CHAPTER 3: ACCOUNTING CYCLE

3.0 Accounting Cycle

Financial information is presented in reports called financial statements. But before they can be prepared,
accountants need to gather information about business transactions, record and collate them to come up with the
values to be presented in the reports.

The cycle does not end with the presentation of financial statements. Several steps are needed to be done to prepare
the accounting system for the next cycle.

3.1 Steps in the Accounting Cycle

1. Identifying and analyzing business transactions

The accounting process starts with identifying and analyzing business transactions and events. Not all transactions
and events are entered into the accounting system. Only those that affect the business entity are included in the
process. The first step includes the preparation of business documents, or source documents. A business document
serves as basis for recording a transaction.
2. Recording in the journals
A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded
using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts
(one debited and one credited). To simplify the recording process, special journals are often used for transactions
that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to
record those that cannot be entered in the special books.

Transactions are recorded in chronological order and as they occur. Journals are also known as Books of Original
Entry.

3. Posting to the ledger

Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each
account as a result of past transactions, and their current balances. After the posting all transactions to the ledger,
the balances of each account can now be determined. For example, all journal entry debits and credits made to
Cash would be transferred into the Cash account in the ledger. We will be able to calculate the increases and
decreases in cash; thus, the ending balance of Cash can be determined.

4. Unadjusted trial balance

A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from
the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added.
Total debits should be equal to total credits. When errors are discovered, correcting entries are made to rectify
them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total
debits and total credits and not to determine the correctness of accounting records. Some errors could exist even
if debits are equal to credits, such as double posting or failure to record a transaction.

5. Adjusting entries
Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting
period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been
earned but not entered in the books. Adjusting entries are prepared to update the accounts before they are
summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses,
deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and
allowances.

6. Adjusted trial balance

An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are
prepared. This is to test if the debits are equal to credits after adjusting entries are made.

7. Financial statements
When the accounts are already up-to-date and equality between the debits and credits have been tested, the
financial statements can now be prepared. The financial statements are the end-products of an accounting system.
A complete set of financial statements is made up of: (1) Statement Of Profit or Loss (Income Statement) (2)
Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash
Flows, and (5) Notes to Financial Statements.

8. Closing entries
Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next
accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are
measured periodically. The accounts are closed to a summary account (usually, Income Summary) and then closed
further to the appropriate capital account. Take note that closing entries are made only for temporary accounts.
Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9. Post-closing trial balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of
debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the
post-closing trial balance contains real accounts only.

3.2 Types of Business Documents

The document is a source of business written as a proof for each business transaction that has occurred. There are
two types of functions, namely business source document for reference document and the document as a source
of information. Only the document source of information should be recorded in accounting books.

Invoice and Bill

Invoice or bill records the sale or purchase goods on credit . It is prepared by the seller and issued to the buyer.
The invoice contains quantity, rate and total amount. Usually, invoices are made in duplicate, the main copy
(original) is sent to the buyer and the duplicate copy is kept by the seller for record and future reference. A
specimen of an invoice or a bill is given below
  Issued by the seller
to the buyer in the
event of a credit
transaction.
 Original invoice –
credit Purchase
 A copy of the
invoice – credit
sales

Purchase Order (PO)

Purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed
prices for products or services. It is used to control the purchasing of products and services from external
suppliers.
The issue of a purchase order does not initiate a contract. If no prior contract exists, then it is the acceptance of
the order by the seller that forms a contract between the buyer and seller.

 Sent by the
buyer to the
seller that
contains
information
about the
goods to be
purchased
Delivery Note
A document accompanying a shipment of goods that lists the description, and quantity of the goods delivered. A
copy of the delivery note, signed by the buyer or consignee, is returned to the seller or consignor as a proof
of delivery.

DELIVERY NOTE
 Delivered by the seller to
the buyer together with the
goods.
 Buyers can check these
items.

Debit Note
A debit note or debit memorandum (memo) is a commercial document issued by a buyer to a seller as a means of
formally requesting a credit note. Debit note acts as the Source document to the Purchase returns journal. In other
word, it is an evidence for the occurrence of a reduction in expenses.

DEBIT NOTE

 Delivered by the
seller to the buyer
to inform that his
account has been
debited
(Debt
increases)
Credit Note

A credit note is issued in various situations to correct a mistake, such as when (1) an invoice amount is overstated,
(2) correct discount rate is not applied, (3) goods spoil within guaranty period, or (4) they do not meet the buyer's
specifications and are returned. Also called credit memo.

CREDIT
NOTE

 Delivered by
the seller to the
buyer to inform
the buyer that
the account has
been credited
(reduced debt.)

Receipt
Receipt is an evidence of making the payment on account of any business transaction. This source document is
prepared for showing the proof of giving any cash to the party (who receives the cash) on account of any business
transaction.

At least two copies are made of any receipt. The original copy is prepared for giving it to the party who makes the
payment and another copy is kept for record.

The details about the business transaction on account of which the cash is received viz. date, amount, name of the
party and the nature of payment etc. are given in this source document
  Issued by the seller when receipt of
payment from the buyer.
 as an evidence for Receipts and
payments have been made.

Payment Voucher
A document which can be used as proof that a monetary transaction has occurred between two parties. In business,
a payment voucher can be used for a variety of purposes, sometimes taking the place of cash in a transaction,
acting as a receipt, or indicating that an invoice has been approved for payment.

PAYMENT
VOUCHER
Internal documents
provided by the
business owner to
record any kind of
payment.

Cheque Stub (butt)

A part of a cheque that is kept for record keeping purposes. For example, the stub is the part of a
payroll cheque that includes information about the current paycheck as well as payments to date. The cheque
stub can also be a carbon copy of a cheque that is made when the original cheque is written
 CHEQUE BUTT

 Cheque butt used as a reference and

resource records.

Bank Slip

A bank slip (deposit slip) is a form supplied by a bank for a depositor to fill out, designed to document in
categories the items included in the deposit transaction. The categories include type of item, and if it is a
cheque, where it is from such as a local bank or a state if the bank is not local.

BANK
SLIP

Form
issued by
the bank
for the
transactio
n record
deposit or
withdraw
money
from
customers.

Bank statement
A bank statement is a document that is issued by a bank once a month to its customers, listing the
transactions impacting a bank account.

Bank statement

Issued by the bank

to the account
holder at the end of
the month.

3.3 Journaling Process

In order to put together all of the accounting and bookkeeping elements a company will do, and understand how
all of these elements work together--we need to understand the actual bookkeeping process; that is, the exact
mechanical process to keep sales, expenses, revenue, and income documented in all the right places so that we
can provide accurate financial statements in a timely manner. To do this, we need to understand the accounting
structure. Doing so requires the use of source documents that record any specific item's financial transaction for
processing and bookkeeping.

The Journal

In general, everything starts from a source document and then moves to a journal. In the accounting world, the
journal is a book that contains original entries for financial transactions. Journals store financial transaction
information ultimately derived from source documents. Later, these journal entries are summed up and then
posted, or transferred, to a ledger. A journal records all entries chronologically. This process is known as
journalizing.

Before we start with the journalising process, we need to understand the nature of merchandising business. CMart,
Mydin and TESCO are called merchandising companies because they buy and sell merchandise rather than
perform services as their primary source of revenue. Merchandising companies purchase and sell directly to
customer are called retailers and merchandising companies that purchase and sell directly to retailers are known
as wholesalers.
 Inventory Systems

A merchandising company keeps track of its inventory to determine what is available for sale and what has been
sold. Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic
inventory system.

Periodic Inventory System (For Accounting Cycle)

In periodic inventory system, company do not keep detailed inventory records of the goods on hand throughout
the period. Instead, they determine the cost of goods sold only at the end of the accounting periods- that is,
periodically. To determine the cost of goods sold under a periodic inventory system, the following steps are
necessary:

1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting periods.

Transactions of merchandising business

Companies purchase merchandise can either by cash or
credit (on account). The purchase is recorded when the
goods were received from the seller. A purchase invoice
(original invoice issued by seller) is used to record credit
purchases. Credit purchase is recorded in the purchase
journal.
If merchandise is purchased in cash, the seller will issue
receipt to the buyer. Thus, buyer received original
receipt. This transaction is recorded in the cash payment
journal.

Companies sell merchandise can either by cash or credit

(on account). Companies record sales of merchandise
revenues with compliance with the revenue recognition
principle when the goods transferred to the buyer.
Sales invoice (a duplicate invoice) is used to recorf credit
sales. Credit sales are recorded in the sales journal.
Cash sales are recorded in the cash receipt journal, based
on the duplicate receipt.

Purchase Returns and Allowances

A purchaser may be dissatisfied with the merchandise
received because the goods are damaged or defective, of
inferior quality, or do not meet the purchaser’s
specifications. In such cases, the purchaser may return
the goods to the seller for credit if the sales was made on
credit, or for cash refund if the purchase was for cash.
This transaction is known as a purchase return.

Alternatively, the purchaser may choose to keep the

marchandise if the seller is willing to grant an allowance
( deduction) from the purchase price. This transaction is
known as a purchase allowance.

Sales Return and Allowances

A buyer may be dissatisfied with the merchandise
received because the goods are damaged or defective, of
inferior quality, or do not meet the purchaser’s
specifications. In such cases, the buyer may return the
goods to the seller for credit if the sales was made on
credit, or for cash refund if the purchase was for cash.
This transaction is known as a Sales return.

Alternatively, the buyer may choose to keep the

marchandise if the seller is willing to grant an allowance
( deduction) from the purchase price. This transaction is
known as a sales allowance.
 Trade Discount
- A special discounts to certain classes of buyers that
order large quantities.
- The seller/buyer records the item at net after trade
discount ( no journal entries recorded)

Cash discount Purchase Discounts.

Credit Terms- specify the amount of the cash discount and
time period in which it is offered. Credit term, 2/10, n30 –
means that the buyer may take a 2% cash discount on the
invoice prices less (“net of”) any return or allowances, if
payment is made within 10 days of the invoice date (the
discount period). If the buyer does not pay in that time, the
invoice price, less any returns or allowances, is due 30 days
from invoice date.
The credit terms of a purchase on account may permit the
buyer to claim a cash discount for prompt payment. The
buyer calls this cash discount a purchase discount. The
purchaser save money, and the seller shortens the
operating cycle by more quickly converting the accounts
receivable into cash.
Sales Discounts.
The seller may offer the customer a cash discount-called
by the seller a sles discount – for the prompt payment of
balance due. It is based on the invoice price less returns
and allowances.

Freight Costs
The sales agreement should indicate who-the seller or the buyer- is to pay for transporting the goods to the buyer’s place
of business. When a comman carrier such as a railroad, trucking company, or airlines transports the goods, the carrier
prepares a freight bill in accord with the sales agreement. Freight terms are expressed as aither FOB Shipping point or
FOB destination.
 FOB Shipping point:
Terms indicating that the buyer must pay to get the goods
delivered. (The buyer will record freight-in and the seller will
not have any delivery expense.) With terms of FOB shipping
point the title to the goods usually passes to the buyer at
the shipping point.
Freight In or carriage Inward
FOB destination:
Terms indicating that the seller will incur the delivery expense
to get the goods to the destination. With terms of FOB
destination the title to the goods usually passes from the seller
to the buyer at the destination.
Freight out or carriage outward or Delivery Expense
Or Transportation cost

EXAMPLE
TIJARAH TUNJIKUM ENTERPISE completes the following transactions and events during March of this year. (Terms
of all credit sales are 2/10,n30)

DATE TRANSACTION
Purchased RM 30,000.00 of merchandise on credit from MARI Enterprise
March 1 terms 2/10, n/30.
4 Sold merchandise on credit to Jannah Industries Sdn Bhd, Invoice No. 954, for RM 16,800
6 Purchased RM 1,220 of office supplies on cash basis.
8 Sold merchandise on credit to Pondok Modern Sdn Bhd, Invoice No. 955, for RM 10,200
12 Received RM 32,200 of merchandise and an invoice no. B0010, terms 2/10, n/30, from Sunnah Bites Sdn
Bhd.
12 Sold RM 4,000 worth of goods and received cheque No. 1001.

12 Borrowed RM 26,000 cash by giving Bank Muamalat Sdn Bhd a long term promissory note payable, received
cheque no. 2001.
15 Received payment from Jannah Industries Sdn Bhd for the March 4 sales, received cheque no. 3001.
16 Received a RM 200 credit memorandum from Sunnah Bites Sdn Bhd for unsatisfactory merchandise received
on March 12 and return for credit.
16 Received cash payment from Pondok Modern Sdn Bhd for the March 8 sales.
17 Sold RM 8,000 worth of goods on cash basis.

18 Owner drawing RM 2,500 in cash from the business for personal use.
20 Sold merchandise on credit to Makmur Enterprise, invoice No.956, for RM 5,600.
20 Sent Sunnah Bites Sdn Bhd. Check No. 516 in payment of its March 12 dated invoice less the returns and the
discount.
22 Received RM 20,000 of merchandise and an invoice NO. ab 0010, term 2/10, n/30, Wali Enterprise.
25 Sold RM 5,000 worth of goods on cash basis.

26 Issued a RM 600 credit memorandum to Makmur Enterprise for defective merchandise sold on March 20 and
returned for credit.
31 Issued Check No. 517, payable to Payroll, in payment of RM 11,000 sales salaries for the month.
31 Paid rent by cash, RM 3,000.
31 Sold RM 6,000 worth of goods on cash basis.

3.3.1 Special Journal

As the number of business transactions increases and therefore to provide accounting information on a more timely
basis, it usual to subdivide the journal into a number of specialsed Journals. Each journal will be used to record
transactions of similar nature. Four types of special journals are:
 Sales Journal - to record all sales of merchandise on credit.
 Purchases Journal- to record all purchases of merchandise on credit.
 Cash receipts journal-to record all receipts by cash and cheques.
 Cash payments journal- to record all payments made by cash or cheques.

3.3.3.1 Sales Journal

The sales journal records all credit sales of goods. For each credit sales made, usually the selling firm will sent
out a document called the sales invoice. From this invoice, the selling firm will then record the credit sales into
the sales journal. The following is an example of sales journal :-
SALES JOURNAL
Dr. Acct. Receivable
Date Account Debited Ref Cr . Sales
March RM
4 Jannah Industries 16800.00
8 Pondok Modern Sdn Bhd 10200.00
20 Makmur Enterprise 5600.00
31 32600.00

3.3.1.2 Purchase Journal

In many businesses, a portion of transaction will be on credit rather than on cash basis. For each credit purchase,
the buying firm will receive a document from seller. This document is called an invoice and to the buyer of goods,
this is referred to as a purchase invoice. From the invoice, the buyer records the relevant details into the purchases
journal. The purchases journal as shown below:

PURCHASES JOURNAL
Dr Purchases
Date Account Credited Ref Cr Acct. Payable
March RM
1 Mari Enterprise 30000.00
11 Sunnah Bites Sdn Bhd 32200.00
22 Wali Enterprise 20000.00
82200.00

3.3.1.3 Cash Receipts Journal

The cash receipts journal will be used to record receipts of cash and cheques as shown below:-

CASH RECEIPTS JOURNAL

Date Account Credited Ref Bank(Dr) Cash (Dr) Sales Discount (Dr)
March RM RM RM
12 Sales 4000.00
12 Note Payable 26000.00
15 Jannah Industries And Bhd 16800.00
16 Pondok Modern Sdn Bhd 9996.00 204.00
17 Sales 8000.00
25 Sales 5000.00
31 Sales 6000.00
 46800.00 28996.00 204.00
*Pondok Modern Rm 10200 X 2% = RM 204

3.3.1.4 Cash Payment Journal

All cash and cheque payment by a firm will be journalized into the cash payments journal. The cash payments
journal is as follows:

CASH PAYMENT JOURNAL

Date Account Debited Ref Bank Cr) Cash (Cr) Purchase Discount(Cr)
March RM RM RM
6 Office Supplies 1220
18 Drawing 2500
20 Sunnah Bites Sdn Bhd 31360.00 640.00
31 Rent Expenses 3000.00
31 Salaries Expenses 11000.00
Total 42360.00 6720.00 640.00
* Sunnah Bites = RM 32 200 - RM 200 = RM 32000
RM 32000 * 2% = 640

3.3.1.5 General Journal.

General Journal is used to record transactions that are not recorded in special journals, namely:

 Asset investment in business (except cash)

 Merchandise drawings
 Sales of fixed assets on credit
 Purchase of assets on credit
 Sales returns/ return outwards
 Purchase returns/ return inwards
 Adjusting entries
 Closing entries
 Correcting entries

The example of General journal:

GENERAL JOURNAL

Date Account Titles And Description Ref Debit Credit

March RM RM
16 Acc. Payable - Sunnah Bites 200.00
Purchases Returns And Allowances 200.00
( Purchases Return)

26 Sales Returns And Allowances 600.00

Acc. Receivable - Makmur 600.00
( Sales Return)
3.4 Posting to General Ledger

As we have seen from the general journal, we have every financial transaction the company has made recorded
chronologically. Now we need to take these transactions and rewrite them again into the general ledger, or special
ledgers that in turn are summarized and get posted to the general ledger. At first glance, this might seem
redundant. However, every transaction that is specified chronologically in the general journal gets posted to the
general ledger in its own ledger account. The general ledger is organized into many different accounts and
classified by what each transaction represents.
The general ledger is the book of a company. It contains all accounts and their balances for the accounting period.
The main difference between how the general journal works and how the general ledger works is that the general
journal itemizes financial transactions by date, and the general ledger is a record of financial transactions by
account (or summarized by account).
Using the above example of TIJARAH TUNJIKUM ENTERPISE, a general ledger may look something like
this:

ACC. BANK
Date Explanation Ref Debit Credit Balance
31-Mar Multiple accounts 46800.00 46800.00
31-Mar Multiple accounts 42360.00 4440.00

ACC. CASH
Date Explanation Ref Debit Credit Balance
31-Mar Multiple accounts 28996.00 28996.00
31-Mar Multiple accounts 6720.00 22276.00

ACC. SALES DISCOUNT

Date Explanation Ref Debit Credit Balance
31-Mar Acc. Receivable 204.00 204.00

ACC. SALES
Date Explanation Ref Debit Credit Balance
12-Mar Bank 4000.00 4000.00
17-Mar Cash 8000.00 12000.00
25-Mar Cash 5000.00 17000.00
31-Mar Cash 6000.00 23000.00
31-Mar Acc. Receivable 32600.00 55600.00

ACC. NOTE PAYABLE

Date Explanation Ref Debit Credit Balance
 12-Mar Bank 26000.00 26000.00

ACC. RECEIVABLE
Date Explanation Ref Debit Credit Balance
31-Mar Sales 32600.00 32600.00
15-Mar Bank 16800.00 15800.00
16-Mar Cash 9996.00 5804.00
16-Mar Sales Discount 204.00 5600.00
26-Mar Sales Returns And Allowances 600.00 5000.00

PURCHASE DISCOUNT
Date Explanation Ref Debit Credit Balance
31-Mar Acc. Payable 640.00 640.00

RENT EXPENSES
Date Explanation Ref Debit Credit Balance
31-Mar Cash 3000.00 3000.00

SALARIES EXPENSES
Date Explanation Ref Debit Credit Balance
31-Mar Bank 11000.00 11000.00

PURCHASES
Date Explanation Ref Debit Credit Balance
31-Mar Acc. Payable 82200.00 82200.00

ACC. PAYABLE
Date Explanation Ref Debit Credit Balance
31-Mar Purchases 82200.00 82200.00
16-Mar Purchases Returns And Allowances 200 82000.00
22-Mar Bank 31360.00 50640.00
31-Mar Purchase Discount 640 50000.00

SALARIES EXPENSES
Date Explanation Ref Debit Credit Balance
31-Mar Bank 11000.00 11000.00

OFFICE SUPPLIES
Date Explanation Ref Debit Credit Balance
6-Mar Cash 1220.00 1220.00

PURCHASES RETURNS AND ALLOWANCES

 Date Explanation Ref Debit Credit Balance
Acc. Payable 200.00 200.00

ACC. DRAWINGS
Date Explanation Ref Debit Credit Balance
18-Mar Cash 2500.00 2500.00

SALES RETURNS AND ALLOWANCES

Date Explanation Ref Debit Credit Balance
26-Mar Acc. Receivable 600.00 600.00

3.5 Subsidiary Ledgers

Sometimes financial transactions for an active company just get too complex and detailed to list in the general
ledger, and in such cases, we need another, more focused ledger that summarizes transactions that then get posted
to the general ledger. These ledgers are known as subsidiary ledgers. A subsidiary Ledger is a group of accounts
with a common characteristic. Two common subsidiary ledgers are:-

1. The account receivable (or customers) subsidiary ledger, which collects transaction data of individual
customers.
2. The account payable (or creditors) subsidiary ledger, which collects transaction data of individual
creditors.

Advantages of Subsidiary Ledgers.

Subsidiary ledgers have several advantages:

1. They show in a single account transactions affecting one customer or one creditor, thus providing up-to-
date information on specific account balances.
2. They free the general ledger of excessive details. As a result, a trial balance of the general ledger does
not contain vast numbers of individual account balances.
3. They help locate errors in individual accounts by reducing the number of accounts in one ledger and by
using control accounts.
4. They make possible a division of labor in posting. One employee can post to the general ledger while
someone else posts to the subsidiary ledgers.

Using the above example of TIJARAH TUNJIKUM ENTERPISE, below is the subsidiary ledger:

SUBSIDIARY LEDGER: ACC. RECEIVABLE

JANNAH INDUSTRIES AND BHD

Date Explanation Ref Debit Credit Balance
1-Mar Sales 16800.00 16800.00
15-Mar Bank 16800.00 0.00
 PONDOK MODERN SDN BHD
Date Explanation Ref Debit Credit Balance
6-Mar Sales 10200.00 10200.00
16-Mar Sales Discount 204.00 9996.00
16-Mar Cash 9996.00 0.00

MAKMUR ENTERPRISE
Date Explanation Ref Debit Credit Balance
20-Mar Sales 5600.00 5600.00
26-Mar Sales Returns And Allowances 600 5000.00

SUBSIDIARY LEDGER: ACC. PAYABLE

SUNNAH BITES SDN BHD

Date Explanation Ref Debit Credit Balance
11-Mar Purchases 32200.00 32200.00
16-Mar Purchases Returns And Allowances 200.00 32000.00
20-Mar Bank 31360.00 640.00
20-Mar Purchase Discount 640.00 0.00

MARI ENTERPRISE
Date Explanation Ref Debit Credit Balance
1-Mar Purchases 30000.00 30000.00

WALI ENTERPRISE
Date Explanation Ref Debit Credit Balance
22-Mar Purchases 20000.00 20000.00

50000.00

3.5 Trial Balance

The trial balance is exactly as its name suggests: It is a trial balance or test run of balancing the books. This is not
a report that is seen by owners and investors; it is a report generated for the accountant, by the accountant, to
determine not only where the company stands financially, but how well the books are in balance. The trial balance
is generated from the general ledger. The trial balance consolidates all this information into one convenient
statement for the accountant to review and check against other financial reports, ledgers, and journals. When the
general ledger has been reviewed, balanced, totaled, and transferred to the trial balance sheet, it will look
something like this:
 Tijarah Tunjikum Enterpise
Trial Balance
31 March 2017
ACCOUNT DEBIT(RM) CREDIT(RM)
Bank 4440.00
Cash 22276.00
Sales 55600.00
Acc. Note Payable 26000.00
Acc. Receivable 5000.00
Purchase Discount 640.00
Rent Expenses 3000.00
Salaries Expenses 11000.00
Purchases 82200.00
Acc. Payable 50000.00
Office Supplies 1220.00
Purchases Returns And Allowances 200.00
Drawings 2500.00
Sales Returns And Allowances 600.00
Sales Discount 204.00
132,440.00 132,440.00
The above trial balance sheet is oversimplified to suit our small company example. However, it does show how
the overall trial balance would be balanced if everything was done properly. This is critical. If the debits and
credits of a trial balance are not equal, something is amiss in the general ledger. Trial Balance: At the end of the
accounting period, all debit and credit transactions are totaled for each account and placed into a two-column
report that compares all resulting debit and credit balances. The sum total of all debits for all accounts must equal
the sum total of all credits for all accounts. If the totals are equal, then the trial balance is in balance. Of course, if
the trial balance balances, it does not mean that it is error-free. A trial balance is still prone to the following errors:
 Debit and credit transactions are recorded in the wrong accounts
 A journal entry never made it to the general ledger or a financial transaction was never documented in
the general journal
 Debit and credit transactions were recorded in reverse

If the trial balance does not balance, this means there could be errors, ranging from a simple numeric
miscalculation to an improperly entered journal entry or journal posting. The best remedy against a disastrously
non-balanced trial balance report is to run the report frequently and balance it frequently. In other words, try to
catch the errors as quickly as they appear, instead of trying to fix everything at the year-end.

3.6 Preparing Financial Statement for Merchandising and Service Entities

 Example of income statement for merchandise business

Net profit

Example of income statement for services business

Or Net profit
 Perniagaan Contoh
Statement of Financial Position
As at 31 March 2016

(RM) (RM) (RM)

ASSETS
Non- Current Assets
Office Equipments 22,850
Vehicle 50,000
(Accumulated Depreciation) (10,000) 40,000
Total Non-current Asset 62,850

Current Assets
Cash 194644
Bank 12,744
Accounts receivable 5,000
Inventory 20,000
Prepaid insurance 1 000
Commission receivables 2 000
Total current assets 235,388

Total Assets 298 238

Owner's equity
Beginning Capital 100,000
+ Net Profit 46,763
+ Additional Capital 10,000
-Drawings (2,000)
Total owner's equity 154,763

Non-current liabilities
Notes Payable 50,000
Loan 26,000 76,000

Current liabilities
Accounts payable 64,475
Accrued electricity 1,000
Unearned rental revenue 2,000 67,475
Total Liabilities 143,475
Total Liabilities and owner's equity 298,238