Chapter Two

Summary of the Accounting process

Introduction
As it is well know, accounting has been called the “language of business” because it is a
method (means) of communicating business information. To carry out such an activity,
we need to have an accounting system.

Accounting system: the prime purpose of a company’s accounting system is to provide

useful information to both external and internal users for making sound operating
decisions. Through this system a company records and stores the financial and
managerial information from its transactions to that when a need arise it can retrieve and
report the information in an accounting statement.

Very importantly, the accounting process consists of three major parts:

1) The recording of transactions during an accounting period.

2) The summarizing of information at the end of the period.
3) The preparation of financial statements.

2.1. Recording Business Transactions and Events

For financial accounting purposes, a change in a company’s economic resources (assets),

obligations (liabilities), or residual interest (stockholders’ equity) may be caused by a
transaction or an event. Transactions and events may be classified into two broad groups:
(1) external transactions and events or those between the business enterprise and other
party, and (2) internal events, such as the expiration or transfer of costs within the
enterprise. For example, recording depreciation of a plant asset

Supporting Documents

The company uses business documents or source documents, relating to these

transactions and events as initial information for recording process. Such documents
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show the date, amount, and nature of the transaction, and the parties involved. Journal
entries are prepared from supporting documents; for example, check- stub support entries
in the cash payment journal.

Double – Entry System

In the accounting information system, economic events are recorded in such a way as to
affect at least two accounts. This practice, called the double – entry system based on the
basic accounting equation.

The double – entry system also ensures that the accounting equation remains in balance.
For example, when a company acquires Br. 25,000 worth of equipment on credit, both
assets and liabilities increase by br. 25,000. The accounting equation remains in-balance.

All Journal entries are made within the framework of the basic accounting equation
(assets = liabilities + owner’s equity). The self-balancing nature of this system facilitates
the preparation of a complete set of financial statements.

Double – entry system originated from the fact that equal debit and credit entries should
be made for every transaction or event. The terms debit and credit may be related to the
basic accounting equation (A = L + OE) in the following way:

Asset accounts = Liability + owners’ equity accounts

Increase are recorded by debits Increase are recorded by credits

Decrease are recorded by credits Decrease are recorded by debits

The two independent variables in basic accounting equation are assets and liabilities;
whereas the dependent variable is owner’s equity. It is a residual value from assets and
liabilities. There are two classes of accounts which can be taken as one source to bring a
change in the owners’ equity i.e. revenue and expenses. Revenue accounts measure the
inflow of assets resulting from the production and distribution of goods and services to
customers.

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Expresses accounts measure the outflow of assets necessary to produce and distribute
these goods and services.

The application of the rules of debit and credit for revenue and expenses is summarized
below:

Expense accounts Revenue accounts

Increase are recorded by debit Increase are recorded by credits

Decrease are recorded by credits Decrease are recorded by debits

The terms debit and credit are used in accounting, they have no further meaning except
the debit side is always the left side, and the credit side is always the right side.

Accounting Cycle

The accounting cycle is a complete sequence of accounting procedures that are repeated
in the same order during each accounting period. In a typical manual system includes the
following steps:

1. Recording business transactions and events in the journals.

2. Classifying data by posting from the journals to the ledger.
3. Summarizing data from the ledger in an unadjusted trial balance.
4. Adjusting, correcting, and updating recorded data; completion of the work sheet.
5. Summarizing adjusted and corrected work sheet data in the form of financial
statements.
6. Closing the accounting records (nominal accounts) to summarize the operations of
the accounting period.
7. Preparation of a post – closing trial balance.
8. Reversing certain adjusting entries to facilitate the recording process in the
subsequent accounting period.

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Journals

A company initially records its transactions (and events) in a journal. It is possible for a
company to record all its transactions in a single journal, called the general journal.
However, many companies have a number of different special journals, each designed to
record a particular type of transaction. Special journals may be used as a more efficient
means of recording and summarizing recurring transactions.

The journalizing process requires the analysis of business transactions and events in
terms of debits and credits to the ledger accounts they affect: 1) assets, 2) liabilities, 3)
owner’s equity, 4) revenue, and 5) expenses.

Much greater number of business transactions are of four types, for that reason most of
the data may be recorded by the use of special multicolumn journals and a general
journal.

As a company increases in size and complexity, it needs to efficiently record and

summarize many daily transactions. For this purpose, special journals are used. A special
journal is a journal used by a company to record its transactions with a similar
characteristic.

The major journals and their uses are:

1. Sales journal. Used to record all (and only) sales of merchandise on credit.
2. Purchases journal. Used to record all (and only) purchases of merchandise on
credit.
3. Cash receipts Journal. Used to record all cash receipts.
4. Cash payments Journal. Used to record all cash payments.
5. General Journal: Used to record adjusting, closing and reversing entries and other
transactions not recorded in special journals.
Ledger

After Journalizing, the next step is transferring information to ledger accounts. This
transfer process is called posting, which means that each debit and credit amount in the
journals is entered in the appropriate ledger account.

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A ledger consists of a number of accounts. Each ledger account represents stored
information about a particular asset, liability, owners’ equity, revenue or expense.

Ledger accounts are often classified as nominal (temporary) and real (permanent)
accounts. The nominal (revenue and expense) accounts are closed at the end of each
accounting period by transferring their balances to other accounts.

Trial Balance

A trial balance is a working paper that lists all the company’s general ledger accounts and
their account balances. The trial balances is used to verify that the total of the debit
balances is equal to the total of the credit balances. At the end of each accounting period
an unadjusted trial balance of the ledger is prepared to determine that the mechanics of
the recording and posting operations have been carried out accurately.

2.2. Adjusting Entries

Some financial events not recognized on a day – to – day basis must be recorded through
adjusting entries at the end of the period so as to bring the accounting records up to date.

An adjusting entry ordinarily affects both a permanent (balance sheet) and a temporary
(income statement) accounts. Adjusting entries may be classified in to three categories:

1. Apportionment of prepaid and deferred items

a. Prepaid expenses
b. Deferred revenues
2. Recording of accrued items
a. Accrued expenses
b. Accrued revenues
3 Recording estimated items

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Prepaid Expenses

A prepaid expense (some times called a prepaid asset) is a good or service purchased by a
business enterprise for its operations but not fully used up by the end of the accounting
period. The prepayment (original transaction) may be debited to either asset or expense
account.

Example 1

Assume that office supplies are acquired during the accounting period at the cost of Br.
6,000. Physical inventory reveals that supplies on hand cost Br. 1,950. At time of
supplies acquisition, the Br. 6,000 were debited to asset account or debited, to expense
account.

Hence, you are required to record end of period adjusting entry on both procedure.

Solution

When prepayment debited to asset account:

Inventory of Office Supplies

Office supplies Expense

Balance, Dec. 31 6,000

Adjusting entry 4,050 4,050

 When Prepayment debited to expense account:

Inventory of Office Supplies

Office Supplies Expense

Balance, Dec. 31 6,000

Adjusting entry 1,950 1,950

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Deferred Revenues

Deferred (or unearned) revenue is a payment received by a company in advance for the
future sale of inventory or performance of services. If cash is received, the original
transaction may be recorded as a credit to a liability account or a revenue account.

Example 2

Assume that on December 1, a company received Br. 9,000 for three months rent in
advance. On December 31 it must make an adjusting entry because it has now earned
one month rent. Record the adjusting entry when the original transaction amount Br.
9,000, either credited to the liability or revenue account.

Solution

 When liability account credited on receipt of cash:

Unearned Rent Rent Revenue

Balance, Dec, 31 9,000

Adjusting entry 3,000 3,000

 When revenue account credited on receipt of cash:

Unearned Rent Rent Revenue

Balance , Dec, 31 9,000

Adjusting entry 6,000 6,000

Accrued Expenses

Accrued expense is an expense that a company has incurred during the accounting period
but has neither paid nor recorded. Interest and salaries are typical of the expenses that
accrue with the passage of time and are recorded only when paid, except when the end of
a period accrues between the time the expense was incurred and the payment is due.

Example 3

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Assume that interest of Br. 12,000 on a br. 300,000 note payable at 8% is paid on June 1
and December 1 of each year. Record the required adjusting entry on December 31.

Solution
Annual interest expense: 0.08  300,000 = Br. 24,000
Interest Expense ……………………………………. 2,000
Interest payable ……………………………… 2,000
To record the interest accrued on a 8%, Br. 300,000 note for one month to Dec.31
Accrued Revenues

An accrued revenue is a revenue that a company has earned during the accounting period
but has neither received nor recorded. In order to measure accurately the results of
operations under the matching principle, revenue is recognized in the period earned.

Example4

Assume that rent totaling Br. 1,500 that has been realized but not collected for the month
of December has not been recorded. To measure assets and revenue accurately we need
to have adjusting entry. Record the required adjusting entry on December 31.

Solution
Rent Receivable ………………………………….. 1,500
Rent Revenue ……………………………. 1,500
To record rent revenue earned during December.
Estimated Items

Some other adjusting entries are based on estimated amounts because they relate, at least
in part, to expect future events. Adjustments involving (i) the depreciation in assets such
as buildings and equipment, and (2) the uncollectibility of some accounts receivable are
both based upon estimates.

Example 5

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Assume that a company acquired a building, at a cost of Br. 900,000 on March 30, 2006.
The company estimates that the asset will have useful life of 35 years and the residual
value of the building will be Br. 25,000 at the end of its life. The company is following a
straight – line method of depreciation. Record the required adjusting entry on December
31,2006.

Solution

Cost−Estimated Re sidual Value

Annual depreciation = Estimated Service Life
Br . 900 ,000−Br . 25 , 000
= 35
= Br. 25,000
Depreciation expense from March 30 – December 31 (9 months) =

9
×Br .25 , 000
12 = Br. 18,750
Adjusting Depreciation Expense ……………………… 18,750
Entry Accumulated Depreciation of Building … 18,750
To record depreciation expense for nine months
2.3. Closing Procedures

Closing entries are journal entries that a company makes at the end of the accounting
period (1) to reduce the balance in each temporary account to zero, and (2) to update the
retained earnings account.

Closing Revenue and Expense Accounts

If we assume that a rent revenue ledger account after adjustment has a credit balance of
Br. 1,500, the closing entry is:

Rent Revenue ……………………………… 1,500

Income Summary …………………. 1,500
To close the rent revenue ledger account.

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To close an expense ledger account, you must transfer its debit balance to the left side of
the income summary account. The following Journal entry is to close a supplies expense
account with a debit balance of Br. 4,050:

Income Summary …………………………… 4,050

Supplies Expense …………………… 4,050
To close the supplies expense ledger account,
Closing Inventories and Related Ledger Accounts

Example : Assume the following for year 8: January 1 inventory Br. 90,000, purchases,
Br. 285,000; Freight – in, Br. 50,000; purchases returns and allowances, Br. 3,500;
December 31 inventory, including applicable freight – in, $60,000. The Journal entry to
close the accounts is as follows:

Inventory (Dec. 31, year 8 ) ……………………………… 60,000

Purchases Returns and Allowances ………………………. 3,500
Income Summary ………………………………………….361,500
Inventory (Jan. 1, Year 8)…………………………. 90,000
Purchases …………………………………………. 285,000
Freight – in ……………………………………….. 50,000
To close beginning inventory and net purchases for the period, and to record ending
inventory

Closing the Income Summary Account

After the completion of the closing of all revenues and expenses (including cost of goods
sold) the balance of the income summary ledger account indicates the net income or net
loss for the year. The income summary account is closed by transferring its balance to
the retained earnings account.

2.4. Reversing Entries

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After the completion of adjusting and closing of accounting records for the current
period, it begins a new accounting cycle for the next accounting period. Before
journalizing the daily transactions of the new accounting period in the general journal,
most companies prepare reversing entries.

A reversing entry is the exact reverse (accounts and amounts) of an adjusting entry.

A reversing entry is optional and has one purpose: to simplify the recording of a later
transaction related to the adjusting entry.

As a general guideline, reversing entries should be made for any adjusting entry that
creates a new balance sheet account as follows:

1. Adjusting entries that create accrued revenues or expenses to be collected or paid

in the next accounting period.
2. Adjusting entries related to prepayments of costs initially recorded as expenses or
receipts- in-advance initially recorded as revenues.
Example

Assume that on June 30, Year 1, Tabor Company borrowed Br. 300,000 at 12% on a long
term note with interest of 9,000 payable every four months. The first payment of interest
was made on October 31, year 1; the next interest payment is due on February 28, year 2.
 End – of – period adjustment:
November & December months, interest 9,000  4 = 2,250 × 2 = 4,500
Adjusting Entry: Dec. 31 Interest expense …………………. 4,500
Interest payable ………….. 4,500
Reversing Entry: Jan. 1 Interest payable ………………. 4,500
Interest Expense ……… 4,500
This reversing entry has eliminated the liability account interest payable and has caused
the interest expense account to have a Br. 4,500 credit balance. Consequently, the cash
payment of four months interest on February 28 will not need to be apportioned.

The February 28 entry will consist of a debit to interest Expense for Br. 9,000 and a
credit to cash for Br. 9,000. After the February 28 interest payment has been recorded,

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the interest expense ledger account for year 2 still contain a debit of Br. 9,000 and a
credit of Br. 4,500 and as a result it produces net balance of Br. 4,500 which interest
expense of January and February.

iii) Inventory of office supplies ……………… 6,000

Office supplies expense ………………. 6,000
iv) Interest Expense……………………………9,000
Interest Payable ……………………….. 9,000
2.5. Correcting Entries

Adjusting entries and correcting entries may seem similar but they are not. Correcting
entries are not considered adjusting entries because their function is to correct errors of
omission and commission. For instance, omission such as failure to record a transaction
would be rectified by journal entry. The improper recording of a transaction requires a
journal entry to ensure that ledger accounts are stated properly. In the event of an error is
made in one accounting period but discovered in a subsequent period, the possible effect
of the error on the net income of the earlier periods is closed to the Retained Earnings
ledger account. Moreover, an error is detected in the period in which the error occurs,
but prior to the closure of the accounting records are closed, revenue and expense
accounts may require correction and the retained earnings account generally is not affect.

Example: Assume that the following two errors were made in Year 1 and were detected
at the end of the accounting period when the work sheet for the year ended December 31,
year 1, was being prepared:

i) A purchase of furniture for Br. 3,500 cash was wrongly recorded by a debit of
Br. 350 to the supplies expense ledger account and a credit of Br. 350 to cash.
ii) An acquisition of machinery for cash of Br. 8,000 on February 1, year 1, was
recorded as a purchase of merchandise. The machinery had an economic life
of 10 years with no residual value, and was depreciated by the straight – line
method for 6 months in year 1.
the two errors to determine the appropriate correcting entries follows:

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Incorrect Journal entry as recorded Correct Journal entry that Required correcting entry
should have been made

i) Supplies Exp ………. 350 Furniture ……… 3,500 Furniture ……. 3,500
Cash ………………. 350 Cash ……… 3,500 Supplies exp… 350
Cash …………. 3,150
ii) Purchases …………… 8,000 Machinery……… 8,000 Machinery …… 8,000
Cash ……………... 8,000 Depre. Expense … 400 Dep. Expense…. 400
Cash ………... 8,000 Purchases …. 8,000
Accumulated Accumulated
Dep. Machinery… 400 Dep. Machinery… 400

2.6. Work Sheet

A work sheet is a multicolumn work space that provides an organized format for
performing several end – of – period accounting cycle steps and for preparing financial
statements. It also provides evidence, for audit trail purposes, of an organized and
structured accounting process that can be more easily reviewed than other methods of
analysis. The main purpose of preparing a worksheet is to minimize errors, simplify
recording of adjusting and closing entries in the general journal, and make it easier to
prepare the financial statements.

A Worksheet is not a substitute for any accounting records or financial statement; it is

merely a working paper designed for these purposes.

Work Sheet for a Merchandising Enterprise

Work Sheet is a plan for the preparation of financial statements for different form of
business organizations. Be it sole proprietorship, partnership and corporation. On Top of
that the nature of business may be service organization, merchandising enterprise or
corporation. The point is work sheet as a plan equally important to all of businesses.

Illustration of work sheet for manufacturing Enterprise

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Even though, there is a similarly between merchandising and manufacturing enterprises
with regard to the procedures for preparation of a work sheet, there is a major difference.
It is due to additional pair of columns for summarizing the manufacturing operations.
The following is an illustration of a work sheet for a manufacturing enterprise.

The following data are the basis for the adjusting entries included in the work sheet for
Ethio Manufacturing Company for the year ended December 31, year 6:

a) Doubtful accounts expense for year 6 is estimated to be Br. 4,000

b) A three – year insurance policy was acquired on July 1, year 5 at the cost of
Br. 8,100, the insurance expense is allocated to other factory costs and other
general expenses in a 3:1 ratio.
c) The wages accrued since the last pay period are direct labor, Br. 2,800 and
indirect labor, Br. 1,950. The officers, office staff, and sales staff are paid on the
last day of each month.
d) Interest of Br. 2,225 has accrued on notes payable.
e) Depreciation expense for the plant assets is computed by the straight line method
based on the following information:
Assets Estimated Estimated Cost allocation, %
economic life residual value
(years ) Factory General

Building …………….. 50 Br. ‘0’ 90 10

Machinery and equipment ……. 15 -0- 100 -0-
Furniture and fixtures…………. 20 3,000 20 80

f) The power bills of December have not been received as of December 31, year 6.
From experience, the cost applicable to December is estimated to be Br. 2,150.
All heat, light and poor costs relate to the factory.
g) An inventory of factory supplies on December 31, year 6, indicates that supplies
costing Br. 2,750 are on hand.
h) The income taxes expense for year 6 is estimated at Br. 5,500.
i) Inventories on December 31, year 6, are as following:

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 Finished goods ………………………………… Br. 50,000

Goods in process ………………………………….. 26,000

Raw Material ………………………………….. 14,000

Page 15 of 25
 ETHIO MANUFACTURING COMPANY
Work Sheet
For Year Ended December 31, Year 6
Unadjusted trial balance Adjustments Manufacturing Income Retained Balance sheet
Statement earnings
statement

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash 42,000 42,000

Accounts receivable 60,000 60,000

Allowance for double accounts 2,200 (a)4000 6,200

Inventories (Jan. 1, Year 6)

Finished goods 58,000 58,000 50,500 50,500

Goods in Process 20,000 20,000 26,000 26,000

Raw material 18,000 18,000 14,000 14,000

Un expired insurance 6,750 (b)2,700 4,050

Land 80,000 80,000

Buildings 150,000 150,00

0

Accum. Depr of buildings 40,000 (e)3,000 43,000

Machinery and equipment 120,000 120,00

0

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Accum. Depr. Of mach. And equip. 40,000 (e)8,000 48,000

Furniture and Fixtures 20,000 20,000

Accum. Depr. of furn. And fixtures 5,000 (e)850 5,850

Notes payable – current 70,000 70,000

Accounts Payable 35,300 (f)2,150 37,450

Common stock, 110,000 110,00

0

Paid in capital in excess of par 110,000 110,00

0

Retained earnings (Jan. 1, year 6) 90,875 90,875

Dividends 8,000 8,000

Sales 639,600 639,60

0

Sales returns and allowances 4,600 4,600

Raw material purchases 120,000 120,00

0

Purchases returns and allowances 9,250 9,250

Freight – in 2,500 2,500

Direct labor costs 190,500 (c)2,80 193,30

0 0

Indirect labor costs 71,600 (c)1,95 73,550

0

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Heat, light, and power 9,300 (f)2,15 11,450
0

Other factory costs 15,000 (b)2,02 (g)2,750 14,275

5

Advertising expense 30,000 30,000

Sales Salaries expense 40,000 40,000

Delivery expense 9,000 9,000

Administrative salaries expense 48,000 48,000

Office salaries expense 18,000 18,000

Telephone and telegraph expense 2,800 2,800

Other general expenses 3,800 (b) 675 4,475

Interest expense 4,375 (d)2,22 6,600

5

Doubtful accounts expense (a)4,00 4,000

0

Wages payable (c)4,750 4,750

Interest Payable (d)2,225 2,225

Depreciation of bldg. (factory) (e) 2,700

2,700

Depreciation of bldg. (general) (e) 300 300

Depreciation of mach. And equip. (e) 8,000

(factory) 8,000

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Depreciation of furn. And fix. (e)170 170
(factory)

Depreciation of furn. And fix. (e) 680 680

(general)

Inventory of factory supplies (g)2,75 2,750

0

Income taxes expense (h)5,50 5,500

0

Income taxes payable (h)5,500 5,500

Cost of finished goods manufactured 414,695 414,69 5,500

5

Net income 43,450 34,950

Retained earnings (Dec.31, year 6) 126,32 126,32

5 5

Totals 1,152,225 1,152,225 35,925 35,925 463,945 463,945 690,100 690,100 134,325 134,325 569,300 569,300

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Work Sheet and Year –End Procedures
In a manufacturing enterprise, the journal entries for closing the manufacturing ledger accounts,
for adjusting the inventory balances, for closing the revenue and expense accounts, and for
closing the Dividends account are illustrated for Ethio manufacturing as follows:
Ethio Manufacturing Company
Closing Entries
December 31, Year 6
Raw material Inventory (Dec. 31, year 6)………………………………… 14,000
Goods in process inventory (Dec. 31, Year 6)……………………………. 26,000
Purchases returns and Allowances………………………………………. 9,250
Cost of Finished Goods Manufactured …………………………………. 414,695
Raw material inventory (Jan. 1, year 6)…………………………. 18,000
Goods in process inventory (Jan. 1, year 6)…………………….. 20,000
Raw material purchases………………………………………… 120,000
Freight – in ……………………………………………………… 2,500
Direct labor costs……………………………………………….. 193,300
Indirect labor costs…………………………………………….. 73,550
Heat, high, and power ……………………………………….. 11,450
Other factory costs …………………………………………….. 14,275
Depreciation of Buildings ……………………………………… 2,700
Depreciation of machinery and equipment ……………………. 8,000
Depreciation of furniture and fixtures………………………….. 170
To record cost of finished goods manufactured and ending inventories and Goods in process:
Finished Goods Inventory (Dec. 31, Year 6)…………………………. 50,500
Cost of Goods Sold…………………………………………………… 422,195
Cost of Finished Goods Manufactured………………………. 414,695
Finished Goods Inventory (Jan.1, Year 6)…………………… 58,000
To record ending finished goods inventory and cost of goods sold.

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Sales…………………………………………………………………… 639,600
Cost of Goods Sold………………………………………….. 422,195
Sales Returns and Allowances ……………………………… 4,600
Advertising Expense ……………………………………….. 30,000
Sales Salaries Expense……………………………………… 40,000
Delivery Expense…………………………………………… 9,000
Administrative salaries expense……………………………. 48,000
Office salaries expense…………………………………….. 18,000
Telephone and Telegraph Expense………………………… 2,800
Other General Expenses…………………………………… 4,475
Interest Expense…………………………………………… 6,600
Doubtful Accounts Expense………………………………. 4,000
Depreciation of Buildings ………………………………… 300
Depreciation of furniture and fixtures ……………………. 680
Income Taxes Expense …………………………………… 5,500
Income Summary ………………………………………… 43,450
To Close revenue and expense accounts.
Income Summary ………………………………………………… 43,450
Retained Earnings ………………………………………… 43,450
To close income summary account
Retained Earnings …………………………………………………. 8,000
Dividends………………………………………………….. 8,000
To Close Dividends Account

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 Ethio Manufacturing Company
Statement of Cost of Finished Goods Manufactured
For Year Ended December 31, Year 6
Goods in Process Inventory (Jan. 1, Year 6)……………………… Br. 20,000
Raw Material Used:
Raw material inventory (Jan.1, year 6)…………………… Br. 18,000
Raw material purchases (net)…………………………….. 113,250
Cost of raw material available for use …………………… Br. 131,250
Less: Raw material inventory (Dec. 31, year 6)…………. 14,000
Cost of raw material used ……………………………… Br. 117,250
Direct labor costs ……………………………………….. 193,300
Factory overhead costs (see work sheet for details)…….. 110,145
Total manufacturing costs ………………………….. 420,695
Total cost of goods in process during, year 6 …………… Br. 440,695
Less: Goods in process inventory (Dec. 31, year 6)…….. 26,000
Cost of Finished Goods Manufactured …………………. Br. 414,695
Exercise 1: Seada Retail Store uses a perpetual inventory system and engaged in the
following transactions during the month of June.

Date Transactions

June 1 Made cash sales of Br. 8,500; the cost of the inventory was Br. 5,900.

5 Purchased Br. 4,200 of inventory on credit.

9 Made credit sales of Br. 5,500; the cost of the inventory sold was Br. 4,100.
13. Paid sales salaries of Br. 3,100 and office salaries of Br. 2,800.
14. Paid for June 5 purchases.
18 Purchased equipment costing Br. 10,200; made a down payment of Br. 4,200 and
agreed to pay the balance in 30 days.
21 Purchased Br. 2,800 inventory for cash.

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 27 Sold land that had originally cost Br. 4,100 for Br. 4,800.
Required: Record the preceding transactions in a general journal.

Exercise 2 The following data are available under a periodic inventory system; Purchases, Br.
90,000; sales Br. 170,000; returned sales, Br. 25,000; returned purchases, Br. 24,000; freight –
in, Br. 27,000; beginning inventory, Br. 52,000, selling expenses, Br. 38,000, and ending
inventory, Br. 49,000.

Required: Compute the cost of goods sold.

Exercise 3: On December 31, 1992, Gojeb Corporation made the following adjusting
entries:
a. Wage expense …………………… 42,000
Wage payable …………………… 42,000
b. Depreciation expense ……………………. 100,000
Accumulated depreciation ……………. 100,000
c. Bad debt expense …………………………. 12,000
Allowance for doubtful accounts …….. 12,000
d. Income tax expense ………………………. 58,000
Income tax payable …………………… 58,000
Required:
i) Give reversing entries that you think would be preferable on January 1, 1993.
ii) For each adjusting entry, explain how you decided whether to reverse it.
Exercise 4: At December 31, 2,000 (at the end of the accounting period), Seka
corporation reflected the following amounts on its work sheet.
Sales revenue ………………………………. Br. 400,000
Interest revenue ……………………………. 28,000
Beginning inventory (periodic inventory system)… 80,000
Ending inventory ………………………….. 88,000
Freight – in (on purchases)……………………… 32,000
Purchases………………………………………… 236,000

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 Sales returns ……………………………………. 36,000
Purchase returns ……………………………….. 24,000
Operating expenses (including income tax) …… 124,000
Required: i) Compute cost of goods sold
ii) Give the adjusting entry for purchases, inventory, and cost of goods sold. If none
is required, explain why.
i) Give the closing entries for (a) revenues, (b) expenses, and (e) net income.
Problem 2: Super Power Company prepared the following trail balance for the year ended
December 31. 2014:
Trial Balance
Accounts Debit Credit
Cash ……………………………………… 15,000
Accounts receivable ……………………… 6,000
Allowance for doubtful accounts ………….. 900
Inventory …………………………………… 8,800
Prepaid rent ………………………………… 4,600
Equipment ………………………………….. 35,000
Accumulated depreciation …………………… 14,000
Accounts payable ……………………………. 4,700
Notes payable (due 7/1/2002)……………….. 6,000
Capital stock (1,000 shares) ……………….. 9,900
Retained earnings (1/1/2001)……………….. 15,200
Dividends distributed ………………………. 1,500
Sales revenues ……………………………… 60,000
Cost of goods sold …………………………. 22,000
Salaries expense …………………………… 8,100
Utilities expense…………………………… 4,300
Advertising expense ………………………. 5,400

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 Total ………………………………. 110,700 110,700
Additional information:
1. The equipment is being depreciated on a straight – line basis over a 10 – year life, with
no residual value
2. salaries accrued but not recorded total Br. 1,500
3. on January 1, 2014 the company had paid three years’ rent in advance at Br. 1,000 per
month
4. bad debts are expected to be 1% of total sales
5. interest of Br. 480 has accrued on the note payable; and
6. The income tax rate is 40% on current income and will be paid in the first quarter of
2015.
Required:
1. Complete the work sheet
2. Prepare financial statements for 2014.
3. Prepare closing entries in the general journal

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