PART II REVIEW OF THE ACCOUNTING PROCESS

A PRIMARY OBJECTIVE of financial reporting is to provide information that is useful to present and
potential investors and creditors and other users in making rational investment, credit, and similar
decisions. Most investors in corporations (the corporate stockholders) are external to the Corporation,
have very little, if any, input into its day-to-day management activities, and are usually not allowed (or
inclined) to examine the corporate records related to its business transactions. Creditors, potential
inventors and other interested parties, such as the various agencies of federal, state, and local
governments, are other external user groups that have little direct impact on management activities.

Yet these external users are vitally interested in receiving summary reports concerning the Corporation’s
financial activities. They are interested in answers to questions such as what are the economic resources
being used in the corporate activities, how efficiently are the economic resources being used, is the
Corporation making a profit and paying dividends to the stockholders, is the Corporation solvent, and
will the Corporation continue to be profitable, pay dividends, and remain solvent? Financial Statements
and the accompanying notes are summary reports used to provide answers to these questions. These
statements are the result of a complex financial accounting process. To understand the basic nature of
financial accounting it is necessary to be familiar with the accounting system used to accumulate the
information contained in these statements.

A. THE ACCOUNTING SYSTEM

Although a major purpose of financial accounting is to provide information to external users, much
accounting data is also useful to the corporate managers in making operating decisions. Many business
transactions result in important financial and managerial accounting information. An accounting system
is a means by which the financial and managerial information related to the business transactions
of a Company is recorded and stored so that it can be retrieved when necessary and reported in an
accounting statement. All companies have accounting systems, ranging from the very simple, such as a
check-book to the very complex, involving the use of sophisticated interconnected computers.

The intent in this section is to present the rudiments of an efficient financial accounting system the at are
applicable to either a manual or a computer accounting process. For convenience, the discussion is
primarily in terms of a manual system. The components of an accounting system include (1) the
framework for operation of the system, (2) the input source documents, (3) the records used to store
accounting information, and (4) the output reports. Each of these is discussed in subsequent sections.

1. Accounting Equation

The financial accounting recording process for a Corporation involves (1) identifying events occurring
within the Corporation’s economic environment that constitute financial business transactions, (2)
gathering the documents related to these transactions, (3) analyzing the documents to determine the
relevant financial information to be recorded, (4) recording the financial information, and (5) storing this
information for future retrial and use. A basic accounting model has been developed that provides a
framework for the accounting system. It serves as the basis for the recording of financial transactions.
This model, called the residual equity theory model, is usually expressed in equation form for a
Corporation as follows:

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 Assets = Liabilities + Stockholders’ Equity

Where assets are defined as the Corporation’s economic resources, liabilities are its obligations owed to
creditors, and stockholders’ equity is the owners’ residual interest in the corporate assets. This equation
must remain in balance at all times because each side presents a different “picture” of the same
information. That is, the left side summarizes the economic resources while the right side summarizes
the sources of (or claims upon) the economic resources. Evolving from this basic equation are several
other interrelated equations pertaining to information desired by external users. These are shown in
Exhibit 1-1.

Contributed capital includes the amounts of stockholder investments resulting from the sale of shares of
stock by the Company, while retained earnings include the lifetime amount of corporate earnings
reinvested in the corporation and not distributed to stockholders. Dividends (which are not expenses)
are the amounts distributed to stock holders as a return of their investment, Revenues are charges to
customers for goods or services provided and expenses are the costs incurred by the Corporation to
provide the goods or services.

Exhibit 1-1

INTERRELATED ACCOUNTING EQUATIONS

Assets = Liabilities +Stockholders’ Equity

Stockholders’ equity =Contributed Capital +Retained Earnings

Retained earnings =Beginning Retained Earnings + Net income-dividends

Net Income = Revenues –expenses

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2. Transactions, events, and Supporting documents

For financial accounting purposes a change in the economic resources (assets), obligations (liabilities),
or residual interest (stockholders’ equity) of a Company may be caused by a transaction or an event. A
transaction involves the transfer of something of value between the Company and another party. An
event is a happening of consequence to the company. The event may be internal, such as used
equipment in operations, or external, such as a transaction or a decline in price. The transactions and
events affecting economic resources and obligations are recorded, and substantiating evidence is
maintained to support this recording. The business documents, or source documents, relating to these
transactions and events are used in the accounting system as initial input information for the recording
process. These documents (such as sales invoices, checks, and freight bills) normally contain
information as to the monetary amount to be recorded, the parties involved, the terms of the transactions,
and other relevant information. Once a transaction or even is recorded, the supporting source documents
are appropriately stored as a means of verifying and substantiating the accounting records.

3. Accounts

Within the accounting system, accounts are used to store the recorded monetary information from
the transactions or events. Separate accounts are maintained for each asset, liability, revenue, expense,
and other stockholders’ equity items. examples of these accounts include Cash, Accounts Receivable
(that is, amounts due from customers), Building, Accounts Payable (that is, amounts owed to suppliers),
Mortgage Payable, Sales revenue, Salaries Expense, Purchases, Capital Stock, Retained Earnings, and
Dividends distributed. Each account is assigned a specific number from the Company’s chart of
accounts, a numbering system designed to efficiently organize the accounts and to minimize errors in the
recording process.

An account can be in several physical forms. It might be a location on a computer disk or tape, or a
standardized business paper in the case of a manual system. No matter which physical form is employed,
a single logical format is used that can best be explained in terms of a manual system. The format for
the accounts in a manual system is called a T-account. Each T-account has a left (or debit) and a right (or
credit) side for storing monetary information. Since each account accumulates information concerning
both increases and decreases resulting from various transactions or events, a rule has been established
that standardizes the method of recording these changes. This rule is embodied in the double-entry
system. In the double-entry system, for each transaction or event recorded, the total dollar amount
of the debits entered in all the related accounts must be equal to the total dollar amount of the
credits.

By associating the double-entry system with the accounts in the basic accounting equation, the
framework for the accounting system is completed. All accounts on the left side of the equation (assets)
are increased b debits (that is, entries on the left side of the accounts) and decreased by credits, while
accounts on the right side of the equation (liabilities and stockholders’ equity) are increased by credits
(that is, entries on the right side of the accounts) and decreased by debits. This relationship is shown on
the left side of Exhibit 1-2.

Accounts are classified as permanent (or real) accounts and temporary( or nominal) accounts. The
permanent accounts are the asset, liability, and stockholders’ equity accounts which have balances at the
end of the accounting period that are carried forward into the next accounting period. The accounts on

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the far right of Exhibit 1-2, namely the revenue, expense, and dividend accounts, are temporary accounts
because they are “temporarily” used to determine the change in retained earnings that occurred during the
accounting period and, therefore, their account balances are not carried forward into the next period. The
rules for recording transactions in temporary accounts are also shown in Exhibit 2-2. Because an increase
in revenues causes an increase in retained earnings, the rules for recording transactions in these accounts
are the same as those for retained earnings.

However, because an increase in several temporary accounts (such as expenses and dividends) causes a
decrease in retained earnings, the rules for recording transactions in these accounts are exactly the reverse
of those for retained earnings. For instance, since the payment of dividends as a debit.

In certain instances a Corporation will use a contra (or negative) account to emphasize a reduction in a
specific associated account. The rules for increasing or decreasing a contra account are also exactly the
reverse ofthose for the associated account. A contra account may be associated with a permanent
account or a temporary account. For instance, a Sales Discounts Taken account may be used to
accumulate the cash discounts taken by customers on Sales Revenues while an Accumulated
Depreciation account may be used to accumulate the depreciation recorded for Buildings. Contra
accounts are further illustrated in a subsequent section.

ACCOUNTING EQUATION AND DOUBLE –ENTRY SYSTEM

Permanent Accounts Temporary Accounts

Assets = Liabilities+ Stockholders’ Equity

Assets Accounts Liability Accounts Capital Stock Accounts Revenue Accounts

(debit) (Credit) (debit) (Credit) (debit) (Credit) (debit) (Credit)

Increase Decrease Decrease Increase Decrease Increase Decrease Increase

Retained Earnings ExpenseAccounts

(debit) (credit) (debit) (credit)

Decrease Increase Increase Decrease

DividendAccounts

(debit) (credit)

ncrease Decrease

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The balance of an account on a particular date is the difference between the total debits and
credits recorded in that account. These balance are used in the preparation of the Corporation’s
Financial Statements.

4. Financial Statements

A Corporation’s Financial Statements are used as output summary reports of the accounting system.
These statements are derived from the interrelated equations presented earlier. The major Financial
Statements include (1) the income statement, (2) the balance sheet (alternatively titled the statements
of financial position), and (3) the statement of cash flows. These Financial Statements are prepared
at the end of each year, the year being referred to as the accounting period. The annual set of
financial statements and accompanying supporting schedules and notes, along with other financial
and corporate data that are distributed to the various external users, is called the annual report.
Financial Statements are often prepared for a shorter time period such as three months; these are
called interim (or quartile) financial statements.

The income statement is used to summarize the results of a Company’s income producing
activities for the accounting period. Here the net income is derived by subtracting the total
expenses from the total revenues. A supporting schedule is usually prepared to tie the income
statement to the balance sheet. This schedule, referred to as the statement of retained earnings,
summarizes the amount of a Company’s net income retained in the business. This procedure
involves adding the current net income to the retained earnings balance at the beginning of the
period and subtracting the dividends distributed to stockholders. The balance sheet summarizes
the amounts of the assets, liabilities, and stockholders’ equity of a Company on a particular
date. The stockholders’ equity includes the ending retained earnings balance from the statement of
retained earnings. Usually a balance sheet is presented for the end of the previous accounting period
as well as the end of the current accounting period. Its name is derived from the fact that it is an
expansion of the basic accounting equation, which always remains in balance.

Because of the “linkage” between the income statement, statement of retained earnings, and
balance sheet due to net income and retained earnings, these Financial Statements are said to be
articulated.

The third major statement, the statement of cash flows, summarizes the cash receipts and cash
payments of a Company during the accounting period.

B. THE ACCOUNTING CYCLE

Aseries of steps are completed during each accountings period to record, store, and report the
accounting information contained in the recorded transactions. These steps are referred to as the
accounting cycle. The major steps include:
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1. Recording daily transactions in a journal
2. Posting the journal entries to the accounts in the ledger
3. Preparing Trial Balance
4. Preparing Worksheet and posting adjusting entries
5. Preparing the Financial Statements
6. Preparing and posting closing entries for the revenue, expense, and dividend accounts and
prepare Post-Closing Trial balance.
Each of these steps is discussed in the sections that follow.

1. Recording in the General Journal (Step 1)

A journal is often called a “ document of original entry” because a Company’s transactions

(and events) are initially recorded here. All transactions could be recorded in a single journal,
called the general journal. However, most corporations have a number of different special journals,
each designed for the recording of a particular type of business transaction.

The focus in this section is on the general journal. This journal consists of a date column, a column
to list the accounts affected by each transactions, a column to list the account numbers, and a debit
column and a credit column for listing the amounts to be recorded as a debit or credit to each
account.

Just below the listing of the accounts a written explanation of the transaction is presented. The
process of recording the transaction in the journal is called Journalizing. The resulting entry
is referred to as a Journal entry.

A number of advantages result from the use of a general journal (and special journals). First, use of
this journal helps in preventing errors. The accounts and debit and credit amounts for each
transaction are initially recorded on a single journal page rather than directly in the numerous
accounts. This makes it easier to verify the equality of the debits and credits. Second, all the
transactional information (including the explanation) is recorded in one place, thereby providing a
complete “ picture” of the transaction. This second advantage is especially useful during the auditing
process or if an error is discovered later in the accounting cycle because reference can be made back
to the general journal to determine the nature of the original transaction. Finally, since the
transactions are recorded in chronological order, the journal also provides a chronological record of
the Company’s financial transactions.

2. Posting to the Ledger (step 2)

In a manual system each account is listed on a separate standardized business paper. A general
ledger is the entire group of accounts for a Company. It might take several forms, such as a
computer storage location on a tape or disk, or in the case of our manual system a loose-leaf binder
with a page for each T-account. Once a Company’s transactions and events have been journalized in
a general journal, each account (that is, financial information storage record) within the general
ledger must be updated. This is accomplished through the process of posting. Posting entails
transferring the date and debit and credit amounts from the journal entries in the general journal to
the appropriate debit and credit sides of the applicable accounts in the general ledger. Thus, after
posting, the general ledger accounts contain the same information as in the general journal, just in a
different format.
Trial Balance. After the journal entries have been prepared and posted for the accounting period,
the balance in each account is determined. Then a trial balance is often prepared. A trial balance is
an accounting working paper that lists all the general ledger accounts and their account
balances.
These account balances are listed in either the debit or the credit column. The trial balance is used to
verify that the total of the debit balances is equal to the total of the credit balances.

If a trial balance does not balance, an error has been made. To find the error, the debit and credit
columns of the trial balance should be readded. If the column totals do not agree, the amounts in the
debit and credit columns should be checked to be sure that a debit or credit account balance was not
mistakenly listed in the wrong column. If the error is still not found, the difference in the column
totals should be computed and divided by 9. When the difference is evenly divisible by 9, there is a
good chance that a transposition or a slide has occurred. A transposition occurs when two digits in a
number are mistakenly reversed.

A slide occurs when the digits are listed in the correct order but are mistakenly moved one decimal
place to the left or right.

If a transposition or slide has occurred, the error may have been made when the account balances
were transferred from the accounts to the trial balance or when the account balances were initially
computed. Thus the account balance listed on the trial balance should be compared with the account
balances listed in the ledger. Then the ledger account balances should be recomputed, and if no
error is found, the postings should be double-checked. Finally, the journal entries should be
reviewed for accuracy.

If the trial balance is in balance, it is likely that (1) equal debit entries and credit entries were
recorded for each transaction;
(2) the debit and credit entries were posted to the accounts; and (3) the account balances were
correctly computed. The equality of the debit and credit totals, however, does not necessarily mean
that the information in the accounting system is error free. Several types of errors are not found by a
trial balance. First an entire transaction may not have been journalized. Second, an entire
transaction may not have been posted to the accounts. Third, equal debits and credits, but of the
wrong amount, may have been recorded for a transaction.
Forth, a transaction may have been journalized to a wrong accounts. Finally, a journal entry may be
posted to the wrong account.

3. Preparation of Adjusting Entries (step 3)

Because generally accepted accounting principles require use of the accrual method of accounting,
most companies use this method. Under accrual accounting, revenues are recognized in the
accounting period in which they are considered earned, and expenses are recognized in the
accounting period in which they are incurred, regardless of the inflow or outflow of cash. In many
instances not all accounts are up to date at the end of the accounting period. Certain amounts must
be adjusted so that all revenues and expenses are properly recorded and the balance sheet accounts
have correct ending balances. These adjustments are made by means of adjusting entries.
Adjusting entries are journal entries made at the end of the accounting period so that the
Financial Statements properly include the correct amounts for the current period.

An adjusting entry ordinarily affects both a permanent (balance sheet) and a temporary (income
statement) account. Adjusting entries may be classified into three categories. These categories and
the types of balance sheet accounts involved in the adjusting entries are:

1. Apportionment of prepaid and unearned items

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

a) Prepaid Expenses. A prepaid expense (sometimes called a prepaid asset) is an item of goods
or services purchased by the Company for use in its operations but not fully consumed by the end of
the accounting period.
When the goods or services are initially purchased, the cost is recorded as an acquisition of an asset
(prepaid expense). At the end of the accounting period certain of these items have been consumed in
the process of generating revenues. The associated costs must be systematically matched, as
expenses, against the current revenues, while the unused cost remains as an asset on the balance
sheet. Examples of prepaid expenses include prepaid rent, office supplies, and prepaid insurance.
b) Unearned Revenues. Unearned revenue is payment received by the Company in advance for
the future sale of inventory or performance of services. Initially a liability is usually recorded
because the Company has an obligation to provide the future goods or services. When these have
been provided to the customer, the liability is eliminated and the revenue is recorded by means of an
adjusting entry. Although the adjusting entry might be made at the time the goods or services are
provided, typically it is made at the end of the accounting period. Examples of unearned revenues
include unearned rent and unearned advertising.

It should be noted that some companies will initially record the entire prepayment of a cost as an
expense (instead of an asset) or the entire receipt in advance as a revenue (instead of a liability). In
this case adjusting entries are still necessary at the end of the accounting period, but they are
different in form and amNount.

c) Accrued Expenses. An accrued expense is an expense that has been incurred during the
accounting period but has neither been paid nor recorded. In order to properly match expenses
against revenues and to reflect the proper liabilities at the end of the period, an adjusting entry must
be made for each accrued expense. Examples accrued expenses interest payable, salaries payable,
and income tax payable.

d) Accrued Revenues. An accrued revenue is a revenue that has been earned during the
accounting period but has been neither received nor recorded. An adjusting entry is necessary to
properly increase the assets and revenues at the end of the period. Examples of accrued revenues
interest receivable and fees earned.
e) Estimated Items. Certain other adjusting entries must be made to properly state the financial
statements at the end of the accounting period. These adjustments are based on estimated amounts
because they are a function, at least in part, of future events. Nonetheless they are critical to a proper
matching of revenues and expenses. Adjustments involving (1) the depreciation on assets such as
buildings and equipment and (2) the recognition that some accounts receivable will never be
collected are both based up on estimates.

When an asset, such as a machine, sales fixture, or building, is acquired for use in a Company’s
operations, its cost is recorded as an economic resource (asset). It is expected that after several
periods of use the asset will be disposed of at a value significantly less than its original cost. The
difference between the original cost and an estimate of this later value (alternatively called residual
value, salvage value, scrap value, or trade-in value) is the asset’s depreciable cost. This depreciable
cost must be systematically and rationally allocated as an expense to each accounting period in
which the asset is used. This cost allocation process is referred to as depreciation. One systematic
depreciation method is straight-line depreciation, which allocates a proportionate amount as an
expense to each accounting period. Its computation is as follows:

Annual Depreciation Expense = Cost–Estimated Residual value

Estimated Service Life

Depreciation is recorded at the end of the accounting period by means of an adjusting entry. The
entry increases Depreciation Expense and decreased the remaining depreciable cost of the asset.
However, this decrease is not recorded directly in the asset account. Instead a contra (negative) asset
account, entitled Accumulated Depreciation, is increased. This contra account is then subtracted
from the asset account on the balance sheet. The resulting balance is referred to as the book value
(or carrying value) of the asset.

Many companies make a significant proportion of their sales on credit Regardless of the collection
effort expended, a Company is likely to experience a certain amount of bad debts-customer accounts
that will not be collected. Although the recognition that particular customers will not pay their
accounts may not occur until an accounting period after the sale, the bad debt expense should be
properly matched against the revenues in the period of the sale. Furthermore the assets should be
correspondingly reduced in order to reflect the projected collectibility of accounts receivable at the
end of the period in which the sale occurred. The adjusting entry to record the increase in expenses
and the decrease in assets requires the use of an estimate of future uncollectable accounts. However,
since in the period of sale it is not known which specific customers will default on their accounts,
Accounts Receivable should not be directly reduced. Instead a contra-asset account, Allowance for
Doubtful Accounts, is increased. This account is then deducted from Accounts Receivable on the
balance sheet to reflect the collectable accounts.

Note that corporations are subject to income tax on their income (they may also be subject to other
types of taxes such as property taxes). Although these income taxes may not be paid until the
following period, they are an expense and year-end obligation of the period in which the income is
earned. Normally the adjusting entry for income taxes is prepared after all the other adjusting
entries because the amount is usually computed by multiplying the income tax rate times the current
income before income taxes.

4. Preparation of the Financial Statements (step 4)

After the adjusting entries have been prepared and posted to the general ledger accounts, the
Financial Statements are prepared. This procedure involves several steps. The balance of each
account in the ledger is recomputed if necessary. Next an adjusted trial balance is frequently
prepared; it is similar to a trial balance. An adjusted trial balance lists all the accounts and also
the account balance after adjustments (but before closing) in either a debit or a credit column.
The adjusted trial balance is used to verify that the total of the debit balances is equal to the total of
the credit balances. This working paper also facilitates the preparation of the Financial Statements
because all the accounts and amounts included in the Financial Statements are listed on the adjusted
trial balance. Finally the income statement, statement of retained earnings, and balance sheet are
prepared in sequential order directly from the information contained in the adjusted trial balance.

5. Preparation of Closing entries (step 5)

The next step in the accounting process consists of preparing and posting closing entries. Closing
entries are those journal entries at the end of the accounting period necessary to (1) reduce the
balance in each temporary account to zero and (2) update the retained earnings and inventory
accounts.

The temporary accounts (namely, all revenue, expense, and dividend accounts) are used during each
accounting period to accumulate and summarize information pertaining to the net income and
dividends for that period. Once the period is over and the Financial Statements are prepared, the
balances in these accounts are no longer needed. In fact, these accounts must begin the next
accounting period with a zero balance in order to more easily summarize the next period’s net
income and dividend information. Correspondingly, the Company’s permanent stockholders’ equity
account Retained Earnings must be updated for the net income and dividend information contained
in the temporary accounts. Finally, if a Company uses a periodic inventory system, its ending
inventory must be updated because this inventory affects net income (that is, it is part of the cost of
goods sold computation) and it is also the beginning inventory of the next accounting period.

The revenue and expense accounts (including beginning and ending inventories uses to compute cost
of goods sold in a periodic system) are closed to a temporary closing account called income
Summary. The resulting balance in this account is the net income (or loss) for the period. This
balance is then transferred to Retained Earnings.

The closing process is straight forward. Each temporary income statement account is debited or
credited for the amount that will result in a zero balance in that account. The total of the credits to
these accounts is recorded as a debit to the Income Summary account; the total of the debits to the
other temporary accounts is recorded as a credit to income Summary.

A resulting credit balance in the Income Summary account represents the net income for the period
and is the same amount as that shown on the income statement. This credit balance is closed to zero
with a debit entry to Income Summary and a credit entry to Retained Earnings for the amount of the
net income. On the other hand, a resulting debit balance in the Income Summary account represents
a net loss for the period. This debit balance is closed to zero with a debit entry or Retained Earnings
and a credit entry to Income Summary for the amount of the net loss. Finally, the Dividends
Distributed account is credited for the amount necessary to reduce its balance to zero; the
corresponding debit to Retained Earnings reduces it for the amount of the dividends.

After the closing entries have been prepared and posted, many companies will prepare an accounting
working paper called a post-closing trial balance. A post-closing trial balance is prepared to
verify that the total of the debit balances is equal to the total of the credit balances in all the
permanent accounts.

So far, a relatively simple accounting system was explained to illustrate the accounting cycle.
Certain additional complexities are fairly common in businesses today. These include the use of
reversing entries, a worksheet, subsidiary ledgers, special journals, and voucher systems. Each of
these is discussed in the sections that follow,

C. REVERSING ENTRIES

After the accounts have been adjusted and closed for the current period, a new accounting cycle is
begun for the next accounting period. Prior to journalizing the daily transactions of the new
accounting period in the general journal, most major companies will prepare reversing entries. A
reversing entry is the exact reverse (accounts and amounts) of an adjusting entry. Reversing
entries are usually made at the same time as closing entries but are dated the first day of the next
accounting period.

They are optional and have one purpose: to simplify the recording of a subsequent transaction
related to the adjusting entry. Reversing entries enable the subsequent transaction to be recorded in
a routine fashion, without the need to consider the possible impact of the related adjusting entry.

As a general guideline, reversing entries should be made for any adjusting entry that establishes a
new balance sheet account. Consequently, reversing entries should be made for:
Adjusting entries that establish accrued revenues or expenses to be collected or paid in the next
accounting period.
Adjusting entries related to prepayments of costs initially recorded as expenses or receipts in
advance initially recorded as revenues.
Reversing entries should not be made for:
1. Adjusting entries related to prepayments of costs initially recorded as assets or receipts in
advance initially recorded as liabilities.
2. Adjusting entries related to estimated items such as depreciation or bad debts
These guidelines are just that, guidelines. They are no substitute for good accounting judgment.

To summarize, reversing entries are not necessary but, if used, do reduce the analyses related to
subsequent transactions and increase operational efficiency. If reversing entries are prepared, they
are usually made to eliminate the accrued items-that is, assets (such as Interest Receivable)
established as a result of recording accrued revenues, and liabilities (such as Salaries Payable)
established as a result of recording accrued expenses in the adjusting entries. Reversing entries are
also made if a Company initially records a payment in advance as an expense instead of an asset and
when a Company initially records a receipt in advance as a revenue instead of a liability and then
makes subsequent adjustments to establish an asset and a liability, respectively. Reversing entries
are not made for adjustments recording income taxes or estimated items such as depreciation and
bad debts.

D THE WORKSHEET

At the end of an accounting period a Company must prepare adjusting entries, closing entries, and its
Financial Statements. a worksheet is often prepared in conjunction with these accounting
activities in order to minimize errors, to simplify the journal recording of the adjusting and
closing entries, and to facilitate the preparation of the Financial Statements. It should be noted
that a worksheet is not a substitute for any accounting records or Financial Statements; it is merely
an accounting working paper designed for the previously mentioned purposes.

A worksheet in a manual system is a large columnar accounting Paper. It consists of a column for
listing all the ledger accounts and of debit and credit columns for the trial balance, adjustments,
adjusted trial balance, income statement, and balance sheet.
The process of completing the worksheet begins with the preparation of the trial balance. All the
accounts and account balances (prior to adjustments) are listed and the debit and credit columns of
the trial balance are totaled to verify the equality of the debits and credits.

Second, the accounts are analyzed to determine the necessary adjustments. These adjustments are
initially entered on the worksheet in the adjustments columns. If the adjustment involves an account
that does not currently have a balance, the account title is entered on the first available line below the
other account titles. Note that the adjusting entry for income taxes is not made until after the income
before income taxes is computed. Note also that the accounts in each adjusting entry are keyed with
the same letter of the alphabet to reduce the likelihood of error. Explanations keyed to these entries
are also usually prepared at the bottom of the worksheet. The adjustments columns are subtotaled to
prove the equality of the debits and credits. At this point some companies would prepare an adjusted
trial balance in a next set of columns. In an adjusted trial balance the adjustment amounts are
combined with the trial balance amounts to determine the new account balances.

Next, the trial balance amount of each account is combined with the adjustments to that account and
carried over to the proper column of the financial statement in which the account is located.

Fourth, the income statement debit and credit columns are subtotaled. Ordinarily the debit column
total will differ from the credit column total, the difference being the income(or loss)
Before income taxes.

Finally, the financial statement debit and credit columns are totaled in sequential order. First the
income statement columns are totaled. The difference between the debit and credit totals represents
the net income or loss for the period. This amount is used to balance the income statement columns.
It is also entered in the balance sheet credit column.
 The balance sheet debit and credit columns are finally totaled. The equality of the total of the debit
and credit columns indicates that the system is in balance and the worksheet is complete.

It should be remembered that the worksheet is prepared as a preliminary step, prior to the recording
of the adjusting and closing entries in the general journal and prior to the preparation of the formal
Financial Statements. A brief review of the worksheet indicates how such a worksheet facilitates the
accounting process. All the adjusting entries are now developed and shown in their basic format.
They must just be formally recorded in the general journal. The closing entries are also simplified.
Finally the preparation of the actual Financial Statements is facilitated. The amounts from the
worksheet columns for each financial statement are rearranged in the proper order on that financial
statement. The work sheet is particularly useful in preparing interim (such as quarterly) financial
statements when a Company does not desire to actually adjust or close its accounts. The adjusting
entries necessary to update the Financial Statements may be made on the worksheet only, thereby
enabling the Company to maintain its accounts on an annual basis.

E. SUBSIDIARY LEDGERS

For a larger Company selling to many customers and purchasing from many suppliers, its general
ledger substantially increases in size. Not only does it incur additional types of expenses and earn
other types of revenues, but it also must maintain adequate records of amounts owed by each of its
customers and to each of its suppliers.

In order to (1) reduce the size of its general ledger, (2) minimize errors, (3) divide the accounting
task, and (4) keep up-to-date records of its dealings with charge customers and suppliers, a Company
will establish subsidiary ledgers that are not part of the double-entry system. A subsidiary ledger is
a group of accounts, all of which pertain to one specific Company activity. Most companies
have separate subsidiary ledgers for accounts receivable and accounts payable. These ledgers enable
the Company to better focus its attention on the collection and payment process of the receivables
and payables. Many companies also use subsidiary ledgers for such major categories of accounts as
property and equipment, selling expenses, and administrative expenses. The accounts receivable
subsidiary ledger contains the individual accounts of all the Company’s charge customers. Since
these individual customer accounts have debit balances, it follows that this subsidiary ledger has a
total debit balance (computed by preparing a schedule of the individual customer account balances).
When this subsidiary ledger is used, an Accounts Receivable account is still maintained in the
general ledger. It is referred to as a control account because its debit balance must be equal to that
of the subsidiary ledger on any balance sheet date. The postings to this control account are
significantly reduced because only summary postings of customer account activities are necessary.
Similarly, the accounts payable subsidiary ledger contains the individual accounts of all the
Company’s charge suppliers.
Since these accounts have credit balances, the credit total of this subsidiary ledger must agree with
the credit total of the accounts Payable control account in the general ledger on any balance sheet
date.

F. SPECIAL JOURNALS
Just as a Company’s increasing size and complexity causes the need for subsidiary ledgers, it also
creates the need for establishing ways to efficiently record and summarize many daily transactions.
Special journals have been established for this purpose. A special journal is a journal used to
record transactions with a similar characteristic. Use of these journals (1) allows the accounting
task to be divided, (2) reduces the time necessary to complete the various accounting activities, and
(3) provide for a chronological ordering of similar transactions. Since operating procedures and
transactions vary across companies, each Company organizes the special journals in a way best
suited to its operations.
However, a great majority of transactions may be classified into four types: (1) sales of merchandise
on account, (2) purchases of merchandise on account,(3) cash receipts, and (4) cash payments.
Special journals are usually established to record these transactions. A general journal is still
necessary to record various other transactions or events not sufficiently repetitive to warrant the use
of special journal.

The major journals and their uses are:

1. Sales journal. Used to record all (and only) sales of merchandise on account.
2. Purchases Journal. Used to record all (and only) purchases of merchandise on account.
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 the special journals.

Sometimes a Company institutes a voucher system, requiring modification of the preceding journals
and the use of a different journal called a voucher register. This system is briefly discussed at the
end of this section.

(a) Sales Journal

The sales Journal is used to record all sales on account (cash sales are recorded in the cash
receipts journal). Each transaction is recorded by simply listing the customer account and the
amount of the sale. After the daily sales have been recorded, the amounts are posted as debits to the
individual customer accounts in the accounts receivable subsidiary ledger. By use of this procedure
these customer account balance are always current.

At the end of the period (or perhaps more frequently, say monthly) the total of the sales journal is
posted to two accounts: as a credit to the Sales Revenue account to record total sales on account and
as a debit to the Accounts Receivable control account to bring its balance into agreement with the
total of the accounts receivable subsidiary ledger.

b) Purchases Journal

The purchases journal is used to record all merchandise purchases on account (cash purchases
are recorded in the cash payments journal). Each transaction is recorded by listing the supplier’s
account and the amount of the purchase. After the daily purchases have been recorded, the amounts
are posted as credits to the individual supplier accounts in the accounts payable subsidiary ledger,
thus maintaining current balances in these accounts. At the end of the period (or sooner) the total of
the purchases journal is posted to two accounts, as a credit to the accounts Payable control account to
bring it balance into agreement with the subsidiary ledger total and as a debit to the purchases
account to record the total purchases on account.

c) Cash receipts Journal

The cash receipts journal is use to record all transactions involving the receipt of cash. A cash
debit column is provided for this purpose. Since a variety of transactions involve cash receipts, each
Company will determine exactly which of its accounts are frequently credited and will establish
column headings for these accounts. A miscellaneous column is then used for recording the amounts
of infrequent transactions. Many cash receipts are for cash sales and collection of accounts
receivable (less the sales discounts taken), so column headings are frequently provided for these
accounts.

To record a cash receipt transaction it is necessary to list an account title only if the amount of the
affected account must be recorded in the miscellaneous column or if an individual customer account
in the subsidiary ledger is involved. Account titles are not necessary for amounts listed in columns
already identified as relating to a specific account in the general ledger.

The cash receipts journal is usually posted on a daily and an end-of-period (or sooner) basis. The
entries to all the miscellaneous accounts are posted daily as are any entries to individual customer
accounts. At the end of the period all the columns are totaled, and the total of the debit columns is
compared to the total of the credit columns to verity equality. The totals of the Cash and Sales
Discounts Taken columns are posted as debits to each of these accounts, respectively. The credit
total of the Accounts Receivable column is posted to the control account to bring it into agreement
with the subsidiary ledger. Finally the credit total of the Sales Revenue column is posted to the
Sales Revenue account to record the total cash sales. The total of the miscellaneous column is not
posted because the miscellaneous accounts have already been posted.

d. Cash Payments Journal

The cash payments journal is used to record all transactions involving the payment of cash. Its
format and the journal entry and posting procedures are very similar to the cash receipts journal. A
cash credit column is used to record each cash payment. Column headings are established for
frequently debited accounts, and miscellaneous columns are used for recording amounts of
infrequent transactions. Since cash payments frequently involve cash purchases and payments of
accounts payable (less the purchases discounts taken), column headings are often provided for these
accounts.

To record a cash payment transaction, an accounts title is listed only if its amount is recorded in the
miscellaneous column or if it is an individual creditor account in the subsidiary ledger. Account
titles are not necessary for entries in specific account columns. Posting is usually performed on a
daily and an end-of-period basis. The miscellaneous accounts and the individual creditor subsidiary
ledger accounts are posted daily. At the end of the period the columns are totaled and the debit and
credit equality is verified. The totals of the Cash and Purchases Discounts Taken columns are
credited to these accounts, while the totals of the Accounts Payable and Purchases columns are
debited to these accounts. The miscellaneous column totals are not posted.

e) General Journal

The general journal is still a necessity, even when special journals are used. It is used for recording
adjusting, closing, and reversing entries as well as certain other transactions that occur relatively
infrequently, such as purchases returns and sales returns on credit and the purchase or sale of assets
(other than merchandise) on credit. The journalizing and posting process is the same as described
earlier, with one exception. If subsidiary ledgers are used, any debit or credit to accounts receivable
or accounts payable must be posted twice, once to the individual subsidiary account that is not part
of the double-entry system and once to the appropriate control account.
Voucher System
In order to provide safeguards over the disbursement of cash, many companies establish a voucher
system. The use of a voucher system requires that (1) a liability (Voucher payable, which replaces
Accounts Payable) be established for each anticipated cash payment, (2) each cash payment be
supported by a voucher (a written authorization as illustrated in Exhibit 1-4) and substantiating
documents to prove the validity of the payment, and (3) all payments be made by check.
When a voucher system is used, the purchases journal described earlier is expanded to include not
only a column for purchases on a account, but also a column for vouchers payable and columns for
any other frequently used accounts as well as miscellaneous columns. This journal is referred to as a
voucher register. Each expenditure is initially recorded in this voucher register as a liability by a
credit to Voucher Payable and a debit to the associated asset or expense account (such as Salaries
Expense, Purchases, and Equipment). Each expenditure is assigned a voucher number in sequential
order and each voucher contains a file of supporting evidence (for example, purchase order, sales
invoice, and freight receipt).
When payment is made, an authorization signature is required and a check is issued. The check
number is entered in the voucher register beside the number of the paid voucher. In this manner all
unpaid vouchers (which are liabilities) at the end of the period can be identified as those without an
associated check number. Postings from the voucher register must be made daily and at the end of
the period and are similar to those for the cash receipts and cash payments journals discussed earlier.
Because all expenditures are initially recorded in the voucher register, the check register (the cash
payments journal in a non voucher system) is substantially reduced. An account title column is
needed only for identifying individual supplier subsidiary accounts. Columns are needed only for
debits to Vouchers Payable and Purchases Discounts Taken and credits to Cash. A column is also
usually included to record the number of the paid voucher. After each payment is recorded, the daily
and end-of period posting are similar to those discussed earlier. Although the voucher system
institutes greater control over the disbursement of cash. The related special journals involve
relatively minor modification from those discussed earlier. Consequently an example is not
presented.
(FRONT) (BACK)

TIGER WALLPAPER COMPANY Accounting Distribution

Acct
Voucher No. 312 Account Debited No. Amount
Purchases 510 300,00
Date: June 1, 1992 Transportation-in 504 20,00
Payee: Yared Company
Street: Mercato
City: AdissAbeba
Region: 14

Date of
Invoice Terms Invoice Number Amount
June 1 n/30 60752 320,00 Payment Summary
Total cost 320.00
Discount -0-
Net payment $320,00
Check No. 573
Date of Check 6/10/92
Payment approved
_______________
Definition of Elements

 Assetsare probable future economic benefits obtained or controlled by a particular entity as a

result of past transactions or events.
 Liabilitiesare probable future sacrifices of economic benefits arising from present obligations
of a particular entity to transfer assets or provide services to other entities in the future as a
result of past transactions or events.
 Equity is the residual interest in the assets of an entity that remains after deducting its
liabilities. In a business enterprise, the equity is the ownership interest.
 Investments by owners are increases in net assets of a particular enterprise resulting from
transfers to it from other entities of something of value to obtain or increase ownership
interests (or equity) in it. Assets are most commonly received as investments by owners, but
that which is received may also include services or satisfaction or conversion of liabilities of
the enterprise.
 Distributions to owners are decreases in net assets of a particular enterprise resulting from
transferring assets, rendering services, or incurring liabilities by the enterprise to owners.
Distributions to owners decrease ownership interests (or equity) in an enterprise.
 Comprehensive income is the change in equity (net assets) of an entity during a period from
transactions and other events and circumstances from non owner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owners.
 Revenues are inflows or other enhancements of assets of an entity or settlements of its
liabilities (or a combination of both) during a period from delivering or producing goods,
rendering services, or other activities that constitute the entity'’ ongoing major or central
operations.
 Expenses are outflows or other using up of assets or incurrences of liabilities (or a
combination of both) during a period from delivering or producing goods, rendering services,
or carrying out other activities that constitute the entity’s ongoing major or central
operations.
  Gains are increases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
during a period except those that result from revenues or investments by owners.
 Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
during a period except those that result from expenses or distributions to owners.

PART III PRACTICAL PROBLEMS

1. ABC Real Estate Company acts as an agent in buying, selling, renting, and managing real
estate. The account balances at the end of July of current year are as follows:

11 Cash……………………………. 46,240
12 Accounts Receivable…………… 23,600
13 Prepaid Insurance………………. 3,240
14 Office Supplies…………………. 2,830
17 Building…………………………...30,000
21 Accounts Payable ……………… 9,250
22 Notes Payable …………………... 0
31 Capital Stock……………………. 20,000
32 Retained Earnings………………. 19,606
33 Dividends………………………….2,000
41 Fees Earned……………………… 335,600
51 Salary and Commission Expense.. 244,480
52 Rent Expense……………………. 12,000
53 Advertising Expense…………….. 10,300
54 Automobile Expense…………….. 8,450
59 Miscellaneous expense…………... 1,316 ______
384,456384,456
The following business transactions were completed by seawell realty, Inc. during august of the
current year.

Aug. 2. Paid rent on office for month, $1,000.

3. Purchased office supplies on account, $250.
5. Received cash from clients on account, $16,280.
7. Paid insurance premiums, $1,400.
12. Paid salaries and commissions, $12,870
14. Purchased land for a future building site for $20,500, paying
$5,500 in cash and giving a note payable for the remainder.
15. Recorded revenue earned and bulled to clients during first half of month, $14,160.
18. Paid creditors on account, $2,420
20. Returned a portion of the supplies purchased on August 3,receiving full credit for their cost,
$80.
23. Received cash from clients on account, $10,190.
24. Paid advertising expense, $820.
27. Discovered an error in computing a commission; received cash from the salesperson for the
overpayment, $350.
28. Paid automobile expenses (including rental charges), $630.
30. Paid miscellaneous expenses, $216.
31. Recorded revenue earned and bulled to clients during second half of month, $16,300
31. Paid salaries and commissions, $19,840.
31. Paid dividend, $2,000
Instructions:

1) Open a ledger of four-column accounts for the accounts listed. Record the balances in the
appropriate balance columns as of august 1, write “Balance” in the item section, and place a check
mark () in the posting reference column.
2) Record the transactions for August in a two-column journal.
3) Post to the ledger, extending the month-end balances to the appropriate balance columns after all
posting is completed.
4) Prepare a trial balance of the ledger as of August 31.

2. The store supplies inventory at the beginning of the fiscal year is $610, purchases of store
supplies during the year total $2,450, and the inventory at the end of the year is $530

a) Set up T accounts for Store Supplies and Store Supplies Expense, and record the following
directly in the accounts, employing the system of initially recording office supplies as an asset
(identify each entry by number): (1) beginning balance; (2) purchase for the period; (3) adjusting
entry at the end of the period; (4) closing entry.
b) Set up T accounts for Store Supplies and Store Supplies Expense, and record the following
directly in the accounts, employing the system of initially recording office supplies as an expense
(identify each entry by number): (1) beginning balance; (2) purchases for the period; (3) adjusting
entry at end of the period; (4) closing entry.
3 The unearned advertising revenue of Hagos Advertising Agency at the beginning of the fiscal
year is $27,750, revenues received during the year total $280,500, and the unearned advertising
revenue at the end of the year is $30,800.

a) Set up T accounts for Unearned Advertising Revenue and Advertising Revenue and record the
following directly in the accounts, employing the system of initially recording advertising fees as a
liability (identify each entry by number):
(1) beginning balance; (2) revenues received during the period; (3) adjusting entry at the
end of the period; (4) closing entry.
b) Set up T accounts for Unearned Advertising Revenues and Advertising Revenue and record the
following directly in the accounts, employing the system of initially recording advertising fees as a
revenue (identify each entry by number): (1) beginning balance; (2) revenues received during the
period; (3) adjusting entry at the end of the period; (4) closing entry.

4. In the their first year of operations, the Southern Publishing Co. received $290,000 from
advertising contracts and $620,000 from magazine subscriptions, crediting the two amounts to
advertising Revenue and Circulation revenue respectively. At the end of the year, the deferral of
advertising revenue amounts to $32,000 and the deferral of circulation revenue amount to $197,000.
(a) If no adjustments are made at the end of the year, will revenue for the year be overstated or
understated, and by what amount? (b) Present the adjusting entries that should be made at the end of
the year. (c) Present the entries to close the two revenue accounts. (d) Present the reversing entries
if appropriate.

5. The information presented below was obtained from a review of the ledger (before adjustments)
and other records of Solomon Company at the end of the current fiscal year ended December 31:
a) As office supplies have been purchased during the year, they have been debited to Office
Supplies Expense, which has a balance of $995 at December 31.
The inventory of supplies at that date totals $280.
b) On December 31, Rent expense has a debit balance of $26,000, which includes rent of $2,000 for
January of the following year, paid on December 31 of the preceding year.
c) Sales commissions are uniformly 1% of net sales and are paid the tenth of the month following
the sales. Net sales for the month ended December 31 were $90,000. Only commissions paid have
been recorded during the year.
d) Prepaid advertising has a debit balance of $7,800 at December 31, which represents the advance
payment on March 1 of a yearly contract for a uniform a mount of space in 52 consecutive issues of
a weekly publication. As of December 31, advertisements had appeared in 44 issues.
e) Unearned Rent has a credit balance of $14,700, composed of the following: (1) January 1
balance of $2,700, representing rent prepaid for three months, January through March, and (2) a
credit of $12,000, representing advance payment of rent for twelve months at $1,000 a month,
beginning with April.
f) Management Fees Earned has a credit balance of $130,750 at December 31. The unbilled fees
at December 31 total $7,150.
g) As advance premiums have been paid on insurance policies during the year, they have been
debited to prepaid insurance, which has a balance of $1,248 at December 31. Details of premium
expirations are as follows:
Policy Premium Cost Period in Effect
No. Per Month __ During year___
3172 $30 Jan. 1-March 31
D701 25 April 1-Dec. 31
5154 42 Jan. 1 – Dec. 31
744B 18 Jan. 1- May 31
649C 22 June 1-Dec. 31

Instructions:

1) Determine the amount of each adjustment, identifying all principal figures used in the
computations.
2) Journalize the adjusting entries as of December 31 of the current fiscal year identifying each
entry by letter.
3) Journalize the reversing entries that should be made as of January 1 of the succeeding fiscal year,
identifying each entry by the corresponding letter used in (2).

6. Transactions related to advertising and rent are presented below Accounts are adjusted and
closed only at December 31, the end of the fiscal year.
Advertising

Jan. 1. Debit balance of $1,500 (allocable to January-March).

Apr. 1. Payment of $7,200 (allocable at $600 a month for 12 months beginning April 1).

Rent

Jan. 1. Credit balance of 11,800 (2,800 allocable to January –April;$9,000 allocable to January-
June)
May 1. Receipt of $9,600 (allocable at $800 a month for 12 months beginning May 1).
July 1. Receipt of $19,200 (allocable at $1,600 a month for 12 months beginning July 1).

Instructions:

(1) Open account for prepaid advertising, advertising Expense, Unearned rent, and rent income.
Using the system of initially recording prepaid expense as an asset and unearned revenue as a
liability, record the following directly in the accounts: (a) beginning balances as of January 1; (b)
transactions of April 1, May 1, and July 1; (c) adjusting entries at December 31; (d) closing entries at
December 31; and (e) reversing entries at January 1, if appropriate. Identify each entry in the item
section of the accounts as balance, transaction, adjusting, closing, or reversing, and extend the
balance after each entry.
(2) Open a duplicate set of accounts and follow the remaining instructions in instruction (1),
expected to employ the system of initially recording prepaid expense as an expense and unearned
revenue as revenue.
(3) Determine the amounts that would appear in the balance sheet at December 31 as asset and
liability respectively, and in the income statement for the year as expense and revenue respectively,
according to the system employed in Instruction (1) and the system employed in Instruction (2).
Present your answers in the following form
7. Selected accounts from the ledger of Genet Alene Co. at the end of the fiscal year are as
follows. The account balances are shown before and after adjustment.

Unadjusted Adjusted
Balance__ Balance_
Fees Receivable………….. - $3,250
Supplies………………………$ 2,125 675
Prepaid Insurance………… 5,600 2,450
Wages Payable…………… - 2.970
Utilities Payable………….. - 475
Unearned Rent……………. - 600
Fees Earned………………. 91,000 94,250
Wages Expense…………… 60,050 63,020
Utilities Expense…………. 4,950 5,425
Insurance Expense……….. - 3,150
Supplies Expense………… - 1,450
Rent Income……………… 7,800 7,200

Instructions:

(1) Journalize the adjusting entries that were posted to the ledger at the end of the fiscal year.
(2) Insert the letter ”R” in the date column opposite each adjusting entry that should be reversed as
of the first day of the following fiscal year.

8. Baxter & Son holds a 90-day, 14% note for $5,000, dated June 20, that was received from a
customer on account. On July 20, the note is discounted at the Ogden national Bank at the rate
of 16%.
a) Determine the maturity value of the note.
b) Determine the number of days in the discount period
c) Determine the amount of the discount.
d) Determine the amount of the proceeds
e) Present the entry, in general journal form, to record the discounting of the note on July 20.

9. Record the following transactions, each in general journal form, in the accounts of C. Reed
and Daughter.

May 1. Received a $6,000, 60-day, 14% note dated May 1

fromShaul Corp. on account.
31. discounted the note at royal National Bank; discount rate 15%.
June 30. The note is dishonored; paid the bank the amount due
 on the note plus a protest fee of $7.
July 30. Received the amount due on the dishonored note plus interest for 30 days at 14% on the
total amount debited to Shaul corp. on June 30.

10. At the end of the current year, the accounts receivable account has a debit balance of $75,000
and net sales for the year total $800,000. Determine the amount of the adjusting entry to record the
provision for doubtful accounts under each of the following assumptions:

a) The allowance account before adjustment has a debit balance of $300.

Uncollectbile accounts expense is estimated at ½ of 1% of net sales
Analysis of the accounts in the customers ledger indicates doubtful accounts of $5,250.
b) The allowance account before adjustment has a debit balance of $300.
Uncollectible accounts expense is estimated at ¾ of 1% of net sales.
Analysis of the accounts in the customers ledger indicates doubtful accounts of $5,250.

11. The following were selected from among the transactions completed by D.L. Parton Co. during
the current year.

Jan. 9. Sold merchandise on account to Haggart Co., $5,000.

19. Accepted a 30-day, 12% note for $5,000 from Haggart Co. on account.
Feb. 18. Received from Hagart Co. the amount due on the note of January 19.
May 1. Sold merchandise on account to C.D chow Inc., for $2,000,charging an additional $30
charged from prepaid transportation cost.)
10. Loaned $3,000 cash to Jon Johnson, receiving a 30-day, 14%note.
May 31. Received from C.D Chow Inc. the amount due on the invoice of May 1, less 2% discount.
June 9. Received the interest due from John Johnson and a new 60-day, 14% note as a renewal of
the loan. (Record both the debit and the credit to the notes receivable account.)
Aug. 8. Received from John Johnson the amount due on his note
Sept. 16. Sold merchandise on account to west and Son, $6,000
Oct. 11. Received from west and Son a 60-day , 12% note for $6,000.
Nov. 10. Discounted the note from west and Son at the palmer national Bank at 10%
Dec. 10. Received notice from Palmer National Bank that West and son had dishonored its note.
Paid the bank the maturity value of the note.
Dec. 20. Received from West and Son the amount owed on the dishonored note, plus interest for 10
days at 10% computed on the maturity value of the note.

Instructions:

Record the transactions in general journal form

13. A) The beginning inventory and the purchases of Commodity X3C during the year were as
follows:

Jan. 1 Inventory………………….. 10 units at $135

Mar. 17 Purchase………………….. 20 units at $141
July 2 Purchase………………….. 20 units at $145
 Oct. 30 Purchase…………………… 15 units at $144

There are 18 units of the commodity in the physical inventory at December 31 (the periodic system
is used). Determine the inventory cost and the cost of merchandise sold by three methods,
presenting your answers in the following form:

_______________Cost_________________
Inventory Method Merchandise Inventory Merchandise Sold
(1) First-in, first-out $ $
(2) Last-in, first-out
(3) Average cost

B) Beginning inventory, purchases, and sales data for Commodity 92-D are as follows. The
enterprise maintains a perpetual inventory system, costing by the first-in, first-out method.
Determine the cost of the merchandise sold in each sale and the inventory balance after each
sale, presenting the data in the form illustrated on page 254.

July 1. Inventory …………………. 24 units at #30

5. Sold……………………….. 10 units
13. Purchased…………………. 15 units at $31
19. Sold……………………….. 18 units
22. Sold……………………….. 5 units
30. Purchased…………………. 15 units at $32

C) Good Vibes employs the periodic inventory system. Details regarding the inventory of television
sets at July 1, purchases invoices during year, and the inventory count at June 30 are summarized as
follows:

Inventory
_______Purchases Invoices____Count,
Model July 1 1st 2nd 3rd June 30
A 29 6 at $150 4 at $150 7 at $155 8 at $155 5
G12 5 at 173 10 at 175 10 at 177 8 at 182 8
J47 4 at 700 2 at 725 2 at 725 2 at 750 2
M59 3 at 520 4 at 531 2 at 549 3 at 542 4
P30 9 at 231 7 at 251 6 at 222 6 at 225 8
T99 6 at 305 3 at 310 3 at 316 4 at 324 5
W71 _____ 2 at 440 2 at 460 _____ 1

Instructions:

Determine the cost of the inventory on June 30 by the first-in, first-out method. Present data in
columnar form, using the following columnar headings. If the inventory of a particular model is
composed of an entire lot plus a portion of another lot acquired at a different unit price, use a
separate line for each lot.
Model Quantity Unit Cost Total Cost

Determine the cost of the inventory on June 30 by the last-in, first-out method, following the
procedures indicated in instruction (1)
Determine the cost of the inventory on June 30 by the average cost method, using the columnar
headings indicated in instruction (1)

D) The beginning inventory of Commodity P741 and data on purchases and sales for a three-month
period are as follows:

April 1. Inventory…………… 7 units at $180 $1,260

6. Purchase……………. 10 units at 182 1,820
13. Sale…………………. 10 units at 245 2,450
24. Sale…………………. 3 units at 245 735
May 4. Purchase…………….. 12 units at 183 2,196
6. Sale………………….. 6 units at 250 1,500
19. Sale………………….. 5 units at 250 1,250
25. Purchase…………….. 15 units at 184 2,760
June 5. Sale…………………. 6 units at 250 1,500
12. Sale…………………. 7 units at 250 1,750
19. Purchase……………. 10 units at 185 1,850
30. Sale…………………. 9 units at 250 2,250

Instruction:

Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record
similar to the one illustrated on page 254, using the first-in, first-out method.
Determine the total sales and the total cost of Commodity P741 sold for the period and indicate their
effect on the general ledger by two entries in general journal form. Assume that all sales were on
account.
Determine the gross profit from sales of Commodity P741 for the period.
Determine the cost of the inventory at June 30, assuming that the periodic system of inventory had
been employed and that the inventory cost had been determined by the last-in, first-out method.

E) A plant asset acquired on January 3 at a cost of $165,000 has an estimated life of 10 years.
Assuming that is will have no residual value, determine the depreciation for each of the first two
years (a) by the straight-line method, (b) by the declining-balance method, using twice the straight-
line rate, and (c) by the sum-of-the-year-digits method.

F) A diesel-powered generator with a cost of $150,000 and estimated salvage value of $10,000 is
expected to have a useful operating life of 70,000 hours. During January, the generator was operated
720 hours. Determine the depreciation for the month.
G) Balances in Trucks and Accumulated depreciation-Trucks at the end of the year, prior to
adjustment, are $63,800 and $28,970 respectively. Details of the subsidiary ledger are as follows:

Estimated Accumulated Miles

Estimated Useful Depreciation Operated
Truck Residual Life at Beginning During
No. Cost Value__ in Miles of Year____ Year___
$24,400 $4,400 200,000 $8,500 20,000
2 10,900 2,600 100,000 1,660 25,000
3 19,500 3,000 150,000 11,110 30,000
4 9,000 1,000 100,000 7,700 6,000

Determine the depreciation rates per mile and the amount to be credited to the accumulated
depreciation section of each of the subsidiary accounts for the current year. (b) Present the general
journal entry to record depreciation for the year.

H) An item of equipment acquired at the beginning of the fiscal year at a cost of $38,00 has an
estimated trade-in value of $2,000 and an estimated useful life of 8 years. Determine the following:
(a) the amount of annual depreciation by the straight-line method, (b) the amount of depreciation for
second year computed by the declining-balance method (at twice the straight-line rate), (c) the
amount of depreciation for the second year computed by the sum-of-the-years-digits method.

I) A piece of office equipment acquired at a cost of $15,900 has an estimated residual value of $900
and an estimated life of 5 years. It was placed in service of October 1 of the current fiscal year,
which ends on December 31 Determine the depreciation for the current fiscal year and for the
following fiscal year (a) by the declining-balance method, at twice the straight-line rate, and (b)
by the sum-of-the-years-digits method.