Chapter -2-Accounting Process(summary)

Seven Basic Steps of the Accounting Cycle

1. Transactions are analyzed and recorded in the
journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared,
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.

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General Rules of Debit and Credit
for Accounts
 Assets-the increasing side of all assets account is the
debit side and the decrease is the credit side.
 Liabilities-the increase side of all liabilities is the credit

side and the decreasing side is the debit side.

 Capital -the increase side of capital account is the credit

side and the decreasing side is the debit side.

 Revenue- the increase side of all Revenue accounts is the

credit side and the decreasing side is the debit side.

 Expenses -the increasing side of all expenses account is

the debit side and the decrease is the credit side.

 Drawing- the increasing side of drawing is the debit side

and the decrease side is the credit side.

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Normal Balance of Accounts

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 Classification of Accounts
1. Balance Sheet Accounts
1.1 Asset
Current asset- changed in to cash within 1 yr
-Cash, Accounts Receivable, supplies, inventories
PPE-permanent in nature
-Equipments, machinery, building, furniture, land, etc

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 Cont...

1.2 Liability
A, Current liability
-salary payable, interest payable, tax payable,
and accounts payable
B, Long term liability
-mortgage payable, notes payable
1.3 Owner’s Equity

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 Cont...
2. Income Statement Accounts
Revenue is increase in capital as a result of:
-Sale of goods and service
-Renting real-estate and other properties
-Providing professional service
-Sale of assets
Expenses – represent decreasing in capital as a
result of business operation. That is as a result
of consuming assets or using up of services.

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Chart of Accounts
The list of accounts along with their numbers
showing the sequence of account in the ledger
is called Chart of Accounts.
1.Asset..................11
2. Liability.............21
3. Capital...............31
4. Revenue............41
5. expense.............51

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 1.Analysis transaction &record in journal
Analysis of transaction mean:
1. Determine whether an asset, a liability, owner’s equity,
revenue, or expense account is affected by the transaction.
2. For each account affected by the transaction, determine
whether the account increases or decreases.
3. Determine whether each increase or decrease should be
recorded as a debit or a credit.
Journalizing
The process of recording a business transaction in the
accounting record.
It is accounting record in which a transaction is initially
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 Cont...

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 Cont..
 Illustration
 To illustrate the complete accounting cycle, we will

consider the following list of selected transactions. The

transactions were completed by EBM in the month of
January 2003.
 Jan1. Ato Biniyam took Birr 450,000 from his personal

savings and deposited it in the name of EBM.

 Jan 2. EBM purchased two used trucks for Birr 150,000

each, on cash.

 Jan 4. EMB received a check for Birr 650 for services
given to Chala Trading.
 Jan 4. Received an invoice for truck expenses Birr 90.
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 Cont...
 Jan 11. Paid Birr 600 for Awash Insurance Company to
buy an insurance policy for its trucks
 Jan 16. Biniyam issued a check for Birr 9,400 to the

workers as a salary for two weeks.

 Jan 20. EMB Billed Selam Supermarket for goods
transported from Gizen to Assosa Birr 2,650
 Jan 21. Biniyam wrote a check for birr 450 to have one of

the trucks repainted

 Jan 21. EBM purchased stationary materials and other

supplies of Birr 740 on account

 Jan 22. Office equipment of Birr 11,600 is bought on

account.
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 Cont...
 Jan23. Purchased an additional truck for Birr 250,000
paying birr 100,000 in cash and issuing a note for the
difference.
 Jan 23. Recorded services billed to customers on account

birr 14,600.
 Jan 25. Received cash from customers on account Birr

15,000.
 Jan 27. The owner withdrew Birr 500 in cash for his
personal use.
 Jan 28. Paid Birr 9,400 to workers as a salary for the last

two weeks of the month.

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 Cont...
Jan 30. Paid telephone expense of Birr 95 and electric
expenses of Birr 125 for the month.
Jan 30. Paid other miscellaneous expenses Birr 50.
Jan 31. Paid Birr 4,000 as a rent for a building used for office
space.
Required: journalize the transaction?

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2.Posting from journal to ledger(T-account ) –
The processing of transferring a transaction from the journal to ledger accounts is called posting. E.g

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3.Tiral balance(T.B)

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4.Adjusting &journalizing
Additional information
If supplies consumed at end of Dec31,2003 is Br340.
Supplies expense....340
Supplies ....340
If three-fourth of insurance policy is expired
Insurance expense....450
Prepaid insurance....450
At end of the month unbilled fee for services performed to
client totaled Br7400
A/R....7400
Services income....7400
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5. Financial statement preparation

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 Statements of owner equity
EBM
Statement of Owner’s equity
For the month ended Jan31, 2003

Binyam, capital Jan 1, 2003………………Br 450,000

Net income for the month…….Br 900
Less: Withdrawal………………….500 400

Binyam, capital, Jan 31, 2003………….Birr 450,400

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Balance sheet

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6. Closing process
Temporary accounts like revenue, expense and withdrawal
are closed to I/summary account and transferred to capital
account.
Steps in closing:
1.Closing revenue accounts
Revenue------xxx
I/summary-------xxx
2.close expense account
I/summary----xxx
Expenses---------xxx
3. Closing drawing account.
Capital account----xxx
drawing---------xxx By: Geleta D.(Ass. professor) 11/24/2022 25
 Cont...
Service income……………25,300
I/summary………….25,300

(Closing revenue)
I/summary ……………24,400
Salary expense………………………..18,800
rent expense……………………………4,000
Maintenance expense………………… 450
Insurance expense………………………..450
Supplies expense…………………………340
Utilities expense…………………………..220
Truck expense …………………………… 90
Miscellaneous expense…………………….50
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 Cont...
Income summary………………900
bin, Capital………………..900
(Closing income summary)
bin, capital…………………...500
bin, drawing………………………..500
(Closing with drawing)

Note:-The above closing entries have transferred the balance

of the temporary accounts to the permanent capital
account..

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7. Post closing T.B
It should be noted that this trial balance
includes only balance sheet accounts.

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