KARDAN UNIVERSITY

BSc Economics
Prepared By: Sajad Ahmad
 The system under which the double effect
of every transaction is recorded is called
double entry system.
A device which contains a systematic
record of increase or decrease in an item
during a particular period.

 It has three parts:

A title name of the accounts
 Left hand side which is usually called Debit
side
 Right hand side which is usually called Credit
side.
 All the accounts maintained by a business
can be divided into two categories.

1.Real Accounts
2.Nominal accounts
1- Real Accounts :
 These are the accounts of assets, liabilities
and owner’s equity.
OR
 These accounts have their existence even
after the close of a year.

Examples
Land, building, A/P, Owner’s Capital
2- Nominal Accounts:

 These are the accounts of revenues and

expenses.
OR
 These accounts are closed at the end of an
year.

Examples
 Salaries, rent, revenues etc2
 As an account has two parts i.e. Debit (Dr)
left hand side and credit (Cr) right hand
side.

 When we write an amount on left hand side

it is called as debiting an account and
when we write an amount on the right
hand side it is called as crediting an
account.
 Increase in assets
 Decrease in Liability
 Decrease in Owner Equity
 Decrease in Revenue
 Increase in expense
 Increase in withdrawals
 Decrease in assets
 Increase in liabilities
 Increase in owner equity
 Increase in revenue
 Decrease in expense
 Decrease in withdrawals
 When increase in assets is debited the decrease in assets must be
credited.

 When increase in assets is debited the increase in liability must be

credited and hence decrease in liability must be debited.

 Owner Equity is also regarded as claim against assets hence increase

in capital is credited and decrease in capital is debited.

 When income increases owners equity also increases, when income

decrease owners equity decreases therefore increase in income
must be credited and decrease in income must be debited.

 When expenses increases the owners equity decreases as such

increase in expense is debited and decrease in expense is credited.
Assets, Expenses  Liability,
Capital
and withdrawals and Revenues

 Increase ---Debit  Increase---Credit

 Decrease---Credit
 Decrease---Debit
 Any dealing between two or more person for goods and
services which effect the financial position of a business
and also can be measured in terms of money is called
business transactions.

Example:
Business purchased land for $52,000 and pay cash for it.
Here business is receiving land which is an asset but for
acquiring one asset it gives another asset cash and
amount of transaction is $52,000.
There are two types of Transactions:

Cash Transactions
Credit Transactions
 The transaction where immediate cash
receipts or payments is involved is called
cash transaction.
 For Example
 Owner invest $80,000 in business.
 Business pay $200 salary to an employee.
The transaction where cash collection or payments are
made at some future time is called credit transaction.
Examples.
1.The business sells merchandise of price $400 and the
amount will be received after 15 days.
2.The business purchased computer at $300 and
promise that amount will be paid after 20 days.
 The sequence of accounting procedures used to
record, classify and summarize accounting
information is termed as accounting cycle.
 Journal
 Ledger
 Trial Balance
 Adjustment
 Adjusted Trial Balance
 Financial Statements
 Closing Entries
 After Closing Trial Balance
 Journal is a book containing the original
record of a transaction in order of
occurrence.
 OR
 Journal is a chronological (day-by-day)
record of business transactions.
 The simplest type of journal is called general
journal and is shown as follow
Date Description Post Debit Credit
Reference $ $

2006
Mar1

2
 The process of recording the transaction in
general journal is called as journalizing or
making an entry. The following is the procedure
for recording transactions in general journal.
 Date column.

In this column the date on which transaction is

completed, is recorded. year of account is
written at the top and month below it. the
month is written only on the top of the page
 The dates are recorded in smaller column for
every transaction.
 Description column.
 In this column the account to be debited is
inserted at the extreme left, and account to
be credited below it after providing some
space on left side. Brief explanation of entry
is also recorded in this column, generally
known as narration.
 Post reference column.
 This account is completed when postings are
made into ledger. the students are advised
to insert a tick mark while posting the
entries from journal to ledger.
 Amounts column.
 Two amounts column are provided in
journal. The amount of transaction is
recorded in the debit column against the
account to be debited and the amount of
the account(s) to be credited are recorded
in credit column.
 If we are given a business transaction and want to
find accounts to debited and accounts to be credited
in that particular transaction we have to proceed as
under.

 By the analysis of transaction find out the two or

more accounts which are involved in that transaction.

 The account so found are classified in to assets,

liabilities, capital, Revenue expense or withdrawals.
Increase and decrease in account(s) are determine.

 Finally rule is applied.

QUESTION NO
1
 Nov 1: Assad started business by depositing $80,000 in a
company bank account.
 Nov 3: Purchase land for $52,000 by paying cash.
 Nov 5: Purchased a building for $36,000 paying$6,000 in cash
and issuing a note payable for the remaining $30,000 .
 Nov 17: Purchased tools and equipments on account for $13,800
 Nov 20; sold some of the tools at the price equal to their cost
$1800 collectable within 45 days.
 Nov 25: Received $600 in partial collection of the account
receivable from the sale of the tools.
 Nov 26: Paid $6,800 in partial payment of an account payable
Date Accounts Classificat Increase or Debit or
involved ion Decrease Credit

2006 Cash Asset Increase Dr

NOV1 Asad capital owner increase Cr
equity
3 Land Asset Increase Dr
cash asset decrease Cr
5 Building Asset Increase Dr
Cash Asset Decrease Cr
Notes liability Increase Cr
payable
NOV Tools & Asset Increase Dr
17 equipment
Account liability increase Cr
payable
20 Tools & Asset Decrease Cr
equipment
Account asset increase Dr
receivable
25 Cash Asset Increase Dr
Account asset decrease Cr
receivable
26 Cash Asset Decrease Cr
Account liability decrease Dr
payable
JOURNAL ENTRIES
OF QI
Date Accounts title Debit Credit
Explanation $ $
2006 Cash 80,000
Nov 1 Assad Capital 80,000
owner invested cash in
the business

”3 Land 52,000
Cash 52,000
Purchased land for business

”5 Building 36,000
Cash 6,000
Notes Payable 30,000
Purchased building paid part
Cash,balance payable within 90
days
” 17 Tools and Equipments 13,800
Accounts Payable 13,800
Purchased tools and
equipments on credit

” 20 Accounts Receivable Tools 1,800

and Equipments 1,800
Sold unused tools and
equipment at cost
” 25 Cash 600
Accounts Receivable 600
Collected part of account
receivable

” 26 Accounts Payable 6,800

Cash 6,800
Made partial payment of
accounts payable
Oct 1. The owner Fahad invested an additional $80,000 cash
in the business.
Oct 5. Purchased a plot for $102,000 of which $30600 was
paid in cash , a note payable was issued for balance.
Oct15.Issued a check for $976 in full payment of an account
payable.
Oct18.Borrowed $30,000 cash from the bank by signing a 90
day note payable.
Oct23. Collected an account receivable of $2900 from
customer
Oct30. Acquired office equipment for $6200 made a cash
down payment of $1500,balance to be paid with in 30
days.
Date Accounts Classificatio Increase Debit or
involved n or Credit
Decrease
2007 Cash Asset Increase Dr
Oct1 Fahad owner increase Cr
capital equity
5 Land Asset Increase Dr
Cash Asset Decrease Cr
Notes liability Increase Cr
payable
Oct15 Account Liability Decrease Dr
payable
Cash Asset Decrease Cr

18 Cash Asset Increase Dr

Notes Liability increase Cr
payable
23 Cash Asset Increase Dr
Account asset decrease Cr
receivable
30 Office Asset increase Dr
Equipment
Cash asset Decrease Cr
Account liability Increase Cr
payable
Solution of
Question 2
Date Description Debit Credit
$ $

2007 Cash 80,000

Oct 1 Fahad Capital 80,000
Owner invested additional
cash in the business

5 Land 102,000
cash 30,600
Notes payable 71,400
Purchased land paid a
part in cash & issue a
note payable
Oct 15 Accounts payable 976
cash 976
Paid accounts payable
18 Cash 30,000
Notes payable 30,000
Borrowed from bank on
90 days note
23 Cash 2,900
Account Receivable 2,900
Collected account
receivable from
customer
Oct 30 Office Equipment 6,200
Cash 1,500
Account payable 4,700
Acquired office
equipment
 Ledger is a book in which every account is
allotted a separate page , and all the
transactions relating to that account are
written on that page in a summary form.
 OR
 Ledger is a book which contains a condensed
record of all the business transaction.
 Transactions are1st recorded in journal, and
then it is posted to ledger.
 Posting simply means updating the ledger
accounts for the effect of transactions
recorded in journal.
JOURNAL
 ENTRIES
OF QI
Date Accounts title Debit Credit
Explanation $ $
2006 Cash 80,000
Nov 1 Assad Capital 80,000
owner invested cash in
the business

”3 Land 52,000
Cash 52,000
Purchased land for business

”5 Building 36,000
Cash 6,000
Notes Payable 30,000
Purchased building paid part
Cash,balance payable within 90
days
” 17 Tools and Equipments 13,800
Accounts Payable 13,800
Purchased tools and
equipments on credit

” 20 Accounts Receivable 1,800

Tools and Equipments 1,800
Sold unused tools and
equipment at cost
” 25 Cash 600
Accounts Receivable 600
Collected part of account
receivable

” 26 Accounts Payable 6,800

Cash 6,800
Made partial payment of
accounts payable
 Nov 30: Recorded $2,200 of sale revenue received
in cash.
 Nov 30: Paid $1,400 of operating expenses in cash,
$200 for utilities and $1200 for wages.
 Here revenue is more than expenses and business
is making profit, profit is added to owner equity
and if it is received in cash, it increase asset
(cash).
 Profit = Revenues – Expenses
 Profit = 2200 – 1400
 Profit = $800
 Because of $800 profit the cash and capital
balances for the month of Nov will increase by
$800.
LEDGER

ACCOUNTS OF
Q1
Date Debit Credit Balance
$ $ $
2006
NOV. 1 80,000 80,000
3 52,000 28,000
5 6,000 22,000
25 600 22,600
26 6,800 15,800
30 800 16,600
 This format is known as a running balance
format.
 This form does not shows that the balance is
either debit or credit.
 But we know that assets normally have debit
balance and liability and owner equity’s has
credit balances.
Date Debit Credit Balance
$ $ $
2006
NOV. 20 1,800 1,800
25 600 1,200
Date Debit Credit Balance
$ $ $
2006
NOV. 3 52,000 52,000
Date Debit Credit Balance
$ $ $
2006
NOV. 5 36,000 36,000
Date Debit Credit Balance
$ $ $
2006
NOV. 17 13,800 13,800
20 1,800 12,000
Date Debit Credit Balance
$ $ $
2006
NOV. 5 30,000 30,000
Date Debit Credit Balance
$ $ $
2006
NOV. 17 13,800 13,800
6,800 7,000
Date Debit Credit Balance
$ $ $
2006
NOV. 1 80,000 80,000
30 800 80,800
The time period for which a business measures its profit and
loss is called accounting period.
OR
The period of time covered by an income statement of a
business is called accounting period.
If a business measure its revenue and expenses for 3 months
its accounting period will be 3 months.
If a business measure its revenue and expenses for one year
then its accounting period will be one year.
One year accounting period is known as a fiscal
year.
 The price of goods sold or services rendered is
called revenue.
 For Example If business sell 1000 pens @ 5 per pen
then 5000 is its revenue.
 If 20 patient comes to a Doctor and he charge 200
fee from every patient then 20 * 200 =4000 is its
revenue.
 Revenue increases owner equity ,because when
business sell goods or provide services it either
receive cash or generate Account receivable both
are assets and on the right side liability do not
increases so it increase owner equity.
 Repair service revenue
 Sales
 Fee earned
 Commission earned
 Interest revenue
 Realizationprinciple indicates that revenues
should be recognized at the time goods sold
or services are rendered.
 The cost of doing business is called expense.
OR
 The cost of goods and services used up in the
process of earning revenue is called expense.
 Examples. salaries, utility bills, rent etc
 An expense always causes a decrease in owner
equity.
 Expense will decrease assets or increase
liability, if expenses are paid in cash (asset) it
will decreases and if it will not be paid until
later it increase liability.
 Matching principle says that revenue should
be offset (match) by all the expenses
incurred in producing that revenue.
 Many expenditures made by a business
benefit more than one accounting period.
 Let suppose car benefit a business for 10
years. If business prepares annual income
statement a portion of the cost of the car
should be recorded as a depreciation
expense.
 If the car cost $4000 then( 4000/10=400) will
be the depreciation expense of car for one
year.
 The policy of recognizing revenue in the
accounting records when it is earned and
recognizing expenses when the related goods
are services are used is called Accrual basis
of Accounting.
 The Accrual basis of Accounting measures the
profitability of the business for the period of
time
 The policy of recognizing revenue in the
accounting records when cash is collected
from the customer and recognizing expenses
when it is paid is called the Cash basis of
Accounting.
 The Cash basis of Accounting measures cash
receipts and payments during a period.
 Withdrawals of owner means when owner
withdraw some cash or assets from the
business for personal use.
 Withdrawal reduce assets and owner equity
of the business.
 Withdrawals are not expenses because
expenses are incurred for the purpose of
generating revenue and withdrawals of
owner do not serve this purpose.
 Drawings decrease owner equity so it is
recorded by debit.
 The excess amount of revenue over the
expense of a business is called Profit.
 For Example if a revenue is $ 100 and
expense is $ 80 then profit is $ 20.
 As income statement covers a period of time,
so income must be related to a period of
time.
 Profit is added with owner equity.
 The excess amount of expenses over the
revenue of a business is called loss.
 Example. If revenue is $100 and expenses are
$130 then $30 is loss.
 Loss is subtracted from owner equity.
 Dec. 1; Paid Daily Tribune $360 cash for news paper
advertising to be run during December.
 Dec. 2; Purchased radio advertising from KRAM to
be aired in December. The cost was $470 , payable
within 30 days.
 Dec. 4;Purchased various shop supplies cost $1,400,
due in 30 days. These supplies are expected to
meet overnight’s needs for three or four months.
 Dec. 15; Collected $4,980 cash for repairs
made to vehicles.
 Dec. 23;Asad the owner , withdrew $3,100
cash from the company’s bank account for
his personal use.
 Dec. 29;Asad found that he did not need all
of the cash he had withdrawn on Dec 23, so
he redeposit $1000 in Overnight’s (business)
bank account.
 Dec.31;Billed Harbor Cab Co. $5,400 for
maintenance and repair services rendered
during December. The agreement with
Harbor Cab calls for payment to be received
by January 10.
 Dec. 31;Paid all employees wages for
December ,$4,900
Date Accounts Classificat Increase or Debit or
involved ion Decrease Credit

Dec1 Cash Asset Decrease Cr

Advertiseme expense increase Dr
nt
2 Advertiseme expense Increase Dr
nt
A/P Liability increase Cr
4 supplies Asset Increase Dr
account liability Increase Cr
payable
Date Accounts Classificat Increase or Debit or
involved ion Decrease Credit

Dec15 Cash Asset increase Dr

Revenue Revenue increase Cr

23 Withdrawal Withdraw Increase Dr

al
Cash Asset decrease Cr
29 Cash Asset Increase Dr
Owner Owner Increase Cr
equity equity
Date Accounts Classificat Increase or Debit or
involved ion Decrease Credit

Dec31 A/R Asset increase Dr

Revenue Revenue increase Cr

31 wages expense Increase Dr

Cash Asset decrease Cr
Date Description Debit Credit
$ $
2006 Advertising expense 360
Dec 1 Cash 360
Purchased newspaper
advertising & pay cash

2 Advertising expense 470

Account payable 470
Purchased radio
advertising on account
Date Description Debit Credit
$ $
2006 Shop supplies 1,400
Dec 4 Account payable 1,400
Purchased shop
supplies on account
15 Cash 4,980
Repair service Rev 4,980
Repair services
rendered
Date Description Debit Credit
$ $
2006 Asad drawings 3,100
Dec 23 Cash 3,100
Owner withdrew cash

29 Cash 1,000
Asad capital 1,000
Owner invested cash
Date Description Debit Credit
$ $
2006 Account receivable 5,400
Dec 31 Repair service Rev 5,400
Billed Harbor cab for
services rendered
31 Wages expenses 4,900
Cash 4,900
Paid wages
Date Debit Credit Balance
$ $ $
2006
NOV. 30 16,600 16,600
DEC. 1 360 16,240
15 4,980 21,220
23 3,100 18,120
29 1,000 19,120
31 4,900 14,220
Date Debit Credit Balance
$ $ $
2006
NOV. 30 1,200 1,200
DEC. 31 5,400 6,600
Date Debit Credit Balance
$ $ $
2006
DEC. 4 1,400 1,400
Date Debit Credit Balance
$ $ $
2006
NOV. 30 52,000 52,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 36,000 36,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 12,000 12,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 30,000 30,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 7,000 7,000
DEC. 2 470 7,470
4 1,400 8,870
Date Debit Credit Balance
$ $ $
2006
NOV. 30 80,800
DEC. 29 1,000 81,800
Date Debit Credit Balance
$ $ $
2006
DEC. 23 3,100 3,100
Date Debit Credit Balance
$ $ $
2006
DEC. 15 4,980 4,980
31 5,400 10,380
Date Debit Credit Balance
$ $ $
2006
DEC. 1 360 360
2 470 830
Date Debit Credit Balance
$ $ $
2006
DEC. 31 4,900 4,900
 The proof of the equality of Debit and Credit
balances is called Trial Balance.
 A Trial Balance is a two column schedule listing
the names and balances of all the accounts in the
order in which they appear in the ledger; the debit
balances are listed in the left hand column and the
credit balances in the right hand side column. The
total of two columns should agree. Trial balance
contains Income statement as well as Balance
sheet accounts.
 A Trial balance taken from Overnight’s ledger
follows
 OVERNIGHT AUTO SERVICE
Trial Balance
December 31, 2006
Description Debit Balance Credit Balance
$ $
Cash 14,220
Account Receivable 6,600
Shop Supplies 1,400
Land 52,000
Building 36,000
Tools and Equipment 12,000
Notes Payable 30,000
Account Payable 8,870
Asad Capital 81,800
Asad Drawing 3,100
Repair Service Revenue 10,380
Advertising Expense 830
Wages Expense 4,900

TOTAL $131,050 $131,050

 Many transactions affects the revenues or
expenses of two or more accounting periods.
e.g depreciable assets, supplies, insurance
policy, prepaid expenses etc
 Initially the costs of such items are recorded
as assets, because they will benefit the
business in future accounting periods.
Overtime these assets are used up, and their
cost becomes expenses of the periods in
which the goods are services are used.
 Business allocate the costs of such assets to
expenses over a span of several accounting
period by making adjusting entries at the
end of each accounting period.
 The purpose of these entries is to assign to
each accounting period the appropriate
amount of revenue and expenses.
 These entries “adjust” the balances of
various ledger accounts, therefore it is
known as a adjusting entries.
A business can make dozen of adjusting
entries, but here we assume that Overnight’s
account require only three adjusting entries
at December 31.
 On December 4,Overnight purchased for $1400 a
quantity of shop supplies expected to last for 3 or 4
months. At the date of purchase, this $1400 cost was
debited to an asset account (shop supplies), because
it was expected to benefit future accounting periods.
 But as these supplies are used this asset gradually
becomes an expense.
 Assume that during December, $400 worth of
Overnight’s shop supplies was used in business
operations and that approximately $1000 worth
remains on hand available for use in future periods.
 The $400 of supplies used during December should be
recognized as expense in that month; the $1000 in
supplies still on hand should appear in the Dec 31
balance sheet as an asset.
 GENERAL JOURNAL
Date Account Titles and Debit Credit
Explanation $ $
2006 Supplies expense 400
Dec 31 Shop supplies 400
To recognize as
expense the cost of
shop supplies used in
December
 Depreciable assets are all those assets which
have a limited useful life. e.g Building, Car,
Machinery and Furniture etc
 They are not physically consumed but their
economic values diminishes overtime.
 Each period a portion of a depreciable assets
usefulness expires. Therefore, a
corresponding portion of its cost is
recognized as depreciation expense.
 The systematic allocation of the cost of a
depreciable asset to expense over the asset
useful life is called depreciation.
 The appropriate amount of depreciation
expense is only an estimate. Because we
cannot look at a building or a piece of
equipment and determine precisely how
much of its economic usefulness has expired
during the current period.
 The most widely used method of calculating
depreciation is “Straight line depreciation
method”. Under the straight line approach,
an equal portion of the asset’s cost is
allocated to depreciation expense in every
period of the asset’s estimated useful life.
The formula for calculating depreciation
expense by the straight line method is:
 Depreciation expense (per period) = Cost of the asset/Estimated useful
life
 Overnight purchased its building for
$36000.And Asad owner estimate that its
useful life is 20 years. Annual depreciation
expense of the building is equal to
(36000/20)=$1800 and per month
depreciation expense is equal to
(1800/12)=$150.
 The adjusting entry to record depreciation
on this building for the month of December
appears below
 GENERAL JOURNAL

Date Account Titles and Explanation Dr Cr

$ $
2006 Depreciation Expense; Building 150
Dec 31 Accumulated Depreciation; Building 150
To record one month’s depreciation on
building
 The depreciation expense account will
appear in Overnight’s income statement for
December, along with other expenses for the
month.
 The accumulated depreciation account will
appear in the balance sheet as a deduction
from the balance of the building account as
shown below;
 OVERNIGHT AUTO SERVICE
Partial Balance Sheet
December 31 ,2006

Assets
Cash ………………………………………………… $14,220
Account Receivable ……………………………… 6,600
Shop supplies …………………………………….. 1,000
Land ………………......................................... 52,000
Building …………………………….......$36,000
Less; Accumulated Depreciation…... 150 35,850
 Overnight also must record depreciation on
its tools and equipment. These assets cost
$12,000, and management estimates that
they will remain in service for about 5 years.
 Thus per year depreciation expense is equal
to (12000/5)=$2400 and monthly
depreciation expense is equal to
(2400/12)=$200.
 The adjusting entry to recognize this monthly
expense is;
 GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2006 Depreciation Expense; Tools & Equip 200

Dec 31 Accumulated Depreciation; Tools & Equip 200
To record one month’s depreciation on tools
and equipment
 Similar adjusting entries to recognize
depreciation expense on the building and
tools and equipment will be made each
month through out the assets useful lives.
 Depreciation begins when the assets are
placed in use for business purpose. Once
these assets have become fully depreciated
that is, their total cost has been recognized
as depreciation expense, the recognition of
depreciation will stop.
LEDGER ACCOUNTS
AFTER
ADJUSTING
ENTRIES
Date Debit Credit Balance
$ $ $
2006
NOV. 30 16,600 16,600
DEC. 1 360 16,240
15 4,980 21,220
23 3,100 18,120
29 1,000 19,120
31 4,900 14,220
Date Debit Credit Balance
$ $ $
2006
NOV. 30 1,200 1,200
DEC. 31 5,400 6,600
Date Debit Credit Balance
$ $ $
2006
DEC. 4 1,400 1,400
31 400 1,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 52,000 52,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 36,000 36,000
Date Debit Credit Balance
$ $ $
2006
DEC. 31 150 150
Date Debit Credit Balance
$ $ $
2006
NOV. 30 12,000 12,000
Date Debit Credit Balance
$ $ $
2006
DEC. 31 200 200
Date Debit Credit Balance
$ $ $
2006
NOV. 30 30,000 30,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 7,000 7,000
DEC. 2 470 7,470
4 1,400 8,870
Date Debit Credit Balance
$ $ $
2006
NOV. 30 80,800
DEC. 29 1,000 81,800
Date Debit Credit Balance
$ $ $
2006
DEC. 23 3,100 3,100
Date Debit Credit Balance
$ $ $
2006
DEC. 15 4,980 4,980
31 5,400 10,380
Date Debit Credit Balance
$ $ $
2006
DEC. 1 360 360
2 470 830
Date Debit Credit Balance
$ $ $
2006
DEC. 31 4,900 4,900
Date Debit Credit Balance
$ $ $
2006
DEC. 31 400 400
Date Debit Credit Balance
$ $ $
2006
DEC. 31 150 150
Date Debit Credit Balance
$ $ $
2006
DEC. 31 200 200
 After all the necessary adjusting entries have
been journalized and posted, an adjusted
trial balance is prepared to prove that the
ledger is still in balance.
 It also provide a complete listing of the
account balances to be used in preparing the
financial statements.
 The following is the adjusted trial balance of
Overnight Auto Service.
 OVERNIGHT AUTO SERVICE
Adjusted Trial Balance
December 31, 2006
Description Debit Balance Credit Balance
$ $

Cash 14,220
Account Receivable 6,600
Shop Supplies 1,000
Land 52,000
Building 36,000
Accumulated Depreciation; Building 150
Tools and Equipment 12,000
Accumulated Depreciation; Tools & Equipment 200
Notes Payable 30,000
Account Payable 8,870
Asad Capital 81,800
Asad Drawing 3,100
Repair Service Revenue 10,380
Advertising Expense 830
Wages Expense 4,900
Supplies Expense 400
Depreciation Expense; Building 150
Depreciation Expense ;tools & equipment 200
 Standard Format
 Share information
 Stake holder
 Monetary information
 OR
 It is a set of different report which is provided by a
business to interested parties. OR
It is simply a declaration of what is believed to be
true communicated in terms of monetary unit.
 Financialstatements prepared for shorter than one
year is called interim financial statements.
 1. The Income Statement
 2. The Statement of Owner’s Equity
 3. The Balance Sheet
 4. The Statement of Cash Flows
 OVERNIGHT AUTO SERVICE
Income Statement
For the Month ended December 31 ,2006

Revenue:
Repair Service Revenue ………………………………. $ 10,380
Expenses:
Advertising expense ………………. $ 830
Wages Expense …………………… 4,900
Supplies Expense ………………….. 400
Depreciation Expense: Building … 150
Depreciation Expense: Tools & Equip 200 6,480
Net Income ……………………………………………………. $3,900
Net Income increase owner’s equity. so owner equity will
increase by an amount of $3900 because of this profit.
 The Statement of Owner’s Equity summarize
the increases and decreases in the amount of
owner’s equity during the accounting period.
 Increases result from earning net profit and
from additional investment by the owner.
 Decreases result from losses and from of
assets by the owner
 OVERNIGHT AUTO SERVICE
Statement of Owner’s Equity
For the Month ended December 31 ,2006

Asad, Capital, Nov. 30, 2006 …………………………….. $ 80,800

Add: Net Income for December ………………………….. 3,900
Additional investment by owner ………………………. 1,000
Subtotal …………………………………………………….. $ 85,700
Less: Withdrawals by owner ……………………………….. 3,100
Asad, Capital, December 31, 2006 ………………………. $ 82,600

The ending balance of owner’s equity ($82,600) appears in

balance sheet.
 The statement which shows that what business has
and what it has to pay at a particular time is called
balance sheet.
 The statement which list the assets liabilities and
owner equity of a business is called Balance sheet.
1= Current Assets.
The assets utilized or that gives benefits within one
accounting period.
Examples
Cash , accounts receivable ,Notes receivable ,
inventory ,supplies etc.
Account receivable (A/R):
The amounts due from customer.
Example. You have sold 10 marker @ 5 per maker and you
haven't received the amount. so 50 is your account
receivable
Notes receivable:
A note or bill receivable from some one.
Example. You have given $ 500 to some one and has taken
written promise from him that he will pay the amount
after 90 days.
Inventory:
Merchandise on hand that is goods remaining unsold.
You purchase merchandise of worth $1000 at the
start of the month and on the day of preparing
balance sheet the remaining goods worth $200 so
inventory is of $200.
Supplies:
The small materials used in the business operation.
Like markers , papers etc in kardan university
 2=Fixed Assets or Long Term asset:
 Those assets which we utilize in more than one
accounting period .
 Land ,building, furniture, machinery ,car etc
 3=Tangible Assets:
 Those assets which we can touch.
 Or
 Those assets which have a physical existence are
called tangible assets.
 Examples
 Inventory ,land, car etc
 TYPES OF TANGIBLE ASSETS.
 1.Depreciable assets.
 Those assets which have a limited useful life.
 Examples
 Building ,car ,furniture ,machinery etc
 2.Non depreciable assets.
 Those assets which have an unlimited useful life.
 Example LAND
 1.Current Liability:
 The obligation payable with in one accounting
period.
 Examples
 Accounts payable , notes payable ,salaries

payable ,interest payable, utility bills payable ,

accrued expenses etc
Accrued expenses:
The expenses incurred but not yet paid.
Salaries payable, rent payable ,interest payable etc
Accounts payable:
The amounts payable to supplier.
You have purchased goods of worth $400 and you
haven’t pay for it so 400 is your accounts payable.
Notes payable:
A written promise to repay the amount to some one
by a particular date.
Like if you have received $800 from some one and
you have made a written promise that I will pay the
amount after 60 days .so $800 is your Notes payable
 2.Long term liability:
 The obligations payable in more than one
accounting period.
 Example
 Long term loan payable
OWNER’S EQUITY
The residual claim of the owner on the assets of the
business.
Owner equity increases from
1.Investment of cash or other assets by the owner
2.Earnings from profitable operation of the business.
Owner Equity.
Owner equity decreases from
1.Withdrawl of cash or other assets by the owner
2.Losses from unprofitable operation of the business.
 The heading of balance sheet communicate three
things
 1.The name of the business
 2.The name of the financial statement
 3.Date
 OVERNIGHT AUTO SERVICE
Balance Sheet
December 31 ,2006
Assets Liabilities & Owner ‘s equity
Cash…………… $ 14,220 Liabilities;
Account receivable 6,600 Notes payable ……. $ 30,000

Supplies 1,000 Accounts payable 8,870

Land …………... 52,000 Total liabilities $ 38,870
Building ………. 36,000 Owner ‘s equity;
Less: Accumulated Dep … 150 35,850
Tools & Equipment 12,000
Less: Accumulated Dep 200 11,800 Asad Capital 82,600
Total Assets ………….. $121,470 Total liabilities & O.Eq $121,470
 OVERNIGHT AUTO SERVICE
Statement of Cash Flows
For the Month Ended December 31 ,2006

Cash flows from operating activities;

Cash received from revenue transactions ………….. $ 4,980
Cash paid for Advertising expenses ………………… (360)
Cash paid for wages expenses ………………………. (4,900)
Net cash provided (used) by operating activities ………….. $( 280)
Cash flows from investing activities; …………………………. 0
Cash flows from financing activities;
Cash Invested by Asad, owner ………………………… 1,000
Cash withdrawn by Asad, owner ……………………… (3,100)
Net cash provided (used) by financing activities $ (2,100)
Net increased (decreased) in cash for the month of December $ ( 2,380)

Add: Cash balance, December 1 , 2006 ………………………………… 16,600

Cash balance on , December 31, 2006 ……………………………….. $ 14,220

THE CASH BALANCE ON DECEMBER, 31, 2006 APPEARS IN BALANCE SHEET .

THE RELATIONSHIP BETWEEN FINANCIAL STATEMENT IS CALLED “ARTICULATION”.
 The revenues, expenses and drawings accounts are
called temporary accounts or nominal accounts,
Because we close it at the end of every accounting
period.
 Revenues increases owner’s equity, expenses and
drawing decreases owner’s equity.
 The process of transferring the balances of
temporary accounts into the owner’s capital
account is called closing the accounts.
 The journal entries made for the purpose of closing
the temporary accounts are called closing entries.
 Revenues and expenses accounts are closed
at the end of each accounting period by
transferring their balances to a summary
account called income summary.
 If the revenues (credit balances) exceed the
expenses (debit balances) the income
summary account will have a credit balance
representing net profit.
 Conversely, if expenses exceed revenue, the
income summary account will have debit
balance representing loss.
 Revenue accounts have credit balances,
therefore closing a revenue account means
transferring its credit balance to the income
summary account.
 This transfer is accomplished by a journal
entry debiting revenue account in an amount
equal to its credit balance, with an offsetting
credit to the income summary account.
 GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2006 Repair Service Revenue 10,380

Dec 31 Income Summary 10,380
To close the repair service revenue
account.
 Afterthis closing entry has been posted,
repair service revenue will have a zero
balance, whereas income summary will have
a credit balance of $10,380.
 Expense accounts have debit balances,
therefore closing an expense account means
transferring its debit balance to the income
summary account.
 This transfer is accomplished by a journal
entry crediting expense account in an
amount equal to its debit balance, with an
offsetting debit to the income summary
account.
 GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2006 Income Summary 6,480

Dec 31 Advertising Expense 830
Wages Expense 4,900
400
Supplies Expense
150
Depreciation Expense: Building
200
Depreciation Expense: Tools &
Equipment
To close the expense accounts.
 Afterthis closing entry has been posted, the
income summary account has a credit
balance of $3,900 ($10,380-$6,480), and the
five expenses accounts have zero balances.
 The net income (Revenue-Expenses) $3,900
(10,380-6,480) earned during December
causes the owner’s equity to increase.
 The credit balance of the income summary
account is, therefore transferred to the
owner’s equity account, by debiting income
summary account for $3,900 and crediting
Asad capital account for $3,900.
 GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2006 Income Summary 3,900

Dec 31 Asad Capital 3,900
To close the Income summary account
for December by transferring the net
income to the owner’s capital account.
 Afterthis closing entry has been posted, the
income summary account has a zero balance,
and the net income for December will appear
as an increase or credit entry in the owner’s
capital account.
 If the Expenses of a business are more than
its revenue, the income summary account
will have a debit balance, representing a loss
for the Accounting Period.
 In that case, the closing of the income
summary account requires a debit to owner’s
capital account and an offsetting credit to
income summary account.
 The owner’s Equity will of course, be
reduced by the amount of the loss debited to
the capital account.
 Drawings by the owner do not constitute an
expense, the owner’s drawing account is not
closed into the income summary account,
but it is closed directly to the owner’s
capital account.
 The following is the closing entry for owner’s
drawing account,
 GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2006 Asad Capital 3,100

Dec 31 Asad Drawing 3,100
To close the owner Drawing account.
 Afterthis closing entry has been posted, the
drawing account will have zero balance, and
the amount withdrawn by owner Asad during
December will appear as a deduction or debit
entry in his Capital account.
LEDGER
ACCOUNTS
AFTER
CLOSING ENTRIES
Date Debit Credit Balance
$ $ $
2006
NOV. 30 16,600 16,600
DEC. 1 360 16,240
15 4,980 21,220
23 3,100 18,120
29 1,000 19,120
31 4,900 14,220
Date Debit Credit Balance
$ $ $
2006
NOV. 30 1,200 1,200
DEC. 31 5,400 6,600
Date Debit Credit Balance
$ $ $
2006
DEC. 4 1,400 1,400
31 400 1,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 52,000 52,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 36,000 36,000
Date Debit Credit Balance
$ $ $
2006
DEC. 31 150 150
Date Debit Credit Balance
$ $ $
2006
NOV. 30 12,000 12,000
Date Debit Credit Balance
$ $ $
2006
DEC. 31 200 200
Date Debit Credit Balance
$ $ $
2006
NOV. 30 30,000 30,000
Date Debit Credit Balance
$ $ $
2006
NOV. 30 7,000 7,000
DEC. 2 470 7,470
4 1,400 8,870
Date Debit Credit Balance
$ $ $
2006
NOV. 30 80,800
DEC. 29 1,000 81,800
31 3,900 85,700
31 3,100 82,600
Date Debit Credit Balance
$ $ $
2006
DEC. 23 3,100 3,100
31 3,100 0
Date Debit Credit Balance
$ $ $
2006
DEC. 15 4,980 4,980
31 5,400 10,380
31 10,380 0
Date Debit Credit Balance
$ $ $
2006
DEC. 1 360 360
2 470 830
31 830 0
Date Debit Credit Balance
$ $ $
2006
DEC. 31 4,900 4,900
31 4,900 0
Date Debit Credit Balance
$ $ $
2006
DEC. 31 400 400
31 400 0
Date Debit Credit Balance
$ $ $
2006
DEC. 31 150 150
31 150 0
Date Debit Credit Balance
$ $ $
2006
DEC. 31 200 200
31 200 0
Date Debit Credit Balance
$ $ $
2006
DEC. 31 10,380 10,380
31 6,480 3,900
31 3,900 0
 1. Close the various revenue accounts by transferring their
balances into the income summary account.
 2. Close the various expense accounts by transferring their
balances into the income summary account.
 3. Close the Income summary account by transferring its
balance into the owner’s capital account.
 4. Close the owner’s Drawing account into the owner’s
capital account. (The balance of the owner’s capital
account in the ledger will now be the same as the amount
of owner’s equity appearing in the Balance Sheet)
 After the revenue and expense accounts have been
closed, it is desirable to prepare an after closing
trial balance, which will consist of balance sheet
accounts only.
 The after closing trial balance is prepared from the
ledger.
 The after closing trial balance gives assurance that
the accounts are in balance and ready for the
recording of the transactions of the new
accounting period.
 The following is the after closing trial balance of
Overnight Auto Service,
 OVERNIGHT AUTO SERVICE
After Closing Trial Balance
December 31, 2006
Description Debit Balance Credit Balance
$ $

Cash 14,220
Account Receivable 6,600
Shop Supplies 1,000
Land 52,000
Building 36,000
Accumulated Depreciation; Building 150
Tools and Equipment 12,000
Accumulated Depreciation; Tools & Equipment 200
Notes Payable 30,000
Account Payable 8,870
Asad Capital 82,600

TOTAL $121,820 $121,820