
Advertising expense 21,000

Step 3: Close the net income in Ali’s Capital

2017 ACCOUNT Debit Credit

31ST, JAN Income Summary (100,000-70,000) 33,000
Ali. Capital 33,000

Step 4: Close the drawings in Ali’s Capital

2017 ACCOUNT Debit Credit

31ST, JAN Ali. Capital 10,000

Ali, Drawings 10,000

b. Prepare Post- Closing Trial balance:

Notice that the following trial balance shows only the balance sheet items.

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 ABC Company
Post-Closing Trial Balance
December 31, 2016
Debit (LE) Credit (LE)
Cash LE 34,000
Rent receivable 11,000
Accounts Receivable 20,000
Supplies 54,000
Furniture & fixtures 116,000
Building 195,000
Accumulated depreciation- Furniture 56,000
Accumulated depreciation- Building 85,000
Accounts payable 42,000
Interest payable 54,000
Salaries payable 20,000
ABC, capital * 173,000
Total LE 430,000 LE430,000

*The ABC, capital account = 150,000 – 10,000 + 33,000 = LE 173,000

C. Prepare classified balance sheet at December ,31st 2016:
ABC MINI-MART
Balance Sheet
December 31,2016
Assets LE LE
Current Assets
Cash ………………………………………….. 34,000
Accounts receivables…………………………. 20,000
Rent receivable ……………………………… 11,000
Supplies…………………………………….. 54,000
Total current assets…………………………… 119,000
Plant assets
Furniture and fixtures …………………..……… 116,000
less: accumulated depreciation ……………………. (56,000) 60,000
Buildings……………………………………… 195,000
Less: Accumulated depreciation…………………. (85,000)
Total plants Assets ………………………….. 110,000
Total assets 289,000

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 Liabilities & Equity
Current liabilities
Accounts payable ………………………………… 42,000
Interest payable …………………………………….. 54,000
Salaries payable …………………………………….. 20,000
Total current liabilities 116,000
Equity
ABC, capital ……………………………………… 173,000
Total liabilities and Equity ………………………. 289,000

Notice that the prepaid expenses such as rent receivable is part of assets, accordingly it
has not been closed like other expense accounts. Similarly, the Interest payable and
Salaries payable accounts are treated as part of liabilities and hence they have not been
closed either.

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