Chapter-2

Accounting Cycle for Service-Giving Business

2.1. Introduction
The term Accounting cycle refers to the steps in preparing financial statements. It is called a cycle
because the steps are repeated each reporting period. Or an accounting cycle is the process in which
businesses analyze, record, and post the effects of transactions; adjust the records at the end of the
period; prepare the financial statements; and then prepare the accounting records for the next accounting
cycle. In this chapter, you will study these accounting cycle processes in detail.
2.2. Characteristics of an account
In order to provide the necessary information to users, accountants maintain separate records on each
element of the financial statements. For example, to report the balance for cash at the end of a year, a
record regarding cash should be kept. The record includes
 Beginning cash balance,
 Cash payments &
 Cash collections during the period.
This record is called an account.
account.

An account is an individual accounting record of increases and decreases in a specific asset, liability, or
owner’s equity item. In its simplest form, an account consists of three parts:
 a title,
 a left or debit side, and
 a right or credit side
Because the format of an account resembles the letter T, we refer to it as a T-account.
Title
Debit Credit
Dr Cr

2.3. Classification of accounts

Accounts are classified into five: assets, liabilities, capital, revenue and expenses.
expenses. The first three are
called balance sheet accounts and the other two are called income Statement accounts.
accounts. Balance Sheet
accounts are those reported on the balance sheet at the end of the reporting period and Income Statement
accounts are reported on the Income Statement. The five groups of account are discussed below:
1. Assets: Resources owned by a business or individual are called assets.
assets. Assets could be tangible or
intangible. Tangible assets are assets having physical existence, like cash, land, computer, stationery
materials. Intangible assets do not have physical existence. Example: Goodwill, Copyright, patent
right. On the balance sheet assets are classified into two:

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  Current Assets: are those assets, which can be used, sold, or converted into cash within one
accounting year. Example: cash, supplies, prepayments, receivables etc.
 Non-current Asset: All assets other than current assets are called non-current assets.
Example: land, patent right, office equipment, vehicles.
2. Liabilities: Creditors’ claims to the assets of a business; amounts owed to creditors are called
liabilities. Like assets, liabilities are classified into two:
 Current liabilities: The liabilities that are payable within the next (one) accounting year are
known as a current liability. Example: Accounts Payable, Rent Payable, Salary Payable.
 Non – Current Liabilities: Debts that are not required to be paid within the next accounting
period. Example long term notes payable.
3. Capital: The excess of the assets of a business over its liabilities is referred to as capital. It is the
equity of the owner in the business.
4. Revenue: Are increases in owner’s equity resulting from the main operations of the business.
Examples of revenue accounts are sales, interest income, tuition fee, and sales commission.
5. Expenses: are decreases in owner’s equity in the process of earning revenue. For example, a
hotel has to pay salary to its workers for the services rendered to clients in order to get the
income from customers (revenue) the Hotel has pay salary to the employees (expense). Example
of expenses: Salary, insurance, depreciation, supplies, utilities, rent etc.

2.4. Chart of accounts

The number and name of accounts used by an organization depends on the nature of its operation. The
list of accounts used by an organization and their codes is called the chart of accounts. Look at the
following chart of accounts of Meskrem Hotel.
Asset Acct. No Revenue Acct. No
Cash 11 Sales income 41
A/receivable 12 Expense
Supplies 13 Salary expense 51
Prepaid insurance 14 Rent expense 52
Equipment 15 Utility expense 53
Accumulated depn.-equipment 16 Advertising expense 54
Liabilities
N/payable 21
A/payable 22
Owner’s equity
Alemu’s capital 31
Alemu’s drawing 32
Income summary 33

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In the chart of accounts the asset accounts are listed based on their liquidity i.e. based on their ability to
be converted to case easily. 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.

An account number is a code assigned to an account for identification purpose. The account number
could be a two digit, three digit or more digits. In the account number:
 The first digit shows the group the account belongs
 The remaining digits show position of the account in the group
When the chart of accounts is prepared in an organization we say the ledger is opened.

2.5. Rules of debit and credit

The term debit indicates the left side of an account, and credit indicates the right side. They are
commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is
commonly thought. We use the terms debit and credit repeatedly in the recording process to describe
where entries are made in accounts.
Every transaction must affect two or more accounts to keep the basic accounting equation in balance. In
other words, for each transaction, debits must equal credits. The equality of debits and credits provides
the basis for the double-entry system of recording transactions.
An account may increase or decrease on the debit side or on the credit side depending on the nature of
the account. In general, accounts appearing on the left hand side of the accounting equation increase on
their left side (Dr. side) and decrease on their right side (Cr. Side); whereas accounts on the right side of
the equation increase on their right side and decrease on their left side.
The above general rule will be expanded as follows
Debit Credit
Increase in assets Decrease in assets
Increase in expense Decrease in expense
Decrease in capital Increase in capital
Decrease in liabilities Increase in liabilities
Decrease in revenue Increase in revenue

2.6. Normal balances of accounts

Normal balance refers to the side of an account (Dr. or Cr.), which will have greater entries than the
other. The increasing side will be the normal balance for accounts. So the normal balance for:
 asset account is debit
 expense account is debit
 capital account is credit
 liability account is credit
 revenue account is credit

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 2.7. Analyzing and recording transactions
When a business transaction takes place, source documents will be obtained and recorded. But before
the transactions are recorded they need to be analyzed. To analyze the transactions the following
questions need to be answered:
a) Which accounts are affected?
b) Is each account increased or decreased?
c) Which account is debited and which is credited?
After the transactions are analyzed they will be recorded in an accounting record called journal.
journal.
Because transactions are recorded for the first time in the journal, journal is referred to as “The book of
original entry”. Transactions are recorded in the journal in chronological order and for each transaction
the journal shows the debit and credit effects on specific accounts. The process of recording a business
transaction in the accounting record is called journalizing.
journalizing.
The Journal commonly used to record all types of transactions is the General Journal. This Journal
includes the following parts, entered step by step.
1. The date of the transaction
2. The title of the account debited
3. The title of the account credited
4. The amount of debit and credit
5. Brief explanation of the entry or reference to the source document.
Look at the following General Journal and notice where each of the above information is found.
Date Description P.R Debit Credit
Year da
Month y Debited account title XXX XX
Credited account title X XX XX
( Explanation )
There are also other types of Journals like, known as 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.

Steps in Journalizing a Transaction

The following steps should be followed in recording a transaction in the journal.
2. Record the date - Insert the year, the month, and the date as shown above.
3. Record the Debit-
Debit- Insert the account debited in the description column and the amount of debit
in the debit column.
4. Record the credit-
credit- Insert the account credited below the debited account and indented to the right
in the description column and the amount of credit in the credit column.
5. Explanation-
Explanation- Write a brief explanation or reference to source document in the description
column, when necessary.
Each one set of debits and credits for a transaction is called a journal entry.
entry.

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Ilustraton-1
Ato Alemu opened a hotel named meskrem-hotel on Hamle 1, 2006. During the first month of
operations, the following transactions occurred.
Hamle 1- Ato Alemu invested Birr 20,000 cash in the business.
2- The company paid Birr 1,000 cash for store rent for meskrem.
3- Purchased supplies for Birr 25,000, paying Birr 10,000 in cash and signing a
Birr 15,000, 6-month, 12% note payable.
4- Paid Birr 1,200 for a one-year accident insurance policy.
10- Received a bill from Reporter News paper for advertising the opening of the
Hotel Birr 200.
20- Ato Alemu withdrew Birr 700 cash for personal use.
30- The company determined that cash receipts from sales for the month were
Birr 6,200.
Instructions (use the chart of account of Meskrem Hotel to record the transactions)
a) Journalize the Hamle transactions. (Use J1 for the journal page number.)
b) Open ledger accounts and post the Hamle transactions.
c) Prepare a trial balance at hamle 30, 2006.

Solution
A) Journalize the Hamle transactions.
General journal page 1
Date Description P/R Debit Credit
2006 1 Cash 11 20,000 -
Hamle Alemu’s capital 20,000 -
(Owner’s investment)
2 Rent expense 1,000 -
Cash 11 1,000 -
(Payment of rent)
3 Supplies 25,000 -
Cash 11 10,000 -
Notes payable 15,000 -
(Purchase of supplies)
4 Prepaid insurance 1,200 -
Cash 11 1,200 -
(Payment of insurance)
10 Advertising expense 200 -
A/payable 200 -
(Advertising expense)
20 Alemu’s drawing 700 -
Cash 11 700 -
(Owner’s withdrawal)
30 Cash 11 6,200
Service revenue 6,200
(Cash sales)

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 2.8. Posting transactions in to ledger
After the information about a business transaction has been journalized, that information is transferred to
the specific accounts affected by each transaction. This process of transferring the information is called
posting.
posting.
An account could be of two types; the two-column account and the four-column account. We will use
the four-column account for our illustration. The two forms of accounts are given below.
1. The two-column account (ledger):
(ledger):
Account Account number
Date Item P.R Debit Date Item P.R Credit

2. The four-column account (ledger):

(ledger):
Account Account number ______
Date Item P. Debit Credit Balance
R Debit Credit

The steps in posting are given below:

1. Record the date and amount of Dr. and Cr. Entry to the account
2. Insert the Journal page number in the P.R (Post Reference) column of the account.
3. Insert the account number in the P.R column of the journal.
Note. The P.R Column is used for reference purposes. The P.R column of the journal shows whether the
entry is posted, and the account to which it is posted. In the account, the P.R Column shows the Journal
page number from which the entry was brought.
The group of accounts used by an organization is called a ledger.
ledger.

Example

Account: cash Acct No.: 11

Date Item P.R Debit Credit Balance
Debit Credit
2006
Haml 1 20,000 20,000
e
2 1,000 19,000
3 10,000 9,000
4 1,200 7,800
20 700 7,100

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 30 6,200 13,300

Account: supplies Acct. No. 12

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 3 25,000 25,000

Account: prepaid insurance Acct. No. 13

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 4 1,200 - 1,200 -

Account: A/payable Acct. No. 21

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 10 200 - 200 -

Account: N/payable Acct. No. 22

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 3 15,000 - 15,000 -

Account: Alemu’s capital Acct. No. 31

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 1 20,000 - 20,000 -

Account: Alemu’s drawing Acct. No. 32

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 20 700 - 700 -

Account: service revenue Acct. No. 41

Date Item P.R Debit Credit Balance
Debit Credit
2006

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 Hamle 30 6,200 - 6,400

Account: Rent Expense Acct. No. 51

Date Item P.R Debit Credit Balance
Debit Credit
2006
Hamle 2 1,000 - 1,000 -

Account: Advertising Expense Acct. No. 52

Date Item P.R Debit Credit Balance
Debit Credit
2005
meskrem 10 200 - 200 -

2.9. Preparing a trial balance

After the posting phase is completed, we have to verify the equality of the debit and credit balances.
This is done through the use of the ‘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.
The steps for preparing a trial balance are:
1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

Meskrem supermarket
Trial balance
Hamle 30, 2006
Cash 13,300
Supplies 25,000
Prepaid insurance 1,200
A/Payable 200
N/Payable 15,000
Almu capital 20,000
Almu drawing 700
Service revenue 6,200
Rent expense 1,000
Advertising expense 200
Total 41,400 41,400

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 2.10. Usefulness of a Trial Balance
The trial balance debit totals and credit totals are equal implies that the accounting work is more likely
to be free from any one or more of the following errors.
 Error in preparing the trial balance including
 Addition error
 The amount of an account balance was incorrectly listed on the trial balance
 A debit balance was recorded as a credit or vice versa
 A balance was entirely omitted.
 Error in posting, including
 An erroneous amount was posted to the account.
 A debit amount was posted as a credit or vice versa
 A debit or credit posting was omitted
2.11. Limitation of a trial balance
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist
even though the trial balance columns agree. For example, the trial balance may balance even when:
 A transaction is not journalized,
 A correct journal entry is not posted,
 A journal entry is posted twice,
 Incorrect accounts are used in journalizing or posting, or
 Offsetting errors are made in recording the amount of a transaction.
As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the
total debits will equal the total credits. The trial balance does not prove that the company has
recorded all transactions or that the ledger is correct.

2.12. The adjusting process

All the transactions recorded above in the journalizing step are the result of daily transactions. Other
transactions result from the passage of time or from the internal operations of the business. For
example, insurance premiums are paid for a certain period of time and expire during that time period.
Another example is office supplies such as paper, pens & pencils.
At the end of the period the balances in accounts such as supplies and prepaid insurance must be brought
up to date. The supplies account balance, for example, must be credited by the consumed part of the
supplies, debiting supplies expense.

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Example: Stationary materials totaling Birr 1,900.00 were purchased and recorded during the year. At
the end of the year, only Birr 150 of the supplies is left in the hand.

2.12.1. Accrual Vs. Cash Basis of Accounting

a. The cash basis of accounting
In this basis of accounting revenues are reported in the period in which cash is received and expenses are
reported in the period in which cash is paid. Net income will, therefore, be the difference between the
cash receipts (Revenues) and cash payments (expenses). This method will be used by organizations that
have very few receivables and payables. For most businesses, however, the cash basis is not an
acceptable method.

b. The accrual basis of accounting

Under this method, revenues are reported in the period in which they are earned, and expenses are
reported in the period in which they are incurred. For example, revenue will be recognized as services
are provided to customers or goods sold and not when cash is collected. Most organizations use this
method of accounting and we will apply this method in this course.

2.13. Preparing a worksheet

Most of the data required to prepare the accounting reports (financial statements) are now gathered. The
data will now be presented in a convenient form. The worksheet is a large columnar sheet prepared to
arrange in a convenient form all the accounting data required to prepare financial statements. The
worksheet has a heading and a body. The heading has three parts:
i) Name of the Organization
ii) Name of the form (worksheet)
iii) Period of time covered.
The body contains five main parts, each of them with two main columns. These parts are
1. The trial balance
2. The adjustment
3. The adjusted trial balance
4. The income statement
5. The balance sheet.

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Illustration
The trial balance of ABC Company at Hidar 30, 2005 is as follows:
ABC Company
Trial balance
Hidar 30, 2005
Account Debit Credit
Cash 4,000
Accounts receivable 3,200
Prepaid rent 1,900
Supplies 3,000
Equipment 34,800
Accumulated depreciation 1,600
Accounts payable 5,400
Salary payable
Abel’s capital 35,700
Abel’s drawing 2,100
Service revenue 8,600
Depreciation expense
Salary expense 1,700
Rent expense
Utilities expense 600
Supplies expense
Total 51,300 51,300

Additional information at Hidar 30, 2005:

a. Accrued service revenue Birr 600
b. depreciation birr 300
c. accrued salary expense birr 800
d. prepaid rent expired birr 500
e. supplies used birr 100

Requirements
1. Complete ABC-company worksheet for the month ended Hidar 30, 2005.
2. Preparing financial statements from the completed worksheet
3. Journalize adjusting and closing entries

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Page 12
 Adjusted Trial
Account Title Trial Balance Adjustment balance Income statement Balance sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
1 Cash 4,000 4,000 4,000
2 Accounts receivable 3,200 (a) 600 3,800 3,800
3 Prepaid rent 1,900 (d)500 1,400 1,400
4 Supplies 3,000 (e)100 2,900 2,900
5 Equipment 34,800 34,800 34,800
6 Accumulated depn. 1,600 (b)300 1,900 1,900
7 Accounts payable 5,400 5,400 5,400
8 Salary payable (c)800 800 800
9 Abel’s capital 35,700 35,700 35,700
10 Abel’s Drawing 2,100 2,100 2,100
11 Service revenue 8,600 (a)600 9,200 9,200
12 Depreciation expense (b)300 300 300
13 Salary expense 1,700 (c)800 2,500 2,500
14 Rent expense (d)500 500 500
15 Utilities expense 600 600 600
16 Supplies expense (e)100 100 100
17 Total 51,300 51,300 2,300 2,300 53,000 53,000 4,000 9,200 49,000 43,800
18 Net income 5,200 5,200
19 9,200 9,200 49,000 49,000
ABC-company
Worksheet
For the month ended Hidar 30, 2005

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 2.14. Preparing financial statements from a worksheet
After a company has completed a worksheet, it has at hand all the data required for preparation
of financial statements. The income statement is prepared from the income statement columns.
The balance sheet and owner’s equity statement are prepared from the balance sheet columns. At
this point, the company has not journalized or posted adjusting entries. Therefore, ledger
balances for some accounts are not the same as the financial statement amounts.
The amount shown in the owner’s capital on the worksheet is the account balance before
considering drawings and net income (or loss).When the owner has made no additional
investments of capital during the period, this worksheet amount of the owner’s capital is the
balance at the beginning of the period.
Using a worksheet, companies can prepare financial statements before they journalize and post
adjusting entries. However, the completed worksheet is not a substitute for formal financial
statements. The format of the data in the financial statement columns of the worksheet is not the
same as the format of the financial statements. A worksheet is essentially a working tool of the
accountant; companies do not distribute it to management and other parties.
a. Income statement: All the data required to prepare the income statement is brought from
the worksheet income statement column.
ABC-company
Income statement
For the month ended Hidar 30, 2005
Revenue:
Service revenue 9,200
Operating expense:
Depreciation expense 300
Salary expense 2,500
Rent expense 500
Utilities expense 600
Supplies expense 100
Total operating expense (4,000)
Net income 5,200

b. Statement of owner’s equity – This statement shows the beginning balance of capital
and the changes that affected it. The balance of the owner's equity account in the
worksheet may not be the beginning one. Therefore, the ledger has to be reviewed to see
if there was an additional investment during the period or not. In our illustration there is
no additional investment.

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 ABC-company
Statement of Owners Equity
For the month ended Hidar 30, 2005
Abel’s capital Hidar 1, 2005 35,700
Net income for the period 5,200
Less: Abel’s drawing (2,100) 3,100
Abel’s capital on Hidar 30, 2005 38,800

c. Balance sheet:
sheet: The data to prepare this statement will be taken from the worksheet and
the other financial statements.
 Note that in balance sheet assets and liabilities are classified as current and
non-current.

ABC-company
Balance sheet
Hidar 30, 2005
Asset Liability
Current assets:
Cash 4,000 Accounts payable 5,400
Accounts receivable 3,800 Salary payable 800
Prepaid rent 1,400 Total liability 6,200
Supplies 2,900 Owner’s equity
Total current asset 12,100 Abel’s capital 38,800
Plant asset (Non-current asset)
Equipment 34,800
Less: Accumulated depn. (1,900)
32,900
Total asset 45,000 Total liabilities and owner’s equity 45,000

2.15. Adjusting and closing entries

2.15.1. Adjusting entries

Accounting systems are designed to record most recurring daily transactions, particularly those
involving cash. As cash is received or paid, it is recorded in the accounting system. In general,
this focus on cash works well, especially when cash receipts and payments occur in the same
period as the activities that produce revenues and expenses. However, cash is not always

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received in the period in which the company earns the related revenue; likewise, cash is not
always paid in the period in which the company incurs the related expense.
How do the accounting system record revenues and expenses when one transaction is needed to
record a cash receipt or payment and another transaction is needed to record revenue when it is
earned or an expense when it is incurred? The solution to the problem created by such
differences in timing is to record adjusting entries at the end of every accounting period so that:
 Revenues are recorded when they are earned (the revenue principle).
 Expenses are recorded when they are incurred to generate revenue (the matching
principle).
 Assets are reported at amounts that represent the probable future benefits remaining at
the end of the period.
 Liabilities are reported at amounts that represent the probable future sacrifices of assets
or services owed at the end of the period.
Types of Adjusting Entries
There are four types of adjustments:
Revenues
 Unearned Revenues Previously recorded liabilities that were created when the cash was
received in advance and that must be adjusted for the amount of revenue actually earned
during the period.
 Accrued Revenues Revenues that were earned but not yet recorded, with cash to be
received in future periods.
Expenses
 Prepaid Expenses Previously recorded assets, such as Prepaid Rent, Supplies, and
Equipment that were created when the cash was paid in advance and that must be
adjusted for the amount of expense actually incurred during the period through the use of
the asset.
 Accrued Expenses are expenses that were incurred but not yet recorded, with cash to be
paid in future periods.
Each of these types of adjustments involves two entries:
 One for the cash receipt or payment.
 One for recording the revenue or expense in the proper period (through the
adjusting entry).

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We will illustrate the process involved in analyzing and adjusting the accounts by reviewing all
adjustments for ABC - companies in the above example.
The information to make adjusting entries is obtained from the adjustment column of the
worksheet. So let’s make the adjusting entries based on the above information:

a) 2005 A/receivable -------------------------------600

Hidar 30 service Revenue ------------------------------600
(To record delivery of service on account)
b) 2005 Depn expense -----------------------------300
Hidar 30 accumulated Depn. --------------------------300
(To record Depn. Expense)
c) 2005 salary expense ---------------------------800
Hidar 30 salaries payable --------------------------------800
(To record payment of accumulated salary)
d) 2005 Rent Expense ----------------------------500
Hidar 30 prepaid Rent -----------------------------------500
(To record expired rent)
e) 2005 supplies Expense -----------------------100
Hidar 30 supplies ----------------------------------------100
(To record usage of supplies)

2.15.2. Closing entries

After adjusting entries have been recorded and posted, companies need to prepare the ledger
accounts for the next period. This phase in the accounting cycle is called closing the books.
The ending balance in each of asset, liability, and owner’s equity accounts carries over as a
beginning account balance for the next period. So the balances in these permanent accounts are
not reduced to zero (not closed) at the end of the accounting period.
In contrast, revenue, expense, and owner’s drawing accounts accumulate data for the current
accounting period only. As such, these accounts must begin each period with a zero balance.
Therefore, the balances in these accounts, called temporary accounts, are closed (reduced to
zero) at the end of each period.

Steps in closing
1. Closing revenue accounts - Debit each revenue account by its balance and credit the
‘Income Summary’ account by total revenue for the period.

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 Note: Income summary is an account used to close revenue and expense accounts. This
account will immediately be closed to the capital account at the end of the closing
process.
2. Closing expense accounts – Debit the income summary account by the total of expenses for
the period and credit each expense account by its balance.

3. Closing the income summary account – Income summary will be closed to the capital
account. The balance of his account depends on the nature of operation; credit if result is
profit and debit if the result is loss.
loss.

4. Closing Withdrawal – Debit the owners equity account by the total of drawings for the
period and credit the drawing account.

a) To close revenue
2005 Service revenue ----------------------------------- 9,200
Hidar 30 Income summary --------------------------------------9,200
(To close service revenue)
b) To close expenses
2005 Income summary --------------------------------- 4,000
Hidar 30 Depn. Expense --------------------------------------------300
Salary expense ----------------------------------------- 2,500
Rent expense -------------------------------------------- 500
Utility expense ------------------------------------------ 500
Supplies expense --------------------------------------- 100
(To close expenses)
c) To close income summary
2005 Income summary ------------------------------------ 5,200
Hidar 30 Abel’s capital --------------------------------------------5,200
(To close income summary)
d) To closs drawing account
2005 Abel’s capital -----------------------------------------2,100
Hidar 30 Abel’s Drawing ------------------------------------------2,100
(To close a drawing account)

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 2.16. Post-closing trial balance
After the closing entries have been journalized and posted, a trial balance is prepared to prove
the equality of the general ledger before recording the New Year’s transactions. It should be
noted that this trial balance includes only balance sheet accounts. This is because the temporary
income statement accounts are closed during the closing process. This trial balance is called the
post – closing trial balance.
balance.
In practice the ledger balance after closing may be checked by a simple calculator print out rather
than a formal trial balance. The post closing trial balance for Bait Transport is presented below.

ABC-company
Post closing trial balance
Hidar 30, 2006

Account Debit Credit

Cash 4,000
Accounts receivable 3,800
Prepaid rent 1,400
Supplies 2,900
Equipment 32,900
Accounts payable 5,400
Salary payable 800
Abel’s capital 38,800
Total 45,000 45,000
Exercise-1
Africa Clinic engaged in the following economic events during May 2010:
May 1 Mr. Alemu invested Birr 20,000 in cash to form Africa Clinic.
2 Made an agreement to provide Birr 6,000 in services over the next year to CBE.
3 Paid Birr 600 in advance for two months rent of an office.
9 Purchased medical supplies for Birr 400 in cash.
12 Purchased Birr 4,000 of equipment on credit; made a 25 percent down payment.
15 Delivered a service for a fee of Birr 350 on credit.
18 Made a payment of Birr 500 on the equipment purchased in May 12.
27 Paid a utility bill of Birr 140.
Required
a. Identify the company’s business transactions, and record them in a journal form.
b. Post the transactions to the following T accounts/ four column ledger: Cash, Accounts
Receivable, Medical Supplies, Prepaid Rent, Equipment, Accounts Payable, Alemu,
Capital; Service revenu, and Utilities Expense.
c. Prepare a trial balance for the month of May.

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