01 Process Financial Transactions and Extract Interim Reports

PARADISE VALLEY COLLEGE
Training, Teaching and Learning Materials
ACCOUNTS AND BUDGET SUPPORT LEVEL III
Learning Guide
Unit of Competence Process Financial Transactions and Extract Interim
Reports
Module Title Process Financial Transactions and Extract Interim
Reports
LG Code: BUF ACB3 01 0812
TTLM Code: BUF ACB3M 01 0812
TTLM Development Manual Date: Nov , 2021

Compiled By Gudeta Dekema
INTRODUCTION
Welcome to the module “Processing Financial Transactions and Extract
Interim Reports”. This learner’s guide was prepared to help you achieve the
required competence in “Accounts and Budget Support Level III ”. This will be
the source of information for you to acquire knowledge attitude and skills in this
particular occupation with minimum supervision or help from your trainer.
Summary of Learning Outcomes
After completing this learning guide, you should be able to:
Lo1:- Check and verify supporting documentation
Lo2:- Prepare and process banking and petty cash documents
Lo3:- Prepare and process invoices for payment to creditors and for debtors
Lo4:- Prepare journals and batch monetary items
Lo5:- Post journals to ledger
Lo6:- Enter data into system
Lo7:- Prepare deposit facility and lodge flows
Lo8:- Extract a trial balance and interim reports
How to Use this TTLM
o Read through the Learning Guide carefully. It is divided into sections
that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.
Lo1:- Check and verify supporting documentation

Information Sheet1.1Information from documents is identified, checked and

recorded
Information includes:
 account numbers
 addresses
 amounts of money, figures
 card numbers
 cheque numbers
 dates& Names
Definition: -accounting cycle refers the series of procedures used to record, classify
summarize and business transactions and preparing financial reports.
Basic procedures: -the accounting cycle /process includes the following basic procedures
1. Collection of data about economic events
2. Analyzing data about economic events
3. Recording economic events in a Journal (the genera journal and special journal)
4. Posting to ledger accounts (general and subsidiary ledgers)
5. Preparing unadjusted trial balance
6. Preparing and posting adjusting entries (this is for deferrals, accruals, depreciation
expense, uncollectible accounts expense, inventory adjustment etc)
7. Preparing the adjusted trial balance
8. Completion of the worksheet (optional)
9. Preparation of financial reports
10. Recording and posting closing entries
11. Preparing a post –closing trial balance
12. Recording and posting reversing entries (for prepayments and unearned items).
Dear learner! This all steps /procedures will be illustrated and elaborated by giving a brief
example at the end of this chapter. Before that elaboration, let’s see the nature and
classification of accounts and some rules of accounts.
Nature and classification of accounts
Definition: an account is a business form used to record additions (increases) and deductions
(decreases) for each individual asset, liability, owner’s equity, revenue and expense items. A
group of related accounts of a specific business enterprise is called a ledger

Nature of an account:- the simplest form of an account is called T account ; and it has three
parts
 Title to write the name of the account
 Space for recording increases or decreases in the account (item) interns of money. ,
i.e. (left and right sides). It can be presented as follows:
Title (name)
Left side Right side
(Debit) (Credit)
As is shown in the simplest account above the title is used to write the name of the account (e.g. cash,
accounts receivable, salary expense, capital, etc). The left-hand side of the accounts is called debit, but
the right-hand side is called the credit.
The right side (credit) and the left-side (debit) are used to record either the increases or decreases
of the accounts of a transaction. Depending on the type of the account the debit or credit sides
serve to record the effect of the transaction.
2.2.3 Classification of accounts:- generally accounts are categorized as
_ Balance sheet accounts and
_ Income statement accounts
i) Balance sheet accounts they are also called real or permanent accounts. They include the
following groups of accounts.
a) Assets: are both physical (tangible/ sensible) or rights (intangible or the right to use some
thing) properties that have monetary values which are owned by the business. They are further
classified as:
Current assets: which are expected to be converted to cash or used up with in a year or less.
Some examples included cash, accounts receivable, prepaid expenses, merchandise inventory,
etc
Plant assets /Fixed assets/ long-term assets (including land, building, equipments, furniture’s
and fixtures, etc) are those acquired or constructed internally to be used for relatively long-period
of time, usually more than a year.
All plant assets except land lose their usefulness with the passage of time. This decline in
usefulness is called depreciation.
b) Liabilities:- are obligations to pay money or to deliver goods to customer/creditors or
obligations to perform service.
They are, like assets, grouped as current and long- term liabilities.
Current liabilities are liabilities that must be paid or settled with a period of one year or less.
Examples include: accounts payable, salary payable, tax payable, rent payable, unearned rent,
etc.
Non current Liabilities
Liabilities that they will not be paid with in a year or less are called long-term liabilities.
Example, of long- term liabilities include notes payable, bonds, long- term payable, mortage
payable, etc.
c) Owner’s equity: - is the residual claim against the assets of the business after the total
liabilities are deducted- (for a corporation, owner’s equity is frequently called stockholders
equity’s, shareholders equity or stockholders’ investment). Capital is the owner’s equity in a sole
proprietorship and partnership. The owner’s equity maybe described as net worth. For a
corporation, capital stocks represent the investment of the stockholders, and retained earnings
represent the net income retained in the business.
Drawings: represent the amount of withdrawals made by the owner of a sole proprietorship and
a partnership. For corporations, dividends represent the distribution of earning to stockholders.
ii) Income statement accounts: - They are also called temporary or nominal accounts, for they
are closed at the end of the accounting year. They include the following:
a) Revenue accounts: - are inflows of assets from sale of merchandise (sales),
renting / leasing properties (rent income), rendering service (fees earned), etc.
They are the gross increase in owner’s equity as a result of sale of merchandise,
the performance of services for a customer or client, the rental of money, etc.
b) Expenses accounts: -are outflows / consumption of assets in the day-to-day
activities of a business in order to generate profit/ income to the business. Costs
expired in the activities of the business are called expenses.
2.2.4. Rule of Debits and Credits
The rules to debit or credit accounts or transactions occurred may be summarized in short as
follows:

 Increases in asset accounts /expense accounts are recorded in the debit side of the account
but decreases on them are recorded in the credit side.
 Increases in liability, capital and revenue accounts are recorded in the credit side of the
count but decreases on them are recorded in the debit side.
2.2.5 Normal balance of an account: - the difference between the total increases (may be debit
or credit depending on the close of the account) and the total decreases (debit or credit side)
recorded in an account is called account balance. Normal or the usual balance of an account is
positive, i.e., the difference between the sum of the increased side of the account and that of the
sum of the decreased side is positive under normal business operations.
The increase, decrease and the normal balance of the five classes of accounts are summarized as
follows:
Class of the account when increases when decreases its normal balance
Balance sheet accounts
Assets Debit Credit Debit
Liabilities Credit Debit Credit
Owner’s equity/
Capital stock/Retained turnings/ Credit Debit Credit
Withdrawal and dividends Debit Credit Debit
Income statement account
Revenue Credit Debit Credit
Expenses Debit Credit Debit
The sum of the increases recorded in an account is usually equal to or greater than the sum of the
decreases recorded in the account. For this reason, the normal balances of all accounts are positive. For
example, in the summary above, the total debits (increases) in an asset account will ordinarily be greater
than the total decreases (credits). Thus, the asset accounts normally have debit balance. Remember that
a normal balance of an account is its increase side
Charts of accounts
The number of accounts maintained by a specific enterprise is affected by the nature of its
operations, its volume of business and the extent to which details are needed for taxing
authorities, managerial decisions, credit purpose, etc.
Accounting systems are intended to show the increase and decrease in financial statement item
in a separate record. This is called an account.
A group or collection of all the accounts of a business entity is called a ledger. (a ledger and its
forms will be discussed in detail later on the accounting cycle using examples). A list of all
general ledger account titles and their related identification numbers is called chart of accounts.
The chart of accounts for Aksum Hotel, for example, is shown below.
Balance sheet accounts
1. Assets:
1001 cash
1002 accounts receivable
1003 inventory
1004 supplies
1005 prepaid insurance
1006 prepaid rent
1007 land
1008 office equipment’s
1009 machinery
2. Liabilities
2001 accounts payable
2002 salary payable
2004 notes payable
2006 unearned rent
2008 bank loan payable
3. Owner’s equity
3001 owner’s Hotels, capital
3001 owner’s Drawing
Income statement accounts:
4. Revenue:
4001 sales revenue
4002 rent revenue
4003 interest revenue
5. Expenses:
5001 salary expenses
5002 supplies expenses
5003 utilities expenses
5004 rent expenses
5008 miscellaneous expense
In the chart of account shown above, each account has four digits. It is up to the organization to
limit the number of digits. In any case, the first digit indicates the major classification of the
ledger in which the account is located. Accounts beginning with1 represents assets with 3 capital
or owner’s equity, with 5 expenses, etc. The other digits indicate the location of the account with

in its class. For example 4001 sales revenue indicates it is a revenue with a first class in its
category, revenue; and 2008 bank loan payable indicates it is a liability with the either position in
its category liabilities. Therefore, digits in an account number may show major divisions (assets,
liabilities, owner’s equity, revenue and expenses), subdivision or position of the account in the
subdivision. Of course, this numbering depends on the size and type of the business. There
should be a flexible system.
Illustration: - on the debits and credits of the accounts. (Analyzing and summarizing
transaction)
Every business transaction affects a business’s financial statements (the accounting equation)
and at least two accounts. In chapter one, the effect of each transaction was stated in terms of the
increases (+) and decreases (-). In this chapter, you are introduced what debits and credits are.
Hence, the effects of a business transaction on the accounts will be stated in terms of debits and
credits using examples.
Examples: - 1. Aksum Hotel deposited Br. 150,000 cash in a bank account on September-1
After the deposit, the balance sheet for the business is as follows
Aksum Hotel
Balance sheet
On September 1
Assets
Owner’s
Cash Br. 150,000 Aksum, Capital Br. 150,000

Since the cash account is increased and cash is an asset, this increase is recorded on the left side
(debit side) of the account. And owner’s equity or capital is increased and this increase is
recorded in the right side (credit) of the account. Hence, using the simplest account the effects
are shown as follows:
Cash Aksume, Capital
Sep. 1 1150,000(+) 150,000(+) Sep1
150,000
2. Aksum paid salary Br. 2000 for the month of September on September 30
The effect of the above transaction is decreasing cash (an asset) by Br. 2000 and increasing salary
expense account by Br. 2000. Increase an expenses is recorded on the debit side and decrease on assets
on the credit side. Using the T accounts the effect is shown as follows:
Cash Salary Expense

Sep30 150,000(+) 2000 (-) Sep30 Sep 30 (+) 2000
148,000 2000
At the end of the month the balance on cash account is Br. 148,000, on salary expense Br. 2000
and on the capital account Br. 150,000
Note: - The procedures involved in the accounting cycle will be discussed next using transactions
in an organization.
The accounting cycle
It is the sequence of procedures in which that begins with the analysis and journalizing of transactions
and ends with the post-closing trial balance. The procedures are summarized as follows and will be
discussed by considering an example
Unadjusted
Source Analyzing Journalizing Posting trial balance
Adjusting
entries
Adjusted
Post closing Closing Financial trial balance
trial balance entries statements
To illustrate the accounting procedures / steps consider the following example

Roble and Rahel, the two outstanding NewMillenniumCollege students and the first batch graduates of
the accounting department had operated a super snak in Rahel’s parents’ home on their extra time. As
of January 2002, after graduation, they decided to open a new metal and wood work shop and moved to
rented campus and to devote full time to the business, which is to be known as “2 R lovers shaping”

service. Assume a fiscal /accounting year of January to December and entered the following transitions
during January
January 1 the following assets were received (transferred) from the super snak to the shop
Cash --------------------------------------------Br. 7500
Accounts receivable ----------------------------900
Supplies ------------------------------------------1,250
Service equipment -----------------------------11,000
There were no liabilities received.
The beginning capital of 2 R lovers shop service is Br. 20,650 (7,500 + 900+ 1,250 + 11,000-0)
which is computed using the accounting equation A = L +C
C = Asset – Liability
The transactions occurred during the month were summarized as follows:
January
Paid three-month’s rent in advance Br. 2250 Prepaid rent.
1. Paid the premiums on property and casualty insurance policies, Br. 1,740 prepaid
insurance.
4. Purchased additional service equipment on a accounts from Omedad Br. 2,500
6. Received cash from customers on account Br. 500
9. Paid cash for a news paper advertisement, Br. 110
11. Paid Omedad for the part of liability incurred on January 4, Br. 1, 250
12. Record service revenue on account? Br. 1000
13. Paid laborers for two weeks salary Br. 500
17. Recorded cash from cash customers for service revenue earned during the first half of
January Br. 1, 100
17. Purchased supplies for cash Br. 950
20. Recorded service revenue on account for the period January 13- 20, Br. 700
24. Recorded cash from customers for service revenue earned for the period January 17-24
Br. 1, 850
27. Received cash from customers on account, Br. 1,200
27. Paid labourers for two weeks salary Br. 500

30. Paid telephone bill for January Br. 75
30. Paid electricity bill for January Br. 140
30. Recorded cash from cash customers for services revenues earned for the period
January 25- 30, Br. 950
30. Recorded sales on account for the remaindar of January, Br. 800
30. Rahel and Robel withdrew Br. 1,500 for their personal use
Instructions:
1. Open a ledger of four- column for accounts of “2R – lovers shopping service” using the
following titles and account numbers; Cash, 11; accounts receivable, 12; supplies 14;
prepaid rent15; prepaid insurance, 16; service equipment, 18; accumulated depreciation,
19; accounts payable, 21; salaries payable, 22; 2R- lovers, capital, 31; 2R lovers
Drawing, 32; income summary, 33, service revenue. 41; salary expense, 51; Rent
expense, 52; supplies expense, 53; depreciation expense, 54’ insurance expense, 55;
miscellaneous expense, 59.
2. Record the transactions in a two-column journal
3. Post the journal to the ledger, extending the month-end balances to the appropriate
balance columns after all posting is completed
4. Prepare a trial balance as of January 31, on a ten-column work sheet, listing all the
accounts in the order given in the ledger. Complete the worksheet, using the following
adjustment data:
a. Insurance expired during January ---------------Br. 145
b. Inventory of supplies on January31-------------1520
c. Depreciation of service equipment for January 100
d. Accrued salary on January 31 ------------------ 100
e. Rent expired during September ------------------- 750
5. Prepares an income statement, a statement of owners’ equity, balance sheet to the
organization
6. Journalize and post the adjusting entries
7. Journalize and post the closing entries
8. Prepare a post closing trial balance

Solution: Dear learner! The answers for the problem are presented step-by-step by explaining
the accounting procedures involved in the accounting cycle. Therefore, the steps, the answers
depending on the steps are illustrated as follows
Procedure /steps: 1. Collecting data about economic events
Business transactions are economic events that they need recording. Bills, invoices etc could be
used as source documents to record the transaction. The transactions involved from
January1 - January 31 in the example, above, are the data for the economic events.
Procedure / step 2 single analyzing the data about economic events
The ability to analyze the effects of transactions on financial statements is an essential skill for a
successful career in a business. Double accounting system is very powerful tool in this regard.
Analyzing transactions involve the following steps.
a. Determine whether an assets, a liability, owner’s equity, revenue of an expense account is
affected by the transaction
b. For each account affected by the transaction, determine whether the accounts increases or
decreases
c. Determine whether each increase or decrease should be recorded as a debit or a credit
To illustrate this analysis let’s consider two transactions from the example given. Transaction
(January 2 and January 9) is taken randomly. The others effect is left to you.
January 2 paid the premiums on property and casualty insurance policies, Br. 1, 740
Analysis: advance payments of expenses such as
a. Insurance are prepaid expenses, which are assets. Hence the accounts involved are assets
(prepaid insurance) and cash (an asset).
b. The asset cash decreases and another asset prepaid insurance increases
c. Cash is credited and prepaid insurance debited.
January 9: paid cash for a newspaper advertisement.Br.110
Analysis:
a. The accounts involved are cash (asset) and advertisement expense (could simply be
charged to miscellaneous expense)
b. Cash decreases and miscellaneous expense increases
c. Cash is credited and miscellaneous expense debited

Step 3 Journalizing: is the process of recording transactions in a business book called journal.
This recording transaction in a chronological order is done, after collecting the source documents
and annualizing the transaction
The following is called a two – column Journal used to record transactions
Journal Page 1
Date Description Post Ref Debit Credit Used to
Year/month Date record the
credit
account
amount
Used to write the Used to Refers Used to

date (year, month describe the where the record the
and date) the items to be transaction debited
transaction is recorded is posted accounts
involved amount
Procedure / step4 posting: is the process of transferring debits and credits from the journal to
the accounts in the ledger. There are different types of accounts. T- Account, two columns, three-
column and four- column accounts.
There are two types of ledgers-general and subsidiary. A general ledger is the principal ledger when
used in conjunction with the subsidiary ledgers that contains all accounts. It is containing account.
Subsidiary ledger is a ledger containing individual accounts with common characteristic
In the accounting procedures the journalizing and posting processes are actions taken simultaneously.
Therefore, these procedure are presented together using a journal form and a ledger (an account) form
Used to write
A four-column account form is depicted below the account ID
Account title Account No
Date Item Post ref Debit Credit Balance

Debit Credit
To record the Description about the

item
Refers from Used to record the
increase/decease on the
Used to show the debit
or credit balance of the
date (year, which page of account due to a account
month, date) the journal the transaction
the transaction
transaction is comes
After these steps using the forms (General Journal and a ledger) let’s return back to the transactions and
posted
record and post them. To do that first let us open the ledgers given and use a general journal.
Journal page 1
Post
Date Description Ref Debit Credit
2002
Jan 1 Prepaid rent 15 Br.2250 00
Cash 11 2250 00
2 Prepaid insurance 16 1740 00
Cash 11 1740 00
4 Service equipment 18 2500 00
Accounts payable 21 2500 00
6 Cash 11 500 00
Accounts receivable 12 500 00
9 Miscellaneous expe. 59 110 00
Cash 11 110 00
11 Accounts payable 21 1250 00
Cash 11 1250 00
12 Accounts receivable 12 1000 00
Service revenue 41 1000 00
13 Salary expense 51 500 00
Cash 11 500 00
17 Cash 11 1100 00
17 Supplies 14 950 00
Cash 11 950 00
20 Accounts receivable 12 700 00
24 Cash 11 1850 00

Three lines are requiring in recording a transaction in a journal:
1. For recording debit part
2. For recording credit part
3. Reason for recording the transaction
Journal page 2
Post
2002
Jan 27 Cash 11 1200 00
Accounts receivable 12 1200 00
27 Salary expense 51 500 00
Cash 11 500 00
30 Miscellaneous expense 59 75 00
Cash 11 75 00
30 Miscellaneous expense 59 140 00
Cash 11 140 00
30 Cash 11 950 00
30 Account receivable 12 800 00
30 2R- Drawing 32 1500 00
Cash 11 1500 00
31 Adjusting entries
Insurance expense 55 145 00
Prepaid insurance 16 145 00
Supplies expense 53 680 00
Supplies 14 680 00
Depreciation ex. Stor.eq. 54 100 00
Accumulated dep.exp. 19 100 00
Salary expense 51 100 00
Salary payable 22 100 00
Rent expense 750 00
Prepaid rent 15 750 00
Three lines are require in recording atransaction in a journal:

4. For recording debit part
5. For recording credit part
6. Reason for recording the transaction
Journal page 3
Post
2002 Closing entries:
Jan 31 Income summary 33 3100 00
Insurance expense 55 145 00
Supplies expense 53 680 00
Rent expense 52 750 00
Dep. Exp. Store eq 54 100 00
Salary expense 51 1100 00
Miscene. Expense 59 325 00
To close expenses
Service Revenue 41 6400 00
Income summary 33 6400 00
To close revenue
2R capital 31 1500
2R drawing 32 1500 00
To close drawing
Income summary 33 3200 00
2R – capital 31 3200 00
To close income sum.
(Net income of the period)
(The above Journal shows an answer to question # 2 which is journalizing transaction in a

Journal)
This is a general journal of 2R- shopping service consisting all the transaction occurred and
recorded during the month of January
The debit and credit section shows the amount debited and credited and the post reference
represents where the amount is posted to (the account number)
These accounts which are described in the following few pages are answers to question # 1 and 3
opening an account and posting. All are completed accounts at the end of the month after the
adjusting and the closing entries are posted.
Cash account no 11

Post ref Balance
Date Item Debit Credit Debit Credit
2002 Balance 7500 00
Jan 1 1 2250 00 5270 00
2 1 1740 00 3510 00
6 1 500 00 4010 00
9 1 110 00 3900 00
11 1 1250 00 2650 00
13 1 500 00 2150 00
17 1 1100 00 3250 00
17 1 950 00 2300 00
24 1 1850 00 4150 00
27 1 1200 00 5350 00
27 2 500 00 4850 00
27 2 75 00 4775 00
30 2 140 00 4635 00
30 2 950 00 5585 00
30 1500 00 4085 00
Ending balance 4085 00
Account receivable 12
Balance
Date Item Post ref Debit Credit Dr. Cr.

2002 Balance 900
Jan 1 500 400
6 1 1000 1400
12 1 700 2100
20 2 1200 9000
27 2 800 1700
30
Ending balance 1700
Supplies 14
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
ent
TTLM Development Manual Date: Nov , 2021 balance
2002 Balance 1250
Jan 17 1 950 2200
31 Adjusting entry 2 680 1520
1520
After adjustment
Prepaid Rent 15
Balance
Date Item Post ref Debit Credit Dr. Cr. Before

2002 2250 adjustm
Jan 1 1 2250 750 1500 ent
31 Adjusting entry 2 balance
1500
After adjustment
Prepaid insurance 16
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
ent
2002
balance
Jan 2 1 1740 1740
31 Adjusting entry 145 1595
1595
After adjustment
Service equipment 18
Balance

2002 Balance 11,000
Jan 4 Purchase of equip. 1 2500 13,500
145
Ending balance 13500
Accumulated depreciation service equipment 19

Balance


2002
Jan Adjusting entry 2 100 100
Accounts payable 21
Balance

2002
Jan 4 1 2500 2500
11 1250 1250
1250
Salary Payable 22
Balance

2002
Jan 31 Adjusting entry 2 100 100
100
2R - Capital 31
Balance
Date Item Post Debit Credit Dr. Cr.

ref
2002 Balance 20650
Jan 31 Closing Drawings 3 1500 1700
31 Closing net income 3 3200
22350

2R drawing 32
Balance

2002
Jan 33 2 1500 1500
31 Closing entry 3 1500 -
Income summary 33
Balance

2002
Jan 31 Closing expense 3 3200 3200
31 Closing revenue 3 6400 3200
31 Closing net income 3 3200
(Income summary)
Service revenue 41
Balance

2002 12 1 1000 1000
Jan 17 1 1100 2100
20 1 700 2800
24 1 1850 4650
30 2 950 5600
30 2 800 6400
31 Closing entry 3 6400
Salary Expense 51
Balance

2002 13 Payment 1 500 500
Jan 27 payment 2 500 1000
31 Adjusting entry 2 100 1100
31 Closing entry 3 1100 -

Rent expense 52
Balance

2002
31 Closing entry 3 750 _
Supplies expense 53
Balance

2002
Depreciation expense- service equipment 54

Balance

2002
31 Closing entry 3 100
Insurance expense 55
Balance

2002
Miscellaneous expense 59
Balance

2002
Jan 6 1 110 110
30 2 75 185
30 2 140 325
Procedure/ step 5: preparation of a trial balance

The equality of debits and credits in a ledger must be proved at the end of each accounting period. This
is made by preparing a trial balance. Trial balance is a list of tittles and related balances of the accounts
in the ledger.
After posting all the entries, including adjusting and closing, the end balances and tittles of 2R-
shopping service using the trial balance is shown as below.
2R –shopping service
Trial balance
On January 31, 2002
Title Debit Credit
Cash 4085 00
Accounts receivable 1700 00
Supplies 2200 00
Prepaid rent 2250 00
Prepaid insurance 1740 00
Service equipment 13500 00
Accounts payable 1250 00
2R- lovers capital 20650 00
2R- drawing 1500 00
Service revenue 6400 00
Salary expense 1000 00
Miscellaneous expense 325 00
Total 28,300 00 28,300 00
(The above trial balance which is computed and completed is is an answer to question # 4)

The trial balance does not provide the complete proof of accuracy of the ledger. It indicates only
that debits and credits are equal.
If the two totals of the trial balance are not equal it is probably due to the following errors.
 Errors in preparing the trial balance was incorrectly added: it may be due to one of the
following activates
 One of the columns of the trial balance may be incorrectly determined
 Omitting balance of an account
 Incorrect listing of an account
 Error in computing account balance such as:

 Omitting to add/deduct a given figure
 Entering account balance to wrong column
 Error in posting such as
 Posting wrong debit or credit
 Posting debit as credit or vice versa
 Omitting debit /credit entry
 Error in Journalizing such as
 Journalize wrong debit /credit figure
 Journalizing a debit as a credit or vice versa
 Omitting debit/credit entry
The following errors cannot be detected by the trial balance
 Failure to record or post a transaction
 Journalizing or posting erroneous but equal amounts of debit and credit
 Recording the same transaction more than one
 Posting a part of a transaction correctly as a debit or credit but to the wrong accounts
Note: two other common types of errors are known as transpositions and slides. Transportation is the
erroneous rearrangement of digits, such as writing Br. 625 as Br. 265 or Br. 652. In a slid error type the
entire number is erroneously moved one or more spaces to the right or the left, such as writing Br. 625
as Br. 62.50 or 6.25

Detecting errors: There are no standard rules for searching errors. Errors can be detected by trial and
error, by auditing, by chance, etc.
Some of the procedures used to locate an error include the following
 Recalculate the debit and credit totals of the trial balance
 Compare amounts in the trial balance with the balance of accounts in the general ledger
 Recalculate the balance of accounts
 Check postings from the journal
 Check the equality of debit and credit entries in the journal
Correction of errors: For incorrect journal entry but not yet posted or for incorrect amounts posted
draw a single line through the error and write the correct title or amount
-For incorrect Journal entry which is posted or for posting to the wrong account journalizing and posting
a correcting entry.
Procedure / step 6: adjusting process
Before directly involving in to the adjusting procedure and the adjusting entries it is important to
introduce some basic concepts such as the following:
i. Accounting period concept: according to this concept reports should be prepared at periodic
intervals such as monthly, quarterly or yearly called accounting periods. The annual accounting
period adopted by a business enterprise is called fiscal/ accounting year. Financial statements
prepared for less than one-year period are called interim financial statements
ii. Accrual concept: there are two revenue and expense recording methods
Cash basis: under this method revenues are recorded and reported in which cash is collected; and
expenses are recorded and reported in the period in which cash is paid
Accrual basis: under this method of accounting revenues are recorded and reported in the period in
which they are earned (goods are sold or services are performed regardless of collection of cash).
Expenses are recorded and reported in the period in which they are incurred (assets are consumed or
expired; services are received regardless of payment of cash).
Activity: an enterprise has provided services to a customer in March and the customer paid for the
service in April. When should the revenue be recorded and reported using cash basis? Or Accrual basis?
iii. Matching principle: this principle states that in determining net income / net loss for a given period,
all expenses incurred in that period should be deducted from the revenues earned in that period, i.e. the
income statement should match the revenues earned and the expenses incurred in a certain period to
determine net income/ net loss of that period.

At the end of an accounting period, many of the balances of accounts in the ledger can be reported,
with out change, in the financial statements. Some accounts in the ledger, however, require updating.
The process of updating the balances of accounts by recording unrecorded transactions at the end of
the accounting period is called an adjusting process; and the journal entries needed are called adjusting
entries. By their nature, all adjusting entries affect at least one income statement and one balance sheet
account. Thus, an adjusting entry will always involve revenue or an expense account and an asset or a
liability account.
Some items that require adjusting entries include the following
Prepaid expenses (deferred expenses):- initially recorded as assets but are expected to become
expenses over time in the business. Examples include prepaid rent, prepaid insurance, supplies etc
Accruals: are created by failure to record an expense that has been incurred or revenue that has been
earned. Examples include unrecorded wage (accrued expense/ accrued liabilities) and unrecorded fees
earned (accrued revenue often called accrued assets)
Plant assets: the expired cost of plant assets due to usage and passage of time is called depreciation.
‘Accumulated depreciation’ is a contra plant asset account whose balance must be deducted from the
original cost of a plant asset.
Unearnedrevenues: are liabilities created by receiving cash in advance for provision of goods or services
Note: deferrals are cash received or paid in the current period but revenues or expanse recorded in the
future period
-Accruals are revenues or expenses recorded in the current period but cash received or paid is the future
period.
- Journalizing and posting adjusting entries is used to bring the balance of accounts in the general ledger
in to agreement with the balances shown on the financial statements, i.e. to update balances. The
entries should be recorded on the Journal and posted to the respective ledgers.
For the example given above, 2R- shopping service the adjustment data is given. From the adjustment
data adjusting entries are recorded on the journal at the end of the month (January 31) and posted to
the respected ledgers on that time. Let’s see the effect, of the adjusting entries using a worksheet
(Answers for question 4- adjusting entries are recorded on the Journal)
Procedure/ step 7: worksheet completion: it is a working paper used by an accountant. It is a
multicolumn sheet of paper used to collect and summarize data needed for preparation of financial
statements, adjusting and closing entries
The worksheet of 2R –shopping service is presented as follows using the given data. The beginning data
on the worksheet is the trial balance prepared above, then the adjusting entries recorded (from the
given data) helps for the adjustment column. In the adjustment column similar items (debits or credits)

are added and different items are deducted. To begin the completion of the column worksheet for 2R-
shopping service, let we inset the figures on a ten-column worksheet as follows complete it
2R shopping service
Worksheet
For the month ended January 31, 2002
Account title Trial balance Adjustments Adjusted trial In come Balance sheet
balance statement
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 4085 4085 4085
Acco/Receivable 1700 1700 1700
Supplies 2200 b) 680 1520 1520
Prepaid Rent 2250 e) 750 1500 1500
Prepaid insurance 1740 a) 145 1595 1595
1250 1250 1250
Service. Equip. 13500 13,500 13500
20,650 20,650 20650
Acc. Payable
2R-capital
6400 6400 6400
d) 1100 1500
2R,drawing 1500 100 1500 325
Service Revenue
28,300
Salary expense 1000 1100
Misce. Expense 325 325 145
a) 680
145 100
Total 28,300 b) 100 100
680 100 100
c) c) 750
Insurance Expe. 100 100 145 28,500 3,200 6,400 22,200
d) 3,200 3,200
Supplies. Exp. 680
100 6,400 6,400 25,400 25,400
Deprecation Exp. 100
e)
Accumulated dep. 750 1875 25,400
Salary payable 1875
Rent expense 751

28,500
Adjustment

b) Supplies used Br. 650 (2200-1520)
a) Insurance expired Br. 145
e) Rent expired Br. 750
d) Salary accrued but not paid Br. 100
c) Depreciation of service equipment Br. 100
Explanation for the adjustment column:
Cross-referencing the debit and credit of each adjustment by letters is useful in reviewing the
worksheet.
If the tittles of some of the accounts to be adjusted do not appear in the trial balance, they should be
inserted in the account title column, below the trial balance totals, as needed. On the adjustment
column let’s see the adjustment given by letter
a) Prepaid insurance: The prepaid insurance as of January the beginning of the month has a balance of
Br. 1,740, which represents advance payment for the year. For the month of January out of the total
balance Br. 145 was expired. Therefore as January 31 of the total balance 145 was expensed but the
remaining 1595 (1740-145) is entered by writing (a) insurance expenses in the account title column and
(a) in the adjustments debit column
b) Supplies: The supplies account including the purchase has a balance of Br. 2200. But after physical
inventory or count the supplies on hand was found Br. 1520, therefore, Br. 680 (2200-1520) i.e. the
expired or consumed amount which is supplies expense. The adjustment is entered by writing (b) Br.
680 in the adjustments debit column on the same line as supplies expense ad (b) Br. 680 in the line as
supplies
c) Depreciation expense: Depreciation for the equipment for the month is Br. 100. The adjustment is
entered by writing(c) depreciation expense in the account title column Br. 100 adjustment debit column
the same line as depreciation expense but accumulated depreciation in the account title column Br. 100
in the adjustment credit column on the same line as accumulated depreciation
d) Accrued salary: The amount Br. 100 for January is an increase in expense and increase in liabilities.
The adjustment is entered by writing (d) Br. 100 in the adjustments debit column on the same line as
salary expenses (d) salary payable in the account title column, and (d) Br. 100 in the adjustment credit
column on the same line as salary payable.
e) Prepaid rent: Of the total amount paid in advance for three months Br. 750 (2250/3) is expired, rent
expense. The adjustment is entered as rent expense Br. 750 in the same line in the debit side of the
adjustment column and (e) Br. 750 in the credit side of the adjustment column the same line as the
prepaid rent line moth adjustment column
The adjustment columns are totaled to verify the mathematical accuracy of the adjustment data. The
total of the debit column must equal the total of the credit column

Note: The adjusted trial balance amounts are determined by extending the trial balance amounts plus or
minus the adjustments. For example, supplies account debit balance Br. 1520 on the adjusted trial
balance is the trial balance amount of Br. 2200 minus the Br.680 of the adjustment credit. Accordingly,
the worksheet is completed as shown in the worksheet. (Procedure 7 is completed)
Procedures /step 8: financial statements preparation. The financial statements are directly derived
from the work sheet. The statements are, therefore, prepared as follows
2R- shopping service
Income statement
For the month ended January 31, 2002
Service revenue ------------------------------------------------Br. 6400
Less: Expenses
Salary expenses Br. 1100
Insurance expense 145
Supplies expense 680
Rent expense 750
Depreciation expense 100
Miscellanies expense 325 3200
Net income Br. 3200
2R shopping service
Statement of owner’s equity
For month ended January 31, 2002
2R- capital, January 2002 ------------------Br. 20650
Add. Net income for the month 3200
Less with drawl 1500
Increase in capital 1700
2R –capital, January 31,2002 22,350
Balance sheet

On January 31, 2002
Asset s:
Current assets:
Cash -----------------Br.4085
A/R 1700
Supplies 1520
Prepaid rent 1500
Total current assets Br. 10400
Plane assets:
Service equipment 13500
Less accumulate. Depreciation ( 200) 13300
Total assets 23,700
Liabilities and capital:
Account payable 1250
Salary payable 100
Total liability 1350
2R- capital 22,350
Total liab& capital 23,700
Procedure /step 9: closing entries
Revenues, expenses and drawing /dividend account are temporary accounts used to accumulated
effects of some transaction on owner’s equity account for a specific period. At the end of the accounting
period the balances of revenue and expense accounts are summarized in one another temporary
account called the income summary. The balance in the income summary is transferred/closed to the
capital (owner’s equity) account. The balance on the drawing /divided account is directly closed to the
capital (retained earnings account).
The process of transferring balances of temporary accounts to the capital account is called closing entry;
and these entries should be posted to the respective ledgers after journalization.
This closing of accounts is used to transfer net income or net loss and drawing /dividend to
capital/retained earning, account. Moreover; it is used to reduce the balance of temporary accounts to
zero so that they will be ready for the next accounting period.

For our example, 2R-shopping service, the closing entries are journalized on the journal and posted to
the respective ledgers. See them on the journal and on their respective ledgers.
Procedure / step 10: post closing trial balance: It is a trial balance prepared after all adjusting and
closing entries are posted. It is prepared to check the equality of the total debit and the total credit of
the balance of the real accounts. It is the last step on the accounting cycle/ process the post-closing trial
balance for the 2R-shopping service is prepared and presented as follows.
Post closing trial balance
On January 31, 2002
Account title Debit Credit

Cash Br.4085
Accounts receivable 1700
Supplies 1520
Prepaid rent 1500
200
Service equipment 13500 1250
Accumulated dep. Service 100
Accounts payable
22,350
23,800
Salary payable
2R- capital 23,800
Total
Activity-two
1. If the supplies account, before adjustment on May 31, indicated a balance of Br. 2,250 and
an inventory of supplies on hand at May 31, totaled Br. 950, the adjusting entry would be:
A. debit supplies, Br. 950; credit supplies Expense, Br. 950.
B. debit supplies, Br. 1,300; credit supplies Expense, Br. 1,300.
C. debit supplies, Expense, Br. 950; credit supplies, Br. 950.
D. debit supplies, Expense, Br. 1,300; credit supplies, Br. 1,300.
2. If the estimated amount of depreciation on equipment for a period is Br. 2,000 the adjusting
entry to record depreciation would be:
A. debit depreciation Expense, Br. 2,000; credit Equipment, Br. 2,000

B. debit Equipment, Br. 2,000; credit depreciation Expense, Br. 2,000
C. debit depreciation Expense, Br. 2,000; credit Accumulated Depreciation, Br. 2,000
D. debit Accumulated Depreciation, Br. 2,000; credit depreciation Expense, Br. 2,000
3. If the equipment account has a balance of Br. 22,500 and its accumulated depreciation
account has a balance of Br. 14,000, the book value of the equipment is:
A. Br. 36, 500 C. Br. 14, 000
B. Br. 22,500 D. Br. 8,500
4. Which of the following accounts would be closed to the income summary account at the end
of a period?
A. sales C. both sales and salary expense
B. salary Expense D. Neither sales nor salary expense
5. The post closing trial balance would include which of the following accounts?
A. cash C. salary expense
B. sales D. all of the above
Self Test-2
1. Why are adjusting entries needed at the end of the accounting period? Why are closing entries
needs?
2. How are revenues & expenses reported on the income statement under:
a) Cash basis accounting?
b) Accrual basis accounting?
3. Define deferrals & accruals
4. What is the nature of the balance in the prepaid insurance account at the end of the accounting
period?
a) Before adjustment?
b) After adjustment?
5. If the worksheet a substitute for the financial statements? Discuss.
6. In accounting for depreciation on equipment, what is the name of the account that would be
referred to as a contra asset account?
7. Which of the following accounts in the ledger of a corporation will ordinarily appear in the
post closing trial balance?

a) Accounts Receivable g) equipment
b) Accumulated depreciation h) Retained earnings
c) Cash i) Dividends
d) Supplies j) Capital stock
e) Depreciation expense k) wages expense
f) Wages payable l) Sales
8. A business enterprise pays weekly salaries of Br.12,000 on Friday for a five-day week ending
on that day, Journalize the necessary adjusting entry at the end of the fiscal period, assuming
that the fiscal period ends. (a) On Monday (b) On Wednesday
9. The balance in the supplies account, before adjustment at the end of the year, is Br.2,750. The
inventory of supplies at the end of the year was determined to be Br.600. The estimated
depreciation on equipment used during the year is Br.1,600. Journalize the adjusting entries
required at the end of the year to recognize a) supplies used during the year and b)
depreciation expense for the year.
10. The trial balance of west side Laundromat at July 31,1991, the end of the fiscal year, and the
data needed to determine year-end adjustments are as follows.
Westside Laundromat
Trial balance
July 31, 1991
Account Title Debit Credit
Cash Br. 7,790
Laundry supplies 4,750
Prepaid insurance 2,825
Laundry equipment 85,600
Accumulated depreciation Br. 55,700
Accounts payable 4,950
Ana Perez, capital 30,900
Ana Perez, Drawing 18,000

Laundry Revenue 76,900
Wages expense 24,500
Rent expense 15,575
Utilities expense 8,500
Miscellaneous expense 910
Total Br. 168,450 Br. 168,450
Adjustment data:
(a) Inventory of Laundry supplies at July 31 ............................................. Br. 1,840
(b) Insurance premiums expired during the year ....................................... 1,500
(c) Depreciation on equipment during the year .......................................... 5,720
(d) Wages accrued but not paid at July 31 .................................................. 850
Instructions:
1. Record the trial balance on a ten-column worksheet and complete the worksheet.
2. Prepare an income statement, a statement of owner’s equity and a balance sheet. (No
additional investments were made during the year).
3. On the basis of the adjustment data in the worksheet, journalize the adjusting & closing
entries.
11. J. F. M. D. Outz has been practicing as a cardio list for three years. During April Outz
completed the following transactions in her practice of cardiology.
April 1. Paid office rent for April, Br.800
3. Purchase equipment on account, Br.2,100
5. Received cash on account from patients, Br.3,150
8. Purchase X-ray film and other supplies on account, Br.245
9. One of the item of equipment purchase on April 3 was defective. If was returned with
the permission of the supplier, who agreed to reduce the account for the amount
charged for the item, Br.325.
12. Paid cash to creditors on account, Br.1,250.
17. Paid cash for renewal of a six-month property Insurance policy, Br.370.

20. Discovered that the balances of the cash account and of the accounts payable account
as of April were overstated by Br.200. A payment of that amount of creditor in
March had not been recorded. Journalize the Br.200 payment as of April 20.
24. Paid cash for laboratory analysis, Br.545
27. Paid cash for business bank account for personal and family expense. Br.1,250..
30. Recorded the cash received in payment of service (on a cash basis) to patients during
April, Br.1,720.
30. Paid salaries of receptionist and nurses, Br.1,725.
30. Paid various utility expenses, Br.260.
30. Recorded fees charge to patients on account for service performed in April,
Br.5,145.
30. Paid miscellaneous expenses, Br.132.
Outz’s account title, members and business as of April 1 (all normal balances) are listed as
follows:
Cash, 11, Br.4,123; Accounts Receivable, 12, Br.6,725; Supplies, 13, Br.290; Prepaid Insurance,
14, Br.465; Equipment, 18, Br.19,745; Accounts payable, 22, Br.765; J.F. outz, Capital, 31,
Br.30,583, J.F. Outz, Drawing, 32, Professional Fees, 41, Salary expense, 51, Rent Expense, 53,
Laboratory expense, 55, Utility expense, 56, Miscellaneous Expense,, 59.
Instructions
5. Open a ledger of standard four-column accounts for Dr. Outz as of April 1 of the current year.
Enter the balances in the appropriate balance columns and place a check mark () in the
posting reference column. (it is advisable to verify the equality of the debit and credit
balances in the ledger before proceeding with the next instruction).
6. Journalize each transaction in a two-column journal.
7. Post the journal to the ledger, extending the month-end balance to the appropriate balances
columns after each posting.
8. Prepare a trial balance as of April 30.


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PARADISE VALLEY COLLEGE

Training, Teaching and Learning Materials

ACCOUNTS AND BUDGET SUPPORT LEVEL III

TTLM Development Manual Date: Nov , 2021

Lo1:- Check and verify supporting documentation

TTLM Development Manual Date: Nov , 2021

Information Sheet1.1Information from documents is identified, checked and

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

Cash Br. 150,000 Aksum, Capital Br. 150,000

Cash Salary Expense

To illustrate the accounting procedures / steps consider the following example

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

Used to write the Used to Refers Used to

Date Item Post ref Debit Credit Balance

TTLM Development Manual Date: Nov , 2021

To record the Description about the

TTLM Development Manual Date: Nov , 2021

Three lines are require in recording atransaction in a journal:

(The above Journal shows an answer to question # 2 which is journalizing transaction in a

TTLM Development Manual Date: Nov , 2021

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr. Before

Date Item Post ref Debit Credit Dr. Cr.

Ending balance 13500

Accumulated depreciation service equipment 19

TTLM Development Manual Date: Nov , 2021

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post Debit Credit Dr. Cr.

TTLM Development Manual Date: Nov , 2021

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

TTLM Development Manual Date: Nov , 2021

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Depreciation expense- service equipment 54

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Date Item Post ref Debit Credit Dr. Cr.

Procedure/ step 5: preparation of a trial balance

TTLM Development Manual Date: Nov , 2021

 Error in computing account balance such as:

TTLM Development Manual Date: Nov , 2021

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Rent expense 751

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

TTLM Development Manual Date: Nov , 2021

Account title Debit Credit

TTLM Development Manual Date: Nov , 2021