chapter on principle.ppt

Chapter one
Introduction to
accounting and business
Principles of Accounting I

Objectives of the chapter
At the end of this chapter the students will able to:
• Describe the nature of business
• Describe accounting as an information
• Describe the evolution of accounting, understand the importance
of accounting
• Describe the profession of accounting
• Describe the development of accounting principles and their
relation to practice
• Familiarized a business transaction
• Identify the accounting equation and its basic elements
• illustrate and describe how all business transactions can be stated
in terms of the resulting changes in the three-basic element of the
accounting equation
• describe the financial statement of a sole proprietorship

Introduction
• We live in the information age-a time of
communication, and a time when information is a
vital resource.
• In this information era, how we live, whom we
associate with, and the opportunities we have all
depend on our access to and understanding of
information.
• The same is true for businesses

Cont’d
An information system is the collecting,
processing, and reporting of information to
decision makers.
 Understanding and processing information is the
core of accounting.
The kind of information processed in accounting
is financial i.e. of a monetary nature.
Providing information about what businesses
own, what they owe, and how they perform is the
aim of accounting.

Cont’d
• a study of accounting helps people make better
and informed decisions about assessing
opportunities, products, investments, and social
and community responsibilities.
• But the use of accounting information is not
limited to accountants or people in business.
• You can use accounting information in your daily
life.

The Nature of Business Enterprise
• A business enterprise is an organization in
which inputs converts into goods and services
to customer.
• Inputs are basic resources or factory of
production such as raw materials, labor, capital,
Entrepreneurship.
• Out puts are finished product such as goods
and services.
• There are three different types of business and
forms of business

Based on there activity
1. Service business
2. Merchandised business
3. Manufactured business

Based on forms of ownership
1. Sole Proprietorship
• Business owned by one person
• Simple to establish
• Owner controlled
• Tax advantages
• Owner personally liable
• Financing difficult

2. Partnership
• Two or more owners
• Simple to establish
• Shared controlled
• Broader skills & resources
• Tax advantages
• Personal liability

3. Corporation
• Separate legal entity owned by
stockholders
• Easy to transfer ownership
• Greater capital raising potential
• Lower legal liability
• Unfavorable tax treatment

Evolution, definitions, and importance
of accounting
Accounting has evolved, as have, medicine,
law, & most other fields of human activity, in
response to the social & economic needs of
the society.
For the most part, primitive accounting (the
practice of accounting in the old times) was
characterized by archaic accounting in which
no systematic records were kept.

Cont’d
• Complete accounting for an enterprise developed
somewhat latter in response to the needs of
commercial republics of Italy.
• Modern accounting came to existence after 1494
the period when “double entry system” was
invented by Luca Pacioli.
• The invention is so called “double entry system”,
because it provides for recording double (two)
aspects of a transaction in such a manner as to
establish equilibrium.

Cont’d
• modern accounting is the product of many influences
and conditions
• First, accounting recognizes that people live in a world
of scarce resources.
• Second, accounting recognizes and accepts society’s
current and ethical concepts of property and other
rights when determining equity among the varying
interests in an enterprise or entity.
• Third, accounting recognizes that in highly developed,
complex economic systems, some (owners and
investors) entrusts the custodianship of and control
over property to others (managers).

What is Accounting?
• Accounting is a process of identifying,
measuring, recording, and communicating
financial information about an economic entity
to permit informed judgment and decisions by
users of the information.
• It is the language of business

Characteristics of Accounting Information
• It provides predominantly financial information’s
• It have objectives like measuring :
• It is relevant, reliable, Understandable, Comparable,
consistency and neutral.
• It is implemented in consideration with the cost-benefit
analysis. It is focus on information’s that will have
material impact for decision making.
• It is influenced by personal judgments and estimations.
• It is highly framed by principles, concepts, and
standards that are generally accepted but not universally
accepted.
• It could be manual or automated.

Users of Financial Information
Internal
• Managers who plan,
organize and run a
business
– Marketing managers
– Production supervisors
– Finance directors
– Company officers

Internal Users Ask?
Cash to pay bills? Cost per unit?
Give raises? Which product is
profitable?

External
• Investors
• Regulatory agencies
• Tax authorities
• Customers
• Labor Unions
• Economic analysist
• Owner
• Creditors

External Users Ask?
Earning enough? Compare to competition?
Will the company be able to pay bills
when due?

The Profession of Accounting
As professionals, accountants are
typically engaged in either:
1. Public accounting: are independent
professional accountants, licensed by state,
who provide accounting services to clients
(companies) on a fee basis.
2. Private accounting: are those accountants
who are employed by a business firm or not-
for-profit organizations.

Accounting Standards
• They are standards or guidelines that the
accountant should follow in identifying,
measuring, recording, and reporting the
financial statements of an organization.
• Presently, there are two primary
accounting standard-setting bodies-the
International Accounting Standards
Board (IASB) and the Financial
Accounting Standards Board (FASB).
• IFRSs are determined by the 1ASB.

Cont’d
Measurement Principles
• IFRS generally uses one of two measurement
principles, the cost principle or the fair value
principle.
• Relevance means that financial information is
capable of making a difference in a decision.
• Faithful representation means that the numbers
and descriptions match what really existed or
happened-it is factual.

Cont’d
• Assumptions
• Assumptions provide a foundation for the
accounting process. Two main assumptions are
the monetary unit assumption and the
economic entity assumption.

The Distinction B/n Bookkeeping & Accounting
• bookkeeping is the process of recording
business activities, and keeping the records.
It encompasses the record-making phase of
accounting; only a small and probably the
simplest but important part of accounting.

Business Transactions & The Accounting
Equation
• BT are economic events or conditions that have
a direct impact on the business.
• It is the occurrence of an event or condition that
must be recorded.
• Business transactions may be described as:
1. Simple transactions
2. Complex transactions
3. External transaction
4. Internal transaction

Accounting Equation
• It is an algebraic equation that expresses the
relationship between assets (resources),
liabilities (obligation), and owner’s equity
Elements of accounting equation:
1. Assets: are properties with money value that are
owned by a business.
2. Liabilities: are debts owed by a business .i.e.
the claims/rights of creditors
3. Owner’s equity: it is net residual interest after
all liabilities have been satisfied. It is also
called Capital, Proprietor ship, or Net worth.

Illustration
• Assume that Mr. John establishes a sole proprietorship
to be known as John Taxi.
1. Transaction 1: John deposits Br. 10,000 in a bank
account in the name of john taxi, which is investment.
2. John purchases land as a future building site, for which
Br. 7,500 in cash is paid.
3. John purchases different supplies for Br. 850 from
various suppliers agreeing to pay on the near future.
4. during the month john paid Birr 400 to creditors on
account.
5. John Taxi earned fares of Br.4, 500 from the
service performed to the customers and received
in cash.

Cont’d
6. John Taxi earned fares of Br. 1,000 from the service
rendered to his customers and agreed to collect in the
near future.
7. For John Taxi various business expenses incurred and
paid during the month were as follows. Wages Br. 1,
125, rent Br. 850, utilities Br. 150, miscellaneous
expense Br. 75.
8. at the end of the month it is determined that the cost of
supplies on hand is Br. 250.
9. at the end of the month, John withdraws from the
business Br.1, 000 in cash for personal use.

Cont’d
• The following observation should be noted from the
above illustration.
1. The effect of every transaction can be stated in terms of
increase and/or decreases in one or more of the
elements of accounting equation.
2. The equality of the two sides of the accounting
equation is always maintained
3. The owner’s equity is increased by:
Amounts invested by the owner, and Revenues
4. The owner’s equity is decreased by:
Withdrawals by the owner, and Expenses

Financial Statements
• It is accounting statements that communicates or reports
essential information of a business enterprise to users of
accounting information.
• By reading, financial statements users of accounting
information can make informed judgments about:
 The financial position of a business,
 The financial progress of a business,
 The financial status of a business, and
 The cash flows of a business.

Cont’d
1. Income Statement: It shows the results of business operations
for specific period of time.
2. Statement of retain earning: It reports the changes in the
owner’s financial interest (capital) of the business during the
period.
3. Statement of financial position: It is a financial statement that
reports the financial status or financial condition of a business as
of a specific date.
4. Statement of Cash Flow: It is a summary of cash receipts &
cash payments of a Business for a specific period of time.
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities: - cash transaction related to
cash investment by owner’s, borrowings, & cash withdrawals by
owners.

Objective of the chapter
At the end of this chapter the student s able to:
• Define accounting cycle
• Describe the characteristics of an account.
• List the rules of debit and credit and the normal balances of
accounts.
• Analyze business traction and record on journal
• Prepare a unadjusted trial balance and explain how it can be used
to discover errors.
• Prepared adjustment, worksheet and financial statement effects of
transactions.
• Illustrate how to prepare closing entry and post-closing trail
balance.
• Familiarized how to prepared reversing entries

Accounting cycle
• Accounting cycle is a series of steps that accountants
perform during the accounting period to analyze record,
classify, summarize, and report useful financial
information for the purposes of preparing financial
information.
• It is a complete sequence of accounting procedures that
are repeated in the same order during each accounting
period.

The basic procedures/phases in the
accounting cycle are:
1. Identifying and analyzing business transaction.
2. Recording business transaction in a journal.
3. Classifying data by posting transactions from the journal to a
ledger.
4. Preparation of unadjusted trial balance.
5. Adjusting, correcting, and updating recorded data; completion
of the worksheet.
6. Preparation of financial statements.
7. Closing nominal accounts to summarize the operation of the
accounting period.
8. Preparation of post-closing trial balance.
9. Reversing certain adjusting entries to facilitate the recording
process in the subsequent accounting period.

Characteristics’ of an Accounts
• The accounting form, which is used to record such
effects in terms of increase and/or decrease for each
individual asset, liability, owner’s equity, revenue and
expense items, is called an account.
• A group of related accounts that comprise a complete
unit, such as all of the accounts of a specific business
enterprise, is called a ledger.
• An account could be of three types:
1. The T account
2. The two-column account, and
3. The four-column account.

T Account
• The T account is the simplest form of an account. It has got its
name from the fact that it resembles the capital letter T.
It has three main parts
 The title -for recording the name of the item.
 The debit, or left side- a space for recording the increases and/or
decreases in the amount of an item, in terms of money
 The credit, or right side-a space for recording the increases
and/or decreases in the amount of an item, in terms of money
The T Account Format
Title
Debit = (Left side) Credit= (Right side)

Cont’d
Often Debits and Credits are abbreviated as “Dr”
and “Cr” respectively, based on the Latin terms
“Debere” and “Credere”
Amounts entered on the left side of an account,
regardless of the account title, are called debits or
charges to the account , and the account is said to
be “Debited” or “Charged”
Amounts entered on the right side of an account,
regardless of the account title, are called credits ,
and the account is said to be “Credited”

Classification of Accounts
• Accounts are classified into five as: Asset, Liability, owner’s
equity, Revenue, and Expense. According to their common
characteristics the first three accounts are known as Balance
Sheet Accounts and the other two accounts are called Income
Statement Accounts.
• Balance Sheet accounts: are those accounts that are reported on
the balance sheet at the end of the reporting period. It includes:-
• Assets
• They are properties/resources with monetary value that are
owned by a business or individuals.
1. tangible or intangible.
2. Current Assets and Non – Current Assets.

Cont’d
• Liabilities: They are debts owed to outsiders (creditors) and
frequently described on the balance sheet by titles that include the
word “payable”. Like assets, liabilities are classified in to two as
Current Liabilities and Non – Current Liabilities
Owner’s Equity
• It is a residual claim against the asset of the business after the
total liabilities are deducted. For a corporation, owner’s equity is
frequently called stockholders equity or shareholders equity.
Examples:
• Capital Account- for sole proprietor ship and partnership.
• Capital stock and Retained earnings - for corporation
• Drawing account – for sole proprietor ship and partnership.
• Dividend account – for corporation.

Cont’d
• Income Statement Accounts: are those accounts that are
reported on the income statement during the accounting period. It
includes:-
• Revenues
• They are gross increases in owner’s equity resulting from the
main operations of the business. Examples of revenue accounts
are fees earned, fares earned, sales, interest income, insurance
premium, sales commission etc.
• Expenses
• They are decreases in owner’s equity in the process of earning
revenue. Examples of expenses are insurance expense,
depreciation expense, supplies expense, utilities expense, rent
expense etc.

Chart of Accounts
• It is a listing of the account titles and account
numbers (codes) being used by a given business.
• In numbering (coding) accounts the first digit
indicates the major division of the ledger in
which the account is placed.
• In the chart of accounts, the asset accounts are
listed according to their liquidity. Liquidity is
the ease with which an asset can be converted in
to cash.

Rules of Debit and Credit
– Debit sides signify: Credit sides signify:
Balance sheet accounts:
• Increase in asset accounts - decrease in asset accounts
• Decrease in liability accounts - increase in liability accounts
• Decrease in owner’s equity accounts_ - increase in owner’s equity
account
• except for drawing account (increasing) except for drawing
account(decreasing)
Income statement Accounts:
• Decrease in revenue accounts - increase in revenue
accounts
• Increase in expense accounts - decrease in expense
accounts

Normal Balance of Accounts (Balance
Sides of Accounts)
Summary on the Rules of Debits and Credits:
Increase Decrease Normal
Balance
Balance sheet accounts:
Asset Debit Credit Debit
Liability Credit Debit Credit
Owner's equity/stock holder’s equity
Capital Capital Stock Credit Debit Credit
Retained Earnings Credit Debit Credit
Drawing Dividends Debit Credit Debit
Income statement Accounts:
Revenue Credit Debit Credit
Expense Debit Credit Debit

Recording Business Transactions in a Journal
• The accounting record in which a transaction is
initially recorded is known as a journal.
• It is “The book of original entry”.
• The process of recording a business transaction
in the accounting record is called Journalizing.
• Each one set of debits and credits for a
transaction is called a journal entry.
• An entry composed of two or more debits or of
two or more credits is called Compound Journal.
• The Journal commonly used to record all types
of transactions is the General Journal.

Cont’d
• In recording a business transaction, the following
three basic questions must be answered:
Which accounts are affected?
Is each account increased or decreased?
Which account is debited & which is credited?

Steps in Journalizing a Transaction
1. Record the date
2. Record the Debit
3. Record the credit
4. Explanation
Example: On January 10, 2003 3F Company paid
Birr 6,000 to its employees as a salary for the first
week of the year.
1. Which accounts are affected?
2. Is each account increased or decreased?
3. Which account is debited & which is credited?

Illustration - 1
• Bieti beauty salon company an, a newly established
business with the aim of providing beauty service on
fee basis as well as rendering service to clients has the
following accounts in its ledger (chart of accounts).
• The following assets and liability were invested by
Bieti, on January 1, 2016 at the start of the business.
 Cash Birr 140,000
 Furniture 50,000
 Notes payable 100,000 (a bank notes
due in 5- years with an interest rate of 12 % &
equal yearly installment payments)

Cont’d
• The following transactions were taking place for the month January, 2016
 1. GA paid a one year rent of Birr 20, 000
 1. Purchased machinery at cost of Birr 35,000 by paying Birr 10,000 and agreed to pay
the remaining amount in the near future
 1.Paid a six-month insurance premium for Birr 2,400
 2. Purchased office equipment for Birr 25,000
 4. Paid Birr 800 for television advertisement
 7. Purchased supplies worth of Birr 5,000
 10. Purchased a land for Birr 60,000 which will be used for future building site
 15. Received a total of Birr 150,000 advance payment from trainees for a four-month
tuition fee starting from January 1
 17. Received Birr 5,000 form clients for decorating services rendered
 20. Paid Birr 15,000 partial payment to creditors for the Jan. 1 purchase of machinery
 20. Purchased additional supplies on account for Birr 7,000
 26. Send a bill to customers for the service rendered on account for Birr 12,000
 26. Paid Birr 6,500 salary to employees.
 28. Paid Birr 1,000 utilities expenses
 28. Paid to creditors on account for the January 20 purchase of supplies
 30. Received cash from customer on account for Birr 5,000
 31. GA withdrew a cash of Birr 5,000 for personal use

Posting to the Ledger
• The process of transferring the information from the
journal to a ledger is called Posting.
The steps in posting using the four-column account are
given below:
1. Write the name of the account and its related identification
number (Account number).
2. Enter the year, month, and date of the transaction in the date
column.
3. Insert the Journal page number in the P.R (Post Reference)
column of the account.
4. Enter the amount by which it is affected in the debit or credit
column.
5. Determine the accounts balance & enter it in the appropriate
sub-column of the balance column.

Illustration- 2
Account: Cash Account number111
Date Item P.R Debit Credit
Balance
Debit Credit
2016
Jan. 1 Balance  140,000 00
1 1 20,000 00 120,000 00
1 1 10,000 00 110,000 00
1 1 2,400 00 107,600 00
2 1 25,000 00 82,600 00
4 1 800 00 81,800 00
7 1 5,000 00 76,800 00
10 1 60,000 00 16,800 00
15 1 150,000 00 166,800 00
17 1 5,000 00 171,800 00
20 1 15,000 00 156,800 00
26 2 6,500 00 150,300 00
28 2 1,000 00 149,300 00
28 2 7,000 00 142,300 00
30 2 5,000 00 147,300 00
31 2 5,000 00 142,30
0
00

Trial Balance
• A trial balance is a two-column listing of the accounts
in the ledger and their balance to make sure that the
total of debit balances equals the total of credit
balances.
Uses of a Trial Balance
 It provides as a means of discovering errors
 It is used to check (proof) the accuracy of the ledger.
 It facilitates the preparation of financial statements.

Limitations of Trial Balance
• The trial balance amounts are equal doesn’t mean that the
accounting work is free from error. That is, there are errors that
may take place without affecting the trial balance totals.
Some examples are mentioned below:
• Failure to record a transaction or to post a transaction.
• Recording the same erroneous amount for both the debit and
credit parts of a transaction.
• Recording the same transaction more than once.
• Posting part of a transaction to the correct side but the wrong
account.
Please Note: All these errors have the same effect (increasing or
decreasing) on the debit totals and credit totals

Preparations of Financial Statements
a) Income statement
Bieti beauty salon Company & Training Centre
Income Statement
For the Month Ended January 31, 2016
Fees earned------------------------------------------------------------------------------ Birr 17,000
Less: Operating Expenses:
- Depreciation expense------------------------------------ 1,440
- Utility expense--------------------------------------------- 1,000
- Salary expense ---------------------------------------- 6500
- Miscellaneous expense----------------------------------- 800
Total operating expense----------------------------------------------------------------- (9740)
Net income --------------------------------------------------- ------------------- 7260

Cont’d
a) Statementofowner’sequity
BietibeautysalonCompany&TrainingCentre
StatementofOwner’sEquity
ForTheMonthEndedJanuary31,2016
GA,capitalJanuary1,2016------------------------------------------------------Birr90,000
Add:Netincomeforthemonth–-------------------------------------7260
Less:withdrawal---------------------------------------------------------(5000)
Increaseinowner’sequity----------------------------------------------------------------2260
Bieti,capitalJanuary31,2016---------------------------------------------------- Birr92,260

Cont’d
a) Balance sheet
Bieti beauty salon Company & Training Centre
Balance Sheet
January 21, 2016
Assets:
Current Assets:
Cash…………………………………………Birr 142,300
Accounts Receivable…………………………….. 7,000
Supplies…………………………………………… 12,000
Prepaid rent…………………………………… .....20,000
Prepaid insurance…………………………………2400
Total current assets……………………………………………Birr 183,700
Plant Asset (None-Current Assets):
Office equipment………………Birr 25,000
Less: Acc. Deprn. –Equip’t…………... (315) 24,685
Furniture …………………………… 50,000
Less: Acc. Deprn. –Furniture………...(625) 49,375
Machinery……………………………..35,000
Less: Acc. Deprn. –Machinery………...(500) 34,500
Land………………………………………………..60,000
Total plant assets………………………………………………… 168,560
Total asset…………………………………………………………………Birr 352,260
Liabilities:
Current liabilities:
Accounts payable……………………………..Birr 10,000
Unearned revenue……………………………. 150,000
Total current liabilities………………………………………….. Birr 160,000
Non-current liabilities:
Notes payable……………………………………………………………..100,000
Total liabilities……………………………………………………..Birr 260,000
Owner’s equity
GA, Capital ………………………………………………………………… 92,260
Total liability and owners’ equity………………………………Birr 352,260

Closing Entries
• The revenue, expense, and drawing/dividend accounts
are temporary accounts used to accumulate data related
to a specific accounting period.
• At the end of each accounting period, the balance of
these temporary/nominal accounts are transferred or
closed, to owner’s capital/retained earnings account.
Closing entries have two major purposes:
 To transfer net income or loss to owner’s capital/retained
earnings account.
 To establish a zero balance in each of temporary
accounts to start the next accounting period.

Cont’d
• Procedures to close the accounts
1. close revenue account
2. close expense account
3. To close income summary account
4. To close drawing account

Cont’d
Two Column General Journal
Page 4
Date Description PR Debit Credit
2016
Jan. 31
Closing entries
411
313
17000 00
17000 00
Fees Earned
Income Summary
31 Income Summary
Salary Expense
Depreciation Expense
Utility Expense
Miscellaneous Expense
313
512
516
517
518
9740 00
6500
1,440
1,000
800
00
00
00
00
31
Income Summary
Bieti , Capital
313
311
7260 00
7260 00
31
Bieti , Capital
Bieti , Drawing
311
312
5,000 00
5,000 00

Post-Closing Trial Balance
• The last procedure of the accounting cycle is the
preparation of trial balance after all temporary /
nominal accounts have been closed.
• The purpose of the post-closing (after closing) trial
balance is to make sure that the ledger is in balance at
the beginning of the new accounting period.
• It is prepared to retest the equality of the account
balances b/c errors may have been introduced in the
process of adjusting and closing entries.
• It will show only balance for the permanent accounts
(or real accounts).

Chapter Three
3. Accounting for A Merchandising Enterprise

At the end of this chapter the student will be able to:
Define merchandise enterprise
Define merchandise inventory
Differentiate inventory system
Demonstrate accounting for purchase and sale

Definitions
• Merchandising Enterprises are profit - seeking
businesses /entities, which are predominantly engaged
in a continuous purchase and resale of merchandises
• Merchandises are those goods that a merchandising
enterprise/company purchases and resale to its
customers.
• The account that shows the cost of merchandise
purchased for resale to the customers is called
Purchases.
• This account is used only for merchandise bought for
resale.

Merchandising Inventory Systems
• Merchandising inventory systems are the
ways/mechanisms through which the quantity of goods
sold and on hand at the end of the accounting period
will be determined.
1.The Periodic Inventory System: Under this system, as
the name periodic suggests, the inventory account is
updated only periodically i.e., only at the end of a period.
No detailed records of the inventory on hand are
maintained during the accounting period.
When goods are bought, a temporary purchases account
is debited instead of the inventory account itself.

Perpetual Inventory Systems
• Under the perpetual inventory system, the
Merchandise Inventory and Cost of Goods Sold
accounts are continually updated during the accounting
period as purchases, sales, and other inventory
transactions that affect these accounts occur.
• It is continuously records the amount of inventory on
hand (perpetual =continuous).
• Under this system, the merchandise inventory account
is debited or credited every time (goods) are bought or
sold.
• When an item is sold, its cost is recorded in a separate
cost of goods sold account in addition to recording
sales.

Accounting for Purchases
• As noted above, a merchandising enterprise uses the
purchase account to record the cost of merchandise
bought for resale during its accounting period.
• Purchases of merchandises are usually made through
one of the following two basic arrangements:
•Cash purchase
•Credit purchase/purchase on account
Example:Almaz retail store made two purchase of
merchandise from XYZ Whole sale Company. Almaz
purchase Birr. 30,000 of merchandise on account on
May 4, & on May21, purchase Birr 20,000 of
merchandise on cash. The required journal entries are:

Cont’d
• The arrangements agreed up on by the buyer and the
seller as to when payments for merchandise are to be
made is called credit terms.
• Purchase Discounts: As a means of encouraging
payment before the end of the credit period, the seller
may offer a discount for the early payment of cash.
• Example: Assume the credit term for Almaz retail store
on May 4 purchases are 2/10, n/30, and if the
merchandise is paid on May 14 a 2% discount may be
taken.
Require: recorded under net and gross method on may 4
and 14

Cont’d
• Purchase Returns and Allowances: Purchasers may at times
return some merchandise already purchased or may request a
price adjustment from the seller. There are several reasons for
this practice including:
• Inferior quality of goods received.
• Wrong specification.
• Damage caused to goods in shipment etc.
The source document used for recording purchase returns
and allowances is a debit memorandum.
AssumeAlmaz returns Birr.2000 of merchandise to XYZ
Company before paying for the goods, the journal entry
would be:

Accounting for Sales
• Sale of merchandise transaction are recorded in a
ledger account identified as “Sales”. This is a revenue
account used to record the sale of merchandise during
an accounting period.
• A sales discount refers to an available discount offered
by the seller to encourage early payments of invoices
by the purchaser. Sales discounts are mirror images of
purchases discounts.
• Sales Returns and Allowances: A seller of
merchandise may receive a return of merchandise that
was sold to a purchaser and may make reductions in the
original sale price.

Cont’d
• Example: Assume that on July 21, 2004 ABC
Company received Birr. 2000 cash from sale that was
made on account @ July 12, 2004 to 3k Trading, term
2/10, n/30. Journalize the entry to record:
A. The sale of merchandise on July 12, 2004,
B. Assume that on July 15 a Birr.200 of goods sold on
account is returned by the customers. and
C. The receipt of cash on July 21, both in the books of
ABC Company.

Trade Discounts, Transportation Costs, and
Sales Tax.
1. Trade Discounts: is a discount from the list or catalogue
price of commodities offered usually for customers who
purchase in large amounts. The main purpose of a trade
discount offer is to induce purchases of goods by customers
in larger quantities.
When available trade discounts are taken, purchases of
merchandise are recorded net of trade discounts.
There is no requirement to account trade discounts, in a
separate account
Example: Assume on April 15, 1996, Bahir Dar Garments Plc
purchased merchandise on account from Almeda Textile
Factory. The list price is Birr 60,000 and 20% trade discount.

Cont’d
• Transportation Costs: may be incurred by the buyer
or the seller depending on the term of shipment. The
terms of agreement between the buyer and the seller
could be two types.
1.FOB Shipping Point
2.FOB Destination.
• Example: Assume that X Company purchases merchandise
from Y Company on account Birr for1900, terms, FOB-
Shipping Point to 2/10, n/30 with prepaid transportation cost of
Birr 150 added to the invoice on June 1.
Required: Record the necessary journal entries on June 1&10
(assume X Company has paid the seller @ June 10) for the
buyer and for the seller.

Cont’d
• Sales tax: Government and states commonly levy/impose
various types of taxes. A tax imposed by governmental
units on sale of goods is known as a Sales Tax or VAT.
• Example: Rita Trading sold merchandise on account to
Marathon Motor Engineering Ltd., Birr 25,000 plus a 15 %
sales tax.
Required: record the sale of merchandise

Chapter Four
4. Accounting For Manufacturing Business

• At the end of the chapter the student will able to:
– Describe the characteristics of manufacturing business.
– Differentiate classification of manufacturing costs
– Explain product costing systems
– Prepared chart of accounts for a manufacturing business
– Illustrate recording the flow of costs through production
process
– Prepared financial statements for a manufacturing business
– demonstrate closing entries for a manufacturing business

Characteristics of manufacturing business
• A manufacturing business is purchases raw materials,
converts them in to finished good and sells them to
customers (wholesalers, retailers, end users).
• the activity involved and the investment required are
usually complex and extended than the other type of
business organizations.
• A sound cost accounting system is critically essential in
a manufacturing business.
• the manufacturer has three types that are unprocessed
materials, partially complete work in process, and
ready for sale finished goods.

Classifications of manufacturing costs
• A cost is a payment of cash or its equivalent or a
commitment to pay cash in the future for the purpose
of generating revenues. A cost provides a benefit that
is used immediately or deferred to a future period of
time.
• Cost is a financial measure of the resource used or
given up to achieve a stated purpose.
• In manufacturing business cost can be classified in to
three.
 Manufacturing or nonmanufacturing costs.
 Product or period costs.
 Fixed or variable costs.

1. Manufacturing or nonmanufacturing costs.
• The total cost of manufacturing a product is referred to as manufacturing
cost, factory cost, or product cost. It includes three cost elements.
i. Direct material costs: those are the cost of the major ingredients that are
incorporated as part of the finished product, used only in the manufacture
of the product, and clearly and easily traceable to the product. The cost of
direct materials includes the net invoice price of the actual quantity used
plus delivery charges.
ii. Direct labor costs: include labor costs of all employees actually working
on materials to convert them into finished goods. It includes only those
labor costs that are clearly traceable to, or readily identifiable with, the
finished product.
iii. Manufacturing over head costs: includes all manufacturing costs except
those costs accounted for as direct material & direct labor. It is costs that
must be incurred but that cannot or will not be traced directly to specific
units produced.
Non manufacturing costs: Are generally classified in to two that are: - selling
& administrative costs

Product & period cost
1. Product costs: - costs incurred in the manufacture of
products and assigned to units of the product produced
by a manufacturing company.
• Those costs include costs of DM, DL & MOH.
2. Period cost: - are not assigned to units of products but
are related more closely to periods of time rather than
to products produced.
• Those costs are not traced directly to the manufacture
of a specific product & expensed in the period of
costing system.

Product costing system
• There are two principal types of costing systems: -
A. Job costing: - Is a costing system also called job order
costing where the cost of independent and discrete jobs
will be determined. The jobs are most often performed
based on customer order and the cost of each job is
accumulated in a separate record called job cost sheet.
B. Process costing: - Is a costing system where costs are
accumulated in each processing department. This
system is applicable in a factory where similar items
are produced in bulk with almost equal attention.
Example sugar, cement factory … etc.

Recording the flow of cost through production
process
• When a manufacturer uses periodic inventory
procedure, the materials purchases, transportation in,
materials purchase returns and allowances, and material
inventory accounts are used in the same manner as they
are used by a merchandiser.
• Example: - During September 1, Ashu manufacturing
company purchased Birr. 50,000 of materials and
supplies on account, on term of FOB shipping point and
paid transportation charge Birr. 2000. On September 10
Ashu manufacturing company returns a material
purchase Birr 5000, because of defective materials.
Required: Record the necessary journal on September,

Financial Statements for a Manufacturing Business
• The major difference between a
merchandiser and a manufacturer is in the
types of inventory carried.

Financial Statements(cont’d)
• The Statement of Cost of Goods Manufactured: is used to
support the CGS figure on the income statement. The two most
important calculations on this statement are: -
• The cost to manufacture – includes the costs of all resources put
into production during the period. That is = DMC+
DLC+FOHC
• The costs of goods manufactured: - consists of the cost of all
goods completed during the period and CGM=CTM + BWIPI-
EWIPI
• Cost of goods sold includes the cost of goods manufacture plus
the beginning finished goods inventory minus the ending
finished goods inventory.
• And does not appear on the cost of goods manufactured
statement but is show on the income statement.

Cont’d
Ashu Manufacturing Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2004
Materials: -
Materials inventory beginning (Jan1)………………………………………..xx
Materials purchase (net) ……………………………………………………..xx
Transportation in …………………………………………………………….xx
Materials available for use……………………………………………………xx
Less: Materials inventory ending (Dec 31) ………………………………. (xx)
Material used …………………………………………………………………..…..xx
Direct Labor……………………………………………………………………………….xx
Manufacturing overhead: -
Indirect labor ………………………………..……..xx
Supervisor salary expense …………………….……..xx
Maintenance & repairs expense………………..…….xx
Factory utility expense ………………………………xx
Factory property taxes expense……………………...xx
Depreciation expense fact. Building ………………...xx
Depreciation expense fact equity ……………………xx
Insurance expense ……………………………..…..…xx
Total manufacturing over head………………………………………….……………...xx
Cost to manufacture …………………………………………………..…………….…….xxx
Add. Work in process inventory beginning (Jan 1) …………………………………….…....xx
Less. Work in process inventory ending (Dec 31) ……………………………….………….(xx)
Cost of goods manufactured……………………………………………..…………………xxx

Cont’d
Income Statement: are more complex than the merchandise, and it shows the
cost of goods manufactured, which is added to the beginning inventory of
finished goods to drive the cost of goods available for sale.
Income Statement
For the Yare Ended December 31, 2004
Operating Revenue: -
Sale …………………………………………………………-------……..…….xx
Cost of goods Sold: -
Finished goods inventory beginning (Jan1)………………………….xx
Add. Cost of goods manufactured……………………………………xx
Cost of goods available for sale………………………………………xx
Less, finished goods inventory end (Dec 31)………………………….xx
Cost of goods sold…………………………………-----………………………..(xx)
Gross margin ……………………………………………………………-------………...xx
Operating expense: -
Selling expense…………………………………………………..xx
Administrative expense………………………………………….xx
Other operating expense…………………………………………xx
Total operating expense ……………………………………………-------…………(xx)
Income from operations…………………………………………………………………..xx
Non Operating Revenue & Expense: -
Interest expense …………..…………………………………………………(xx)
Income before federal income taxes…………………………………………….…………xx
Less, Federal income taxes………………………………………………….…………....(xx)
Net income…………………..………………………………………………..xx

Cont’d
Balance Sheet : it shows Materials, work in process, finished goods entry separately.
Also show greater detail in the property, plant and equipment section because of the
significant in statement in plant assets. See example for Ashu manufacturing company
Balance Sheet bellow:
Balance Sheet
December 31, 2004
Current, Asset
Cash ……………………………………………………………..xx
Account Receivable ……………………………………………..xx
0preapid insurance ………………………………………………xx
Inventories
Material s…………………………………………………….…..xx
Work in process …………………………………………………xx
Finished goods …………………………………………………..xx
Total current Asset ………………………………………xx
Property, Plant & Equipment
Lend ………………………………………………………………xx
Factory building …………………………………xx
Less Accumulated depreciation………………….xx……………. xx
Factory equipment ………………………..……xx……………..xx
Less accumulated depreciation……………….….xx…………….xx
Total property, plant & equipment…………………………….…xx
Total Assets…………………………………………………xxx
Liability & Owners Equity
Current liability
Account
Liability…………………………………………………xx
Payroll payable…………………………………………………xx
Total current liability……………………………………xx
Long Term Liabilities
Mortgage payable
………………………………...………….………………xx
Total liability ...…………………………………………..xx
Owner’s Equity
Ashu capital……………………………………………………..xx
Total liabilities & owner equity……………………………...xxx

Adjusting and Closing Entries for Manufacturing Company
• Closing entries for a manufacturing company using
periodic inventory procedure are slightly different from
closing entries prepared for a merchandiser.
• The d/c is due to the use of a manufacturing summary
accounts, which records the cost of goods produced during
the period.
It have 5 steps to close manufacturing accounts

Cont’d
First closed the statement of cost of goods manufactured debit account, by debiting manufacturing
summary and crediting all cost of goods manufactured debit accounts:-
2004
December 31; Manufacturing summary ……………..……….xx
Materials inventory (beginning)………………………………………xx
Work in process inventory (beginning)……………………………….xx
Material purchase (net) ………………………………………………xx
Transportation in…………………..……………………..………….xx
Direct labor………………………………………………………….xx
Supervisors’salaries expense………………………………………….xx
Maintenance & repairs expense………………………………………..xx
Factory utilities expense……………...………………..……….…….xx
Factory property tax expense ……………………………..……….. xx
Dep’t expense equipment ………………………….……………... xx
Insurance expense Factory ……………….…………………….…….xx
(To close all accounts in the manufacturing statement debits Column to manufacturing summary)

Cont’d
2. The second closing entry sets up the inventory that appear in the cost of goods
manufacturing statement credit columns by debiting those and crediting
manufacturing summary: -
2004; Dec 31, Material inventory (ending) ………………………………xx
Work in process (ending)………………………………….xx
Manufacturing summary ………………………………………..xx
(To close ending inventory of materials and work in process)
3. The third closing entries close all of the accounts in income statement debit columns
by crediting those accounts, and debiting income summary.
2004
Dec 31, Income summary ………………………………………...xx
Finished goods inventory (beginning)…………………………….xx
Selling expense ………………………………………..…………xx
Administrative expense………………………………………….xx
Interest expense ……………………………………….…………xx
Federal income tax expense………………………….…………..xx
Manufacturing summary………………………………………. . Xx
(To close all accounts in the income statement Debit columns to income summary)

Cont’d
4. The forth closing entry establishes the ending finished goods inventory balance
& closes the sale account by debiting those and crediting income summary
accounts: -
2004
Dec 31, Finished goods inventory (ending)…….………xx
Sales ……………………………………….……xx
Income summary……………………………………………….xx
(To close finished good & sales by income summary)
5. The fifth closing entry closes the income summary account by debiting income
summary and crediting retained earnings (capital)
2004
Dec 31, Income summary …………………………………..xx
Capital (R. earning)…………………………………………..xx
(To close income summary account to retained earnings)

Chapter 6
Accounting for Cash and
Receivables

Objective of the Chapter
At the end of the chapter the students are able to:
• Describe characteristics of the cash
• Describe internal control over cash
• Illustrate bank reconciliation and petty cash
• Describe accounting for receivable and note receivable
• Describe accounting for dishonored not receivable
• Illustrating accounting for uncollectable receivable

Accounting for cash
• Cash is a medium of exchange that a bank will accept
at face value and immediate credit to the depositors
account.
An item to be reported as cash it must fulfill the following
criteria’s:
• It should be used as a medium of exchange, i.e. in
settlement of transactions.
• It should be available immediately for the payment of
current obligations.
• It should be free from any contractual restriction that
limits its use in satisfying debts

Cash
Included in Cash
• Coins and currency
• Checking accounts
• Savings accounts
• Negotiable checks
• Bank drafts
Excluded from Cash
• Certificates of deposit
• Bank overdrafts
• Postdated checks
• Travel advances
• Postage stamps

Internal Control over Cash
 An internal control system is a set of policies and procedures
designed to protect assets, provide accurate accounting records
and evaluate performances.
 A sound internal control system for cash increases the likely
hood that the reported values for cash are accurate.
Internal control over cash should include the following procedures:
The individuals who receive cash should not also pay cash
The individuals who handle cash should not access accounting
records
Cash receipts are immediately recorded and deposited and are
not used directly to make payments.
Disbursements are made by serially numbered checks
Bank accounts are reconciled monthly.

Cont’d
The following are the most common elements of
internal control over cash:
Maintaining a bank account system,
Maintaining a petty cash fund,
A voucher system,
Change fund, and
Cash short and over.

Control over cash through a bank account
• One of the major devises/tools for control over cash is
maintaining a bank account. The forms used by a business in
connection with a bank account are:
1.Signature Card
2.Deposit Ticket
3.Checks: A check is a written instrument signed by the depositor,
ordering the bank to pay a certain sum of money to the order of
the designated person. There are 3 parties in a check transaction:
 the Drawer, the one who signs the check;
 the Drawee, the bank on which the check is drawn; and
 the Payee, the one to whose order the check is drawn.
4. Records of checks drawn: A memorandum record of the basic
details of a check should be prepared at the time the check is
written.

Cont’d
A bank account is one of the most important means of controlling
cash that provide several advantages such as:
• Cash is physically protected by the bank,
• A separate record of cash is maintained by the bank, and
• Customers may remit payments directly to the bank.
monthly statements (reports) received from the bank are called
bank statements.
Bank Reconciliation: It is a schedule prepared by
the depositor to bring the balance shown in the
bank statement and the balance shown in the
depositor’s accounting record into agreement.

Bank Reconciliation
• Outstanding checks
• Deposits in transit
• Charges made by the
bank
• Deposits made directly
by the bank
• Errors
Causes of the
difference between
the cash balance
and the company’s
bank statement
balance.

Illustration:
The January bank statement sent by Awash Bank to ABC Company shows Birr
5,000.17 assume also that on January 31, 2012, the Cash account of ABC Company
shows a balance of Birr 4,262.83. The accountant of ABC Company has identified the
following items:
1. A deposit of Birr 410.90 made after banking hours on Jan. 31 does not appear on
the bank statement.
2. Two checks issued in January have not yet been paid by the bank:
Check No. 301 Birr 110.25
Check No. 342 607.50
3. A credit memorandum was included in the bank statement, which was for proceeds
from collection of a non-interest bearing note receivable to ABC Company Birr
524.74.
4. Two debit memorandums accompanied the bank statement, a check of Birr 50.25
received from a customer ,XYZ Company & deposited by ABC Company was
charged back as NSF & service charge by the bank for the month January amounts
Birr 17.00
5. Check No. 305 was issued by ABC Company for payment of telephone expense in
the amount of Birr 85 but was erroneously recorded in the cash payments journal as
Birr 58.
Required: prepare and record January 31 bank reconciliation for ABC Company

Petty cash fund
• Petty cash fund, which is part of the total cash
balance, is used to handle many types of small
payments such as employee transportation costs,
purchase of office supplies, purchase of postage
stamps, and delivery charges.
• Establishment of Petty Cash fund: To establish
a petty cash fund a check is issued to a bank.
• Replenishment of Petty Cash fund: When the
fund runs low or at the end of the company’s
accounting period, a check is issued to reimburse
the fund for the expenditures made during the
period.

Cont’d
Illustration:
Assume on January 1, 2004 Selam Company established a petty cash fund
for Birr 400. At the end of the month count of cash on hand indicate
that Birr 81.60 cash remained in the fund. Sorting of petty cash
receipts disclosed that the following expenditures were made from the
fund.
Postage expenses………………………………….Birr 139.60
Office supplies…………………………………….… 72.75
Miscellaneous expenses…………………………. 104.05
Total………………………………………………… 316.40
Required: -Prepare the necessary entries to record the petty cash
transaction for the month of January, 2004

cont’d
• Voucher System: One method to control cash
disbursements is a voucher system. A voucher is a
special form, which contains relevant data about a
liability and its payment.
• Change Fund: is part of the total cash balance, that
is used for facilitating business transaction. The
issuance of a check to establish a change fund is
recorded by debiting cash on hand/change fund
and crediting cash in bank account.

Accounting For Receivables
Definition and Classification of Receivables
• Receivables are claims held against customers and others
for money, goods, or services.
• For financial statement purposes, companies classify
receivables as either current (short-term) or noncurrent
(long-term).
• Based on source, Receivables can be broadly classified
into Trade Receivables and Non-trade Receivables.
• Based on formality and Based on the above broad
classification, receivables can be further classified into
Account Receivable and Notes Receivables.

Characteristics of Notes Receivable
• Due Date: the date a note is to be paid is
called the Due Date or Maturity date.
• Interest: is the cost of borrowing money for
the borrower.
• Maturity Value: is the amount that is due at
the maturity or due date.

Accounting for notes receivable
• Notes Receivables are usually recorded in a single note
Receivable account to simplify record keeping.
• Example: assume that on Jannuary-10, Nile Co. sales
merchandise on account to Tana Co. and receive a Br.
5,000, 90-day, 12% promissory note.
• Required:
determine due date, interest and maturity value
Record on January l and on due date
Record if the company is dishonored on due date

End-Of-Period interest Adjustment
• When notes receivable are outstanding at the end of
an accounting period, accrued interest is computed
and recorded. For example, on December 20, 20x1,
Nile Co. accepted a Br. 2000, 60-day, 12% note from
a customer in granting an extension of a past-due
account. Assuming that the accounting period ends on
Dec. 31.
• Required: record the receipt of the note, accrued
interest, and payment of the note at maturity.

Converting Receivables to cash before Maturity
Converting receivable is usually done either (1) by selling
them, or (2) by using them as security for a loan
Step 1 – Determine the maturity date & maturity value.
Step 2 – Determine the Bank Discount (Bank discount is an interest
that is charged by the bank). Bank Discount = MV X DR X DP
Step 3- Determine proceed= MV – D
Step 4 – Record the necessary journal entry at the date of discount.

Cont’d
Example: assume that a 90-day, 12%, Br. 20,000
N/R from Hiwot Co. dated Jan.1, 20x2 is
discounted at the payee’s bank on February 12,
20x2 at the discount rate of 15%.
• Required: record discounting of note on bank
and assume that the maker, Hiwot Co, dishonored
the above discounted note at maturity. The bank
charges a protest fee of Br. 25.

Accounting for uncollectible receivables
• There are two methods of accounting for
uncollectible receivables.
1. allowance method, which provides an expense
for uncollectible receivables in advance of their
write-off (removal from the ledger) and
2. direct write-off method, which recognizes the
expense only when accounts receivable are
judged to be worthless.

Cont’d
Example: Assume that G. Company has total
accounts receivable of Br. 350,000 at the end of
the year, and is in process of preparing a
balance sheet and estimates that Br.
21,700 of this amount may ultimately prove to
be uncollectible.

Financing Activities
• Borrowing creates liabilities
– Bank loans
– Debt securities
– Goods on credit or payables
• Selling stock creates
stockholders’ equity

Investing Activities
• Obtaining resources or
assets to operate the
business
– Land
– Buildings
– Vehicles
– Computers
– Furniture

Operating Activities
• Primary activity of business
– Selling goods
– Providing services
– Manufacturing
– Cost of Sales
– Advertising
– Paying employees
– Paying utilities

Operating Activities
• Revenue is generated from sales or
services
• Expenses are the cost of doing business
• If revenue > expense = Net Income
• If revenue < expense = Net Loss!

#
4 Describe Content and Purpose
of Financial Statements
• Accountants communicate
with users through four
financial statements
• Income Statement
• Retained Earnings Statement
• Balance Sheet
• Statement of Cash Flows

Income Statement
• Reports operating success or failure for a
period.
• Summarizes revenues and expenses for
period: month, quarter, or year.
• If revenue > expense = Net Income.

Income Statement
Do this statement first!

Retained Earnings Statement
• Shows changes in retained earnings for
period: month, quarter, or year
• Beginning balance
• Add Net Income from income
statement!
• Deduct Dividends
• Ending balance

Do this statement second!

Balance Sheet
• Reports assets and claims to assets.
• Claims of creditors, liabilities.
• Claims of owners, stockholders’ equity.
• Assets = Liabilities + Stockholders’ Equity
• Specific date – one point in time!

Balance Sheet
From
Retained
Earnings
Statement

Statement of Cash Flows
• Provides information about cash
receipts and cash payments
• Summarizes for period: month, quarter,
or year.
• Cash effects of operating, investing,
and financing activities.

• Where did the cash come from?
• How was cash used during the period?
• What was the change in the cash
balance during the period?
• You can’t survive without cash!

Agrees
with
Balance
Sheet

#5 Explain the Meaning of
Assets, Liabilities, and
Stockholders’ Equity.
State the Basic Accounting
Equation

Assets
• Resources owned by the
business
– Cash
– Accounts receivable
– Inventories
– Building
– Furniture and fixtures
– Equipment
– Supplies

Liabilities
• Obligations or debts of business
– Notes payable
– Accounts payable
– Interest payable
– Salaries payable
– Unearned revenue

Stockholders’ Equity
• Ownership claims on assets
• Paid-in capital
– Common stock
• Retained earnings

Basic Accounting Equation
Assets =
Liabilities + Stockholders’ Equity

#
6 Components that Supplement
the Financial Statements in an
Annual Report
• Managements Discussion and Analysis
• Notes to Financial Statements
• Auditor’s report

Management’s Discussion and
Analysis covers three items:
1. Liquidity
2. Capital resources
3. Results of operations

Management’s Discussion and
Analysis

Notes to Financial Statements
• Explanatory notes and supplementary
schedules
• Clarifies information in financial statements
• Expands with additional detail
• Describes accounting policies
• Explains uncertainties and contingencies

Auditor’s Report
• Certified Public Accountant – CPA
• Auditor (CPA) conducts independent
examination of financial statements
• Fair representation?
• Follow generally accepted accounting
principles (GAAP)?
• Unqualified opinion

Monetary Unit Assumption
• Only what can be expressed in money
• Assumes unit of measure stays constant
© PhotoDisc/Getty Images

Economic Entity Assumption
• Economic events identified with unit
• Separately identified apart from owner

Time Period Assumption
• Divide life of business into artificial time
periods
• Monthly, quarterly, yearly

Going Concern Assumption
• Divide life of business into artificial time
periods
• Monthly, quarterly, yearly

Cost Principle
• Assets must be recorded at cost
• Verifiable vs. subjective

Full Disclosure Principle
• All circumstances and events that would
make a difference to users must be
disclosed

Do It Problem: CSU Corporation
Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings ?
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $2,000
Dividends $600
• CSU begins on
Jan. 1, 2005
• For year ended
Dec. 31, 2005,
prepare
– Income statement
– Retained earnings
statement
– Balance sheet

Retained earnings ?
Equipment $16,000
Supplies $1,800
Cash $2,000
Dividends $600
• Action step 1:
Report the
revenues &
expenses for a
period of time,
Income Statement

CSU Corporation
Income Statement
Create the heading
Name of the
statement
Name of the
company
Period
of time

CSU Corporation
Income Statement
Revenues
List the revenues
Use dollar signs to denote U.S. currency

CSU Corporation
Income Statement
Revenues
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
________
List the expenses & underline sub-totals
________

CSU Corporation
Income Statement
Revenues
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Net Income $ 6,800
Calculate net income: revenues - expenses
________
________
________
________

Retained earnings ?
Equipment $16,000
Supplies $1,800
Cash $2,000
Dividends $600
• Action step 2:
Show amounts
and causes of
changes in
retained earnings
• Use Net Income
from Income
Statement
• Dividends

CSU Corporation
Retained earnings, January 1 $ 0
Add: Net income 6,800
6,800
Less: Dividends 600
Retained earnings, Dec. 31 $ 6,800
________
________
________
________

Retained earnings $6,800
Equipment $16,000
Supplies $1,800
Cash $2,000
Dividends $600
• Action step 3:
Present assets and
claims to those
assets at a
specific point in
time on the
Balance Sheet
• Use $6,800
Retained earnings
from previous
statement!

CSU CORPORATION
Balance Sheet
December 31, 2005
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Stockholders’ equity
Retained earnings 6,800
Total Stockholders’ equity 16,800
Total liabilities and stockholders’ equity $23,800

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