Chapter 4: Illustrating the Accounting Process

SENIC, S.A. is a music retailer which activity includes buying and selling
goods related with music such CDs, DVDs, Blu-Ray, Box-sets, videos. At the
beginning of 2014 the company has the following assets and liabilities.

- A building where the shop is located which value is 220,000€.

- Furniture for 35,000€.
- The accumulated Depreciation on fix assets is 18,000€
- Cash 49,000€.
- Liabilities ( for goods purchased to suppliers of CDs) 8,000€.
- Accounts Receivable for credit sales 5,000€.
- Inventory 29,000€.
- Long-term loan with RISE Bank for 100,000€, of which one fourth has to
be repaid within the current period
- Reserves (Retained Earnings 12,000€)
- Capital: ¿?

Balance Sheet (31 December 2013)

Assets

Long term assets ____________________237.000

Buildings … ..220.000
Furniture………… 35.000
Acc. Depreciation…….(18.000)
Short term assets __________________83.000
Inventory …...… ..29.000
Acc. Receivable… .. 5.000
Cash ……… .49.000

Total assets……………………………………………………………………………..320.000

Liabilities

Owners´s equity _______________________ 212.000

Capital………….200.000
Retained earnings 12.000

Long term liabilities ___________________75.000

Long term debt……75.000

Short term debt_________________________33.000

Short term debt…. .25.000
Accounts payable....8.000

TOTAL liabilities……………………………………………………………………….320.000

1
Opening phase
Record the initial entry and post the information to the ledger book.

Transactions phase
Record the following transactions.

- (2.0) The company sells on account CDs and DVDs for 28,000€, which
cost was 17,000€. The customer will pay in the future.
- (2.1) Three of the CDs which value was 2,400€ have been damaged by
one customer while testing them in the shop and therefore the company
cannot sell the CDs.
- (2.2) The company decides to sell some of the CD s on a special offer at a
price lower than the cost. The cost of the CDs was 3,000€ and the
company offers and sells them for 2,000€ in total. The sale is done in
cash.
- (2.3) The company pays employees’ salaries for 8,000€.
- (2.4) SENIC decides to get security services to avoid potencial damage of
goods or shoplifting. The cost of this service is 3,500€ which will be paid
in the future.
- (2.5) SENIC pays 1,500€ interest on the loan with RISE Bank.

Closing phase
Record the closing entries (in both the Journal and the Ledger book). Record the
adjustments necessary assuming that the only transactions made during the
accounting cycle are the ones described in the exercise. Besides, SENIC
depreciate fix assets at 10% of the acquisition value of the assets in each period.
Prepare the Balance Sheet and the Income Statement

2
Opening phase: Recording the initial entry and post the information to the ledger book.

AA
220.000 Buildings
35.000 Furniture
29.000 Inventory
5.000 Accounts Receivable
49.000 Cash a Accumulated Depreciation 18.000
a Capital 200.000
a Retained Earnings 12.000
a Long-term Debt 75.000
a Short-term Debt 25.000
a Accounts Payable 8.000

Transactions Phase: Recording the transactions 2.0 to 2.5 and post the information to the ledger book.

28.000 Accounts Receivable 2.0 Inventory 17.000

17.000 Cost of goods sold a Sales Revenue 28.000
a
2.1
2.400 Losses from inventory damages (expense) a Inventory 2.400

2.2
3.000 Cost of goods sold Inventory 3.000
2.000 Cash a Sales Revenue 2.000

3
 2.3
8.000 Salaries a Cash 8.000

2.4
3.500 Security service (Expense) a Accounts payable 3.500

2.5
1.500 Interest expense Cash 1.500
a
25.500 Depreciation expense Accumulated Depreciation 25.500

Closing phase: Closing entries and determine the accounting income

60.900 Retained earnings a Losses from inventory damage (expense) 2.400

a Salaries 8.000
a Security service 3.500
a Interest expense 1.500
a Depreciation expense 25.500
a Cost of goods sold 20,000
3.R2
30.000 Sale revenue a Retained earnings 30.000

4
Preparing the financial statements

Balance Sheet (31 December 2014)

Assets
Long term assets ____________________211.500
Buildings … ..220.000
Furniture………… 35.000
(-) Acc. Depreciation (43.500)

Short term assets __________________81.100

Inventory …...… .6.600
Acc. Receivable… ..33.000
Cash ……….41.500

Total assets………………………………………………………………………292.600

Liabilities
Owners´s equity _______________________ 181.100
Capital………… .200.000
Retained earnings (18.900)

Long term liabilities ___________________75.000

Long term debt……75.000

Short term debt_________________________36.500

Short term debt…. .25.000
Accounts payable....11.500

TOTAL liabilities……………………………………………………………………….292.600

Income Statement
Sales Revenue……………………………………….…………………30.000
(-) Cost of goods sold…… …………………………………………..(20.000)
+ Other operating income …………………………………….. 0
(-) Operating expenses ……………………………………………..(39.400)
Services expense… 3.500
Salaries……………… 8.000
Loss from damage of inv. 2.400
Depreciation exp. .. 25.500
= Operating income …………………… ..(29.400)
+ (-) Financial income………………………….. (1.500)
+ Financial income … 0
(-) Financial expense …. (1.500)
= Net income before tax…………… .. …(30.900)

(-) Income tax ………………………… ……… 0

= Net income …………………… …...(30.900)