Professional Documents
Culture Documents
Learning Guide: Queens' College Ayertena Campus Training, Teaching and Learning Materials
Learning Guide: Queens' College Ayertena Campus Training, Teaching and Learning Materials
Learning Guide
INTRODUCTION
Welcome to the module “Design and Produce Business Documents”. This learner’s guide was
prepared to help you achieve the required competence in “Accounts and Budget Support Level III”. This will
be the source of information for you to acquire knowledge attitude and skills in this particular occupation with
minimum supervision or help from your trainer.
o Read through the Learning Guide carefully. It is divided into sections that cover all the
knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section to check your
progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your trainer to show
you the correct way to do things or talk to more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and provide you with feedback
from your performance.
In order to obtain more complete information about the business the accountant has to know to start an accounting
system. Hence to star a new accounting system the accountant requires to know:
The accountant lists and totals in one column what the business owns and lists and totals in another column what the
business owes. In the next step the accountant finds out what the business is worth by subtracting the total what the
business owes from the total of what is own.
i.e. What is worth = what the business owns – what the business owes.
Total owned...........................................Br.5,000
Less total owed...................................... Br. 1,000
Equals what the business worth..................... Br.4,000
Balance sheet
Left Right
ii. Report form:- under this form of preparing a balance sheet what is owned, what is owed and what is worth
will not be reported as to right and left column. However, assets are lists first then liabilities followed at the
bottom of it and next capital at the bottom of all.
Balance sheet
Asset
xxx
xxx
xxx
xxx
xxx
Liability
xx
xx
xx
xx
Capital
xx
xx
xxx
Total........................ xxx
Example
XYZ Company Line 1
Balance sheet Line 2
Dec 31, 2003 Line 3
B. Body of Balance sheet: it also has three sections that shows what is owned, (Asset) what is owed
(liability), and what the business is worth (capital).
i) Asset:anything of value that is owned by a business these are resources supplied by both
owner’s and creditor’s. In other words, it can be expressed as the right of both owners and creditors. Assets
are listed on the left hand side of the balance sheet.
ii) Liabilities: an amount that is owned is called a liability. It is a resources supplied by
creditors. Liabilities are lists on the right hand side of the balance sheet. The liabilities of a business are the
debts of a business. The one to whom an amount is owned is called a creditor.
iii) Capital: the amount that remains after the total liabilities are subtracted from the total
asset is what the business is worth. What the business is worth is called capital. An owner of a business is
called a proprietor. The amount of capital is shown beneath the liabilities on the right hand side of the
balance sheet.
Balance sheet
1) write the heading on three lines and center each item in the heading
2) prepare the assets section on the left hand side, as follows
- write the words assets in the center of the first line of the wide column on the left
- list the name and amount of each asset, using a brief title to describe it.
3) prepare the liability section on the right hand side as follows.
- write the word liabilities in the center of the first line of the wide column on the right
- list the name and amount of each liability, using a brief title to describe it begin on the next line
- Rule a single line across the amount column directly under the last column
- write the total of the liabilities in the amount column and label this amount total liability.
4. Prepare the capital section on the right hand side, beneath the liability as follows:
- skip one line and write the word capital in the center of the wide column
- write the name of the owner and the word capital on the next line
- On a separate sheet of paper, find the amount of the capital by subtracting the total liabilities from
the total assets.
- write the amount of the capital in the amount column on the same line as the name of the owner.
5. Determine if the balance sheet is “in balance ”& complete its preparation as follows.
- Rule a single line across the amount column on the right hand side directly under the amount of
the capital. Rule a single line across the amount column on the left hand side on the same line as
the single line on the right hand side.
- Add each column and compare the totals. The two totals should be the same. If the two totals are
the same this proves that the total of the assets equals the combined total of the liability and
capital.
- Record the totals directly under the addition line on each side. Don’t skip a space.
- Write the words total assets on the same line at the left land side
- Write the words totals liabilities and capital on the same as the right hand total
- Rule double lines across both amount columns directly under each total the double lines show that
the work is completed and that the balance sheet is “in balance’’.
Hagos car wash
Balance sheet
August 2002
ACCOUNTING EQUATION
There are two types of equities. These are the equity of the creditors (liabilities) and the equity of the owners
(capital). The equation is expressed as:
The statement that assets equal liabilities plus capital is called the Accounting Equation. This equation is true of all
completed balance sheet.
The following are common accounting practices that has to be studied and used.
A. Words are written is full when space is adequate. words may be abbreviated when space is inadequate, as
total liability and capital.
B. The word birr, dollar signs, cent signs, and decimal points are not used when amounts are written in ruled
columns of accounting paper. A heavy vertical ruling or a color?Are used to separate the birr or the dollars
from the cents.
B. Two zeros are written in the cents column when an amount is in even birr/dollars. If the cents column is/left
blank. There might be some doubt later as to whether the recording of cents was overlooked. (Some
accountants use a dash (-) instead of two zeros for indicating ‘no cents’.)
C. When the accountant rules a single line beneath an amount, this single line indicates that either a total or a
remainder will follows.
D. A double ruling across an amount column indicates that the work above the double lines is complete and
accurate.
E. For neat accounting work a ruler or other straight edge is needed for drawing single and double rulings.
Periodically, every business needs to know its up to date financial position. for example, from month to month XXZ
Co. wants to know how well his business is doing:
To provide the necessary data for future balance sheets and for other financial statements, an orderly accounting
system must be used.
A new accounting system is started by making the data on the beginning balance sheet apart of the permanent
records. This is done by recording the dataon the beginning balance sheet in one of the books of the business.
The first book in which the records of a business are written is called a journal. Each record in a journal is called an
entry. The entry that records the data shown on a beginning balance sheet is called an opening entry. Because it is
the first book in which entries are recorded, a journal is also known as a book of original entry.
There are different kinds of journals. The nature of a business and the extent of its activities determine the types of
journals that are needed. A journal may have one or more amount columns.
A journal with two amount columns in which all kinds of entries may be recorded is called a general journal. The
standard form of two column general journal used by Hagos car wash is shown as follows.
General Journal
Post
Date Account Title Ref Debit Credit
When an accounting clerk makes an entry in a journal, there should be some written evidence to support the entry.
This evidence is usually some business paper. The business paper from which a journal entry is made is called a
source document.
The beginning balance sheet of Hagos car wash shown is the source document of the opening entry made in the
general journal. The amounts on the left-hand side of the balance sheet are recorded in the left hand amount
column of the two column general journal. The left hand amount column of a two-column general journal is called
the debit column. The amounts on the right hand side of the balance sheet are recorded in the right hand amount
column of the journal. The right hand amount of a two column general journal is called the credit column.
Every journal entry has four parts (1) date, (2) a debit part, (3) a credit part and (4), a brief explanation or an
indication of the source document.
Step 1: Date of the entry:- Write the date of the opening entry as illusted in the general journal. Note that (1) the
year is written only once on a journal page, (2) because the date column is narrow, the name of the month
may be abbreviated, and (3) the date is written once and only once for each entry, regardless of how many
lines are used for the entry.
Step3:Credit part of the entry: write the name of each liability and capital indenting about one-half inch from
the left edge of the Account title and write the amount of each credit item in the credit column. Indenting the
names of the credit items helps to separate the credit part of the entry from the debit part.
Step4: Reason for or source of the entry: write a brief explanation or indicate the source document used for
making the entry in the Account title column immediately below the last credit item by indenting about one
inch from the left edge. If the explanation takes more than one line, each line should be indented one inch.
The purpose of an explanation or an indication or the source document is to supply the reason for the
journal entry or to identify its source in case further
information needed.
General journal
Page No
Post ref.
Date Account title Debit Credit
2000 Cash 650 00
August 1 Operating supplies 250 00
Car wash equipment 3600 00
Office equipment 500 00
Auto cash equipment 850 00
Marco plumbing company 150 00
Harry Shaw, capital 4000 00
August 1 balance sheet
As you have learned in the last topics, the opening entry is the record of the assets, the liabilities and the capital on
the day the accounting system is started. As a business carries its normal operation, the value of the assets, liabilities
and capital will change, Cash is received and paid, goods and services are purchased and sold, Loans are taken and
paid. The amount of capital may increase as a result of profit or may decrease as a result of los
An exchange of property or services is called a business transaction. Each business transaction cause a change in
the amount of some balance sheet items. An accounting system must show not only what a business has but also the
changes in its Asset, Liabilities and Capital.
THE LEDGER– A book of secondary Entry
After business transactions are recorded in the journal, Then next step will be transferring the entries to the accounts
in the ledger. An accounting form that is used to sort and summarize the changes caused by business transactions is
called an Account. A group of accounts is called a ledger. Because the information recorded in the ledger is taken
from the journal, the ledger is also known as a book of Secondary entry.
The two column Account form
There are different forms of ruling to a ledger . One form of ruling is in two amount columns which have. One Debit
column and anther credit column. The two column account form is divided in to two halves. These are right hand
side and the left hand side. The left hand side of a two column account form is called the debit side. The right hand
side of a two column account form is called the credit side.
An entry on the left hand side of a two column account form is called a debit entry. An entry on the right hand side
of a two column account form is called a credit entry. The abbreviations Dr for debit and Cr for credit, are derived
from the words Debtor and Creditor, are usually used in accounting.
A form for a two column account is shown below
Date Item Post Dr Date Item Post Credit
reference reference
Chart of Accounts
An accounting form that is used to sort and summarize the changes caused by business transaction is called An
Account. Each account has a name and a number. The name given to an account is called the account title. The
number given to account to show its location in the ledger is called the account number.
A list of account titles along with their numbers showing the arrangement of the accounts in the ledger is called a
chart of accounts. The accounts are arranged in the ledger in numerical order. As a result they can be located easily.
Account numbers may consist more then one digit. The first digit of each account number tells the major division of
the ledger the account is located and the second digit may show the sub division of the ledger the account is located
and the third digit may show the position of the account on the subdivision.
1. Asset 3. Capital
II. Current Asset 31 Hagos capital
111. Cash 32 Income summary
112. Account receivable
113. Prepaid rent 4. Revenue
41 Rent income
12. Plant Asset 42 Sales
121. Equipment 43 Fees earned
122. Land
123. Building 5. Expenses
51 Insurance expense
2. Liability 52 Utility expense
Current liability 53 Advertising expense
211. Account payable
212. Notes payable
Long-term liability
long-term loan
Mortgage payable
An account needs to be opened in the ledger for each account listed on the chart of accounts. Writing the account
title and the account number on the first line of a ledger account form is called opening an account. As additional
accounts are needed, they are listed on the chart of accounts and are opened in the ledger.
Cash is the first account to be opened in the ledger because it is the first account in the chart of accounts.
The cash account is opened by:
1. Writing the name of the account cash at the left on the first line of the first page of the ledger, and
2. writing the number of the cash account, 111inthe upper right hand corner of the ledger page. The cash
account, after it is opened, appears as follows,
Account cash Account No 111
The producer, in opening each of the remaining accounts is the same as that followed in opening the cash account.
Each account in the opening entry of Hagos wash shown in lesson and it transferred to the proper ledger account.
Transferring the entries in a journal to the accounts in a ledger is called posting. Posting sorts the data in the journal
bringing all the data of one kind together.
The following five steps are followed in posting of the opening entry.
(1) Write the amount of the cash debit in the debit column of the cash account in the
ledger
(2) Write the date of the journal entry, in the date column of the ledger account the same as it is written in the
journal entry
(3) Write the word balance in the item column of the account. This helps to distinguish between the beginning
amount in an account and the amounts recorded later as a result of normal business transactions.
(4) Write JI in the post-reference column of each account. JI is written in the post reference column of the
account to show that this debit to cash came from page 1 of the general journal. (J is the abbreviation for
General Journal.)
(5) Reform to the journal and write in the post Ref-column of the journal the number of the account, 111,to
which the item was posted. Writing the number 111in the post. Ref. Column of the general journal shows
that this item was posted to account number111. The number also shows that all the details of the posting
of this line have been completed.
General journal
Page 1
Post ref.
Date Account title Debit Credit
2000 Cash 11 650 00
August 1 Operating supplies 12 250 00
Car wash equipment 13 3600 00
Office equipment 14 500 00
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Auto cash equipment 21 850 00
Marco plumbing company 22 150 00
Harry Shaw, capital 31 4000 00
August 1 balance sheet
The credit items in the general journal are posted in the same manner as the debit items. The exception is that the
credit items are posted to the credit side of the accounts.
After the posting of the opening entry has been completed, the post, Ref, Column in the general journal appears as
shown in the illustration.The numbers in the posting reference columns in the journal and in the ledger are useful for
cross-reference. An accounting clerk looking at entry in the journal can find the number of the account to which the
journal entry was posted. With this information, the account can be quickly located on the ledger. Also, the
accounting clerk looking at a ledger account can find the number of the journal page from which the positing was
made. With this information the entry in the journal can be quickly located. This cross referencing information is
useful when the accuracy of the posting is being checked. Accuracy is extremely important in all accounting work.
SELF TEST I
1. What is the meaning of bookkeeping, Accounting and then what is their difference?
2. List the users of Accounting information
3. To start a new accounting system, one has to know three concepts. What are these concepts?
4. What are the three items in the heading of a balance sheet?
5. What are the two parts of a balance sheet?
6. What are the three sections of the body of a balance sheet?
7. What is meant by journal? why it is said to be a book of original entry?
8. What is meant by a ledger? why it is said to the book of secondary entry?
Part II
1. The following are the Assets and Liabilities of Meseret Rental Enterprise, owned and operated by
W/roMeseret.
Asset Liabilities
Required: Prepare a balance sheet for Meseret Rental Enterprise dated Dec. 31, of the current fiscal year.
Each asset account normally has a left hand or debit balance. Assets, therefore are found listed on the left hand
side of the balance sheet. Each liability account and the capital account normally have right hand or credit
balances. Liability accounts and the capital account, there fore, are found listed on the right hand side of the
balance sheet.
Every business transaction increases or decreases the balance of two or. More accounts. These increases or
decreases are shown in the records when the transaction is recorded in a journal, and then posted to a ledger. The
two sides of a two column ledger account are used to show the increases and decreases in account balances. All
increases are recorded on the balance side of the account. All decrease are recorded on the side opposite the
balance side of the account.
Principles of debit and credit for balance sheet accounts
The left side of an account is called the debit side and the right side is called the credit side. The word debit or credit
doesn’t mean increase or decrease by it self rather its meaning depends on the nature of the account used. For
example an increase for assets are recorded in the debit side and a decrease for an asset account are recorded in the
credit side. Rules of debit and credit for balance sheet accounts is shown as follows
A business transaction is the occurrence of an event or a condition that must be recorded. Before a transaction can
be recorded in a journal, it must be analyzed to determine in what ways the assets, the liabilities, or the capital
Jan1. Received cash form the sale of supplies for birr 750.
In order to analyze the effect of this transactions we have to take into account the above mentioned three questions.
A. What are the names of the accounts affected?
The name of the account that are affected are cash and supplies.
B. What is the classification of each account or item affected?
The major classifications of these account is Asset. Because cash is an asset account and supplies is also an
asset account.
C. What is the balance of each of these accounts affected?
Since cash is an asset account and shows an increase in its balance, then it will be recorded in the debit side by the
amount of birr 750.
More over supplies is also an asset account and shows a decrease, then a decrease in any asset account is always
recorded on the side opposite the balance side.
- Supplies is an asset element
- the increasing side of an asset is debit and a decreasing side of an asset is a credit. Therefore the
supplies account is credited for the amount of the decrease birr 750.
Examples 2 – part payment of a liability
Jan 1. Paid cash in part payment of the amount owed birr 350, to Auto wash equipment Company
Analysis of the transaction
1. What are the names of the accounts affected?
.-Auto wash equipment co. and cash
2. What is the classification of each account affected?
-Auto wash equipment co. is a liability account. cash is an asset account
3. What is the balance of these accounts changed?
The balance of Auto wash equipment co. account, a liability account, is decreased by Br 350. The balance side of
every liability account is the credit side. A decrease in any account balance is always recorded on the side opposite,
The balance of the cash account, an asset account, increased by birr 300.
However, the balance of capital is increased by Br 300 the balance side of any proprietor’s capital account is credit
side. An increase in any account balance is recorded on the balance side of the account. The proprietor’s capital is
therefore credited for the amount of the increase in investment br 300.
Revenues are the gross increases in capital as the result of the sale of merchandise, the performance of services for a
customer, the rental of property, the lending of money etc. revenues are also known as Income.
Expenses are the decreases in capital that results from the operation of a business is called an expense. Business
expenses are the costs of items and services used to produce revenue.
Profit: when the total revenue exceeds the total cost of operating a business or expenses, the difference is called a
profit.
When the total expense (costs) exceed the total revenue. The differences is called net loss.
Crediting all revenue transactions and debiting all expense transaction to the capital account would make that
account large and hard to analyze. Therefore revenues and expenses are recorded in separate revenue and expense
accounts instead of the capital accounts. Detailed information about each kind of revenue enables the manger or
owner to see what sources of revenue are increasing or decreasing and how much. This information helps in making
such decision as the amount of money to spent on advertising or the number of employees needed by the business.
Separate expense accounts show the owner how much is being spend for each kind of expense. A separate expense
accounts also show which expenses are increasing and how much it increases.
An increase in capital from sale of merchandise or service is called revenue and a decrease is capital that results
from the operation of a business is called expense. Instead of crediting the capital directly for revenue, a separate
revenue account is credited for each different kinds of revenue transaction. Similarly, instead of debiting the capital
account directly for expenses, a separate expense account is debited for each kind of expense.
The principles of debit and credit for revenue and expenses account is shown as follows:
An increase in any revenue account is recorded as a credit and a decrease in any revenue account is recorded as
debit. However, an increase in any kind of expense account is recorded as a debit and a decrease in any kind of
expense account is recorded as a credit.
Cash: the balance of cash account, an asset account, is decreased by Br 250. The cash account is therefore
credited for the amount of the decrease br 250.
Rent expense: the balance side of any expense account is the debit side. Therefore, the expense account, rent
expense, is debited for the amount of the increase br 250.
1) Journalizing Increase Accuracy: when the debit and credit parts of a transaction are recorded
together in a journal entry, the equality of the two amounts is readily seen. Thus, if only apart of the
transaction is journalized, the omission is seen easily and the error can be corrected immediately.
If transactions were recorded directly in ledger accounts,. The accounting clerk could to record both
parts of the transaction. An interruption in the work might cause the accounting clerk to record only
part of the transaction and to forget to record the other part. An error of this kind would be very
difficult to locate
2. Journalizing provides a record of transactions in their chronological order.
A journal contains the day to day transactions in the life of a business. Therefore, when facts about a
transactions are needed some days or months after is occurred, the journal is an easy source to consult.
If transactions were recorded directly into a ledger accounts, the debit would be on one page and the credit part of a
single transaction.
A two column general journal was used by Hagos car wash for recording its opening entry. This kind of journal can
be used for recording all the transactions of a business. If Hagos car wash continued to use its general journal for
journalizing the first five transactions analyzed in the precious topic these entries would appear as shown below.
1 Cash 500 00
Hagos show, capital 500 00
Receipt No.2
Each business plans its journals to fit its own needs. Few businesses use only a general journal. Some businesses
may use several journals. Some use a single multi column journal. For example, Hagos car wash finds that the work
is more easily completed if a journal for cash transactions only is used. A journal that is used to record only one type
of entry is called a special journal. A special journal in which all cash transactions and only cash transactions are
recorded is called a cash journal.
Cash debit General debit Date Account title Post General Sales Cash
No credit credit credit
2000
August 1 Bala. In hand br. 650
10 00 1 Office equipment R1 10 00
200 00 1 Auto wash.equ.com CR1
500 00 1 Hagos, capital R2 500 00
82 00 1 R3 82 00
350 00 2 Rent expense CR2 350 00
Note that:- (1) In this cash journal all debit columns are at the left of the account Title column. All credit columns
are at the right of the account Title column; (2) the entry on the first line of the cash journal is not for a business
transaction and is explained later in this lesson.
(1) Less space is required for recording:- Journal entries in a cash journal than in a two column general
journal. for example, compare the entry in each journal for the first transaction. Each entry records the same
information but the entry in general journal requires three lines, while the entry in the cash journal requires only one
line. thus, if a two column general journal were used to record all transactions, the general journal would be much
bulkier than the cash journal.
(2) Less time is required for recording:- cash transactions in cash journal than in a two – column general
journal. A general journal entry requires that the title of each account in the transaction be written in the account
Title column. A cash journal entry, however, requires that the title of no more than one account be written. This is
true because the “cash” part of a transaction is always recorded in one of the special cash columns. If both the debit
amount and the credit of a transaction are recorded in special columns, it is not necessary to write any account title
in the Account title column. when a two column general journal is used, additional time and labor are required to
write an account title for both parts of every transaction.
2 Less time is required for posting:- list time is required for posting from the cash journal than from the
general journal. Every amount that is recorded in a two column general journal is posted separately. The
amounts entered in special columns of the cash journal are not posted separately. Only the total of a special
column is posted. There fore, special columns in a cash journal save both time and labor in the later posting
of the cash journal.
SELF TEST ON II
Part I: Answer each of the following questions carefully.
Part II
I) Analyze each of the following transaction in to its debit and credit parts
Transaction No.Transactions
1. Received cash from sale of type writer, $ 35.00
2. Paid cash in part payment of amount owed $ 150.00
3. Received cash from the proprietor as an additional investment in the business; $ 800.00
4. Paid cash for an electric type writer, $400.00
5. Received cash from sale of old check writing machine, $ 10.00
6. Paid cash in full payment of amount owed, $ 50.00
7. Received cash from sale of old desk, $30.00
8. Paid cash for telephone expense $ 18.00
9. Paid cash for electricity expense $ 150.00.
10. Paid cash for electricity expense $ 26.00
11. Paid cash for news paper advertising $ 40.00
12. Received cash from sale of old office desk $ 20.00
3. Record the account balance: write the account balance is small pencil figures in the item column of the
account on the side with the ledger total. Write this amount in line with the small pencil footing of the debit column.
A disagreement between the cash account balance and the amount of cash on hand indicated that one or more errors
have been made. Errors may have been made (2) on the cash stubs,(b) in posting to the cash account, or (c) in
calculating the balance of the cash account. Any errors found should be corrected immediately.
In double entry accounting the debit amount must equal the credit amount for each business transaction recorded
in a journal. If no errors are made when posting, the total of the debit amounts in the ledger should equal the total
of the credit amounts in the ledger. The proof of the equality of the debits and the credits in the ledger is called a
trialbalance.
If the sides of an account are equal, a small-o-is written in the item column on the balance side of the account. The
account title is included on the trial balance and a short dash(-) is inserted in the proper amount column.
When an account has two or more entries on one side only, that side is footed. The balance is not written in the item
column because the footing is the balance
Steps in preparing a trial balance
The five steps in preparing a trial balance are explained and illustrated. As you study the steps 1 check each one
with the illustration of the trial balance of Hagos carwash.
Step 2 4
5
1. Write the trial balance heading at the top of a sheet of Paper that has two amount columns. The heading
consists of three lines
(2) The name of the business, (b) the word trial balance, and (c) the date for which the trial balances is prepared.
Each line of the heading should be centered.
2. Enter on the trial balance each account in the ledger and its balance. In each cash the account title, the account
number, and the balance. Enter debit balance in the left hand or debit column. Enter credit balances in the right-
hand or credit column.
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QUEENS’ college AYERTENA CAMPUS
Training, Teaching and Learning Materials
3. Rule a single line across both amount columns of the trial balance under the last amount listed
4. Add each column and compare the totals. if the two totals are the same, write the totals on the first line below the
single ruling. (if the totals are not the same, the error or errors must be found and corrected)
5. Rule a double line under the totals across the amount columns. a double ruling indicates that the work has Been
completed. The double line is not drawn until the trial balance is in balance.
A trial balance that is in balance does not always prove the complete accuracy of the accounting records.
The following are two common kinds of errors in journalizing and posting which are not detected by a trial balance.
1 if the journalizing of a transaction is omitted, the ledger will still be in balance, but the error will not be indicated
by the trial balance. If, however, the omitted transaction affects cash, the error will be found when cash is proved.
Until the error is corrected, the balance of the cash account will not agree with the cash on hand.
2 if an amount is posted to the correct side, but to the wrong account, the trial balance will still be in balance if an
error of this type is not found at the time the trial balance is prepared, it should be discovered when the financial
reports are prepared.
Some typical errors that cause a trial balance to be out of balance include the following
1. Errors in the addition of the trial balance columns.
2. Listing in the account balance in the wrong column of the trial balance.
3. Mistakes in arithmetic when figuring account balances.
4. Copying an amount incorrectly when journalizing, posting, or preparing the trial balance.
5. Posting only one amount of a journal entry.
Steps for locating errors when a trial balance does not balance
When a trial balance fails to balance, a systematic procedure for locating the error or errors should be followed the
recommended steps are
1) Re- add the trial balance columns to prove the accuracy of the addition of the columns
2) Find the difference between the totals of the trial balance columns. Look in the ledger to see if the amount
of the difference is an account balance that was omitted from the trial balance.
Errors in accounting records should be avoided by careful and attentive work. When an error is made, it should be
corrected so that both the error and the correction are obvious. For example if an error is made in an amount, the
amount is canceled by drawing a lines through the incorrect figure. The correct amount is then written immediately
above the canceled amounts. When an error is corrected in this manner, the accounting clerk is indicating that a
mistake was found and corrected. Concealed errors, on the other hand, suggest possible dishonesty and can create
suspicion
If an account balance has been omitted from the trial balance, the amount should be inserted in its proper position. If
an account balance has been placed in the wrong column of the trial balance, the amount should be canceled with a
line and written in the correct column. A similar correction should be made for a balance copied incorrectly. The
trial balance totals should also be corrected.
The information needed to find the profit or the loss of a business is contained in the ledger accounts. This
information, however, needs to be summarized and analyzed. Although a trial balance summarizes the information
in the ledger accounts, the summary does not show the amount of profit or loss.
WORK SHEET
Accounting paper with a number of amount columns that can be used to sort and analyze information is called
analysis paper. The amount columns are used to classify and summarize amounts in the trial balance. The number of
amount columns used depends on the kind and size of business.
Analysis paper on which the financial condition of a business is summarized is called a work sheet . The work sheet
is used (a) to summarize the financial condition of a business and (b) to assist in the preparation of financial reports.
The work sheet is not part of the permanent records of the business and may be prepared in pencil.
A business analyzes its financial condition and prepares financial statements at regular intervals. The length of time
for which an analysis of business operations is made is called a fiscal period. A fiscal period is also known as an
accounting period. fiscal periods may be consist of a month, a quarter of a year, a half year, or a year. An
accounting period of twelve consequtive month is called a fiscal year. The fiscal year does not always begin in the
same month as the calendar year. How ever, many businesses do use the calander year as their fiscal period.
The three-line heading on the work sheet shows the name of the business, the name of the form, and the fiscal period
for which the analysis is made.
The account title column contains a list of the ledger accounts. The Acct. No Column lists the account numbers. The
six amount columns on this work sheet are composed of Paris of Debit and credit columns under the major headings
of Trial balance, Income statement, and Balance sheet.
The Trial Balance columns are used to sort the general ledger account balance in the proper Trial balance Debit or
Credit column.
The balance sheet columns are used to list the up-to-date balances of accounts that will be reported on the balance
sheet. The balance of each asset account is listed in the balance sheet Debit column. The balance of each Liability
account and the balance of the capital account are listed in the balance sheet credit column.
The steps that are followed in preparing the six column work sheet are explained as follows. As you study these
steps, check each one with the illustration of the work sheet of Hagos car wash.
1. Write the heading on three lines: center each item in the heading. The date indicates the length and
the closing date of the fiscal period for which the analysis is made, For month ended August 31, 2000.
2. Write the column heading: (If they are not preprinted on the work sheet). Reading from left to right
the column headings are: Account Title, Acc No., Trail balance Debit and Credit, Income statement
Debit and Credit, and Balance sheet Debit and credit.
3. Record the trail balance: For each account in the general ledger list the account title in the Account
title column, account numbers in the Acct-No. column, and the account balance in the appropriate Trial
balance Debit or credit column. Rule a single line across both trial balance columns under the last
amount listed. Add the trial balance columns. If the totals of the debit and the credit columns are equal,
draw double lines below the totals in columns 1 and 2. If the totals are not equal, find the errors and
correct them before completing the work sheet.
4. Extend the balance sheet items: extend the balance sheet items into the balance sheet columns as
follows as:
a) Extend the balance of each asset account from the trial balance Debit column in to the balance
sheet debit column.
b) Extend the balance of each Liability account and the balance of the capital from the Trial balance
credit column into the Balance Sheet credit column.
5. Extend the Revenue and Expense items: extend the revenue and expenseitem into income statement
columns as follows:
(when the total of the Income statement Debit column is larger, subtract the total of the credit
column from the total of the debit column to find the net loss. )
b) Write the amount of net Income, birr777.00, immediately below the smaller of the two totals in the
Income Statement columns.
c) Write the words Net Income in the Account Title column on the same line as the amount of the net
income.
d) Rule single line across the Income statement columns and add these columns. Write the proving
totals on the next line. (when these two proving totals of the Income statement columns are equal,
the amount of the net income (or the net loss) is assumed to be correct.
8. Extend the Net Income into Balance Sheet credit column as follows.
a) Extend the amount of net income birr 777.00, into the balance sheet credit column. This amount
shows the increase in capital as a result of the net income earned by the business during the month
of August.
(If there is net loss for the month, the capital is decreased.) the amount of a net loss is therefore
extended into the Balance sheet Debit column)
b) Rule a single line across the balance sheet column and add these columns.
(When these two proving total of the balance sheet columns are equal the amount of the net
income (or the net loss) is assumed to be correct. If the two proving totals of the Balance sheet
columns are equal the error must be found and corrected.
The six-column work sheet is used to summarize the account balances from the ledger as described. Two important
financial statements are prepared from the data summarized on the work sheet.
The owner of a business needs the information provided on financial statements to make management decision.
financial statements provide information needed by people considering the investment of some of their money in
a business.
c) Expense Section: the heading of the second section of the Income Statement, Expense, is written at the left
margin. The titles of the individual expense accounts are listed in the same order in which they are given on the
worksheet.
d) Figure net income (net loss): A single line is ruled across the second amount column to indicate
subtraction of the total expense from the total revenues. The result is written beneath the single ruled line in the
second amount column. The words net income/net loss are written at the left margin. The amount of the net income
shown on the income statement should agree with the amount of the net income previously calculated and recorded
on the worksheet.
e) rule the Income Statement: Double lines are rules across the amount columns to show that all work has
been completed and is assumed to be correct.
BALANCE SHEET
The balance sheet lists all the Assets, the liabilities, and the capital on specific date. The financial condition of
business on a particular date is shown by the balance sheet of that date. The source date to prepare the balance
sheet is the worksheet.
1. Preparing the heading: write the heading on three lines. center each item in the heading
2. Prepare the asset section: the titles of the asset accounts are written on the left hand side of the
balance sheet in the same order as shown on the work sheet. The total of the left hand side of the
balance sheet is written on the same line as the final total on the right hand side.
3. Prepare the liabilities section:, the liability accounts are written on the right hand side of the balance
sheet in the same order shown on the worksheet. A single line is ruled across the amount column under
the amount of the last liability. The amount of the total and the words total liabilities are written
Prove and rule the balance sheet: A single line is ruled across the amount column under the amount of the capital
and on the same line across the amount column of the asset section.
Step 1: To close revenue account: transfer the credit balance of the revenue account to the credit side of the
income summary account by debiting each revenue account and crediting income Summary for the total of all
revenue account balances.
Merchandise business
A merchandise business is a business organization which purchases or buys goods for resale to customers. A
person or firm to whom a business sells merchandise is called a customer. The goods that a merchandise business
purchases for resale to customers are called merchandise.
The value of the goods a business purchases to resell to customers is called the cost of merchandise. All costs of
merchandise are deductions from the revenue of the business. Therefore the costs of merchandises are recorded
as debits. Cost of merchandise are kept in a separate division of the general ledger.
A merchandising business frequently purchases merchandise for resale to customers and buys supplies and
equipment for use in conducting the business.
The Account that shows the cost of merchandise purchased for resale to customers is titled purchases. A more exact
title for this account would be merchandise purchase. Common usage has shortened the title to purchase. This
account is used only for merchandise brought for resale.
The purchase account has a debit balance just as an expense account had a debit balance. Therefore, the purchase
account is increased on its balance side which is its debit side. The purchase account is decreased on its credit side.
The source document for a purchase of merchandise on Account:- when a seller sends merchandise to a buyer,
the seller prepare a form showing what has been sent. A form describing the goods shipped, the method of shipment,
the quantity and the price of the goods is called an Invoice. A copy of an invoice that the seller uses as the source
document for recording the purchase of merchandise is called a Purchase Invoice.
The purchase invoice can be paid after the total has been verified. The agreement between the buyer and the seller as
to payment for merchandise is called the terms of sale.
The general ledger account that summarizes the amount owed to all creditors is titled Account Payable which is a
liability account.
Example . Nov 3, 2001 purchase merchandise on Account from a supplier Br 770.00 purchase invoice no. 21
This transaction increases the balance of the purchase account. Therefore it is debited for Br. 770.00 This transaction
also increase the amount owed to creditors. The liability account accounts payable has a credit balance and increased
on its credit side. Account payable therefore is credited for Br 770.00.
Example: Nov 4, 2001, paid on Account to the supplier Br 360. Check No 125
This cash payment on account decreases the amount owed to a creditor. The liability Account payable has a credit
balance and is decreased on its debit side. Account payable therefore, is debited for Br 360.00.
ANALYZING SALES OF MERCHANDISE TRANSACTION
Sales of merchandise may be occurred either on case basis or on Account bases. A sale in which cash is received for
the full amount at the time of the transaction is called a cash sale. An enterprise uses a cash register to record all
cash sales. The cash register tapes are then used as the source document for the cash sales transaction.
Example of cash sales
The source document for recording the sale of merchandise on account is a sales invoice. A sales invoice is also
known as sales ticket or sales slip.
All merchandises sold on account are summarized in a single general ledger account called Account Receivable.
Account receivable is an asset account.
Example Nov. 7,2001 sold Merchandise on account br 60 sales invoice No. 42.
This sale of merchandise on Account increases the amount to be collected from customers. The asset account
accounts receivable has a debit balance. Thus, it is increased on the debit side. Account receivable therefore is
debited for br 60.00. This transaction also increases the balance of the sales account. The revenue account sales
has a credit balance and is increased on its credit side. Sales therefore, is credited for Br 60.00.
This cash received on Account increases the balance of the asset account cash. Cash is therefore debited for Br
110.00. This transaction also decreases the amount to be collected from customers. The asset account receivable,
therefore, is credited for br 110.00
Information SHEETPosting Journal Entries from combination Journals To General and Subsidiary Ledger
General Ledger
TTLM Development Manual Date: 2010/17
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Training, Teaching and Learning Materials
Posting transaction from a journal to a ledger account helps sort and summarize the date for future use. A ledger
that contains all the accounts needed to prepare an income statement and a balance sheet is called a general
ledger.
Subsidiary ledger
Frequently accounts that are similar are placed in a separate ledger.
For example, a business must keep an individual account for each charge customer to know how much each
customer owes. A general ledger can obtain an account for each charge customer.
An account in the general ledger that summarizes all the accounts in a subsidiary ledger is called a controlling
account. The separate ledger kept for charge is a subsidiaryledger. The general ledger account receivable is the
controlling account. the balance of a controlling account equals the total of all the account balances in the
subsidiary ledger.
A subsidiary ledger that contains accounts with creditors only is called an account payable ledger. the balance of the
individual accounts payable ledger ( a subsidiary ledger) are brought together and summarized in account payable
( a controlling account in the general ledger).
An account payable is a liability and liabilities have credit balances. Therefore, the form used in the account payable
ledger has a credit balance column. Each entry in the accounts payable columns of the combination journal affects
the creditors named in the account title column. Each amount listed in these two columns is posted daily to the
proper creditors account in the account column ledger. The totals of these special amount columns are posted at the
end of the month.
Posting to the General Ledger
Posting from the combination journal to the general ledger is done periodically through out the month. However,
the posting must be done at least once a month . Each amount in the general debit column or the general credit
column in the combination journal is posted individually to the account shown in the account title column. Posting
A single error in a ledger account may cause the balance sheet to be out of balance. A single error may cause the
profit to be understated or overstated on the Income Statement. A single error may cause a business to over pay
or under pay its creditors. The record must be accurate. Accountants check many thing to assure that the records
are accurate. Three of the accuracy checks are cash proof, Agreement of controlling accounts with subsidiary
ledgers and equality of debits and credits in the general ledger.
Proving cash: After all the posting is completed, the accountants compares the balance of the general ledger cash
account with the cash proof. The cash proof is important, because so many transactions affect the cash account. there
are many chances to make an error in cash.
Proving the subsidiary ledgers: the balance of the controlling account in the general ledger should equal the sum
of the account balances in the corresponding subsidiary ledger.
SELF TEST
Closing entries are prepared at the end of each fiscal period for the following reasons.
1. To clear the revenue, the cost, and the expense accounts by transferring their balance to the income
summary account.
2. To bring the owner’s capital account up to date
- A journal entry is made to record the net income (or net loss) in the capital account. The
balance of the income summary account is equal to the net income (net loss) for the fiscal
period.
- A journal entry is made to transfer the balance of the drawing account to the capital
account.
The data needed to closing entries are obtained from the income statement columns and the balance sheet
columns of the work sheet
Closing entries for revenue account credits the income summary and debits the sales account. After a closing
entry the sales account has a zero balance. The balance of the sales accounts has been transferred as a credit
to the income summary account.
All account balances in the income statement debit column of the work sheet are closed with one journal
entry. The income summary account is debited for the total of these account balances. Each accounts with a
debit balance in the income statement debit column is credited for the amount of its balance.
Net income occurs when the total sales exceeds from the total expenses. As a result, to close the net income,
the credit balance of the income summary account is closed in to the capital account. If a business has a net
loss, the income summary account has a debit balance. The capital account would then be debited and the
income summary account credited for the amount of the net loss.
Withdrawals by the owner decrease capital. At the end of the fiscal period, the balance of the drawing
account closed in to the owner’s capital account closing drawing entry. Debits the capital account credits the
drawing account. Debit the capital account shows the decrease in capital because of the withdrawals.
Example of closing entries for sales. Expenses, net income, drawing is shown in thefollowing combination
journal.
Combination Journal
8992 00
30 Sales
8992
00
Income summary 7605 60
30 Income summary
5018 00
Purchase 92 00
25 00
Delivery expanses 40 00
Insurance expanses 500 00
720 00
Miscellanies expenses 310 00
Rent expenses 827 40
Salary expanses 370 00 726 00
Supplies expanses
370 00
Income summary
30 Capital
Capital
30 Drawing
A post closing trial balance is taken after adjusting and closing entry have been posted. The purpose of the post
closing trial balance is to prove the equality of debits and credits in the general ledger. The general ledger accounts
TTLM Development Manual Date: 2010/17
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QUEENS’ college AYERTENA CAMPUS
Training, Teaching and Learning Materials
that have balances are listed on the post closing trial balance. Only the balance sheet accounts remain open the
balance sheet accounts remain open. The accounts are listed on the trial balance in the same order as they appear in
the general ledger. Accounts with zero balance are closed and are not listed on the post closing trial balance.
Accounts that are closed are the revenues, cost and expense accounts, the owner’s drawing account and the income
summary account.
Gift world
Supplies ----------------------------166.00
Prepaid insurance-------------------125.00
Account payable----------------------------------------------2144.00
Capital ---------------------------------------------------------11326.40
Total $ 13, 470.40 $13, 470.40
On the post closing trial balance, the debit balance Br 13,470.40 is the same as the credit balance total $
13,470.40. The equality of debits and credits in the general ledger is proved. The general ledger is, therefore,
ready for the next fiscal period.
SELF TEST