Course Materials

Of
Financial Accounting

Chapter One
An introduction to accounting, concepts & principles.
♣What is accounting?
Simply we can define Accounting as an information system that provides information to the users.
What Information System is?
 Information: are processed data.
 System: is a set of connected thing or parts.
 Information System: is a set of processed data from where an user can get his useful information.
Simply Accounting is a language for communicating business information.
 Business Information includes:
Profitability, Liquidity, Solvency, Leverage
 It may be defined as the science which deals with the recording of monetary transactions of every descriptions.
Definition of Accounting:
 Accounting may be defined as, “the process of recording, classifying and summarizing financial transactions
and preparing financial statements (income statement, cash flow statement, owners’ equity statement and
balance sheet), preparing financial report there on and making available to all stakeholders”.
Various Parts of the Definition
► What is Financial Transaction?
 ‘Financial transactions’ – has been defined as any act or event that alters the financial position of a concern,
where such alteration can be measured in terms of money.
 Transactions may refer to an act of performance, an exchange, a transfer etc.
For Example:
 Mr. Nadim invested taka 50,000 to start a business under the name N. Software Ltd.
-This is a transaction.
 N. Software Ltd. purchased a Computer for taka 25,000.
-This is a transaction.
 Hired a person, who will start his activities from the next month and will be paid from the next month.
-This is not a transaction.
► ‘Recording’ transactions in various meaningful ways, as required according to the size of the organization
[ ‘Journal’ book]
By creating a debit and credit of same amount.
Debtors- Debit- Dr
Creditors- Credit- Cr
►The art of classifying’- grouping of transactions or entries of the same nature at one place.
Journal to Ledger.
Separation of transaction under different heads.
►Summarizing: refers to listing of all ledger balances known as Trial Balance. Debit balance of ledger will come to the
debit side of trial balance and Credit balance of a ledger will come to the credit side of trial balance
►Preparation of Financial Statement: which includes-
 An income statement: to determine the net income or loss.
 An owners’ equity statement: to show the changes in owners’ equity position.
 A cash flow statement: to show the changes in cash position.
 A balance sheet: to show the assets and liabilities at the closing date of any financial year.
American Accounting Association (AAA):
AAA defines “ Accounting refers to the process of identifying measuring and communicating economic information to
permit informed judgement and decisions by users of the information.”
Weygandt, Kieso & Kimmel:

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“Accounting as an information system that identifies, records and communicates the economic events of an
organization to interested users.”
This definition views accounting as an information system that identifies and records the financial transactions,
ascertains the results and provides information to the various interested users in the users desirable way or according to
their needs. It is an information device or tools that works to provide information to interested users to rationalize their
decision-makings.
From the definition there are three functions of accounting:
1. Identification
2. Recording
3. Communication
Finally we can say:
Accounting is a process which identifies, records and communicates business information to the users.
This process consists 10 steps:
 Obtain information about external transactions from source documents.
 Analyze the transaction.
 Record the transaction in a journal.
 Post from the journal to the general ledger.
 Prepare an unadjusted trial balance.
 Record adjusting entries and post to the general ledger accounts.
 Prepare an adjusted trial balance.
 Prepare financial statements.
 Close the temporary accounts to retained earnings(at year end only)
 Prepare a post-closing trial balance (at year-end only).
♣ Works of Accounting:

Action
Decision Makers

Business Information
Activities
Data
Accounting
Fig: Accounting as an information system for business decisions

The modern view of Accounting is, “Accounting seen as a service activity.” It is a link between business activities and
decision-makers.
First, accounting records data on business activity for future use.
Second, through data processing, the data are stored until needed, then processed in such a way a to become useful
information.
Third, the information is communicated, through reports, to those who can use it in making decisions.
♣ Modern History of Accounting:
In 1494,Luca Pacioli in Italy wrote a book named, “Suma De Aritmetica Geometria Proportion-et Proportionlita.”
where he for the first time discussed about the double entry concept of Accounting and eventually the history of
‘Modern Accounting’ started from that time. ‘Luca Pacioli’ is called ‘The Father Modern Accounting’ .In this book he
discussed about the rules regarding ‘Debtor’ and ‘Creditor’, Journal, Ledger, Trial Balance etc.
♣ Scope of Accounting:
 Accounting in the business organization:
To earn profit is the main objective of an organization, Accounting helps an organization to calculate profit or loss of
that organization and also to ascertain the financial position of that organization.
 Accounting in the non-profit organization:
Non-profit organizations like school; collage, hospital, club etc. also need accounting to run the organization efficiently.
It also needs accounting to allocate the funds properly.

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 Accounting in Govt. organization:
Govt. organizations need accounting to ascertain income and expenditure, for proper planning to achieve the desired
objectives and to prepare the ‘National Budget’.
 Accounting for Professionals:
Accounting is needed for doctors, engineers, advocates and others to fix up their income tax.
♣ Bookkeeping and Accounting:
The difference between ‘Book-keeping’ and ‘Accounting’: The term bookkeeping and accounting are often used
synonymously, because the distinction between the two is to some extent arbitrary. In fact, bookkeeping is
complementary to the Accounting process. Where bookkeeping is the systematic recording of financial and economic
transactions, Accounting is the analysis and interpretation of bookkeeping records.
♣ Nature of Accounting Information:
The following characteristics are pre-requisite for events and transactions to become accounting information:
1. Accounting Information must be able to change the financial position of an organization.
Two type of change may occur:
Net change: The events or transactions that change the position of assets and liabilities of the organization, is
called the net change.
For example, Salary Tk.2000 paid to Mr. Ahmed.
Structural change: The events or transactions that change the structure of assets and liabilities of the
organization.
For example, equipment purchased at Tk.10, 000.
2. Accounting information must be measured in terms of money.
3. There must be two parties related with accounting activities/transactions. (Dual aspect of accounting i.e. the
interchange between two parties will complete a transaction.)
4. Accounting information must be self sufficient and independent from one another.
5. Any invisible events that change the financial position of an organization may be termed as financial transactions.
For example, 10% depreciation of fixed asset each year
♣ Uses and users of Accounting Information:
The users of Accounting information can be divided roughly into three groups:
 Those who manage a business
 Those outside a business enterprise who have direct financial interest in the business
 Those persons, groups, or agencies that have an indirect financial interest in the business

Business Activities

Accounting

Management Those with Direct Those with Indirect Financial Interest

 Owners, partners Financial Interest
 Board of directors  Present or Taxing Authorities Regulatory Agencies
 Officers of the potential  NBR  SEC
company investors  Municipal  Stock Exchange
 Managers  Present or  Other  Other agencies
 Department heads potential
 Supervisors creditors Economic Other Groups
Planners  Employee and labor
 Council of unions
Economic  Financial Advisors
planners  Customers and the
 Govt. general public
planners

Management:
Management is the group of people in a business who have overall responsibility for achieving the company’s goals.
Success and survival in a tough and competitive business environment require that concentrate much of its effort on two
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major goals: Profitability and liquidity. Profitability is the ability to make enough profit to attract and hold investment
capital. Liquidity means having enough funds on hand to pay the debts when they fall due. Successful managers
consistently make the right decisions on the basis of timely and valid information.
Present or Potential Customers:
A through study of company’s financial statements will help the present and potential investors judge the prospects for
a profitable investment.
Present and potential creditors:
Most of the companies have to borrow money for both long and short term operating needs. The creditors, who lend the
money, are interested mainly in whether the company will have the cash to pay the interest charges and repay the debt
at the appropriate time. They will study the company’s liquidity and cash flow as well as its profitability. Banks, finance
companies, mortgage companies, securities firms, insurance firms and others who lend money expect to analyze the
company’s financial position.
Others:
Taxing Authorities, Regulatory Agencies need accounting information for charging taxes and regulate the business
affairs.
Economic planners and govt. planners need information for preparation and execution of plans. Employees, consumers
and the general public all have an interest in the financial statements of the business. Employees and labor unions study
the financial statements of corporations as part of their task of preparing for important labor negotiations.
Consumer’s groups, customers, and the general public have become more curious bout the financing and earning of
corporations as well as with the effects that corporations have on inflation, the environment, social problems and the
quality if life.
♣ Accounting as an Information System:
Accounting is an information system in its own right. It employs several systematic operations to generate relevant
information. Among the operations that it encompasses are:
(1) Recording economic data,
(2) Processing and analyzing these data, and
(3) Presenting quantitative information in financial terms.

Economic Recording Processing Analyzing Reporting Financial

data information
Information:
Information is intelligence that is meaningful and useful to persons for whom it is intended. Usually information is
Operations
derived from data. Data are the raw within
facts and the accounting
figures and evenactivity
symbols that together from the inputs to an information
system.
System:
A system is a unified group of interacting parts that function together to achieve objectives and purposes.
Accounting as an information system collects data and events from various internal and external sources and then
processed in a systematic manner (i.e. recording, processing, summarizing and provide information in the form of
reporting) to provide output in the form of information to the decision makers to rationalize their decisions.

Input (Data) Process Output (Information)

Accounting as an information system

AIS refer to ‘Accounting Information System’, which is a subsystem of MIS. AIS serve both the internal and external
users. AIS deal with only the financial data. The data are publicly available.
♣ Conceptual Framework:
A conceptual framework is like a constitution. It is “a coherent system of interrelated objectives and fundamentals that
can lead to consistent standard and that prescribes the nature, function, and limits of financial accounting and financial
statements.”
To ease the definition of conceptual framework, we can state that conceptual framework is like a boundary. The
prepares and users of accounting information are permitted to work within this boundaries and they are not allowed to
encroach this rules and regulations.
♣ Basic Elements of Financial Statements:

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Assets: Probable future economic events obtained or controlled by a particular entity as a result of past transactions or
events.
Liabilities: Probable future sacrifices of economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result of past transactions or events.
Owner’s Equity: Residual interest in the assets of an entity that remains after deducting its liabilities.
Revenues: Inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from
delivering or producing goods, rendering services, or other activities that constitute an entity’s major, ongoing
operations.
Expenses: Outflows or other using up of assets or incurrence of liabilities during a period from delivering or producing
goods, rendering services, or carrying out other activities that constitute the entity’s ongoing, major or central
operations.
Gains: Increases in net equity from peripheral or incidental transactions of an entity and from all other transactions and
other events and circumstances affecting the entity during a period except those that result from revenues or
investments by owners.
Losses: Decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and
other events and circumstances affecting the entity during a period except those that result from expenses or
distributions to owners.
♣ GAAP(Generally Accepted Accounting Principles):
Recognition and measurement in Financial Statements of Business Enterprises: This is also known as GAAP (Generally
Accepted Accounting Principles)
It has three parts:
1. Assumptions
2. Principles
3. Constraints
Assumptions
 Economic Entity Assumption : This principle is followed during the recording of transactions. For recording
transactions each organization/ project/ department is treated as a separate entity. Main theme of this principle
is that the business enterprise is a separate entity from its owner. As a result, business transactions are
separated from owners transactions and capital supplied by owner is treated as liability of business.[Assets=
Liabilities+ Owners’ equity]
 Money measurement Assumption : Under this principles accounting transactions are recorded in terms of
money i.e. Tk. in Bangladesh, dollar, pound, euro etc. Those transactions, which cannot be expressed in terms
of money, cannot be recorded.
 Going Concern Assumption : According to this principle a business will run for a long time and the assets of
the business are not for sale. That is why assets are valued at cost and depreciation is deducted from assets.
According to this principle- prepaid expenses are treated, as assets though they are not saleable.
 Accounting Period Assumption : Accounting period is very important for determining income. The objective
of these principles is to confine business transactions in a specific time period. A business probably runs for a
long years. Profit or loss of a business can be determined if the business is stopped. But a businessman cannot
wait for a long time to determine profit or loss. Hence the total life is broken-up into some units such as a year,
half-year, quarter etc.
Principles
 Double Entry principle: This principle is used during recording of transactions. According to this principle
every transaction involves two parties i.e. for every debit there must be a corresponding credit. Luca Pacioli, in
his book Summa De Arithmetica Geometria Proportioniet Proportionalita, discussed about double entry
system. For double entry system two sides of trial balance and balance sheet agree.
 Objective Evidence principle: Transactions are recorded in primary books on the basis of main
documents/evidence. This principle is followed to create confidence and reliability on accounts. Various
parties such as owner, manager, creditors, debtors, labour union, government tax authorities, other financial
institutions use accounts information for various purposes. That is why maintaining of evidence is essential.
 Historical Cost principle: The principle is closely related with money measurement principles. According to
this principle transactions are recorded at the value of the date they incurred. Under this principle all assets in
B/S are shown at cost price/ purchase price. It faces challenges due to inflation.
 Recognition of Revenue and Cost principle: In income determination process recognition of income and
expenditure is an important step. Profit or loss in determined by recognizing income and expenditure earned or

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 incurred in accounting period and then by matching them. Income can be recognized at any time of the
followings-
 At the time of production
 At the time of sales
 At the end of production
 At the time of realization of cash money.
 Matching principle: Profit or loss is determined by matching income and expenditure after their recognition.
There should be matched with revenue all those costs incurred in acquiring goods or services whose utility has
expired in the earning of that revenue.
 Disclosure: All the material, facts should be disclosed in the annual report of a company. Partial disclosure is
not permitted.
Constraints
 Consistency Constraint: Under this conventions the method of recording an item must be same for each year
i.e. if a method is followed once then that procedure will have to use again and again .Example-there are a
number of method for calculating depreciation of fixed assets. One can use same method for each year.
 Conservatism Constraint: It involves income determination and assets valuation. Main theme of this
convention do not think for profit, provide provision for all loses. Recognize revenue only when it is realized
in cash.
 Materiality constraint: It states that-
-Relates to an item’s importance to a firm’s overall financial operations.
-An item must make a difference to be material and be disclosed.
-Insignificant amounts need not be recorded & reported according to GAAP.
 Cost-Benefit Relationship: It states that-
-The cost of information should not outweigh the benefit derived.
-Costs and benefits are not always derivable, obvious or quantifiable.
-Sound judgment must be used.
-The cost of providing the information should not exceed the benefits derived from using the information.

Chapter Two
♣ The Accounting Process
What is Financial Transaction?
 ‘Financial transactions’ – has been defined as any act or event that alters the financial position of a concern,
where such alteration can be measured in terms of money.
 Transactions may refer to an act of performance, an exchange, a transfer etc.
For examples:
 Mr. Nadim invested taka 50,000 to start a business under the name N. Software Ltd.
-This is a transaction.
 N. Software Ltd. purchased a Computer for taka 25,000.
-This is a transaction.
 Hired a person, who will start his activities from the next month and will be paid from the next month.
-This is not a transaction.
♣ Criteria to be fulfilled by the transactions to be recorded:
In any case to be recorded, the transaction must relate directly to the business entity. All business transactions are
recorded usually in terms of money i.e. an event can be a transaction if it fulfills the following basic criteria:
1. It must have two parties i.e. dr and cr
2. Financial condition must be changed through the business transactions
3. Measurable in monetary value
4. May be invisible e.g. depreciation
5. May be intangible e.g. goodwill, patent etc.
6. It must be supported by documents e.g. voucher, cash memo etc.
Finally we can say, every transaction is an event but every event is not a transaction. To be transaction, an event
must be of financial by nature.
♣ Accounts
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  An account is a detailed record showing the effects of transactions i.e. the effects of increase or decrease in
each specific asset, liability, revenue, expense or owner’s equity. It is a ledger from which financial statements
are prepared.
 A separate account is maintained for each item.
 Account can be classified in a number of ways like assets account, expense account, revenue account, owner’s
equity account and liabilities account (American System).
 Account can also be classified as personal account ( related to persons), real account (related to assets), and
nominal account ( related with revenues and expenses).
♣ Double Entry System:
 Account is the life blood of accounting.
 Every account must have two sides: Debit (Dr) and Credit (Cr).
 Double entry system means that both the sides of every account should be recognized and recorded
 The basis of double entry system is: every debit must have its corresponding credit. Here the term
corresponding means equal and opposite. i.e. Debit=Credit
 Example: say, purchase on cash for taka 1,000
 This is a financial transaction
 Two sides of the transaction are
1. Purchase and 2. Cash
Note: When there is cash payment or cash receipt then cash is one party.
Purchase is an expense in nature and cash is an asset. Due to purchase on cash, expense increases, so purchase is debit.
Cash decreases, so cash is credit.
♣ Accounting Equation:
 In double entry system, for every debit there must be a credit and vice-versa.
 This universal rule leads to the basic equation in accounting.
 The relationship between the assets and liabilities plus owners’ equity is known as the accounting equation.
 The equation is also called as the balance sheet equation.
 Basic Equation: Assets= Liabilities
 Expanded Form: Assets= Liabilities + Owners’ Equity

Cash from owner that Cash taka 1,00,000 Purchased equipment for taka
is owners’ equity Equipment taka 50,000 50,000 on credit
For taka 1,00,000 Total assets= 1,50,000 Liabilities= taka 50,000

Business Organization
From the above information we see
Assets= Liabilities+ Owners’ Equity
Tk 1,50,000= Tk 50,000 + Tk 1,00,000
 Assets: Total resources owned by the business entity.
 Owners’ Equity: The claim on the assets of the organization from the owners.
 Liabilities: The claim on the total assets from the creditors or outsiders.
Owners’ equity increases:
1. By investment by the owner
2. By revenues
Owners’ equity decreases:
1. By expenses
2. By drawings by the owners.
So the equation can be-
Assets= Liabilities + (Owners’ equity + Revenues – Expenses – Drawings)
♣ Elements of accounting equation:
Elements of Sub-classification Examples
accounting equation

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 Current assets Cash/bank, accounts receivable, short term notes receivable, supplies,
[Utility < 1 year] prepaid expenses, accrued revenues, inventory, short-term investment.
Fixed tangible assets Land, Building, Plant/ Equipment/ machineries, office furniture, store
1. Assets [Utility > 1year & which is visible] furniture, leased property, long term investment.
Fixed intangible assets Goodwill, patents, copyrights, trademarks, trade name
[Utility > 1 year & which is not visible]
Fictitious assets Preliminary expenses, share discount, deferred expenses.
Current liabilities Accounts payable, unearned revenue, income taxes payable,
[payable within 1 year] accrued expenses, other liabilities.
Long Term Liabilities Issuance of bond, long term lease obligations, long term notes
2. Liabilities
[payable after 1 year] payable, deferred tax liabilities, other non current liabilities.
3. Owners’ Equity Common stock, additional paid up capital, retained earnings
Sales, service revenue earned, fees earned, accounting revenue
4. Revenues earned, other receipts.
Purchase, salaries expense, rent expense, supplies expense,
advertising expense, commission paid, delivery expense,
freight in/ carriage inward, freight out/ carriage outward, wages
5. Expenses expense, utility expense, insurance expense.
Kinds of Assets:
Assets can generate income for an organization and the physical objects or services that have financial worth.
1. Physical /tangible assets: Land, building, cash, motorcar etc. that we can see and have the physical existence.
2. Right for receiving payment: Accounts Receivable, Sundry Debtors, Notes Receivable, advances to employees.
3. Right for receiving services: Prepaid insurances, unexpired rates etc.
4. Intangible assets: Goodwill, patents etc that has no physical existence.
In another sense assets can be classified into two groups:
1. Long-term assets: Those assets that will give benefit more than one-year .For example: Land, Equipment etc.
Short term assets /Current assets: Those assets that will be matured within one year. For example: Cash, bank
balance, Accounts receivable etc.
Kinds of Liabilities:
Claims in the assets by outsiders or creditors or Obligation to pay for purchases. Liabilities can be classified into two
groups:
1. Short term /current liabilities: Those liabilities that will have to pay with in one year. For example: Notes
payable, accounts payable, salaries payable etc.
2. Long team liabilities: Those liabilities that we can avail for more than one year. For example: Debenture,
Bond Payable, Mortgage payable etc.
Owner’s Equity (O.E):
- The claims of owners from to organizations assets
- It can be said ‘Residual Claim’ since at the time of termination of the organization the creditors are firstly paid
and the remaining amount paid to the owners.
♣ Tabular analysis of transactions on the accounting equation: Format used
Date Assets Liabilities Owners’ equity Remarks
Cash Accounts Prepaid Supplies Equipment Accounts Telephone Capital
receivable insurance payable bill payable

Balance
Jan. 1 +10000 +10000
Jan. 5
Examples of Accounting Equation:
Transactions Assets =Liabilities Owner’s
Cash + Motor Car + Equity
1. Investment by owner tk. 10,00,000 (+) 10,00,000 (+) 10,00,000
2.Purchase a car of tk. 5,00,000 (-) 5,00,000 (+) 5,00,000
3.Purchase another car on account tk. 400,000 (+) 400,000 (+) 400,000
4.Interest earned tk. 15,000 (+) 15,000 (+) 15,000
5. Staff salary paid tk. 20,000 (-) 20,000 (-) 20,000
Total 4,95,000 + 9,00,000 =4,00,000 + 9,95,000

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 Tk. 13, 95,000 Tk. 13, 95,000

Problem 01: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following
transactions for the month of May
1. Invested taka 10,000 cash to start the repair shop. (cash, capital)
2. Purchased equipment for taka 5,000 cash. (equipment, cash)
3. Paid taka 400 cash for May office rent. (cash, office rent expense)
4. Received taka 5,100 from customers for repair service. (cash, service revenue)
5. Withdrew taka 1,000 cash for personal use. (cash, drawing)
6. Paid part-time employee salaries of taka 2,000. (cash, salaries expense)
7. Incurred taka 250 of advertising costs, on account. (advertising expense, accounts payable)
8. Provided taka 750 of repair services on account. (accounts receivable, service revenue)
9. Collected taka 120 cash for services previously billed. (cash, accounts receivable)
Assets are- cash, equipment, accounts receivable; Liabilities are- accounts payable; Owners’ equity- capital;
Revenue- service revenue; Expenses are- office rent expense, salaries expense, advertising expense
Date Assets Liabilities Owners’ Equity Remarks
May Cash Equipment Acc. Receivable Accounts Payable Capital
1 +10,000 +10,000 Investment
2 -5,000 +5,000
3 -400 -400 Office rent expense
4 +5,100 +5,100 Service revenue
5 -1,000 -1,000 Drawings
6 -2,000 -2,000 Salaries expense
7 +250 -250 Advertising expense
8 +750 +750 Service revenue
9 +120 -120
Balance 6,820 5,000 630 250 12,200
Total 12,450 12,450
Problem 02:
The list below contains the transactions for the Joan Miller advertising agency during the month of January, 2003:
January 1: Joan Miller invested $10,000 in her own advertising agency
January 2: Rented an office, paying two months rent in advance $800
January 3: Hired a secretary and agreed to pay $600 every two weeks. The secretary
agreed to work extra hours to make up the time for the first two days of January.
January 4: Purchased art equipment for $4200
January 5: Purchased office equipment from Morgan Equipment for $3000. Paying $1500 in cash and agreeing to pay
the rest next month.
January 6: Purchased on credit art supplies for $1800 and office supplies for $800 from Taylor Supply co.
January 8: Paid $480 for a one-year insurance policy with coverage effective, January 1.
January 9: Paid Taylor Supply Co. $1000 of the amount owed.
January 10:Performed a service by placing advertisements for an automobile dealer in the Newspaper and collected a
fee of $1400
January 12: Paid the secretary two weeks salary, $600
January 15: Accepted $1000 as an advance fee for artwork to be done for another agency, Ziko Co.
January 19: Performed a service by placing several major advertisements for ward department stores. The earned fees
of $2800 will be collected next month.
January 25: Joan Miller withdrew $1400 from the business for personal living expenses.
January 26: Received (but did not pay) a telephone bill, $70.
You are requested to prepare a tabular analysis for Joan Miller advertising agency for the month of January ‘2003.
Solution:
Joan Miller advertising agency
January ‘2003
(All figures are in Tk.)
Date Assets = Liabilities (+)

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Jan. Cash Pre Art Offic Art Offic Prepai A/R A/P A/P Unearne T.B. Remark
paid equip e Suppli e d (Morga (Taylo d paya s
rent ment equip es suppl insura n Co.) r Co.) Service ble O.E*
ment ies nce Revenue
1 (+) 10000 (+) Investme
10000 nt
2 (-) 800 (+)
800
3 - - - - - - - - - - -
4 (-) 4200 (+)
4200
5 (-) 1500 (+) (+) 1500
3000
6 (+) (+) (+)
1800 800 2600
8 (-) 480 (+) 480
9 (-) 1000 (-)
1000
10 (+) 1400 (+) Service
1400 revenue
12 (-) 600 (-) Salaries
600 expense
15 (+) 1000 (+) 1000
19 (+) (+) Service
2800 2800 revenue
25 (-) 1400 (-) Drawing
1400 s
26 (+) 70 (-) 70 Telepho
ne
expense
Total 2420 800 6000 3800 480 2800 1500 1600 1000 70 12130
16,3000 16,300
Problem: 03
On the basis of the above problem, now try to solve the following problem.
Michelle Pfeiffer opened a law office, Michelle Pfeiffer, attorney at law, on July 1, 2002. One July 31, 2002, the
balance sheet showed cash $4000, Account Receivables $1500, Supplies $500, Office equipment $5000, Accounts
Payable $4200 and Capital $6800.
During August the following transactions occurred:
1. Collected $1400 of A/R
2. Paid $2700 cash on A/P
3. Earned revenue of $7500 of which $3000 s collected in cash and the balance is due in September.
4. Purchased additional office equipment for $1000, paying$ 400 in cash and the balance on account.
5. Paid salaries $2500; Rent for August $900 and advertise expenses $350
6. Withdrew $550 in cash for personal use.
7. Received $2000 from Standard Federal Bank-money borrowed on a note payable.
8. Incurred utility expenses for month on account $250.
Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column heading should be as
follows:
Cash + A/R+ Supplies + Office Equipment = Notes payable +A/P+ Capital.
♣♣Financial Statements:

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From the problem number one-
Income Statement

Reports the revenues and expenses

for a specific period of time.
Net income – revenues exceed
expenses.
Net loss – expenses exceed revenues.
Owners’ Equity Statement

Owners’ Equity Statement

Statement indicates the reasons why
owner’s equity has increased or
decreased during the period.

Balance Sheet

Reports the assets, liabilities,

and owner’s equity at a specific
date.
Assets listed at the top,
followed by liabilities and
owner’s equity.
Total assets must equal total
liabilities and owner’s equity.

Statement of Cash Flows

Information for a specific

period of time.
Answers the following:

Where did cash come from?

Page 11 of 55
What was cash used for?
What was the change in the
cash balance?
 Chapter: Three: The Recording Process
♣♣Accounting cycle defined:
 Accounting cycle refers to an ongoing process to record and report in a systematic manner the economic
events (transactions) that affect the financial condition of the business entity. Accounting cycle includes
accounting functions, which are ongoing, never-ending and sequential. Hence they are called as accounting
cycle.
♣♣Basic accounting terms:
 Transactions: Business transactions are economic events that affect financial position of a business entity. For
instance, purchase raw materials for cash.
 Source Documents: Source documents or business papers, identify and describe transactions and events
entering the accounting process. For instance, cash memo.
 Account: An account is a detailed record showing the effects of transactions .i.e. the effects of increase or
decrease in each specific asset, liability, revenue, expense or owner’s equity.
 Double entry system: Two sided effects of each transaction are recorded in appropriate accounts. In this
regard, we need to keep in mind that debit equals credit.
 Accounting equation: Double entry system leads to the creation of accounting equation. The relationship
between the assets and liabilities plus owners’ equity is known as the accounting equation.
i.e. assets= liabilities + owners’ equity

♣♣Accounting Cycle:
Identification &
measurement of
transaction
Reversal entries Recording
(optional)

Post closing trail balance Posting

(optional) Accounting
Cycle

Closing entries Trial balance

Page 12 of 55
 Statement preparation Work sheet (optional) Adjustments

Adjusted trail balance

♣♣Step: one: identification and analysis of transaction

 The first step in accounting cycle starts with the bookkeeper’s task of identifying and measuring transactions.
The book keeper initially identifies the transaction from source documents. He recognizes and measures
economic events as transactions only when they are measurable in terms of money and able to change the
financial condition of the business enterprise.
 For instance: cash purchase taka 5,000.
 This is a transaction as this is measurable in terms of money and cause financial change by taka 5,000.
 Suppose the organization places an order for purchase of goods for taka 5,000. This is not a transaction, as this
does not bring any change in the financial condition of the business.
♣♣Step: Two: Recording:
 During recording we have to use the technique of double entry system i.e. the book keeper has to find out the
debit and credit for each transaction.
 He records the analyzed transactions in chronological record (according to date) along with explanation.
 This chronological record is called as the book of original entry or journal entry.
Debit & Credit:
 The term ‘Debit’ & ‘Credit’ gives an accounting explanation of the mathematical changes in the individual
accounts. There must be always equal increases and decreases so that equality of the two sides of the
accounting equation is maintained.
♣♣ Determination of Debit and Credit in Journal Entry:
1. Traditional or British System:
1. Personal Account (related with person)
Facility Provider- Credit
Facility Receiver- Debit
2. Real Account (assets account)
Which comes- Debit
Which goes- Credit
3. Nominal account ( income or expense account)
Revenues, gain- Credit
Expense- Debit
2. Modern or American System:
 Accounts are of five types:
 1. Assets Accounts AID-
Increase-Debit A-Assets
Decrease- Credit I-Increase
 2. Liability Account D-Debit
Increase-Credit Accounting equation:
Decrease- Debit Assets= Liabilities + Owners’ equity + Revenues-
 3. Capital Account Expenses
Increase-Credit Liability is opposite to asset so liability increase-it would be
Decrease- Debit credit.
 4. Revenue Account Capital same to liability
Increase-Credit Revenue same to liability
Decrease- Debit Expenses similar to assets.
 5. Expense Account
Increase-Debit

Page 13 of 55
 Decrease- Credit
♣♣How to write the journal entries?
 For example: Sony Ltd. purchases of equipment for taka 50,000 in cash at 1st January, 2011.
 The two parties are: (1) cash (2) equipment
 Cash and equipment both are assets.
 For the transaction equipment increases so equipment is debit and cash decreases so cash in credit as asset
increase debit and decrease credit.
Date Accounts Title and explanation Reference Debit Credit

2011 Equipment A/C……..Dr 50,000 50,000

Jan. 1 Cash A/C…………….Cr
OR Equipment A/C ……Dr 50,000
To Cash A/C 50,000

OR Equipment A/C 50,000

Cash A/C 50,000
(Purchased equipment on cash)
Example 01:
Mr. Farhan on completion of his business education starts a new business “Farhan Enterprise” by contributing taka
10,00,000 as capital on 1st July, 2011. The following transactions occurred during the first month of operation:
July 1 Hired a manager for a salary of taka 15,000 per month
July 5 Hired an office space for business for rent of taka 10,000 per month
July 7 Purchased office equipment from an outside supplier for taka 20,000 to be paid in next 60
days
July 15 Performed service on behalf of the clients’ taka 60,000 on account
July 23 Borrowed taka 20,000 from HSBC by issuing a note payable in two years
July 28 Paid rent for office space
July 28 Paid salary to manager
Solution:
 July 1: Cash invested taka 10,00,000 as capital
 This is a transaction
 Two parties are: (1) Cash (2) Capital (money invested by the owner).
 Due to the transaction cash increases and cash is an asset, so cash is debit.
 Due to the transaction capital increases and so capital credit. Therefore the entry for the transaction-

Date Accounts Title and explanation Reference Debit Credit

2011 Cash A/C 10,00,000
July 1 Capital A/C
(money invested by the owner) 10,00,000
 July 1: Hired a manager for a salary of taka 15,000 per month
 This is not a transaction.
 July 5: Hired an office space for business for rent of taka 10,000 per month
 This is not a transaction
 July 7: Purchased office equipment from an outside supplier for taka 20,000 to be paid in next 60 days
 This is a transaction
 Two parties are: (1) Office Equipment and (2) Account Payable
 Office equipment is an asset and asset increases, so office equipment is debit
 Account payable is a liability and liability increases, so account payable is credit.
 The entry for the transaction is:

Page 14 of 55
 Date Accounts Title and explanation Reference Debit Credit

2011 Office Equipment A/C 20,000

July 7 Accounts Payable A/C 20,000
(Purchased office equipment on account)
July 15: Performed service on behalf of the clients’ taka 60,000 on account
 This is a transaction. Two parties are: (1) Accounts Receivable (2) Service Revenue
 Account receivable is an asset and asset increases, so asset is debit.
 Service revenue increases, so service revenue is credit.
Date Accounts Title and explanation Reference Debit Credit

2011 Accounts Receivable A/C 60,000

July 15 Service Revenue A/C 60,000
(Performed services on account)
 July 23: Borrowed taka 20,000 from HSBC by issuing a note payable in two years.
 This is a transaction
 Two parties are: (1) Cash and (2) Notes payable
 Cash is an asset and asset increases, so cash is debit.
 Note payable is a liability and liability increases, so note payable is credit.
 The entry is:
Date Accounts Title and explanation Reference Debit Credit

2011 Cash A/C 20,000

July 23 Note Payable A/C 20,000
(Borrowed money by issuing a note payable)
July 28: Paid rent for office space
 This is a transaction
 Two parties are: (1) rent expense (2) cash
 Rent expense is an expense and expense increases, so rent expense is debit
 Cash is an asset and cash decreases, so cash is credit.
 The entry is:
Date Accounts Title and explanation Reference Debit Credit

2011 Rent expense A/C 10,000

July 28 Cash A/C 10,000
(Paid expenses in cash)

 July 28: Paid salary to manager

 This is a transaction
 Two parties are: (1) salaries expense (2) cash
 Salaries expense is an expense and expense increases, so salaries expense is debit
 Cash is an asset and cash decreases, so cash is credit.
 The entry is:
Date Accounts Title and explanation Reference Debit Credit

2011 Salaries expense A/C 15,000

July 28 Cash A/C 15,000
(Paid expenses in cash)
So, the journal entry:
Farhan Enterprise
Journal Entry
Date Accounts Title and explanation Reference Debit Credit

2011 Cash A/C 10,00,000

July 1 Capital A/C 10,00,000
(money invested by the owner)

2011 Office Equipment A/C 20,000

July 7 Accounts Payable A/C 20,000
(Purchased office equipment on account)

Page 15 of 55
2011 Accounts Receivable A/C 60,000
July 15 Service Revenue A/C 60,000
(Performed services on account)

2011 Cash A/C 20,000

July 23 Note Receivable A/C 20,000
(Borrowed money by issuing a note payable)

2011 Rent expense A/C 10,000

July 28 Cash A/C 10,000
(Paid expenses in cash)

2011 Salaries expense A/C 15,000

July 28 Cash A/C 15,000
(Paid expenses in cash)

Example 02:
Mr. Jasim invested taka 1,00,000; a computer for taka 20,000; furniture for taka 25,000 and bank balance for taka
50,000 at 1st January 2011 to start a business under the name SONY SOFTWARE LTD. The following are the
transactions for the month of January.
January 1 Paid office rent for taka 15000 for three months in advance.
January 2 Purchased a Laptop by signing a 10%, one year notes, for taka 40,000
January 5 Appointed a secretary for a salary of taka 10,000 per month.
January 8 Incurred advertising expense for taka 1000.
January 12 Took interview from 20 candidates to select 2 officer who will join at and will be
paid taka 10,000 per officer per month.
January 16 Developed a software for Rangs Limited for taka 20,000 and billed the client.
January 19 Purchased office supplies from Tata & Company for taka 10,000 paying taka 4,000
cash and the rest on credit
January 22 Paid wages for taka 3000
January 25 Developed software for Dhaka Limited for taka 20000 and 45% cash received.
January 26 Paid six months insurance policy in advance for taka 6,000
January 27 Received taka advances from Hasem & Co. for a software development.
January 29 Deposited money to the bank for taka 10,000
January 30 Withdrew taka 5000 cash for personal use.
January 31 Ordered for furniture for taka 20,000
January 31 Paid salaries to secretary and two officers.
January 31 Received 40% cash from Rangs Limited
January 31 Paid 50% of dues to Tata & Company.
Solution:
Sony Software Ltd.
Journal Entries
Date Accounts Title and explanation Refere Debit Credit
nce

2011 Cash A/C 1,00,000

Jan. 1 Furniture A/C 25,000
Computer A/C 20,000
Bank A/C 50,000
Capital A/C 1,95,000
(The owner invested taka 1,00,000 cash, furniture for taka 25,000,
computer for taka 20,000, and bank balance of taka 50,000 to start
the business)

Page 16 of 55
Jan. 1 Prepaid rent A/C 15,000
Cash A/C 15,000
(paid rent in advance)

Jan. 2 Laptop A/C 40,000

10% Notes Payable A/C 40,000
(Purchased laptop by signing 10% note)

Jan. 5 No transaction

Jan. 8 Advertising expense A/C 1,000

Accounts Payable A/C 1,000
(Incurred advertising expense on account)

Jan. 12 No transaction

Jan. 16 Accounts Receivable A/C 20,000

Service Revenue A/C 20,000
(Service provided on account)

Jan. 19 Office Supplies A/C 10,000

Cash A/C 4,000
Accounts Payable A/C 6,000
(Purchased supplies paying taka 4000 in cash and the rest is due)

Jan. 22 Wages expense A/C 3,000

Cash A/C 3,000
(Paid wages in cash)

Jan. 25 Cash A/C 9,000

Account Receivable A/C 11,000
Service Revenue A/C 20,000
(Provided services for taka 9,000 cash and the rest is due)

Jan. 26 Prepaid Insurance A/C 6,000

Cash A/C 6,000
(Paid insurance in advance)

Jan. 27 Cash A/C 10,000 10,000

Unearned Service Revenue A/C
(received money for providing service)

Jan. 29 Bank A/C 10,000 10,000

Cash A/C
(Deposited money into bank)

Jan. 30 Drawings A/C 5,000 5,000

Cash A/C
(Money withdrawn by the owner)

Jan. 31 No transaction

Jan. 31 Salaries expense A/C 16,667 16,667

Cash A/C
(paid salaries to the secretary and officers)

Jan. 31 Cash A/C 8,000 8,000

Account Receivable A/C
(received cash from customer who was billed earlier)

Jan. 31 Accounts Payable A/C 3,000 3,000

Cash A/C
(Cash paid to the suppliers)
Journal problem: 1
Ann Evans, CPA, completed the following transactions during August of this current year:

Page 17 of 55
Aug. 1: Begin a public accounting practice by investing $1500 in cash and office equipment having a $ 1200 fair value.
Aug. 1: Purchased office supplies $75 and office equipment $250, from Sierra Company on credit.
Aug. 1: Paid three months rent in advance on suitable office space, $900.
Aug. 5: Completed accounting work for a client and collected $ 60 cash there for.
Aug. 11:Paid Sierra Co. $ 125 of the amount owed for the items purchased on August 1.
Aug. 12: Paid the premium on insurance policy, $375.
Aug. 15: Completed accounting work for Nevada Co. on credit, $ 350.
Aug. 20: Ann Evans withdrew $100 from the Accounting practice for personal expenses.
Aug. 23: Completed Accounting work for Donner co. on credit, $200.
Aug. 25: Received $ 350 from Nevada co. for the work completed on August 15.
Aug. 31: Paid the utility bills, $ 35
Required:
Prepare journal entries for the transactions
Solution:
Ann Evans, CPA
Journal Entries
Particulars LF Dr (Tk) Cr (Tk)
Date
2003 Cash A/C 1500
Aug 1 Office equipment A/C 1200
Capital A/C 2700
(Investment made by owner)
Aug 1 Office Supplies A/C 75
Office equipment A/C 250
Accounts payable (Sierra Co) 325
(purchased office equipment and office supplies on
credit)
Aug 1 Prepaid Rent A/C 900
Cash A/C 900
(Rent paid in advance)
Aug 5 Cash A/C 60
Accounting Revenue 60
(Earned revenue and received cash)
Aug 11 Accounts payable (Sierra Co) 125
Cash A/C 125
(Money paid to Sierra Co.)
Aug 12 Prepaid Insurance 375
Cash A/C 375
(Insurance paid in advance)
Aug 15 Accounts Receivable (Neveda Co) 350
Accounting Revenue 350
(Revenue earned on credit)
Aug 20 Drawings A/C 100
Cash A/C 100
(Money withdrawn by the owner)
Aug 23 Accounts Receivable (Donner Co) 200
Accounting Revenue 200
(Revenue earned on credit)
Aug 25 Cash A/C 350
Accounts Receivable (Neveda Co) 350
(Money received from Neveda Co. for service
provided previously)
Aug 31 35
Utility Expense
35
Cash A/C
(Paid utility expense) 5,520 5,520
Journal problem: 2
Page 18 of 55
Dr. Wali Asahraf completed the following transactions in the practice of his profession during May of the current year:
May 1. Paid office rent for May tk. 1400
2. Purchased X –ray film and other supplies on account tk. 680
4. Received cash on account from patient’s tk.8476
6. Purchased equipment on account tk.5100
6. Paid cash to creditors on account tk. 4810
8. Sold X-ray film to another doctor at cost, as an accommodation, receiving cash tk. 120
10. Paid invoice for laboratory analysis tk.280
11. Paid cash for renewal of property insurance policy tk. 560
20. Out of the items of equipment purchased on May 6 one was defective. It was returned with the permission of
the supplier who agreed to reduce the account for the amount charged for the item tk. 800
26. Paid cash from business bank account for personal and family expenses tk. 3500
31. Recorded the cash received in payment of services (on a cash basis) to patients during May tk.8350
31. Recorded fees charged to patients on account for May tk. 10,000
Requirement:
Pass journal entries for the above transactions.
Journal problem: 3
Journalize the following entries:
1.Mr. Hasan starts his business. He invests TK 10,00,000; a motorcar of Tk 5,00,000; a machinery of Tk 1,00,000 and
Tk 2,00,000 in the Standard Chartered Bank to operate the business.
2. Purchase goods at a cost of Tk 30,000
3. Purchase office equipment of Tk 50,000
4. Purchase goods from Beximco ltd. co on account at Tk 15,000
5. Sold goods for cash Tk 1,00,000
6. Sold goods on credit to Mr. Rafiq at Tk 50,.000
7. Goods returned to Beximco ltd. co Tk 1000
8. Goods returned from Rafiq at Tk 2000
9. Deposited cash into the Bank Tk 2,00,000
10. Paid carriage on sales of goods Tk 500
11. Salary paid by cheque Tk 20,000
12. Purchase of 10% Government Defense Certificate Tk 5,00,000
13. Bank charges Tk 100 for services. On the other hand we earned interest Tk 200 from them.
14. Insurance prepaid Tk 2500
15.Wages outstanding Tk 2000

Chapter: Four: The Recording Process

♣♣Step: Three: Posting to the ledger.
 Ledger: The individual accounts are normally maintained in a book referred to as “Ledger”. It is the most
important book of accounts, because it includes all the summaries of transactions. Therefore, it is called the
‘principal book’ of the books of accounts. It provides a permanent record of the financial transactions of a
firm.
 Ledger means classification of account or grouping of accounts according to various heads.
 There are two ways to prepare ledger, viz (1) T- account (Traditional system) and (2) Continuous balancing
method ( American method)
Under T-account, there are 8 columns:
 1. In left side: Date, particulars, reference, taka
 2. In right side: Date, particulars, reference, taka
Under continuous balancing method, there are 7 columns:
 Date, particulars, reference, debit, credit, debit balance, credit balance.
♣♣ Form of ledger:
 T-account
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka

Page 19 of 55
  Continuous balancing method
Date Particulars Ref. Debit Credit Balance
Debit Credit

Ledger from the previous example:

Farhan Enterprise
Journal Entry
Date Accounts Title and explanation Reference Debit Credit
2011 Cash A/C 10,00,000
July 1 Capital A/C 10,00,000
(money invested by the owner)
2011 Office Equipment A/C 20,000
July 7 Accounts Payable A/C 20,000
(Purchased office equipment on account)
2011 Accounts Receivable A/C 60,000
July 15 Service Revenue A/C 60,000
(Performed services on account)
2011 Cash A/C 20,000
July 23 Note payable A/C 20,000
(Borrowed money by issuing a note payable)
2011 Rent expense A/C 10,000
July 28 Cash A/C 10,000
(Paid expenses in cash)
2011 Salaries expense A/C 15,000
July 28 Cash A/C 15,000
(Paid expenses in cash)
CashA/C
Capital A/C
Cash A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Capital A/C 10,00,000
July 1
Capital A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Balance C/D 10,00,000 2011 Cash A/C 10,00,000
July 31 10,00,000 July 1 10,00,000
Office Equipment A/C
Accounts Payable A/C
Office Equipment A/C
Dr Cr
Page 20 of 55
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Accounts Payable A/C 20,000 2011 Balance C/D 20,000
July 7 20,000 July 31 20,000

Accounts Payable A/C

Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Balance C/D 20,000 2011 Office Equipment A/C 20,000
July 31 20,000 July 7 20,000
Accounts Receivable A/C
Service Revenue A/C
Accounts Receivable A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Service Revenue A/C 60,000 2011 Balance C/D 60,000
July 15 60,000 July 31 60,000

Service Revenue A/C

Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Balance C/D 60,000 2011 Accounts Receivable 60,000
July 31 60,000 July 15 A/C 60,000
Cash A/C
Note Payable A/C
Cash A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 July 1 Capital A/C 10,00,000
July 23 Note payable A/C 20,000
Rent expense A/C
Cash A/C
Rent expense A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 Cash A/C 10,000 2011 Balance C/D 10,000
July 28 10,000 July 31 10,000
Cash A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 July 1 Capital A/C 10,00,000 2011 Rent expense A/C 10,000
July 23 Note payable A/C 20,000 July 28

Page 21 of 55
Salaries expense A/C
Cash A/C
Salaries expense A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka
2011 July 28 Cash A/C 15,000 2011 Balance C/D 15,000
15,000 July 31 15,000
Cash A/C
Dr Cr
Date Particular Ref. Taka Date Particulars Ref. Taka

2011 July 1 Capital A/C 10,00,00 2011 July28 Rent expense A/C 10,000
July 23 Note payable A/C 0 July 28 Salaries expense A/C 15,000
20,000 July 31 Balance C/D 9,95,000
10,20,000
10,20,00
0

♣♣ Continuous balancing method:

Cash A/C
Capital A/C
Cash A/C
Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Capital A/C 10,00,000 10,00,000
July 1
Capital A/C
Date Particular Ref. Debit Credit Balance
Debit Credit
2011 Cash A/C 10,00,000 10,00,000
July 31
Office Equipment A/C
Accounts Payable A/C
Office Equipment A/C
Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Accounts 20,000 20,000
July 7 Payable A/C
Accounts Payable A/C

Date Particular Ref. Debit Credit Balance

Page 22 of 55
 Debit Credit
2011 Office Equipment A/C 20,000 20,000
July 7
Accounts Receivable A/C
Service Revenue A/C
Accounts Receivable A/C

Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Service Revenue A/C 60,000 60,000
July 15
Service Revenue A/C
Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Accounts receivable A/C 60,000 60,000
July 31
Cash A/C
Note payable A/C
Cash A/C

Date Particular Ref. Debit Credit Balance

Debit Credit
2011 July 1 Capital A/C 10,00,000 10,00,000
July 23 Note payable A/C 20,000 10,20,000
Note payable A/C
Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Cash A/C 20,000 20,000
July 31
Rent expense A/C
Cash A/C
Rent expense A/C

Date Particular Ref. Debit Credit Balance

Debit Credit
2011 Cash A/C 10,000 10,000
July 28
Cash A/C
Date Particular Ref. Debit Credit Balance

Page 23 of 55
 Debit Credit
2011 July 1 Capital A/C 10,00,000 10,00,000
July 23 Note Receivable A/C 20,000 10,20,000
July 28 Rent expense A/C 10,000 10,10,000
Salaries expense A/C
Cash A/C
Salaries expense A/C

Date Particular Ref. Debit Credit Balance

Debit Credit
2011 JJu Cash A/C 15,000 15,000
ly 28
Cash A/C
Date Particular Ref. Debit Credit Balance

Debit Credit
2011 July 1 Capital A/C 10,00,000 10,00,0000
July 23 Note Receivable A/C 20,000 10,20,000
July 28 Rent expense A/C 10,000 10,10,000
July 28 Salaries expense A/C 15,000 9,95,000

Chapter: Five: The Recording Process

♣♣Step: Four: Preparation of trail balance.
 A trial balance is a list of all ledger balances. The debit balance of a ledger will come to debit side of trail
balance and the credit balance of a ledger will come to the credit side of a trial balance.
 The trial balance is prepared to see the arithmetical accuracy of posting.
 Basically there are four columns in a trail balance: (1) Serial (2) Accounts Title (3) Debit and (4) Credit.
 Form of a trial balance:
Name of the company
Trial Balance
As at 31st December, 2011

Serial Number Accounts Title Reference Debit Credit

 Note: The total of debit must agree with the total of credit.
 If there is any shortage in any side of trail balance then the shortage will be treated as suspense account.
Farhan Enterprise
Trial Balance
As at 31st July 2005
Serial Accounts Title Reference Debit Credit

Page 24 of 55
 1. Cash A/C 9,95,000
2. Capital A/C 10,00,000
3. Office Equipment A/C 20,000
4. Accounts Payable A/C 20,000
5. Accounts Receivable A/C 60,000
6. Service Revenue A/C 60,000
7. Note Payable A/C 20,000
8. Rent Expense A/C 10,000
9. Salaries Expense A/C 15,000
Total 11,00,000 11,00,000
 General balance of ledger:
 Assets- Debit Balance
 Liabilities- Credit Balance
 Capital- Credit Balance
 Revenue- Credit Balance
 Expense- Debit Balance
♣♣ Errors that can not be detected by trial balance:
Different classes of errors that may exist in spite of the agreement of the Trial Balance are discussed below:
(a) Errors of omission: Such an error arises when any transaction is either wholly or partially unrecorded in the in the
books. In the former case, the trial balance will not be affected, and thus the error will be more difficult to detect.
Where only one aspect of a transaction is recorded, the omission will throw the Trial Balance out of agreement.
(b) Errors of commission: Errors of commission arise when transactions are incorrectly recorded, either wholly or
partially. In the former case the Trial Balance will not the trial balance out of agreement to that extent.
(c) Clerical errors: A clerical error is a form of error of commission. It may consist of an incorrect posting, or a mistake
in casting, or the transposition of figures, or posting to the wrong account. Unless the error affects the debit and
credit equally, the incorrect posting and mistakes in casting will cause the trial balance to be out of the agreement.
Posting to the wrong account but on correct side, however, will not affect the agreement of the Trial Balance.
(d) Errors of Principle: An error of principle arises by reason of a transaction being recorded in a fundamentally
incorrect manner. Certain errors of principle may not affect the ultimate profit, but it may cause a revenue item being
posted to wrong revenue account. Major errors of principle directly affect profit. They may be caused by treating a
revenue item as an asset or liability, or vice versa. These errors will not throw the trial balance out of agreement.
(e) Compensating errors: A compensating error is one, which is counter balanced by another error or errors of the same
amount either in the same account or other accounts. Such error will not cause the Trial Balance to disagree.
From the above discussion it is clear that, a Trial Balance may agree in spite of the presence of many errors mentioned
above. Hence an agreed Trial Balance cannot be regarded as a conclusive evidence of the correctness of the books of
accounts, rather it may be regarded as a prima facie proof that the posting are arithmetically correct.
Problem 1:
From the following balances of accounts prepare a Trial Balance as at 31 st December 1991:
Particulars Tk Particulars Tk
Opening Stock 41,000 Bad Debts 600
Purchases 1, 10,000 Sales 1,80,000
Drawings 18,000 Sundry Debtors 14,000
Sales Return 6,000 Fixed Assets 35,000
Wages 5,400 Creditors 62,500
Salaries 9,000 Cash 8,200
Travelling 950 General Expenses 1,200
Rent, Rates and Taxes 2,400 Advertisements 900
Purchase Returns 1,500 Capital 8,750
Interest Paid 1,200 Investments 3,500
Discount Allowed 800 Bank Overdraft 5,000
Insurance Charges 600 Commission Received 1,000
On 31st December 1991 closing Stock was valued at Tk 16,000.
Solution: Trial Balance
as at 31 December, 1991
Page 25 of 55
 Accounts L.F. Debit (Tk) Credit (Tk)
Opening Stock 41,000
Purchases 1,10,000
Drawings 18,000
Sales Returns 6,000
Wages 5,400
Salaries 9,000
Traveling 950
Rent, Rates and Taxes 2,400
Purchase Returns 1,500
Interest Paid 1,200
Discount Allowed 800
Insurance Charges 600
Bad Debts 600
Sales 1,80,000
Sundry Debtors 14,000
Fixed Assets 35,000
Creditors 62,500
Cash 8,200
General Expenses 1,200
Advertisements 900
Capital 8,750
Investments 3,500
Bank Overdraft 5,000
Commission Received 1,000
Total 2,58,750 2,58,750
Note: Closing Stocks are not included in the Trial Balance

Problem 2:
From the following balances of accounts prepare a Trial Balance as at 31 st July2000:
Accounts Tk
Capital 8,900
Drawings 1,000
Stock (1.7.1999) 3,700
Purchases 23,125
Sales 39,400
Motor Vehicles 1,450
Cash in hand 135
Sundry Creditors 4,976
Sundry Debtors 13,970
Bank Overdraft 900
Wages and Salaries 6,200
Lighting and Heating 315
Equipment 3,500
Carriage Outward 231
Return Inwards 205
Provision for Bad Debts 425
Returns Outward 316
Discount Allowed 280
Discount Received 315
Rent, Rates and Insurance 1,121
Answer: Total of the Debit and Credit are Tk 55,232.
Notes:
1. Stock (1.7.1999) is the Opening Stock
2. ‘Provision for Bad Debts’ is a liability
3.Discount Allowed is an expense
Page 26 of 55
4.Discount Received is a revenue
Problem no.: 3
The accounts in the ledger of Asbury Park Inc. as of August 31 of the current year are listed in alphabetical order as
follows. All accounts have normal balances. The balance of the cash account has been intentionally omitted.
Accounts Payable Tk 18,750
Accounts Receivable Tk 20,500
Capital Stock Tk 50,000
Cash ?
Dividends Tk 20,000
Fees earned Tk 3,15,000
Insurance Expense Tk 5,000
Land Tk 1,25,000
Miscellaneous Expense Tk 9,900
Notes Payable Tk 35,000
Prepaid Insurance Tk 3150
Rent Expense Tk 58,000
Retained Earnings Tk 60,290
Supplies Tk 4,100
Supplies Expense Tk 5,900
Unearned Rent Tk 6,000
Utilities Expense Tk 41,500
Wages Expense Tk1, 75,000
Prepare a Trial balance, listing the accounts in their proper order and inserting the missing figure for cash.

Chapter: Six: The Recording Process

♣♣Step: Five: Preparation of Adjusting Entries.
♣♣ Why adjustments are made?
 1. Periodicity: Adjusting entries are needed whenever transactions affect the revenue or expense of more than
one accounting period.
For example: insurance premium paid for 3 years recorded as ‘Prepaid insurance’ .At the end of the year 1, one
years insurance premium expired and shown as ‘Insurance expense’ one third of the amount and the rest two
third shown as ‘Prepaid insurance’.
 2. Proper matching of cost and revenue: The accrual basis of accounting recognizes revenue when sales are
made or services are rendered even though cash is not yet received. Expenses are recognized as incurred
regardless of whether or not cash is paid.
 3. Deferral and accrual accounting: A deferral is a postponement of the recognition of an expense already
paid or of revenue already received.
For example: Rent income received 24,000 Tk. for two years in January 1.At the end of the first year it would
not be feasible to record 24,000 Tk. as income for that year. It should record 12,000 Tk, as income for that year
and 12,000 Tk. as advance income (liability) for that year.
Journal:
January 1. Cash a/c 24,000
Rent income 24, 000
Dec .31:
Rent income 12, 000
Unearned rent (liability) 12, 000
4. Accurate operational result and reasonable valuation of assets: Accounting works as an information
system and its primary objective is to provide accurate and valid information to its uses. This information helps
users to rationalize their decisions making.
♣♣ What to be adjusted?
Generally two types of accounts are adjusted-
 1. Recorded trial balance accounts: All the balances from ledger accounts are recorded in the trial balance.
For example: in the Trial Balance (T/B) consumable supply expenses (Dr balance) of tk. 3,000.At the
adjustment given that stock of consumable supplies on hand tk.1, 800 at the end of the period.
To adjust the following journal entries are needed:
Page 27 of 55
 Dec.31. Consumable Supply Stock Dr. 1,800
Consumable supply expense Cr.1, 800
Note: We assume that at the time of procuring supply, we recorded the supply as ‘supply Expenses’.
 2. Unrecorded accounts or out of trial balance accounts:
Those transactions that are not yet recorded have to be adjusted.
For example: Depreciation to be charged on equipment @ 10% on tk. 40,000.
To adjust the following journal entries are needed:
Dec 31. Depreciation expenses 4,000
Accumulated Depreciation –Equipment 4,000

Examples of types of adjustments:

Types of adjustments:
1.Assets/Expenses adjustments
2.Assets/evenues adjustments
3.Liablity/Expenses adjustments
4.Liablity/Revenue adjustments

1. Assets/ expenses adjustments:

Example 1:
(a) When supplies are treated as ‘Asset’:
In the T/B supplies stock has a Dr. Balance of tk. 10,000.An actual physical count at the end of the year shows tk. 3,000
of supplies on hand.
To adjust the following journal entries are needed:
Dec 31. Supplies Expense 7, 000
Supplies stock/Supplies inventory/supplies on hand 7,000
(b) When supplies are treated as ‘Expenses’:
Example 1:
In the T/B supplies expenses has a Dr. Balance of tk. 10,000.An actual physical count at the end of the year shows tk.
3,000 of supplies on hand.
To adjust the following journal entries are needed:
Dec 31. Supplies stock/Supplies inventory/supplies on hand 3,000
Supplies Expense 3,000
Example 2:
Prepaid insurance in the T/B tk 3,000(for three years.); adjust it at the end of the first year.
To adjust the following journal entries are needed: (as an asset):
At the end of year 1: Insurance expense 1,000
Prepaid insurance 1,000
To adjust the following journal entries are needed (as an expense):
At the end of year 1: Prepaid insurance 2,000
Insurance expense 2,000
Example 3:
A Company purchased a Motorcar at a cost of tk.1, 00, 000 which ca be used for an estimated life of 10 years with a
salvage value of tk. 20,000.
Calculation of annual depreciation: cost of Motor car =Tk.1, 00, 000
(-) Salvage value =tk. 20,000
------------------------------
Depreciable value=Tk. 80,000
Annual depreciation = (tk.80, 000/10 years) =Tk. 8000
To adjust the following journal entries are needed:
Deprecation Expenses –Motor Car 8,000
Accumulated depreciation-Motor Car 8,000
Example 4:

Page 28 of 55
Accounts receivable of a company shows a balance of tk. 12000 in the T/B.5% of accounts receivable is estimated to be
uncollectible.
Calculation of estimated uncollectible accounts= (12,000*5%) =tk. 600
To adjust the following journal entries are needed:
Bad debt expenses /Uncollectible accounts expenses 600
Allowance for doubtful accounts 600

2.Assets/revenues account:

Example 5: A Company invests some amount in fixed deposit account. Interest is received twice a year on May 1 and
November 1 in the amount of tk.1200 on each date. Pass entry on the closing date of December 31,2002

Adjusting entry:
Dec. 31,2003 Interest Receivable 400
Interest income 400
(1200*2/6)= Tk 400
Example 6:
A company let out a property at a monthly rental of tk. 300 on 10th December, 2000. Pass the entry on the calendar year
closing date.
Adjusting entry:
Dec 31,2000: Rent Receivable 200
Rent income 200

3.Liability/expense adjustments:
Example 7:
Wages paid for four weeks of December at Tk. 2,000 per week but the wages for the last three working days accrues at
the year-end closing date.
Adjusting entry:
Dec 31. Wages expense 1,000
Wages payable 1,000
Note: to record one half of a weeks wages
4.Liability/ Revenue adjustments

Example 8:
Rent received in advance for three years tk. 3,000 on January 1.
January 1: Cash a/c 3,000
Unearned Rent 3,000
(To record the rent received in advance)
Adjusting entry:
Dec 31. Unearned rent 1,000
Rent Income 1,000
(To record portion of advance earned in current year)
Problem 1:
Selected accounts of City Real Estate firm, are shown below as of January 31,2003,of the current
year before any adjusting entries has been made:
Particulars D
Prepaid Insurance 2,700
Supplies on hand 1,000
Office Equipment 8,400
Unearned rental fees 3,000
Salaries expenses 2,900
Renal fees earned 12,000
Total 15,000 15,000
Based on the following information, record in a general journal the necessary adjusting entries on January 31:
(a) Prepaid insurance represents premiums for 3 years paid on January 1
Page 29 of 55
(b) Supplies of Tk. 400 were on hand January 31
(c) Office equipment is expected to last 10 years
(d) The firm collected 6 months rent in advance on January 1 from a tenant renting space for Tk 500 per month
(e) Accrued salaries not recorded as of January 31 are Tk. 360
Solution:
Date Particulars L.F. Dr (Tk) Cr (Tk)
2003 (a) Insurance Expense 75
Jan 31 Prepaid Insurance 75
(Three yeas i.e. 36 months insurance premium =Tk 2,700
One months premium (2,700*1/36)=Tk 75)
” (To record insurance expense)
(b) Supplies Expense 600
Supplies on hand 600
” (Supplies Expense=1000-400=Tk 600)
(To record supplies expense)
(c) Depreciation Expense –Equipment 70
Accumulated Depreciation –Equipment 70
” (Annual Depreciation=8,400/10=Tk 840
Monthly Depreciation=840/12=Tk 70)
(To record depreciation expense)
” (d) Unearned Rental Fees 500
Rental Income 500
(To record rental income earned)
(e) Salaries Expense 360
Salaries Payable 360
(To record salaries expense)
Problem 2:
Cox’s Bazar Beach Motel adjusts and closes its accounts once a year on December 31.Most guests of the motel pay at
the time they check out and the amounts collected are credited to ‘rental revenue’. A few guests pay in advance for
rooms and these amounts are credited to ‘unearned rental revenue’ at the time of receipt. The following information is
available as a source for preparing adjusting entries a December 31.
(a) A one year bank loan in the amount of Tk. 80,000 ha been obtained on November 1.No interest has been paid and
no and no interest expense has been recorded. The interest accrued at December 31 is Tk. 1,600
(b) On December 16 a suite of rooms was rented to a corporation for 6 months at a monthly rental of Tk. 3200. The
entire6 months rent of Tk. 19,200 was collected in advance and credited to unearned rental revenue. At December
31 the amount of tk.1600 representing one-half months rent was considered to be earned and the remainder of Tk.
17,600 was considered to be unearned.
(c) As of December 31, the motel has earned Tk. 18,090 rental revenue from current guests who will not be billed until
they are ready to check out.
(d) Salaries earned by employees at December 31,but not yet paid to Tk. 11,640
(e) Depreciation on the motel for the year was Tk. 51,250
(f) Depreciation on the station wagon owned by the motel was based on a 4-year life. The station wagon was
purchased on September 1 of this current year at a cost of 12,600.Depreciation for four months should be recorded
at December 31.
(g) On December 31, Cox’s Bazar beach motel entered into an agreement to host the national shooter society’s
convention in June of next year. The motel expects to earn rental revenue of at least tk.30, 000 from the
convention.
Solution: Cox’s Bazar Beach Motel
Adjusting journal entries
Date Particulars LF Dr (Tk) Cr (Tk)
Dec (a) Interest Expense 1600
31 Interest payable 1600
(To record interest expense)
(b) Unearned Rental Revenue 1600
Rental Income 1600
(To record rental income earned)
Page 30 of 55
 (c) Rent Receivable 18,090
Rent Income 18,090
(To record rental income earned on account)
(d) Salary Expense 11,640
Salary payable 11,640
(To record salary expense)
(e) Deprecation Expense-Motel 51,250
Accumulated Depreciation –Motel 51,250
(To record depreciation on Motel)
(f) Deprecation Expense-Station Wagon 1050
Accumulated Depreciation – Station Wagon 1050
(12,600/4=3150/1/3=Tk 1,050)
(To record depreciation expense om station wagon)
(g) Agreement for rental did not constitute a transaction - -
Problem no.3:
The information presented below was obtained from a review of the ledger (before adjustments) and other records of
Golden Heart Co. Ltd. at the end of the current fiscal year ended December 31:
(a) As Office Supplies have been purchased during the year they have been debited to Office Supplies Expense,
Which has a balance of tk. 995, at December 31. The inventory of supplies at that date totals tk. 280.
(b) On December 31 Rent Expense has a debit balance of tk. 26,000, which includes rent of tk. 2000 for January of
the following year paid on December 31 of the preceding year.
(c) Sales commissions are uniformly 1% of net sales and are paid the tenth of the month following the sales. Net sales
for the month ended December 31 were tk. 90,500. Only commissions paid have been recorded during the year.
(d) Prepaid Advertising has a debit balance of tk. 7,800 at December 31, which represents the advance payment on
March 1 of a yearly contract for a uniform amount of space in 52 consecutive issues of a weekly publication. As of
December 31 advertisements had appeared in 44 issues.
(e) Unearned Rent has a credit balance of tk. 14,700 composed of the following:
(1) January 1 balance of tk. 2700 representing rent prepaid for three months January through March and
(2) a credit of tk. 12,000 representing advance payment of rent for twelve months at tk. 1000 a month
beginning with April.
(f) Management Fees Earned has a credit balance of tk. 1,30,750 at December 31. The unbilled fees at December 31
total tk. 7,150.
Journalize the adjusting entries as of December 31 of the current fiscal year.
Solution: Adjusting entries on December 31
Date Particulars L.F. Dr Cr
Dec. 31 (a) Supplies 280
Office Supplies Expense 280
(To adjust supplies)
(b) Prepaid Rent 2000
Rent expense 2000
(To record prepaid rent)
Commission Expense
(c) Commission Payable 905
(To record commission expense) 905
Advertising Expense
Prepaid advertisement 6600
(d) (To record advertising expense) 6600
Unearned Rent
(e) Rent Income 11,700
(To record rental income earned) 11,700
Management Fees Receivable
Management Fees Income 7150
(f) (To record management fees income) 7150

Calculation:
Page 31 of 55
(a) Commission expense (for December) = (tk.90, 500 1%) = tk. 905
(b) Advertisement expense = (7800 44/52) = Tk.6600
(C) (1) Rental Income tk. 2700
(2) Rental income = (tk.12, 000 9/12) = tk.9, 000(April to Dec.)
♣♣ Step: Six: Preparation of Adjusted Trial Balance:
 After adjusting entries, we have to prepare adjusted ledger then we have to prepare adjusted trial balance.
 From a given problem:
 First we have to prepare journal entries
 Then we have to prepare ledger
 Then trial balance
 After that we have to prepare adjusting entries by using additional information.
 Then we have to prepare adjusted ledger
 Finally we have to prepare adjusted trial balance.
Problem:
Mr. Jasim invested taka 1,00,000; a computer for taka 20,000; furniture for taka 25,000 and bank balance for taka
50,000 at 1st January 2011 to start a business under the name SONY SOFTWARE LTD. The following are the
transactions for the month of January.
January 1 Paid office rent for taka 15000 for three months in advance.
January 2 Purchased a Laptop by signing a 10%, one year notes, for taka 40,000
January 5 Appointed a secretary for a salary of taka 10,000 per month.
January 8 Incurred advertising expense for taka 1000.
January 12 Took interview from 20 candidates to select 2 officer who will join at and will be
paid taka 10,000 per officer per month.
January 16 Developed a software for Rangs Limited for taka 20,000 and billed the client.
January 19 Purchased office supplies from Tata & Company for taka 10,000 paying taka
4,000 cash and the rest on credit
January 22 Paid wages for taka 3000
January 25 Developed software for Dhaka Limited for taka 20000 and 45% cash received.
January 26 Paid six months insurance policy in advance for taka 6,000
January 27 Received taka 10,000 advances from Hasem & Co. for a software development.
January 29 Deposited money to the bank for taka 10,000
January 30 Withdrew taka 5000 cash for personal use.
January 31 Ordered for furniture for taka 20,000
January 31 Paid salaries to secretary and two officers.
January 31 Received 40% cash from Rangs Limited
January 31 Paid 50% of dues to Tata & Company.
Additional Information:
a. Economic life of Computer is 10 years.
b. Furniture is depreciated @ 10% per year.
c. Office rent is paid for three months.
d. Economic life of Laptop is 8 years.
e. Interest on note is due for 1 month.
f. At the end of the month supplies at hand taka 4,000
g. Insurance is paid for 6 months.
h. 50% of unearned revenue is earned during the month.
Solution:
Sony Software Ltd.
Journal Entries
Date Accounts Title and explanation Refer Debit Credit

Page 32 of 55
 ence
2011 Cash A/C 1,00,000
Jan. 1 Furniture A/C 25,000
Computer A/C 20,000
Bank A/C 50,000
Capital A/C 1,95,000
(The owner invested taka 1,00,000 cash, furniture for
taka 25,000, computer for taka 20,000, and bank
balance of taka 50,000 to start the business)
Jan. 1 Prepaid rent A/C 15,000
Cash A/C 15,000
(paid rent in advance)
Jan. 2 Laptop A/C 40,000
10% Notes Payable A/C 40,000
(Purchased laptop by signing 10% note)
Jan. 5 No transaction

Jan. 8 Advertising expense A/C 1,000

Accounts Payable A/C 1,000
(Incurred advertising expense on account)
Jan. 12 No transaction
Jan. 16 Accounts Receivable A/C 20,000
Service Revenue A/C 20,000
(Service provided on account)
Jan. 19 Office Supplies A/C 10,000
Cash A/C 4,000
Accounts Payable A/C 6,000
(Purchased supplies paying taka 4000 in cash and the
rest is due)
Jan. 22 Wages expense A/C 3,000
Cash A/C 3,000
(Paid wages in cash)
Jan. 25 Cash A/C 9,000
Account Receivable A/C 11,000
Service Revenue A/C 20,000
(Provided services for taka 9,000 cash and the rest is
due)
Jan. 26 Prepaid Insurance A/C 6,000
Cash A/C 6,000
(Paid insurance in advance)
Jan. 27 Cash A/C 10,000
Unearned Service Revenue A/C 10,000
(received money for providing service)
Jan. 29 Bank A/C 10,000
Cash A/C 10,000
(Deposited money into bank)

Page 33 of 55
Jan. 30 Drawings A/C 5,000
Cash A/C 5,000
(Money withdrawn by the owner)
Jan. 31 No transaction
Jan. 31 Salaries expense A/C 16,667
Cash A/C 16,667
(paid salaries to the secretary and officers)
Jan. 31 Cash A/C 8,000
Account Receivable A/C 8,000
(received cash from customer who was billed earlier)
Jan. 31 Accounts Payable A/C 3,000
Cash A/C 3,000
(Cash paid to the suppliers)
Posting to Ledger:
Cash A/C
Date Particulars Ref. Debit Credit Balance
Debit Credit
2011
Jan 1 Capital A/C 1,00,000 1,00,000
Jan 1 Prepaid rent A/C 15,000 85,000
Jan 19 Office supplies A/C 4,000 81,000
Jan 22 Wages expense A/C 3,000 78,000
Jan 25 Service revenue A/C 9,000 87,000
Jan 26 Prepaid insurance A/C 6,000 81,000
Jan 27 Unearned service revenue A/C 10,000 91,000
Jan 29 Bank A/C 10,000 81,000
Jan 30 Drawing A/C 5,000 76,000
Jan 31 Salaries expense A/C 16,667 59,333
Jan 31 Accounts receivable A/C 8,000 67,333
Jan 31 Accounts payable A/C 3,000 64,333

Furniture A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 1 Capital A/C 25,000 25,000
Computer A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 1 Capital A/C 20,000 20,000
Bank A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
Page 34 of 55
2011 Jan 1 Capital A/C 50,000 50,000
Cash A/C 10,000 60,000
Capital A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011
Jan 1 Cash A/C 1,00,000 1,00,000
Jan 1 Furniture A/C 25,000 1,25,000
Jan 1 Computer A/C 20,000 1,45,000
Jan 1 Bank A/C 50,000 1,95,000

Prepaid Rent A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Cash A/C 15,000 15,000
Jan 1
Laptop A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 10 % Notes Payable A/C 40,000 40,000
Jan 2
10% Notes Payable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Laptop A/C 40,000 40,000
Jan 2
Advertising expense A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Accounts Payable A/C 1,000 1,000
Jan 1
Accounts Payable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011
Jan 8 Advertising expense A/C 1,000 1,000
Jan 19 Office Supplies A/C 6,000 7,000

Page 35 of 55
Jan 31 Cash A/C 3,000 4,000
Accounts Receivable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011
Jan 16 Service Revenue A/C 20,000 20,000
Jan 25 Service Revenue A/C 11,000 31,000
Jan 31 Cash A/C 8,000 23,000

Service Revenue A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011
Jan 16 Accounts Receivable A/C 20,000 20,000
Jan 25 Cash A/C 9,000 29,000
Jan 25 Accounts Receivable A/C 11,000 40,000
Office Supplies A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011
Jan 19 Cash A/C 4,000 4,000
Jan 19 Accounts Payable A/C 6,000 10,000
Wages A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 22 Cash A/C 3,000 3,000
Prepaid Insurance A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 26 Cash A/C 6,000 6,000

Unearned Service Revenue A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 27 Cash A/C 10,000 10,000
Drawings A/C
Page 36 of 55
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 30 Cash A/C 5,000 5,000

Salaries Expense A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Cash A/C 16,667 16,667

Trail Balance:
Sony Software Ltd.
Trail Balance
As at 31st January, 2011
Serial Accounts title Reference Debit Credit

1. Cash A/C 64,333

2. Furniture A/C 25,000
3. Computer A/C 20,000
4. Bank A/C 60,000
5. Capital A/C 1,95,000
6. Prepaid Rent A/C 15,000
7. Laptop A/C 40,000
8. 10% Notes Payable A/C 40,000
9. Advertising Expense A/C 1,000
10. Accounts Payable A/C 4,000
11. Accounts Receivable A/C 23,000
12. Service Revenue A/C 40,000
13. Office Supplies A/C 10,000
14. Wages Expense A/C 3,000
15. Prepaid Insurance A/C 6,000
16. Unearned Service Revenue A/C 10,000
17. Drawings A/C 5,000
18. Salaries Expense A/C 16,667
2,89,000 2,89,000

Adjusting Entries:
Sony Software Ltd.
Adjusting entries
Date Accounts Title and Explanation Ref. Debit Credit

2011 Jan 31 Depreciation Expense- Computer 167

Accumulated Expense- Computer 167
(To record the depreciation expense of computer)
2011 Jan 31 Depreciation Expense- Furniture 208

Page 37 of 55
 Accumulated Expense- Furniture 208
(To record the depreciation expense of furniture)
2011 Jan 31 Rent expense A/C 5,000
Prepaid rent A/C 5,000
(To record rent expense)
2011 Jan 31 Depreciation Expense- Laptop 417
Accumulated Expense- Laptop 417
(To record the depreciation expense of Laptop)
2011 Jan 31 Interest expense A/C 333
Interest payable A/C 333
(To record interest expense)
2011 Jan 31 Supplies expense A/C 6,000
Supplies A/C 6,000
(To record supplies expense)
2011 Jan 31 Insurance expense A/C 1,000
Prepaid insurance A/C 1,000
(To record insurance expense)
2011 Jan 31 Unearned Service Revenue A/C 5,000
Service Revenue A/C 5,000
(To record service revenue earned)
Adjusted Ledgers:
Cash A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 64,333
Furniture A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 25,000
Computer A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 20,000
Bank A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 60,000
Capital A/C
Page 38 of 55
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 1,95,000

Prepaid Rent A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 15,000
2011 Jan 31 Rent expense A/C 5,000 10,000

Laptop A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 40,000
10% Notes Payable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 40,000
Advertising expense A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 1,000
Accounts Receivable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 23,000
Service Revenue A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 40,000
2011 Jan 31 Unearned service revenue A/C 5,000 45,000
Office Supplies A/C
Date Particulars Ref. Debit Credit Balance

Page 39 of 55
 Debit Credit
2011 Jan 31 Balance b/d 6,000 10,000
2011 Jan 31 Office supplies expense A/C 4,000

Wages A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 3,000
Prepaid Insurance A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 6,000
2011 Jan 31 Insurance expense A/C 1,000 5,000
Unearned Service Revenue A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 10,000
2011 Jan 31 Service revenue A/C 5,000 5,000
Drawings A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 5,000
Salaries Expense A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Jan 31 Balance b/d 16,667
Depreciation expense- Computer A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Accumulated Depreciation - Computer A/C 167 167
Jan 31
Accumulated Depreciation - Computer A/C
Page 40 of 55
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Depreciation expense- Computer A/C 167 167
Jan 31

Depreciation expense- Furniture A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Accumulated Depreciation - Furniture A/C 208 208
Jan 31
Accumulated Depreciation - Furniture A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Depreciation Expense- Furniture A/C 208 208
Jan 31
Rent Expense A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Prepaid rent A/C 5,000 5,000
Jan 31
Depreciation expense- Laptop A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Accumulated Depreciation- Laptop A/C 417 417
Jan 31
Accumulated Depreciation - Laptop A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Depreciation Expense- Laptop A/C 417 417
Jan 31
Interest Expense A/C
Date Particulars Ref. Debit Credit Balance

Page 41 of 55
 Debit Credit
2011 Interest payable A/C 333 333
Jan 31
Interest payable A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Interest Expense A/C 333 333
Jan 31

Office Supplies expense A/C

Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Office Supplies A/C 6,000 6,000
Jan 31
Insurance Expense A/C
Date Particulars Ref. Debit Credit Balance

Debit Credit
2011 Prepaid Insurance A/C 1,000 1,000
Jan 31

Adjusted Trial Balance

Sony Software Ltd.
Serial Accounts title Reference Debit Credit

Page 42 of 55
1. Cash A/C 64,333
2. Furniture A/C 25,000
3. Computer A/C 20,000
4. Bank A/C 60,000
5. Capital A/C 1,95,000
6. Prepaid Rent A/C 10,000
7. Laptop A/C 40,000
8. 10% Notes Payable A/C 40,000
9. Advertising Expense A/C 1,000
10. Accounts Payable A/C 4,000
11. Accounts Receivable A/C 23,000
12. Service Revenue A/C 45,000
13. Office Supplies A/C 4,000
14. Wages Expense A/C 3,000
15. Prepaid Insurance A/C 5,000
16. Unearned Service Revenue A/C 5,000
17. Drawings A/C 5,000
18. Salaries Expense A/C 16,667
19. Depreciation expense- Computer 167
20. Accumulated depreciation-Computer 167
21. Depreciation expense- Furniture 208
22. Accumulated depreciation Furniture 208
23. Rent expense A/C 5,000
24. Depreciation expense- Laptop 417
25. Accumulated depreciation- Laptop 417
26. Interest expense A/C 333
27. Interest payable A/C 333
28. Supplies expense A/C 6,000
29. Insurance expense A/C 1,000
Total 2,90,125 2,90,125

Chapter: seven: Financial statements

♣♣ Step: Eight: Preparation of Financial Statement:
There are four Financial Statements:
 1. Income Statement 2. Owners’ equity statement 3. Cash Flow Statement 4. Balance Sheet
1. Income Statement:
 Income statement is a statement prepared to determine the net profit or net loss of the organization. The
income statement, often called the statement of income or statement of earnings, is the report that measures the
success of enterprise operations for a given period of time.
 The business and investment community uses this report to determine profitability, investment value, and
credit worthiness. It provides investors and creditors with information that helps them predict the amounts,
timing, and uncertainty of future cash flows.
♣♣ Elements of Income Statement:
Net income results from revenue, expense, gain and losses transactions. These transactions are summarized in the
income statement.
1. Revenues: Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period
from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing
major or central operations. Revenues take many forms, such as sales, fees, interest, dividends, and rents.
2. Expenses: Outflows or other using-up of assets or incurrence of liabilities during a period from delivering or
producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major
or central operations. Expenses take many forms, such as cost of goods sold, depreciation, interest, rent,
salaries and wages, and taxes.
3. Gains: Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that
result from revenues or investments by owners. Gains are of many types, resulting from the sale of investment,
sale of plant assets, settlement of liabilities, write-off of assets due to obsolescence or theft.
4. Losses: Decreases in equity ( net assets) from peripheral or incidental transactions of an entity except those
that result from expenses or distributions to owners. Losses are of many types, resulting from the sale of
investment, sale of plant assets, settlement of liabilities, write-off of assets due to obsolescence or theft.

Page 43 of 55
 Adjusted Trial Balance
Sony Software Ltd.
Serial Accounts title Reference Debit Credit

1. Cash A/C 64,333

2. Furniture A/C 25,000
3. Computer A/C 20,000
4. Bank A/C 60,000
5. Capital A/C 1,95,000
6. Prepaid Rent A/C 10,000
7. Laptop A/C 40,000
8. 10% Notes Payable A/C 40,000
9. Advertising Expense A/C 1,000
10. Accounts Payable A/C 4,000
11. Accounts Receivable A/C 23,000
12. Service Revenue A/C 45,000
13. Office Supplies A/C 4,000
14. Wages Expense A/C 3,000
15. Prepaid Insurance A/C 5,000
16. Unearned Service Revenue A/C 5,000
17. Drawings A/C 5,000
18. Salaries Expense A/C 16,667
19. Depreciation expense- Computer 167
20. Accumulated depreciation-Computer 167
21. Depreciation expense- Furniture 208
22. Accumulated depreciation Furniture 208
23. Rent expense A/C 5,000
24. Depreciation expense- Laptop 417
25. Accumulated depreciation- Laptop 417
26. Interest expense A/C 333
27. Interest payable A/C 333
28. Supplies expense A/C 6,000
29. Insurance expense A/C 1,000
Total 2,90,125 2,90,125

♣♣ Income statement can be prepared:

in horizontal form ( British Form) or
in vertical form (American Form)
Horizontal Form:
Sony Software Ltd.
Income Statement
For the Month ended 31st January, 2011
Particulars taka Particulars taka
Advertising expense 1,000 Service revenue 45,000
Wages expense 3,000
Salaries expense 16,667
Depreciation expense-Computer 167
Depreciation expense-Furniture 208
Rent expense 5,000
Depreciation expense- Laptop 417
Interest expense 333
Supplies expense 6,000
Insurance expense 1,000
Net income 11,208
45,000 45,000
Vertical Form (American Form):
Page 44 of 55
Single Step:
Sony Software Ltd.
Income Statement
For the Month ended 31st January, 2011
Particulars Taka Taka
Revenues:
Service Revenue 45,000
Less: Expenses:
Advertising expense 1,000
Wages expense 3,000
Salaries expense 16,667
Depreciation expense-Computer 167
Depreciation expense-Furniture 208
Rent expense 5,000
Depreciation expense- Laptop 417
Interest expense 333
Supplies expense 6,000
Insurance expense 1,000 33792
Net Income 11,208
Owners’ Equity Statement:
Sony Software Ltd.
Owners’ equity statement
For the month ended 31st January, 2011
Particulars Taka Taka
Beginning capital (1st January,2011)
Add: Investment Nil
Add: Net Income 1,95,000
Less: Drawings 11208 2,06,208
Ending Capital 5,000
2,01,208
♣♣ Balance Sheet:
 A balance Sheet is a list of assets, liabilities and owners’ equity at the closing date of a financial year.
♣♣ Elements of Balance Sheet:
Assets: Assets are commonly divided into classes for presentation on the Balance Sheet. Two of the classes are (1)
current assets and (2) fixed or long-term assets i.e. property, plant, and equipment.
Current assets:
Cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less,
through the normal operations of the business, are called Current Assets. In addition to cash, the current assets usually
owned by a service business are notes receivable, accounts receivable, supplies, and other prepaid expenses.
Notes receivable are amounts customers owe. They are written promises to pay the amount of the note and possibly
interest at an agreed rate. Accounts receivable are also amounts customers owe, but they are less formal than notes and
do not provide for interest. Accounts receivable normally result from providing services or selling merchandise on
account. Notes receivable and accounts receivable are current assets because they usually are converted to cash within
one year or less.
Property, plant, and equipment:
The property, plant, and equipment section may also be described as ‘ Fixed asset’ or ‘Plant assets’. Theses assets
include equipment, machinery, building, and land.
Liabilities: Liabilities are the amounts the business owes to creditors. The two most common classes of liabilities are
(1) Current liabilities and (2) long term liabilities.
Current liabilities:
Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are
called current liabilities. The most common liabilities in this group are notes payable and accounts payable. Other
current liability accounts commonly found in the ledger are interest payable, tax payable and unearned fees.
Long-term liabilities:
Page 45 of 55
Liabilities that will be due for a long time (usually more than one year) are called long term liabilities. If Computer
King had long-term liabilities, they would be reported below the current liabilities. As long-term liabilities come due
and are to be paid within one year, they are classified as current liabilities.
Owners’ Equity (For Company Stockholders equity):
The owners right to the assets of the business are presented on the Balance Sheet below the liabilities section. The
Stockholders Equity is added to the total liabilities, and this total must be equal to the total assets.
♣♣ Forms of Balance Sheet:
There are two forms to prepare Balance Sheet: (1) Horizontal and (2) Vertical
Horizontal Form:
Sony Software Ltd.
Balance Sheet
As at 31st January, 2011
Liabilities and Owners’ Equity Taka Assets Taka

Liabilities: Current Assets:

Current Liabilities: Cash 64,333
Account payable 4,000 Bank 60,000
Unearned Service revenue 5,000 Prepaid rent 10,000
Interest payable 333 Accounts receivable 23,000
Long Term Liabilities: Office supplies 4,000
10% Note Payable 40,000 Prepaid Insurance 5,000
Owners’ Equity: Long term investment: Nil
Capital (ending) 2,01,208 Property, Plant, equipment:
Computer 20,000
Less: Accumulated Depreciation 167 19833
Furniture 25,000
Less: Accumulated Depreciation 208 24,792
Laptop 40,000
Less: Accumulated depreciation 417 39,583
Intangible assets: Nil

Total of liabilities and owners’ equity 250541 Total assets 250541

Vertical Form:
Sony Software Ltd.
Balance Sheet
As at 31st January, 2011
Items Taka Taka

Assets:
1. Current assets:
Cash 64,333
Bank 60,000
Prepaid rent 10,000
Accounts receivable 23,000
Office supplies 4,000
Prepaid Insurance 5,000 1,66,333
2. Long Term Investment: Nil
3. Property, plant and equipment:
Computer 20,000
Less: Accumulated Depreciation 167 19833
Furniture 25,000
Less: Accumulated Depreciation 208 24,792
Laptop 40,000
Less: Accumulated depreciation 417 39,583 84,208
4. Intangible Assets: Nil
Total Assets 2,50,541
Liabilities and Owners’ Equity:
Liabilities:

Page 46 of 55
 1. Current Liabilities:
Account payable 4,000
Unearned Service revenue 5,000
Interest payable 333 9,333
2. Long Term Liabilities
10% Note Payable 40,000 40,000
Owners’ Equity
Capital (Ending) 2,01,208
2,50,541

♣♣ Step: Nine: Closing Entries:

 Closing entries are required to close all the nominal accounts at the end of a certain accounting
period or at the end of a fiscal year.
 The transfer of revenue, expense, income/loss, drawing accounts balances at the end of the
accounting period is accomplishment by journal entries is called closing entries.
 In closing the books, the business enterprise distinguishes between temporary accounts and
permanent accounts.
 Temporary accounts relate only to a given period.
 All the accounts that are related with income statement and owners’ drawing are temporary
accounts.
 Permanent accounts relate to one or more future accounting periods. All the accounts that are related
with balance sheet and owners’ capital accounts are permanent accounts; these accounts are not
closed.
♣♣ Temporary Accounts:
1. All revenues accounts
2. All expenses accounts
3. Owner’s drawings accounts
♣♣ Permanent Accounts:
1. All assets accounts
2. All liabilities accounts
3. Owner’s capital accounts

♣♣ The following closing entries are needed to close the nominal accounts:
1. To close the revenue:
Sales a/c
Interest income a/c
Dividend income a/c
Gain on sale of asset a/c
Income Summary a/c
2. To close the expenses:
Income Summary a/c
Purchase a/c
Wages a/c
Salaries a/c
Depreciation expense a/c
Interest expense a/c
3. To record the profit:
Income Summary a/c
Capital or retained earnings
4.To record the loss:
Capital or Retained earnings
Income summary a/c
Page 47 of 55
5.To transfer the dividends declared:
Retained earnings
Dividends
From the previous example:
Sony Software Ltd.
Closing Entries
As at 31st January, 2011
Date Accounts Title Ref. Debit Credit
2011 Jan 31 Service Revenue A/C 45,000
Income Summary A/C 45,000
(To close revenue account)
2011 Jan 31 Income summary A/C 33792
Advertising expense 1,000
Wages expense 3,000
Salaries expense 16,667
Depreciation expense-Computer 167
Depreciation expense-Furniture 208
Rent expense 5,000
Depreciation expense- Laptop 417
Interest expense 333
Supplies expense 6,000
Insurance expense 1,000
(To close expenses account)
2011 Jan 31 Income Summary A/C 11,208
Capital A/C 11,208
(To close income summary)
2011 Jan 31 Capital A/C 5,000
Drawings A/C 5,000
(To close drawing account)

Chapter-Eight: Preparation of Worksheet

Worksheet:
Accountants often use working papers for collecting and summarizing data that they need for preparing various analysis
and reports. Such working papers are useful tools, but they are not considered a part of the formal accounting records.
This is in contrast to the chart of accounts, the journal and the ledger, which are essential parts of the accounting
system. Working papers are usually prepared by using a spreadsheet program on a computer.
The worksheet is a working paper that accountants may use to summarize adjusting entries and the account balances for
the financial statements.
The worksheet is a useful device for understanding flow of the accounting data from the unadjusted trial balance to the
financial statements. This flow of data is the same in either a manual or a computerized accounting system.
Steps in Worksheet:
(i) Unadjusted Trial balances (ii) Adjustments Column (iii) Adjusted Trial Balance
(ii) Income Statement and Balance Sheet
Unadjusted Trial balances:
Example 1: Worksheet with Unadjusted Trial Balance
Computer King Corporation
Work Sheet
For the Two Months ended on December 31, 2000
(All figures are in
’00 TK)
Trial balance Adjustments Adjusted Trial Income Balance Sheet
balance Statement
Page 48 of 55
 Accounts Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 10,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Capital stock 15,000
Dividends 4,000
Fees Earned 16,340
Wages expenses 4,275
Rent Expenses 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
32,600 32,600

Adjustments Column:
(a) Supplies: The supplies account has a debit balance of Tk 2000. The cost of the supplies on hand at the end of
the period is Tk 760. Therefore, the supplies expense for December is the difference between the two amounts
or Tk 1240. Enter the adjustment by writing (1) Tk 1240 in the Adjustments Debit column on the same line as
Supplies Expense and (2) Tk 1240 in the Adjustments Credit column on the same line as Supplies.
(b) Prepaid Insurance: The prepaid insurance account has a debit balance of Tk 2400, which represents the
prepayment of insurance for 24 months beginning December1. Thus, the insurance expense for December is
Tk 100(Tk 2400/24). Enter the adjustments by writing (1) Tk 100 in the adjustment’s Debit column on the
same line as Insurance Expense and (2) Tk 100 in the Adjustments Credit column on the same line as Prepaid
Insurance.
(c) Unearned rent: The unearned rent account has a credit balance of Tk 360, which represents the receipt of
three months rent, beginning with December. Thus, the rent revenue for December is Tk 120. Enter the
adjustment by writing (1) Tk 120 in the Adjustments Debit column on the same line as Unearned rent and (2)
Tk 120 in the Adjustments Credit column on the same line as Rent Revenue.
(d) Wages: Wages accrued but not paid at the end of December total Tk 250. This amount is an increase in
expenses and an increase in liabilities. Enter the adjustment by writing (1) Tk 250 in the Adjustments debit
column on the same line as Wages Expense and (2) Tk 250 in the Adjustments Credit column on the same line
as Wages payable.
(e) Accrued Fees: Fees accrued at the end of December but not recorded total Tk 500. This amount is an increase
is an increase in an asset and an increase in revenue. Enter the adjustments by writing (1) Tk 500 in the
adjustments Debit column on the same line as Accounts Receivable and (2) Tk 500 in the Adjustments Credit
column on the same line as Fees Earned.
(f) Depreciation: Depreciation of the Office Equipment is Tk 50 for December. Enter the adjustment by writing
(1) Tk 50 in the Adjustments Debit column on the same line as Depreciation Expense and (2) Tk 50 in the
Adjustments Credit column on the same line as Accumulated Depreciation.
Total the Adjustments columns to verify the mathematical accuracy of the adjustment data. The total of the Debit
Column must equal the total of the Credit column.

Example 2: Worksheet with Unadjusted Trial Balance, Adjustments and Adjusted Trial Balance Entered
(All figures are in ’00 TK)
Trial balance Adjustments Adjusted Trial Income Statement Balance Sheet
balance
Accounts Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Page 49 of 55
Cash 2,065 2,065 2,065
Accounts Receivable 2,220 (e) 500 2,720 2,720
Supplies 2,000 (a) 1240 760 760
Prepaid Insurance 2,400 (b) 100 2,300 2300
Land 10,000 10,000 10,000
Office Equipment 1,800 1,800 1800
Accounts Payable 900 900 900
Unearned Rent 360 (c) 120 240 240
Capital stock 15,000 15,000 15,000
Dividends 4,000 4,000 4000
Fees Earned 16,340 (e) 500 16,840 16,840
Wages expenses 4,275 (d) 250 4,525 4,525
Rent Expenses 1,600 1,600 1,600
Utilities Expense 985 985 985
Supplies Expense 800 (a) 1240 2,040 2,040
Miscellaneous Expense 455 455 455
Insurance Expense (b) 100 100 100
Rent Revenue (c) 120 120 120
Wages payable (d) 250 250 250
Depreciation Expense (f) 50 50 50
Accumulated Depreciation (f) 50 50 50
Net Profit 7205 7205

Total 2,260 2,260 33,400 33,400 16,960 16,960 23645 23645

Computer King Corporation

Income statement
For the Two Months Ended December 31,2000
Particulars Tk Tk
Fees earned 16,84,000
Rent revenue 12,000
Total revenues 16,96,000
Expenses:
Wages Expense 4,52,500
Supplies expense 2,04,000
Rent expense 1,60,000
Utilities expense 98,500
Insurance expense 10,000
Depreciation expense 5000
Miscellaneous expense 45,500
Total expense 9,75,500
Net income 7,20,500

Computer King Corporation

Retained Earnings Statement
For the Two Months Ended December 31,2000
Particulars Tk
Net income for November and December 7,20,500
Less: Dividends 4,00,000
Retained earnings, December 31,2000 3,20,500

Computer King Corporation

Balance Sheet
December 31,2000
Tk Tk

Page 50 of 55
 Assets
Current assets:
Cash 2,06,500
Accounts receivable 2,72,000
Supplies 7,6000
Prepaid insurance 2,30,000
Total current assets 7,84,500
Property, plant and Equipment:
Land 10,00,000
Office equipment 1,80,000
Less: Accumulated depreciation 5000 1,75,000
Total property, plant and equipment 11,75,000
Total Assets 19,59,500

Current liabilities:
Accounts payable 90,000
Wages payable 25,000
Unearned rent 24,000
Total liabilities 1,39,000

Stockholder’s equity
Capital stock 15,00,000
Retained earnings 3,20,500
18,20,500
Total Liabilities and Stockholders’ Equity 19,59,500
Computer King Corporation
Retained Earnings Statement
For the Two Months Ended December 31,2001
Particulars Tk Tk
Retained earnings, January 1,2001 3,20,500
Net income for the year 1,59,59,500
Less: Dividends 24,00,000
Increase in retained earnings 1,35,59,500
Retained earnings, December 31,2001 1,38,80,000
For Computer King, the amount of dividends was less than the net income. If the dividends had exceeded the net
income, the order of the net income and the dividends could have been reversed. The difference between the two items
would then be deducted from the beginning Retained Earnings balance. Other factors, such as a net loss, may also
require some change in the form of the Retained Earnings statement, as shown in the following example:
Retained earnings, January 1,20xx.......Tk 45,000
Less: Net loss for the year ...................Tk 5,600
(+) Dividends.............................. Tk 9,500
Decrease in Retained Earnings .............Tk15, 100
Retained earning, December 31, 20xx Tk 29,900

Problem:
Three years ago T. Roderick organized harbor Reality Inc. At July 31, 2000, the end of the current fiscal year, the trial
balance of Harbor Reality is as follows:
Harbor Realty Inc.
Trial balance
July 31, 2000
Accounts name Dr Cr

Page 51 of 55
 Cash 3,42,500
Accounts receivable 7,00,000
Supplies 1,27,000
Prepaid Insurance 62,000
Office equipment 51,65,000
Accumulated Depreciation 9,70,000
Accounts payable 92,500
Unearned fees 1,25,000
Capital Stock 5,00,000
Retained earnings 24,00,000
Dividends 5,20,000
Fees earned 59,12,500
Wages expense 22,41,500
Rent expense 4,20,000
Utilities expense 2,71,500
Miscellaneous expense 1,50,500
1,00,00,000 1,00,00,000
The data needed to determine year-end adjustments are as follows:
a. Supplies on hand at July 31,2000 are tk.38, 000
b. Insurance premiums expired during the year are Tk. 31,500
c. Depreciation of equipment during the year is Tk. 4,95,000
d. Wages accrued but not paid ay July 31,2000 are Tk. 44,000
e. Accrued fees earned but not recorded at July 31,2000 are TK. 1,00,000
f. Unearned fees on July 31,2000 are Tk. 75,000
Requirements:
1. Enter trial balance on a ten –column worksheet and complete the worksheet
2. Prepare an income statement, a retained earnings statement, and a Balance sheet
3. On the basis of the data in the worksheet, journalize the closing entries.
Solution: (1)

Harbor Realty Inc.

Work Sheet
For the year ended on July 31,2000
(All figures are in ’00 TK)
Trial balance Adjustments Adjusted Trial Income Balance Sheet
balance Statement
Page 52 of 55
Accounts Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 3,425 3,425 3,425
Accounts Receivable 7,000 (e) 1000 8,000 8,000
(a) 890
Supplies 1270 380 380
(b) 315
Prepaid Insurance 620 305 305
Office Equipment 51,650 51,650 51,650
(c) 4950 14,650
Accum. Depreciation 9,700 14,650
925
Accounts Payable 925 925
(e) 1000 750
Unearned fees 1,250 750
(f) 500 5,000
Capital stock 5,000 5,000
24,000
Retained earnings 24,000 24,000
Dividends 5,200 5,200 5,200
60,625
Fees Earned 59,125 (f) 500
Wages expenses 22,415 (d) 440 22,855 22,855
Rent Expenses 4,200 4,200 4,200
Utilities Expense 2,715 2,715 2,715
MiscellaneousExpense 1,505 1,505 1,505
Supplies Expense (a) 890 890 890
Insurance expense (b) 315 315 315
Depreciation expense (c) 4,950 4,950 4,950
(d) 440 440
Wages payable 440
37,430 45,765
Net Profit 23,195 23,195
Total 1,00,0000 1,00,0000 8,095 8,095 1,06,390 60,625 68,960
1,06,390 60,625 68,960

Harbor Realty Inc.

Income Statement
For the year Ended July 31,2000
Particulars Tk Tk
Fees earned 60,62,500
Operating Expenses:
Wages Expense 22,85,500
Depreciation expense 4,95,000
Rent expense 4,20,000
Utilities expense 2,71,500
Supplies expense 89,000
Insurance expense 31,500
Miscellaneous expense 1,50,500
Total operating expense 37,43,000
Net income 23,19,500
Harbor Realty Inc.
Retained Earnings Statement
For the year Ended July 31,2000
Particulars Tk Tk
Retained earnings, August 1,1999 24,00,000
Net income for the year 23,19,500
Less: Dividends 5,20,000
Increase in retained earnings 17,99,500
Retained earnings, July 31,2000 41,99,500

Harbor Realty Inc.

Balance Sheet
July 31,2000
Tk Tk
Assets
Current assets: 3,42,500
Cash 8,00,000

Page 53 of 55
 Accounts receivable 38,000
Supplies 30,500
Prepaid insurance 12,11,000
Total current assets
Property, plant and Equipment:
Office equipment 51,65,000
Less: Accumulated depreciation 14,65,000
37,00,000
Total assets 49,11,000
Liabilities and Owners’ Equity:
Current liabilities:
Accounts payable 92,500
Unearned fees 75,000
Wages payable 44,000
Total liabilities 2,11,500
Stockholder’s equity
Capital stock 5,00,000
Retained earnings 41,99,500
46,99,500
Total liabilities and stockholder’s equity 49,11,000
Closing entries Journal
Date Description L.F Dr (Tk) Cr (Tk)
2000 Fees Earned 60,62,500
July 31 Income Summary 60,62,500
Income Summary 37,43,000
July 31 Wages expense 22,85,500
Rent expense 4,20,000
Utilities expense 2,71,500
Miscellaneous expense 1,50,500
Supplies expense 89,000
Insurance expense 31,500
Depreciation expense 4,95,000
Income Summary 23,19,500
July 31 Retained earnings 23,19,500
Retained Earnings 52,000
July 31 Dividends 52,000
Problem 1: Balances taken from the ledger of Mr. S. Dewan as on 31st December, 2002 are given below after first year of business:
Accounts name Tk
Cash 30,000 Accounts payable 10,000
Capital 100,000 Gain on sale of fixed assets 3000
Sales 150,000 Rent expenses 14,000
Accounts receivable 60,000 Salary expense 20,000
Purchases 70,000 Office equipment 10,000
Interest income 3000 Stores equipment 13,500
Allowances for doubtful accounts 2000 Supplies 3000
Merchandise inventory(1-1-2002) 45,000 Freight in 2500

Adjustments are to be made:

(a) Merchandise inventory on 31st December,2002, Tk. 35,000
(b) Prepaid rent tk.2000
(c) Accrued salaries tk.4000
(d) Doubtful accounts to be written of against allowances Tk. 1000
(e) Maintain an allowances for doubtful accounts equal to 7% of accounts receivable
(f) Office equipment includes an item purchased on 1 st July 2002 at Tk. 2000. Depreciation to be charged @ 10% per
annum
(g) Stores equipment was charged with an amount of tk.1500, which was spent for repairing the trolley of the stores.
Depreciation to be charged @ 10% per annum
(h) Goods valuing Tk. 1000 taken by the proprietor for personal use debited to purchase
(i) Supplies in hand Tk 500
Required:

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(a) Prepare a 10 column work sheet
(b) Adjusting entries, show computation where necessary.
(c) Prepare the Income statement and The Balance Sheet
Answer: Net Income Tk 29,270.
Total of the Balance Sheet (asset and Liability side) are Tk 1,49,500
Problem 2:
Mr. Abu Hasan started a business named ‘Southern Express Communication Ltd. co.’ The Trial Balance of the
company at the end of the current fiscal year on 31st December, 2002 are as follows:
Southern Express Communication Ltd. co
Trial Balance
December 31,2002
Accounts Name Dr. Cr.
Bank balance 100,000
Cash in hand 50,000
Accounts Receivable 20,000
Supplies on hand 1000
Prepaid Insurance 25,000
Building 500,000
Accumulated Depreciation 200,000
Accounts Payable 30,000
Unearned Fees 50,000
Capital 400,000
Fees Earned 32,000
Rent Expense 11,000
Utilities Expense 5000
Total 712,000 712,000
But at the last date of this calendar year Mr. Hasan found that the following entries are need to be adjusted to determine
exact position of the organization:
1.Prepaid Insurance represents premiums for 5 years paid on January 1,2002
2.Supplies of tk.300 were expensed and the exact amount were on hand Tk. 700
in December 31
3.It is estimated that the building can be used for 100 years
4.The firm collected 5 months fees in advance on December 1 of this year from a
client as unearned fees to provide services @ Tk. 10,000 per month
5. Accrued rent expenses Tk 1000 for one month
As a probationary officer of this organization you are requested to prepare a ten-column worksheet and to complete the
worksheet as on December31, 2002.
Answer: Net Income Tk 14,700
Total of the Balance Sheet (asset and Liability side) are Tk 6,90,700

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