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The T Account _ Format
Title
Notes:
- Often Debits and Credits are abbreviated as Dr and Cr respectively, based on
the Latin terms Debere and Credere
- Amounts entered on the left side of an account, regardless of the account title, are
called debits or charges to the account , and the account is said to be Debited or
Charged
- Amounts entered on the right side of an account, regardless of the account title, are
called credits , and the account is said to be Credited
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2.3. Classification of Accounts
Accounts are classified into five as: Asset, Liability, owners equity, Revenue, and
Expense. According to their common characteristics the first three accounts are known as
Balance Sheet Accounts and the other two accounts are called Income Statement
Accounts.
1. Balance Sheet accounts: are those accounts that are reported on the balance sheet at the
end of the reporting period. It includes:-
a) Assets
They are properties/resources with monetary value that are owned by a business or
individuals. Assets could be tangible or intangible. Tangible assets are those assets
having physical existence, like Cash, Land, Computer, Stationery Materials etc. Intangible
assets are those assets that do not have physical existence like for example: Goodwill,
Copyright, Patent Right etc. On the other hand for the purpose of presentation on the
balance sheet assets are classified into two as Current Assets and Non Current Assets.
i. Current Assets are those assets, which can be used, sold, or converted into cash
within one accounting period. Example: cash, supplies, prepayments, receivables
etc.
ii. Non-current Assets: all assets other than current assets are called non-current
assets. They are also known as plant assets or fixed assets. Examples: land, office
equipment, building, trucks etc.
b) Liabilities
They are debts owed to outsiders (creditors) and frequently described on the balance
sheet by titles that include the word payable. Like assets, liabilities are classified in to
two as Current Liabilities and Non Current Liabilities
i. Current Liabilities: are liabilities that will be due within short time (usually one
year or less). Examples: Accounts Payable, Rent Payable, Salary Payable etc.
ii. Non Current Liabilities: are debts that are not required to be paid within one
accounting period. They are also called long term liabilities. Examples: long term
notes payable, mortgage payable etc.
c) Owners Equity
It is a residual claim against the asset of the business after the total liabilities are
deducted. For a corporation, owners equity is frequently called stockholders equity or
shareholders equity. Examples:
Capital Account- for sole proprietor ship and partnership.
Capital stock and Retained earnings - for corporation
Drawing account for sole proprietor ship and partnership.
Dividend account for corporation.
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2. Income Statement Accounts: are those accounts that are reported on the income
statement during the accounting period. It includes:-
a) Revenues
They are gross increases in owners equity resulting from the main operations of the
business. Examples of revenue accounts are fees earned, fares earned, sales, interest
income, insurance premium, sales commission etc.
b) Expenses
They are decreases in owners equity in the process of earning revenue. Examples of
expenses are insurance expense, depreciation expense, supplies expense, utilities expense,
rent expense etc.
In the chart of accounts, the asset accounts are listed according to their liquidity.
Liquidity is the ease with which an asset can be converted in to cash. Cash is the most
liquid asset so it is listed first. Accounts other than cash will be listed in their frequency
of use or in alphabetical order. The account number listed in front of each account is a
code to identify accounts. The number could be a two digit, three digit or more digits.
In the above example a two digits code is used. When the chart of accounts is
prepared in an organization we say the ledger is opened.
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2.5. Rules of Debit and Credit
Debit sides signify: Credit sides signify:
Balance sheet accounts:
Increase in asset accounts - decrease in asset accounts
Decrease in liability accounts - increase in liability accounts
Decrease in owners equity accounts_ - increase in owners equity accounts _
except for drawing account (increasing) except for drawing account (decreasing)
Income statement Accounts:
Decrease in revenue accounts - increase in revenue accounts
Increase in expense accounts - decrease in expense accounts
The sum of the increases recorded in an account is usually equals to or greater than
the sum of the decreases recorded in the account. For this reason, the normal balances of
all accounts are positive rather than negative and it is always recorded in the increasing
side of an account.
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2.6. Recording Business Transactions in a Journal
When a business transaction takes place, source documents will be obtained and
recorded. The accounting record in which a transaction is initially recorded is known as
a journal. The journal is therefore referred to as The book of original entry. The
process of recording a business transaction in the accounting record is called
Journalizing. Each one set of debits and credits for a transaction is called a journal
entry. An entry composed of two or more debits or of two or more credits is called
Compound Journal.
The Journal commonly used to record all types of transactions is the General
Journal.
There are also other types of Journals like, Special journals that are used to record
specific types of transactions. The cash Journal, for instance, is used to record only
transactions affecting cash. The General Journal is used for illustrations in this chapter.
Special journals will be discussed later on Chapter five.
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Example: On January 10, 2003 3F Company paid Birr 6,000 to its employees as a
salary for the first week of the year.
This business transaction will be analyzed and recorded as follows.
1. Which accounts are affected? Answer: Cash and Salary Expense.
2. Is each account increased or decreased? Answer: cash is decreased and salary
expense is increased.
3. Which account is debited and which is credited? Answer: Salary Expense is
debited because increase in expenses is recorded on the debit side. And cash is
credited because decrease in assets is recorded on the credit side.
4. Prepare the complete Journal entry.
Illustration - 1
Hiwot Beauty Salon and Training Center, a newly established business with the aim of
providing training on beauty salon on fee basis as well as rendering decoration service
to clients has the following accounts in its ledger (chart of accounts).
1. Assets 2. Liabilities
111 Cash 211 A/Payable 5. Expenses
112 A/R 212 Notes Payable 511 Supplies expense
113 Supplies 213 Unearned Revenue 512 Salary expense
114 Prepaid Rent 214 Salary Payable 513 Rent expense
115 Prepaid Insurance 215 Interest Payable 514 Insurance expenses
121 Office Equipt 515 Interest expense
122 Furniture 3. Owners equity 516 Depreciation
123 Machinery 311 Hiwot, Capital expense
124 Land 312 Hiwot, Drawing 517 Utilities expense
125 Acc. Depr -Equpt
n 313 Income Summary 518 Misc. expenses
126 Acc. Deprn -
Furniture 4. Revenue
127Acc. Deprn 411 Fees Earned
Machinery
The following assets and liability were invested by Hiwot, on January 1, 2012 at the
start of the business.
Cash Birr 140,000
Furniture 50,000
Notes payable 100,000 (a bank note due in 5- years with an interest rate of
12 % & equal yearly installment payments)
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The following transactions were took place for the month January, 2012 for Hiwot
Beauty Salon and Training Center.
Required:
Record the above transactions of Hiwot Beauty Salon and Training Center in a Two
Column General Journal with provided chart of accounts of the business.
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Two Column General Journal Page 1
Date Description PR Debit Credit
2012 1 Cash 111 140,000 00
Jan. Furniture 122 50,00 00
Note payable 212 100,000 00
Hiwot, capital 311 90,000 00
(investment by the owner )
1 Prepaid rent 114 20,000 00
Cash 111 20,000 00
(prepayment for rent )
1 Machinery 123 35,000 00
Cash 111 10,000 00
A/P 211 25,000 00
(purchase of machinery )
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Two Column General Journal Page 2
Date Description PR Debit Credit
26 A/Receivable 112 12,000 00
Fees earned 411 12,000 00
(fees earned on account)
26 Salary expense 512 6,500 00
Cash 111 6,500 00
(payment for salary )
28 Utilities expenses 517 1,000 00
Cash 111 1,000 00
(payment for utilities )
28 A/Payable 211 7,000 00
Cash 111 7,000 00
(payment of liability )
30 Cash 111 5,000 00
A/Receivable 112 5,000 00
(receipt of cash from customers on
account )
31 Hiwot, drawing 312 5,000 00
Cash 111 5,000 00
(withdrawal by the owner )
Exercise: John has opened a new business so called Bright Consulting. Journalize the
following transactions that are occurred during the month of January, 2012 for Bright
consulting. Use the following pages: For transactions occurred from January 1 up to 12, page
1; for transactions occurred from January 15 up to 30, page 2 with the following Chart of
accounts:
Bright consulting
Chart of Accounts
Assets:
101 Cash Owners equity: Expenses:
142 Office Supplies 311 John, Capital 511 Rent expense
181 Office Equipments 312 John, Drawing 521 Utilities expenses
525 Misc. expenses
Liability: Revenue:
202 Account payable 411 Fees Earned
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Transactions occurred for Bright consulting during January are the following:
January 1: John invested cash in the business, Birr 200,000
January 2: Paid office rent, Birr 1,000
January 5: Purchased office equipments on account, Birr 30,000
January 10: Received cash for services rendered, Birr 1,500
January 12: Paid a magazine subscription, Birr 300
January 15: Purchased office supplies on account, Birr 6,000
January 20: Made a payment on account for January 5 transaction, Birr 3000
January 25: Received cash for services rendered, Birr 7000
January 28: Paid utilities bill, Birr 1700
January 30: John withdrew cash for personal use, Birr 2000
The steps in posting using the four column account are given below:
1. Write the name of the account and its related identification number (Account number).
2. Enter the year, month, and date of the transaction in the date column.
3. Insert the Journal page number in the P.R (Post Reference) column of the account.
4. Enter the amount by which it is affected in the debit or credit column.
5. Determine the accounts balance & enter it in the appropriate sub-column of the balance
column.
- SHORT SUMMARY:
The flow of accounting data from the time a transaction occurs to its recording in the
ledger is diagramed as follows:
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Illustration- 2
Post the recorded transactions of Hiwot Beauty Salon and Training Center, during January
2012, using the four column account.
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Account: Prepaid Rent Account number114
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 20,000 00 20,000 00
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Account: A/Payable Account number 211
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 25,000 00 25,000 00
20 1 15,000 00 10,000 00
20 1 7,000 00 17,000 00
28 2 7,000 00 10,000 00
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Account: Fees Earned Account number 411
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 17 1 5,000 00 5000 00
26 2 12,000 00 17,000 00
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2.8. The Trial Balance, Its Uses and Limitations
Trial Balance
A trial balance is a two column listing of the accounts in the ledger and their balance to
make sure that the total of debit balances equals the total of credit balances. It is a statement
that tests the accuracy of total debits and credits after transactions have been posted to the
ledger.
To prepare a trial balance, perform the following steps.
1. Enter the trial balance headings showing the company name, report title and
closing date for the accounting period.
2. List the account names in the same order as they appear on the financial statements.
Asset
Liability
Owners equity
Revenue, and
Expense
3. Enter the ending balance of each account in the appropriate debit or credit
column(this is obtained from the accounts in the ledger)
4. Total the debit column.
5. Total the credit column.
6. Compare the total debits with the total credits.
Uses of a Trial Balance
It provides the business man with a means of discovering errors which may have
been committed in writing the book of accounts in accordance with the rules of
double entry system.
It is used to check (proof) the accuracy of the ledger. In other words, the proof of the
equality of debits and credits in the ledger ( i.e. Debits = Credits)
It facilitates the preparation of financial statements.
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Errors detected through the medium of trial balance
If the total of a trial balance are not equal, (i.e. Debits Credits), it is probably due to
one or more of the following types of errors.
1. Errors in preparing the trial balance
One of the columns of the trial balance was incorrectly added.
A debit balance was recorded on the trial balance as credit or vice versa, or a balance
was omitted entirely.
The amount of an account balance was incorrectly recorded on the trial balance.
2. Errors in posting a transaction in the ledger, such as:
An erroneous amount was posted to the account.
A debit entry was posted as a credit, or vice versa.
A debit or credit posting was omitted.
3. Errors in determining the account balance, such as:
A balance was incorrectly computed
A balance was entered in the wrong balance column.
Procedures in locating errors when the trial balance does not equal:-
1. Re-add the trial balance (specifically if the difference are 10, 100,1000, etc)
2. If the difference is evenly divisible by 2,
Look through the account to see if the amount has been recorded on the
wrong side of an account or check if this amount has been recorded in the
wrong column of the trial balance.
3. If the difference is evenly divisible by 9, the error is as a result of:-
Transpositions: - the erroneous rearrangement of digits such as writing 542
as 524 or 452.
Slides: - implies the entire number is erroneously moved one or more space
to the right or to the left. Example: writing 140 as 14.0 or as1.40.
4. Re compute the balance of each account in the ledger.
5. Trace the posting in the ledger back to the journal.
6. Verify the equality of the debit and credit in the journal.
Illustration- 3
Prepare the Trial balance for Hiwot Beauty Salon and Training Center, at the closing date of
the accounting period (i.e. @ January 31, 2012).
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Hiwot Beauty Salon and Training Center
Trial balance
January 31, 2012
Cash 142,300 00
A/Receivable 7,000 00
Supplies 12,000 00
Prepaid Rent 20,000 00
Prepaid Insurance 2,400 00
Office Equipment 25,000 00
Furniture 50,000 00
Machinery 35,000 00
Land 60,000 00
Account Payable 10,000 00
Notes Payable 100,000 00
Unearned Revenue 150,000 00
Hiwot ,Capital 90,000 00
Hiwot, Drawing 5000 00
Fees Earned 17,000 00
Salary Expenses 6,500 00
Utility Expense 1,000 00
Miscellaneous Expense 800 00
Total 367,000 00 367,000 00
Exercises:
1. The accounts in the ledger of Alex Company as of June 30, 2012 are listed in alphabetical
order as follows. All accounts have normal balances. The balance of cash account has been
intentionally omitted.
Account Payable _______________________ Birr 21,900
Account Receivable_____________________ 28,500
Cash __________________________________ ?
Alex, Capital___________________________ 150,000
Alex, Drawing__________________________ 28,000
Fees Earned____________________________ 350,000
Insurance Expense______________________ 5,000
Land__________________________________ 125,000
Miscellaneous Expense__________________ 9,900
Notes Payable _________________________ 25,000
Pre Paid Insurance______________________ 3,150
Rent Expense___________________________ 48,000
Salary Expense_________________________ 215,000
Supplies_______________________________ 3,900
Supplies Expense_______________________ 6,100
Utilities Expense________________________ 41,500
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Required: Prepare a trial balance, for Alex Company listing the accounts in their proper
order and insert the missing figure for Cash.
2. Lakeview Carpet Installation, a sole proprietor ship owned by Joan Key, has the following
trial balance as of September 30 of the current year.
Cash 8,820 00
A/Receivable 17,825 00
Supplies 1,800 00
Pre-Paid Insurance 400 00
Equipment 22,500 00
Notes Payable 25,000 00
A/Payable 5,000 00
Joan Key, Capital 36,720 00
Joan Key, Drawing 8,000 00
Sales 59,750 00
Wages Expense 31, 500 00
Rent Expense 1,800 00
Advertising Expense 5,700 00
Gas, electricity& water expense 5, 650 00
Total 103,995 00 126,470 00
The debit and credit totals of the trial balance are not equal as a result of the following errors:-
a. The balance of cash was understated by Br.700.
b. A cash receipt of Br. 470 was Posted as a debit to cash of Br, 740.
c. A credit of Br. 325 to A/R was not posted.
d. A return of Br. 245 of defective supplies was erroneously posted as a Br. 425 credit to
supplies.
e. An insurance policy acquired at a cost of Br. 400 was posted as a credit to pre-paid
insurance.
f. The balance of notes payable was overstated by Br.5, 000.
g. A credit of Br.910 in account payable was over looked when determining the balance of
the account.
h. A debit of Br. 1,000 for a withdrawal by the owner was posted as a debit to wages
expense.
i. The balance of Br. 18,000 in the rent expense was entered as Br. 1,800 in the trial balance.
j. Miscellaneous expense, with a balance of Br. 1,100 was omitted from the trial balance.
Required:-
Prepare a correct trial balance for Lakeview Carpet Installation as of September 30 of the
current year.
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Solutions for the Exercises:
Alex Company
Trial Balance
As Of June 30, 2012
Cash x
Account Receivable 28,500 00
Supplies 3,900 00
Pre Paid Insurance 3,150 00
Land 125,000 00
A/Payable 21,900 00
Notes Payable 25,000 00
Alex, Capital 150,000 00
Alex, Drawing 28,000 00
Fees Earned 350,000 00
Rent Expense 48,000 00
Salary Expense 215,000 00
Supplies Expense 6,100 00
Utilities Expense 41,500 00
Insurance Expense 5,000 00
Miscellaneous Expense 9,900 00
Total X+514,050 00 546,900 00
Cash* = 32,850
Lakeview Carpet Installation
Corrected Trial Balance
September 30, 2012
Cash 9,250 00
A/Receivable 17,500 00
Supplies 1,980 00
Pre-Paid Insurance 1,200 00
Equipment 22,500 00
Notes Payable 20,000 00
A/Payable 5,910 00
Joan Key, Capital 36,720 00
Joan Key, Drawing 9,000 00
Sales 59,750 00
Wages Expense 30, 500 00
Rent Expense 18,000 00
Advertising Expense 5,700 00
Gas, electricity& water expense 5, 650 00
Miscellaneous expense 1,100 00
Total 122,380 00 122,380 00
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