North South University

Summer 19
ACT201 Sec:12
Class Time- RA,11:20 – 12:50
Major Assignment

Submitted By- Submitted To-

Name – Md.Sabir Faculty - Dr.Samina Rahman
ID - 1831620030
Email - [email protected]

Date of Submission – 22nd August 2019

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Answer to question No-1a)

GENERAL JOURNAL PAGE J1

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2019
Jan.
1 Cash 100,000
Owner's Capital 100,000
(Owner's Investment of Cash in business)

2 Prepaid Rent 36,000

Cash 36,000
(Paid for 3 month rent)

3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
(Purchased equipment on cash and on
Loan from Bank)

4 Supplies 17,600
Accounts Payable 17,600
(Purchased supplies on account)

13 Cash 28,500
Service Revenue 28,500
(Received Cash for service Revenue)

Accounts Payable 17,600

Cash 17,600
(Paid Creditor on Account)

14 Salary & Wage Expense 19,100

Cash 19,100
(Paid Monthly Salary)

18 Cash 32,900
Account Receivable 21,200
Service Revenue 54,100
(Received Cash & Billed clients for
service performed)

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 PAGE J2
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

23 Cash 15,300
Account Receivable 15,300
(Received Cash in payment of account)

25 Cash 4,000
Unearned Service Revenue 4,000
(Received Cash for Future Service)

26 Supplies 5,200
Accounts Payable 5,200
(Purchased Supplies on Account)

28 Utility Expense 19,000

Cash 19,000
(Paid Cash for Water Bill)

31 Advertising Expense 5,000

Cash 5,000
(Paid for advertising expense)

Utility Expense 2,470

Accounts Payable 2,470
(Received bill for Electricity)

Utility Expense 1,494

Accounts Payable 1,494
(Received bill for Telephone)

Miscellaneous Expense 3,470

Cash 3,470
(Paid for miscellaneous expense)

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Answer to question No-1B)

GENERAL LEDGER
CASH No.101
Date Explanation Ref Debit Credit Balance
2019
Jan-01 J1 100,000 100,000
2 J1 36,000 36,000
3 J1 60,000 4,000
13 J1 28,500 32,500
13 J1 17,600 14,900
14 J1 19,100 (4,200)
18 J1 32,900 28,700
23 J2 15,300 44,000
25 J2 4,000 48,000
28 J2 19,000 29,000
31 J2 5,000 24,000
31 J2 3,470 20,530
ACCOUNTS RECEIVABLE No.112
Date Explanation Ref Debit Credit Balance
2019
Jan-18 J1 21,200 21,200
23 J2 15,300 5,900

PREPAID RENT No.120

Date Explanation Ref Debit Credit Balance
2019
Jan-02 J1 36,000 36,000
SUPPLIES No.126
Date Explanation Ref Debit Credit Balance
2019
Jan-04 J1 17,600 17,600
26 J2 5,200 22,800
EQUIPMENT No.157
Date Explanation Ref Debit Credit Balance
2019
Jan-03 J1 80,000 80,000
NOTES PAYABLE No.200
Date Explanation Ref Debit Credit Balance
2019
Jan-03 J1 20,000 20,000

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 ACCOUNTS PAYABLE No.201
Date Explanation Ref Debit Credit Balance
2019
Jan-04 J1 17,600 17,600
13 J1 17,600 0
26 J2 5,200 5,200
31 J2 2,470 7,670
31 J2 1,494 9,164
UNEARNED SERVICE REVENUE No-209
Date Explanation Ref Debit Credit Balance
2019
Jan-25 J2 4,000 4,000
OWNER'S CAPITAL No-301
Date Explanation Ref Debit Credit Balance
2019
Jan-01 J1 100,000 100,000
SERVICE REVENUE No-400
Date Explanation Ref Debit Credit Balance
2019
Jan-13 J1 28,500 28,500
18 J1 54,100 82,600
ADVERTISING EXPENSE No-521
Date Explanation Ref Debit Credit Balance
2019
Jan-31 J2 5,000 5,000
MISCELLANEOUS EXPENSE No-539
Date Explanation Ref Debit Credit Balance
2019
Jan-31 J2 3,470 3,470
UTILITIES EXPENSE No-732
Date Explanation Ref Debit Credit Balance
2019
Jan-28 J2 19,000 19,000
31 J2 2,470 21,470
31 J2 1,494 22,964
SALARY AND WAGE EXPENSE No-726
Date Explanation Ref Debit Credit Balance
2019
Jan-14 J1 19,100 19,100

Answer to question No-1C)

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 ANNA CAR REPAIRING SHOP
Trial Balance
January 31, 2019
Debit Credit

Cash $20,530
Accounts Receivable 5,900
Prepaid Rent 36,000
Supplies 22,800
Equipment 80,000
Notes Payable $20,000
Accounts Payable 9,164
Unearned Service Revenue 4,000
Owner's Capital 100,000
Service Revenue 82,600
Advertising Expense 5,000
Miscellaneous Expense 3,470
Utilities Expense 22,964
Salary & Wage Expense 19,100
$215,764 $215,764
Answer to no Question No-1D)

ANNA CAR REPAIRING SHOP

Income Statement
For the Month Ended January 31,2019

Revenues
Service Revenue $82,600

Expenses
Salary & Wage Expense $19,100
Advertising Expense 5,000
Miscellaneous Expense 3,470
Utilities Expense 22,964
Total Expenses (50,534)
Net Income 32,066

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 ANNA CAR REPAIRING SHOP
Balance Sheet
January 31,2019

Assets
Current Assets
Cash $20,530
Account Receivable 5,900
Prepaid Rent 36,000
Supplies 22,800
Total Current Assets $85,230
Property, Plant & Equipment
Equipment 80,000
Total Plant & Equipment 80,000
TOTAL ASSETS $165,230

Liabilities & Owner's Equity

Current Liabilities
Accounts Payable $9,164
Unearned Service Revenue 4,000
Total Current Liabilities $13,164
Long Term Liabilities
Notes Payable❑[ A ] 20,000
Total Long Term Liabilities 20,000
Owner's Equity
Owner's Capital 132,066
Total Liabilities & Owner's Equity $165,230

[A] –Here we are considering the loan is taken from bank for a long term basis.

ANSWER TO SHORT QUESTIONS-2

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 A) Cost Principle:-

This principle states that transactions are recorded at the cost pric e not at
the the market price.

For example – John purchased insurance policy for $2000. The actual
market price of the insurance policy is $3500. According to cost principle, in the
book he can only record ($2000) the price that he has paid to buy the insurance
not the price which is prevailing at market.

B) Economic Entity Assumption:-

According to this assumption, owner’s personal transactions are kept

separated from business transaction.

For Example- We have Maria’s Pizza, Maria wants to buy a new delivery car,
the company is low on cash, so she decides to pay by herself.

Maria intends to add the car in the balance sheet of the pizza shop, however since
the car was bought by Maria personally it must remain a personal vehicle unless
the company buys it from Maria in order not to violate the economic entity
assumption.

C) Monetary Unit Assumption:-

According to Monetary Unit Assumption, we will be recording only those

transactions that have monetary value.

For example, Pran paid salary and wages of worth $10,000, to its employee
so this transaction has a monetary value of $10,000 therefore we will recording
this transaction into accounting books.

In another scenario, Pran appoints a new receptionist, this incident does

not include any monetary exchange so this information will not come into
accounting records.

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D) Going Concern;-

Going concern means the company will continue to operate in the

forseeable future and the business of the prepared accounts are in a stable,
sound and healthy conditions. It is also assumed that the business has no
intention to reduce the size of business or liquidate in the short run.
In some cases, if the business is not a going concern this would mean
that assets of the business may worth a lot less compared to the value in the
accounts of financial statement.

For Example- Beximco is about to release financial accounts. Although

Beximco made a profit, the balance sheet of the business has significantly
higher debt compare to assets. Therefore, Beximco should apply going
concern concept and make the following statement.

(i) Business may not be a growing concept.

(ii) This is because, business might find it extremely difficult to pay
the debts in short run.
(iii) Therefore, it could be said, business could find hard to trade in
foreseeable future, especially if it had to pay short term debts.
This is mainly due to the business debts being greater than
business assets.

E) Periodicity;-

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 Business goes on for foreseeable future (according to growing concept),
so we can’t wait till the business to close to know about how the business
performed (in terms of profit & loss), therefore we can divide the business life
cycle into small and equal periods so that we can calculate profit and losses.
Each period could be equal to monthly, quarterly, or annual basis. Once the
business life cycle is divided into periods, now it’s possible to determine
company’s profit and loss in each period and compare company’s performance
from one period to another.

For Example- It takes couple of years for a construction company to complete

a project, so they divide the business life cycle into small and equal periods so
that they can keep track of revenues, expense and overall business
performance.

F) Revenue Recognition Principle:-

Revenues are recorded in the period within which it is earned/service

performed, regardless when cash is received by the company from customer.

For Example:- On 1st January, a person goes to a bakery and order a cake
for the next month and gives advance payment. On 2 nd February,the person
comes and collect the cake. So the cake is provided on February, thus revenue
should be recorded in the month of February according to Revenue
Recognition Principal and not in the month of January, although cash is
received on January.(Here cash is provided before service is performed).

In another scenario, a law firm provides consultation service of $5000 in

the month of December. However, the law firm did not receive the payment
until January. According to Revenue recognition principle, the law firm will
record the service revenue in the month of December, because service was
performed on December, although cash was received in January.

G) Matching Concept;-
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 Expense (needed for the revenue to generate) needs to be
recognized in the accounting period in which the revenue was made.
Therefore, expense related to revenue should be recognized in the same
accounting period and not in different accounting periods.

For Example- Hamim Textile group, paid salary to its employee in

January 2019 for the month of December 2018. According to Matching
Concept this expenditure should be recognized in 2018 and not in 2019.

H) Accrual Basis of Accounting;-

Revenues are recognized as it’s earned and expenses are recorded as

they are incurred. If the revenue is made on August, it should be recorded
to the income statement of August, irrespective of when the payment is
received by the company.

For Example- On December 25th, a bakery company delivered cake to a

customer. The bakery issued the invoices with term of net 10 days to pay.
As the cake was delivered on December, the accountant will recognize the
revenue in the accounts of December, irrespective of when bakery receives
the cash. So the journal will be-

Accounts Receivable,Dr 12,000

Service Revenue,Cr 12,000

Pros of Accrual Basis of Accounting:-

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 (i) It applies the matching principle. Therefore, business profitability can
accurately be measured in specific time period.
(ii) It also gives accurate information of account receivable & payable.
(iii) It is accepted by GAAP & IFRS.

Cons of Accrual Basis of Accounting:-

(i) It does not explicitly track cash flow, so cash flow needs to be
calculated separately.
(ii) It is more complicated than Cash method of accounting because we
need to make estimates & assumption. This could be unsuitable for
smaller business hence, why many of them choose to adopt to cash
flow method.

I) Dual Aspect Concept-

Each business transaction is recorded by means of two opposing

accounting entries, i.e. debit & credit.

For Example- Karl, buy a new van for his business at a price of
$40,000 and paid by cash. Here, Karl needs to apply Dual Aspect Concept
because it’s a business transaction and according to dual aspect concept
each business transaction is recorded by means of two opposing entries.

Therefore, the purchase of the van of $40,000 will cause an increase

or debit entry of $40,000 in the value of motor vehicles in fixed assets, and
the opposing entry will cause a decrease or credit entry of $40,000 in the
value of cash in current assets.

Answer to Question No-3A

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 BAKER CORPORATION
CASH FLOW STATEMENT
FOR THE YEAR ENDED JUNE 2019

Cash flow from operating activities

Net income 106000
Add. Depreciation 30000
Add. Decrease in account receivable 30000
(less) Increase in inventory (140000)
Add. Increase in account payable 70000 (10000)
Net Cash inflow from operating activities 96000

Cash flow from investing activities

Purchase of equipment (40,000)

Net Cash Outflow from investing activities (40000)

Cash flow from financial activities

(less)Dividends Paid (76000)
(less)Decrease in longterm debts (30000)
(add.)Increase in notes payable 20000
Net Cash Outflow from financing activities (86000)
Net Decrease in Cash (30000)
(add.) Opening Balance 70000
Closing Balance 40000

Answer to Question- 3B

1) Current Ratio
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= Current Asset / Current Liabilities

= 820000 / 520000

= 1.58:1

2) Quick Ratio

= Investment + Accounts Receivable / Current Liabilities

= 360000/520000

= 0.64:1

3) Accounts Receivable Turnover

= Net Credit Sales /Average Net Accounts Receivable

= 2200000 / 335000

= 6.57 times

4) Profit Margin

=Net Income / Net Sales

=106000 / 2200000

=0.048: 1

5) Asset Turnover

= Net Sales / Average Total Asset

= 2200000 / 1155000

= 1.9: 1

6) Return On Assets

= Net Income / Average Total Assets

= 106000 / 1155000
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= 0.092: 1

7) Return On Common Stockholders’ Equity

= Net Income – Preferred Dividends / Average Common Stockholders’ Equity

= 10600 / 100000

= $1.56

8) Debt to Asset

= Total Liabilities / Total Assets

= 840000 / 1200000

= 7: 100

9) Times Interest Earned

=Net Income + Interest Expense + Income Tax Expense / Interest Expense

= 180000 / 29000

= 6.21 times

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