INTRODUCTION

TO
ACCOUNTING
Complied By

Dr. Dr.
Medhat A.El-Rashed Salem Safinaz Abd-Elhai Abd-Elhamid
Accounting Department
Faculty of Commerce
Cairo University

2017
Chapter one: Accounting an Introduction ------------------------------------

Chapter One
Accounting an Introduction

Learning objectives:

1- Define accounting.
2- Define accounting as an information system.
3- Determine the basic function of accounting.
4- Describe the main users of accounting information.
5- Distinguish accounting from book keeping.
6- Define the basic financial accounting concepts and principle.

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Chapter one: Accounting an Introduction ------------------------------------

1.1. What Is Accounting?

As a financial information system, accounting is process of

three activities: identifying, recording, and communicating the
economic events of an organization (Business or non business) to
interested users of the information. Let's take a closer look at these
three activities:
1- The first part of the process- identifying- involves selecting
those events that are considered evidence of economic activity
relevant to a particular organization. The sale of goods, the
rendering of services, the payment of wages, and the payment of
.expenses are examples of economic events.
2- Once identified and measured in L.E., economic events are
recorded to provide a permanent history of the financial
activities of the organization. Recording consists of keeping a
chronological diary of measured events in an orderly and
systematic manner. In recording, economic events are also
classified and summarized.
3- This identifying and recording activity is of little use unless
the information is communicated to interested users. The
information is communicated through the preparation and
distribution of accounting reports; the most common of which
are called financial statements. To make the reported financial

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Chapter one: Accounting an Introduction ------------------------------------

information meaningful, accountants describe and report the

recorded data in a standardized way. Information resulting
from similar transactions is accumulated and totaled. Such
data are said to be reported in the aggregate. For example, all
sales transactions are accumulated over a certain period of time
and reported as one amount in the financial statements. By
presenting the recorded data in the aggregate, the accounting
process simplifies a multitude of transactions and renders a
series of activities understandable and meaningful.

Identification Recording communication

Select economic Record, classify -prepare accounting

events and summarize Reporting
(transactions)
- Analyze and
interpret for users

A vital element in communicating economic events is the

accountant's ability and responsibility to analyze and interpret the
reported information. Analysis involves the use of ratios,
percentages, graphs, and charts to highlight significant financial
trends and relationships. Interpretation involves explaining the
uses, meaning, and limitations of reported data.

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Chapter one: Accounting an Introduction ------------------------------------

1.2. Accounting As An Information System:

An accounting system consists of the personnel, procedures,
devices, and records used by an organization:
(1) to develop accounting information and.
(2) to communicate this information to decision makers.
The design and capabilities of these systems vary greatly
from one organization to the next. In very small businesses, the
accounting systems may consist of little more than a cash register, a
checkbook, and an annual trip to an income tax preparer. In
large businesses, an accounting system includes computers, highly
trained personnel, and accounting reports that affect the daily
operations of every department. But in every case, the basic
purpose of the accounting system remains the same: to meet the
organization's needs for accounting information as efficiently as
possible.
Many factors affect the structure of the accounting system
within a particular organization. Among the most important are:
(1) the company's needs for accounting information.
(2) the resources available for operation of the system.
Viewing accounting as an information system focuses attentions
on the information accounting provides the users of the information,
and the support for financial decisions that is provided by the
information. These relationships are depicted in the chart. (1-A).

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Chapter one: Accounting an Introduction ------------------------------------

Observe, however, that the information system produces the

information presented in the middle of the diagram-cost and revenue
determination, assets and liabilities, and cash flows. This information
meets the needs of users of the information-investors, creditors, mangers,
and so on- and supports many kinds of financial decisions-
performance evaluation and capital allocation, among others. These
relationships are consistent with what we have already learned- namely,
the accounting information is intended to be useful for decision making
purposes.
Information Cost and Revenue Decision Support
system Determination
 Job costing.
 Process costing.
 Activity- based costing.  Cost/ Volume/ profit
 Investors.  Sales. analysis.
 Creditors. Assets and Liabilities;  Performance
 Mangers.  Plant and equipment. evaluation.
 Owners.  Loans and equity.  Incremental analysis.
  Receivables, payables,
Customers.
and Cash.  Budgeting.
 Employees. Cash Flows:  Capital allocation.
 from operations.  Earning per share.
from financing.  Ratio analysis
 from investing
(Chart 1.A)

1.3 Basic Functions of An Accounting Systems:

In developing information about the financial Position of a
business and the results of its operations, every accounting
systems performs the following basic functions:

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Chapter one: Accounting an Introduction ------------------------------------

1. interpret and record the effects of business transactions.

2. Classify the effects of similar transaction in a manner
that permits determination of the various totals and
subtotals useful to management and used in accounting
reports.
3. Summarize and communicate the information contained in
the systems to decision makers.
The differences in accounting systems arise primarily in the
manner and speed with which these functions are performed.
Many small businesses continue to use manual accounting
systems, but they modify these systems to meet their needs as
efficiently as possible.
1.4. Who Uses Accounting Data:
Because it communicates financial information about a
business enterprise, accounting is often called "the language of
business", the information that a specific user of financial
information needs depends upon the kinds of decisions that user
makes. The differences in the decisions divide the users of
financial information into two broad groups: internal users and
external users. Internal users are those who manage the business
(officers and other decision makers ).

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External users are those outside the business who have either a
present or potential direct financial interest (investors and
creditors)or an indirect financial interest (taxing authorities,
regulatory agencies, labor unions, customers, and economic
planners). The relationship of these users to the accounting process
and to one another is diagrammed in the chart (1 .B).
The Accounting Process

Identification

Recording

Communication

Internal Users External Users

Management Direct Interest Indirect Interest

Officers Present and potential Taxing authorities
Other decision makers Investors Customers
Creditors Labor unions
Economic planners

(Chart 1.B)
1.A.1. Internal Users:
Management at all levels uses accounting information in
planning, controlling, and evaluating business operations. To
perform these functions, managers need detailed information on
a timely basis .For example, the managers of a company might ask:

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Chapter one: Accounting an Introduction ------------------------------------

 Is cash sufficient to pay our debts?

 Are customers paying their bills promptly?
 What is the cost of manufacturing each unit of product?
 What costs exceed budget?
 Can we afford to give employee pay raises this year?
 Which product line is the most profitable?
 How much money must be borrowed to expand the
factory?
To assist management in answering these questions, accounting
provides internal reports .Examples include financial comparisons
of operating alternatives, projections of income from new sales
campaigns, and forecasts of cash needs for the next year .In
addition, statements on financial position and results of
operations of the entire business are prepared.
1.4.2. External Users:
A- Direct Interest:
External users with a direct interest are the company's
investors and creditors.
Investors (owners) make .their decisions to buy, hold, or sell
their financial interests on the basis of accounting information.
Creditors (suppliers and bankers)evaluate the risks of granting
credit or lending money on the basis of available accounting

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Chapter one: Accounting an Introduction ------------------------------------

information. Some of the questions asked by investors and creditors

about a company might be:
 Is the company earning satisfactory income?
 How does the company compare in size and profitability
with competitors?
 Will the company be able to pay its depts. As they
come due?
 Are interest payments and dividends protected by
an adequate inflow of cash from operations?
B- Indirect Interest:
The information needs and questions of those with indirect
financial interests vary considerably. Taxing authorities want to
know if the company complies with the tax laws. Regulatory
agencies want to know if the company is operating within
prescribed rules. Customers are interested in whether a company
will continue to honor product warranties and otherwise support its
product lines. Labor unions want to know if the owners have the
ability to pay increased wages and benefits .Economic planners use
accounting information to analyze and forecast economic activity.
The many and varied uses of accounting information clearly
attest to its importance. Without accounting, our existing
systems of production, investment, credit and taxation would be
seriously impaired.

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1.5. Distinguishing Between Bookkeeping And Accounting:

Many individuals mistakenly consider bookkeeping and

accounting to be one and the same. This confusion is
understandable because the accounting process includes the
bookkeeping function. However, accounting also includes much
more. Bookkeeping usually involves only the recording of
economic events and is therefore just one part of the accounting
process. In total, accounting involves the entire process of
identification, recording, and communication.
The bookkeeping function is often performed by individuals
with limited skills in accounting. As a result, it is not surprising that
the increased use of computers by .business enterprises has
resulted in much of the detailed work that is part of the
bookkeeping process being performed by machines.
1.6. The Accounting Profession :
What would you do if you joined the accounting profession?
You probably would apply your expertise in one of three major fields
-public accounting, private accounting, or not -for- profit accounting.
1.61. Public Accounting:
In public accounting ,you would offer expert service to the
general public in much the same way that a doctor serves patients
and a lawyer serves clients. A major portion of public accounting
practice is involved with auditing. In this area, a certified public
accountant (CPA) examines the financial statements of companies
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Chapter one: Accounting an Introduction ------------------------------------

and expresses an opinion as to the fairness of presentation.

When the presentation is fair, users consider the statements to be
reliable.
Taxation is another major area of public accounting. The
work performed by tax specialists includes tax advice and planning,
preparing tax returns, and representing clients before governmental
agencies.
A third area in public accounting is managements consulting.
Management consulting ranges from the installing of basic
computerized accounting systems to helping companies determine
weather they should use the space shuttle for high-tech research
and development projects.
1.6.2. Private Accounting:
Instead of working in public accounting an accountant may
be an employee of a business enterprise. In private (or managerial)
accounting you would be involved in one of the following activities.
1- Cost accounting -determining the cost of producing
specific products.
2- Budgeting-assisting management in quantifying goals
concerning revenues, costs of goods sold, and operating
expenses.
3- General accounting -recording daily transaction and
preparing financial statements and related information.

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Chapter one: Accounting an Introduction ------------------------------------

4- Accounting information systems- designing both manual and

computerized data processing systems.
5- Tax accounting -preparing tax returns and engaging in tax planning for
the company.
6- Internal auditing-reviewing the company's operations to
determine compliance with management policies and
evaluating the efficiency of operations.
From the above, you can see that within a specific company,
private accountants perform as wide a variety of duties as the public
accountant.
1.6.3. Not-For -Profit Accounting:
Like businesses that exist to make a profit, not-for-profit
organizations also need sound financial reporting and control.
Hospitals, colleges, and universities must make decisions about
the allocation of funds. Local, governmental units are continually
providing financial information to legislators, citizens, employees,
and creditors. In each of these cases, accounting expertise is highly
valued.
1/7. Types of Business Organizations:
There are three main types of business organizations:
1- Sale proprietorship.
2- Partnership.
3- Corporation.

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1.7. 1 Proprietorship:

A business owned by one person is generally a proprietorship.

The owner is often the manager/operator of the business. Small
service-type businesses (barber shops, law offices, plumbing
companies, and auto repair shops), farms, and retail stores (antique
shops, clothing stores, and book stores) are often sole proprietorships.
Usually only a limited amount of money (capital) is necessary to
start in business as a proprietorship, and the owner receives any
profits, suffers any losses, and is personally liable for all debts of the
business. Although there is no legal distinction between the business
as an economic unit and the owner, the records of the business
activities are kept separate from the personal records and activities
of the owner. Although sole proprietorships represent the largest
number of businesses they are typically the smallest in size and volume
of business.
1.7.2. Partnership:
A business owned by two or more persons associated as partners
is a partnership. In most respects a partnership is similar to a
proprietorship except that more than one owner is involved. When a
partnership is created, an agreement (written or oral) should set forth
such terms as initial investment of each partner, duties of each
partner, division of net income (or net loss), and settlement to be made

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upon death or withdrawal of a partner. Each partner generally has

unlimited personal liability for the debts of the partnership. Like a
proprietorship, for accounting purposes the partnership affairs must
be kept separate from the personal activities of the partners.
Partnerships are often used to organize tail and service-type
businesses, including professional practices (lawyers, doctors,
architects, and certified public accountants).
1.7.3. Corporation:
A business organized as a separate legal entity under state corporation
law and having ownership divided into transferable shares of stock is called
a corporation. The holders of the shares (stockholders) enjoy limited
liability; they are not personally liable for the debts of the corporate
entity. Stockholders may transfer all or part of their shares to other
investors at any time (i.e, sell their shares in the securities market). The ease
with which ownership can change adds to the attractiveness of investing in
a corporation. Because ownership can be transferred-without dissolving the
corporation, the corporation enjoys an unlimited life.
1.8.- Basic Financial Accounting Concepts and Principles:
The principles of accounting termed "Generally Accepted
Accounting Principles" (GAAP) are of particular importance to financial
accountants.
These principles have been developed because of the need for accurate
financial information to evaluate the performance of management.

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Generally accepted accounting principles include the basic objectives,

concepts, and rules of preparing and presenting financial statements.
In this part, we will discuss briefly the main generally accepted
accounting principles. It should be noted that there is no comprehensive
list for these generally accepted accounting- principles because they
emerge continuously as a result of the shortcoming of existing rules and
the demand by outsiders, who use accounting information.
It should be noted also that some terms such as standards, objectives,
concepts, rules, and assumptions are sometimes use to describe the
generally accepted accounting principles.
1.8.1. Business Entity:
The business entity concept states that a business, financial information
is recorded and reported separately from the owner's personal financial
information.
A person can own a business and also own a personal house,
furniture and car. Financial records of the business should not include the
personal house furniture, and car. But they include what is related to the
business only.
In short, financial records for the business and for its owner's personal
belongings should not be mixed and each group is to be recorded and
reported separately.

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L8.2. Historical Cost:

The historical cost concept states that the actual amount paid
or received is the amount to be recorded in accounting records. Any
changes in prices after the acquisition are to be neglected. Therefore,
accounting records do not necessarily show the current fair market
value.
To illustrate, let us assume that a business has purchased a
building at a cost of L.E. 200,000. The amount to be recorded in the
accounting records is L.E. 200,000. Assume that after 10 years later
the market value of the building is L.E. 500,000. Although the
market value of the building has increased greatly, the accounting
records will not be changed and the value of the building will continue
at the cost of L.E. 200,000.
1.8.3. Unit Measurement:

According to this concept all .business transaction are recorded

in- terms of money. Money is used as a unit of measurement because
it is the common factor of all business transactions. Moreover, it the
only feasible unit of measurement that can be used to achieve
uniform financial data.
Using money as a unit of measurement is based on the stability
of monetary units, i.e., the purchasing power of the monetary unit is
constant and unchanged.

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To illustrate let us assume that the business has purchased

land 10 years ago for L.E. 50,000 and purchased a second similar
land this year for L.E. 270,000. The total cost of land shown in
accounting records will be L.E. 320,000. This total cost of land is a
mixture of two kinds of Egyptian pounds with two different
purchasing powers.
1.8.4. Going Concern:
The financial statements of a business are prepared on the
assumption that it is a continuing enterprise, i. e., it will remain in
operation indefinitely. In other-words, it is assumed that business will
not be sold or liquidated in the near future.
Consequently, current estimated faire-market value or prices
are of no particular importance because there is no sale for the
business. It is a going concern one.
1.8.5. Objectivity:
According to this concept, accounting measurements are to be
based on factual-basis and subject to independent verification.
Therefore, only business transactions that actually did occur
should be recorded. Every accounting transaction is to be
supported by an objective evidence which can be checked.
Because of the objectivity principle, accountants use cost rather
than current market values. Costs are definite, factual, and can

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be verified Estimated market values are not factual and,

therefore, they are not objective (subjective).
1.8.6. Consistency:
Consistency refers to the use of the same accounting principles
in the same way in each accounting period. Financial statements
are compared from one period to another. If accounting information
is recorded differently from one period to the next, information
reported on financial statements cannot be compared. However,
changes in accounting methods or statements are made if such
changes make information more easily understood.

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Chapter Two: Introduction to Financial Statements ------------------------

Chapter Two
Introduction to Financial Statements

Learning Objectives:
1- Define basic financial statements.
2- Define a balance sheet and describe its content.
3- Identify the accounting equation and its basic
elements.
4 Describe how all business transactions can be stated in
terms of the resulting changes in the basic elements of the
accounting equation.
5- Determine how business transactions affect the balance
sheet.
6- Identify and describe the income statement and its
contents.
7- Identify and describe the owner' equity statement.

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Chapter Two: Introduction to Financial Statements ------------------------

Financial statements are the end product of an accounting

system. The principal financial statements are:
1. The balance sheet
2. The income statement
3. The owner's equity statement.
We will discuss these financial statements and their contents.
2.1. Basic Accounting Equation:
Other essential building blocks of accounting are the
categories into which economic events are classified. The two
basic elements of a business are what it owns and what it owes.-
Assets are the resources owned by a business. Equities are the
rights or claims against these resources. This relationship can be
shown in equation form as follows:
Assets = Equities

Equities may be further subdivided into two categories:

claims of creditors and claims of owners. Claims of creditors are
called liabilities. Claims of owners are called owners equity.
The equation above can, then, be expanded as follows:
Assets = Liabilities + Owner's Equity

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Chapter Two: Introduction to Financial Statements ------------------------

This equation is referred to as the basic accounting equation.

assets must equal the sum of liabilities and owner's equity.
Because creditors claims are paid before ownership claims if
a business is liquidated, liabilities are shown before owner's
equity in the basic accounting equation.
The accounting equation applies to all economic entities
regardless of size, nature of business, or form of business
organization.

The equation provides the underlying framework for recording and

summarizing the economic events of a business enterprise.
Let's look in more detail at the categories in the basic accounting
equation.
2.1.1 Assets:
As indicated above, assets are resources owned by a business. Thus
they are the things of value used in carrying out such activities as
production, consumption, and exchange. The common characteristic
possessed by all assets is the capacity to provide future services of benefits
to the entities that use them. In a business enterprise, that service potential
of future economic benefit eventually results in cash inflows (receipts) to
the enterprise.

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Assets may be tangible such as land, buildings, machinery,

and inventory. Assets may also take an intangible form in terms of
legal claims or rights such as amounts due from customers
(accounts receivable) and patents (protected rights)
In short, assets are things physical or not, owned by the
business entity and have a value. Assets are valued according to
their historical costs. Changes in prices, of assets after their
acquisition are neglected because assets are acquired for use and
not for resale.
2.7.2. liabilities:
liabilities are claims against assets. Put more simply,
liabilities are existing debts and obligations.- For example,
businesses of all sizes and degrees of success usually find it
necessary to borrow money and to purchase merchandise on
credit. These obligations are called accounts payable. Persons or
entities to whom owes money are called creditors.
Most claims of creditors attach to total enterprise assets
rather than to the specific assets provided by the credits In the
event of nonpayment, creditors may legally force the liquidation
of a business. In that case, the law requires that creditor claims be
paid before – ownership claims.

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2.1.3. Owner's Equity:

The ownership claim on total assets is known as owner's
equity. It is equal to total assets minus total liabilities. Here is
why: the assets of a business are supplied or claimed by either
creditors or owners. To determine what belongs to owners, we
therefore subtract creditors claims-the liabilities- from assets. The
remainder- owners equity- is the owner's claim on the assets of the
business. Since m6 claims of creditors take precedence over
ownership claims, the latter are often referred to as residual equity.
In a proprietorship, owner's equity is increased by owner's
investments and revenues. It is decreased by owner's drawings
and expenses.
2.1.3.1.Investments By Owner:
Investments by owner are the assets put into the
business by the owner. These investments in the:
business increase owner's equity.
2.3.1.2. Drawing:
An owner may withdraw cash or other assets during the
accounting period for personal use. These withdrawals could be
recorded as a direct decrease of owner's equity. However, it is
generally considered preferable to use a separate classification
referred to as drawings to determine the total withdrawals for the
accounting period. Drawings decrease total owner's equity.

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2.1.3.3.Revenues:
Revenues are the gross increase in owner's equity resulting
from business activities entered into for the purpose of earning
income. Generally, revenues result form the sale of
merchandise, the performance of services, the rental of property,
and the lending of money.
Revenues usually result in an increase in an asset. they may
arise from different sources and are identified by various names
depending on the nature of the business. The titles for and sources
of revenue common to many businesses are: sales, fees,
services,. commissions, interest dividends, royalties, and rent.
2. 1-3.4. Expenses:
Expenses are the decreases in owner's equity that result from
operating the business. They are the cost of assets consumed or
services used in the process of earning revenue. Expenses represent
actual or expected cash outflows (payments). Like revenues, expenses
take many forms and are identified by various names depending
on the type of asset consumed or service used . For example, a
business recognizes the following types of expenses: wages
expenses; utility expense (electric, gas, and water expense);
telephone expense; delivery expense; supplies expense; rent
expense; interest expense; and property tax expense.

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In summary, the principal sources (increases) of

owner's equity are:

(1) Investments by owners. And,

(2) Revenues from business operations.
In contrast, reductions in owner's equity are a result of:

(1) Withdrawals of assets by owners. And,

(2) Expenses.
Net income results when revenues exceed expenses
conversely, a net loss occurs when expenses exceed revenues.
These relationships are shown in chart (2.A.)

INCREASTE DECREASE

Chart 2.A

2/2. Effects of Business Transactions on Accounting Equation:

Transactions (often referred to as business transactions) are the
economic events of the enterprise that are recorded. Transactions
may be identified as external or internal. External transactions involve
economic events between the company and some outside enterprise

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or party. Internal transactions are economic events that occur

entirely within one company,
A company may carry on many activities that do not in
themselves represent business transaction. Hiring employees,
answering the telephone, talking with customers, and placing an
order for merchandise with a supplier are examples. Some of
these activities, however, may lead to a business transaction:
employees will earn wages, and merchandise will be delivered by the
supplier. Each transaction must be analyzed in terms of its effect on
the components of the basic accounting equation. This analysis must
identify the specific items affected and the amount of the change in
each item.
The equality of the basic equation must be preserved.
Therefore, each transaction must have a dual effect on the equation.
For example, if an individual wet is increased, there must be a
corresponding:
1- Decrease in another asset, or.
2- Increase in a specific liability, or.
3- Increase in owner's equity .
It follows that tow or more items could be affected when an asset
is increased. For example, as one asset is increased LE. 10,000
another asset could decrease L.E.6,000, and a specific liability
could increase L.E. 4,000 Note also that any change in an

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individual liability or ownership claim is subject to similar

analysis.
2.2.1. Transaction Analysis:
The following examples are business transactions for a new
business during its first month of operation. You will want to study
these transactions until you are sure you understand them. They are
not difficult but they are important to your success in this course. The
ability to analyze transactions in terms of the basic accounting
equation is essential for an understanding of accounting.
Transaction (1) Investment by Owner.
Ahmed decides to open a computer programming. service. On
September l, 2015, he invests L.E.15,000 cash in the business, which he
names. SOFTBYTE This transaction results in an equal increase in
assets and owner's equity. In this case, there is an increase in the asset
Cash, L.E.15,000, and an equal increase in the owner's equity, Ahmed
capital, L.E.15,000. The effect of this transaction on the basic equation
is:
Assets = Liabilities + Owner's Equity
Cash = Ahmed Capital
15,000 = 15,000
Observe that the equality of the basic equation has been
maintained. Note also that the source of the increase in owner's
equity is indicated, to make clear that the increase is an

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Chapter Two: Introduction to Financial Statements ------------------------

investments rather than revenue from operations. Why does this

mater? because investment by the owner do not represent revenues,
and they are excluded in determining net income .
Transaction (2) Purchase of Equipment for Cash.
SOFTBYTE purchases computer equipment for L.E.7,000 cash.
This transaction results in an equal increase and decrease in total
assets, though the composition of assets is changed: Cash is
decreased L.E7,000, and the asset Equipment is increased L.E.7,000.
Both the specific effect of this transaction and the cumulative of the
first transactions are:
Assets = Liabilities + Owner's Equity
Cash + Equipment Ahmed Capital
+ 15000 = 15000
-7000 + 7000 =
8000 + 7000 = 15000
15000 = 15000
Observe that total assets are still L.E.I5,000 and Ahmed's equity
also remains at L.E.I5,000 the amount of his original investment.
Transaction (3), Purchase of Supplies On Credit.
SOFTB YTE purchases computer paper and other supplies expected
to last several months from SAMY Supply Company for L.E.I,600.
SAMY Company agrees to allow SOFTB YTE to pay this bill in October,
a month later. This transaction is often referred to as a purchase on
account or a credit purchase. Assets are increased by this transaction
because of the expected future benefits of using the paper and

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Chapter Two: Introduction to Financial Statements ------------------------

supplies, and liabilities are increased by the amount due SAMY

Company. The asset supplies is increased L.E.I,600 and the liability
Accounts Payable is increased by the same amount. The effect on
equation is:
Owner's
Assets = Liabilities +
Equity
Accounts Ahmed
Cash + Supplies + Equipment = +
Payable Capital
8000 7000 15000
+1600 +1600
8000 +1600 = 1600 + 15000
16600 = 16600

Total assets are now L.E. 16,600.This total is matched by

a L.E 1,600 creditor's claim and a L.E. 15,000 ownership
claim.
Transaction (4). Services Rendered for Cash.
SOFTBYTE receives L.E. 1,200 cash from customers for
programming services it has provided. This transaction
represents the principal revenue-producing activity of
SOFTBYTE. Recall that revenue increases owner's equity.
Both assets and owner's equity are, then, increased by this
transaction: in this case, Cash is increased L.E. 1,200 , and
Ahmed Capital, is increased L.E. 1,200 the new balances in the
equation are:

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Chapter Two: Introduction to Financial Statements ------------------------

Owner's
Assets = Liabilities +
Equity
+ + Accounts Ahmed
Cash =
Supplies Equipment Payable Capital
8000 1600 7000 = 1600 15000
+1200 +1200
9200 +1600 +7000 = 1600 + 16200
17800 = 17800
The two sides of the equation balance at L.E. 17,800.
Note that owner's equity is increased when revenues are earned.
The source of the increase in owner's equity is indicated as
service revenue. Service revenue is included in determining
SOFTBYTE'S net income.
Transaction (5) Purchase of Advertising On Credit.
SOFTBYTE receives bill for L.E.250 from the daily news for
advertising the opening of its business but postpones payment of the
bill until a later date. This transaction results in an increase in
liabilities and a decrease in owner's equity. The specific terms
involved are Accounts Payable and Ahmed, capital. The effect on the
equation is:
Owner's
Assets = Liabilities + Equity
Cash + + = Accounts Ahmed
Supplies Equipment Payable Capital
9200 1600 7000 = 1600 16200
+250 -250
9200 +1600 +7000 = 1850 + 15950
17800 = 17800

32
Chapter Two: Introduction to Financial Statements ------------------------

The two sides of the equation still balance at L.E.I7,800.

Observe that owner's equity is decreased when the expense is
incurred, and the specific cause of the decrease (advertising expense)
is noted. Expenses do not have to be paid in cash at the time they are
incurred. When payment is made at a later date, the liability
Accounts Payable will be decreased and the asset Cash will be
decreased [see transaction (8)]. The cost of advertising is
considered an expense, as opposed to an asset, because the benefits
have been used. This expense is included in determining net income.
Transaction(6)Services Rendered for Cash and Credit
SOFTBYTE provides programming services of L.E.3,500 for
customers. Cash amounting to L.E.I,500 is received from
customers, and the balance of L.E.2,000 is billed to customers on
account. This transaction results in an equal increase in assets and
owner's equity.
Three specific items are affected : Cash is increased
L.E.I500;Accounts Receivable is increased L.E. 2000; and Ahmed
Capital is increased LJE. 3,500. The new balances are as follows:
Assets Owner's
= Liabilities +
Equity
Acc. + Supplies + Accounts Ahmed
Cash =
Receivable Equipment Payable Capital
9200 1600 7000 = 1850 15950
+1500 +2000 -3500
10700 +2000 +1600 +7000 = 1850 + 19450
21300 = 21300

33
Chapter Two: Introduction to Financial Statements ------------------------

Why increase owner's equity by L.E .3500 when only L.E.I,500

has been collected? Because the inflow of assets resulting from the
earning of revenues does not have to be in the form of cash.
Remember that owner's equity is increased when revenue are
earned, and in SOFTBYTE's case that is when the service is
provided.
When collections on account are received at a later date, Cash
will be increased and Accounts Receivable will be decreased [ see
transaction (9)]
Transaction (7) Payment Of Expenses.
Expenses paid in cash for September are store rent. L.E.600,
salaries of employees, L.E.900, and utilities, L.E.200, these
payments result in an equal decrease in assets and owner's, equity.
Cash is decreased L.E.I,700 and Ahmed Capital is decreased by
the same The effect of these payments on the equation is:
Assets Owner's
= Liabilities +
Equity
Acc. + Supplies + Accounts Ahmed
Cash =
Receivable Equipment Payable Capital
10700 2000 1600 7000 = 1850 15950
-1700 -1700
9000 +2000 +1600 +7000 = 1850 + 17750
19600 = 19600
The two sides of the equation now balance at L.E.I9,600. Three
lines are required in the analysis to indicate the different types of expenses
that have been incurred.

34
Chapter Two: Introduction to Financial Statements ------------------------

Transaction (8) Payment of Accounts Payable.

SOFTBYTE pays its .Daily News advertising bill of L.E.250 in
Cash. In analyzing the effect of this transaction, we must recall that the bill
has previously been recorded in Transaction (5) as an increase in
Accounts Payable and, a decrease in owner's equity. Thus, this payment
"on account" decreases both assets and liabilities. In this case, the asset
Cash and the liability Accounts Payable are decreased by L.E.250. The
effect of this transaction on the equation is:
Observe that the payment of a liability related to an expense that has
previously been recorded does not affect owner's equity.
Transaction (9) Receipt Of Cash On Account
The sum of L.E.600 in cash is received from customers
who have previously been billed for services in Transaction (6).
This transaction does not change total assets, but it changes the
composition of SOFTBYTE's assets Cash is increased .L.E.600
and Accounts Receivable is decreased L.E.600. The new
balances are:
Assets Owner's
= Liabilities +
Equity
Acc. + Supplies + Accounts Ahmed
Cash =
Receivable Equipment Payable Capital
8750 2000 1600 7000 = 1600 177950
+600 -600
9350 +1400 +1600 +7000 = 1600 + 17750
19350 = 19350

35
Chapter Two: Introduction to Financial Statements ------------------------

Note that a collection on account for services previously

billed and recorded does not affect owner's equity. Revenue was
already recorded in Transaction (6) and should not he recorded again.
Transaction (10) 'Withdrawal of Cash By Owner:
Ahmed withdraws L.E.I,300 in cash from the business for
his personal use. This transaction results in an equal decrease in
assets and owner's equity. Thus, both Cash and Ahmed Capital
are decreased L.E.I,300, as shown below:
Assets Owner's
= Liabilities +
Equity
Acc. + Supplies + Accounts Ahmed
Cash =
Receivable Equipment Payable Capital
9350 1400 1600 7000 = 1600 17750
-1300 -1300
8050 +1400 +1600 +7000 = 1600 + 16450
18050 = 18050
Observe that the effect of a cash withdrawal by the owner is
the opposite of the effect of an investment by the owner. Owner's
drawings do not represent expends. Like owner's investment, they
are not included in determining net income.
2.2.2. Summary of the Effects of Transactions On The
Accounting Equation:
The transactions of SOFTBYTE are summarized in table 2.1 to
show their cumulative effect on the basic accounting equation, the
transaction number, the specific affects of the transaction, and the

36
Chapter Two: Introduction to Financial Statements ------------------------

balances after each transaction are indicated. The table 2.1

demonstrates a number of significant facts:
1- Each transaction must be analyzed in terms of its
effect on:
a) The three components of the basic accounting equation.
b) Specific types (kinds) of items within each component.
2- The two sides of the equation must always be
equal.
3- The causes of each change in the owner's claim on assets must be
indicated in the owner's equity column.
+ Owner's
Assets = Liabilities
Equity
+ Accounts + Accounts + Ahemd
Transaction Cash Receivable
+ Supplies
Equipment
= Payable Capital
(1) +15000 = +15000
(2) -7000 +7000 =
8000 7000 = 15000
(3) +1600 = +1600
8000 +1600 = +1600 15000
(4) +1200 = +1200
9200 +1600 +7000 = 1600 +16200
(5) +250 -250
9200 +1600 +7000 = 1850 +15950
(6) +1500 +2000 +3500
10700 2000 1600 +7000 = 1850+ 19450
(7) -1700 -600
-900
-200
9000 +2000 +1600 +7000 = 1850 +17750
(8) -250 = -250
8750 +2000 +1600 +7000 = 1600+ 17750
(9) +600 -600
9350 +1400 +1600 +7000 = 1600+ 17750
(10) -1300 = -1300
8050 +1400 +1600 +7000 = 1600+ 16450
L.E 18050 = L.E 18050

37
Chapter Two: Introduction to Financial Statements ------------------------

2.3. Financial Statements:

After transactions are identified, recorded, and summarized,
four financial statements are prepared from the summarized
accounting data:
1- An income statement presents the revenues and expenses
and resulting net income or net loss of a company for a specific
period of time.
2- An owner's equity statement summarizes the changes in owner's
equity for a specific period of time.
3- A balance sheet reports the assets, liabilities, and owner's
equity of a business enterprise at a specific date.
Each statement provides management, owners, and other
interested parties with relevant financial data. The financial
statements of SOFTBYTE and their inter- relationships are shown
in table (2.2.) the statements are interrelated:
(1) Net income of L.E.2,750 shown on the income statement is
added to the beginning balance of owner's equity statement.
(2) Owner's capital of LE. 16,450 at the end of the reporting
period shown in the owner's equity statement is reported on
the balance sheet.
(3) Cash of L.E.8,050 on the balance sheet is reported on the
balance sheet.

38
Chapter Two: Introduction to Financial Statements ------------------------

2.3. L Income Statement:

The income statement for SOFTBYTE is prepared from the data
appearing in the owner's equity column of table (2.1.). The heading
of the statement identifies the company, the type of statement, and
the time period covered by the statement. Note that the primary
focus of the income statement is on reporting the success or
profitability of the company's operations over a specified
period of time. To indicate that it applies for a period of time, the
income statement is dated " For The Month Ended September 30,
2015"
SOFBYTE
Income Statement
For the Month Ended September 30, 2015

Revenues:
Service revenue 4700
Expenses:
Salaries expense 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses: 1950
Net income 2750

39
Chapter Two: Introduction to Financial Statements ------------------------

SOFBYTE
Owner's Equity Statement
For the Month Ended September 30, 2015
Ahmed Capital September 1 0
Add: Investment 15000
Net income 2750
17750
17750
Less: Drawings (1300)
Ahmed Capital, September 30 16450

SOFBYTE
Balance Sheet
September 30, 2015

Assets:
Cash 8050
Accounts receivable 1400
Supplies 1600
Equipment 7000
Total assets 18050
Liabilities:
Accounts Payable 1600
Owner's Equity:
AHAMED Capital 16450
Total Liabilities and Owner's Equity 18050
Table 2-2

40
Chapter Two: Introduction to Financial Statements ------------------------

On the income statement, revenues are listed first, followed by

expenses. Finally net income (or net loss) is determined.
Note that investment and withdrawal transactions between the
owner and the business are not included in the measurement of
net income. For example, the withdrawal by Ahmed of cash
from SOFTBYTE was not regarded as a business expense, as
explained earlier.
2.5.2. Owner's Equity Statement:
Data for the preparation of the owner's equity statement are
obtained from the owner's equity column of the tabular summary
(table 2-1) and from the income statement. The heading of this
statement identifies the company, the type of statement, and the
time period covered by the statement. -The time period is the same
as that covered by the income statement and therefore is dated " For
The Month Ended September 30, 2015". The beginning owner's
equity amount is shown on the first line of the statement. Then the
owner's, investments, net income, and the owner's drawings are
identified in the statement. The information provided by this
statement indicates the reasons why owner's equity has increased
or decreased during the period.
What if SOFTBYTE reported a net loss in its first month?
Let's assume that during the month of September, 2015,

41
Chapter Two: Introduction to Financial Statements ------------------------

SOFTBYTE lost L.E.I0,000 the presentation in the owner's

equity statement of a net loss appears in table (2.3.)
SOFBYTE
Owner's Equity Statement
For the Month Ended September 30, 2015
Ahmed Capital September 1 0
Add: Investment 15000
15000
Less: Drawings 1300
Net Loss 10000 (11300)
Ahmed Capital, September 30 3700
Table 2.3

If there are additional investments, they are reported as

investments in the owner's equity statement.
2.5.5. Balance Sheet:
The balance sheet for SOFTSYTE is prepared from the
column headings and the month-end data shown in the last line
of the tabular summary (table 2-1). The heading of a balance
sheet must identify the company, the statement, and the date. To
indicate that the balance sheet is at a specific date, it is dated
"September 30, 2015". Observe that the assets are listed at the
top, followed by liabilities and owner's equity. Total assets must
equal total liabilities and owner's equity. In the SOFTBYTE
illustration, only one liability, accounts payable, is reported on

42
Chapter Two: Introduction to Financial Statements ------------------------

the balance sheet. In. most. cases, there will be more than one
liability.
When two or more liabilities are involved, a customary
way of listing is as follows:
Liabilities
Notes Payable 10000
Accounts Payable 63000
Salaries payable 18000
Total Liabilities 91000

The balance sheet is like a snapshot of the company's

financial condition at a specific moment in time (usually the
month-end or .year-end).
2.4.Demonstration Problems:
Problem (1):
The accounting data for Star Business at December 31,
2015 are shown below:
Accounts Payable 111000 Cash 130000
Accounts receivable 75000 Notes receivable 45000
Supplies 15000 Salaries payable 6000
Land 168000 Building 138000
Office equipment 39000 Ahmed Capital ??
Notes payable 54000

43
Chapter Two: Introduction to Financial Statements ------------------------

Instructions:
Prepare a balance sheet at December 31, 2015.
Solution
START BUSINESS
Balance sheet
December 31, 2015
Assets Liabilities&
Owner's Equity
Cash 138000 Liabilities
Notes receivable 45000 Notes payable 54000
Accounts receivable 75000 Accounts payable 111000
Supplies 15000 Salaries payable 6000
Land 168000 Total Liabilities 171000
Building 138000
Office equipment 39000 Owner's equity
Ahmed Capital 447000
Total 618000 Total 618000
Problem (2):
Use the following information to complete the balance
sheet of FAGR Business on June30,2015 :
1- The business started on July 1, 2014 and has operated
for one year.
2- The land and building were purchased for a total price of
L.E. 170,000 on January 11, 2014.
3- Cash and accounts receivable together amount to four times
as accounts payable.

44
Chapter Two: Introduction to Financial Statements ------------------------

FAGR BUSINESS
Balance sheet
June 30, 2015
Assets Liabilities&
Owner's Equity
Cash 35000 Liabilities
Accounts receivable ? Notes payable ?
Land 70000 Accounts payable ?
Building ?
Machinery& 40000 Total Liabilities 60000
Equipment
Supplies 3000
Owner's equity
Ahmed Capital ?
Total Assets ? Total Liabilities& 393000
Owner's Equity
Solution
FAGR BUSINESS
Balance sheet
June 30, 2015
Assets Liabilities&
Owner's Equity
Cash 35000 Liabilities
Accounts receivable 145000 Notes payable 15000
Land 70000 Accounts payable 45000
Building 100000
Machinery& 40000 Total Liabilities 60000
Equipment
Supplies 3000
Owner's equity
Ahmed Capital 33000
Total Assets 393000 Total Liabilities& 393000
Owner's Equity

45
Chapter Two: Introduction to Financial Statements ------------------------

Notes:
1- Total assets must be L.E.393,000 to agree with the total
liabilities and owner's equity.
2- Total cost of land and building (L.E. 170,000) the cost of
building equals L.E. 100,000 (170,000-70,000)
3- Accounts Receivable equal L.E. 145,000 to achieve a total
asset of L.E.393,000
4- Cash (35,000) plus accounts receivable (145,000) equals
180,000 Accounts Payable are one fourth of the total cash
and accounts receivable, i.e. 180,000 ÷ 4 = 45,000
5- Notes payable=Total liabilities-Accounts payable
= 60,000-45,000 = 15,000

46
Chapter three: Transaction Analysis and Accounting Cycle --------------

Chapter three
Transaction Analysis and
Accounting Cycle

Learning objectives:
1- Define accounting records.
2- Define accounting terms related to analyzing transactions
into debit and credit
3- Use T accounts to analyze transactions into debit
and credit.
4- Define the double- entry system of accounting.
5- Describe a journal and its relationship to the ledger.
6- Prepare journal- entries to record business transactions.
7- Describe posting from the journal to the ledger.
8- Prepare a trial balance and discuss its uses and
limitations.
9- Define briefly the accounting cycle.

47
Chapter three: Transaction Analysis and Accounting Cycle --------------

3.1. The Role of Accounting Records:

Businesses do not prepare new financial statements after every
transaction. Rather, they accumulate the effects of individual business
transactions in their accounting records.
Then, at regular intervals, the date in these records are used to prepare
financial statements, and other types of accounting reports.
But the need for accounting reports is not the only reason businesses
maintain accounting records. Managers and employees of the business
frequently use these records for such purposes as:
1- Establishing accountability for the assets and /or transactions
under an individual' s control.
2- keeping track of routine business activities—such as the amounts of
money in company bank accounts amounts due from credit
customers, amounts owed to suppliers.
3- Obtaining detailed information about a particular
transaction.
4- Evaluating the efficiency and performance of various
departments within-the organization.
5- Maintaining documentary evidence of the company's
business activities. (For example tax laws require
companies to maintain accounting records supporting the
amounts reported in tax returns.)

48
Chapter three: Transaction Analysis and Accounting Cycle --------------

3.2, The Ledger:

An accounting system includes a separate record for each item
that appears in the .financial statements. For example, a separate
record is kept for the asset cash showing all increases and
decreases in cash resulting from the many transactions in which cash is
received or paid. A similar record is kept for every other asset, for
every liability. For owner's equity, and for every revenue and
expense account appearing in the income statement.
The record used to keep track of the increases and decreases
in financial statement items is termed a "ledger account" or
simply, an account. The entire group of accounts is kept
together in an accounting record called a ledger.
5.2.7. The Use Of Accounts :
An account is a means of accumulating in one place all
the information about changes in specific financial statement
items, such as a particular asset or liability. For example, the Cash
account provides a company's cash balance, a record of its cash
receipts, and a record of its cash disbursements.
In its simplest form an Account has only three elements:
(1) A title.
(2) A left side, which is called the debit side; and
(3) A right side, which is called the credit side.
This form of an account, illustrated below, is called a

49
Chapter three: Transaction Analysis and Accounting Cycle --------------

T account because of its resemblance to the letter T.

Title of account
Left Right
or or
Debit Side Credit Side

3.2.2. Debits and Credits:

The terms debit and credit mean left and right, respectively.
They are commonly abbreviated as Dr. for debit and Cr. for
credit(1).
(1) These terms do not mean increase or decrease. The terms debit
and credit are used repeatedly in the recording process . For
example, the act of entering an amount on the left side of an
account is called debiting the account, and making an entry on
the right side is crediting the account. When the totals of the tow
sides are compared, an account will have a debit balance if the
total of the debit amounts exceeds the credits.
Conversely, an account will have a credit balance if the credit
amounts exceed the debits.

(1)The abbreviation come from the Latin words: debere (Dr.), and credere (Cr.)

50
Chapter three: Transaction Analysis and Accounting Cycle --------------

The procedure of having debits on the left and credits on

the right is an accounting custom, or rule. This rule applies to all
accounts.
The procedure of recording debits and credits in an account
is shown in Illustration (3-1) for the cash transactions of Soft
byte. The data are taken from the cash column of the tabular
summary in table( 2.1.)
Tabular Summary Account Form
Cash Cash
15000 Debits Credits
-7000 15000 1700
1200 1200 250
1500 1500 1300
-1700 600
-250 Balance
600 8050
-1300 Debit
8050
(IIIustration 3.1)
Every positive item in the tabular summary represents a
receipt of cash ; every negative amount constitutes a payment
of cash . Notice that in the account form the increases in
cash are recorded debits, and the decreases in cash are

51
Chapter three: Transaction Analysis and Accounting Cycle --------------

recorded credits. Having increases on one side and decreases the

other helps in determining the totals of each side of the account as
well as the balance in the account. The account balance, a debit of
L.E.8,050, indicates that SOFTPYTE has had L.E.8,050 more
increases then decreases in cash. That is, it has L.E.8.050 in its
cash account.
3.2.3. Debit and Credit Procedure:
In Chapter(2) you learned the effect of a transaction
on the basic accounting equation. Remember that each
transaction must affect two or more accounts to keep the basic
accounting equation in balance. In other words, for each
transaction debits must equal credits in the accounts. The
equality of debits and credits provides the basis for the double-
entry system of recording transactions (sometimes referred to as
double-entry bookkeeping);
Under the universally used double-entry system, the dual
(two-sided) effect of each transaction is recorded in appropriate
accounts this system provides a-logical method for record
transactions. It also offers a means of proving the accuracy of the
recorded amounts: If every transaction is recorded with equal
debits and credits, then the sum of all the debits to the accounts
must equal the sum of all the credits.

52
Chapter three: Transaction Analysis and Accounting Cycle --------------

The double-entry system for determining the equality of the

accounting equation is much more efficient than the plus minus
procedure used in Chapter(2). There, it was necessary after
each transaction to compare total assets with total liabilities and
owner's equity to determine the equality of the two sides of the
accounting equation.
Assets and liabilities:-
In the SOFTBYTE illustration above, increases in cash-an
asset- were entered on the left side , and decreases in cash when
entered on the right side .We know that both sides of the basic
equation (assets = liabilities + owner's equity) must be equal; it
then follows that increases and decreases in liabilities will have
to be recorded opposite from increases and decreases in assets.
Thus increases in liabilities must be entered on the right or credit
side, and decreases in liabilities must be entered on the left or debit
side. The effects that debits and credits have on assets and liabilities
are summarized as follows:
Debits Credits
1 -Increase assets 1 -Decrease assets
2-Decrease liabilities 2-Increase liabilities
Debits to a specific asset account should exceed the credits to
that account, and credits to a liability account should exceed debits
to that account. Thus, asset accounts normally show debit balances,

53
Chapter three: Transaction Analysis and Accounting Cycle --------------

and liability accounts normally show credit balances. The normal

balances may be diagrammed as follows:
Assets Liabilities
Increase Debit Decrease Credit Decrease Debit Increase Credit

Normal Balance Normal Balance

An awareness of the normal balance in an account may help
you when you are trying to trace errors. For example, a credit
balance in an asset account such aS land or a debit balance in a
liability account such as wages payable would indicate errors
in recoding Occasionally, however, an abnormal balance may
be correct the cash account, for example will have a credit balance
when a company has overdrawn its bank balance (i.e., written a
"bad" check).
Owner' s Equity:-
As indicated in Chapter(2) owner's equity is , increased by
owner's investments and revenues, it is decreased by owner's
drawings and expenses, in a double- entry system, accounts are
kept for each of these types of transactions, as explained below.
Owner's Capital:
Investments by owners are credited to the owner's capital
account. The owner's capital account is increased by credits and
decreased by debits. For example, when cash is invested in the

54
Chapter three: Transaction Analysis and Accounting Cycle --------------

business, cash is debited and owner's capital is credited.

Conversely, owner's capital is debited when the owner's
investment in the business is reduced.
The rules debit and credit for the owner's capital account
are stated as follows:
Debits Credits
Decrease Owner's Capital Increase Owner's Capital
The -normal balance in this account may be
diagrammed as follows:
Owner's Capital
Decrease Debit Increase Credit

Normal Balance

Owner's Drawing:
An owner may withdraw cash or other assets for personal use.
Withdrawals could be debited directly to owner's capital to
indicate a decrease in owner's equity. However, it is preferable to
establish a separate. account, referred to as the owner's drawing
account, in order to determine the total withdrawals for the
accounting period. The drawing account decreases owner's equity. It
is not an income statement account like revenues and expenses.

55
Chapter three: Transaction Analysis and Accounting Cycle --------------

Owner's drawing is increased by debits and decreased by

credits. Normally, the drawing account will have a debit balance. The
rules of debit and credit for the drawing account are stated as follows:
Debits Credits
Increase Owner's Drawing Decrease Owner's Drawing
The Normal balance may be diagrammed as follows:
Owner's Drawing
Increase Debit Decrease Credit

Normal Balance
Revenues and expenses:
when revenues are earned, owner's equity is increased.
Accordingly, the effect of debits and credits on revenue accounts is
identical to their effect on owner's capital. Revenue accounts are
increased by credits and decreased by debits.
On the other hand expenses decrease owner's equity. As a
result, expenses are recorded by debits. Since expenses are the
negative factor in the computation of net income, and revenues are
the positive factor, it is logical that the increase and decrease sides
of expense accounts should be the reverse of .revenue accounts.
Thus, expense accounts are increased by debits and decreased by
credits.

56
Chapter three: Transaction Analysis and Accounting Cycle --------------

The effect of debits and credits on revenues and expenses

may be stated as follows:
Debits Credits
1 - Decrease Revenues 1 -Increase Revenues
2-Increase Expenses 2-Decrease Expenses
Credits to revenue accounts should exceed the debits, and
debits to expense accounts should exceed credits. Thus, revenue
accounts normally show credit balances and expense accounts
normally show debit balances. The normal balances may be
diagrammed as follows:
Revenue Expenses
Decrease Debit Increase Credit Increase Debit Decrease Credit

Normal Balance Normal Balance

3.2.4. Expansion of Basic Equation:
You have already learned the basic accounting equation.
Illustration (3-2) expands this equation to show the accounts
that comprise owner's equity. In addition, the debit/ credit rules
and effects on each type of account are illustrated. Study this
diagram carefully. It will help you understand the fundamentals
of the double-entry, system. Like the basic equation, the
expanded basic equation must be balance (total debits equal total
credits).
57
Chapter three: Transaction Analysis and Accounting Cycle --------------

Assets = Liabilities + Owner's Equity

Assets Liabilities Owner's Owner's Revenues Expenses

equity drawing
Dr+ Cr- Dr- Cr+ Dr- Cr+ Dr+ Cr- Dr- Cr+ Dr+ Cr-

IIIustration (3-2)
3.5. Steps In The Recording Process:
Although it is . possible to enter transaction information
directly into the accounts, few businesses do so. In practically
every business, the basic steps in the recording process are;
1- Analyze each transaction in terms of its effect on , the
accounts.
2- Enter the transaction information in a journal (book of
original entry).
3- Transfer the journal information to the appropriate,
accounts in the ledger (book of accounts).
The actual sequence of events begins with the Transaction.
Evidence of the transaction comes in the form of a business
document, such as a sales slip, a check. A bill, or a cash register
tape. This evidence is analyzed to determine the effect of the
transaction on specific accounts. The transaction is then entered in
the journal. Finally, the journal entry is transferred to the
designated accounts in the ledger.

58
Chapter three: Transaction Analysis and Accounting Cycle --------------

The basic steps in the recording process occur repeatedly in

every business enterprise. The analysis of transactions has already
been illustrated, and further examples of this step will be given in
this and later chapters. The other steps in the recording process
are explained in the next sections.
5.5.7. The Journal:
Transactions are initially recorded in chronological (day-by-
day) order in a journal before being transferred to the
accounts. Thus, the journal is referred to as the book of
original entry. For each transaction the journal shows the
debit and credit effects on specific accounts. Companies may
use various kinds of journals, but every company has the most
basic form of journal, a general journal. Typically, a general
journal has spaces for dates, account titles, and explanations,
references, and two money columns.
The journal makes several significant contributions to the
recording process:
1- It discloses in one place the complete effect of a
transaction.
2- It provides a chronological record of transactions.
3- It helps to prevent or locate errors because the debit
and credit amounts for each entry can be readily,
compared.

59
Chapter three: Transaction Analysis and Accounting Cycle --------------

3.3.2. Journalizing:-
Entering transaction date in the journal is known as
journalizing. Separate journal entries are made for each transaction.
A complete entry consists of:
(1) The date of the transaction.
(2) The accounts and amounts to be debited and credited,
and,
(3) A brief explanation of the transaction.
To illustrate the technique of journalizing, the first two
transactions of SOFTSYTE are journalized in illustration (3.3). These
transactions were: September 1 Ahmed invested L.E.I5,000 cash in
the business,-and computer equipment was purchased for
L.E.7,000 cash.
General Journal
Date Account Titles& Explanation Debit Credit
2015 Cash 15000
Sept 1 Ahmed Capital 15000
(Invested cash in business)
1 Computer Equipment 7000
Cash 7000
(Purchased equipment for cash)

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Chapter three: Transaction Analysis and Accounting Cycle --------------

The standard form and content of journal entries as follows:

1- The date of the transaction is entered in the Date column,
the date recorded should include the year, month, and day
of the transaction.
2- The debit account title (that is, the account to be debited)
is entered first at-the extreme left margin of the column
headed account Titles and Explanation. The credit account
title (that is,, the. account to be credited) is then entered on
the next line, indented under the line above. The indentation
decreases the possibility of switching the debit and
credit amounts.
3- The amounts for the debits are recorded in the Debit (left)
column: and the amounts for the credits are recorded in the
Credit (right) column.
4- A brief explanation of the transaction is given.
5- A space is left between journal entries. The blank space
separates individual journal entries and makes the entire
journal easier to read.
6- The column entitled Ref (which stands for reference)is
left blank at the time the journal entry is made. The Reference
column is used later when the journal entries are transferred
to the ledger accounts. At that time, the ledger account number

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is placed in the Reference column to indicate where the

amount in the journal entry was transferred.
It is important to use correct and specific account titles in
journalizing.
Since most accounts appear in the financial statements,
erroneous account titles lead to incorrect financial statements. Some
flexibility exists initially in selecting account titles. The main criterion
is that each title must appropriately describe the content of the
account. For example, the account title used for the cost of. delivery
trucks may be Delivery Equipment, Delivery Trucks, or Trucks. Once
a company chooses the specific title to use, all subsequent
transactions involving the account should be recorded under that
account title.
If an entry involves only two account, one debit and one
credit is considered simple entry; For some transactions, however, it
may be necessary to use more than two accounts in journalizing.
When three or more accounts are required in one journal entry,
the entry is referred to as a compound entry. To illustrate that on
July 1, Ahmed Company purchases a delivery truck costing L.E.
14,000 by paying L.E. 8,000 cash and the balance on account (to be
paid at a later date). The entry is as follows:

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Chapter three: Transaction Analysis and Accounting Cycle --------------

General Journal
Date Account Titles& Explanation Debit Credit
2015 Delivery Equipment 14000
July 1 Cash 8000
Accounts Payable 6000
(Purchased Truck for cash with
balance on account)
In a compound entry it is important to determined the total
and credit amounts are equals. Also the standard format
requires that all debits be listed before the credits are listed.
3.3.3.Posting Journal Entries To The Ledger Accounts:
The procedure of transferring journal entries to the ledger
accounts is called posting this phase of the recording process
accumulates the effects of journalized transactions in the individual
accounts. Posting involves the following steps:
1- In the ledger, enter in the appropriate columns of the
account(s) debited the date, journal page, and debit
amount shown in the journal.
2- In the reference column of the journal, write the account
number to which the debit amount was posted.
3- In the ledger, enter in the appropriate columns of the
account(s) credited the date, journal page, and credit
amount shown in the journal.

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4- In the reference column of the journal, write account number

to which the credit amount was posted.
These four steps are diagrammed in IIIustration (3.4) using the
journal entry of SOFTBYTE.
General Journal
Date Account Titles& Explanation Debit Credit
2015 Cash 15000
Sept Ahmed, Capital 15000
General Ledger
Cash
Date Debit Credit Balance
2015, Sep.1 15000 15000

Ahmed Capital
Date Debit Credit Balance
2015, Sep.1 15000 15000
(IIIistration 3.4)
3.3.4. Ledger Accounts After Posting:
After all the transactions have been posted, the accounts are
arranged in the same order as in the balance sheet-that is assets first,
followed by liabilities and owner's equity. Each ledger account is
presented in what is referred to as a running balance format (as opposed to
simple T accounts). You will notice that the running balance format does not

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indicate specifically whether a particular account has a debit or credit

balance. This causes no difficulty, however, because we know that asset
accounts normally have debit balances, and liability and owner's equity
accounts normally have credit balances.
A form widely used in a accounting system is shown in illustration
(3.5.) using assumed date from a cash account.
Cash
Date Explanation Debit Credit Balance
2015
June 1 25000 25000
2 8000 17000
3 4200 21200
9 7500 28700
17 11700 17000
20 250 16750
30 7300 9450
IIIustration (3.5)

3.4 The Trial Balance:

Since equal dollar amounts debits and credits are entered in
the accounts for every transaction recorded, the sum of all the
debits in the ledger must be equal the to sum of all the credits. If
the computation of account balance has been accurate, it follows
that the total of the accounts with debit balances must be
equal to the total of the accounts with credit balances.

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Chapter three: Transaction Analysis and Accounting Cycle --------------

Before using the account balances to prepare a balance sheet, it

is desirable to prove that the total of accounts with debit balances is in
fact equal to the total of accounts with credit balances. This proof of the
equality of debit and credit balances is called a trial balance. A trial
balance is a two-column schedule listing the names and balances of
all the accounts in the order in which they appear in the ledger; the
debit balances are listed in the left-hand column and the credit
balances in the right-hand column. The totals of the two columns
should agree. .
Assuming Trial Balance is shown in illustration (3.6.).
RAGHDA BUSINESS
Trail Balance
December 31,2015
Cash 14220
Accounts receivable 6600
Shop supplies 1400
Land 52000
Building 36000
Tools and Equipment 12000
Notes Payable 30000
Accounts payable 8870
RAGHDA Capital 81800
RAGHDA Drawing 3100
Repair service Revenue 10380
Advertising Expense 830
Wages Expense 4900
131050 131050
IIIustration (3.6)

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This trial balance proves the equality of the debit and credit
entries in the company's ledger. Notice that the trial balance now
contains income statement accounts as well as balance sheet
accounts.
Uses and limitations of the Trial Balance:
The trial balance provides proof that the ledger is in balance. The
agreement of the debit and credit totals of the trial balance gives
assurance that:
1- Equal debits and credits have been recorded for all
transactions.
2- The debit or credit balance of each account has been correctly
computed.
3- The addition of the account balances in the trial balance has
been correctly performed.
Suppose that the debit and credit totals if the trial balance do not
agree. This situation indicates that one or more errors have been made.
Typical of such errors are:
(1) The posting of a debit as" credit, or vice versa;
(2) Arithmetic mistakes in determining account balances;
(3) Clerical errors in copying account balance into the trial balance;
(4) Listing a debit balance in the credit column of the trial balance,
or vice versa; and
(5) Errors in addition of the trial balance.

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The preparation of a trial balance does not prove that transactions have
been correctly analyzed and recorded in the proper accounts; If, for
example, a receipt -of cash were erroneously recorded by debiting the
land account instead of the Gash account, the trial balance would still
balance, Also, if a transaction were - completely .omitted form the ledger,
the error would not be disclosed by the trial -balance. In brief, the trial
balance proves only one aspect of the ledger, and that is the equality
of debits and credits.
3.5. The Accounting Cycle:
The sequence of accounting procedures used to record, classify,
and summarize accounting information is often termed the accounting.
The accounting cycle begins with the initial recording of business
transactions and concludes with the preparation of formal
financial statements. The term cycle indicates that these procedures
must be repeated continuously to enable the business to prepare new,
up-to date financial statements at reasonable intervals. Thus far, we
have:
(1) journalized (recorded ) transactions and
(2) Posted each journal entry to appropriate ledger accounts. The steps in
the cycle that remain include:
(3) Preparing a trial balance,
(4) Making end-of-year adjustments,
(5) Preparing an adjusted trial balance,

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(6) Preparing financial statements,

(7) Journalizing and posting closing entries, and
(8) Preparing an after-closing trial balance.
3.6. Demonstration Problem:
Ahmed opened ELNASR Laundromat on September l,
2016. During the first month of operations the following
transactions occurred:
Sept. I Invested L.E.20,000 cash in the business,.
2 Paid L.E.I,000 cash for store rent for the month of September.
3 Purchased washers and dryers for L.E. 25,000 paying L.E.
10,000 in cash and signing a L.E. 15,000 6-month 12%
note payable.
4 Paid L.E. 1,200 for one-year accident insurance policy.
10 Received bill from the AHRAM News for advertising the
opening of the Laundromat, L.E.200.
20 Withdrew L.E.700 cash for personal use.
30 Determined that cash receipts for laundry fees for month were
L.E.6,200 .
Instructions:
(a) Journalize the September transactions.
(b) Open Ledger accounts and post the September transactions.
(c ) Prepare a trial balance at September 30,2016.

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Chapter three: Transaction Analysis and Accounting Cycle --------------

Solution:
A- General Journal
Date Account Titles& Explanation Debit Credit
2016 Cash 20000
Sept.1 Ahmed, Capital 20000
(Invested cash in business)
2 Rent Expense 1000
Cash 1000
(Paid September rent)
3 Laundry Equipment 25000
Cash 10000
Notes payable 15000
(Purchased Laundry equipment)
4 Prepaid Insurance 1200
Cash 1200
(Paid one- year insurance policy)
10 Advertising Expenses 200
Accounts payable 200
(Received bill from AHRAM News)
20 Ahmed, Drawing 700
Cash 700
(Withdrew cash)
30 Cash 6200
Fees Earned 6200
(Received cash for Laundry fees earned)

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B – General Ledger
Cash
Date Explanation Debit Credit Balance
2016 Sep
1 20000 20000
2 1000 19000
3 10000 9000
4 1200 7800
20 700 7100
30 600 13300

Prepaid Insurance
Date Explanation Debit Credit Balance
2016 Sep
4 1200 1200

Laundry Equipment
Date Explanation Debit Credit Balance
2016 Sep
3 25000 25000

Notes payable
Date Explanation Debit Credit Balance
2016 Sep
3 15000 15000

Accounts Payable
Date Explanation Debit Credit Balance
2016 Sep
10 200 200
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Chapter three: Transaction Analysis and Accounting Cycle --------------

Ahmed Capital
Date Explanation Debit Credit Balance
2016 Sep
1 20000 20000

Ahmed Drawing
Date Explanation Debit Credit Balance
2016 Sep
20 700 700

Fees Earned
Date Explanation Debit Credit Balance
2016 Sep
30 600 6200

Advertising Expenses
Date Explanation Debit Credit Balance
2016 Sep
10 200 200

Rent Expenses
Date Explanation Debit Credit Balance
2016 Sep
2 1000 1000

Accounts Payable
Date Explanation Debit Credit Balance
2016 Sep
1 20000 20000

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Chapter three: Transaction Analysis and Accounting Cycle --------------

C- Trial Balance
ELNASER LAUNFOMAT
Trail Balance
December 31,2016
Cash 13300
Prepaid Insurance 1200
Laundry Equipment 25000
Notes Payable 15000
Accounts Payable 200
Ahmed Capital 20000
Ahmed Drawing 700
Fees Earned 6200
Advertising Expense 200
Rent Expense 1000
41400 41400

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Chapter Four: Accounting For Merchandising Operations ----------------

Chapter Four
Accounting For Merchandising
Operations
Learning Objectives:
1- Describe the nature of merchandising operations, and
illustrate the operating cycle of a merchandising firm.
2- Explain the accounting for purchases and sales.
3- lllustrate the operation of a periodic inventory system.
4- Describe the perpetual inventory system.
5- Compare the periodic inventory system with the
perpetual inventory system.
6- Evaluating the performance of a merchandising firm.

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4.1. The Nature Of Merchandising Operation :

Merchandising companies earn most of their revenue by
selling goods. Goods that are purchased for purposes of resale to
customer are called inventory.The success of most merchandising
companies depends on their ability to acquire distribute, and sell
inventory quickly.
In many cases inventory is a relatively "liquid" asset-that is,
it usually is sold within a few days or weeks. For this reason,
inventory appears near the top of the balance sheet, immediately
below accounts Receivable.
The Operation Cycle of Merchandising Company:
The series of transactions through which a business
generates its revenue and its cash receipts from customers
is called the operating cycle. The operating cycle-of a
merchandising company consists of the following basic
transactions:
(l)Purchases of merchandise.
(2) Sales of the merchandise, often on account; and
(3) Collection of the accounts receivable from customers.
As the word cycle suggests, this sequence of transactions
repeats continuously. Some of the cash collected from the
customers is used to purchase more merchandise, and the cycle

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begins anew. This continuous sequence of merchandising

transactions is illustrated in figure (4.A.)
Cash

Accounts
Inventory
Receivable

2. Sale of Merchandise on account

Figure (4.A) The operating Cycle repeats continuously

4.2. Measuring Net Income:

Measuring net income for a merchandising company is conceptually
the same as for a service enterprise. That is, net income (or loss ) results
from the matching of expenses with revenues. In a merchandising
company, the primary source of revenues is the sale of merchandise, often
referred to simply as sales revenue or sales. Expenses for a merchandising
company are divided into two categories :
(1) The cost of goods sold and
(2) Operation expenses.

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Chapter Four: Accounting For Merchandising Operations ----------------

The cost of goods sold is the total cost Of merchandise sold

during the period. This expense is directly related to the revenue
recognized form the sale of the goods.
Sales revenue less cost of goods sold is called gross profit ( or gross
margin ) on sales. Merchandising companies customarily report
gross profit on sales in the income statement.
After gross profit is calculated, operation expenses are
deducted to determine net income (or loss). Operating
expenses are expenses incurred in the process of earning
sales revenue. Examples of operating expenses are sales
salaries, advertising expense, and insurance expense. The
income measurement process for a merchandising company
may be diagrammed as shown in figure (4.B.).
Sales Less
Revenue

Cost of Equals Gross Less

Goods Sold profit

Operating Equals Net Income

Expenses (Loss)

Figure 4.B

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Chapter Four: Accounting For Merchandising Operations ----------------

I 4. Sales Revenue:
Sales revenues, are recorded when earned. This is in accordance with the
revenue recognition principle. Typically, sales revenues are. earned when the
goods are transferred from the seller to the buyer. At this point, the sales
transaction is completed and the sales price is established.
Sales may be made on credit or for cash. Every sales transaction
should be supported by a business document that provides written evidence of
the sale.
This document (invoice) shows the date of sale, customer
name, total sales price, and other relevant information.
To record a sale, an asset account is debited, and the revenue account,
sales, is credited. For cash sales, the Cash account is debited. For credit
sales, Accounts Receivable is debited, he following entry is made by
Ahmed Business to record the credit sale for the sale invoice
(L.E. 3800) to EL Nile Co.
Date Account Titles& Explanation Debit Credit
May 4 Accounts receivable 3800
Sales 3800
(To record credit sales)
As indicated by this entry, sales revenues can before cash .is
actually collected. For credit sales, the amount due may not be
collected until the next period. Therefore, the sales revenues

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earned during a particular period may by significantly different from

the cash collected from sales during that same period.
To illustrate a sale for cash, assume that Ahmed`s) cash register
total for cash sales on May 4 is L.E.6,210 The entry, therefore, is:
Date Account Titles& Explanation Debit Credit
May 4 Cash 6210
Sales 6210
(To record daily cash sales)

4.3.1. Sales Returns and Allowances:

A customer may by dissatisfied with the merchandise received
because the goods are damaged or defective, of inferior quality, or not in
accord with the customer's specifications. In such cases, the customer
may return the goods to the seller for credit if he sale was made on credit, or
for a cash refund if the sale was originally for cash. This transaction is
known a sales return. Alternatively, the customer may to keep the
merchandise if the seller is willing grant an allowance (deduction) from
the selling price. This transaction is known as a sales allowance. For
accounting purposes, sales returns. and sales allowances are combined
into one account, Sales Returns and Allowances.
To give the customer a sales return or allowance, :he seller
normally prepares a credit memorandum. This document informs

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a customer that a credit has been made to the customer's account

receivable for a sales return or allowance.
The original copy of the credit memorandum is sent to the
customer, and a copy is kept by the seller as evidence of the
transaction. The seller's entry to record a credit memorandum
involves a debit to the Sales Returns and Allowances
account and a credit to Accounts Receivable, as shown below:
Date Account Titles& Explanation Debit Credit
May 4 Sales returns and Allowance 300
Accounts receivable 300
(To record for allowance for
damaged goods)
For a sales return or allowance on a cash sale, cash refund is
normally made in such case, sale returns and allowances is
debited and cash is credited
Sales Returns and Allowances is a contra revenue account
to Sales. The normal balance of sales return and allowances is a
debit. A contra account is used, instead of debiting sales to disclose the
amount of sales returns and allowances in the accounts and in the
income statement. Disclosure of this information is important to
management

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Chapter Four: Accounting For Merchandising Operations ----------------

4.3.2. Sales Discounts:

The terms of a credit sale may include an offer of a cash discount,
called a sales discount, to the customer for prompt payment of-the balance
due. This incentive offers advantages to both parties: The purchaser saves
money, and the seller is able to convert the accounts receivable into cash
earlier.
The credit terms specify the amount and time period cash discount.
They also indicate the length of which the purchaser is expected to
pay the full invoice price. In the sales invoice in credit terms are
2/10, n/30,which is read "Two- ten, net thirty" this means that a
2% cash discount may be taken on the invoice price (less any
returns or allowances) if payment is made within 10 days of the
invoice date (the discount period), otherwise, the invoice price less
any returns or allowances is due 30 days from the invoice date.
Alternatively, the discount period may extend to a specified number
of days following the month in which the sale occurs. For
example, 1/10 E.O.M. (end-of-month) means that a 1% discount
is available if the invoice is paid within the first 10 days of the next
month.
When the seller elects not to offer a cash discount for prompt
payment credit terms will specify only the maximum time period
for paying the balance due. For example, the time period may be
stated as n/30,n/60,or n/10 E.O.M.

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When cash discounts are taken by customers, the seller debits

sales discounts. To illustrate, assume El-Nile Co. pays the balance
due of L.E.3,500 (sales L.E.3,800 less sales returns and allowances
L.E.300) on may 14, the last day of the discount period. The cash
discount is L.E.70 (L.E.3,500 x2%) and the amount of cash paid
by El-Nile Co. is L.E.3430 (L.E.3,500 L.E.70). Assuming the
payment is received by Ahmed Business on May 15,the entry is:
Date Account Titles& Explanation Debit Credit
May 4 Cash 3430
Sales Discount 70
Accounts Receivable 3500
(To record collection with in
2/10, n/30 discount period)

Sales discounts is a contra revenue account to sales:

Its normal balance is a debit. This account is used, instead of
debiting sales, to disclose the amount of cash discounts taken by
customers. If the discount is not taken, Ahmed business debits
cash for L.E.3,500 and credits Accounts Receivable for the same
amount at the date of collection.
4.4. Recording Purchases Of Merchandise:
When merchandise is purchased for resale to customers, the
temporary account, Merchandise Purchases, or simply Purchases,

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is debited for the cost of the goods. However, not all purchases are
debited to Purchases. Purchases of assets .acquired for use and not
for resale, such as supplies, equipment, and similar items, should
be debited to. specific asset accounts rather than to Purchases.
Like sales, purchases may be made for cash or on account
(credit). The purchases is normally recorded by the purchaser
when the goods are receive from the seller Every purchase, should
be supported by business documents that provide written
evidence of the transaction. Each Cash Purchase should be
supported by a canceled check or cash register receipt indicating
the items purchased. Cash Purchases are recorded by a debit to
purchases and a credit to cash. Each credit purchase should be
Supported by a purchase invoice indicating the total purchase
price and other relevant information:
The entry by EL-NILE Co. for the purchases is:
Date Account Titles& Explanation Debit Credit
May 4 Purchases 3800
Accounts Payable 3800
(To record goods purchases on
account terms 2/10, n/30)
4.4. L Purchase Returns And Allowances:
A sales return and allowance is recorded as a purchaser return
and allowance of the purchaser. The purchaser initiates the request

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for a reduction of the balance due - through the - issuance of a

debit memorandum. A debit memorandum is a document issued by
a buyer to inform a seller that a debit has been made to the seller's
account. The original copy of the memorandum is sent to the seller
and one copy is retained by the purchaser. The information contained
in a debit memorandum is similar to the information found in
the credit memorandum. The entry by El-Nile Co. for the
merchandise returned on May 8 is:
Date Account Titles& Explanation Debit Credit
May 4 Accounts Payable 300
Purchases Returns and 300
Allowance
(To record allowance for
damaged goods)
Purchase returns and allowances represents a reduction
in the cost of goods purchased for resale. It is a contra account to
Purchases and its normal balance is a credit. The contra account
is used instead of crediting purchases in order to disclose both
the L.E. amount of returns and allowances and the percentage of
gross purchases that have proven to be unsatisfactory. Excessive
purchase returns and allowances may indicate inefficiencies in
a company's purchasing procedures or the need to find more
reliable suppliers.

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The purchaser sends a debit memorandum to indicate a debit

to Accounts Payable and a credit to Purchas Returns and
Allowances. Similarly, a seller issues a credit memorandum to indicate a
credit to Accounts Receivable und a debit to Sales Returns and
Allowances.
4.4.2. Purchase Discounts:
Credit terms may permit the buyer to claim a cash discount for
the prompt payment of a balance due. The buyer calls this discount a
purchase discount. Like a sales discount, a purchase discount is
based on the invoice cost less returns and allowances, if any
Purchase Discounts is credited for discounts that are taken. The
entry to record the May 14 payment by El-NIL Co. is as follows:
Date Account Titles& Explanation Debit Credit
May 14 Accounts Payable 3500
Purchases Discount 70
Cash 3430
(To record payment with in
discount period)
like Purchase Returns and Allowances, Purchase Discounts represents a
reduction in the cost of goods purchased for resale. Purchase Discounts is a
contra account to purchases. Its normal balance is a credit. El- Nile Co fails
to take the discount and full payment is made on June 3 El- Nile Co. makes
the following entry:

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Chapter Four: Accounting For Merchandising Operations ----------------

Date Account Titles& Explanation Debit Credit

June 3 Accounts Payable 3500
Cash 3500
(To record payment with in no
discount taken)
4.4.3. Freight Costs:
The sales agreement should indicate whether seller or the buyer is
to pay the cost of transporting the goods to the buyer's place of
business. When common carrier such as a railroad, trucking company
or airline is used, the transportation company prepare a freight bill (often
called a bill of lading) in accordance with the sales agreement. Freight
terms are expressed as either FOB shipping point or FOB
destination. The letters FOB mean free on board thus, FOB
shipping point means that goods are placed free on board the
carrier by the seller, and the buyer pays the freight costs.
Conversely, FOB destination means that the goods are placed
free on board at the buyer's place of business, and the seller pays
the freight.
When the purchaser directly incurs the freight costs, the
account Freight - in for Transportation-in is debited. For
example, if upon delivery of the goods on May 6 El- Nile Co. pays
L.E.I50 for freight charges, the entry on El-Nile Co. books is:

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Chapter Four: Accounting For Merchandising Operations ----------------

Date Account Titles& Explanation Debit Credit

May 6 Fright – in 150
Cash 150
(to record payment of fright
terms FOB shipping point)
Like purchases, Freight- in a temporary account whose
normal balance is a debit.
Freight-in is part of cost of goods purchased. The reason is
that cost of goods purchased should include any freight charges
necessary to bring the goods to the purchaser. The use of a
Freight-in account enables management to determine the
materiality of these costs. If freight costs are significant,
management may want to compare the cost of truck, rail, or air
freight to find the least expensive alternative. Freight costs are
not subject to a purchase discount. Purchase discounts apply
on the invoice cost of the merchandise.
In contrast, freight costs incurred by the seller on outgoing
merchandise are an operating expense to the seller. These costs
are debited to freight-out of delivery expense. For example, if the
freight terms had specified FOB destination and Ahmed Business
paid the L.E. 150 freight charges, the entry by Ahmed Business
would be:

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Chapter Four: Accounting For Merchandising Operations ----------------

Date Account Titles& Explanation Debit Credit

May 6 Fright – out 150
Cash 150
(to record payment of fright on,
goods sold FOB destination)
When the freight charges are paid by the seller, the seller
will usually establish a higher invoice price for the goods, to
cover the expense of shipping.
4.5. Cost Of Goods Sold:
As you learned earlier in this chapter, the second factor in
measuring net income in a merchandising company is the cost of
goods sold. The cost of goods sold may be determined each
time a sale occurs or at the end of an accounting period. To
make the determination when the sale occurs, a company uses a
perpetual inventory system. Under this system, detailed records
of the cost of each inventory item are maintained and
continuously show the inventory that should be on hand.
Perpetual inventory systems have traditionally been used by
companies that sell high unit-value items such as automobiles,
furniture, television sets, and large home appliances.
When cost of goods sold is determined only at the end of an
accounting period, a company is said to be using a periodic
inventory system. This system is widely used by companies that

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sell thousands of low unit-value items. Most businesses employ the

periodic inventory system because they can control merchandise and
manage day-to-day operations without detailed inventory records. In
addition, perpetual systems are expensive, and often the benefits
they offer do not justify their cost.
Figure (4.C.) compares the sequence of activities and the timing
of the cost of goods sold computation under the two inventory
methods.

Inventory Purchased Item sold Point of sale End of period

Periodic

Cost of goods sold

computed

Inventory Purchased Item sold Point of sale End of period

Perpetual

Cost of goods sold

computed
Figure 4.c
To determine the cost of goods sold under a periodic
inventory system, it is necessary to :
1) Record purchases of merchandise,
2) Determine the cost of goods purchased, and
3) Determine the cost of goods on hand at the beginning

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and end of the accounting period.

4.5.1.Determining Cost Of Goods Purchased:
In explaining the accounting for goods purchased for resale,
we discussed the following temporary accounts:
Account Normal Balance
Purchases Debit
Purchases Returns and allowances Credit
Purchases Discount Credit
Fright- in debit
The Procedure for determining the cost of goods purchased
is as follows:
1- The accounts with credit balances (purchase returns and
allowances and purchase discounts) are subtracted
from purchases to produce net purchased.
2- Freight-in is then added to net purchases to produce cost of
goods purchased.
To illustrate, assume that Ahmed Business shows the
following balances for the accounts above:
Purchases 325000 Freight- in 12200
Purchases returns and 10400 Net purchases 307800
allowances
Purchases discounts 6300 Cost of goods purchased 320000

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As computed in as follows:
Purchases 325000
(1) Less: purchases returns and allowances 10400
Purchases discounts 6800
(17200)
Net purchases 307800
(2)Add: Freight- in 12200
Cost of goods purchased 320000

4.5.2. Determining Cost of Goods On Hand:

To determine the cost of inventory on hand, it is necessary
to take a physical inventory. Taking physical inventory
involves:
1- Counting the units on hand for each item inventory.
2- Applying unit costs to the total units on hand for
each item of inventory.
3- Aggregating the costs for each item of inventory determine
the total cost of goods on hand.
The account Merchandise Inventory is used record the cost of
inventory on hand at the balance sheet date. This amount
becomes the beginning inventory for the next accounting period.

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4..5. 3. Computing Cost of Goods Sold:

We have now reached the point where wet compute
cost of goods sold. Doing involves two stops:
1- Add the cost of goods purchased to the cost of goods
on hand at the beginning "of the period; (beginning
inventory) to obtain the cost of goods available for
sale
2- Subtract the .cost of goods on hand at the end of the
period (ending inventory) from the cost of goods
available for sale to arrive at the cost of goods sold.
For Ahmed Business the cost of goods available for sale, the
cost of good Sold .beginning inventory and ending inventory
L.E.356000,L.E.316000,L.E. 36000 and L.E.40000 respectively, as
shown below
Beginning inventory 36000
(1) Add: Cost of goods purchased 320000
Cost of goods available for sale 356000
(2)Less: Ending inventory (40000)
Cost of goods sold 316000

4.5.4. Perpetual Inventory Systems:

Under a perpetual inventory system, records are kept of the
quantity and cost of each item as it is bought, held in
inventory, and sold. Because of detailed information available
under a perpetual inventory system, management is able to

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respond to inquiries of salespersons and customers about

merchandise availability, to maintain optimum inventory levels
and to avoid running out of stock.
Under a perpetual system, the cost of each item is debited to
the Merchandise Inventory account when purchased. At the time of
sale, the cost of each item is transferred from the Merchandise
Inventory account to the Cost of Goods sold account. Thus, the
Cost of Goods Sold account at all times equals the cost of
merchandise sold during the period, and the Merchandise
Inventory account at all times equals the cost of merchandise on
hand.
Merchandise Transactions under a Perpetual Inventory System:
Because all increases and decreases related to merchandise
are recorded directly in the merchandise inventory account under
a perpetual system, accounts for purchases, purchase returns
and allowances, purchase discounts, and freight-in are not used.
To illustrate the recording of merchandise transactions under a
perpetual system, we will use selected transactions of
RAGHDA Co. the beginning inventory on July 1 is L.E.68,000
and the ending inventory on July 31 is L.E.93,940.
Purchase of merchandise on credit. On July 5, RAGHDA Co.
purchased L.E.40.000 of merchandise on account from AL-NASR
Co. terms 2/lO, n/30. The entry, to record the purchase is:

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Date Account Titles& Explanation Debit Credit

July 5 Merchandise Inventory 40000
Accounts Payable 40000
(To record goods purchased on account)
Purchase Returns and allowances: on July 6, RAGHDA Co.
returned merchandise received from Al-Naser Co. on July 5 for a
credit of L.E 2000. The entry is:
Date Account Titles& Explanation Debit Credit
July 6 Accounts Payable 2000
Merchandise inventory 2000
(To record returned merchandise)
Fright Costs On Purchases: RAGHDA Co. received a bill on
July 8 from AL-NASR Co. for fright charges on the July 5
purchases, terms n/30, L.E 200 the entry to record payment is:
Date Account Titles& Explanation Debit Credit
July 8 Merchandise Inventory 200
Accounts Payable 200
(To record fright costs on account)
Payment on Account With A Discount:
On July 14 RAGHDA Co. Paid AL-NASR Co. in full the
July 5 purchase, less L.E 2000 that was returned on July 6 and
less the discount of L.E 760 ({40000- 2000} × 2%) the entry is:
Date Account Titles& Explanation Debit Credit
July 14 Accounts Payable 38000
Cash 37240
Merchandise Inventory 760
(To record payment with in discount period)

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Sale of Merchandise on Credit:

On July 16, RAGHDA Co. sold merchandise on credit to Al-
AMAL Co., terms 1/10, N, 30 FOB destination L.E 2400, The
cost L.E 12000 Entries to record the transaction are:
Date Account Titles& Explanation Debit Credit
July 16 Account Receivable 24000
Cash 24000
(to record credit sale)
Cost of goods sold 12000
Merchandise Inventory 12000
(to record cost of goods sold)
Return of Merchandise sold:
RAGHDA Co. on July 18 accepted for full credit the return
of L.E 1000, of merchandise sold to AL-AMAL Co. on July 16
the cost of which was L.E 500. Entries to record the return are:
Date Account Titles& Explanation Debit Credit
July 18 Sales Returns and allowance 1000
Accounts Receivable 1000
(To record allowance for
returned goods)
Merchandise Inventory 500
Cost of goods sold 500
(to record cost of returned goods)
Cash Received On Account With A Discount:
On July 25, RAGHDA Co. received payment in full of the
account from AL.AMAL Co. less the return of July 18 and less
the discount of L.E 230 ({24000- 1000} × 1%).

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Date Account Titles& Explanation Debit Credit

July 25 Cash 22700
Sales Discount 230
Accounts Receivable 23000
(To record collection within
1/10, n/30)
Comparison of entries:
Under the perpetual system, the merchandise inventory
account balance changes with every change in amount or cost of the
inventory. Under the periodic system, the merchandise inventory
account balance does not change until the closing entries are made.
To summarize, the differences between the periodic and the
perpetual systems are:
1- The perpetual inventory system records all purchases in
the merchandise inventory account, it uses no purchases
account. The periodic inventory system uses a purchases
account.
2- The perpetual inventory system records returns of purchased
merchandise by directly reducing the merchandise inventory
account. The periodic inventory svstem uses a purchase
returns and allowances account.
3- The perpetual Inventory system increases the merchandise
inventory account for additional costs of purchases like
freight-in and decreases merchandise inventory directly for
reductions in purchases like purchase discounts. The periodic

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inventory system uses freight - in and purchase Discounts

accounts.
4- The perpetual inventory system increases cost of goods sold
and decreases merchandise inventory when merchandise is
sold. The periodic Inventory system computes cost of goods
sold based on the inventory count at the end of the period.
5- The perpetual inventory system records customer returns
and allowances by decreasing cost of goods sold and
increasing the merchandise inventory. Account The
periodic inventory system makes no entry for the cost of a
sales return.
We can compare accounting Merchandise in the two systems
as follows:

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Transaction Perpetual Inventory System

July 5 Purchase of Merchandise Merchandise Inventory 40000
on Credit Accounts Payable 40000
July 6 Purchase returns and Accounts Payable 2000
allowance Merchandise Inventory 2000
July 8 Fright Costs on Purchases Merchandise Inventory 200
Accounts Payable 200
July 14 Payment on account with a Accounts Payable 38000
discount Cash 37240
Merchandise Inventory 760
July 16 Sale of merchandise on Account Receivable 24000
credit Sales Revenue 24000
Cost of Goods sold 12000
Merchandise Inventory 12000
July 18 Returns of merchandise Sales Returns and Allowance 1000
sold Accounts Receivable 1000
Merchandise Inventory 500
Cost of Goods sold 500
July 25 Cash received on account Cash 22770
with a discount Sales Discounts 230
Accounts receivable 23000

Transaction Perpetual Inventory System

July 5 Purchase of Merchandise Purchases 40000
on Credit Accounts Payable 40000
July 6 Purchase returns and Accounts Payable 2000
allowance Purchases Returns and 2000
Allowance
July 8 Fright Costs on Purchases Freight- in 200
Accounts Payable 200
July 14 Payment on account with a Accounts Payable 38000
discount Cash 37240
Purchase discounts 760
July 16 Sale of merchandise on Account Receivable 24000
credit Sales Revenue 24000
No Entry

July 18 Returns of merchandise Sales returns and allowance 1000

sold Accounts Receivable 1000
No entry

July 25 Cash received on account Cash 22770

with a discount Sales Discount 230
Account Receivable 23000

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Under the perpetual inventory system The cost of goods sold

and the amount of inventory are continuously updated, and the
balances are "readily available at any time. Under the periodic inventory
system cost of goods sold and inventory amounts are not available until
they are computed and accompanied by a physical inventory count.
Periodic Inventory System Perpetual Inventory System
Merchandise Inventory Merchandise Inventory
Bal. 68000 7/31 68000 Bal. 68000 7/6 2000
Closing Purchase
7/31 93940 7/5 40000 7/14 760
Closing purchases Discount
Bal. 8/1 93940 7/8 Fright 200 7/16 Cost of 12000
goods sold
17/8 sales 500
Return
Bal. 8/1 93940
4.5.5. Operating Expenses:
Operating expenses are the third component in measuring net income
for a merchandising company at operating expenses were L.E.I 14000 the
firm's net income is determined by subtracting operating expenses
from gross profit, thus, net income is LE.30000 as shown below:
Gross Profit 144000
Operating expenses 114000
Net Income 30000
The net income amount is the "bottom line" of a
company's income statement. .
4. 5. 6. Non-operating Activities:
Non-operating activities consist of:
(1) Revenues and expenses that result from secondary or
auxiliary operations and

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(2) Gains and losses that are unrelated to the company's

operations.
The results Of non-operating activities are shown in two
sections: other revenues and gains and Other expenses and
losses. For a merchandising company these sections will
typically include the following items.
Other Revenues and Gains Other Expenses and Losses
Interest revenue from notes Interest expense on notes and
receivable and Marketable loans payable
securities
Dividend revenue from Casualty Losses from
investments in Capital Stock recurring causes such as
Vandalism and accidents
Rent revenue from subleasing Loss from the sale of
a portion of the store abandonment of property,
Plant, and equipment.
Gain from the sale of Loss from strikes by
property, plant, and employees and supplies.
equipment.
4.6. Income Statement:
The income statement for retailers and wholesalers contains
three features. These features are:-
(1) A sales revenue section.
(2) A cost of goods sold section, and
(3) Gross profit.
Using assumed data for specific operating expenses, the
income statement "for RAGHDA Co. can be prepared using:
A - A Single step approach (table 5.D.)
B- A Multiple step approach (tabie5.E.)

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RAGHDA Co.
Income Statement
For the year Ended December 31, 2015
Sales revenues:
Sales 480000
Less: Sales returns and allowance 12000
Sales discounts 8000 20000
Net sales 460000
Cost of goods sold:
Inventory, January 1 36000
Purchases 325000
Less: Purchases returns and allowance 10400
Purchases discount 6800 17200
Net purchases 307800
Add: Freight- in 12200
Cost of goods purchased 320000
Cost of goods available for sale 356000
Inventory, December 31 40000
Cost of goods sold 316000
Gross Profit 144000
Operating expenses:
Store salaries expense 45000
Rent expense 19000
Utilities expense 17000
Advertising expense 16000
Depreciation expense store equipment 8000
Freight- out 7000
Insurance 2000
Total operation expenses 114000
Net income 30000
(Table 5.D)

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RAGHDA Co.
Income Statement
For the year Ended December 31, 2015
Sales revenues:
Sales 480000
Less: Sales returns and allowance 12000
Sales discounts 8000 20000
Net sales 460000
Cost of goods sold:
Inventory, January 1 36000
Purchases 325000
Less: Purchases returns and allowance 10400
Purchases discount 6800 17200
Net purchases 307800
Add: Freight- in 12200
Cost of goods purchased 320000
Cost of goods available for sale 356000
Inventory, December 31 40000
Cost of goods sold 316000
Gross Profit 144000
Operating expenses:
Setting Expense
Store salaries expense 45000
Adverting expense 16000
Depreciation expense store equipment 8000
Freight- out 7000
Total selling expenses 76000
Advertising expense
Rent expense 19000
Utilities expense 17000
Insurance expense 2000
Total Administrive expense 38000
Total operating expense 114000
Income from operations 30000
Other revenues and gains:
Interest revenue 30000
Gain on sale of equipment 600 3600
Other expense and Losses:
Interest expense 1800
Casualty loss from vandalism 200 2000 1600
Net Income 31600
(Table 5.E)

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Chapter Five
Adjusting the Accounts

Learning Objectives:
1- Explain the time period assumption.

2- Distinguish between the revenue recognition

principle and the matching principle.

3- Explain why adjusting entries are needed.

4- Identify the major types of adjusting entries

5- Prepare adjusting entries for prepayments.

6- Prepare adjusting entries for accruals.

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5.1. Selecting an Accounting Time Period:

No adjustments would be necessary if we waited to prepare financial
statements until a company ended its operations. At that point, we could
readily determine its final balance sheet and the amount of lifetime income
it earned. Although management usually wants monthly financial
statements, accountants make the assumption that the economic life of a
business can be divided into artificial time periods. This assumption is
referred to as the time period assumption.
Many business transactions affect more than one of these arbitrary
time periods. Therefore it is necessary to determine the relevance of each
business transaction to specific accounting periods. Doing so may
involve subjective judgments and estimates. Generally, the shorter the
time period ( e. g ., a month or a quarter of a year). The more difficult it
becomes to determine the proper adjustments to be made.
5.2. Fiscal and Calendar Years:
Both small and large companies prepare financial statements on a
periodic basis in order to assess their financial condition and results of
operations. Accounting time periods are generally a month, a quarter, or
a year. Monthly and quarterly time periods are often referred to as interim
periods. Most large companies are required to prepare both interim
(quarterly) and annual financial statements.

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An accounting time period that is one year in length is referred to

as a fiscal year. A fiscal year usual begins with the first day of a month and
ends 12 month later on the last day of a month. The accounting period
used by most businesses coincides with the calendar year (January 1 to
December 31).
5.3. Recognizing Revenues and Expenses:
Determining the amount of revenues and expenses to be reported in
a given accounting period can be difficult. Therefore, accountants
have developed two principles as part of generally accepted
accounting
'principles (GAAP) that help in this determination: the revenue
recognition principle and the matching principle.
The revenue recognition principle dictates that revenue be
recognized in the accounting period in which it is earned. In a service
.enterprise, revenue is considered. to be earned at the time the service is
performed. To illustrate, assume that a dry cleaning business cleans
clothing on June 30 but customers do not claim and pay for their clothes
until the first week of July. Under the revenue recognition principle,
revenue is earned in June. when the service is performed, and not in July
when the cash is received. At June 30, The dry cleaner would report a
receivable on its balance sheet and revenue income statement for the
service performed.

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In recognizing expenses, accountants follow the approach of "let the

expenses follow the revenues" thus expense recognition is tied to revenue
recognition. In the preceding example Principle means that the salary
expense incurred in performing the cleaning service on June 30 should be
reported in the income statement for the same period in which the
service revenue is recognized.
The critical issue in expense recognition is when the expense makes
its contribution to the revenue. It may or may not be the same period in
which the expense is paid. If the salary incurred on June 30, is not paid
until July, the dry cleaner would report salaries payable on in June 30
balance sheet. The practice of expense recognition is referred to as the
matching principle because it dictates that efforts (expenses) be
matched with accomplishments (revenues).
Once the assumption is made that the economic life of a
business can be divided into artificial time periods, it follows that
the revenue recognition and matching principles can be applied.
This one assumption and two principles thus provide guidelines
as to when Revenue and expenses should be reported. These
relationships are shown in Figure, (5.A).

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Time period Assumption

Economic life of business can be

divided into artificial time periods

Revenue Recognition Principle Matching Principle

Revenue recognized in the Expenses matched with revenues

accounting period in which in the period when efforts are
it is earned expended to generate revenue

Revenue and Expense recognition

In accordance with generally

accepted accounting principles
(GAAP)

(Figure5 .A)

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Chapter Five: Adjusting the Accounts ------------------------------------------

5.4. The Basics of Adjusting Entries:

In order for revenues to be recorded in the period in which they are
earned, and for expenses to be recognized in the period in which they are
incurred, adjusting entries are made at the end of the accounting period. In
short, adjusting entries are needed to ensure that the revenue recognition
and matching principles are followed.
The use of adjusting entries makes it possible to report on the balance
sheet the appropriate assets, liabilities, and owner's equity at the statement
date and to report on the income statement the proper net income (or loss) for
the period. However, the trial balance- the first pulling together of the
transaction date- may not contain up-to-date and complete date. This is
true for the following reasons:
1- Some events are not journalized daily because it inexpedient to do
so. Examples are the consumption or supplies, and the earning of wages
by employees.
2- Some costs are not journalized during the accounting period because
these costs expire with the passage of time rather than as a result
of recurring daily transactions. Examples of such costs are building
and equipment deterioration and rent and insurance.
3- Some items may be unrecorded. An example is a utility service
bill that will not by received until the next accounting period.

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Adjusting entries are required every time financial statements are

prepared. An essential starting point is an analysis of each account in trial
balance to determine whether it is complete and up-to-date for financial
statement purposes. The analysis requires a thorough understanding of the
company's operations and the interrelationship of accounts. The
preparation of adjusting entries is often an involved process. In
accumulating the adjustment date, the company may need to make
inventory counts of supplies and repair parts. Also it may be desirable to
prepare supporting schedules of insurance policies, rental agreements,
and other contractual commitments. Adjustments are often prepared
after the balance sheet date. However, adjusting entries are dated as of
the balance sheet date.
5. 5. Types of Adjusting Entries:
Adjusting entries can be classified as either prepayments or
accruals. Each of these classes has subcategories as shown below:
Prepayments Accruals
1 – Prepaid expenses. Expenses 3- Accrued Revenue. Revenues
paid in cash and recorded as assets earned but not yet received in cash
before they are used or consumed. or recorded.
2 – Unearned Revenues. Revenues 4 – Accrued Expenses. Expense
received in cash and recorded as incurred but not yet paid in cash
liabilities before they are earned. recorded.

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5. 5.1. Adjusting Entries for Prepayments:

As indicated earlier, prepayments are either prepaid expenses
or unearned revenues. Adjusting entries for prepayments are
required at the statement date to record the portion of the
prepayments that represents the expense incurred or the revenue
earned in the current counting period. Assuming an adjustment is
needed for both types of prepayments, the asset and liability are
overstated and the related expense and revenue are understated.
For example, in the trial balance, the balance in the asset,
Supplies, shows only supplies purchased. This balance is
overstated, the related expense account supplies expense, is
understated because the cost of supplies used has not been
recognized. Thus the adjusting entry for prepayments will
decrease a balance sheet account and increase an income statement
account. The effects of adjusting entries for prepayments are
graphically depicted in figure (5.B.)

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Chapter Five: Adjusting the Accounts ------------------------------------------

ADJUSTING ENTRIES
Prepaid Expenses
Asset Expense
Unadjusted Credit Debit
Adjusting Adjusting
balance Entry (-) Entry (+)
Unearned Revenues
Liability Revenues
Debit Credit
Unadjusted
Adjusting Adjusting
Balance
Entry (-) Entry (+)

Figure (5. B)
5. 5. 1. Prepaid Expenses:
Expenses paid in cash and recorded as assets before .they
are used or consumed are identified as prepaid expenses. When
a cost is prepaid, an asset account is debited to show the service
or benefit that will be received in the future. Prepayments often
occur in regard to insurance, supplies, advertising, and rent. In
addition, prepayments are made when buildings and equipment are
purchased.

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Prepaid expenses expire either with the passage of time (e.g.

rent and insurance). Or through use and consumption (e.g.
supplies). The expiration of these costs does not require daily
recurring entries, which would be unnecessary and impractical.
Accordingly, it is customary to postpone the recognition of such
cost expirations until financial statements are prepared. At each
statement date, adjusting entries are made to record the expenses
that apply to the current accounting period and to show the
unexpired costs in the asset account. An asset-expense
relationship exists with prepaid expense. Prior to adjustment,
assets are overstated and expenses are understated. Thus, the prepaid
expense adjusting entry results in a debit to an expense account and
a credit to an asset account.
Supplies. Several different types of supplies are used in a business
enterprise. Supplies are generally debited to an asset account when
they are acquired. During the course of operations, supplies are
depleted or entirely consumed. However, recognition of supplies
used is deferred until the adjustment process when a physical
inventory (count) of supplies is taken, the difference between the
balance in the supplies (asset) account and the cost of supplies on
had represent the supplies used (expense) for the period.

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Ahmed Advertising Agency purchased advertising supplies

costing L. E. 2,500 on October 5. The debit was made to the asset
Advertising Supplies, and this account shows a balance of
L.E.2,500 in the October 31,. trial balance: An inventory count at
the close of business on October 31, reveals that L.E.I,000 of supplies
are still on hand. Thus, the cost of supplies used is L.E.I 500 (2,500-
1,000), and the following adjusting entry is made:
Date Account Titles& Explanation Debit Credit
Oct. 31 Advertising Supplies expense 1500
Advertising Supplies 1500
(To record Supplies used)
After the adjusting entry is posted, the two supplies accounts
in T- Account from show:
Advertising Supplies
10/5 2500 10/31 Adj. 1500
10/31 Bal. 1000

Advertising Supplies expense

10/31 Adj. 1500

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The asset account Advertising Supplies now shows a balance of

L.E.I,000 which is equal to the cost of supplies on hand at the
statement date. In addition, Advertising Supplies Expense shows
a balance of L.E. 1,500 which equals the cost of supplies used in
October. If the adjusting entry is not made, October expenses
will be understated and income overstated, by I.E. 1,500.
Moreover, both assets and owner's equity will be overstated by
L.E.I, 500 on the October 31, balance sheet.
Insurance. Most companies have fire and theft insurance. on
merchandise and equipment, personal liability insurance for
accidents suffered by customers, and automobile insurance on
company cars and trucks the cost of insurance protection is
determined by the payment of insurance premiums. The term and
coverage are specified in the insurance policy. The minimum term is
usually one year, but three-to five-year terms are available
and offer lower annual premiums, insurance premiums normally are
charged to the asset account prepaid insurance when paid. At the
financial statement date it is necessary to debit Insurance Expense
and credit Prepaid Insurance for the cost that has expired during the
period.
On October 1, Ahmed Advertising, Agency paid L.E.600
for a one - year fire insurance policy. The effective date of

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coverage was October 1. The premium was charged to prepaid

insurance when it was paid, and this account shows a balance of
L.E.600 in the October 31 trial balance. An analysis of the
policy reveals that L. E.50 (600÷12) of insurance expires each
month. Thus, the following adjusting entry is made:
Date Account Titles& Explanation Debit Credit
Oct. 31 Insurance expense 50
Prepaid Insurance 50
(To record insurance expense)
After the adjusting entry is posted, the account show:
Prepaid Insurance
10/4 600 10/31 Adj. 50
10/31 Bal. 550

Insurance Expense
10/31 Adj. 50

The asset prepaid insurance shows a balance of L.E.550,

which represents the unexpired cost applicable to the remaining
11 months of coverage. At the same time, the balance in
insurance expense is equal to the insurance cost that has expired
in October. If this adjustment is not made, October expenses

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will be understated by L.E.50 and net income overstated by

L.E.50. Moreover, both assets and owner's equity also will be
overstated by L.E.50 on the October 31 balance sheet.
Depreciation. A business enterprise typically owns a variety of
productive facilities such as buildings, equipment, and motor
vehicles. These assets provide a service for a number of years.
The term of service is commonly referred to as the useful life of
the asset. Because an asset such as a building is expected to
provide service for many years, it is recorded as an asset, rather
than an expense, in the year it is acquired such assets are
recorded at cost, as required by the cost principle.
According to the matching principal, a portion of the cost of a
long-lived asset should be reported as expense during each period of the
asset's useful life. Depreciation is the process of allocating the cost of a asset
to expense over its useful life in a rational and systematic manner.
Need For Depreciation Adjustment. From an accounting standpoint, the
acquisition of productive facilities is viewed essentially as a long-term
prepayment services. The need for making periodic adjusting entries for
depreciation is, there- fore, the same as described before for other prepaid
expenses, that is, to recognize the cost that has expired (expense) during the
period and to report the unexpired cost (asset) at the end of the period.

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In determining the useful life of a productive facility, the primary

causes of depreciation are actual deterioration due to the elements,
and obsolescence, the time an asset is acquired, the effects of these
factors cannot be known with certainty, so they must be estimated.
Thus, you should recognize that depreciation is an estimate rather than
a factual measurement of the cost that has expired. A common procedure
in computing depreciation expense is to divide the cost of the asset by
its useful life. For example, if cost is L.E.I0,000 and useful life is
expected to be 10 years, annual depreciation is L.E.I,000. .
For Ahmed Advertising, depreciation on the office equipment is
estimated to be L.E.480 a year, or L.E.40 per month. Accordingly,
depreciation for October is recognized by the following adjusting entry:
Date Account Titles& Explanation Debit Credit
Oct. 31 Depreciation Expense 40
Accumulated Depreciation- 40
office equipment
(To record monthly depreciation)
After the adjusting entry is posted, the account show:
Office Equipment
10/1 5000

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Accumulated Depreciation Office Equipment

10/31 Adj. 40

Depreciation Expense
10/31 Adj. 40

The balance in the accumulated depreciation account will

increase L.B.40 each month. Therefore, after journalizing and
posting the adjusting entry at November 30, the balance will be
L.E.80.
Statement Presentation:
Accumulated depreciation—office equipment is a contra asset
account. A contra asset account is an account that is offset- against an asset
account on the balance sheet. This means that the accumulated
depreciation account is offset against office equipment on the balance sheet
and that its normal balance is a credit. This account is used instead of
crediting office equipment in order to permit disclosure of both the
original cost of the equipment and the total cost that has expired
to date. In the balance sheet, Accumulated Depreciation- office
equipment is deducted from the related asset account as follows:
Office Equipment 5000
Less: Accumulated depreciation office equipment (40)
4960

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The difference between the cost of any depreciable asset and

its related accumulated depreciation is referred to as the book value
of that asset. The book value of the equipment at the balance sheet
date is L.E.4,960. It is important to realize that the book value and
the market value of the asset are generally two different values. The
reason the two are different is that depreciation is not a matter of
valuation but rather, a means of cost allocation.
Note also that depreciation expense identifies that portion of
the asset's cost that has expired in October. As in the case of other
prepaid adjustments, the omission of this adjusting entry would
cause total assets, total owner's equity, and net income to be
overstated and depreciation expense to be understated.
If additional equipment is involved, such as delivery or store
equipment, or if the company has buildings, depreciation expense is
recorded on each of these items. Related accumulated depreciation
accounts also are established. These accumulated depreciation
accounts would be described in the ledger as follows:
 Accumulated- Depreciation- Delivery Equipment.
 Accumulated- Depreciation-Store Equipment, and
 Accumulated- Depreciation Buildings.

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5.5. 1.2. Unearned Revenues:

Revenues received in cash and recorded as liabilities before
they are earned are called unearned revenues. Such items as rent,
magazine subscriptions, and customer deposits for future service
may result in unearned revenues. Unearned revenues are the
opposite of prepaid expenses.
When the payment is received for services to be provided
in a future accounting period, an unearned revenue (a liability)
account should be credited to recognize the obligation that
exists. Unearned revenues are subsequently earned through
rendering service to customer. During the accounting period it
may not be practical to make daily recurring entries as the revenue
is earned. In such cases, the recognition of earned revenue is
delayed until the adjustment process. Then an adjusting entry
is made to record the revenue that has been earned and to show
the liability that remains. A liability- revenue account
relationship therefore exists with unearned revenues. In the typical
case, liabilities are overstated and revenues are understated
prior to adjustment. Thus, the adjusting entry for unearned
revenues results in a debit (decrease) to a liability account and
a credit (increase) to a revenue account.

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Ahmed Advertising Agency received LE. 1,200 on October 2,

from EL-AMAL Co. For advertising services expected to be
completed by December 31. The payment was credited to unearned
fees, and this account shows a balance of L.E.I,200 in the October
31 trial balance. When analysis reveals that L.E.400 of those
fees has been earned in October 31 trial balance. The following
adjusting entry is made:
Date Account Titles& Explanation Debit Credit
Oct. 31 Unearned Fees 400
Fees Earned 400
(To record fees earned)
After the adjusting entry is posted, the account show:
Unearned Fees
10/31 Adj. 400 10/2 1200
10/31 Bal. 800

Fees Earned
10/31 Bal. 10000
10/31 Adj. 400

The liability unearned fees now shows a balance of L.E.800,

which represents the remaining advertising services expected to be
performed in the future. At the same time, fees earned shows total

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revenue earned in October of L.E.I 0,400. If this adjustment is not

made, revenues and net income will be understated by L.E.400
in the income statement. Moreover, liabilities will be overstated
and owner's equity will be understated by L.E.400 on the
October 31 balance sheet.
Example:
The ledger of RAGHDA Co. On March 31, includes the
following selected accounts before adjusting entries are prepared:
Debit Credit
Prepaid Insurance 3600
Office Supplies 2800
Office Equipment 25000
Accumulated Depreciation- Office equipment 5000
Unearned Fees 9200
An analysis of the accounts shows the following:
1- Insurance expires at the rate of L.E. 100 per month.
2- Supplies on hand total L.E.800.
3- The office equipment depreciates L.E.200 a month.
4- One-half of the unearned fees were earned in March.
Required:
Prepare the adjusting entries for the month of March.

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Solution
The adjusting Entries:
Date Account Titles& Explanation Debit Credit
1 Insurance Expense 100
Prepaid Insurance 100
(To record insurance expired)
2 Office Supplies expense 2000
Office Supplies 2000
(To record supplies used)
3 Depreciation Expense 200
Accumulated Depreciation 200
(To record monthly depreciation)
4 Unearned fees 4600
Fees earned 4600
(To record fees earned)

5.5.2. Adjusting Entries for Accruals:

The second category .of adjusting entries is accruals.
Adjusting entries for accruals are required to record revenues earned
and expenses incurred in the current accounting period that have not
been recognized through daily entries. If an accrual adjustment is
needed, the revenue account (and the related asset account) and/

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or the expense account (and the related liability account) is

understated.
Thus, the adjusting entry for accruals will increase both a balance sheet
and an income statement account. Adjusting entries for accruals are
graphically depicted in Figure (5.C.);.
ADJUSTING ENTRIES
Accrued Revenue
Asset Revenue
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)

Accrued Expenses
Expenses Liability
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)

Figure (5. C)

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5.2.1. Accrued Revenues:

Revenues earned but not yet received in cash or recorded at
the statement date are accrued revenues. Accrued revenues
may accumulate (accrue) with the passing of. time, as in the
case of interest revenue and rent revenue. Or they may result from
services that have been performed but neither billed nor collected, as
in the case of commissions and fees. The former are unrecorded
because the earning of interest and rent does not involve daily
transactions, . the latter may be unrecorded because only a portion
of the total service has been provided.
An adjusting entry is .required to show the receivable t exists
at the balance sheet date and. to record the revenue that has been
earned during the period. An asset-revenue accounting relationship
exists with accrued revenues. Prior to adjustment both assets and
revenues are understated. Accordingly, an adjusting entry for
accrued revenues results in a debit (increase) to an asset account and a
credit (increase) to a revenue account.
In October Ahmed- Advertising agency, earned L.E.200 in fees for
advertising services that were not billed to clients before October 31.
Because these services have not been billed, they have not been recorded.
Thus, the following adjusting entry is made:

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Date Account Titles& Explanation Debit Credit

Oct. 31 Accounts Receivable 200
Fees Earned 200
(To record fees earned but not
billed or collected)
After the adjusting entry is posted, the account show:
Accounts receivable
10/31 Adj. 200

Fees Earned
10/31 Bal. 10000
10/31 Adj. 400
31 200
10/31 Bal. 10600
The asset Accounts Receivable shows that L.E.200 is owed by
clients at the balance sheet date. The balance of L.E.I0600 in
fees Earned represents the total fees earned daring the month
(10,000 +400 + 200). If the adjusting entry is not made, assets
and owner's equity on the balance sheet, and revenues and net
income on the income statement, will all be understated.

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In the next accounting period, the clients will be billed.

When this occurs, the entry to record the billing should
recognize that L.E.200 of fees earned in October have already been
recorded in the October 31 adjusting entry. To illustrate, assume that
bills totaling L.E.3,000 are mailed to clients November 10. Of this
amount, L.E.200 represents fees earned in October and recorded
as Fees Earned in the October 31 adjusting entry. The remaining
L.E.2,800 represents fees earned in November. Thus , the
following entry is made:
Date Account Titles& Explanation Debit Credit
Oct. 31 Accounts Receivable 2800
Fees Earned 2800
(To record fees bills)
This entry records the" amount of fees earned between
November 1 and November 10. The subsequent collection of fees
from clients (including the L.E.200 earned in October) will be
recorded with a debit to Cash and a credit to Accounts Receivable.
5.5 2. 2- Accrued Expenses:
Expenses incurred but not yet paid or recorded at the statement date
are called accrued expenses. Interest, rent, and salaries can be accrued
expenses. Accrued expenses result from the some causes as accrued
revenues.

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Adjustments for accrued expenses are necessary to record the

obligation that exist at the balance sheet date and to recognize the
expenses that apply to the current accounting period. A liability-
expenses relationship exists with accrued expenses. Prior to adjustment
both liabilities and expenses are understated. Therefore, the adjusting entry
for accrued expenses results in a debit (increase) to an expenses account
and a credit (increase) to a liability account.
Accrued Interest
Ahmed Advertising Agency signed a 3-month note payable in the
amount of L.E.5,000 on October 1. The note requires interest at an annual
rate of 12 %. The amount of the interest accumulation is determined by
three factors:
1- The face value of the note,
2- The interest rate, which is always expressed as annual rate -ate,
and
3- The 1ength of time the note is outstanding.
In this instance, the total interest due on the L.E.5000 note its
due date 3 months hence is L.E.I50 ( ), or L.E:50 for
one month. Note that the time period is expressed as a fraction of a
year. The accrued expense adjusting entry at October 31 is as
follows:

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Date Account Titles& Explanation Debit Credit

Oct. 31 Interest Expenses 50
Interest Payable 50
(To accrue in interest on notes
payable)
After the adjusting entry is posted, the account show:
Interest Expenses
10/31 Adj. 50

Interest payable
10/31 50

Interest Expense shows the interest charges applicable to

the month of October. The amount of interest owed at the
statement date is shown in interest payable. It will not be paid
until the note come due at the end of three months. The interest payable
account is used instead of crediting Notes Payable to disclose the two
types of obligations (interest and principal) in the accounts and
statements. If this adjusting entry is not made, liabilities and interest
expense will be understated, and net income and owner's equity will be
overstated.

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Accrued Salaries
Some types of expenses, such as employee salaries and commission,
are paid for after the services have been performed. At Ahmed
Advertising, salaries were last paid on October 28, the next payment of
salaries will not occur until November 9. At October 31 ?the salaries for
these days represent an accrued expense and a related liability to Ahmed
Advertising. The employees receive total salaries of L.E.2000 for a five-day
work, or L.E.400 per day. Thus, accrued salaries at October 31 are
L.E 1200 (400 ×3) and the adjusting entry is:
Date Account Titles& Explanation Debit Credit
Oct. 31 Salaries Expenses 1200
Salaries Payable 1200
(To record accrued salaries)
After the adjusting entry is posted, the account show:
Salaries expenses
10/28 4000
31 1200
10/28 Bal. 5200
Interest payable
10/31 1200

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After this adjustment, the balance in salaries expenses of

L.E5200 (13 days × 400) is the actual salary expense for October.
The balance in salaries payable of L.E 1200 is the amount of the
liability for salaries owed as October 31, if the L.E 1200
adjustment for salaries is not recorded, Ahmed's expenses will be
understated L.E. 1200 and its liabilities will be understated
L.E.I 200,
Example:
RAGHDA is, the new owner of Micro Computer Service
at the end of August 2016, their "first month of ownership,
RAGHDA is trying to prepare a monthly financial statement.
The following information relates August :
1. At August 31, RAGHDA owed their employ L.E. 800 in
salaries that will paid op September 1 .
2. On August 1, RAGHDA borrowed L.E 30000 form a MISR
bank on a. 15-year mortgage. The annual Interest rate is
10%.
3. Fees earned but unrecorded for August totaled L.E 1100.
Required:
Prepare the adjusting entries needed at August 31, 2016.

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Solution
The adjusting Entries:
Date Account Titles& Explanation Debit Credit
1 Salaries Expense 800
Salaries Payable 800
(To record accrued salaries)
2 Interest Expenses 250
Interest Payable 250
(To record accrued interest 30000
× 10% 1/12= 250)
3 Accounts Receivable 1100
Fees Earned 1100
(to accrue fees earned but not
billed or collected)

Summary Of Basic Relationships:

Pertinent data on each of the four basic types of adjusting
entries are summarized in the table below. Take some time to
study and analyze the adjusting entries shown in the summary. Be
sure to note that each adjusting entry affects one balance sheet
account and one income statement account.

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Type of Account Account before Adjusting Entry

Adjusting Relationship adjusting
1. prepaid Assets and Assets overstated Dr. Expenses
expenses Expenses Expenses understated Cr. Assets
2. Unearned Liabilities and Liabilities overstated Dr. Liabilities
Revenue Revenues Revenue understated Cr. Revenues
3. Accrued Assets and Assets understated Dr. Assets
revenues Revenues Revenue understated Cr. Revenues
4. Accrued Expenses and Expenses understated Dr. Expenses
expenses Liabilities Liabilities understated Cr. Liabilities
5.6 Demonstration Problem:
The un adjusting trial balance for RAGHDA Services appeals
as follows on December 31, 2016.
RAGHDA Services
Trial Balance
December 31, 2000
Cash 2160
Accounts receivable 1250
Office Supplies 180
Prepaid Insurance 240
Office Equipment 3400
Accumulated Depreciation Equipment 600
Accounts Payable 700
Revenue Received in Advance 460
Capital 4470
Service revenue 2900
Wages Expense 1500
Rent expense 400
9130 9130

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The Following information is also available:

a- Insurance that expired during December amounted to L.E
40.
b- Office supplies on hand at the end of December totaled
L.E75.
c- Depreciation for the month of December totaled L.E.100.
d- Accrued wages at the end of December totaled L.E. 120.
e- Revenues earned for services performed but not yet billed
on Decembers 1,2000 totaled L.E. 300.
f- Revenues earned for services performed that were paid in
advance totaled L.E. 160.
Required:
1- Determine the required adjusting entries and record them
in the journal.
2- Post the adjustments to the relevant ledger accounts. Open
any new accounts as needed.
3- Prepare an adjusted trial balance.
4- Prepare the financial statements.
5- Record the closing entries.

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Solution
The adjusting Entries:
Date Account Titles& Explanation Debit Credit
2000 Insurance Expense 40
12/31 Prepaid Insurance 40
(Insurance expired During
December)
Office Supplies Expense 105
Office supplies 105
(Office supplies consumed During Dec.
Depreciation Expense Equipment 100
Accumulated depreciation 100
Euip.
(Depreciation for the Month of Dec.)
Wages Expense 120
Wages Payable 120
(Accrued wages at the end of dec)
Accounts received in advance 300
Service revenue 300
(Revenue earned but not yet billed)
Revenue Received in advance 160
Service revenue 160
(Revenue earned for services performed)

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2- Leader Accounts:
Accounts receivable
Bal 1250
( e) 300
1550

Accumulated Depreciation
Bal. 600
( c) 100
700
Office supplies
Bal. 180 (b) 105
75

Prepaid Insurance
Bal. 240 (a) 40
200
Capital
Bal. 4470
Revenue Received in advance
(f) 160 Bal. 460
300
Depreciation Expense
(c ) 100

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Insurance expense
(a ) 40

Office supplies expense

(b ) 105

Rent expense
Bal. 400
Office Equipment
Bal. 3400
Wages Expense
(d) 120
Wages expense
Bal. 1500
(d) 120
1620
Service Revenue
Bal. 2900
(e) 300
(f) 600
3360

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3 – Adjusted Trial Balance:

RAGHDA Services
Trial Balance
December 31, 2016
Cash 2160
Accounts receivable 1550
Office Supplies 75
Prepaid Insurance 200
Office Equipment 3400
Accumulated Depreciation Equipment 700
Accounts Payable 700
Wages payable 120
Revenue Received in Advance 300
Capital 4470
Service Revenue 3360
Wages expense 1620
Rent Expense 400
Insurance Expense 40
Office Supplies Expense 105
Depreciation expense- Equipment 100
9650 9650

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4 – Financial Statements:

RAGHDA Services
Income Statement
For December 2016
Service Revenue 3360
Operating Expenses:
Wages Expense 1620
Rent Expense 400
Insurance Expense 40
Office Supplies Expense 105
Depreciation Expense- Equipment 100
2265
Net Income 1095

RAGHDA Services
Statement of Owner's Equity
For December 2016
Capital, December 1, 2016 4470
Add: Net Income 1095
Balance, December 31, 2016 5565

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RAGHDA Services
Statement of Financial Position
For December 2016
ASSET:
Current Assets:
Cash 2160
Accounts Receivable 1550
Office Equipment 75
Prepaid Insurance 200
3985
Fixed assets:
Office Equipment 3400
Less: Accumulated Depreciation (700)
2700
Total Assets 6685
LIABILITITES:
Current Liabilities:
Accounts Payable 700
Wages Payable 120
Revenue Received in Advance 300
1220
OWNER"S EQUITY:
Capital 5565
Total Liabilities 6685

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5 – Closing Entries:

General Journal
Date Explanation Debit Credit
12/31 Service Revenue 3360
Income Summary 3360
(Closing revenue account for December)
Income Summary 2265
Wages Expense 1620
Rent Expense 400
Insurance Expense 40
Office Supplies Expense 105
Depreciation Expense – Euip. 100
(Closing expenses accounts for December)
Income Summary 1095
Capital 1095
(Closing net income in Owner's equity)

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Chapter Six
Cash and Short-Term Investments
6.1- Introduction
Transactions involving cash occur frequently. Cash is the
most liquid asset of a business and is immediately available for
paying current obligations. Creditors are particularly interested in
ratios involving cash -for example, the ratio of cash to total
current liabilities- because such ratios represent the funds
available to repay them. Since cash is the easiest asset to steal,
stringent accounting procedures and recordkeeping must be
followed for cash transactions.
Short-term investments (marketable securities) are those that
managements intends to hold for one year or less. Hence, they
are highly liquid assets. When idle cash exists it is financially
advantageous to invent excess funds in securities so that a return
is earned.
6.2- What Is Cash?
Cash is what the bank accepts for deposit, crediting the
company’s account. The cash account includes currency, coin,
demand deposits (checking account), savings deposits, petty
cash, and money orders. Although other items, such as postage
stamps and postdated checks, are controlled by the cashier, they
are not cash. Postage represents a prepaid expense, while

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postdated checks are receivables. Creditors are interested in

restrictions upon corporate bank accounts since the applicable
cash subject to the restriction is not currently available to meet
debits. An example is a compensating balance. This represents
the amount of cash that must be kept as collateral with the bank
in support of a loan.
Sinking funds set up to meet the principle on bonds are not
available cash and hence represent non current assets.
6.3- The Control of Cash
Internal control over cash through the separation of duties is
essential because of this asset’s susceptibility to theft. The
individual having the physical custody over cash should not have
responsibility for handling the accounting records regarding it.
For a cash hand, there should be frequent surprise counts.
Some controls applicable to cash receipts are:

1. Cash sales should have supporting documentation such as

sales tickets.
2. A receipt should be received when cash is given to another
party.
3. Cash receipts should be deposited at the end of each day.
Some controls dealing with cash disbursements are:
1. Cash payments should be made only by an authorized
individual.

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2. Approved supporting documentation should exist prior to

payment.
3. The person who approves the expenditure should not be the
one who signs the check.
4. Prenumbered checks should be used.
5. Spoiled checks should be voided.
6. The individual making out the checks should perform no other
function having to do with cash.
Two controls are important regarding the preparation of the
bank reconciliation:
1. The person preparing the bank reconciliation should not be
involved in cash receipt or cash payment functions.
2. The envelope containing the bank statement and cleared
checks should not be opened by any party other than the
preparer of the bank reconciliation.
6.4- The Bank Statement
A bank statement shows for a monthly period the deposits
made, checks cleared, various changes and credits and the
account balances at the beginning and end of the period.
6.5- Bank Reconciliation.
A bank reconciliation is prepared based upon the information
contained in the bank statement.
Rarely does the ending balance in the bank statement agree
with the ending balance in the cash account per books. To reflect

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the reconciling items, bank reconciliation is required. Once

completed, the adjusted bank balance must prove to the adjusted
book balance. When it does, it indicates that both records are
correct. Journal entries are then prepared to update the records
and to arrive at an ending balance in the cash account that agrees
with the ending balance in the bank statement. In other words,
the cash balance per book must be the same as the balance in the
bank account at the end of the period. Reconciling differences
relate to:
1) Items shown on the company’s books but not on the bank

statement.
2) Items shown on the bank statement but not on the company’s

books.
6.5.1-Reconciling Items for The Bank Statement

The bank balance is adjusted for items reflected on the

company’s book that are not on the bank statement. They include
several types of items.
1. Outstanding cheeks. These are checks that have been issued
by the company but have not as yet cleared the bank. The total
of outstanding checks is deducted from the bank balance.
2. Deposits in transit. This refers to cash received by the
company at the end of the period that has not been deposited
yet or was deposited after the bank prepared its statements.
Such deposits are added to the bank balance.

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6.5.2- Reconciling Items for The Books

The book balance (cash account) is adjusted for items shown on
the bank statement that are not reflected on the books. They
include.
1. Bank charges. Fees for bank services are a reduction of the

book balance. These amounts are not known until the bank
statement is received.
2. NSF checks. These are checks that have bounced because of

insufficient funds in the company’s checking account (NSF

stands for Not Sufficient Funds). In these cases the company’s
bank issues a debit memorandum for the dishonored amount
and hence the book balance is reduced.
3. Collections. Notes and other items are collected by the bank.

The proceeds received less the charge (in the form of the
credit memorandum) is credit to the company account. The
net amount is added to the book balance.
4. Interest earned. Interest income credited by the bank on the

company account increases the book balance.

5. Errors on the book. Various types of mistakes can be made on

the books.
After the bank reconciliation has been prepared journal entries
are made for the reconciling items affecting the book balance.
This is because the amounts on the books will have to be updated

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for any items reflected on the bank statement that the company
did not know about during the period.
Example 1.
El-Amal Corporation provides the following data in
connection with the preparation of its bank reconciliation at June
30/2004; balance in bank statement L.E 4,889, balance per books
L.E 4,400; outstanding checks L.E 500, L.E 200; deposit in
transit L.E 300; collection on note – principal L.E 200 and
interest L.E 16; collection fee on note L.E 12; NSF check L.E
100 and service charge L.E 15.
Solution:
El-Amal Corporation
Balance per bank L.E4,889 Balance per books L.E4,400
Add: Deposit in Add: Proceeds
Transit 300 on note 216
L.E5,189 L.E4,616
Less: outstanding checks Less:
# 410 L.E500
# 423 200 NSF check L.E100
700 Collection fee 12
Service charge 15
127
Adjusting bank balance L.E 4,489 Adjusted book balance L.E 4,489
======= =======
The following journal entries are required at June 30, 2000:

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General Journal
June 30 Cash 216
Notes receivable 200
Interest income 16
Accounts receivable 100
Cash 100

Bank service charge 27

Cash 27

After the journal entries have been pasted, the books are up to
date.
For example, the cash balance in books will now agree with the
bank balance. The cash “T” account is shown below.
Cash
6/3 Balance before adjustment 4,400 100
16 27
4,616 127
6/3 Balance after adjustment 4,489

7.6- Cash Shortage and Overage.

The shortage or overage is revealed when the cash count at
the end of the day does not agree with the cash register tape.
Ex. Assuming that the count is L.E 600 and the cash register
reading shows L.E 620, the appropriate journal entry is:
Cash 600
Cash short and over 20
Sales 620

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Cash short and over is an income statement account that is

grouped with miscellaneous expenses or miscellaneous revenue.
6.7- Petty Cash.
Company writes out checks for cash payment. However in the
case of small expenditures such as postage, taxi fare, and
delivery charges, it is not feasible to issue a check. Such
expenditures are made through a petty cash found. One
individual (custodian) should be responsible for the fund. The
fund is available currency and must be replenished over short
intervals of time, usually monthly. At any given point, the fixed
amount of the fund consists of the total currency left and the
receipts for the expenditures made.
The following procedure is involved in the maintenance of a
petty cash fund:
1. Estimate the amount needed in the fund. A check is cashed for

the anticipated funds to be disbursed for a given period of

time. An entry is made in the petty cash account when the fund
is established as well as when it is subsequently replenished
for expenditures made. For a fund set up for L.E500. The
appropriate journal entry is:
Petty Cash 500
Cash 500

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2. Issues petty cash vouchers. Currency and signed petty cash

vouchers are kept in a safe place. When an employee receives

currency, the voucher number, date, amount, payee, nature of
expenditure and recipient’s signature is written on the voucher.
After the expenditure has been made, an entry is prepared in
the petty cash book and the voucher is kept a long with the
money in the petty cash box.
3. Make entries in the petty cash book. An illustrative petty cash

book follows:
Example 2:
Petty cash book
office
date explanation voucher receipt postage taxi payments
supplies
Jan. 1 Initiate fund L.E 500
3 Taxi fare 1 L.E 20 L.E 20
16 Stamps 2 L.E 40 40
Offices 3 L.E 100 100
supplies
L.E 500 L.E100 L.E 40 L.E 160
Balance L.E 20 340
L.E 500 L.E 500
Feb 1 Balance L.E 340
replenishment 160

4. Replenish the fund when necessary. The appropriate journal

entry for the replenishment of petty cash is:

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Office supplies 100

Postage expense 40
Taxi expense 20
Cash 160
The vouchers in support of the amount replenished should
be perforated so they will not be used again.
6.8- Short – Term Investment.
Short – term investments (marketable securities) are classified
as current assets. Examples of securities in which idle funds can
be invested are corporate stocks, bonds, government issuances
(e.g., treasury bills) and notes. Marketable securities are highly
liquid because they can quickly be converted to cash.
The growth of marketable securities represents an investment
portfolio. The investment objective of the firm should be
maximizing return at minimum risk. Risk can be reduced through
diversification, for example, by investing in companies in
different industries.
6.9- Valuation of Marketable Equity Securities.
When an equity security (stock) is acquired, it is recorded to
the total cost to buy it. This equals the list price of the security
plus the brokerage commission plus the transfer tax.
Example 3:
On May1, 5000 shares of ABC company common stock were
acquired for L.E17 per share plus 2% brokerage commission.
The journal entry is.

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May 1 Marketable Securities 86,700

Cash 86,700
The amount is computed as follows
List price 5000 shares × L.E17 per share L.E85,000
Brokerage fee 2% × L.E85,000 1,700
Total cost L.E86,700
=======

On August 5, the company received cash dividends of L.E2 per

share. The journal entry is
August 5 Cash 10,000
Dividend Income 10,000
The calculation is 5,000 shares × L.E2 = L.E10,000
On November 12, all of the ABC Company common stock was
sold for L.E20 per share. The brokerage commission and transfer
taxes were L.E2400. The journal entry is

Nov. 12 Cash 79,600

Marketable securities 86,700
Gain on Sale of Marketable
Securities 10,900
The cash amount is calculated as follows:
List price 5000 shares × L.E20 per share L.E100,000
Brokerage commission and transfer taxes - 2,400
Proceeds L.E 97,600
=========

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Stock dividends are extra shares of stock given based upon

the shares held by the investor. For example, if 1000 shares are
held and there is a 10% stock dividend, 100 additional shares will
be received by the holder. Stock splits are accomplished by
replacing old shares with more new shares. For example, if
10000 shares are held and a two-for-one stock split is issued,
there are will be 20000 new shares received by the holder in
exchange for his or her old shares.
Stock dividends and stock splits are not revenue to the recipient
and as such require only a memorandum entry indicating an
additional amount of shares owned since there are now more
shares hold at the same total cost, the cost per share drops.
Example 4:
On February 1, a company owned1,000 shares of B company
stock at a cost of L.E5,500. A 10% stock dividend is given,
representing 100 shares. A company now has 1100 shares at a
total cost of L.E5,500. The cost per share is now L.E50
(L.E5,500 / L.E110).
The following memorandum entry provides the relevant data:
Feb.1 memorandum: 100 shares of B company stock were
received arising from a 10% stock dividend. The
company now owns 1,100 shares having a cost basis
of L.E5,500 representing L.E50 per share.

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6.10- Lower of Cost or Market Value.

Marketable equity securities are reflected at the lower of cost
or market value applied on a total portfolio basis. The application
of the lower of cost or market value rule requires us to look at the
aggregate cost and market value of the year and take the lower of
the two amounts for balance sheet presentation. If market value is
less than cost, the portfolio is written down for such amount and
an unrealized loss is recognized. When market value is in excess
of original cost, however, the appreciation in value is not shown.
The lower of cost or market value rule is thus consistent with the
conservatism principle.
The unrealized loss account resulting from market value being
less than the cost of marketable equity securities is shown in the
Income Statement. The appropriate journal entry is
Unrealized loss on marketable securities
Allowance to reduce marketable securities
from cost to market value
Example 5:
The investment portfolio of Ghazy Corporation at December
31, 2015 as follows.
Cost Market Value
X Company Common Stock L.E 70,000 L.E 75,000
Y Company Common Stock 50,000 43,000
Z Company Preferred Stock 100,000 90,000
Total L.E220,000 L.E208,000
======== ========

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Because market value is less than cost, the appropriate

balance sheet evaluation is L.E20,8000. An realized loss of
L.E12,000 must be recognized. The journal entry at December
31, 2003 is
Dec.31 Unrealized loss on marketable
Securities 12,000
Allowance to reduce
marketable Securities from
cost to market value 12,000
6.10.1- The Allowance Account
The allowance to reduce marketable securities from cost to
market value is a contra account to marketable securities. It
reduces the cost of the portfolio to market value. It is similar to
accumulated depreciation which is a contra account to fixed
assets. A partial balance sheet showing the presentation of
marketable securities follows.
Current assets
Cash L.E60,000
Marketable securities L.E220,000
Less: allowance to reduce
Marketable securities
From cost to market value 12,000 L.E208,000

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Note that the account marketable securities, representing the

second most liquid assets, are shown immediately below cash.
If the market value of the marketable securities happened to
be above cost, the marketable securities would be shown in
footnote, as follows:

Current assets
Cash L.E 60,000
Marketable securities
(Market value L.E230,000) 220,000

6.10-2- Adjustment of The Allowance Account

In applying the lower of cost or market value rule, the
allowance account is adjusted only at the end of the year if the
portfolio’s market value has declined further during the year, the
allowance account will have to be increased with the concurrent
recognition of an unrealized loss for the period. However, if the
market price has gone up during the year, the allowance account
will be reduced and unrealized gain recognized. The unrealized
gain account is shown in the income statement.
Example 6:
The investment portfolio of Ghazy Corporation at December
31, 2015 is.

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Cost Market Value

X Company Common Stock L.E 70,000 L.E 72,000
Y Company Common Stock 50,000 48,000
Z Company Preferred Stock 100,000 96,000
Total L.E220,000 L.E216,000
======== ========
At year’s end, 2004, the investment portfolio should be
reflected at L.E 216000, since this is less than the portfolio’s cost
of L.E 220000. Since the allowance account already has a L.E
12000 balance (example 5), it must be debited for L.E 8,000 to
bring it to the desired amount. The unrealized gain is thus L.E
5000. For clarification, the allowance “T” account is shown
below:
Allowance to Reduce Marketable Securities from Cost to Market
Value
12/31/04 adjustment 8,000 12/31/03 balance 12,000
12/31/04 balance 4,000
The adjusting entry is
Dec.04 allowance to reduce marketable
securities from cost to
market value 8,000
Unrealized gain on
marketable securities 8,000

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As of December 31, 2015 the Balance Sheet would show

Current assets
Marketable securities L.E220,000
Less: Allowance to reduce
marketable securities
from cost to market value 4,000 L.E216,000
Example 7:
The investment portfolio can not be written up above its
original cost. Thus, if the market value of the aforementioned
portfolio at December 31, 2004, happened to be L.E 229,000
rather than L.E 216,000, the marketable securities would be
reflected at the total cost of L.E 220,000. In this case, the
allowance account is no longer needed. Hence, in order to bring
the allowance account to zero, it would be debited for L.E 12000.
In other words, the unrealized gain is limited to the amount in the
allowance account. Increased above cost are not recognized.
The journal entry would be.
Dec. 31 Allowance to reduce marketable
securities from cost to
market value 12,000
Unrealized gain on
Marketable securities 12,000

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6.11 - Realized Gain and Losses

Upon the sale of a given marketable security, a realized gain
or losses is recognized based upon the difference between the
security’s coast and selling price.
Example 8:
On March 1, 2014, Aswan Company common stock costing
L.E 20,000. The journal entry is:
March 1 Cash 21,000
Marketable securities 20,000
Realize gain on sale
of marketable securities 1,000
6.12 - Marketable Debt Securities
In the case of marketable debt securities, the investment is
recorded at the list price, plus the brokerage commission.
Accrued interest as bonds at the acquisition date is not part of the
investment’s cost and is separately shown in a bond interest
receivable account.
The lower of cost or market value rule does not apply to
marketable debt securities since we know that at the maturity
date of the bond, its market price will be the same as its face
value. Therefore, debt securities are recorded only at cost, and a
gain or loss is recognized only when the securities are sold.

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Example 9:
On April 1, 2015, five bonds of ABC Company having a 10
percent interest rate are acquired at 95, which means at 95
percent of face value. The brokerage fee is L.E 60. Interest is
payable January 1 and July 1. Because bonds are in L.E1,000
denominations, the face value of the bonds is L.E5,000. Because
they are bought at 95, the list price is L.E4,750 (95% × 5000).
The total cost is L.E4,810 (L.E4750 + L.E60). Since the
company will receive six months of interest on July 1, it has to
pay accrued interest for three months (January 1 – April 1). The
accrued interest from January 1 to April 1 is L.E125 (L.E5000 ×
10% × 3/12).
Note that interest is always based on the face value of the
bond. The appropriate journal entry is:
2015, April 1 Investment in ABC bonds 4,810
Bond interest receivable 125
Cash 4,935
On July 1, 2015, interest amounting to L.E250 (L.E5,000 ×
10% × 6/12) is received for six months (January 1 - July 1) The
Company has earned L.E 125 of this interest since it held the
bonds for only three months (April 1- July 1). Therefore, bond
interest income is L.E125.the journal entry is:
2015, July 1 Cash 250
Bond interest receivable 125
Bond interest income 125

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On December 31, 2015 interest must be accrued from the last

interest payment date. Six months of interest is involved (July1-
December31).The accrued interest is L.E125 (L.E5, 000 × 10% ×
6/12). The appropriate entry is:
2015, Dec. 31 Accrued bond interest receivable 250
Bond interest income 250
On January 1, 2016 the company receives the interest
payment. The journal is:
2016 Jan. 1 Cash 250
Accrued bond interest
Receivable 250
On March 1, 2016 the ABC bonds are sold at 98. The
brokerage Commission is L.E50. Accrued interest on the bonds
is for two Months (January1-March1) this amounts to L.E83
(L.E5, 000 × 10% × 2/12). The proceeds received from the bond
sale are L.E4,933 (L.E5000x98%+L.E83-L.E50). The journal
entry is:

2016, March 1 Cash 4,933

Investment in ABC
Company bonds 4,810
Bonds interest income 83
Gain on sale of ABC
Bonds 40

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Problems & Exercises

1. In preparing bank reconciliation for Mohamed Corporation,

you note a number of reconciling items. For each item listed

below, place an x in the appropriate column to indicate how
you would treat it in order to produce equal adjusted balances
for the books and bank.
Increase Decrease Increase Decrease
book book bank bank
balance balance balance balance
1) Outstanding check
2) Deposit in transit
3) Proceeds of a
customer note
collected by the
bank
4) Proceeds of a loan
made to the
company by the
bank
5) A customer’s
bounced check
6) Bank service
charge

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Solution
Increase Decrease Increase Decrease
book book bank bank
balance balance balance balance
1) Outstanding check X
2) Deposit in transit X
3) Proceeds of a
customer note X
collected by the bank
4) Proceeds of a loan X
made to the company
by the bank X
5) A customer’s X
bounced check
6) Bank service charge
2. The following data are accumulated for use in reconciling the

bank account of Cairo Company for May:

(1) Balance per bank statement at May 31, is L.E3,359.78.
(2) Balance per book at May 31, is 2,242.99.
(3) Deposit of July 31 not recorded in bank statement 816.20.
(4) Checks outstanding: No. 812, L.E1,061.00.
No.878, L.E 435.39.
No.883, L.E 48.60
1,544.99.

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(5) Note collected by bank (credit memorandum) not recorded in

cash receipts journal. 400.00

(6) Bank service charges (debit memorandum) not recorded in

cash payment journal. 3.00

(7) Check No. 879 for L.E732.26 to Giza Co. on account recorded

in cash payments journal as L.E723.26 9.00

required:
Prepare bank reconciliation.
3. Identify each of the following reconciling items as:

(1) An addition to the balance per bank.

(2) A deduction from the balance per bank.

(3) An addition to the balance per books.

(4) A deduction from the balance per books.

Non of the transactions reported by bank debit and credit

memorandums has been recorded by depositors.

(a) Deposit in transit,L.E420.15.

(b) Outstanding checks, L.E772.33.
(c) Note collected by the bank, L.E150.
(d) Check of a customer returned by bank to depositor because
insufficient funds, L.E40.
(e) Check drawn by depositor for L.E100 recorded in check
register as L.E10.
(f) Check for L.E75 charged by bank as L.E57.
(g) Bank service charge, L.E4.10.

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4. Which of the reconciling items listed in problem 3 will

require an entry in the depositor’s book ?
5. The following data are accumulated for use in reconciling the
bank account of Dina Company for June:
(a) Balance per bank statement at June 30, L.E2,790.15.

(b) Balance per books at June 30, L.E2,456.45.

(c) Deposit in transit not recorded by bank, L.E388.50.

(d) Checks outstanding, L.E717.80.

(e) A check for L.E156 in payment of a voucher for rent

expense was erroneously recorded in the check register as

L.E165.
(f) Bank debit memorandum for service charges, L.E4.60.

Required:
Prepare bank reconciliation.
6. Using the data presented in problem 5, prepare in general

journal form the entry or entries that should be made by the

depositor.
7. prepare the bank reconciliation of Misr Insurance Company as

of November 30, using the following information:

a) Balance pre depositor’s records, L.E11,550

b) Balance per bank statement, L.E16,840

c) Outstanding checks, L.E2,442

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d) Recording a check # 1558 for telephone expense

incorrectly. L.E171; actual amount issued by check, L.E117

e) Bank service charge, L.E6

f) Deposit in transit, L.E2,760

g) Note collected by bank acting as Misr Company L.E6,400

h) NSF check of Mr. Ghazy L.E840

Solution:
Balance per depositor’s records L.E11,550
Add: Note collected L.E6,400
Error in check #1558 54 6,454
L.E18,004
Deduct: Bank service charge L.E 6
NSF check of Mr. Ghazy 840 846
Adjusted balance L.E17,158
========
balance per bank statement L.E16,840
add: Deposit in transit 2,760
L.E19,600
Deduct: Outstanding checks 2,442
Adjusting balance L.E17,185
========
8. With regard to problem 7, prepare appropriate adjusting

entries.
Solution:
Cash 6,454
Notes receivable 6,400
Telephone expense 54

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Bank service charge 6

Accounts receivable 840
Cash 846
9. The accountant for Dina Corporation was unable to prepare

correctly the bank reconciliation shown below. She has asked

you to correct any mistakes that he has made and to complete
the bank reconciliation.
Dina Corporation
Bank Reconciliation
August 31, 2015
Balance per depositor’s books L.E7,540
Add: Deposit in transit L.E500
Bank error in crediting
another company’s deposit
to our account 100 600
L.E8,140
Deduct: NSF check L.E 70
Outstanding checks 300 370
Adjusted balance L.E7,770
=======
Balance per bank statement L.E7,600
Add: Note collected by bank L.E200
Check #107 for L.E300

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applicable to advertising
expense was incorrectly
written in the
checkbook as L.E330 30 230
L.E7,830
Deduct: Transportation cost to
and from the bank 50
Adjusted balance L.E7,780
=======
10. Prepare the appropriate adjusting entries for problem 9.

Solution:
Cash 230
Notes Receivable 200
Advertising Expense 30
Accounts Receivable 70
Cash 70
11. Based on the information presented below, prepare bank

reconciliation for Mohammed Corporation at December 31,

2014.

a) Balance per bank statement-December 31,2003,

L.E101,240
b) Balance per books-November 30, 2003 L.E87,000
c) Cash receipts for December2003, L.E40,000

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d) Cash payments for December 2003, L.E38,000

e) Outstanding checks-December 31, 2003:
# 108 for L.E12,000
# 114 for L.E5,000
f) Received cash-December 31, 2013, L.E4,000; deposited on
January 2, 2014
g) Return of L.E300 check, made out to Dina Corporation, by
the bank on December 26, 2013, due to absence of
countersignature
h) Incorrect entry on bank statement for December 16,2013
deposit, L.E2.010; actual deposit, L.E2,100
i) Incorrect charge of L.E200 against Mohammed Corporation
account for check issued by Elnasr Corporation
j) December 20, 2013: collection on a note receivable by bank
for Mohammed Corporation, L.E1,100 including L.E100 in
interest; collection charge, L.E20
k) Bank service charge for December 2013 per debit
memorandum, L.E50
l) Incorrect debit memorandum of December 21, 2013 to
charge the firms account for settlement of a bank loan in
which check # 82 was issued on December 20, 2012,
L.E2,000
m) Incorrect credit to Mohammed Corporation account for
December 14, 2012 Ghazy Corporation deposit, L.E800

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12. With regard to problem 11, prepare the appropriate adjusting

entries.
13. For the month of January, Alfa Corporation had the following

transactions relating to the establishment of its petty cash

fund:
January 1- An imprest petty cash fund of L.E300 was set up.
January 31 – the petty cash box contained L.E90 cash plus the
following paid vouchers:
postage, L.E80; taxi fares, L.E60; office supplies,
L.E50; miscellaneous expense, L.E20.
Required:
Prepare appropriate journal entries for the above information.
Solution:
Jan. 1 Petty Cash 300
Cash 300
Jan. 31 Postage Expense 80
Taxi Fare Expense 60
Office Supplies Expense 50
Miscellaneous Expense 20
Cash 210

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Chapter Seven
Receivables And Payables

One of the key factors underlying the growth of the American

economy has been the trend toward selling all types of goods and
services on credit. The automobile industry has long been the
classic example of the use of retail credit to achieve the
efficiencies of large-scale output. Today, however, in nearly
every field of retail trade it appears that scales and profits can be
increased by granting customers the privilege of making payment
a month or more after the date of sale. The sales of manufacturers
and wholesalers are made on credit to an even greater extent than
in retail trade.
Accounts Receivable
7.1-The Credit Department
No business concern wants to sell on credit to a customer who
will prove unable or unwilling to pay his account. Consequently,
most business organizations include a credit department which
must reach a decision on the credit worthiness of each
prospective customer. The credit department investigates the
dept-paying ability and credit record of each new customer and
determines the maximum amount of credit to be extended.

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If the prospective customer is a business entity as, for

example, a retail store, the financial statements of the store will
be obtained and analyzed to determine its financial conditions
and the trend of operating results. The credit department will
always refer to really upon financial statements which have been
audited be certified public accountants.

7.2-Uncollectible Accounts
A business that sells its goods or services on credit will
inevitably find that some of its accounts receivable are
uncollectible. Regardless of how thoroughly the credit
department investigates prospective customers, some
uncollectible accounts will arise as a result of errors in judgment
or because of unanticipated developments. As a matter of fact, a
limited amount of uncollectible accounts is evidence of a sound
credit policy. If the credit department should become too
cautious in rating customers, it might avoid all credit losses, but
in so doing, lose profitable business by rejecting many acceptable
accounts.

7.3- Reflecting Uncollectible Accounts in The Financial

Statements
One of the most fundamental principles of accounting is that
revenue must be matched with the expenses incurred in securing
that revenue.

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Uncollectible account expenses is caused by selling goods on

credit to customers who fail to pay their bills; such expenses,
therefore, are incurred in the year in which the sales are made,
even though the accounts are not determined to be uncollectible
until the following year. And account receivable which originates
from a sale on credit in year 1, and is determined to be
uncollectible sometime during year 2 represents an expense of
year 1. Unless each year’s uncollectible accounts expense is
estimated and reflected in the year-end balance sheet and income
statement, both of these financial statements will be seriously
deficient.
Example 1:
Ghazy Corporation began business on January 1, year 1, and
made most of its sales on credit throughout the year. At
December 31, year 1 accounts receivable amounted to
L.E200,000. On this date the management reviewed the status of
the accounts receivable, giving particular study to accounts
which were passed due. This review indicated that the collectible
portion of the L.E200,000 of accounts receivable amounted to
approximately L.E190,000. In other words, management
estimated that uncollectible accounts expense for the first year of
operations amounted to L.E10,000. The following adjusting entry
should be made at December 31, year 1:

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Uncollectible accounts expense 10,000

Allowance for uncollectible accounts 10,000
To record the estimated uncollectible account expense for year 1
The uncollectible accounts expense account created by the
dept part of this entry is closed into the income summary account
in the same manner as any other expense account. The allowance
for uncollectible accounts which was credited in the above
journal entry will appear in the balance sheet as a deduction from
the face amount of the accounts receivable. It serves to reduce the
accounts receivable to their net realizable value in the balance
sheet, as shown by the following illustration:
Ghazy Corporation Partial Balance Sheet December 31, Year 1

Assets
Current assets:
Cash L.E 75,000
Accounts receivable L.E200,000
Less: allowance for uncollectible accounts 10,000
190,000
Inventory 100,000
Total current assets L.E365,000

7.4- The Allowance for Uncollectible Accounts

There is no way of telling in advance which accounts
receivable will be collected and which ones will prove to be

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worthless. It is therefore not possible to credit the account of any

particular customer to reflect our overall estimate of the year’s
credit losses. The only participle alternative, therefore, is to
credit a separate account called allowance for uncollectible
accounts with the amount estimated to be uncollectible. The
credit balance of the allowance for uncollectible accounts is
shown on the balance sheet as a deduction from the total account
of account receivable. The resulting net figure is the estimated
net realizable value of the accounts receivable.
In the preceding chapter accounts have repeatedly been
calcified into five groups: (1) assets, (2) liabilities, (3) owners’
equity, (4) revenue, and (5) expenses. In which of these five
groups’ accounts does the allowance for uncollectible accounts
belong? The answer is indicated by the position of the allowance
for uncollectible accounts on the balance sheet. It appears among
the assets and is used to reduce an asset (accounts receivable)
from a gross value to a net realizable value. From the standpoint
of account calcifications, the allowance for uncollectible
accounts is, therefore, included in the asset category.
The allowance for uncollectible accounts is sometimes
descried as a contra account, an offset account, an asset reduction
account, a negative asset account, and most frequently of all,
evaluation account. All these terms are derived from the fact that

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the allowance for uncollectible accounts is an account with a

credit balance, which is offset against an asset account to produce
the proper balance sheet value for an asset.
Alternative titles for the allowance for uncollectible accounts
are allowance for bad debts. Bad debts expense is also commonly
used as an alternative title for uncollectible accounts expense.

7.5- Two Methods of Estimating Uncollectible Accounts

Expense
The provision for uncollectible accounts is an estimate of
expense to be sustained. Two alternative approaches are widely
used in making the annual estimate for uncollectible accounts.
One method consists of adjusting the valuation account to a new
balance equal to the estimated uncollectible portion of the
existing accounts receivable. This method is referred to as the
balance sheet approach and rests on an aging of accounts
receivable. The adjusting takes into consideration the existing
balance in the allowance for uncollectible accounts.
The alternative method requires an adjusting entry computed
as a percentage of the year’s net sales. This may be regarded as
the income statement approach to estimating uncollectible
accounts. This percentage of sales method emphasizes the
expense side of the adjustment and leaves out of consideration

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any existing balance in the valuation account. If any substantial

balance should accumulate in the allowance account, however, a
change in the percentage figure being applied to sales might be
appropriate. These two methods are explained below.
7.5.1- Aging The Accounts Receivable
A past-due account is always viewed with some suspicion.
The fact that the customer is either unable or unwilling to pay the
analysis of accounts by age is known as aging the accounts.
This analysis of accounts receivable gives management a
useful picture of the status of collections and the probabilities of
credit losses. Almost half of the total accounts receivable are past
due. The question (how long past due?) is pertinent, and is
answered by the bottom line of the aging analysis. About 29% of
the total receivables are past due from 1 to 30 days; another 12%
are past due from 31 to 60 days; about 3% are past due from 61
to 90 days; and 5% of the total receivable consist of accounts
past due more than three months. If an analysis of this type is
prepared at the end of each month, management will be
continuously informed of the trend of collections and can take
appropriate action to ease or tighten credit policy.

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Analysis of Accounts Receivable by Age

December 31,2014
not 1-30 31-60 61-90 Over
Yet days days days 90 days
Customer Total due past due past due past due past due
Al-Amal 500 500
Dina 150 150
Al-salam 800 800
Misr 900 800 100
Queen 400 400
Others 3250 16300 10000 4200 200 1550
Total 35000 18000 10000 4350 1000 1650
percentage 100 51 29 12 3 5
The further past due an account receivable becomes, the
greater the likelihood that it will not be collected in full. In
recognition of this principle, the analysis of receivables by age
groups can be used in determining a reasonable to add to the
allowance for uncollectible accounts. To make this determination
it is desirable to estimate the percentage of probable expense for
each age group of accounts receivable. This percentage, when
applied to the pound amount in each age group, gives a probable
expense for each group. By adding together the probable expense
for all the age groups, the required balance in the allowance for
uncollectible accounts is determined. The following schedule
lists the group totals from the preceding illustration and shows

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how the total probable expense from uncollectible accounts is

computed.
Accounts Receivable by Age Groups

Allowance
% For
considered Uncollectible
amount uncollectible accounts
Not yet due 18,000 1 180
1-30days past due 10,000 3 300
31-60 days past due 4,350 10 435
61-90 days past due 1,000 20 200
Over90 days past due 1,650 50 825
Total 35,000 1,940
===== =======
This summary indicates that an allowance for uncollectible
accounts of L.E1,940 is required. Before making the adjusting
entry, it is necessary to consider the existing balance in the
allowance account. If the allowance for uncollectible accounts
presently has a credit balance of, say, L.E500, the adjusting entry
should be for L.E1,440 in order to bring the account up to the
required balance of L.E1,940. This entry is as follows:
Uncollectible accounts expense 1,440
Allowance for uncollectible accounts 1,440

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To increase the valuation account to the estimated probable

expense of L.E1,940 computed as follows:
Present credit balance of valuation account 500
Current provision of uncollectible accounts 1,440
New credit balance in valuation account 1,940
=====
On the other hand, if the allowance for uncollectible
accounts contained a debit balance of L.E500 before adjustment ,
the adjusting entry would be made in the amount of L.E2,440
(L.E1,940 + L.E500) in order to create the desired credit balance
of L.E1,940.
7.5.2- Estimating Uncollectible Accounts As A Percentage of
Net Sales
An alternative approach to providing for uncollectible
accounts preferred by some companies consists of computing the
charge to uncollectible accounts expense as a percentage of the
net sales for the year. The question to be answered is not (how
large a valuation allowance is needed to show our receivables at
realizable value?) instead; the question is stated as (how much
uncollectible accounts expense is associated with this year’s
volume of sales?)
Example 2:
Assume that for several years the expense of uncollectible
accounts for Ghazy Company has averaged 1% of net sales (sales

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minus retunes and allowances and sales discounts). At the end of

the current year, before adjusting entries the following account
balances appear in the ledger:
Debit credit
Sales 1,260,000
Sales returns and allowance 40,000
Sales discount 2 0,000
Allowance for uncollectible accounts 1,500
The net sales of the current year amount to L.E1,200,000;
1% of this amount is L.E12,000. The existing balance in the
allowance for uncollectible accounts should be ignored in
computing the amount of the adjusting entry, because the
percentage of the net sales method stresses the relationship
between uncollectible accounts expense and net sales rather than
the valuation of receivables at the balance sheet date. The entry
is:
Uncollectible accounts expense 12,000
Allowance for uncollectible accounts 12,000
To record uncollectible accounts expense of 1% of the year’s net
sales (.01 × 1,200,000).
If a business makes both cash sales and credit sales, it may
be desirable to exclude the cash sales from consideration and to

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compute the percentage relationship of uncollectible accounts

expense to credit sales only.
The percentage of credit sales approach has the advantage of
being much easier to apply the aging of accounts receivable
method. The aging of receivables, however, tends to give a more
reliable estimate of uncollectible accounts because of the
consideration given to the age and collectability of the specific
accounts receivable at the balance sheet date.

7.6- Writing Off An Uncollectible Account Receivable

Whenever an account receivable from a customer is
determined to be uncollectible, it no longer qualifies as an asset
and should immediately be written off. To write off an account
receivable is to reduce the balance of a customer’s account to
zero. The journal entry to accomplish this consists of a debit to
the allowance for uncollectible accounts and an offsetting credit
to the accounts receivable controlling account in the general
ledger (and to the customer’s account in the subsidiary ledger).
Referring again to the example of Ghazy Corporation as
shown in example 1, the ledger accounts were as follows after
the adjusting entry for estimated uncollectible accounts had been
made on Dec. 31, year 1.
Accounts receivable L.E200,000
Less: allowance for uncollectible accounts 10,000

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Next let us assume that on January 27, year 2, a customer by

the name of Nile Co. became bankrupt and the account
receivable from him in the amount of L.E1,000 was determined
to be worthless. The following entry should be made by the
Ghazy corporation:
Allowance for uncollectible accounts 1,000
Accounts receivable, Nile Co. 1,000
To write off the receivable from Nile Co. as uncollectible.
The important thing to note in this entry is that the debit is
made to the allowance for uncollectible accounts and not to the
uncollectible expense account. The estimated expense is charged
to the uncollectible accounts expense account at the end of each
accounting period. When a particular account receivable is later
ascertained to be the worthless and is written off, this does not
represent an additional expense but merely confirms our previous
estimate of the expense. If the uncollectible accounts expense
account were first charged with estimated credit losses and then
later charged with proved credit losses, we would be guilty of
double counting of uncollectible accounts expense.
After the entry writing off The Nile’s account has been
posted, the accounts receivable controlling account and the
allowance for uncollectible accounts appear as follows:

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Accounts receivable
Year 1 Year 2
Dec. 31 200,000 Jan. 27 (Nile write-off) 1,000

Allowance for uncollectible accounts

Year 1 Year 2
Jan. 27 (Nile write-off) 1,000 Dec. 31 1,000

Note that the net amount of the accounts receivable was

unchanged by writing off the Nile’s account against the
allowance for uncollectible accounts.
Before the write-off After the write-off
Accounts receivable L.E200,000 Accounts receivable L.E199,000
Less: allowance for Less: allowance for
Uncollectible accounts 10,000 Uncollectible accounts 9,000
Net value of receivables L.E190,000 Net value of receivables L.E190,000

the fact that writing off an uncollectible receivable against the

allowance for uncollectible accounts does not change the net
carrying value of accounts receivable shows that no expense is
entered in the accounting records when an account is written off.
This example bears out the point stressed earlier in the chapter:
credit losses belong in the period in which the sale is made, not
in a later period on which the account is discovered to be
uncollectible.

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7.7- Write-Offs Seldom Agree With Previous Estimates.

The total amount of accounts receivable written off in a given
year will seldom, if ever, be exactly equal to the estimated
amount previously credited to the allowance for uncollectible
accounts.
If the amounts written off as uncollectible turn out to be less
than the estimated amount, the allowance for uncollectible
accounts will continue to show a credit balance. If the amounts
written off as uncollectible are greater than the estimated amount,
the allowance for uncollectible accounts will acquire a debit
balance, which will be eliminated by the adjustment at the end of
the period.
7.8-Recovery of An Account Previously Written Off
Occasionally an account which has been written off as
worthless will later be collected in full or in part. Such
collections are often referred to as recoveries of bad debts.
Collection of an account previously written off is evidence that
the write-off was an error, the write-off entry should therefore be
reversed.
Example 3:
A past-due account receivable in the amount of L.E.400 from
Dina was written off by the following entry:

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Allowance for Uncollectible Accounts 400

Accounts Receivable, Dina 400
To write off the receivable from Dina as uncollectible.
At some later date Dina pays her account in full. The entry to
restore Dina’s account will be:
Accounts Receivable, Dina 400
Allowance for Uncollectible Accounts 400
To reverse the entry writing off Dina’s account.
A separate entry will be made in the cash receipts journal to
record the collection from Dina. This entry consists of a debit to
cash and a credit to Accounts Receivable.

7.9- Direct Charge-Off Method of Recognizing Uncollectible

Accounts Expense
Instead of making adjusting entries to record uncollectible
accounts expense on the basis of estimates, some companies
merely change uncollectible accounts to expense at the time such
receivables are determined to be uncollectible. This method
makes no attempt to match revenue and related expenses.
Uncollectible accounts expense is recorded in the period in which
the individual accounts are determined to b worthless rather than
in the period in which the sales were made.

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When the direct charge-off method is in use, the accounts

receivable will be listed in the balance sheet at their gross
amount, and no valuation allowance will be used. The
receivables, therefore, are not stated at there probable net
realizable value.
In the determination of taxable income under present national
income tax regulations, both the direct charge-off method and the
allowance method of estimating uncollectible accounts expense
are acceptable from the stand point of accounting theory, the
allowance method is much the better, for it enables expenses to
be matched with related revenue and thus aids in making a
logical measurement of net income.
7.10- Credit Card Sales
Many retailing businesses avoid the risk of uncollectible
accounts by making credit sales to customers who used well-
known credit cards, such as American Express, City Bank or
Visa Card. When a customer makes a purchase using one of
these credit cards the retailer acquires an account receivable from
the credit cad company rather than from the customer. The credit
card company promptly pays the retailer and redeems the sales
invoice. At the end of each month, the credit company bills the
credit card holder for all the invoices it has redeemed during the

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month. If the credit card holder fails to pay the amount owed, it is
the credit card company which sustains the loss.
By making credit sales through credit card companies,
retailers receive cash more quickly from credit sales and avoid
uncollectible accounts expense. Also, the retailers avoid the
expense of investigating customers’ credit, maintaining
subsidiary ledgers for accounts receivable, and making
collections from customers. Credit card companies, however, do
not redeem sales invoices at the full sales price. The agreement
between the credit card company and the retailer allows the credit
card company a substantial discount (usually between 3% and
7% of the amount of the sales invoice).
When a retailer makes sales to credit card customers, he may
record the receivable from the credit card company at the net
amount and dept an expense account for the amount of the credit
card fee. These two debits will offset the credit to the sales
account for the retail price of the goods or services. Example 4
assumes Camera Shop sells a camera for L.E.200 to a customer
who uses a City Bank credit card. Entry would be:
Account receivable, City Bank 190
Credit card discount expense 10
Sales 200
To record a sale to a customer using a City Bank credit card and
the discount expense of 5% charged by City Bank.

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Mohamed Camera Shop may then mail the sails invoice to

American Express and receive an immediate cash payment of
L.E190. the expense account, Credit Card Discount Expense
should be included among the selling expenses on the income
statement of Mohamed Camera Shop.
An alternative accounting procedure leading to the same end
result is to record the receivable from the credit card company at
the full amount of the sale (L.E200 in the above example). When
payment of L.E190 is received from the credit card company, the
collection would be recorded by debiting cash for L.E190 and
debiting Credit Card Discount Expense for L.E10, offset by a
credit to Accounts Receivable, City Bank for L.E200.

7.11- Promissory Notes

The maker of a promissory note agrees to pay a given amount
to a payee at a future date. Therefore, a promissory note is a
payable to the maker and a receivable to the payee.
There are several advantages to a promissory note. The holder
may obtain money for the note prior to its maturity from a bank.
This referred to as discounting the note. The note also serves as
written evidence of a debt due and as such represents a priority
lien compared to an open account receivable.

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7.11-1 Interest Computation

Interest is usually computed on the basis of a 360-day year (12
months × 30days per month). The following formula is used:
Interest = Principal × Interest Rate × Time
The principal is the face amount of the note. The interest rate
is what is being earned on an annual basis on the note. The time
is the fraction of the year that the note is held.
Example 1:
An L.E800, 16percent, 90-day note is issued.
The interest is L.E800 × 16% × 90/360 = L.E32.
Example 2:
A L.E1, 200; 15 percent, 45-day note is issued.
The interest is L.E1, 200 × 15% × 45/360 = L.E22.5
7.11-2- Determining The Maturity Date
The date upon which the note is due may be determined through
the following steps:

1. In the month that the note is issued, determine the number of

days in that month subsequent to the issuance date. The day
upon which the note was issued is not counted.
2. Add the days in each full month after the note’s issuance date.
3. Deduct the total days arrived at in steps 1 and 2 from the time
period of the note. This will give the due date in the
appropriate month ( the month after the last full month in step
2).

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Example 3:
The maturity date of a 90-day note dated May 6 is:
Time period note 90
May 31
Issuance date - 6 25
June 30
July 31
Total 86
Maturity date August 4
If the due date is given in months, the maturity date is found
by counting the months from the date upon which the note was
written.
Example 4:
A four month note dated February 10 is due in June 10. A
one-month note dated October 31 is due November 30.

8. Notes Receivable
A note receivable is an asset because a claim exists for future
collection. Interest earned on the note is credited to the interest
income account.
Example 5:
Mohammad Adel owes Dina Ghazy L.E600. Mrs. Dina receives
a 90-day, 16 percent note as settlement. Her journal entry is:

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Note Receivable 600

Account receivable 600
The interest is not recorded until it is due 90 days later. At
that time, the interest income will become part of the journal
entry as follows:
Cash 624
Note receivable 600
Interest income 24*
* L.E.600 × 16% × 90/360=L.E.24

7.11-3-Discounting A Note Receivable

The holder of a note may receive money for it from the bank
or finance company prior to its maturity date. This is referred to
as “discounting a note receivable.” The proceeds received by the
holder at the time the note is discounted is equal to the maturity
value less the bank discount (interest charge). The bank discount
is based upon the period of time the bank will be holding the note
and the note’s interest rate. The interest rate charged by the bank
need not be the same as the interest rate on the maker’s note.
This may be due to changes in the going interest rate over time
due to current money market conditions. The maturity value of
the note is:
Maturity Value = Face Of Note + Interest Income.
The bank discount is

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Bank Discount = Maturity Value × Discount Rate × Period

Note Is Held By Bank.
The net proceeds received by the payee at the of discounting
equal:
Net Proceeds = Maturity value – Bank discount.
On the date that a note is discounted, cash is debited for the
net proceeds received, notes receivable is credited for the face
amount of the note, and interest income is credited for the net
interest earned by the holder.
If the maker pays to the bank his or her note at maturity, no
further entry is required by the payee. In this case, the bank has
received the maturity value of the note.
A default on a note receivable is discussed in a subsequent
section.
Example 6:
Mr. Ghazy holds a L.E1,000, 120-day, 18 percent note dated
September 6. It is discounted at 18 percent on October 6. The
interest on the note is:
L.E1, 000 × 18% × 120/360 = L.E60.
The maturity value is:
L.E1,000 + L.E60 = L.E1,060.

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At the time Mr. Ghazy discount the note, he had already

held it for 30 day. The bank will therefore be holding it for 90
days. The bank discount charge is.
L.E1, 060 × 18% × 90/360 = L.E47.70
Therefore, the net proceeds received by Mr. Ghazy are:
L.E1, 060.00 – L.E47.70 = L.E1,012.30
The journal entry to record the discounting of the note is:
Cash 1,012.30
Note Receivable 1,000.00
Interest Income 12.30
If the note is paid by the maker at maturity, no further entry is
required by Mr. Ghazy.
The same computational procedure is followed even when the
bank discount rate is different from the interest rate on the face of
the not. The only numbers that change are the bank discount
charge and the net proceeds.
Example 7:
Assume the same information as in Example 6. Except that
the bank discount rate is 19 percent rather than 18 percent.
The interest on the note and the maturity value are the same as
before. The bank discount charge is now.
L.E1,060 × 19% × 90/360 = L.E50.35

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The net proceeds become.

L.E1,060.00 – L.E50.35 = L.E1,009.65
The entry to record the discounting of the note is now.
Cash 1,009.65
Notes Receivable 1,000.00
Interest Income 9.65
The interest income is less than before since the higher bank
discount charge reduces the interest earned by Mr. Ghazy for the
30 days he held the note.
If the bank discount rate significantly exceeds the discount
rate on the note, it is possible that the proceeds received may be
less than the face value of the note. In this case, interest expense
would be debited for the difference.
Example 8:
Assume that in Example 9 the bank discount charge is now.
L.E1, 060 × 24% × 90/30 = L.E63.60
The net proceeds become
L.E1, 060.00 – L.E63.60 = L.E996.40
The journal entry is
Cash 996.40
Interest expense 3.60
Note receivable 1,000.00

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7.11-4 Default On A Note Receivable

A note is dishonored if the issuer does not pay it at maturity.
In this case, the principal and interest earned are charged to the
makers account. The journal entry is:
Accounts Receivable ××
Notes Receivable ××
Interest Income ××
Note that interest income is recorded even though not
collected, since the payee is entitled to it.
Example 9:
A L.E600, 60-day, 16 percent note issued by a customer is
dishonored at the maturity date. The journal entry is:
Accounts Receivable 616
Notes Receivable 600
Interest Income 16*
* L.E600 × 16% × 60/360 = L.E.16
The discounting of a note receivable results in a contingent
(potential) liability upon the part of the payee that requires
disclosure as a footnote in the financial statement. If the marker
defaults on the note, the payee-who already has received
payment upon the note from the bank-must make good on the
note’s maturity value. In addition, the payee is charged a protest
fee by the bank, but payment of the protest fee is ultimately the

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responsibility of the maker of the note; that is, the amount paid
by the payee is charged back to the maker. The journal entry is:
Account Receivable ××
Cash ××
Example 10:
A L.E5,000, 60-day, 15% percent note was discounted at the
bank. On the due date, the is dishonored by the maker. A protest
fee of L.E.10 is charged. The journal entry is:

Accounts Receivable 5,135*

Cash 5,135
* Face of the note L.E5,000
Interest (L.E500 × 15% × 60/360) 125
Maturity value L.E5,125
Protest fee 10
Chargeback to the maker of the note L.E5,135
=======

9. Notes Payable
A note payable may be issued either to make a purchase,
settle an open account payable, or borrow from the bank.
Example 11:
A machine was purchased for L.E5000 by issued a note
payable. The journal entry is:
Machinery 5,000
Notes Payable 5,000

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Example 12:
A company owes L.E.4, 000 to a creditor on open account.
The creditor is aware of current financial problems with the
company and desires a written, signed promise. Hence, at the
creditor’s request, a 90-day, 15 percent note is issued in
substitution of the open account.
The journal entry for the company is:
Account Payable 4,000
Notes Payable 4,000
At the maturity date, the entry is:
Notes Payable 4,000
Interest Expense 150*
Cash 4,150
*L.E.4,000 × 15% × 90/360=L.E.150
A note payable is typically issued to the bank when money is
borrowed. Often, the bank immediately deducts the interest on
the loan from the face of the note. The borrower receives the net
proceeds. The term “discounting a note payable” refers to the
case where interest is paid in advance.
Example 13:
A company borrows L.E10,000 for 60 days at 18 percent from
a bank. The loan is made on a discount basis, where interest of
L.E300 (L.E10,000 × 18% × 60/360) is deducted in advance.

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The journal entry is:

Cash 9,700
Interest Expense 300
Notes Payable 10,000
At the maturity date, the entry is:
Notes Payable 10,000
Cash 10,000

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Problems and Exercises

1. Complete the missing word(s).
a) The method of recording the uncollectible accounts expense

at the time of actual customer uncollectability is known as

the --------------- method.
b) The ------------- method accounts for the expected

uncollectability of customer accounts and involves the

matching of expenses to sales.
c) Determining the amount and time outstanding in each

customer’s account is referred to as ------------- the account

receivable.
d) The entry for uncollectible accounts expense should made at

--------.
e) Uncollectible accounts expense is shown in the --------.

f) The allowance for uncollectible accounts is a(n) -------------

account to accounts receivable in the ------------- .

g) The write-off of a customer’s account under the allowance

method will have ------------- upon net accounts receivable.

h) Interest on a note is equal to ------------ × rate × time.

i) The interest on a L.E.1,600, 90-day, 20 percent note is ----- .

j) The maturity date of a 90-day note issued May 14 is -------- .

k) The ------------- of a note is equal to the principal plus

interest.

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l) If Adel issues a L.E.500 note to Dina, Adel is called the -----

and Dina is the ------------- .

m) A note is considered a ------------- to the payee.

n) When a promissory note is received from an open account,

------------- receivable is debited and ------------ receivable is

credited.
o) The term ------------ is used when the payee of a note obtains

funds for it from the bank prior to the maturity date.

p) When a note receivable is discounted, the bank’s discount

charge is equal to the ------------- × discount rate ×

unexpired time.
q) When a note is discounted at the bank, the net proceeds

received by the payee is equal to the ------------- less the --- .

r) Notes receivable discounted represents a(n) ------------

liability.
s) If a note is dishonored by the maker at maturity, -------------

is debited, ------------ is credited, and ------------- is credited.

Answers:
(a) direct–write-off; (b) allowance; (c)aging; (d) year’s end; (e)
income statement; (f) contra (offset), balance sheet; (g) no
effect; (h) principal; (i) L.E.80; (j) August 12; (k) maturity
value; (l)maker, payee; (m) receivable; (n) notes, accounts; (o)

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discounting; (p)maturity value; (q) maturity value, bank

discount; ( r ) contingent; (s) accounts receivable, notes
receivable, interest income.

2 - The following transactions relate to a petty cash fund for the

month of January:
January 1 Established a petty cash fund for L.E100.
January 31 The petty cash box showed the following
receipts for the month: office supplies, L.E15;
cleaning, L.E12; and postage, L.E30.
Prepare the necessary journal entries.
Solution:
Jan. 1 Petty Cash 100
Cash 100
31 Office Supplies Expense 15
Cleaning Expense 12
Postage 30
Cash 57
3 - Prepare journal entries for the following transactions
involving the short-term investments of Ghazy Corporation:
March 7, 2013 Purchased 200 shares of Dina common
stock at L.E50 per share, plus a 3 percent brokerage
commission.

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July 8, 2013 purchased 250 shares of Adel common

stock at L.E70 per share, plus a 2 percent brokerage
fee.
Dec 31, 2015 The year-end market values of the stocks
were Dina, L.E46; Adel,72.
April 6, 2014 received a L.E4 per share cash dividend
on Adel stock.
Oct. 7, 2014 Sold 50 shares of Dina stock for L.E53 per
share.
Nov. 7, 2014 Receive a 10 percent stock dividend from
Adel Corporation.
Dec. 30, 2014 The year-end market values of the stocks
were Dina, L.E49; Adel, 68.
Solution:
2015
March 7 Marketable Securities 10,300
Cash 10,300
July 8 Marketable Securities 17,850
Cash 17,850
Dec. 31 Unrealized Loss on Marketable
Securities 950*
Allowance to Reduce
Marketable Securities
From Cost to Market Value 950

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2016
April 6 Cash 1,000**
Dividend Income 1,000
Oct. 7 Cash 2,650
Marketable securities 2,575***
Realized gain on the
sale of Marketable securities 75
Nov. 7 Memorandum: We received a 10%
Stock dividend from DEF Corporation,
Amounting to 25 shares (250 shares
× 10%). We now have total of 275
Shares costing L.E17,850. The cost
per share has therefore dropped to
L.E64.91.
Dec. 31 Allowance to reduce Marketable 950****
Securities from Cost to Market
Value
Unrealized Gain on
Marketable Securities 950

*Company Shares Cost Market Value

ABC 200 10,300 9,200
DEF 250 17,850 18,000
28,150 27,200

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**L.E4 × 250 Shares = L.E1,000

***Cost of ABC shares sold: 50 shares × L.E 51.50 per share =
L.E2,575
****Company Shares Cost Market Value
ABC 150 7,725 L.E 7,350
DEF 275 17,850 18,700
25,575 L.E26,050
===== ========
4 - Is the direct-write-off method of accounting for uncollectible
accounts theoretically sound?
Solution:
The direct-write-off method is not theoretically sound
because it does not match expenses against revenue. The
uncollectible accounts expense is recognized in a period
subsequent to the time of sale.
5 - The following accounts balances are given for Sun
Corporation for
2014:
Allowance for
Account Receivable Uncollectible Accounts Sales

300,000 4,300 800,000

Prepare the journal entries to record the provision for

uncollectible accounts when uncollectability is based on (a) 2
percent of sales and (b) an aging of accounts receivable that

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indicates a needed balance in the allowance account of

L.E15,700.
Solution:
(a) Uncollectible Accounts Expense 16,000*
Allowance for
Uncollectible Accounts 16,000

*2% × L.E800,000 = L.E16,000

(b) Uncollectible Accounts Expense 11,400*

Allowance for
Uncollectible Accounts 11,400

*L.E15,700 – L.E4,300 = L.E11,400

6 - A L.E 7,000, 18 percent, 90-day note is received upon the sale
of merchandise to a customer. The note is discounted at the bank
30 days later.; the bank discount rate is 20 percent. At maturity,
the note is dishonored. A protest fee of L.E15 is charged.
Prepare the required journal entries when (a) the note is received,
(b) the note is discounted, and (c) the note is dishonored.
Solution:
(a) Notes Receivable 7,000
Sales 7,000
(b) Cash 7,071.17*
Notes Receivable 7,000.00
Interest Income 71.17

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(c) Accounts Receivable 7,330

Cash 7,330

* Interest on the note is: L.E7,000 × 18% × 90/360 = L.E315

The maturity Value is: L.E 7,000 + L.E315 = L.E7,315
The bank discount charge is: L.E7,315 × 20% × 60/360 = L.E243.83
The proceeds are: L.E7,315.00 – L.E243.83 = L.E7,071.17
7 - Dina Corporation borrows L.E4, 000 for 120 days at 18
percent from a bank. The loan is made on a discount basis.
(c) Prepare the journal entry at the time of the loan.

(d) Record the payment on the loan.

Solution:
(a) Cash 3,760
Interest Expense 240*
Notes Payable 4,000

(b) Notes Payable 4,000

Cash 4,000

* L.E4,000 × 18% × 120/360 = L.E240

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Chapter Eight
Fixed Assets, Depreciation,
And Intangible Assets

8.1-Property, Plant, And Equipment

Property, plant, and equipment are tangible, long-term assets
used in the production or sale of goods or service. They are not
held for the purpose of the sale to customers. Items included in
the fixed-assets category include land, building, machinery,
equipment, and auto.
A fixed asset is recorded at historical cost, which is equal to
the list price paid plus all normal incidental cost necessary to
bring the asset into existing use and location.
Example 1:
El-Amal Corporation purchased a machine that was build as
follows: invoice price, L.E20, 000; cash discount, L.E300;
delivery, L.E535; insurance, L.E40; and installation, L.E800. The
journal entry is:
Machinery 21,075()*
Cash 21,075

( ) L.E20, 000 – L.E300 + L.E535 + L.E40 + L.E800 = L.E21,075

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8.2- Depreciation
A fixed asset has a limited life because of physical
deterioration and obsolescence. The asset will eventually be
worth only its salvage value (scrap value). The yearly expiration
of the original cost of fixed asset is termed depreciation. Under
the accrual concept, depreciation expense is matched against the
revenue derived from the asset. Depreciation expense is listed as
an operating expense in the income statement. The accumulated
depreciation of an asset serves to reduce its original cost to arrive
at the book value (carrying value). Accumulated depreciation
constitutes the portion of the asset’s cost which has been
recognized as expense up to the present time. The book value of
the asset is reported on the balance sheet. As the asset becomes
older, its book value declines.
All fixed assets are subject to depreciation with the
exception of land. Land is retained at its original cost.
Example 2:
A machine was originally acquired for L.E25, 000. The
accumulated depreciation at year’s end is L.E7, 500. The
machine’s book value is reported on the balance sheet as follows:
Machinery L.E25,000
Less: Accumulated depreciation 7,500
Book value L.E17,500

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8.3- Depreciation Methods

The depreciable cost of a fixed asset (original cost less
salvage value) may be charged to expense over the asset’s life
under different methods. The straight-line method results in equal
depreciation charges for every period. Accelerated methods result
in higher depreciation charges in the earlier years and lower
depreciation charges in the later years. Two accelerated methods
are the double-declining-balance method and the sum-of-the-
years’-digits method. Accelerated methods are generally more
realistic in the measuring the decline in value of fixed assets
because fixed assets usually are most efficient when new.
Variable charge methods also exist and depend upon the usage of
the asset. An example is the units-of-production method where
the depreciation expense is directly traceable to the volume
produced.
8.3.1- Straight-Line Method
This is the easiest and most popular method. It results in
equal periodic depreciation charges. The method is most
appropriate when the asset’s usage is uniform from period to
period, as is the case with furniture. Depreciation expense is
equal to:
Cost  Salvage.value
Depreciation expense =
Numbers.of . years.of .useful .life

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Example 3:
An auto is purchased for L.E20, 000 with an expected
salvage value of L.E2, 000. The auto’s estimated life is eight
years. Depreciation per year equals:
L.E 20,000  L.E 2,000
 L.E 2,250. per. year .
8 years

An alternative means of computation is to multiply the

depreciable cost of L.E18,000 by the annual depreciation rate of
12.5 percent (1/8). The result is the same: L.E2,250 per year. The
journal entry is:
Depreciation Expense 2,250
Accumulated Depreciation 2,250
8.3.2- Sum-Of-The-Years’-Digits Method
In this method the number of years of the expected life is
enumerated in reverse order in the numerator. For example, let us
assume the expected life of a machine is eight years. If we write
the numbers in reverse order we have 8,7,6,5,4,3,2and1. the
denominator for each fraction is the sum of the years’ digits
(8+7+6+5+4+3+2+1), which equals 36. Thus, be fraction for the
first year 8/36, while the fraction for the last year is 1/36. The
sum of the eight fractions equals 36/36, or 1. Therefore, at the
end of eight years, the machine is completely written down to its
salvage value.

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Example 4:
The cost of an auto having an estimated life of 8 years is
L.E20, 000 and its salvage value is L.E 2,000. The amount
subject to depreciation is L.E18, 000 (L.E20,000 – L.E2,000).
The computation for each year’s depreciation expense is shown
below.
year Fraction × Depreciable Amount = Depreciation Expense
1 8/36 L.E18,000 L.E4,000
2 7/36 18,000 3,500
3 6/36 18,000 3,000
4 5/36 18,000 2,500
5 4/36 18,000 2,000
6 3/36 18,000 1,500
7 2/36 18,000 1,000
8 1/36 18,000 500
Total L.E18,000
==========

If the auto is expected to have a very long life, the following

formula may be used to find the sum of the years’ digits:
( N )( N  1)
S=
2
Where N represents the number of the years of the expected
life. In case of eight years, the sum of the years’ digits is :

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(8)(8  1) (8).(9)
  36
2 2
Example 5:
If the life of a machine is expected to be 40 years, the sum of
the years’ digits would be:
(40)(40  1)
S=  280
2
Example 6:
An auto is purchased on 1/7/2015 for L.E20, 000. Its
expected life is eight years and it has a salvage value of
L.E2,000.
Depreciation expense for 2016 is:
1/7/2015–31/12/2016 8/36 × L.E18, 000 = L.E4,000 × 6/12 = L.E2,000
Depreciation expense for 2017 is:
31/12/2015–30/6/2016 8/36 × L.E18,000=L.E4,000 × 6/12= L.E2,000
1/7/2016 – 31/12/2016 7/36 × 18,000= 3,500 × 6/12= L.E1,750
L.E3,750
======
8.4- Double-Declining-Balance Method
Under this method, depreciation expense is highest in the
earlier years. First, a depreciation rate is determined by doubling
the straight line rate. For example, if an asset has a life of 10
years, the straight line rate is 10 percent, and the double declining
rate is 20 percent. Second, depreciation expense is computed by
multiplying the rate by the book value of the asset at the

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beginning of each year. Since book value declines over time,

depreciation expense will become less each year. The method
ignores salvage value in the computation. However, the book
value of the fixed asset at the end of its useful life cannot be
below its salvage value.
The method is advantageous for tax purposes since higher
depreciation charges in the earlier years result in less income and
thus less tax to be paid. The tax savings may then be invested for
a return. Of course, over the life of the fixed asset, the total
depreciation charges will be the same no matter what
depreciation method is used. However, the timing of the tax
savings will differ. It should be noted that a company can use one
depreciation method in its income tax report and another in its
stockholders’ report.

Example 7:
A L.E20, 000 assets has a life expectancy of eight years.
Since the straight-line rate is 12.5 percent (1/8), the double-
balance rate is 25 percent (2× 12.5%). Depreciation expense per
year is computed below.

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Book Value
At Beginning × Rate = Depreciation Year-end
Year Of Year Expense Book Value
1 L.E20,000 25% L.E5,000 L.E15,000
2 15,000 25% 3,750 11,250
3 11.250 25% 2,813 8,437
4 8,437 25% 2,109 6,328
5 6,328 25% 1,582 4,746
6 4,746 25% 1,187 3,559
7 3,559 25% 890 2,669
8 2,669 25% 667 2,002

If there were an original estimated salvage value of L.E2,

100, then the computation would be the same as above except for
the eighth year. Since the asset cannot be depreciated below its
salvage value, the depreciation expense for that year would have
been L.E569 (L.E2, 669 – L.E2, 100) rather than L.E667.
Example 8:
Assume that in Example 7 the asset was purchased at the end
of the forth month.
The first year’s depreciation is:
L.E20,000 × 25% × 8/12 = L.E3,333
The book value at the end of the year 1 is therefore
L.E16,667 (L.E20, 000 – L.E3,333).

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Depreciation expense for year 2 is:

L.E16, 667 × 25% = L.E4, 167
The book value at the end of year 2 is therefore L.E12, 500
(L.E16, 667 – L.E4,167). The rest of the calculation is as shown
in example 7, although the amounts will, of course be different
now.
8.5- Units-Of-Production Method
This method is appropriate when the use of the asset
materially varies from period to period. Under the method, the
depreciation per unit or other output measure (e.g., machine
hours, miles) is first determined by using the following formula:
Cost  Salvage.value
Depreciation per unit =
Estimated .total .units
The depreciation expense for a given year is determined as
follows:
Depreciation expense = Depreciation per unit × Units
produced.
Example 9:
The cost of machine is L.E20,000, and the estimated total
usage is 8,000 hours. The depreciation per hour is:
L.E 20,000  L.E 2,000
 L.E 2.25
8,000.hours
in the first year the machine is used for 1,600 hours.
Depreciation expense is: 1,600 hours × L.E2.25 per hour =
L.E3,600 .

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8.6-Capital and Revenue Expenditures

In addition to the initial cost of acquiring a plant assets, other
costs related to its efficiency or capacity are incurred from time
to time during its service life. It is often difficult to differentiate
between expenditures that add to the utility of the asset for more
than one accounting period and those that constitute an expense
of the period in which they are incurred. Coast that are
chargeable to an asset account or its related accumulated
depreciation account are termed capital expenditures; those that
are chargeable to current operations are referred to as revenue
expenditures.
Expenditures for an addition to a plant asset would clearly
constitute capital expenditures. For example, the cost of
installing an air conditioning unit in an automobile or of adding a
wing to a building should be charged to the respective asset
accounts. It is equally clear that expenditures for maintenance
and repairs of a recurring nature should be classified as revenue
expenditures. Thus, the cost of replacing spark plugs in an
automobile or of repainting a building should be charged to
expense. In less obvious situations, several criteria may be
considered in classifying the expenditures.
Expenditures that increase operating efficiency or capacity
for the remaining useful life of an asset should be capitalized. For
example, if the power unit attached to a machine is replaced by
one of greater capacity, the cost and the accumulated
depreciation applicable to the old motor should be removed from

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the accounts and the coast of the new one should be charged to
the asset account.
Expenditures that increase the useful life of an asset beyond
the original estimate are also capital expenditures. They should
be debited to the accumulated depreciation account, however,
rather than to the asset account. To illustrate, assume that a
machine with an estimated life of 10 years is completely
overhauled at the end of its seventh year of use. It is expected
that the extraordinary repairs will extend the life of the machine
and additional 3 years beyond the original estimate. The
expenditures restore or “make good” a portion of the depreciation
recorded in prior years, and it is therefore appropriate that they
be debited to the accumulated depreciation account.
When the cost of improvements or extraordinary repairs
substantial or when there is a material change in estimated life,
the depreciation charge for future periods should be recomputed
on the basis of the new book value of the asset and the new
estimate of the remaining useful life.
Expenditures that are minor in amount are usually treated as
repair expense even though they may have characteristics of
capital expenditures. The consequent saving in time and
accounting expenses justifies the sacrifice of a small degree of
accuracy. Some businesses establish a minimum amount for
classifying an item as a capital expenditure.

8.7-Disposal of Plant and Equipment.

When a fixed asset is no longer of value to the entity, the
asset is often sold for its scrap value. If the asset is fully

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depreciated, then no depreciation is recorded at the time of its

disposal.
Example 10:
Equipment purchased for 25,000 is fully depreciated in the
accounts. The company decided to dispose of the asset, the
journal entry is:
Accumulated Depreciation 25,000
Equipment 25,000
If the asset is not fully depreciated at the time of disposal, an
entry is needed to update the depreciation.
Example 11:
Equipment of L.E20,000 with accumulated depreciation of
18,000 as of the end of the previous year (December 31) is being
discarded on March 31. the annual depreciation rate is 10
percent. The depreciation expense for three months (January 1 –
March 31) is L.E500 (L.E20,000 × 10% × 3/12). The journal
entry on March 31 to bring the accumulated depreciation account
up to date is:
Depreciation Expense 500
Accumulated Depreciation 500
The entry to dispose of the asset is:
Accumulated Depreciation 18,500
Loss on disposal of Fixed Assets 1,500
Equipment 20,000
The loss account is shown under other expenses in the
income statement.

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8.7.1- Sale of Plant and Equipment

Before the sale of plant or equipment may be recorded,
depreciation is recognized for the fraction of the year ending with
the disposal date. The difference between the asset’s selling price
and updated book value will result in a gain (selling price is
greater than book value) or a loss (selling price is less than book
value). Of course, in the unlikely case that an asset is sold for an
amount identical to its book value, no gain or loss will arise.
Example 12:
On March 31, 2016 equipment cost L.E20,000 with
accumulated depreciation of L.E18,000 as of December 31, 2015
is sold for L.E2,600. The annual straight-line depreciation rate is
10 percent. Two journal entries are required. The first is to
update the accumulated depreciation account and the second is to
record the sale.
2016
March 31 Depreciation Expense 500()
Accumulated Expense 500
Cash 2,600
Accumulated Depreciation 18,500
Equipment 20,000
Gain on selling
Fixed assets 1,100
The gain may be proved by comparing the selling price to
the book value as follows:

( ) * L.E2, 000 × 3/12 = L.E500

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Selling price L.E2, 600

Book Value
Cost L.E20, 000
Less: accumulated Depreciation 18,500 1,500
Gain L.E1,100
The gain account is shown under other income in the income
statement.

Example 13:
If we assume the same information as in example 12 except
that the equipment is sold for L.E1, 400, the journal entries are:
2016
March 31 Depreciation Expense 500
Accumulated Depreciation 500
Cash 1,400
Accumulated Depreciation 18,500
Losses on selling fixed assets 100
Equipment 20,000
The loss may be proved by comparing the selling price to the
book value
Selling Price L.E1,400
Book Value
Cost L.E20,000
Less: Accumulated Depreciation 18,500 1,500
Loss L.E 100
======

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8.7.2- Trading In of Plant and Equipment

An old asset is often traded in for a new one. In an exchange
of similar assets, the price of the new asset less the credit given
on the old asset represents the cash to be paid (called boot). If the
trade-in value exceeds the book value of the old asset, a gain
arises. According to APB Opinion 29, however, the gain is not
recorded but rather serves as a reduction of the cost basis of the
new asset. The new asset’s recorded cost will be equal to the
book value of the old asset plus the cash paid.

8.8- Gain Is Not Recognized

Example 14:
Assume the following information relating to a trade-in:
Old Equipment
Cost L.E20,000
Accumulated Depreciation as of
December 31 of the
Previous year 17,500
Depreciation expense for the
Current year up to the
time of trade-in 500
New Equipment
Cost L.E22,000
Trade-in allowance 2,600
Cash paid L.E19,400
========

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The entry to bring the depreciation up to date is:

Depreciation Expense 500
Accumulated Depreciation 500
Before the trade-in can be recorded, any gain from the
transaction must be determined.
Trade-in value L.E2,600
Less: book value of old
Equipment 2,000
Gain L.E 600
========
The gain reduces the cost basis of the new asset as follows:
Cost L.E22,000
Less: Gain 600
Recorded cost of new equipment L.E21,400
=========
An alternative computation of the recorded cost of the new
equipment is:
Book value of old equipment L.E 2,000
Add: Cash payment 19,400
Recorded cost of new equipment L.E21,400
=========
The entry to record the trade-in is:
Accumulated Depreciation 18,000
Equipment (new) 21,400
Equipment (old) 20,000
Cash 19,400

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8.9- Loss Is Recognized

If the trade-in allowance is less than the book value of the
old asset, a loss is recognized in accordance with APB Opinion
29. Therefore, the new asset is reflected at cost.
Example 15:
Assume the same information as in Example 14 except that
the trade-in allowance is L.E1, 200 instead of L.E2, 600. The
cash payment now required is L.E20, 800 (L.E22, 000 – L.E1,
200). The journal entries to update the accumulated depreciation
account and to record the trade-in are:
Depreciation expense 500
Accumulated depreciation 500
Accumulated depreciation 18,000
Equipment (new) 22,000
Loss on disposal of fixed assets 800()
Equipment (old) 20,000
Cash 20,800

( ) The loss is equal to

Book Value L.E2,000
Less: Trade-in value 1,200
Loss L.E 800

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In the preparation of a tax return, no gain or loss is

recognized when an asset is exchanged for a similar one. In this
case, the cost of the new asset is equal to the book value of the
old asset plus the boot given.

8.10- Intangible Assets.

Intangible assets lack physical substance and arise from a
right granted by the government or another company. Intangibles
may be acquired or developed internally. Examples of rights
granted by the government are patents, copyrights, and
trademarks, while an example of a privilege granted by another
company is a franchise. Other types of intangibles include
organization costs, leasehold improvements, and goodwill.
Organization costs are the expenditures incurred in starting a new
company; an example would be legal fees. Leasehold
improvements are expenditures made by a tenant to his or her
property, such as the cost of putting up new paneling. Goodwill
represents the amount paid for another business in the excess of
the fair market value of its tangible net assets. For example, if
company A paid L.E100, 000 for company B’s net assets having
a fair market of L.E84,000, the amount paid for goodwill is
L.E16,000. Goodwill can be recorded only when a company
purchases another business. The amount paid for the goodwill of

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a business may be based upon the acquired firm’s excess earning

over other companies in the industry. Internally developed
goodwill (e.g., good customer relations) is not recorded in the
accounts.

Example 16:
The net assets of Alpha Company are L.E800, 000, which
includes intangibles of L.E100, 000. Beta Corporation decided to
acquire the business, paying book value for the net assets. It
decides to capitalize the goodwill at 16 percent. Goodwill is to be
based on the excess earnings over 8 percent. In prior years, net
income has approximated 10 percent of net tangible assets. The
amount of goodwill is equal to:
Average net income
(L.E700, 000 × 0.10) L.E70, 000
Less: Normal net income
(700,000 × 0.08) 56,000
Excess net income L.E14, 000
========
Capitalized goodwill
(L.E14, 000/0.16) L.E87, 500
========

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8.10.1- Accounting for Intangible Assets

APB Opinion 17 specifies the requirements for accounting
for intangible assets.
Intangibles that have been acquired, such as goodwill,
should be recorded at cost. In the event that an intangible is
acquired for other than cash, it should be reflected at either the
fair market value of the consideration given or the fair market
value of the right received, whichever is more clearly evident.
Intangibles should not be arbitrarily written off if they still have
value.
When identifiable intangibles are internally developed (e.g.,
patents), they should be recorded as assets and reflected at cost.
If they are not identifiable, they should be expensed.
Intangible assets must be amortized over the period
benefited not to exceed 40 years. Amortization is a term used to
describe the systematic writ-of to expense of an intangible asset’s
cost over its economic life. The straight-line method of
amortization is used. The amortization entry is:
Amortization Expense xx
Intangible Asset xx
The credit is made directly to the given intangible asset
account. However, it would not be incorrect to credit an
accumulated amortization account, if desired.

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Some intangibles have a limited legal life. An example is

patents, which have a legal life of 17 years.
Example 17:
On January 1, 2015, company A paid L.E1,600 to obtain a patent
that has a life of 17 years. The appropriate journal entry to record
the amortization for 2015 is:
Amortization Expense 100
Patents 100
An amortization expense of L.E100 is shown in the 2011
income statement.
The patent account of L.E1, 600 (L.E1, 700 – L.E100) is
shown under Intangible Assets in the December 31, 2015 balance
sheet.
Costs incurred in sustaining intangible assets should be
capitalized. For example, legal costs incurred in successfully
defending a patent should be charged to the patent account.
If an intangible asset is suddenly deemed to be worthless, the
asset account should be written off and a loss recognized. An
example occurs when a company loses the (final) legal case
involving its patent.
FASB 2 covers research and development costs. It requires
such costs to be expensed in the year incurred.

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Problems and Exercises

1. Complete the missing word(s).
(a) The allocation of the coast of a fixed asset to the periods
benefited from it is called ---------------- .
(b) The cost of a fixed asset less its accumulated depreciation
is equal to the --------------- .
(c) The value placed on a fixed asset at the end of its useful
life is known as --------------- .
(d) A fixed asset not subject to depreciation is --------- .
(e) The depreciation method which results in equal periodic
charges is the --------------- method.
(f) The method which doubles the straight-line rate of
depreciation and then applies it to the book value of the
asset at the beginning of the year is known as the ----------
method.
(g) The method whereby a series of fractions are used to
depreciate the asset is referred to as --------------- method.
(h) When the use of equipment varies considerably from year
to year, an appropriate method of depreciation is the ------
method.
(i) The term --------------- refers to the exchange of an old
fixed asset for a new one.
(j) The amount paid to purchase an item after a trade-in
allowance is deducted from the price is called ------------- .
(k) Equipment purchased for L.E20,000 with a trade-in gain
of L.E1,500 will be recorded at --------------- .

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(l) Equipment purchased for L.E20,000 with a trade-in loss

of L.E1,000 will be recorded at --------------- .
(m) The loss on disposal of a fixed asset is shown under -------
in the income statement.
(n) --------------- assets lack physical substance and arise from
a right granted by the government or another company.
(o) Acquired intangibles should be recorded as ---------------
at cost.
(p) Internally developed intangibles which are not specifically
identifiable should be recorded as --------------- .
(q) Goodwill can only be recorded in a business combination
accounted for under the purchase method when the coast
to the acquirer --------------- the fair market value of the
net assets of the acquired company.
(r) Intangible assets must be amortized over there useful lives
but not in excess of --------------- years.
(s) A patent recorded at L.E20,000 has a remaining legal life
of 14 years. However, its economic life is now estimated
to be 10 years. The annual amortization expense will be
--------------- .
(t) Legal coasts incurred in defending a patent should be
--------------- .
(u) The --------------- account is charged for expenditures
made in starting a company.
Solution:

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(a) depreciation; (b) book value; (c) salvage value; (d) land;
(e) straight-line; (f) double-declining-balance; (g) sum-of-the-
years’-digits; (h) units-of-production; (i) trade-in; (j) boot; (k)
L.E18,500; (l) L.E20,000; (m) Other Expenses; (n) Intangible;
(o) assets; (p) expenses; (q) exceeds; (r) 40; (s) L.E2,000; (t)
capitalized; (u) organization cost;

2. convert each of the following life estimates to a depreciation

rate, stated as a percent, assuming that residual value of the plant
assets is to be ignored:
(a) 4 years, (b) 6years, (c) 10 years, (d) 25 years (e) 33 13 years
(f) 40 years.

3. A pant asset with a cost of L.E100,000 has an estimated

trade-in value of L.E5,000 and an estimated life of 10 years.
(a) What is the annual depreciation, computed by the straight-
line method?
(b) The annual depreciation is what percent of the cost of the
asset?
4. What percent of the cost of a plant asset, acquired at the
binning of the year, with a life estimate of 5 years, is written off
in the first year by the declining-balance method, using twice the
straight-line rate?

5. An asset with an estimated life of 5 years is to be depreciated

by the sum-of-the-years-digits-method.
(a) What is the denominator of the depreciation fraction?

231
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

(b) What is the numerator of the fraction for the second year?

6. A plant asset with a book value of L.E3,000 is traded for a

similar asset with a price of L.E30,000. the trade-in allowance is
L.E1,000.
(a) What is the amount of cash to be paid?
(b) What the gain or the loss on the disposal?
(c) If the gain or the loss is not recognized in the accounts, at
what amount will the new asset be recorded?
(d) If the gain or the loss is not recognized in the accounts at
the time of the exchange, how will it be recognized in the
future?

7. A building acquired on January 12 at a cost of 200,000 has

an estimated life of 40 years. Assuming that it will have no
residual value, determine the depreciation for each of the first
two years.
(a) By the straight-line method.
(b) By the declining-balance method, using twice the straight-
line rate.

8. An electric generator with a cost of L.E35,000 and estimated

salvage value of L.E2,000 is expected to have a useful operating
life of 150,000 hours. During October the generator was operated
500 hours. Determine the depreciation for the month.

9. Balances in the accounts Trucks and Accumulated

Depreciation-Trucks at the end of the year prior to adjustment are

232
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

L.E38.550 and 32,450, respectively. Details of the subsidiary

ledger are presented below.
(a) Determine the amount to be credited to the accumulated
depreciation section of each of the subsidiary accounts for
the current year.
(b) Present the general journal entry to record depreciation for
the year.
Accumulated Miles
Useful Depreciation Operated
Truck Residual Life in at Beginning During
No. Cost Value Miles of Year Year
1 6,500 500 120,000 5,200 12,000
2 5,000 400 100,000 2,500 8,000
3 12,050 12,00 175,000 9,750 20,000
4 15,000 2,000 200,000 6,000 25,000

10. A plant asset acquired at the beginning of the fiscal year at a

cost of L.E2,000 and an estimated useful life of 10 years.
Determine the following:
(a) The annual depreciation charge by the straight-line
method.
(b) The amount of depreciation for the second year computed
by the declining-balance Method (at twice the straight-line
rate).
(c) The amount of depreciation for the second year computed
by the sum-of-the-years-digits method.

233
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

11. The following transactions, adjusting entries, and closing

entries were completed by Modern Furniture Co. during a three-
year period. All are related to the use of delivery equipment.
2015.
Mar.10. Purchased a used delivery truck for L.E2,800, paying
cash.
15. Paid garage L.E190 for tires and L.E214 For repairs to
the truck.
Sept.16. Paid garage L/E37 for miscellaneous repairs to the
motor.
Dec.31. Recorded depreciation on the truck for the fiscal year.
The estimated life of the truck is 2 years, with a trade-in
value of L.E300. the straight-line method of depreciation is
used.
Dec.31. Closed the appropriate accounts to Expense and
Revenue Summary.
2016
Aug.28. Traded in the used truck on a new truck priced at
L.E5,194, receiving a trade-in allowance of L.E700 and
paying the balance in cash. (Record depreciation to date in
1966; gain or loss on exchange is not to be recognized.)
Nov.19. Paid garage L.E49 for repairs to the truck.
Dec.31. Recorded depreciation on the truck. It has an estimated
trade-in value of L.E800 and an estimated life of 4 years.
The declining- balance method (twice the straight-line rate)
of depreciation is used.

234
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

31. Closed the appropriate accounts to Expense and Revenue

Summary.
2016
June.23. purchased a new truck for L.E4,900, paying cash.
Oct.10. Sold the truck purchased in 1966 for L.E2,400 cash.
(Record depreciation).
Dec.31. Recorded depreciation on the remaining truck. It has an
estimated trade-in value of L.E600 and an estimated life of 4
years. The declining-balance method (twice the straight-line
rate) of depreciation is used.
31. Closed the appropriate accounts to Expense and Revenue
Summary.
Required:
(1) Open the following accounts in the ledger:

121 Delivery equipment.

121.1Accumulated Depreciation - Delivery Equipment.
614 Depreciation Expense-Delivery Equipment.
615 Truck Repair Expense.
912 Loss on Disposal of Plant Assets.
(2) Record the transactions and the adjusting and the closing

entries in general journal form. Post to the accounts and

extend the balance after each entry.

235
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

14. On January 3, 2015, ABC Company opened a Burger Eatery

franchise after paying a fee of L.E30,000. it was decided to
amortize the fee over 20 years. (a) Prepare the appropriate annual
amortization entry. (b) Determine the balance in the franchise fee
account at December 31, 2016.
Solution:
(a) Amortization Expense 1,500()
Franchise Fee 1,500

(b) Cost L.E30,000

Less: Accumulated Amortization
(L.E1,500 × 4 ) 6,000
Balance L.E24,000

15. A patent was acquired on January 1, 2014 for L.E8,500. It

was decided to amortize it over 17 years. After 13 years had been
amortized, the company decided that the remaining life should be
10 years rather than 14 years. Taking into account the new life,
prepare the entry to record amortization expanse for the 4th year.
Solution:
Original annual amortization expense: L.E8, 500 /17 = L.E500
Cost L.E8, 500
Less: Accumulated Amortization (500 × 3 ) 1,500
Balance at the end of the 3rd year L.E7,000
=======

( ( 30,000 / 20 years = L.E1,500

236
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

Annual amortization expense after change in estimated life:

L.E7, 000 / 10 = L.E700
The journal entry in the fourth year is:
Amortization Expense 700
Patents 700
16. On January 2, 2014, El-Nagah Corporation acquired a patent

for L.E192, 000. The patent had a remaining legal life of 12 years
and an estimated useful life of 8 years. In January 2014 El-Nagah
paid L.E12,000 in legal fees in a successful defense of the patent.
What should El-Nagah record as patent amortization for 2014?
Solution:
Cost L.E192,000
Less: Accumulated amortization
(19 × 5 – 19× 8) (L.E192, 000 × 4 / 8) 96,000
Balance, December 31, 2015 L.E 96,000
Legal fees, 2016 12,000
Balance prior to amortization
( 4 years remaining ) L.E108,000
==========
Amortization expense for 2004
(L.E108, 000 / 4) L.E 27,000
=========

237
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

17. In January 2015 Dina Corporation purchased a patent for a

new consumer product for L.E180, 000. at the time of purchase,

the patent was valid for 15 years. Due to the competitive nature
of the product, however, the patent was estimated to have a
useful life of only 10 years. During 2013 the product was
permanently removed from the market under government order
because of a potential health hazard present in the product. What
amount should Dina charge to expense during 2016?
Solution:
Cost L.E180, 000
Less: accumulated amortization
(2010 – 2012) (L.E180, 000 × 3/10) 54,000
Balance, December 31, 2015 L.E126,000
=========
Amortization expense for 2016 L.E126,000
=========
Since is now worthless, the patent account must be written off.

18. El-salam Company has L.E 1,500,000 of net assets, of which

L.E240,000 are intangibles. An investor offers to buy the

business, paying book value for the net assets. Goodwill is to be
capitalized at 15 percent and is to be based on the excess
earnings over 12 percent. The yearly earnings of the company
have averaged 14 percent of net tangible assets. Determine the
amount of goodwill.

238
Chapter Eight: Fixed Assets, Depreciation, And Intangible Assets -------

Solution:
Average net income
(L.E1, 260,000 × 0.14) L.E176, 400
Normal net income
(L.E1, 260,000 × 0.12) 151,200
Excess net income L.E 25,000
=========
Capitalized goodwill
(L.E25, 200 / 0.15) L.E168,000
=========
19. The owners of the Moon Suit Clothing Store are
contemplating selling the business to new interests. The
cumulative earnings for the past five years amounted to L.E540,
000, including extraordinary gains of L.E10, 000. The annual
earnings based on an average rate of return on investment for this
industry would have been L.E76, 000. If excess earnings are to
be capitalized at 10 percent, what is the implied goodwill?
Solution:
Cumulative earnings L.E450, 000
Less: Extraordinary gains 10,000
Normal earnings L.E440, 000
=========
Average earnings (L.E440, 000 / 5) L.E 88,000
Industry average earnings 76,000
Excess earnings L.E 12,000
=========
Implied goodwill (L.E12, 000 /0.10) L.E120,000

239
 WORK BOOK FOR
INTRODUCTION
TO
ACCOUNTING

Dr. Safinaz Abd-Elhai Abd-Elhamid

Accounting Department
Faculty of Commerce
Cairo University

2017
 Chapter 1 & 2
Question (1)
Answer the following question:
1) Define the accounting system.
2) What are the basic functions of an accounting system?
3) What are the factors which affect the structure of the accounting
system?
4) Who uses the accounting data?
5) What is the difference between bookkeeping and accounting?
6) What are the fields of the accounting profession?
7) What are the types of the business organizations?
8) Mention the basic financial accounting concepts and principles.
9) What does the business entity concept state?
10) What does the historical cost state?
11) Define the unit measurement concept.
12) What is the assumption upon which the financial statements are
prepared?
13) Define the objectivity and consistency concepts.

Question (2)
Multiple choice Questions:
Select the correct answer for each of the following question:
1 -An accounting system consists of:
a) The personnel. b) Procedures.
c) Devices and records. d) All of the above.

2 -The functions of every accounting system are:

A) Interpret and record the effects of business transaction.
b) Classify the effects of similar transaction.
c) Summarize and communicate the information.
d) All of the above.

3 -The internal users are:

a) Managers. b) Investors. c) Creditors. d) Customers.

4 - A business owned by one person is generally a:

a) Sole proprietorship. b) Partnership.
c) Corporation. d) None of the above.

- 2 -
5 - According to this concept all the business transaction are recorded in
terms of money. This concept is:
a) Business entity. b) Historical cost.
c) Unit measurement. d) Going concern.

6 -The principle which refers to the use of the same accounting principles in
each accounting period is:
a) Consistency. b) Objectivity.
c) Historical cost. d) Going concern.

7 -The gross increase in owner`s equity resulting from business activities:

a) Drawings. b) Capital. c) Expenses. d) Revenues.

8 -The resources owned by businesses called:

a) Liabilities. b) Owner`s equity.
c) Assets. d) Profit.

9 -The decreases in owner`s equity that result from operating the business
are:
a) Revenues. b) Expenses. c) Capital. d) Drawings

10-The basic accounting equation is:

a) Assets = liabilities + owner`s equity b) Assets = Equities
c) Liabilities = Assets + owner`s equity
d) Both A &B.

11-Each time a business activity occurs, amounts are changed in the:

a) Assets. b) Capital.
c) Accounting equation. d) None of the above.

12-When there is an increase in cash and a decrease in equipment:

a) There must also be decrees in capital.
b) There must also be an increase in liabilities.
c) There is no change in equities.
d) None of the above.

13) The three types of financial statements are:

a) The income statement, the statement of owner's equity and balance
sheet.

- 3 -
 b) The income statement, the statement of owner's equity and the
statement of cash flows.
c) The income statement, the balance sheet and report for independent
accounts.
d) None of the above.
14) The going concern assumption 'means that:
a) For reporting purposes, an entity's life can be divided into discrete
time periods.
b) Business financial information is recorded and reported separately
from the owner's personal financial information.
c) The actual paid or received is the amount to be recorded in
accounting records.
d) None of the above.

15) The three main types of business organizations are:

a) Sole proprietorship. b) Partnership.
b) Corporation. d) All of the above.

16) Accountants use cost rather than current market values because of:
a) The objectivity principle. b) Consistency principle.
c) Going concern concept. d) None of the above.

17) If accounting information is recorded differently from one period to the

next, information reported, therefore accountant should compiled with:
a) Going concern concept. b) Entity concept.
c) Consistency principle. d) Objectivity principle.

18) If the business has purchased land 10 Years ago for L.E 50,000. Assume
that the market value of the land this year was L.E500,000. The land
shown in accounting recorded:
a) L.E 500,000. b) L.E 450,000.
c) L.E 50,000. d) None of the above.

19) If the business has purchased land 10 Years ago for L.E 50,000. Assume
that the market value of the land this year was L.E500,000. The
accountant should compile with:
a) Going concern concepts. b) Historical cost principle.
c) Objectivity principle. d) Both b& c.

- 4 -
20) The principles of accounting termed "Generally Accepted accounting
principles" (GAAP) are of particular importance to:
a) Financial accountants. b) Managerial accountant.
c) Factory managers. d) All of the above.

21) A business owned by two or more persons associated as partners a:

a) Partnerships. b) Proprietorship.
c) Corporation. d) All of the above.

22) The holders of the shares (Stock holders) enjoy limited liability, they are
not personally liable for the debts of the:
a) Partnership. b) Proprietorship.
c) Corporate entity. d) None of the above.

23) The ownership [can be transferred without dissolving the:

a) Corporation. b) Proprietorship.
c) Partnership. d) All of the above.

24) Private accounting consists of:

a) Cost accounting. b) Internal auditing.
c) Accounting information System. d)All of the above.

25) Examples of non- for- profit organizations are:

a) Hospitals. b) Collages.
c) Universities. d) All of the above.

26) Reviewing the company's operations to determine compliance with

management policies and evaluating the efficiency of operations refer
to:
a) Cost accounting. b) Tax accounting.
c) Internal auditing. d) General accounting.

27) The external uses of financial information are:

a) Taxing authorities. b) Labor onions.
c) Investors and creditors. d) All of the above.

28) The excess of total revenues over total expenses incurred for a given
period is called:
a) Net income. b) Net Loss.
c) Owner's equity. d)None of the above.

- 5 -
29) With an increase in equities there must also be an increase in:
a) Assets. b) Capital.
c) Notes payable. d) Loans.

30) The Principal sources (increases) of owner's equity are:

a) Investments by owners. b) Revenues from business operations.
c) Increasing in assets. d) A& b.

31) Reductions in owner's equity arte a result of:

a) Withdrawals of assets by owners. b) Expenses.
c) Losses. d) All of the above.

32) If an individual asset is increased, there must be a corresponding:

a) Decrease in another asset. b) Increase in a specific liability.
c) Increase in owner's equity. d) All of the above.

33) The existing debts and obligations are called:

a) Assets. b) Liabilities.
c) Owner's equity. d) Accounts receivable.

34) The actual or expected cash out flows (Payment) is called:

a) Expenses. b) Liabilities.
c) Losses. d) None of the above.

35) When an enterprise purchases merchandise on credit, these obligations

are called:
a) Debtors. b) Accounts receivable.
c) Accounts payable. d) Owner's equity.

36) Persons or entities to who owe money are called:

a) Creditors. b) Debtors.
c) Owners. d) Investors.
37) The ownership claim to total assets is known as:
a) Liabilities. b) Creditors.
c) Owner's equity. d) Assets.

38) Generally, revenues result from:

a) The sale of merchandise. b) The performance of services.
c) The rental of property. d) All of the above.

- 6 -
39) The economic events of the enterprise that are recorded are called:
a) Equations. b) Transactions.
c) Records. d) Statements.

40) A company may carry on many activities that do not represent in

themselves business transaction like:
a) Hiring employees. b) Purchasing merchandise.
c) Placing an order for merchandise with a supplier. d) Both a & c.

41) Dina decided to open a computer programming service. She

invested L.E 100,000 cash. This transaction results in:
a) An equal increase in assets and liabilities.
b) An increase in one asset and equal decrease in another asset.
c) An equal increase in assets and owner's equity.
d) None of the above.

42) Dina purchased computer equipment for L.E 17,000 on account from
Cairo Co. This transaction means that there is:
a) Increase in one assets, decrease in another asset.
b) Increase in one assets, increase in a liability.
c) Increase in one assets, increase in a capital.
d) Non effect on equities.

43) Dina received L.E 1200 cash from customers from programming
services she has provided. The effect of this transaction is:
a) An increasing in cash L.E 1200 and decreasing in liabilities L.E
1200.
b) An increasing owner's equity L.E 1200 and an increasing revenues
L.E 1200.
c) An increasing in owner's equity L.E 1200 and an increasing in cash
L.E 1200.
d) An increasing in owner's equity L.E 1200 and decreasing in accounts
payable L.E 1200.

44) Dina paid Cairo Co. L.E 17000 cash. The effect of this transaction is:
a) Decreasing in cash, decreasing in capital.
b) Decreasing in cash, decreasing in a liability.
c) Decreasing in cash, increasing in an expense.
d) None of the above.

- 7 -
45) Dina provided programming services of L.E 3500 for customers. Cash
amounting to L.E 1500 is received from customers. This transaction
results in all of the following except:
a) An increase in cash. b) An increase in owner's.
c) An increase in debtors. d) An increase in creditors.

46) Dina collected L.E 2000 cash from customers. This transaction results in
all of the following except:
a) An increase in owner's equity. b) An increase in cash.
c) A decrease in accounts receivable. d) An increase in cash flow.

47) Dina paid salaries L.E 900, rent L.E 600 and utilities L.E 200 in cash.
The effect of this transaction is:
a) A decreasing in cash L.E 1700 and a decreasing in liabilities L.E
1700.
b) A decreasing in expenses L.E 1700 and a decreasing in owner's
equity L.E 1700.
c) A decreasing in cash L.E 1700 and a decreasing in owner's equity
L.E 1700.
d) None of the above.

48) At the end of the month the total assets at Dina's firm are:
a) L.E 103000. b) L.E 104700.
c) L.E 86000. d) L.E 17000.

49) At the end of the month the total current assets at Dina's firm are:
a) L.E 19000. b) L.E 17000.
c) L.E 86000. d) L.E zero.

50) At the end of the month the total fixed assets at Dina's firm are:
a) L.E 17000. b) L.E 103000.
c) L.E 2000. d) L.E 86000.

51) At the end of the month the total expenses at Dina's firm are:
a) L.E 1200. b) L.E 1700.
c) L.E 900. d) L.E 200.

52) At the end of the month the total revenues at Dina's firm are:
a) L.E 4700. b) L.E 2700.
c) L.E 1200. d) None of the above.

- 8 -
53) At the end of the month the net income or loss at Dina's firm is:
a) Net Loss L.E 1700. b) Net income L.E 3000.
c) Net income L.E 1000. d) None of the above.
54) Which of the following financial statement should be prepared at a
specific date?
a) Statement of owner's equity. b) Balance sheet.
c) Income Statement. d) None of the above.
55) Which of the following financial statement lists assets, liabilities and
owner's equity?
a) Income statement. b) Balance sheet.
c) Owner's equity statement. d) None of the above.
56) Which of the following financial statement lists revenues, expenses and
net income or net loss?
a) Income statement. b) Balance sheet.
c) Owner's equity statement. d) None of the above.
57) Which of the following financial statement lists withdrawals, additional
investment and the results of operations?
a) Income statement. b) Balance sheet.
c) Owner's equity statement. d) None of the above.

The following balances were taken from the books of the Swimming Club at
31/3/2005.
Swimming lessons revenue LE. 19000
Salaries expense LE. 11500
Accounts Receivable LE. 6000
Capital LE. 150000
Equipment LE. 50000
Land and Building LE. 100000
Supplies expense LE. 5000
Withdrawals LE. 4000
Pool rental revenue LE. 7500
Utilities Expense LE. 3000
Insurance expense LE. 500
Cash LE. 13000
liabilities L.E.19000
Additional investments during the month LE. 8000
(May 2005)

- 9 -
Using the above accounts answer the following questions:
58) The total revenue is:
a) L.E 19000. b- L.E 7500. c) L.E 26500. d) L.E 8000.

59) The total of fixed assets is:

a) L.E 100000. b) L.E 50000. c) L.E 150600. d)L.E 150000.

60) The total of expenses is:

a) L.E 8000. b) L.E 20000. c) L.E 19500. d) L.E 24000.

61) The Net income or loss for the years is:

a) Net income of L.E 6500. b) Net income of L.E 11000.
c) Net Loss of L.E 1000. d) Not loss of L.E 500.

62) The total of current assets is:

a) L.E 21600. b) L.E 19000. c) L.E 6000. d) L.E 13000.

63) The Owner's equity is:

a) L.E 150000. b) L.E 158000. c) L.E 47500. d) L.E 160500.

64) Which of the following is not considered a current asset?

a) Cash. b) Accounts Receivable.
c) Notes receivable. d) Notes payable.

65) Which of the following is not considered a fixed asset?

a) Supplies. b) Machinery. c) Vehicles. d) Furniture.

66) Which of the following is not considered an expense?

a) Accrued salaries. b) Prepaid rent.
c) Adverting expense. d) A& b.

67) Which of the following is not considered an owner's equity?

a) Net income. b) Additional investment.
c) Unearned rent. d) Retained Earnings.

68) Which of the following items appears in the Income statement and
owner's equity statement?
a) Net income. b) Withdrawals.
c) Salaries expense. d) Additional investment.

- 10 -
69) Which of the following appears in the balance sheet and income
statement?
a) Ending inventory. b) Notes receivable.
c) Beginning inventory. d) Supplies.
70) Net income is the difference between:
a) Total assets and total liabilities.
b) Total revenues and total expenses.
c) Total receivable and total payable.
d) None of the above.
71) Financial statements are designed primarily to:
a) Provide managers with detailed information tailored to the manager's
specific information needs.
b) Provide people outside the business organization with information
about the company's financial position and operations results.
c) Report of the Internal Revenue service the company's taxable
income.
d) Indicate to investors in a particular company the current market
values of their investments.
72) which of the following would you expect to find in a correctly prepared
income statement?
a) Cash balance at the end of the period.
b) Loan obtained from a bank.
c) Contributions by the owner during the period.
d) Expenses incurred during the period to earn revenues.

73) A balance sheet:

a) Provide owner's, investors, and other interested parties with all the
financial information they need to evaluate the financial strength,
profitability, and future prospected of a given business entity.
b) Show the current market value of the owner's equity in the business
at the balance sheet date.
c) Assists creditor in evaluating the debt- paying ability of a business
by showing the assets and liabilities of the business.
d) Shows the assets, liabilities, and owner's equity of a business entity,
valued in conformity with generally accepted accounting principles.

74) The valuation of assets in the balance sheet is based primarily upon:
a) What it would cost to replace the assets.

- 11 -
 b) Cost, because cost is usually factual and verifiable.
c) Current fair market value as established by independent appraisers.
d) Cost, because in the event of liquidation, the assets would be sold at
an amount equal to their original cost.

75) If 6,400 LE. Cash and a 20,000 LE. Note payable are given in exchange
for some office machines to be used in a business:
a) Total assets and total in liabilities are increased.
b) Total liabilities are decreased.
c) Total assets are decreased.
d) The Owner's equity in increased.

76) Arrowhead Boat shop purchased a truck for $12,000, making payment
of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a
result of this transaction:
a) Total assets increased by 12,000 LE.
b) Total liabilities increased by 7,000 LE.
c) Total assets increased by 70,000 LE.
d) This transaction had no immediate effect upon the owner's equity in
the business.

77) A transaction caused a 10,000 LE. decrease in both total assets and total
liabilities. This transaction could have been:
a) Purchase of a delivery truck for 10,000 LE. cash.
b) An asset with a cost of 10,000 LE. was destroyed by fire.
c) Payment of a bank loan for 10,000 LE.
d) Collection of accounts receivable for 10,000 LE.

78) The accounting principle that assumes that a company will operate in
the foreseeable future is:
a) Going concern. b) Objectivity. c- Liquidity. d- Disclosure.

79) Metropole Corporation recently borrowed 35,000 LE cash from its

bank. Which of the following was unaffected by this transaction?
a) Assets. b- Liabilities. c) Owner's equity. d) Cash.

80) If a transaction causes an asset account to decrease, which of the

following related effects may occur?
a) An increase of equal amount in an owner's equity account.
b) An increase in a liability account.

- 12 -
 c) An increase of equal amount in another asset account.
d) An increase in the combined total of liabilities and owner's equity.

81) Ali Opened the shop by investing 15,000 L.E in cash. How is the
accounting equation affected?
a) Assets increase, owner's equity decreases.
b) Assets increase, owner's equity increases.
c) Assets decrease, owner's equity increases.
d) Assets decrease, owner's equity decreases.

82) Ali Bought 1,500 L. E of supplies on account from El-Amal Co.

How is the accounting equation affected?
a) Assets increase L.E 1500, Liabilities decrease L.E 1500.
b) Assets decrease L.E 1500, Owner's equity increases L.E 1500.
c) Assets increases L.E 1500, Liabilities increase L.E 1500.
d) None of the above.

83) Ali bought equipment for 8,500 L. E cash.

How is the accounting equation affected?
a) Current assets increase, current liabilities increase.
b) Fixed assets increase, current assets decrease.
c) Fixed assets increase, fixed liabilities increase.
d) None of the above.

84) Ali received cash for services, 1,550 L. E.

How is the accounting equation affected?
a) Current assets increase, Owner's equity increase.
b) Current assets increase, Owner's equity decreases.
c) Current assets increase, Current liabilities increase.
d) None of the above.

85) He paid salaries and other expenses of 450 L. E.

How is the accounting equation affected?
a) Current assets increase, Owner's equity increase.
b) Current assets decrease, Owner's equity decreases.
c) Current assets decrease, Current liabilities decrease.
d) None of the above.

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 86) Bought additional 2,500 L. E of supplies from El-Amal Co.; paid
1,500 L. E cash, remainder on account. How is the accounting
equation affected?
a) Assets decrease L.E 2500, Liabilities increase L.E 1000.
b) Assets increase L.E 1000, Liabilities increase L.E 1000.
c) Assets increase L.E 1000, Owner's equity increase L.E 1000.
d) None of the above.

87) Withdrew 500 L. E for personal use. How is the accounting

equation affected?
a) Owner's equity increases, Assets increase.
b) Owner's equity decreases, Assets decreases.
c) Liabilities increase, Assets decreases.
d) None of the above.

The total assets and the total liabilities of a business at the beginning and at
the end of the year were as follows:

Assets Liabilities
Beginning of the year L.E30,000 L.E10,000
End of the year 45,000 15,000
Determine the net income from operations for the year under each of
the following assumptions:
88) There had been no additional investments and no withdrawals by the
owner during the year.
a) L.E 20000. b) L.E 30000.
c) L.E 10000. d) L.E 50000.

89) The owner withdrawn L.E8,000 during the year.

a) L.E 8000. b) L.E 28000.
c) L.E 38000. d) L.E 18000.

90) The owner had made no withdrawals but had made an additional
investment of L.E3, 000 during the year.
a) L.E 7000. b) L.E 3000.
c) L.E 13000. d) None of the above.

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91) The owner had withdrawn L.E6,000 and had mad an additional
investment Of L.E20,000 during the year.
a) L.E 6000 b) L.E 20000.
c) L.E 26000. d) None of the above.

On August 1 of the current year Adel Ghazy established an enterprise under

the name Ghazy Co., Transactions completed during the month were as
follows, determine which accounts are affected:
92) Opened a business bank account with a deposit of L.E1, 000.
a) An assets and equity. b) An assets and a liability.
c) A liability and equity. d) An asset and another asset.

93) Purchased equipment (desk, chairs, etc.) for L.E1,200, paying cash of
500 with the balance on account.
a) Assets and a liability. b) An asset and a liability.
c) An asset and equity. d) None of the above.

94) Purchased supplies (stationery, stamps, pencils, ink, etc.) for cash
L.E50.
a) An asset and a liability. b) An asset and another asset.
c) An asset and equity. d) None of the above.

95) Paid office rent for month, L.E200.

a) A liability and an asset. b) An asset and revenue.
c) Capital and an asset. d) None of the above.

96) Earned sales commission, receiving cash, L.E900.

a) An expense and an asset. b) Capital and revenue.
c) An asset and a liability. d) An asset and capital.

97) Paid creditor on account, L.E300.

a) An asset and a liability. b) An asset and capital.
c) An asset and an expense. d) None of the above.

98) Paid automobile expenses (including rental charge) for month, L.E110,
and miscellaneous expenses, L.E60.
a) A Capital and expense. b) Capital and a liability.
c) An asset and a liability. d) An asset and Capital.

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99) Withdrew cash from the bank account for personal use, L.E300.
a) Withdrawals and Capital. b) An asset and Capital.
c) An expense and asset. d) None of the above.

Service sales for an enterprise during a month totaled L.E8, 000, of

which L.E5, 000 were for cash and the remainder were on account.
Expenses incurred during the same month totaled L.E6, 000, of which 5,000
were paid in cash and the remainder were on account.
100) What was the amount of the enterprise’s revenue?
a) L.E 5000. b) L.E 13000.
c) L.E 3000. d) L.E 8000.

101) What was the amount of the total expenses?

a) L.E 6000. b) L.E 5000.
c) L.E 1000. d) L.E 11000.
102) What was the amount of net income from operations?
a) Zero. b) L.E 2000.
c) L.E 3000. d) None of the above.

- Mohamed Adel sold for L.E6,000 a vacant lot that he had originally
purchased for L.E4,000 and had not yet paid for.
103) How did this transaction affect the total amount of Mohamed Adel
assets?
a) Increase in an asset, decrease in another asset and increase in capital
b) Increase in a liability, decrease in another asset.
c) Increase in an asset, increase in capital.
d) Decrease in an asset, increase in capital.

104) How did this transaction affect the total amount of Mohamed Adel
liabilities?
a) Increase in one asset, decrease in a liability.
b) Increase in a liability, decrease in another liability.

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 c) Increase in a liability, increase in capital.
d) None of the above.

105) How did this transaction affect the total amount of Mohamed Adel
Capital?
a) Increase in an asset, increase in capital.
b) Decrease in an asset, increase in capital.
c) Increase in a liability, increase in capital.
d) None of the above.

The Answer:

1) d 22) c 43) c 64) d 85) b

2) d 23) a 44) b 65) a 86) b
3) a 24) d 45) d 66) d 87) b
4) a 25) d 46) a 67) c 88) c
5) c 26) c 47) c 68) a 89) d
6) a 27) d 48) a 69) a 90) a
7) d 28) a 49) c 70) b 91) d
8) c 29) a 50) a 71) b 92) a
9) b 30) d 51) b 72) d 93) a
10) d 31) d 52) a 73) d 94) b
11) c 32) d 53) b 74) b 95) c
12) c 33) b 54) b 75) a 96) d
13) a 34) a 55) b 76) b 97) a
14) d 35) c 56) a 77) c 98) d
15) d 36) a 57) c 78) a 99) b
16) a 37) c 58) c 79) c 100) d
17) c 38) d 59) d 80) c 101) a
18) c 39) b 60) b 81) b 102) b
19) d 40) d 61) a 82) c 103) d
20) a 41) c 62) b 83) b 104) d
21) a 42) b 63) d 84) a 105) b

Question (3):
Indicate whether each of the following is true (T) or false (F) and
correct the false ones:

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1) A financial accounting system is process of two activities: identifying
and recording.
2) Bookkeeping involves the entire process of identification, recording
and communication.
3) The bookkeeping function is often performed by individuals with
limited skills.
4) General accounting-determining the cost of producing specific
products.
5) Tax accounting designing both manual and computerized data
processing systems.
6) General accounting-reviewing the company operations to determine
compliance with management polices and evaluating the efficiency of
operations.
7) A business owned by two or more persons is called a corporation.
8) The unit measurement concept that the actual amount paid or received
is the amount to be recorded in accounting records.
9) The business entity concept that a business financial information is
recorded and reported separately from the owner`s personal financial
information.
10) An owner`s equity statement presents the revenues and expenses and
resulting net income or net loss of company.
11) A balance sheet reports the assets liabilities and owner`s equity of a
business enterprise at a specific date.
12) An income statement summarizes the changes in owner`s equity for a
specific period of time.
13) With an increase in total assets there must also be an increase in capital.
14) When cash is paid for creditors, Assets and capital decrease.
15) Net income is the excess of total expenses over total revenues incurred
for a given period.
16) Current assets are those assets management intends to convert into
cash or consume in the normal course of business within a year.
17) The business entity concept assumes that business will not be sold or
liquidated in the near future.
18) Financial accounting is primarily concerned with internal reporting.
19) A Financial statement which shows the financial position of a business by
summarizing its assets, liabilities and owner's equity at one particular
date is called owner equity statement.
20) Investment of cash or other assets in the business by the owner is called
drawings.
21) The amount of resources expended or used up by a business during a period of

- 18 -
 time to earn revenues is called assets.
22) Acquired resources and services should be recorded at their actual cost.
23) A financial statement which shows a summary of the revenue and expenses of a
business entity for a specific period of time is called balance sheet.
24) Debts or obligations owed by a business to the creditors are called assets.
25) Assets are the firm's economic liabilities.
26) Retained earnings represent losses of the business that have not
been withdrawn by its owners.
27) The calculation of net income or net loss is shown in the balance
sheet.
28) Withdrawals are decreased in owner's equity not reported in the income
statement.
29) Accounts receivable are obligations owed by a business to creditors.
30) Management accountants use rules of accounting termed Generally
Accepted Accounting principles (GAAP).
31) The periodicity assumption holds that for measuring an entity
financial position and operating results accurately, it is necessary to
assume that the entity will continue to operate indefinitely.
32) It is a basic assumption in accounting that the monetary unit has a
changing amount of purchasing power.
33) The cost basis is criticized as not being in accord with economic reality.
34) Balance sheet is a listing of the accounting equation component assets,
liabilities and owner's equity.
35) The purpose of the income statement is to disclose the causes of
changing in owner's equity during accounting period.
36) The accounting process involves three main functions: recording,
classifying, and reporting.
37) Net income is the difference between total assets and total liabilities
38) Increases in all expense accounts are credited.
39) A withdrawal of cash by the owner of business for personal uses
reduces cash and Liabilities.
40) Fixed assets should be recorded on the balance sheet at their market
value.
41) Objectivity refers to the use of the same accounting principles
in the same way each accounting period,
42) Business entity concept staffs that the actual amount paid or received
is the amount to be recorded in accounting records.
43) The business entity concept assumes that business will not be sold or
liquidated in the near future.
44) Owner’s equity (capital) represents the residual interest of the

- 19 -
 owners in the assets of the business.
45) When the payment on the note-receivable is received, cash is
credited, notes receivable is debited, and interest revenue is debited.

The Answer:
No. T,F Incorrect term Correct term
1 F Two activities Three activities – communicating
2 F Bookkeeping Accounting
3 T
4 F General accounting Cost accounting
5 F Tax accounting Accounting information system
6 F General accounting Internal auditing
7 F Corporation Partnership
8 F The unit measurement Historical cost
9 T
10 F An owner`s equity An income statement
11 T
12 F An income statement An owner`s equity
13 F In capital In equities
14 F Capital Liabilities
15 F Net income Net loss
16 T
17 F Excess of total expenses over Excess of total revenues over total
total revenues expenses
18 F Internal reporting. External reporting
19 F Owner`s equity Balance sheet
20 F Drawings. Capital
21 F Assets. Expenses
22 T
23 F Balance sheet. Income statement
24 F Assets. Liabilities
25 F Liabilities Resources
26 F losses Profits
27 F Balance sheet. Income statement
28 T
29 F Accounts receivable Accounts payable
30 F Management accountants Financial accountants
31 F The periodicity assumption Going concern

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32 F Changing Constant
33 T
34 T
35 F An income statement An owner`s equity statement
36 T
37 F Net income Owner`s equity
38 F Credited Debited
39 F Liabilities Owner`s equity
40 F Market value. Historical value.
41 F Objectivity Consistency
42 F Business entity Historical cost
43 F Business entity Going concern
44 T
45 F cash is credited cash is debited
notes receivable is debited notes receivable is credited
interest revenue is debited interest revenue is credited

Question (4):

1-Supply the missing amount for each of the following cases:

Assets = Liabilities + Capital

L. E L. E L. E
a) 4,000 = 2,500 + ……..
b) 12,800 = ……….+ 5,700
c) ……….= 2,800 + 3,900
d) 5,650 = ……….+ 2,820
e) 57,000 = 28,000 + ……….

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2- Complete the gaps in the following table:

Assets = Liabilities + Capital

12,500 = 1,800 + ?
28,000 = 4,900 + ?
16,800 = ? + 12,500
19,600 = ? + 16,450
? = 6,300 + 19,200
? = 11,650 + 39,750

3- Complete the gaps in the following table:

Assets = Liabilities + Capital

a) 55,000 = 16,900 + ?
b) ? = 17,200 + 34,400
c) 36,100 = ? + 28,500
d) 119,500 = 15,400 + ?

e) 88,000 = ? + 62,000
f) ? = 49,000 + 110,000
Answer:

a) 38100 b) 51600 c) 7600 d) 104100 e) 26000 f) 159000.

4- Dina opened a small shop by investing 5,000 L.E cash on the first day
of May. The following transactions occurred during the month of May.
a) Purchased 2,000 L.E of merchandise on account from supplier.
b) Purchased store equipment for 1,500 L.E cash.
c) Sold merchandise for cash: cost, 1.200 L.E; selling price, 1,600 L.E
d) Paid salary expense for the month, 500 L.E.
e) Paid rental expense for the month, 350 L.E.

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 f) Sold merchandise for cash: cost, 700 L.E; selling price, 1,200 L.E.
g) Purchased merchandise for 2,500 L.E; paid 1,100, the remainder on
account.
h) Withdrew 1,000 L.E for personal use.
Record the transaction and running balances in the form provided below.
Solution:
Cash +Merchandise +Equipment =Account Payable + Dina Capital
5000 L.E = 5,000
a) 2,000 = 2,000
------- ---------- ----------- -------
Balance 5,000 + 2,000 = 2,000 + 5,000
b) – 1,500 + 1,500
---------- ---------- --------
Balance 3,500 + 2,000 + 1,500 = 2,000 + 5,000
c) +1,600 - 1,200 = + 400
--------- ---------- -------- ------------ ------------
Balance 5,100 + 800 + 1,500 = 2,000 + 5,400
d) – 500 - 500
--------- ------------ --------- ------------ -------------
Balance 4,600 + 800 + 1,500 = 2,000 + 4,900
e) – 350 - 350
--------- ------------ --------- ----------- ------------
Balance 4,250 + 800 + 1,500 = 2,000 + 4,550
f) + 1,200 - 700 + 500
-------- ------------ --------- ------------ ------------
Balance 5,450 + 100 + 1,500 = 2,000 + 5,050
g) – 1,100 + 2,500 + 1,400
-------- ----------- -------- ------------ ------------
Balance 4,350 + 2,600 + 1,500 = 3,400 + 5,050
h) –1,000 -1,000
-------- -------- -------- ------------ ------------
Balance 3,350 + 2,600 + 1,500 = 3,400 + 4,050

5- Based on the information in the Capital column in Question 4, determine

the net income.
Solution:

- 23 -
 Income Statement

Sales Revenue 900 L.E

Less: Expenses
Salaries 500 L.E
Rent 350 L.E
-----------
Total Expenses 850 L.E
Net income 50 L.E
6- The summary data of the Adel Real Estate Agency are presented below in
equation form. Describe the Possible transactions for entry (a) to (g).

Cash +Accounts Receivable +Office Furniture = A.P. + Capital

a) 4,000 = 4,000
b) 820 = 820
c) +120 +30 - 150 =
d) 30 - 30 =
e) -260 = -260
f) +650 = +650
g) –35 = -35

7- The following selected transactions were completed by the M.&H.

Laundry during the month of September:

(a) Paid rent for September, L.E100.

(b)Purchased laundry equipment for cash, L.E600.
(c) Paid miscellaneous expenses, L.E60.
(d)Paid creditors on account, L.E110.
(e) Charged customers for services sold on account, L.E170.
(f) Received L.E350 from cash customers.
(g)Received L.E120 from customers on account.
(h)Withdrew L.E150 in cash for personal use.
Copy the following description of transactions and list after each of
the above transactions that fit the description:

(1) Increase in one asset, decrease in another asset.

- 24 -
 (2) Increase in an asset, increase in a liability.
(3) Increase in an asset, increase in capital.
(4) Decrease in an asset, decrease in a liability.
(5) Decrease in an asset, decrease in capital.

8- Summary financial data of Bluefield enterprises (a service business) for

November are presented in the following equation. Each line designated by
a letter indicates the effect of a transaction on the equation. Only
transactions (c), (e), (f), and (g) affect revenue and expenses.

(1) Describe each transaction.

(2) What is the amount of increase in cash for the month?
(3) What is the amount of the net income for the month?
(4) How much of the net income was retained in the business?

Cash + Supplies + Equipment = Accumulated Liabilities + Capital

Depreciation +
2,000 + 3,000 + 8,000 = 2,0001,000 10,000
(a) -200 - 200 .
1,800 + 3,000 + 8,000 = 2,000 + 800 + 10,000
(b) -300 + 300 . . .
1,500 + 3,000 + 8,300 = 2,000 + 800 +10,000
(c) + 2,600 + 2,600
4,100 +3,000 + 8,300 = 2,000 +800 +12,600
(d) + 100 + 100 .
4,100 +3,100 + 8,300 =2,000 +900 +12,600
(e) - 800 - 800
3,300 +3,100 +8,300 =2,000 + 900 + 11,800
(f) - 600 - 600
2700 + 3100 +8300= 2000 +9000 + 11200
(g) = + 100 - 100
2700 +3100 + 8,300 = 2,100 + 900 +11,100
(h) - 500 - 500
2,200 +3,100 +8,300 = 2,100 + 900 +10,600
==== ===== ===== ===== === ======

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9 - On August 1 of the current year Adel Ghazy established an enterprise
under the name Ghazy Co., Transactions completed during the month were
as follows:
- Opened a business bank account with a deposit of L.E1, 000.
- Purchased furniture (desk, chairs, etc.) for L.E1, 200, paying cash of 500
with the balance on account.
- Purchased supplies (stationery, stamps, pencils, ink, etc.) for cash L.E50.
- Paid office rent for month, L.E200.
- Earned sales commission, receiving cash, L.E900.
- Paid creditor on account, L.E300.
- Paid automobile expenses (including rental charge) for month, L.E110,
and miscellaneous expenses, L.E60.
- Withdrew cash from the bank account for personal use, L.E300.
Instructions:
a. Record the transactions and the balances after each transaction, using the
following tabular headings:
Assets = Liabilities Capital
Cash +Supplies +Equipment = Accounts +Adel Ghazy
Payable Capital

Indicate the nature of each increase and decrease in capital subsequent to the
initial investment by appropriate notations at the right of each change.
b. Prepare an income statement for August, owner’s equity statement for
August, and a balance sheet as of the end of August.

10 - The transactions appearing below are those of the Misr Company for
the month of May 2016. This was the first month of the operation of the
business. Transactions:
1- Owner invested Cash, LE50.000.
2- Purchased cleaning equipment on account, LEI5.000.
3- Earned service revenue on account, LEI2.000.
4- Collected cash on account LE4.000.
5- Paid wages, LE3.000.
6- Paid rent, LE2.000.
7- Received bill for advertising for May, LE600.

- 26 -
 8- Paid on account payable, LEI5.000.
9- Additional investment by owner for LE 5600.
10- Owner withdrew LE1000 cash for personal use
Required:

a) Prepare a summary of transactions using column headed: Cash,

accounts Receivables, Cleaning Equipment, Accounts Payable; and
Owners' Equity. Determine new balances after each transaction.
b) Prepare an income statement for May 2016.
c) Prepare a balance sheet as of May Answer
Accounts Cleaning Accounts
Cash + Owner's equity
receviable Equipment Payable
1 50,000 50,000
2 15,000 15,000
3 12,000 + 12,000
4 +4,000 -4,000
5 -3,000 -3000
6 -2,000 -2,000
7 -600 -600
8 -15,000 -15,000
9- 5,600 5,600
10 -1,000 -1,000
38000 +8000 +15000 ---- 61000
61000 61000

Misr company
Income Statement
For the month of May 2014
L.E L.E
Service revenue 12000
Less: expenses
Wages exp. 3000
Rent exp. 2000
Advertising exp. 600
(5600)
Net income 6400

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 Misr company
Statement of owner's equity
For the month Ended May 2014
L.E L.E
Beginning balance may.1 50,000
Increases:
Net income 6400
Additional investment 5600
62000
Decreases
Owner's withdrawals -1000
Ending balance, may, 31 61000
Misr company
Balance Sheet
May 31, 2014
L.E L.E
Assets
Cash 38000
Accounts receivable 8000
Cleaning Equipment 15000
Total Assets 61000

Liabilities& Owner's equity

Owner's capital 61000

11-The XYZ Company owned by Aly Hassan completed the following

transactions in August 2009: (G May 2009)

1. The company was organized and received L.E. 80000 cash investment
from the owner.
2. The company bought equipment for cash at cost of L.E. 61200.
3. The company performed services for customers who agreed to pay L.E.
8000 in one week.
4. The company received the L.E. 8000 from transaction (3).
5. Equipment which cost 4000 was acquired today. Payment was
postponed until September 30, 2009.
6. L.E. 2400 was paid on the liability incurred in transaction (5).
7. Employee wages for the month were paid L.E. 4800.

- 28 -
 Required:
a) Prepare a Summary of transactions for the XYZ Company for the above
transactions. Use money columns headed Cash, Accounts Receivable,
Equipment, Accounts payable, and Owner's Capital. Determine
balances after each transaction.
b) Prepare an Income Statement for August 2009.
c) Prepare a Balance Sheet as of August 31, 2009.

12- Presented below are the transactions of Realty Company, owned by

Hossam Hassan for the month of May 2003.

1. The owner invested LE 40000 cash.

2. Paid LE 2800 as rent for May on an office building.
3. Billed client for commissions revenue for May LE 32000
4. Paid LE 400 for office supplies received and used in May
5. Borrowed LE 10000 from the bank on a note ,
6. Collected LE 24000 cash on accounts receivable.
7. Received, a bill for LE 1200 for Advertising appearing in the local
newspaper in May,
8. Paid cash for gas and oil consumed in May LE 850
9. The owner withdraws LE 1000 cash.
Required:
a) Prepare a Summary of transactions for the XYZ Company for the above
transactions. Use money columns headed Cash, Accounts Receivable,
Accounts payable, office supplies and Owner's Capital. Determine balances
after each transaction.
b) Prepare an Income Statement for August 2009.
c) Prepare a Balance Sheet as of August 31, 2009.

- 29 -
 Chapter 3,4&5
Question (1):
Indicate whether each of the following is true (T) or false (F) and
correct the false ones:
1) Total debit amount for any transaction should equal total credit amount for the
same transaction.
2) A record in which accounting entries are recorded in chronological order is
called the ledger.
3) A two - column schedule listing the names and the debit or credit balances of all
accounts in the ledger is called balance sheet.
4) Receivable that are due and collectable within a year should be
shown in the fixed assets section of the balance sheet.
5) Gross profit is the difference between net sales and cost of goods sold.
6) The process of recording transactions in the journal is termed
"posting".
7) A petty cash fund is classified as fixed assets on the balance sheet.
8) Revenue expenditure is an expenditure that benefits several futures
accounting periods.
9) Accounting entries are posted from the ledger to the journal.
10) Cash, inventory, accounts receivable, and notes receivable are
examples of current liabilities.
11) Trade discount is a reduction in the sale price of goods that is granted
for early payment
12) Cost of goods sold includes the cost of all merchandise sold during the
period; therefore, it includes the cost of all merchandise remaining
on hand at the end of the accounting period.
13) Trade accounts receivable arise from cash sales.
14) A withdrawal of cash by the owner of business for personal uses
reduces cash and Liabilities.
15) When we account for revenues and expenses under the cash basis,
expenses are matched against the revenues they helped to create,
resulting in improved measurement of financial activity.
16) Depreciation expense is reported in the balance sheet.
17) Prepaid expenses should be included as an expense on the income
statement.
18) Supplies that have been consumed in the operations are considered
assets.
19) Notes payable are examples of current assets.
20) A firm that sells a high volume of low-cost merchandise is more

30
 likely to use a perpetual inventory system.
21) Deferred expense is an expense incurred, but not yet paid.
22) Adjusting entries establish a zero balance in the revenue and expense
accounts to start the new accounting period.
23) Purchases will normally appear in the ledger of a merchandising
company that uses a perpetual inventory system.
24) Owner's Capital account is not closed at the end of an accounting
period.
25) Current assets are assets that are used in the operation of a business and
not held for resale to customers.
26) The allowance for doubtful accounts is a contra asset account which
shows the portion of the receivables estimated to be uncollectible.
27) Accumulated depreciation expense is reported in the balance sheet.
28) Supplies that have not been consumed in the operations are considered
assets.
29) The trial balance is usually prepared at the end of the accounting period
after preparing the required financial statement.
30) Perpetual inventory system provides up-to-date information about the
inventory on hand, and also about the cost of goods sold.
31) If the debits are larger than credits, the account is said to possess a
credit balance.
32) A sales discount is a reduction in the sale price of goods that is granted
for early payment.
33) The accrual basis of accounting recognizes expenses only when they are
paid.
34) Unearned revenue is income and should be reported on the income
statement.
35) Uncollected revenue should never be included as revenue on the income
statement.

No T,F Incorrect term Correct term

1 T
2 F the ledger the journal
3 F balance sheet trial balance
4 F fixed assets Current assets
5 T
6 F "Posting". journalizing
7 F fixed assets Current assets
8 F Revenue expenditure Capital expenditure

31
9 F from the ledger to from the journal to the ledger
10 F current liabilities Current assets
11 F Trade discount Cash discount
12 F it includes it excludes
13 F cash sales Credit sales
14 F Liabilities. owner`s equity
15 T
16 F the balance sheet income statement
17 F An expense on the Liability on the balance sheet
income statement.
18 F Assets. expenses
19 F Current assets. current liabilities
20 F perpetual inventory periodic inventory
21 T
22 T
23 F perpetual inventory periodic inventory
24 T
25 T
26 T
27 T
28 T
29 F after preparing Before preparing
30 T
31 F credit balance debit balance
32 T
33 F accrual basis Cash basis
34 F Unearned revenue Earned revenue
35 F Uncollected revenue Unearned revenue

Problems and Exercises

1- Record the following transactions in the general journal of Ghazi

Company and post the entries to the ledger. Then prepare the trial balance
and the balance sheet at January 31, 2016.
Jan 1: Started business with L.E 500,000 cash.
Jan 2: Purchased office equipment, of L.E 30000 cash.

32
 Jan10: Bought machinery L.E 20,000 on account from the Egyptian
company.
Jan20: Paid the amount owing to the Egyptian Company cash.
Jan 25: Drew L.E 2000 cash for his own use.
Solution:
Ghazi Company General Journal
Date Accounts Dr. Cr.
Jan 1 Cash 500,000
Capital 500,000
(Investment made by the owner)
Jan 6 Office equipment 30,000
Cash 3,000
(Purchased office equipment)
Jan 10 Machinery 20,000
Accounts payable(Egyptian Co) 20,000
(Purchased machinery on credit)
Jan 20 Accounts payable(Egyptian Co) 20,000
Cash 20,000
Jan 25 (Paid Creditor)
Withdrawal 2,000
Cash 2,000
(Withdrawal by the Owner)
Ledger Accounts
Cr. Cash Cr. Dr. Capital Cr.
1/1 500000 1/6 30000 1/1 500000
1/20 20000
1/25 2000
Balance 448000 Balance 500000
500000 500000 500000 500000

Dr. Office equipment Cr. Dr. Machinery Cr.

1/6 30000 1/10 20000

Balance 30000 Balance 20000
30000 30000 20000 20000

33
Dr. Egyptian Cr. Dr. Withdrawal Cr.

1/10 20000 1/20 20000 1/25 2000

Balance 2000
20000 20000 2000 2000

The Trial Balance

Account Dr. Cr.
Cash 448,000
Capital ---- 500,000
Office equipment 30,000 ----
Machinery 20,000 ----
The Egyptian Co. ---- ----
Withdrawals 2,000 ----
----------- -----------
500,000 500,000

Ghazi Company
Balance Sheet statement
January 31.2016
Assets Capital 500,000
Cash 448,000 Less:
Office equipment 30,000 ( 2,000 )
Machinery 20,000 Withdrawals
498,000 498,000
2- On February 3: a store made a cash sale of L.E 5000.
Feb: 12: customers returned of L.E 600 of the goods.
Feb: 13: cash purchase of L.E 3000 from El-Amal Co.
Feb: 14: the store returned of L.E 400 of the goods to El-Amal.
Required:
Prepare the appropriate journal entries

34
Solution:
Date Accounts Dr. Cr.
Feb 3 Cash 5.000
Sales 5.000
(Cash Sales)
Feb 12 Sales Returns and Allowances 600
Cash 600
(Cash returns & allowances)
Feb 13 Purchases 3.000
Cash 3.000
(Cash purchases)
Feb Cash 400
Purchases returns & allowance 400
(Cash returns & allowance)

3- On April 8, L.E 1000 of merchandise was sold to El-Nahda Co. on terms

2/10, n/30.
- How much cash will be received if customer pays on:
a) April 15.
b) April 27.
- Prepare Journal entries to record the collection on each of these dates.
Solution:
Accounts receivable 1000
2  1000
Less discount = (20)
100
980

April 8 Accounts Receivable 1000

Sales 1000
---------------------------------------- -------- --------
a- April 15 Cash 980
Sales discount 20
Accounts Receivable 1000
---------------------------------------- -------- --------
b- April 27 Cash 1000
Account Receivable 1000

35
 3- Prepare journal entries for the following transactions:
April: 10 Purchased merchandise of L.E 1000 from Mohamed terms
2/10, n/30.
April: 15 Paid Mohamed in full, less discount.
Solution:
Date Accounts Dr. Cr.
Apr: 10 Purchases 1000
A / P (Mohamed) 1000
(Purchases on account)
Apr: 15 A / P (Mohamed) 1000
Cash 980
Purchase discount 20
Accounts payable (Mohamed) 1000

{2  1000}
Less: Discount  (20)
100
Proceed 980
4- Prepare Journal entries for the following:
October: 3: Sold merchandise to Mohamed for L.E 800 terms 3/20, n/60.
October: 6: Mohamed returned L.E 100 of the goods.
October: 11: Received payments from Mohamed for the balance due.
Solution:
Date Accounts Dr. Cr.
Oct: 3 Accounts receivable 800
(Mohamed)
Sales 800

Oct: 6 Sales returns and allowances 100

Account receivable (Mohamed) 100

Cash 679
Oct: 11 Sales discount 21
Account receivable (Mohamed) 700

36
 Sales 800
Less: Sales return& Allowance (100)
--------
700
700  3
Less discount { } (21)
100
--------679
5- Determine the net Sales:
Sales discount L.E 2000 – Sales L.E 400.00– Sales returns & allowances
L.E 5000.
Solution:
Sales
40.000
Less: Sales returns & allowances 5.000
Sales discount 2.000

(7.000)
Net Sales
33.000
6- Information regarding purchases is presented below. Compute the net
purchases.
Freight in 15.000 – Purchases discounts 12.000 – Purchases 210.000 –
Purchases returns& allowances 30.000.
Solution:
Purchases 210.000
Freight in 15.000
Cost of purchases 225.000
Less: Purchases returns & Allowances (30.000)
Purchases discount 12.000_____
(42.000)
Net purchases 183.000
7- Adel Company purchased merchandise at a cost of L.E 210.000.
Determine the cost of goods sold, if you now that the beginning inventory
was L.E 80.000 and the ending inventory were L.E 50.000.
Solution:
Beginning inventory 80.000
+ Purchases 210.000
Cost of goods available to sale 290.000
- Ending inventory (50.000)
Cost of goods sold 240.000

37
 8- The following account balances were obtained from the records of El-
Eiman Company at December 31, 2016.
Beginning inventory 21.000 – Ending inventory 28.000 – Sales 105.000 –
Purchases 40.000 – Salaries expense 12.000 – Telephone expense 9.000 –
Advertising expense 6.000 - Rent expense 14.000.
Required: Prepare the income statement.
Solution:
El-Eiman Company
Income Statement
For period ended at December 31, 2016
Sales 105.000
Less Cost of goods sold
Beginning inventory 21.000
Purchases 40.000
Cost of goods available for sale 61.000
Less: Ending inventory (28.000)
Cost of goods sold (33.000
Gross profit 72.000
Less: Operating expenses
Salaries expense 12.000
Telephone expense 9.000
Advertising expense 6.000
Rent expense 14.000
Total operating expense (41.000)
Net Income 31.0

9- Sunny shop retail store had the following transactions during October
2016.
Oct 4: Purchased merchandises on account from Dina shop, L.E
12,000. Terms 2/10, n/30.
Oct 7: Purchased merchandise on credit from Palm Co. L.E 8000.
Terms 2/10, n/30, with transportation costs of L.E 120 paid in
cash.
Oct 8: Sold merchandise on account to Mohamed Co. for L.E 3000,
terms 2/10, n/30.
Oct 9: Purchased office supplies for cash, L.E 400.

38
 Oct10: Returned merchandise purchased on October 4, from Dina
shop, which had a gross invoice price of L.E 1500.
Oct13: Paid Dina shop the remaining amount owed for purchases of
October 4, after allowing for the purchase return of October 10.
Oct15: Purchased merchandise for cash, L.E 6900.
Oct16: Received cash from sale on account of October 8 to Mohamed
Co.
Oct17: Purchased land and a small office building for a total price of
L.E 75,000, of which L.E 20,000 was the value of land. Paid
L.E 40,000 in cash and signed a note payable for the
remaining.
Oct 20: Paid Palm Co. for purchases of October7.
Required: Prepare journal entries to record above transactions.
Solution:
Date Account Titles & Explanation Debit Credit
Oct 4 Purchases 12.000
Account payable (Dina shop) 12.000
(Purchased merchandise on account)

Oct 7 Purchases 8.000

Account payable (Palm co) 8.000
(Purchased merchandise on account)

Transportation-in 120
Cash 120
(recording-the transportation costs)
Oct 8 Accounts receivable (Mohamed )
Sales 3.000 3.000
(Sales on account to Mohamed)
Oct 9 Office Supplies
Cash 400 400
(purchased office supplies)

Oct 10 Accounts payable ( Dina shop)

Purchases returns & allowances 1.500 1.500
(Returned apportion of the merchandise)

39
 Oct 13 accounts payable( Dina shop)
Cash 10.500 10.290
Purchases discount 210
(Payment within discount period)

Oct 15 Purchases
Cash 6.900 6.900
(Purchases merchandise for cash)

Oct 16 Cash
Sales discount
Account receivable 2.940 3.000
(Mohamed Co) 60
(Collection within discount period)
Oct 17
Land
Building 40.000
Cash 20.000 35.000
Oct 20 Notes payable 55.000
(Purchased land & building & paid part
cash & issued a note payable)

Accounts payable (Palm Co.) 8.000

Cash
(Payment after discount period)
8.000

10- Prepare journal entries to record the following transactions (Group B

May 2012)

Oct.1: Sold merchandise to Mary on credit, terms 2/10, L.E.40000.

Oct.2: Purchase merchandise for L.E.28000 on credit from Trout Company,

terms 2/10, n/30 .

Oct. 3: Purchased store supplies on credit from Tracy company, terms n/20,
L.E.3000.

40
Oct.8: Purchased merchandise for L.E.100000.on credit from R.C.
Company, terms
2/10, n / 30
Oct. 10: Received full payment from Mary for her Oct. 1, purchase.
Oct. 12: Paid Trout Company for purchase of Oct.2.
Oct. 13: Sold merchandise on credit to Tomy, terms, 2/10, n/30, L.E.60000.
Oct.14: Returned for credit L.E.3000 of merchandise received on Oct.8.
Oct.18: Paid R.C. Company for purchase of Oct.8.
Oct.23: Received full payment from Tomy for his Oct. 13 purchase.
Date Explanation Debit Credit
Oct.1 Accounts receivable (Mary) 40,000
Sales 40,000
2 Purchases 28,000
Accounts Payable (Trout) 28,000
3 Store Supplies 3,000
Accounts Payable (Tracy) 3,000
8 Purchases 100,000
Accounts Payable (R.C) 100,000
10 Cash = 40,000 – 800 = 39200 39200
Sales discount = 40,000 ×2%= 800 800
Accounts receivable (Mary) 40,000
12 Accounts Payable (Trout) 28,000
28000 ×2%= 560 Purchases discount 560
28000 – 560 = 27440 cash 27440
13 Accounts Receivable (Tomy) 60,000
Sales 60,000
14 Accounts payable (R.C) 3,000
Purchases returns and allowances 3,000
18 Accounts Payable (R.C) 97,000
*Purchase discount 1940
**Cash 95060
23 Cash = 60,000 – 1200 = 58800 58800
Sales discount = 60,000 × 2% 1200
Accounts receivable 60,000
* Purchases discount = 97000 × 2% = 1940
** Cash = 97000 – 1940 = 95060

41
11- During October 2013, Hosam store entered into the following
transactions with Omar store. (May 2014 -Group D)

Oct.2: Hosam store sold merchandise to Omar store on credit, the sale
totaled L.E.10,000 and was made under the following terms 5/10, n/60.
Oct.4: Omar store returned L.E. 1,000 of the merchandise because it was
defective.
Oct.9: Hosam store made an additional sale of L.E.5,000 on account to
Omar store. The terms were 2/10, n/30.
Oct.10: Hosam store received the required payment for Oct.2 sale.
Oct.25: Hosam store received full payment on the Oct.9 sales to Omar store.
Required: Prepare all the required entries for both Hosam store and Omar
store.
Solution:
Hosam Store
Oct.2 Accounts receivable 10000
Sales 10000
Oct.4 Sales returns& allowances 1000
Accounts receivable 1000
Oct.9 Accounts receivable 5000
Sales 5000
Oct.10 Cash 8550
Sales discount 450
Accounts receivable 9000
Oct.25 Cash 5000
Account receivable 5000

Omar Store
Oct.2 Purchases 10000
Accounts payable 10000
Oct.4 Accounts payable 1000
Purchases returns& allowances 1000
Oct.9 Purchases 5000
Accounts payable 5000
Oct.10 Accounts payable 9000
Cash 8550
Purchases discount 450
Oct.25 Account payable 5000
Cash 5000

42
 12- The following balances were obtained from the ledger accounts on
Dec.31/2016 for XYZ firm:
Merchandise inventory, Jan.1/2016 L.E. 20,000
Sales 40,000
Sales discounts 1,000
Sales returns & allowances 2,000
Purchases 30,000
Purchases returns& allowances 2,000
Purchases discounts 2,000
Freight-in 3,000
Selling expenses 6,000
Administrative expenses 8,000
Required: Prepare a 2016 income statement, if you learn that ending
inventory amounts L.E.15,000.
X Y Z Company
Income statement
For the year ended December 31, 2011
Sales Revenues: 40000
Sales
Less: sales returns & allowances 2,000
Sales discount 1,000
(3000)
Net sales 37000
Cost of goods sold:
Inventory, jan1. 20,000
Purchases 30000
Less: Purchases returns & allowances 2000
Purchases discount 2000
(4,000)
Net purchases 26000
Add: Fright- in 3000
Cost of goods purchased 29000
Cost of goods available for sale 49000
Less: Inventory,Dec31 (15000)
Cost of goods sold (34000)
Gross Profit 3000
Operating expenses:
Selling expenses 6,000
administrative expense 8,000
Total operating expense (14,000)
Net loss (11000)

43
 13-Giza business is maintaining its accounts on a calendar year basis. At
December 31, 2001 .The trial balance (before adjustments) appeared as
follows:
Debit L.E Credit L.E
Cash 56000
Accounts receivable 45000
Inventory, January 1, 2001 48000
Unexpired insurance 3600
Office supplies 1700
Land 120000
Building 140000
Accumulated dep; building 20000
Notes payable 24000
Accounts payable 34700
Sherif, Capital 229000
Sherif, drawing 15000
Sales 420000
Sales returns 3500
Sales discount 12000
Purchases 215000
Purchase returns 15000
Purchase discount 18000
Transportation- in 3800
Advertising expenses 14000
Delivery expenses 8000
Salaries expenses 48000
Utilities expenses 25600
Interest expenses 1500
760700 760700
Other data:
a- 12-month insurance policy was purchased on April 1,2001
b- Office supplies on hand at Dec.31,2001 were L.E.500
c- The building is being depreciated over a 50-year useful life (double
declining balance method)
d- Accrued salaries payable as of Dec.31 were L.E. 4000
e- Accrued interest on notes payable at Dec. 31 amounted L.E. 500
f- Inventory of merchandise on Dec. 31 was L.E. 42000
Required:
1. Prepare a classified income statement for the year ended Dec.31,2001

44
2. Prepare a statement of owner's equity for the year ended Dec.31,2001
3. Prepare a classified balance sheet at Dec.31,2001. (May 2002).

Solution:
1) Insurance

Insurance expense Prepaid Insurance

3600 = 3600 – 2700 = 900
= ________ × 9 = 2700 (I.S.) (B.S)
12

2) Office supplies

Supplies expense Supplies on hand

= 1700 – 500 = 1200 500
(I.S) (B.S)
3) building

Depreciation expense Acc. Dep. (building) = 4800 +

(Building) = 140,000- 20,000 = 24800 (B.S)
20,000) × 2/50 = 4800
(I.S)
4) Salaries

Salaries expense Salaries Payable

= 48000 + 4000 = 52000 4000 (B.S)
(I.S)
5) Interest

Interest expense Interest payable

= 1500 + 500 = 2000 (I.S) 500 (B.S)

45
1 – Adjusting entries:
Date Exp: Dr. Cr.
Insurance expense 2700
Prepaid Insurance 2700
Supplies expense 1200
Supplies 1200
Dec. Dep. Exp. (building) 4800
31 Accumulated. Dep.( Building) 4800
Salaries Exp. 4000
Salaries payable 4000
Interest Exp. 500
Interest payable 500
Giza business
Income statement
For the year ended Dec, 31, 2001
Sales 420000
(-) sales discount (12000)
Sales returns (3500) (15500)
Net sales (1) 404500
(-) Cost of goods sold
Inventory 1/1 48000
+ Net purchases
Purchases 215000
(-) Purchases returns (15000)
(-) Purchases discount (18000)
182000
+ Trans Portion 3800 185800
Cost of goods available for sale 233800
(-) Ending Inventory (42000)
Cost of goods sold (2) (191800)
Gross profit (1-2) 212700
(-) Expenses
Insurance exp. 2700
Supplies exp. 1200
Dep. Exp. (building) 4800
Salaries exp. 52000
Interest Exp. 2000
Delivery exp. 8000
Utilities exp. 25600
Advertising exp. 14000 (110300)
Net income 102400

46
 Giza business
Balance sheet statement
On Dec, 31, 2001

Current assets Current

Liability.
Cash 56000 Acc. Payable 34700
A.R 45000 Notes Payable 24000
Inventory 42000 Salaries 4000
payable
Supplies 500 Interest 500
Payable
Prepaid insurance
900
Total current 129800 Total current 63200
Assets Liabilities
Fixed assets Owner's
equity
Land 12000 Capital 229000
Building140000 + net income 102400
-Acc.Dep.(24800) - Drawing (15000)
1152000
Total fixed 235200 316400
Assets
379600 379600

14-Egyptian store is a wholesale store maintaining its accounts on a

December 31,2004 the trial balance appeared as follows (LE) (May 2005)

Cash 46750
Notes receivable 41000
Accounts receivable 82000
Inventory 111500
Unexpired insurance 4500
Office supplies 2000
Land 40000
Building 150000

47
 Accumulated depreciation: Building 6000
Equipment 40000
1
Accumulated depreciation: Equipment 12000
Accounts payable 120500
Owner's Capital 248000
Owner's drawing 45000
Sales 815000
Sales returns and allowances 900
Sales discount 2750
Cost of goods sold 519500
Advertising expense 8000
Salaries expense 60000
Interest expense 2500
Delivery expense 5100
General expenses 40000
Total 1201500 1201500
Other data:
a- Insurance premiums expired during the year, LE. 3000,
b- Supplies on hand at Dec. 31 were estimated to an amount LE, 400
c- Accrued salaries payable as of Dec. 31 were LE. 2500
d-The building is being depreciated over 25-year useful life. The equipment
is being depreciated over 10-year useful life.
Required: Prepare the classified Income statement for the year ended Dec.
31, 2004.
.Solution
1) Insurance 4500

Insurance expense Prepaid Insurance

3000((I.S) = 4500 – 3000 = 1500 (B.S)
2) supplies2000

Supplies
Supplies expense
2000 – 400 = 1600 (I.S) 400 (B.S)

48
 3) Salaries60000

Salaries expense =60000+ 2500 Salaries payable = 2500

= 62500 (I.S) (B.S)
4) Building

Dep. Exp (building) Acc. Dep. (Building.)

150,000/25 Years= 6000 = 6000 + 6000 = 12000
5) Equipment

Dep. Exp. (Equip) Acc. Dep. (equip)

= 40,000/10 Years = 4000 = 4000 + 12000 = 16000
Egyptian Store
Income statement
For the year ended Dec, 31, 2004
Sales 815000
(-)Sales returns and allowance 900
sales discount 2750 (3650)
Net sales (1) 811350
(-) Cost of goods sold (519500)
Gross profit 291850
(-) Expenses
Advertising exp. 8000
Insurance exp. 3000
Supplies exp. 1600
Salaries exp. 62500
Dep. Exp. (building) 6000
Dep. Exp. (equipment) 4000
Interest Exp. 2500
Delivery exp. 5100
General exp. 40000 132700
Net income 159150

15-Mohamed's retail store is maintaining its accounts on a calendar year

basis and using a periodic inventory system. The business records
purchases at net cost. At December 31, 2004 the trial balance appeared as
follows:

49
 Debit (LE) Credit (LE)
Cash 87000
Inventory (January 2004) 30000
Accounts receivable 32000
Notes receivable 12000
Marketable securities 23700
Unexpired insurance 4800
Office supplies 2000
Land 60000
Building 180000
Accumulated depreciation: Building 14400
Accounts payable 42000
Notes payable 15000
Bank loan (due in 10 years) 75000
Mohamed, Capital 184000
Mohamed, drawing 16000
Sales 360000
Sales returns & allowances 8000
Sales discount 10000
Purchases 197000
Purchases returns & allowances 12000
Purchases discount 21000
Transportation-in 5000
Rent revenue 24000
Salaries expense 42000
Utilities expense 18600
Advertising expense 14000
Interest expense 2900
Delivery expense 2400
Total 747400 747400
Other data:
a) Unexpired insurance at the end of the year amounted to LE. 2800,
b)Office supplies on hand at December 31,2004 were LE. 500,
c) The building is being depreciated over a 50-years useful life and the store
uses straight line method for computing depreciation
d) The current market value of the Land is LE. 96000,
e) Salaries earned by employees but not yet paid amount to LE. 4000 at

50
December 31, 2004.
f) Accrued rent revenue as of December 31,2004 was amounted to LE.
6000.
g) Inventory of merchandise on December 31,2004 was LE. 2000.
Required;
1- Prepare the adjusting entries at December 31,2004.
2-Prepare the classified income statement for the year ended December
31,2004.
3-Prepare the statement of owner's equity for the year ended December
31,2004.
4 - Prepare the classified balance sheet at December 31,2004
Solution:
1) unexpired Insurance 4800

Insurance expense Unexpired Insurance

= 4800 – 2800 = 2000 = 2800
(I.S) (B.S)
2) Office supplies

Supplies expense Supplies on hand

= 2000- 500 = 1500 (I.S) 500 (B.S)
3) building

Deprecietionexpnse Acc. Dep. (building) = 14400 +

(Building) = 180,000/50 3600 = 18000 (B.S)
= 3600 (I.S)
4) Salaries

Salaries expense Salaries Payable

= 42000 + 4000 = 46000 (I.S) 4000 (B.S)
5) Rent Revenue

Rent Revenue Rent Revenue receivable or

(accrued rent Revenue)
= 24000 + 6000 = 30000 (I.S) 6000 (B.S)
6) Ending Inventory

I.S B. S

51
1 – Adjusting entries:
Date Exp: Dr. Cr.
Insurance expense 2000
unexpired Insurance 2000
Supplies expense 1500
Supplies 1500
Dec.
Dep. Exp. (building) 3600
31,
Accum. Dep. Building 3600
2004
Salaries Exp. 4000
Salaries payable 4000
Rent Revenue Receivable 6000
Rent revenue 6000

Mohamed's Retail
Income statement
For the year ended Dec, 31, 2004
Sales 360000
(-) sales returns and allowanced 8000
Sales discount 10000 (18000)
Net sales (1) 342000
(-) Cost of goods sold
Inventory 1/1 30000
+ Net purchases
Purchases 197000
(-) Purchases returns& (12000)
allowance
(-) Purchases discount (21000)
164000
+ Trans Portion 5000 169000
Cost of goods available for sale 199000
(-) Ending Inventory (2000)
Cost of goods sold (2) 197000)
Gross profit (1-2) 145000
(-) Expenses
1 – selling expense
Advertising exp. 14000
Delivery exp. 2400
Total selling exp. 16400

52
2 – General and administrate
exp.
Supplies exp. 1500
Insurance exp. 2000
Dep. Exp. (building) 3600
Salaries exp. 46000
Utilities exp. 18600
Total General adm. Exp. 71700
3 – Other exp.
Interest exp. 2900
Total exp. (91000)
Other non- operating Revenue 54000
Rent revenue 30000
Net income 84000
Mohamed's Retail
Balance sheet statement
On Dec, 31, 2004
Current assets Current
Liabilities.
Cash 87000 Acc. Payable 42000
Inventory 2000 N. Payable 1500
Acc. Rec. 32000 Salaries payable 4000
Notes Rec. 12000
Marketable 23700
securities
Unexpired 2800 Total current 61000
insurance Liabilities
Supplies 500 Long Term
liabilities
Rent Revenue 6000 Bane loan 75000
receivable
Total Current 166000 Owner's Equity
Assets
Fixed assets Capital 184000
Land 60000 + Net income 84000
Building 180000 - Drawing (16000)
(-) Exp. Dep. (18000) 162000 252000
222000
388000 388000

53
16-Zahran store is a wholesale store maintaining its accounts on a calendar
year basis & using the periodic inventory system. At December 31, 2000 the
trial balance appeared as follows:

Account Titles Dr. Cr.

Cash 35.200
Accounts receivable 18.000
Inventory ( 9 Jan. 1) 60.000
Unexpired insurance 4.400
Equipment 22.000
Accumulated depreciation equipment 6.600
Accounts payable 21.000
Zahran capital 65.000
Zahran drawing 18.000
Sales 560.000
Sales returns & allowances 20.000
Sales discounts 6.000
Purchases 350.000
Purchases return & allowances 18.000
Transportation-in 11.000
Advertising expense 28.000
Rent expense 30.000
Salaries expense 66.000
Office supplies 2.000
Total 670.600 670.600

Other data:
a) A physical inventory taken at December 31 showed the ending
inventory to be L.E 52,000.
b) The equipment is being depreciated over a 10-years useful life.
c) Insurance premiums expired during the year L.E 2,800.
d) Accrued salaries payable as of December 31, were L.E 6,000.
e) Supplies on hand at December 31 were estimated to amounts L.E 500.
Required:
1- Prepare the adjusting entries as at Des. 31,2015.
2- Prepare the classified income statement for the year ended Dec. 31,
2015.
3- Prepare the classified balance sheet at Dec. 31, 2015.

54
Solution
The adjusting entries:
Date Account title & explanation Debit Credit
Dec. 31 Depreciation expense: Building 2200
Accumulated depreciation: Building 2200
31 Insurance expense 2800
Unexpired insurance 2800
31 Salaries expense 6000
Salaries payable 6000
31 Office supplies expense 1500
Office supplies 1500
Zahran Store
Income statement
for the year ended Dec. 31, 2015
Revenue:Sales 560000
Less: Sales returns & allowances 20000
Sales discounts 6000 (26000)
Net sales 534000
Cost of good sold:
Inventory (Jan. 1) 60000
Purchases 350000
Less: Purchases returns & allowances (18000)
Net Purchases 332000
Add: Transportation- In 11000
cost of goods purchased 343000
Cost of goods available for sale 403000
Less: Inventory (Dec. 31) (52000)
Cost of goods sold (351000)
Gross Profit 183000
Operating Expenses:
Selling expenses:
Advertising expenses 28000
General & Administrative Expenses:
Salaries expenses 72000
Depreciation expenses: Building 2200
Insurance expense 2800
Office supplies expense 1500
Rent expenses 30000
Total Expenses: 108500 (136500)
Net Income 46500

55
 Zahran Store
Balance sheet
AtDec. 31, 2015
Assets:
Current Assets:
Cash 35200
Accounts receivable 18000
Inventory 52000
Office supplies 500
Unexpired insurance 1600 107600
Plant & Equipment:Equipment 22000
Less: Accumulated Dep. Equipment (8800) 13200
Total Assets 120500
Liabilities & Owners Equity:
Current Liabilities:
Accounts Payable 21000
Salaries Payable 6000
Total Liabilities: 27000
Owner’s Equity:
Zahran capital 65000
+Net Income 46500
-Zahran Drawing (18000) 935000
Total Liabilities & Owner’s Equity 120500
Un solved Problems
1-ABC Company had the following transactions during June.
June 1: Started business with L.E 1000,000 cash.
June 2: Purchased land for L.E 50,000 and
building for L.E 72,000 from Ali, paid
L.E 42,000 cash and signing a note
payable for the reminder.
June 3: Paid L.E 1000 salary expense, L.E 900 utility expenses
and L.E 500 advertising expense.
June 4: Received L.E 2000 cash for professional services from
the client.
June 5: Performed professional services to Ahmed of L.E 3.000.
June 6: Collected cash from (Ahmed).
June 15: Bought office furniture for L.E 5000 paying by cash.
June 20: Paid the note payable owing to Ali by cash.
June 21: The owner withdrew L.E 1000 cash.

56
Required:
1- Prepare Journal entries.
2- In each transaction determine the type of account, normal balance
and the effect on the accounting equation.
3- Post June entries to the ledger accounts.
4- Prepare the trial balance for June 30/2016.
5- Prepare the income statement and balance sheet on June 30/2016.

2-Prepare the Journal entries for the following transactions, which occurred
in the World Company during the month of September 2016.
Sep 1: Invested L.E 100,000 cash.
Sep 2: Paid rent for September L.E 200 cash.
Sep 3: Performed repair work for El-Amal Co. on account, sent a bill for
L.E 2500.
Sep 4: Placed advertising to be published next week at cost of L.E 250
cash.
Sep 10: Performed repairs for Aswan Co. on account, sent bill for L.E
1555.
Sep 15: Received payment in full from El-Amal Co. for services
performed on Sep 3.
Sep 20: Obtained a loan from Naser Bank, received L.E 100,000 cash.
Sep 25: Billed Mohamed L.E 500 for services rendered during the month.
Sep 29: The owner withdrew L.E 1000 cash for his personal use.
Required:
1- Prepare the journal entries.
2- Post September entries to ledger accounts.
3- Prepare the trial balance for Sep. 30 / 2016.
4- Prepare the income statement and the balance sheet on Sep. 30 /
2016.

3- Prepare Journal entries for the following transactions in Dina’s shop.

October: 3 Sold merchandise to El-Salam Co. for L.E 800 on account.
October: 4 Sold merchandise to El-Amal Co. for L.E 1000 cash.
October: 5 El-Amal Co. returned of L.E 500 for defective merchandise,
made refunds cash.
October: 10 Sold merchandise to Ali of L.E 800, terms 3/20, n/60.
October: 11 Ali paid the amount cash, less discount.
October: 13 Dina purchased office supplies of L.E 1000 cash.
October: 15 Dina purchased merchandise of L.E 900 cash from Ali.

57
 October: 17 Purchased merchandise of L.E 2000 on account from Queen
Company.
October: 18 She returned L.E 100 of goods purchased on October 17
because of damages.
October: 20 purchased merchandise of L.E 1000 terms, 2/10, n/30 from
El-Wafa Company.
October: 25 Dina returned of L.E 200 to El-Wafa because of defects and
paid in full, less discount.

4- The following balances are from Ghazy’s records. Determine the net
sales and net purchases: Sales discount L.E 10.000 – Purchases
discount 6.000 – Freight in 7.500 – Purchases 105.000 – Sales 200.000 –
Purchases returns & allowances 25.000.
5- Mohamed Company Purchased merchandises at cost of L.E 30.000.
Determine the cost of goods sold if you know that beginning inventory
was L.E 10.000 and ending inventory was L.E 15.000.

6- The trial balance for El-Nasr Company included these balances:

Sales L.E 164.000 – Purchases L.E 80.000 – Salaries expense L.E 17.000 –
Rent expense L.E 10.000 – Advertising expense L.E 6.000 – Supplies
expense L.E 1000 – Interest expense L.E 1000 – Depreciation expense L.E
12.000 – Beginning inventory L.E 37.000 - Ending inventory L.E 42.000.
Required:
Prepare the income statement for the period ended Dec. 31, 2016.

7-Prepare journal entries to record the following transactions which have

been incurred in ABC firm: (G May 2013)
 Oct1: Sold merchandise to Omer on credit, terms 2/10, L.E.40000.
 Oct.2: Purchase merchandise on credit from Aly Company, terms 2/10,
n/30 L.E.28000.
 Oct. 3: Purchased store supplies on credit from Lila company, terms
n/20, L.E.3000.
 Oct. 8: Purchased merchandise on credit from Ammar company, terms
2/10, n/30 L.E.I00000.
 Oct. 10: Received full payment from Omer for his Oct. l, purchase.
 Oct. 12: Paid Aly Company for purchase of Oct.2.
 Oct. 13: Sold merchandise on credit to Hassan, terms, 2/10, n/30,
L.E.60000.
 Oct. 14: Returned for credit L.E.3000 of merchandise received on Oct.8.

58
 Oct. 18: Paid Ammar Company for purchase of Oct.8.
 Oct.23: Received full payment from Hassan for his Oct. 13 purchase.

8-The following were selected from among the transactions completed by

El-Amal Co. during April 2013.
April 1: Sold merchandise on account to Tanta Company. List
price L.E 5000, terms 2/10, n/30.
April 5: Purchased merchandise on account from Cairo
Company. List price L.E 6000, terms 2/10, n/30, freight
charges amounted L.E 200 were paid cash.
April 7: returned L.E 400 of merchandise purchased on April 5.
April 13: Received the proper amount due from Tanta Company
cash.
April 14: Paid cash the amount due to Cairo Company for
purchase of April 5 less returns of April 7.
April 20: Purchased office supplies of L.E1000 cash.
April 22: Paid L.E 3000 cash for 3 years insurance.
Required:
Journalize entries to record the transactions of El-Amal
Company.
8- The following were selected from among the transactions completed
by EI-Aiman Company during May 2004:
May 1: sold LE. 5000 of merchandise on account to Tanta company,
terms 2/10, n/30 F.O.JB. Shipping point El-Aiman company paid LE
100 freight charges.
May5: Purchased merchandise on account from Cairo Company,
list price LE. 6000, trade discount 20%, terms F.OJB shipping
point, 2/10, n/e.o,m. Freight charges amounted LE. 200 were paid by
Cairo Company
May7: Tanta Company returned merchandise for LE. 500 that had
been shipped in error on May 1.
May10; Received the proper amount from Tanta Company.
May 12; Office equipment costing LE.10000 with accumulated
depreciation of LE. 8400 was sold for LE. 1800 cash.
May 15; paid the proper amount to Cairo Company.
MayJ6; Dina's account of L.E 2700 was written off as uncollectable.

59
Required: Prepare journal entries for this transaction in the general
journal of Al-Aiman Company.( B May 2005)
9- XEROX Company deals in copying machines. Shown below is a partial
list of transactions completed during April 2001:
April 1: Purchased 5 copying machines on account from ALEX.
Co. total invoice price was L.E 4000 per machine, terms
2/10, n/30.
April 3: Returned one machine to ALEX Co.
April 5: Sold three copying machines on account to Cairo
university. The sales price was L.E 5000 per machine,
terms 5/10, n/30.
April 8: Paid half of the amount owed to ALEX Co.
April 12: Received cash from Cairo university in full settlement of
the April 5 sale.
April 20: Paid the remaining amount owed to ALEX Co.
April 30: Paid the following expenses: Rent expenses L.E 1000 –
Salaries expenses L.E 3000 – Utilities expenses L.E 500.
Required:
Prepare journal entries to record the above transactions in general
journal.
10- Facts-by-Fax sells facsimile machines, copiers, and other office
equipment. The company uses the periodic inventory system, and the gross
method to record credit purchasing transaction. (May2007)
Transaction related to May 2007 were as follows:
May 1,purchased 5 fax machines on account from Mitsui Co,, at a cost of
LE. 500 each. Credit terms are 2/10 n/30
May5, returned one fax machine to Mitsui'Co.
May 8, paid the full balance to Mitsui Co.
May12,sold 3 fax, machines on credit to XYZ Co. at LE. 800 each, credit
terms 2/5, n/20
May16, collected in cash the full balance from XYZ Co.
Required:
1. Record the previous transactions in Facts-by-Fax's General Journal.
2. Post the entries to the accounts payable ledger account using the running
balance method.

11-Hassan store sells decorating supplies to various decorating service firms.

During March, 2008 the following transactions occurred:
March2: Goods with a price of L.E 5000 were sold on account to
Mohsen, terms 2/10, n/30.

60
 4: Sales of merchandise for L.E. 10,000 cash.
6 Mohsen returned L.E. 1000 of goods purchased on March 2, and
received a credit note.
10: Mohsen paid the amount due.
15: Sales of L.E. 8000 of goods to Ramzy Shop, terms 4/10, n/60.
17: Sale of L.E. 2000 of goods to Magdy. Because he is a new
Customer, terms were 5/10, n/30.
20: Payment received from Ramzy Shop.
31: Payment received from Magdy.
Required: Prepare journal entries.( D May 2009).

12- Marina retail store deals in wide variety of merchandise has completed
the following merchandise transactions:
May 3: Purchased merchandise on credit from national corporation
at a cost of L.E. 10 000 (terms 2/10, n/30).
May 7: Sold merchandise on credit to Zamzam shop for L.E. 900
(terms 2/10, n/30).
May 14: Received cash from Zamzam Shop in full settlement of
May 7 sales.
May 20: Purchased office supplies for each, L.E1500.
May 25: Sold merchandise to Samy for cash, L.E1600.
May 30: Paid National Co. for purchases of May 3.
Required: Prepare journal entries to record the above transactions.
13-The following transactions were completed by EL- Moon Company
during May 2012.
 May 1 Equipment was purchased at a cost of L.E 7,000, a three-month,
10% note payable was signed for this amount.
 May 3 Purchased merchandise on account from Sun Company L.E
10,000, terms FOB shipping point, 2/10, n/30, freight charges amounted
L.E 500 were paid by El-Moon Co.
 May 5 Returned L.E 2,000 of merchandise purchased on May 3 from
Sun Company.
 May 6 Sold merchandise on account to Queen Company for L.E 9,000,
terms FOB destination, 3/10, n/30. The cost of-merchandise sold was
L.E 5,000. Freight charges amounted L.E 200 were paid by El-Moon
Company.
 May 12 Paid the amount due to Sun Company.
 May 14 Received the proper amount due from Queen Company.
 May 18 Paid L.E 300 cash to the Daily News for advertisements run this
past week.

61
 Required: Journalize entries to record the transactions of Moon Company
under the perpetual inventory system. (Group B May 2013)
1 4-The fol l owi ng were sel ect ed from am ong t he
t ransact i ons com pl et ed by El-Hoda Trading Company
during April 2002:
April 1: Sold merchandise on account to Cairo Company, list price
L.E.12500, trade discount 20%, terms F.O.B destinations/10 ,n/30 and
paid freight charges amounted L.E 500.
April 5: Purchase merchandise on account for Arm Company, invoice price
L.E. 6000, terms F.O.B shipping point 2/10, n/30 and paid freight charges
amounted L.E 300.
April7: Returned L.E.1000 merchandise Purchased on April 5 from Amr
Company.
April 10: Received the proper amount due from Cairo Company
April 15: Paid the proper amount to Amr Company
Required: Record the above transaction's in the general journal of El-
Hoda Company. (H May 2002).
15-The following selected transactions were completed by Sara Hegazy
Stores during March 2006: (D May 2006)
March 1: Sold merchandise on account to ABC company, L.E. 25000, trade
discount 20%, terms F.O.B. shipping point, 3/10, n/30, and paid L.E.
1000 freight charges, which were added to the invoice.
March3: ABC Company returned L.E. 2000 of merchandise purchased
March1. Sara stores issued a credit-note to ABC company.
March 9: Received the proper amount from ABC company.
March 10: Purchased office equipment on credit with invoice price of L.E.
50000, trade discount 5% Freight costs of L.E. 1000 and installation cost of
L.E. 500 were paid in cash.
March 15: Withdrew L.E. 1000 from the business to pay personal expenses.
Required;
1- Record the above transactions in the journal of:
a- Sara stores
b- ABC Company.
16-The following account balances, among others, are taken from the
business’s general ledger of Morad Shop, at the end of 2002.
Sales 820,000 L.E
Sales return & allowances 20,000 L.E
Sales discount 15,000 L.E
62
Purchases 460,000 L.E
Purchases returns & allowances 10,000 L.E
Purchases discount 12,000 L.E
Inventory (January 1,2002) 90,000 L.E
Transportation-In 4,500 L.E
Delivery expense 3,700 L.E
Other operating expenses 180,000 L.E
Morad, drawing 20,000 L.E
Inventory at Dec.31, 2002 80,500 L.E
(As determined by the physical count)
Required:
1- Compute the cost of goods sold for 2002.
2- Compute the gross profit for 2002.
3- Prepare the closing entries at Dec. 31,2002.

17-Egyptian store is a wholesale store maintaining its accounts on a

calendar year basis. At Dec. 31,2015 the trial balance appeared as follows:

Account Titles
Cash 46.750
Notes receivable 41.000
Account receivable 82.000
Inventory 111.500
Unexpired insurance 4.500
Office supplies 2.000
Land 40.000
Building 150.000
Accumulated dep. Building 6.000
Equipment 40.000
Accumulated dep. Equipment 12.000
Account payable 120.500
Owner’s capital 248.000
Owner’s drawing 45.000
Sales 815.000
Sales returns & allowances 900
Sales discount 2.750
Cost of goods sold 519.500
Advertising expense 8.000
Salaries expense 60.000
Interest expense 2.500
Delivery expense 5.100
General expense 40.000
Total 1.201.500 1.201.500

63
Other data:
a)Insurance premiums expired during the year, L.E 3,000.
b)Supplies on hand at Dec. 31 were estimated to an amount L.E 400.
c)Accrued salaries payable as of Dec. 31, were L.E 2500.
d)The building is being depreciated over a 25- year useful life. The
equipment is being depreciated over a 10- year useful life.
Required:
1- Prepare the adjusting entries at Dec. 31,2015.
2- Prepare the classified income statement for the year ended Dec. 31,
2015.
3- Prepare the classified balance sheet at Dec. 31, 2015.
18-At the end of accounting period, the records of Samy shop showed the
following balances:
Sales 400.000 L.E Purchases Sales returns & Freight in
300.000 L.E allowances 20.000 L.E 5000 L.E
Purchases discount Sales discount Operating expenses Samy drawing
10.000 L.E 15.000 L.E 38.000 L.E 2.000 L.E
Ending inventory Beginning Purchases returns and Capital
80.000 L.E inventory allowance 10.000 L.E 170000 L.E
90.000 L.E
Required:

Prepare a partial income statement to determine cost of goods sold, gross

profit and net profit.
19-Basant store had the following balances in trial balance at December 31,
2016:

Sales 210000 - Sales returns & allowances 7000 - sales discounts 3000 -
Purchases 125000 - transportation in 2000 - Purchases returns & allowances
3000 - Purchases discounts 4000 - Advertising expense 5000 - Salaries and
wages 30000 - Rent expense 3000 - Building 120000 - Accumulated
depreciation of building 40000 - Equipment 60000 - Accumulated
depreciation of equipment 20000 - Accounts receivable 40000 - The
allowance for doubtful debts 3000 - Accounts payable 20000 - Loan 50000 -
Cash 10000 - Supplies 5000 - loss on sale land 10000 - Merchandize
inventory on January 1, 15000 -Capital 90000 - Drawings 5000.
The data needed for year-end adjustments on December 31, 2012 are as
follows:

64
 The cost of physical inventory on December 31, 2012 amounted to LE
20000, while the NRV is LE 18000.
 The rate of depreciation for building is 5% annually (straight line
method).
 The rate of depreciation for equipment is 10% annually (double
declining balance method).
 Supplies on hand on December 31, 2012 amounted to LE 2000.
 The annual salaries are LE 36000.
 The annual interest rate of the loan is 12%.
 The allowance for doubtful debts is 15% of accounts receivables.
Required Prepare the income statement for the year ended December 31,
2012.

1. Prepare the balance sheet as of December 31, 2012.

2. Prepare the adjusting entries for depreciation and supplies.
(May 2013)

20-Egypt retail store is maintaining its accounts on a calendar year basis and
using periodic inventory system. At December 3 1, 2011 the balances in the
ledger accounts prior to making adjusting entries for the year were as
follows:

Cash 48200 Egypt store. Drawing 24000

Notes receivable 62500 Sales 572000
Account receivable 91300 Sales return& allowance 2000
Inventory (Jan1, 2011) 45700 Sales discounts 10000
Unexpired insurance 3600 Purchase 230000
Office supplies 2800 Purchase return & 4100
allowance
Land 120000 Delivery expense 3200
Building 560000 Transportation in 3500
Accumulated 44800 salaries expense 62600
depreciation: Building
Equipment 40000 Utilities expense 12500
Accumulated 8000 Interest expense 4200
depreciation: equipment
Notes payable 51600 Property tax expense 1100
Accounts payable 132400 Advertising expense 8700
Egypt store capital 523000

65
Other data:
1. Examination of policies showed L.E. 900 unexpired insurance on
December 3 1,2011
2. Supplies on hand at December 3 1, 2011 were estimated to amount to
L.E. 800.
3. The building is being depreciated over a 25-year useful life. The
equipment is being depreciated over a 10-year useful life.
4. Accrued salaries payable as of December 3 1, 2011 were L.E. 2400,
5. Accrued interest on notes payable amounts to L.E. 2300 at December 3
1, 2011 and has not yet been recorded.
6. Inventory of merchandise on December 3 1, 2011was L.E. 42500.
Required:
1. Journalize the adjusting entries for the year ended December 31, 2011.
2. Prepare a classified income statement for the year ended December 31,
2011.
3. Prepare a classified balance sheet at December 3 1, 2011.(May 2012)
4.
21-Jasmine Company had the following transactions:
 Jan. 1: Sold LE 2000 of merchandise to a customer who paid his bill
using visa card of national bank.
 Jan. 2: The national bank adds LE 1900 to the current account after
deducting LE 100 service charge.
 Jan. 4: Purchase new equipment for LE 80000 cash and paid fright
expenses LE2000.
 Jan. 5: Purchased LE 7500 of merchandise on account from Salma Co.
terms 3/10, n/30.
 Jan. 7: Returned defective merchandise for LE 500 of the goods to
Salma Co.
 Jan. 9: Paid the proper amount due to Salma Co.
 Jan. 10: Sold merchandise to Giza Company having a list price of LE
10000, with 20% trade discount and terms of 2/7, EOM.
 Jan. 20: Sold old car for LE 30000 cash (the cost of the car is 80000 and
accumulated depreciation is 48000)
 Jan 25: Purchased merchandise from Sinai Co. for LE 50000 on credit,
terms 2/10, n/30.
 Jan. 28: Paid rent for the next six months LE 6000 cash.
 Jan. 30: Received a note receivable from Giza Co, due at April 30 with
interest rate 15% annually.
 Feb.25:Signs a note payable to Sinai Co. for purchased merchandise at
Jan. 25 due at March 25, with interest 18% annually.
 March 25: Jasmine Company paid the note to Sinai Co. April 30:
Jasmine Company received the proper amount due from Giza Company.
Required:
1. Record the transactions in the general journal of Jasmine Company.
2. Prepare the cash ledger account.

66
 Chapter 6
Multiple choice Questions:
Indicate what you would do in the preparation of bank reconciliation for
Ghazy
1) A L.E 100 check was incorrectly recorded as a cash disbursement of
L.E 90.
a) Add to the book balance
b) Deduct from the book balance
c) Add to the bank statement balance
d) Deduct from the bank statement balance

2) A check of L.E 200 issued by Dina Corporation was incorrectly

charged to Ghazy Corporation account by the bank.
a) Add to the book balance.
b) Deduct from the book balance
c) Add to the bank statement balance
d) Deduct from the bank statement balance

3) A deposit of L.E350 made by Mohamed Corporation was incorrectly

credited to Ghazy Corporation.
a) Add to the book balance.
b) Deduct from the book balance
c) Add to the bank statement balance
d) Deduct from the bank statement balance

4) The company received a customer check of L.E 600 that was in

incorrectly entered as a cash receipt of L.E 560.
a) Add to the book balance.
b) Deduct from the book balance
c) Add to the bank statement balance
d) Deduct from the bank statement balance

5) A deposit made by the company was incorrectly not included in the

bank statement.
a) Add to the book balance.
b) Deduct from the book balance
c) Add to the bank statement balance
d) Deduct from the bank statement balance

- 67 -
Solution
1) b 2) c 3) d 4) a 5) c
Problems and Exercises
1- Listed below are involving the bank reconciliation statement. Some
transactions require adjusting entries on the depositor’s books. Identify
those that do and prepare the appropriate adjusting entries:
a) Deposit in transit L.E650.
b) Bank charge for printing checks L.E30.
c) Incorrect entry for L.E440 on depositor’s records for a check for rent
expense of L.E400.
d) Incorrect bank charge of L.E70 against depositor’s account for check
issued by another company.
e) Return of a customer’s check marked NSF for L.E80.
Solution
1) Bank service charge 30
Cash 30
3) Cash 40
Rent expense 40

5) Account receivable 80
Cash 80

Transaction 1) – deposit in transit – would be added to the bank balance but

requires no adjusting entry.
Transaction 4) – bank error – requires the addition of L.E70 to bank balance
but no adjusting entry.

2- The records of XYZ printing company showed the following of the

month April.
a) Cash balance per books – April 30, L.E15000.
b) Cash balance per bank statement – April 30, L.E12850.
c) On April 30, the following checks were outstanding:
# 510 L.E46
# 541 L.E493
# 547 L.E89
# 601 L.E14
d) The following two customer checks deposited by XYZ were returned to
the company and were marked NSF:
ABC company L.E300
Misr company L.E840

- 68 -
e) A deposit of L.E3100 was made in April 30, but was not included on the
bank statement.
f) The bank collected a L.E2, 000 note for XYZ from the uniform company.
g)The bank service charge was L.E25.
h)The bank charge XYZ L.E527 in error.
Required::Prepare bank reconciliation as of April 30.

Solution
Balance per books 15000 balance per bank 12850
Add: note receivable Add:
Collected 2000
17000 deposit in transit 3100
Less: Bank error 527
3627
16477
NSF checks 1140
Less: outstanding checks
#510 46
Service charge 25 #541 493
1165 #547 89
#601 14
642
Adjusted balance 15835 Adjusted balance 15835
===== ======

3- The cash in bank account for Ghazy Company at December 31 of the

current year indicated a balance of L.E4, 967.53 after both the cash receipts
journal and the check register for December had been posted. The bank
statement indicated a balance of L.E6, 317.48 on December 31. comparison
of the bank statement and the accompanying canceled checks and
memorandums with the records revealed the following reconciling items:
(a) Check outstanding totaled L.E2, 026.87.
(b) A deposit of L.E890.17 representing receipts of December 31 had
been made too late to appear on the bank statement.
(c) A check for L.E200 drawn by Dina Company had been erroneously
charged by the bank to Ghazy Company’s account.
(d) A check for L.E210 returned with the statement had been recorded
in the check register as L.E120. the check was for the payment of an
obligation to Mohammad Company on account for the purchase of office
equipment.

- 69 -
(e) The bank had collected for Ghazy Company L.E510 on a note left
for collection. The face of the note was L.E500.
(f) Bank service charges for December amounted to L.E6.75.
required:
A. Prepare bank reconciliation.
B. Journalize the necessary entries.

4- - Based upon the following date, prepare (a) bank reconciliation and (b)
appropriate journal entries.
Balance per bank statement,
October 31 L.E5, 940
Balance per company’s books,
October 31 4,475
Bank service charge 10
Deposit in transit 390
Outstanding checks:
#110 L.E1,000
#114 1,200
#116 Certified 500 2,700
Note receivable collected by the bank:
Principal L.E 345
Interest 5 350
NSF check 550
Our account was charged in error
by the bank for another
company’s check 150
Check #106 made out for L.E100
To a credit was incorrectly
Entered as a cash disbursement of L.E115 15
Solution:
a. Bank Reconciliation
Balance per bank 5,490 Balance per books 4,475
Add: Deposit in transit 390 Add: notes receivable 345
Account charged in Interest
Error 150 450 income 5
6,480 Proceeds 350
Less: Outstanding checks Check #106 15 365
#110 L.E1,000 4,840
#114 1,200 2,200 less: NDF check 550
Service charge 10 650

- 70 -
 Adjust book
Adjust bank balance 4,280 balance 4,280
===== =====
b. General Journal
Cash 365
Note Receivable 345
Interest Income 5
Account Payable 15
Account receivable 550
Bank service charge 10
Cash 650
5- prepare the bank reconciliation of Misr Insurance Company as of
November 30, using the following information:
a) Balance pre depositor’s records, L.E11,550
b) Balance per bank statement, L.E16,840
c) Outstanding checks, L.E2,442
d) Recording a check # 1558 for telephone expense incorrectly.
L.E171; actual amount issued by check, L.E117
e) Bank service charge, L.E6
f) Deposit in transit, L.E2,760
g) Note collected by bank acting as Misr Company L.E6,400
h) NSF check of Mr. Ghazy L.E840

Solution:
Balance per depositor’s records
L.E11,550
Add: Note collected L.E6,400
Error in check #1558 54 6,454

L.E18,004
Deduct: Bank service charge L.E 6
NSF check of Mr. Ghazy 840 846
Adjusted balance L.E17,158

========
Balance per bank statement L.E16,840
Add: Deposit in transit 2,760 L.E19,600
Deduct: Outstanding checks 2,442
Adjusting balance L.E17, 185

- 71 -
6- With regard to problem 5, prepare appropriate adjusting entries.
Solution:
Cash 6,454
Notes receivable 6,400
Telephone expense 54

Bank service charge 6

Accounts receivable 840
Cash 846

7-The accountant for Dina Corporation was unable to prepare correctly the
bank reconciliation shown below. She has asked you to correct any mistakes
that he has made and to complete the bank reconciliation.
Dina Corporation
Bank Reconciliation
August 31, 2001
Balance per depositors books L.E7, 540
Add: Deposit in transit L.E500
Bank error in crediting
Another company’s deposit
To our account 100 600
L.E8, 140
Deduct: NSF check L.E 70
Outstanding checks 300 370
Adjusted balance L.E7, 770

=======
Balance per bank statement L.E7, 600
Add: Note collected by bank L.E200
Check #107 for L.E300
Applicable to advertising
Expense was incorrectly
Written in the
Checkbook as L.E330 30 230 L.E7,830
Deduct: Transportation cost to
And from the bank 50
Adjusted balance L.E7,780

8- Prepare the appropriate adjusting entries for problem 7-.

Solution:

- 72 -
 Cash 230
Notes Receivable 200
Advertising Expense 30

Accounts Receivable 70
Cash 70

9- Based on the information presented below, prepare bank

reconciliation for Mohammed Corporation at December 31, 2014.
a) Balance per bank statement-December 31,2003, L.E101,240
b) Balance per books-November 30, 2003 L.E87,000
c) Cash receipts for December2003, L.E40,000
d) Cash payments for December 2003, L.E38,000
e) Outstanding checks-December 31, 2003:
# 108 for L.E12,000
# 114 for L.E5,000
f) Received cash-December 31, 2013, L.E4,000; deposited on
January 2, 2014
g) Return of L.E300 check, made out to Dina Corporation, by the
bank on December 26, 2013, due to absence of countersignature
h) Incorrect entry on bank statement for December 16,2003
deposit, L.E2.010; actual deposit, L.E2,100
i) Incorrect charge of L.E200 against Mohammed Corporation
account for check issued by El Nnasr Corporation
j) December 20, 2013: collection on a note receivable by bank for
Mohammed Corporation, L.E1,100 including L.E100 in interest; collection
charge, L.E20
k) Bank service charge for December 2013 per debit memorandum,
L.E50
l) Incorrect debit memorandum of December 21, 2013 to charge
the firms account for settlement of a bank loan in which check # 82 was
issued on December 20, 2012, L.E2,000
m) Incorrect credit to Mohammed Corporation account for
December 14, 2012 Ghazy Corporation deposit, L.E800

10- With regard to problem 9, prepare the appropriate adjusting entries.

11- For the month of January, Alfa Corporation had the following
transactions relating to the establishment of its petty cash fund:
January 1- An impress petty cash fund of L.E300 was set up.

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January 31 – the petty cash box contained L.E90 cash plus the
Following paid vouchers:
Postage, L.E80; taxi fares, L.E60; office supplies,
L.E50; miscellaneous expense L.E20.
Required:
Prepare appropriate journal entries for the above information.
Solution:
Jan. 1 Petty Cash 300
Cash 300

Jan. 31 Postage Expense 80

Taxi Fare Expense 60
Office Supplies Expense 50
Miscellaneous Expense 20
Cash 210

12- If in problem 11 the cash on hand was L.E86, prepare the entry for
reimbursement at January 31.
Solution:
Potage Expense 80
Taxi Fare Expense 60
Office Supplies Expense 50
Miscellaneous Expense 20
Cash Short & Over 4
Cash 214
Note that Cash Short & Over is an income statement account that is closed
out at the end of the reporting period to Income Summary
13- If in problem 11 the cash on hand happened to be L.E97, would
there be a cash shortage? Would the account Cash Short & Over be debited
or credited?
Solution:
There would be a cash overage of L.E7 (L.E97 – L.E90). Cash Short &
Over would be credited.

Problems from Exams

May 2000
i-Omar company is setting up an impress petty cash fund. The
following are the November and December petty cash transactions:
Nov.15 Establish a petty cash fund of L.E. 50.

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 Dec. 5 replenishing the petty cash funds. The cash on hand in the fund
amounted to L.E. 8. A summary of the petty cash vouchers showed the
following expenditures:
Office supplies L.E. 14
Postage stamps L.E10.
Freight-in L.E 17.
Dec. 15 Increase the petty cash fund balance by L.E. 25.
Required: Record the petty cash transactions for Nov. and Dec. in the general
journal.
May 2002
i. At December 31, 2001, the cash balance according to the records of
Amira Farms was $20,100. The December 31 bank statement showed a
balance of $27,840. The following supplementary information was found
by comparing the business books with the bank statement:
(1) Deposit in transit at December 3 1, $5,160.
(2) Outstanding checks: No.123 $3,360 ,No. 124 $1,820, and
No.l25 $4 3020.
(3) Service charges by bank $37.
(4) A note receivable for $ 4800 left by Amira Farms with bank for
collection that had been collected and credited to the account of Amira
Farms.
(5) A check for $ 667 drawn by a customer Aly stores was
returned with the bank statement with the notation "NSF".
(6) Amiga’s check No. 480, issued in payment of $1,905 for
building repairs erroneously recorded in the records of Amira Farms as $
1,509.
Required:
1 – Prepare the bank reconciliation of Amira Farms at June 30.
2 – Prepare the journal entries to update the records of Amira Farms.
May 2003
i. The cash account in the ledger of Sam Company showed a balance of
$17000 at June 20. The Bank Statement, how ever, showed a balance of
$18000 at the same date. The only reconciling items consisted of the
following:
1 – Outstanding checks:
No. 301 $ 470
No. 302 $610
No. 303 720
2 – Note collected by bank $13000.
3 – Deposit in transit $12500.

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4 – NSF check of K. John $957.
5 – Bank service charge $43.
6 – Expenses were written for $907 but erroneously recorded as $607.
Required:
a) Prepare the bank reconciliation of Sam Company at June 30.
b) Prepare the journal entries to update the records of Sam Company.

ii- On, January 15, 2000, a cash shortage of L.E. 50 was discovered in Dina
Firm. On January 30, 2000 a cash overage of L.E. 30 was discovered in
Dina Firm.
Required: Prepare the necessary entries to record and close the cash
over & short .assuming that the net income statement is prepared
for each month by Dina Firm.
iii. The cash account in the ledger of Sam Company showed a balance of
$17000 at June 20. The Bank Statement, how ever, showed a balance of
$18000 at the same date. The only reconciling items consisted of the
following:
1 – Outstanding checks:
No. 301 $ 470
No. 302 $610
No. 303 720
2 – Note collected by bank $13000.
3 – Deposit in transit $12500.
4 – NSF check of K. John $957.
5 – Bank service charge $43.
6 – Expenses were written for $907 but erroneously recorded as $607.

Required:
a- Prepare the bank reconciliation of Sam Company at June 30.
b- Prepare the journal entries to update the records of Sam Company.
May 2013
i. A company writes a check to replenish a LE 100 petty cash fund when the
fund contains receipts of LE 94 and L.E 3 in cash. In-recording the check,
the company should:
a. debit Cash Over and Short for L.E 3.
b. debit Petty Cash for LE 94.
c. credit Cash for L.E 94.
d. credit Petty Cash for L.E 3.

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ii. Sky Company is unable to reconcile the bank balance at January
31. Sky's reconciliation is as follows.
Cash balance per bank L.E 5,300
Add: NSF check 1,070
Less: Bank service charge 35
Adjusted balance per bank L.E 6,335
Cash balance per books L.E 5,705
Less: Deposits in transit 750
Add: Outstanding checks 1,450
Adjusted balance per books L.E 6,405
Prepare: correct bank reconciliation, and the entries required by the
reconciliation.

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 Chapter (7)
Multiple choice Questions:
Select the correct answer for each of the following question:
1-The method of recording the uncollectible accounts expense at the time of
actual customer uncollectibility is known as the:
(a) Direct–write-off. (b) The Allowance for Uncollectible Accounts
(c) Aging the Accounts Receivable (d) None of the above.
2- The method for the expected uncollectibility of customer accounts
and involves the matching of expenses to sales is:
(a) Direct–write-off. (b) Percentage of the year’s net sales
(c) Aging the Accounts Receivable (d) b & c.
3- .Determining the amount and time outstanding in each customer’s
account is referred to as:
(a) Direct–write-off. (b) The Allowance for Uncollectible Accounts
(c) Aging the Accounts Receivable. (d) None of the above.
4- The entry for uncollectible accounts expense should made at:
(a) Year’s end. (b) Year’s beginning.
(c) The bankruptcy of the customer. (d) None of the above.
5- Uncollectible accounts expense is shown in the:
(a) Balance sheet. (b) Owner’s equity statement.
(c) Income statement. (d) All of the above.
6- The allowance for doubtful accounts is a contra asset account which
shows the:
(a) Portion of the receivables estimated to be uncollectible.
(b) Accounts receivable.
(c) Aging the Accounts Receivable
(d) None of the above.
7- The write-off of a customer’s account under the allowance method will:
(a)Increase net accounts receivable. (b) Has no effect;
(c) Decrease net accounts receivable (d) None of the above.
8- Interest on a note is equal to ------------ × rate × time.
(a) The maturity date. (b) Principal;
(c) A promissory note (d) None of the above.
9-The interest on a L.E.1,600, 90-day, 20 percent note is:
. (a) L.E 320. (b) L.E 800.
(c) L.E 80. (d) None of the above.

78
10-The maturity date of a 90-day note issued May 14 is:
. (a) August 12. (b) August 11.
(c) July 12. (d) None of the above.
11-.The ------------- of a note is equal to the principal plus interest.
(a) Maturity date. (b) Discount rate.
(c) Promissory note. (d) Maturity value;
12-If Adel issues a L.E.500 note to Dina, Adel is called the:
(a) Maker. (b) Payee;.
(c) Promissory note. (d) Maturity value;
13-If Adel issues a L.E.500 note to Dina, Dina is called the:
(a) Maker. (b) Payee;.
(c) Promissory note. (d) Maturity value;
14-A note is considered a ------------- to the payee.
(a) Receivable. (b) Payable;.
(c) Promissory note. (d) Maturity value;
15-When a promissory note is received from an open account:
(a)Accounts receivable is debited and notes receivable is credited.
(b) Accounts receivable is credited and notes receivable is debited.
(c) Promissory note is credited and notes receivable is debited.
(d) Maturity value is credited and notes receivable is debited.;
16-When the payee of a note obtains funds for it from the bank prior to the
maturity date. The term which used is:
(a) Receivable. (b) Discounting;.
(c) Promissory note. (d) Maturity value;
17-When a note receivable is discounted, the bank’s discount charge is
equal to the:
(a) Maturity value × discount rate × expired time.
(b) Maturity value ‫ ــ‬discount rate ‫ ــ‬expired time.
(c) Maturity value × discount rate × unexpired time.
(d) None of the above.
18-When a note is discounted at the bank, the net proceeds received by the
payee is equal to:
(a) The maturity value less the bank discount.
(b) Maturity value ‫ ــ‬discount rate ‫ ــ‬expired time.
(c) Maturity value + discount rate + unexpired time.
(d) None of the above.
19-Notes receivable discounted represents:
(a) Receivable. (b) Permanent liability.
(c) Contingent liability.. (d) Maturity value;

79
20-If a note is dishonored by the maker at maturity,
(a) Accounts receivable is debited, notes receivables is credited, and interest
is credited.
(b)Accounts receivable is debited, notes receivable is credited.
(c) Accounts receivable is credited, notes receivable is credited, and interest
is debited.
(d) None of the above.
Solution:
1-a 2-b 3-c 4-a 5-c 6-a 7-b 8-b 9-c 10-a
11-d 12-a 13-b 14-a 15-b 16-b 17-c 18a 19-c 20-a

Problems and Exercises

1- Atlas Company uses the direct-write-off method to account for
uncollectible accounts. In 2003, credit sales were L.E130,000. on March 7,
2014, a customer owing L.E1600 was declared bankrupt. Prepare journal
entries relating to uncollectible accounts.
Solution:
March 7 Uncollectible Accounts Expense 1,600
Accounts Receivable 1,600
2- Dina estimates its bad debts based upon 2 percent of net sales. What
amount should Dina record as bad debt expense for 2014,If you know that
net sales is L.E820,000?
Solution:
Net Sales L.E820, 000
Percent of Net Sales × 2%
Bad-Debt Expense L.E16, 400
3- The following account balances are for Aswan Co.
Accounts Receivable Sales Allowance for
Uncollectible accounts
110,000 320,000 300
Required:
Prepare the adjusting entry to provide for bad debts if the uncollectible
expense is estimated:
(a) At 1precent of net sales.
(b) By aging the accounts receivable and assuming the needed allowance
balance is estimated at L.E3, 300.

80
Solution:
(a) Uncollectible Accounts Expense 3,200*
Allowance for Uncollectible Accounts 3,200
*1% × 320,000 = 3,200
(b) Uncollectible Accounts Expense 3,000*
Allowance for Uncollectible Accounts 3,000
*Desired Allowance Balance L.E3, 300
Current Allowance Balance 300
Additional Allowance Needed L.E3, 000

4- Prepare journal entries for the following transactions:

a. Four customer accounts totaling L.E2, 700 were written off as
uncollectible.
b. One of the accounts written off amounting to L.E500 was paid in full.
Solution:
(a) Allowance for Uncollectible Accounts 2,700
Accounts Receivable 2,700
(b) Accounts Receivable 500
Allowance for Uncollectible Accounts 500
Cash 500
Accounts Receivable 500
5- At the end of the current year the accounts receivable account has a
debit balance of L.E100, 000 and net sales for the year total L.E 1,200,000.
determine the amount of the adjusting entry to record the provision for
doubtful accounts under each of the following assumptions:
(a) The allowance account before adjustment has a credit balance of L.E
1,300.
(1) Uncollectible accounts expense is estimated at 1% of net sales.
(2) Analysis of the accounts in the customers’ ledger indicates doubtful
accounts of L.E11, 400.
(b) The allowance account before adjustment has a debit balance of
L.E400.
(1) Uncollectible accounts expense is estimated at 3 of 1% of net sales.
4
(2) Analysis of the accounts in the customers’ ledger indicates doubtful
accounts of L.E9, 100.
6- The following transactions, adjusting entries, and closing entries
related to doubtful accounts were completed during the current fiscal year
ending December 31:

81
Mar. 8. Wrote off the account of Dina, Inc., L.E290.
May. 16. Received L.E150 from Raghda in payment of her account, which
was written off in the preceding year.
June.24. Received 5% of the L.E900 balance owed by Sun & Co., a
bankrupt, and wrote off the remainder as uncollectible.
Sept. 9. Received L.E80 from Mohamed in payment in his account,
which was written off in the preceding year.
Dec. 30. Wrote off the following accounts as uncollectible (compound
entry): Adel, L.E410; Essam, L.E825; Hesham L.E632; Omar, L.E527.
Dec. 31. On the basis of an analysis of the accounts receivable, allowance
of doubtful accounts is to be adjusted to a balance of L.E3, 200.
Dec. 31. Recorded the entry to close the appropriate account to expense
and Revenue Summary.
Instructions:
(1) Open the following accounts, recording the credit balance indicated as
of January 1:
Allowance for doubtful accounts L.E2,900.
Expense and Revenue Summery ----- .
Uncollectible Accounts Expense ----- .
(2) Record in general Journal from the transactions, adjusting entries,
extending the balance after each entry.
(3) The accounts receivable account has a debit balance of L.E117, 520 at
December 31.what is the expected realizable value of the accounts
receivable at that date?
(4) Assuming that, instead of basing the provision for uncollectible
accounts on an analysis of receivables, the adjusting entry on December 31
had been based on an estimated loss of 1% of net sales for the year of L.E
340,000, determine the following:
(a) Uncollectible accounts expense for the year.
(b) Balance in allowance for Doubtful Accounts after the adjustment of
December 31.
(c) Expected realizable value of the accounts receivable on December 31.

7- Determine the interest on a L.E 10,000, 150-day, 20percent note.

Solution:
L.E10, 000 × 20% × 150/360 = L.E833.33
‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
8- Journalize the following transactions:
March1 :Received a L.E3, 000, 90-day, 18 percent note to settle Adel’s
account.

82
March 31: Discounted the note at the bank (discount rate = 19 percent).
May 30: Adel dishonored the note at maturity. A protest fee L.E4 was charged.
June 4 :Adel paid the note and protest fee.
Solution:
March 1 Note Receivable 3,000
Account receivable 3,000

March 31 Cash 3035.72*

Note Receivable 3,000
Interest Income 35.72
May 30 Account receivable 3,139**
Cash 3,139

June 4 Cash 3,139

Account receivable 3,139

*The Interest on the note is: L.E3,000 × 18% × 90/360 = L.E135

The maturity value is: L.E3,000 + L.E135 = L.E 135
The bank discount charge is: L.E3,135 × 19% × 60/360 = L.E99.28
The net proceeds are: L.E 3,135.00 – L.E99.28 = L.E3, 035.72
**L.E3, 135 + L.E4 = L.E3, 139
‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
9- A L.E10, 000, 120-day, 15 percent note is discounted at the bank after
30 days have elapsed. The bank discount rate is 20 percent. Prepare the
journal entry at the time of discounting.

Solution:
Cash 9,975*
Interest expense 25
Notes Receivable 10,000
* The interest on the note is: L.E10,000 × 15% × 120/360 = L.E500.
The maturity value is: L.E10,000 + L.E500 = L.E10,500.
The bank discount charge is: L.E10, 500×20%×90/360 = L.E52
The proceeds are: 10,500 – L.E525 = L.E9, 975.
10- Use the aging schedule below to make the adjusting entry needed to
provide for the uncollectible accounts expense. Assume the allowance has a
credit balance of L.E 2,400.

83
 Amount Needed in
Age of account Amount Percentage Allowance Account at
Uncollectible Year’s End
1 – 30 days L.E28,000 1 L.E280
61 – 180 days 19,000 4 760
61 – 180 days 9,000 20 1800
181 days and over 5,000 50 2500
Total L.E 61,000 L.E5340
Solution:
Uncollectible Accounts Expense 2,940*
Allowance for Uncollectible Accounts 2,940

*Desired Allowance Balance L.E5, 340

Current credit Allowance Balance 2,400
Additional Allowance Needed L.E2, 940

11- With regard to question 10, what will be reported in the balance sheet?

Solution:
Account Receivable L.E61, 000
Less: Allowance for uncollectible
Accounts (5,340)
Net Realizable value L.E55, 660

12- Assume the same facts as in question 10, except that the allowance account
has a debit balance of L.E2, 400. Prepare the appropriate journal entry.
Solution:
Uncollectible Accounts Expense 7740
Allowance for Uncollectible Accounts
13- At December 31, 2013, Nisr Company’s account balances for
accounts receivable and the related allowance for uncollectible accounts
were L.E800,000 and L.E40,000, respectively. An aging of accounts
receivable indicated that L.E71, 100 of the December 31 receivables may be
uncollectible. What is the realizable value of accounts receivable?
Solution:
Accounts Receivable L.E800, 000
Less: Allowance for uncollectible Accounts (71,100)
Net Realizable Value L.E728, 900

84
14- Prepare journal entries for the following transactions:
May 10 Adel’s account of L.E1, 100 was deemed uncollectible.
June 20 Dina, who owes us L.E900, has been declared bankrupt.
July 7 Adel paid us back L.E800.
Solution:
May 10 Allowance for Uncollectible Accounts 1,100
Accounts Receivable 1,100
June 20 Allowance for Uncollectible Accounts 900
Accounts Receivable 900
July 7 Accounts Receivable 800
Cash 800

15- Nour Company has a credit balance of L.E 3,500 in Allowance for
Doubtful Accounts at December 31, 2012. The estimated bad debts expense
under the percentage-of-sales basis is L.E 4,100. The total estimated
uncollectible under the percentage-of-receivables basis is L.E 5,800.
On January 10, 2013 the account balance of Osama for L.E 500 was
determined to be uncollectible. On May 20, 2013, Osama paid the L.E 500
balance.
Prepare the adjusting entry under each basis, then prepare the entries to
record the write-off and recovery of Osama balance (May 2013).
Solution:
1- To record bad debts exp. As Percentage Net sales:
Bad debts exp. 4100
Allowance for the doubt account 4100
2 – Written off bad debts:
Allowance for the doubt account 500
A/R. 500
3 –collection bad debts:
a) A/R 500
Allowance for the doubt account 500
b) Cash 500
A/R 500

16-A note dated March 1 is due June 25. It was discounted at the bank on
May 15.
(a) How many days is the note for?
(b) How many days did the bank hold the note?

85
Solution:
(a) March 31
Issued -1 30
April 30
May 31
June 25
Time Period of Note 116 days
====
(b) May 31
Discounted - 15 16
June 25
Held by Bank 41 days

17-An L.E8, 000, 90-day, 16 percent note is discounted at the bank after it
has been held for 30 days. The bank discount rate is 16 percent. Determine
the proceeds of the note.
Solution:
Interest: L.E8, 000 × 16% × 90/360 = L.E320
Maturity value: L.E8, 000 + L.E320 = L.E8, 320
Bank discount charge: L.E8, 320 × 16% × 60/360 = L.E221.87
Proceeds: L.E8, 320.000 – L.E 221.87 = L.E8, 098.13.
18- Prepare the journal entries needed for the information given in problem 16
(a) at the time of discounting and.
(b) when note is paid at maturity.
Solution:
(a) Cash 8,098.13
Note Receivable 8,000.00
Interest Income 98.13
(b) No further entry is needed since the note was paid at maturity.

19-Dina Corporation borrowed L.E6, 000 for 60 days at 20 percent interest

from Misr Bank. Interest is to be paid in advance.
Prepare the journal entries to record:
(a) the loan.
(b) the payment.

86
Solution:
(a) Cash 5,800
Interest Expense 200*
Notes Payable 6,000
* L.E6, 000 × 20% × 60/360 = L.E200
(b) notes Payable 6,000
Cash 6,000

20- With regard to problem 19, what would be made at the end of 60 days if
Dina Corporation were unable to repay the loan and an additional 60 days
renewal were given? Assume interest is to be paid in advance.
Solution:
Interest Expense 200
Cash 200
Because the note has been renewed, only interest is to be paid at renewal
date.

21-If in problem 19, the interest was to be paid upon maturity of the note,
what entries would be made to record:
(a) the loan and
(b) the payment?
Solution:
a. Cash 6,000
Note Payable 6,000

b. Notes Payable 6,000

Interest Expense 200
Cash 6,200

Problems from Exams

May 2001
1-During 2000, ABC firm was first year in business, sales totaled L.E,
400,000 during the year. All sales were made on credit and cash
collection from accounts receivable totaled L.E. 300,000 .At the year end,
the accountant estimated that L.E. 15000 of the accounts receivable would
ultimately become uncollectable. On April 1, 2001the firm was; informed
that L.E. 10000 should be written off. In July 3, the firm received L.E. 4000
from the L.E. 10000 which was written off.
Required: prepare the journal entries. (4 marks)

87
2- Prepare the journal entries to record the following transactions, noting
that the accounting period is ended on Dec. 31, each year: (4 marks)
- On Dec 1, 2001 a 90 day, 12%. Note receivable is acquired from a
customer in settlement of an existing account receivable of L.E. 30,000.
On March 1, 2001 the note matures.
- A Firm discounted a L.E. 80,000 12% 90 days note receivable dated
March 1, 2000. The note was discounted on April 1, 2000 at discount rate
of 15%.
3-Ahmed Corp. purchased 8% government bonds with a par value of L.E.
15000 and paid the same value, plus brokerage fees of L.E. 225 on April
1,1999. The bonds pay interest semiannually on April 1 and October 1 and
mature on October 1, 2000. The company's accounting period ends on Dec. 31.
Required: Prepare the following entries for 1999:
a.-April 1 for purchase of the bonds.
b.-October 1 for the collection of interest
c.-December 31 for the accrual of interest.

May 2002
1- Amr Company uses the balance sheet method to estimate uncollectible
accounts expense. At year-end an aging of the accounts receivable
produced the following classifications:
Period past due "days" Accounts receivable L.E % uncollectible
Not yet due 100.000 1%
1-30 days past due 164.000 4%
31-60 days past due 44.400 10%
The allowance for doubtful accounts before adjusting at Dec.31, 2001,
Showed a credit balance of LE 8,000.
Required:
a- Compute the estimated amount of uncollectible accounts based on the
above classification by age groups.
b- Prepare the adjusting entry needed to bring the allowance for doubtful
accounts to the proper amount.
c- Assume that on Jan. 15 of the following year, an account receivable of the
amount LE 1000 which had originated on Sept. 1 was worthless because of
the bankruptcy of the customer.
Prepare the journal entry required on Jan. 15 to write off this account.

2- On December 31, 2001 the unadjusted trial balance of Karnaval

Supermarket included the following accounts:

88
 Debit L.E Credit L.E
Accounts Receivable 80000
Allowance for doubtful accounts 3000
Net credit sales 400000
Other Data:
1. Estimated uncollectible accounts under the balance sheet approach
amounted L.E. 4500.
2. Uncollected accounts expense under the income statement approach is
estimated to be 1 % of net credit sales.
Required: Prepare the adjusting entries at Dec.31 needed to bring the
allowance of doubtful accounts to the proper amount under each of the above
two approaches.
3- Lina Firm prepares monthly financial statements. On January
31,2001 the accounting system of the firm showed the following
data:
Accounts receivable L.E. 200,000
Allowance for doubtful accounts L.E. 8,000
Net credit sales L.E. 500,000
The credit manager estimated the doubtful accounts for January,2001 at an
amount equal 2% of net credit sales of January ,2001.
Required:
1. The adjusting entry for doubtful accounts.
2. The closing entry for the allowance for doubtful accounts.
3. The partial balance sheet on January 31, 2001.

4- On Dec. 1, 2000 a90 day, 10% note receivable was acquired from a
customer in settlement of an existing account receivable of L.E.10, 000 .
This note matured on March 1, 2001
Required: Prepare the necessary entries for this note receivable noting that
the accounting period is ended on Dec.31 of each year.
May 2003
1- Kim Company uses the balance sheet method to estimate the in
collectible accounts. By aging the customer's accounts, the following table is
produced at year- end.
Period past due "days" Accounts Receivable % Un- collectable
Not yet due 152000 4%
1-30% day past due 32000 7%
31-60 days past due 40000 50%

89
The allowance for doubtful accounts before adjusting at Dec. 31 showed a
credit balance of $18320.
Required:
a- Compute the estimated amount of uncollectible accounts based on
the above classification by age group.
b- Prepare the adjusting entry needed to bring the allowances for
doubtful to the proper amount.

2- ABC firm discounted a L.E 200000,12% 60- days, note receivable,

dated April 1,2002 The note was discounted on April 21,2002 at a discount
rate of 15%. (Two Marks)
Required:
a- What are the proceeds of the note to ABC firm?
c- Make the journal entry to record the discount Expense of the interest
revenue.
3- On Dec 1, 2002 a 90-days 12% note receivable is acquired from a
customer; in Settlement of an existing account receivable L.E 60,000.
Required:
Prepare journal entries needed noting that the end of the fiscal year is at
December 31, and the maturity date of the note is on March 1, 2003.
May 2004
1- The credit manager of the ABC Company gathered the following
information on December 31, 2003.
- Balance of Accounts Receivable L.E. 1,750,000
- Balance of Bad Debts Account (actually written off during the year)
96000.
- Allowance for uncollectible receivables (at the beginning of the year)
25,000.
- Accounts receivable written-off at the end of the year 10,000.
- Estimated year-end uncollectible receivables 84,000
Required: Prepare the journal entries to record:
a- Bad debts expense at the end of the year.
b- The adjustment of the allowance for uncollectible receivables.
c- The effect of the previous entries on the income summary (closing
entries).
d- Post the journal entries to the Accounts receivable and Allowance for
uncollectible receivables Accounts.

90
2- ABC Firm discounted a L.E 40, 000, 12%, 90 days, note receivable
dated May 1, 2004. The note was discounted on June 15, 2004 at a discount
rate of 10%.
Required:
a - Determine the proceeds of the note.
b - Prepare the journal entry needed.

3- The following balances were obtained from the books of ABC

Firm on Dec, 31, 2003:
- Accounts receivable LE110, 000.
- Allowance for doubtful debts LE 10,000.
The accountant estimated the uncollectible receivables on Dec. 31,
2003 as LE 15,000. In 2004 the following transactions were taken place as
follows:
On May 1, the firm was informed that L.E 6000 of the accounts
receivable should be written-off. On July 25, the Firm received LE4000
from the amount which was written-off on May 1.
Required:
a- Prepare the journal entries on Dec. 31, 2003 and on May 1 & July
25, 2004.
b- Show the effect of the above transactions on the balance sheet of
2003 and on July 25, 2004 after the last transaction.
4 - On March 1, 2003, the ABC firm received a LE. 20000, 20%, 3-month
note receivable in a, settlement of an account receivable. The note was
discounted on April 1, 2003 at a discount rate of 15%.
Required;
- Compute the discount expense or the interest revenue for the note.
- Prepare the journal entries on both dates: 1/3/2003 and 1/4/2003.

May 2005
1- ABC firm has two notes receivable. One of them amounts LE.
30000, 20%, 90 days dated Jan 1, 2004, this note was discounted on Feb. 1,
,2004 at a discount rate of 15%. The second note receivable was received
and dated on Sept. 1, 2004 and amounts LE. 20000 at an interest rate of
15%, this note was due on March 1, 2005. Noting that the financial year
ends on Dec. 31.
Required:
a- Compute the net proceeds for the first note receivable.
b- Prepare all entries needed for the two notes receivable
assuming that all transactions were competed.

91
2- ABC firm has two notes receivable. One of them amounts LE.
30000, 20%, 90 days dated Jan 1, 2004, this note was discounted on Feb. 1,
,2004 at a discount rate of 15%. The second note receivable was received
and dated on Sept. 1, 2004 and amounts LE. 20000 at an interest rate of
15%, this note was due on March 1, 2005. Noting that the financial year
ends on Dec. 31.
Required:
a- Compute the net proceeds for the first note receivable.
b- Prepare all entries needed for the two notes receivable
assuming that all transactions were competed.

3- You are given the following transactions:-

1/4/2004: Queens Stores sold goods for LE. 9000 to Hope Stores and
received a 6 month, 12% note receivable.
1/6/2004: Queens Stores discounted the note at the bank at a 10% discount
rate.
1/10/2004: Hope Stores defaulted on the note. Queens Stores paid the
bank the due value of the note plus LE. 50 protest fees.
1/11/2004: Hope Stores paid to Queens Stores the total amount due.
Required: In the book of the Queens Stores, prepare the journal
entries for each of the above transactions and post to the Notes
Receivable account.
May 2008
1- Eastern Supply sells a variety of merchandise on credit. The business
adjusts its accounts at December 41 each year. Among the transactions
relating to notes receivable were the following: September 1, 2007: received
from customer (Karim) a nine-month, 10% note for L.E. 75,000 in
settlement of an account receivable due today; June 1, 2008: collected in full
the nine-month note receivable from Karim including interest.
Required: Prepare journal entries to:
a- Record the receipt of the note on Sep. 1, 2007.
b- Record the adjustment for interest on Dec. 31, 2007.
c- Record the collection of the note and interest on June 1, 2008.

May 2010
1- The following information about the accounts receivable and credit
losses during 2009 were presented by the chief accountant of Nader Co:
 Balance of the Allowance for Doubtful Accounts at the beginning of
year 2009, LE30.000 (credit).

92
 Accounts receivable written-off during year 2009, LE20.000.
 Collection of accounts receivable that were previously written off LEI
5.000.
 Desired ending balance of the Allowance for Doubtful Accounts at the
end of year 2009, LE48.000 (credit) according to the balance sheet
method which is used.
Required: Prepare the necessary journal entries to record:
a- The accounts receivable written-off during the year.
b- The recoveries of accounts receivable which are previously written-off.
c- The adjusting entry to adjust the balance of the Allowance for Doubtful
Accounts at the end of year 2009.

May 2012
1- The following information about the accounts receivable and credit
losses during 2011 were presented by the chief accountant of Ali Co.:
 Balance of allowance for doubtful accounts at the beginning of year
2011, LE 40000 (credit).
 Accounts receivable written-off during year 2011, LE 50000.
 Collections of accounts receivable that were previously written-off LT
3000.
 Desired ending balance of the allowance for doubtful accounts at the
end of year 2011, LE 20000 (credit) according to the balance sheet
method which is used.
Required: Prepare the necessary journal entries to record:
a) The accounts receivable written-off during the year.
b) The recoveries of accounts receivable which are previously written off.
c) The adjusting entry to adjust the balance of the allowance for doubtful
accounts at the end of year 2011,

2- ABC firm discounted a L.E. 200000, 12% 60-days note receivable,

dated April, 2011, The note was discounted on April 21, 2011 at a discount
rate of 1 5%. Required: (Three Marks):
a- What are the proceeds of the note to ABC firm?
b- Make the journal entry to record the discount or the interest.
May 2013
1- Net sales for the month are L,E 800,000, and bad debts are expected to be
1.5% of net sales. The company uses the percentage-of- sales basis. If the
Allowance for Doubtful Accounts has a credit balance of L.E 15,000 before
adjustment, what is the balance after adjustment?
a. L.E 15,000. b. LE 27,000
c. L.E 23,000 d. L.E 31,000

93
 Chapter 8
Multiple choice Questions:
Select the correct answer for each of the following question:
1-The allocation of the cost of a fixed asset to the periods benefited from it
is called:
(a) Depreciation. (b) Book value;
(c) Salvage value; (d) Accumulated depreciation
2- The cost of a fixed asset less its accumulated depreciation is equal to the:
(a) Depreciation. (b) Book value;
(c) Salvage value; (d) Accumulated depreciation
3-The value placed on a fixed asset at the end of its useful life is known as:
(a) Depreciation. (b) Book value;
(c) Salvage value; (d) Accumulated depreciation
4-A fixed asset not subject to depreciation is:
(a) Equipment (b) Intangible assets
(c) A building (d) Land
5-The depreciation method which results in equal periodic charges is the:
(a)Straight-line; (b) Double-declining-balance;
(c) Sum-of-the-years’-digits; (d) Units-of-production;
6-The method which doubles the straight-line rate of depreciation and then
applies it to the book value of the asset at the beginning of the year is known
as the:
(a)Straight-line; (b) Double-declining-balance;
(c) Sum-of-the-years’-digits; (d) Units-of-production;

7-The method whereby a series of fractions are used to depreciate the asset
is referred to as:
(a)Straight-line; (b) Double-declining-balance;
(c) Sum-of-the-years’-digits; (d) Units-of-production;

8-When the use of equipment varies considerably from year to year, an

appropriate method of depreciation is the:
(a)Straight-line; (b) Double-declining-balance;
(c) Sum-of-the-years’-digits; (d) Units-of-production;

9-The term which refers to the exchange of an old fixed asset for a new one
is:
(a) Salvage value; (b) Disposal of a fixed asset;
(c) Trade-in; (d) units-of-production;

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10-The amount paid to purchase an item after a trade-in allowance is
deducted from the price is called:
(a) Salvage value; (b) Disposal of a fixed asset;
(c) Boot; (d) units-of-production;

11-Equipment purchased for L.E20, 000 with a trade-in gain of L.E1, 500
will be recorded at:
(a) L.E18, 500; (b) L.E 1,500;
(c) L.E20, 000; (d) L.E21, 500;

12-Equipment purchased for L.E20, 000 with a trade-in loss of L.E1, 000
will be recorded at:
(a) L.E19, 000; (b) L.E 1,000;
(c) L.E20, 000; (d) L.E21, 000;

13-The loss on disposal of a fixed asset is shown in the income statement

under:
(a) Losses; (b) Other expenses
(c) Assets (d) Depreciation.

14-Assets which lack physical substance and arise from a right granted by
the government or another company are:
. (a) Tangible; (b) Other expenses
(c) Costs. (d) Intangible.

15-Acquired intangibles should be recorded as:

(a) Losses; (b) Other expenses
(c) Assets (d) Depreciation.

16-Internally developed intangibles which are not specifically identifiable

should be recorded as:
(a) Losses; (b) Expenses
(c) Assets (d) Depreciation.

17-Goodwill can only be recorded in a business combination accounted for

under the purchase method when the coast to the acquirer --------------- the
fair market value of the net assets of the acquired company.
(a) Exceeds; (b) About
(c) Less than (d) Depreciation.

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18-Intangible assets must be amortized over there useful lives but not in
excess of: years.
(a) 10 years. (b) 30 years.
(c) 20 years. (d) 40 years.
19-A patent recorded at L.E20, 000 has a remaining legal life of 20 years.
However, its economic life is now estimated to be 10 years. The annual
amortization expense will be:
(a) L.E18, 500; (b) L.E 1,000;
(c) L.E2, 000; (d) L.E21, 500;
20-Legal costs incurred in defending a patent should be:
(a) Salvage value; (b) capitalized.
(c) Assets (d) Depreciated.
Solution:
1-a 2-b 3-c 4-d 5-a 6-b 7-c 8-d 9-c 10-c
11-a 12-c 13-b 14-d 15-c 16-b 17-a 18-d 19-c 20-b

Problems and Exercises

1- Convert each of the following life estimates to a depreciation rate, stated
as a percent, assuming that residual value of the plant assets is to be ignored:
(a) 4 years, (b) 6years, (c) 10 years, (d) 25 years (e) 33 1 years (f) 40
3
years.
2- Queen Company purchased a machine having a list price of L.E75,
000. Because the machine was immediately paid for, the company was
entitled to a 2percent discount. Costs incurred to make the machine ready
for use included: freight, L.E3, 000; installation, L.E485; electrical wiring,
L.E700; repair expense because the machine was improperly handled,
L.E100; and rental for special crane, L.E435. What is the acquisition cost of
the machine?
Solution:
List price L.E75, 000
Discount (L.E75, 000 × 2%) ( 1,500 ) L.E73,500
Freight 3,000
Installation 485
Electrical Wiring 700
Rental of Crane 435
Total Cost L.E78, 120

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3- On January 1, 2014, a machine was purchased for L.E30, 000. The
estimated life is six years and the salvage value is L.E1, 500. Determine the
annual depreciation using the straight-line method.
Solution:
L.E30,000.  L.E1,500.
Depreciation expense =  L.E 4,750
6
4- Using the information supplied in question 3, compute the depreciation
for the first three years by the sum-of-the-years’-digits method.
Solution:
( N ).( N  1) 6.(6  1)
S=   21
2 2
Year Fraction x Depreciation Amount =
Deprecation
1 6 / 12 L.E28,500
2 L.E8,14 5 / 12 28,500
3 6,786 4 / 12 28,500
5,429
5- Solve question 4, using the double-declining-balance method.
Solution:
The double-declining rate is 1 / 3 [2 × (1 / 6)]. Salvage value is ignored in
the computation.
Book Value
at Beginning × Rate = Depreciation Year-end
Year of Year Expense Book Value
1 L.E30,000 1/3 L.E10,000 L.E20,000
2 20,000 1/3 6,667 13,300
3 13,000 1/3 4,444 8,889

6- A printing press was purchased on January 1, 2013, for L.E15000. It

has an estimated life of 14 years and salvage value of L.E1000. The straight-
line depreciation method is used. How would the printing press and the
related accumulated depreciation be shown on the balance sheet at (a)
December 31, 2013, and (b) December 31, 2014?
7- Using the information in question 6, what would be reported in the
income statement for (a) 2013 and (b) 2014?
Solution:
(a) Depreciation Expense, L.E1, 000.
(b) Depreciation Expense, L.E1, 000.

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8- A truck was purchased on October 1, 2013, for L.E10, 000. The
estimated life is five years and the salvage value iaL.E500. The straight-line
depreciation method is used. What would be reported on the balance sheet at
(a) December 31, 2013, and (b) December 31, 2014?
Solution:
L.E1,000.  L.E500.
Depreciation per year =  L.E1,900
5

(a) Depreciation for 3 months = L.E1, 900.

Truck L.E10,000.
Less: Accumulated Depreciation (475. )
Book Value L.E 9,525

(b) Truck L.E10,000.

Less: Accumulated depreciation (2,375* )
Book Value 7,625.

*L.E457 + L.E1, 900 = L.E2, 375

9- Referring to question 8, what would be reported in the income

statement for (a) 2013 and (b) 2014?
Solution:
a- Depreciation Expense, L.E475.
b-Depreciation Expense, L.E1,900

10- On October 1, 2010, a machine was purchased for L.E13, 000. It has a
life of five years and a salvage value of L.E1, 000. The sum-of-the-years’-
digits depreciation method is used. What the depreciation expense for (a)
2010 and (b) 2011?
Solution:
a- 10/ 1/ 10 – 31/ 12/ 2010 5/ 15 × L.E12, 000 = L.E4, 000 ×3/
1L.E1,000.
b- 1/ 1/ 11 – 30/ 9 / 2011 5/ 15 × L.E12,000 = L.E4,000 × 9/ 12L.E3,000
10/ 1/ 11 – 31/ 12/ 2011 4/ 15 × L.E12, 000 = L.E3, 200 × 3/ 12= 800
L.E3, 800

11- On July 1, 2013, the moon Corporation purchased factory equipment

for L.E25, 000. Salvage value was estimated to be L.E1, 000. The
equipment will be depreciated over 10 years using the double-declining-

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balance method. What amount should be reported for depreciation expense
in 2014?
Solution:
Depreciation expense for six months ended Dec. 31, 2013 is L.E25, 000 ×
20% = L.E5, 000 × 6/12 = L.E2, 500. The book value at the end of 2013 is
L.E22, 500 (L.E25, 500 – L.E2, 500). Depreciation expense for 2014 is
L.E22, 500 × 20% = L.E4, 500.

12- On April 1,2007 Nile Co. purchased an equipment for L.E. 200,000
with an estimated useful life of 4 years and a residual value of L.E.
10,000.The financial year ends December 31.
Required: Prepare a depreciation schedule for the equipment over its useful
life under:
1-Straight- line method
2- double declining – balance method.(May 2009)
Solution:
a – Schedule of straight line method
Years Cost Dep. Exp. Acc. Dep. Book value
1 200,000 47500 47500 142500
2 200,000 47500 95000 105000
3 200,000 47500 142500 57500
4 200,000 47500 190,000 10,000

- Dep. Exp. For year

200,000 – 10,000
= _______________________ = 47500
4 Years

b – Double declining – balance:

Dep. Rate
100
________
= × 2 = %5
4
- Dep. Exp. Years 1 = (Cost – Acc. Dep.) × %5
=( 200,000 – zero ) × 50/100 = 100,000
And so ….

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Book value = Cost f asset – Acc. Dep.
Years B. Book Rate Dep. Acc. Dep. E. Book
Value Exp. value
1 200,000 50% 100,000 100,000 100,000
2 100,000 50% 50,000 150,000 50,000
3 50,000 50% 25,000 175,000 25,000
4 25,000 15,000 190,000 10,000

Note:
Dep. Exp. For the last year:
= ( book value for the last year – savage value)
= 25000 – 10000 = 15000 L.E.
13- In Jan. 1, 1998, XYZ firm purchased equipment with an estimated 10
years life for LE. 60000. The residual value was estimated at LE. 12000.
The firm uses straight-line depreciation. On Jan 1, 2001 the firm sold this
equipment for LE. 55000. Under these assumptions compute the following
for this equipment:
1. Depreciation expense in 1998.
2. Depreciation expense in 2000.
3. Book value at the end of 2000.
4. Gain or Loss on-the sale in Jan. 1,2001.
5. Prepare adjusting entries to record depreciation expense for year 2000.
6. Entry needed to record the sale of the asset.(May 2001)
Solution:
60000 - 12000
___________________
– Dep. Exp. In 1998 = = 4800
10 Years
– Dep. Exp. In 2000= = 4800
– Book value 2000
= Cost of the euip – Acc. Until 2000
= 60,000 – (4800 × 3)
= 60,000 – 14400 = 45600
– Gain or Loss on sale:
Gain 9400
Book value 45600
Sale 55000
– Adjusting ending
Dep. Exp. (equip) 4800
Acc dep. (equip) 4800

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– Journal entry:
Cash 55000
Acc. Dep. (equipment) 14400
Equipment 60000
Gain on the sale of equipment 9400

14- On March 19, 2013, an auto was acquired for L.E10, 000. It has an
estimated life of eight years and a salvage value of L.E1, 500. It is decided
to depreciate the auto based upon mileage. The estimated total mileage is
85,000. The car was driven 6,000 miles in 2013 and 11,000 miles in 2014.
Insurance paid on the car is L.E700 annually. Determine the depreciation
expense for (a) 2013 and (b) 2014.

15- A fixed asset costs L.E48, 000 and has an estimated salvage value of
L.E 6,000. The anticipated life is 10 years. Compute the annual depreciation
using the following methods:
 The straight-line method for the first year.
 The sum- of -the – year’s digits method for the first three years.
 The double- declining balance method for the first three years.

16- Equipment costing L.E19, 500 with accumulated depreciation of

12,000 is discarded. There is no salvage value. Prepare the appropriate
journal entry for its disposal.
Solution:
Accumulated Depreciation 12,000
Loss in disposal of Fixed Assets 7,500
Equipment 12,500
Since there is no salvage value, the book value of L.E7, 500 for the asset is
considered a loss.

17- Using the information given in question16, prepare the entry if the
equipment was sold for L.E9, 000.
Solution:
Accumulated Depreciation 12,000
Cash 9,000
Equipment 19,500
Gain on Disposal of Fixed Assets 1,500*
*Cash received L.E9,000
Book value ( 7,500 )
Gain L.E1, 500

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18- Using the information in question16, prepare the entry if the equipment
was sold for L.E5, 500.
Solution:
Accumulated Depreciation 12,000
Cash 5,000
Loss on Disposal of Fixed Assets 2,500
Equipment 19,500

19- Ghazy Company traded in an old machine for a new one priced at
L.E4, 000. a L.E200 trade-in allowance was given. The cost of the old
machine was L.E3, 500 and its accumulated depreciation was L.E3, 400.
Prepare the entry to record the trade-in.
Solution:
Accumulated Depreciation 3,400
Machine (new) 3,900
Machine (old) 3,500
Cash 3,800

The recorded cost of the new machine is calculated as follows:

Trade-in allowance L.E200
Book value of old machine 100
Gain L.E100
The gain reduces the cost basis of the new asset:
Price of new machine L.E4, 000
Less: Unrecognized gain (100 )
Cost of new machine L.E3, 900
An alternative computation is
Book value of old machine L.E 100
Cash paid 3,800
Cost of new machine L.E3,900

20- Using the same information given in question19, prepare the entry for
the trade-in, assuming an allowance of L.E80 is given for the old machine.
Solution:
Accumulated Depreciation 3,400
Machine (new) 4,000
Loss on Disposal on Fixed Assets 20*
Machine (old) 3,500
Cash 3,920
*Book value L.E100
Trade-in allowance ( 80 )
Loss L.E20

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21- A machine costing L.E8, 000 with accumulated depreciation of L.E6,
000 is exchanged for a new machine. The trade-in allowance given is L.E2,
300. The price of the new machine is L.E10, 000. Prepare the entry for the
exchange of the machines.

Solution:
Accumulated Depreciation 6,600
Machine ( new ) 9,100
Machine (old ) 8,000
Cash 7,700
The recorded cost of the new machine is calculated as follows:
Trade-in allowance L.E2,300
Book value (1,400)
Gain L.E 900
The gain reduces the cost basis of the new asset:
Price of new machine L.E10,000
Less: Unrecognized gain ( 900)
Cost of new machine L.E 9,100

22- The transactions below pertain to either the disposal or trade-in of a

fixed asset. Depreciation has been recorded up to the end of the preceding
year. If an item is disposed of prior to the 15th of a given month, do not
depreciation the asset for that month. Prepare the journal entries for each
transaction.
July 5 Office equipment cost L.E10, 000 with accumulated depreciation
of L.E8, 400 was sold for L.E1, 800. The annual depreciation is
L.E600.
July 31 Six typewriters costing L.E9, 000 with accumulated depreciation
of L.E8,000 were discarded. They had no salvage value. Annual
depreciation is L.E1, 200.
Sept. 30 an old cash register costing L.E800 with accumulated
depreciation of L.E600 was traded in for a new one priced at
L.E900. the trade-in allowance was L.E100. annual depreciation is
L.E120. a note was issued for the balance due on the new cash
register.
Nov. 10 a desk costing L.E1, 000 with accumulated depreciation of L.E800
was exchanged for a new one priced at L.E1,400. a trade-in
allowance of L.E200 was given. Annual depreciation is L.E60.

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Solution:
July 5 Depreciation Expense 300*
Accumulated Depreciation 300

Accumulated Depreciation 8,700

Cash 1,800
Office Equipment 10,000
Gain on disposal of Fixed Assets 500

July 31 Depreciation Expense 700**

Accumulated Depreciation 700

Accumulated Depreciation 8,700

Loss on Disposal of Fixed Assets 300
Office Equipment 9,000

Sept.30 depreciation Expense 90^

Accumulated Depreciation 90

Accumulated Depreciation 690

Office Equipment (new) 900
Loss on Disposal of Fixed Assets 10^^
Office Equipment (old) 800
Note Payable 800

Nov.10 Depreciation Expense 50^*

Accumulated Depreciation 50

Accumulated Depreciation 850

Office Equipment (new) 1,350^**
Office Equipment (old) 1,000
Cash 1,200
*L.E50 per month × 6 = L.E300
**L.E100 per month × 7 = L.E700
^L.E10 per month × 9 = L.E90
^^Book value L.E 110
Trade-in allowance 100
Loss L.E 10
========
^*L.E5 per month × 10 = L.E50

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^**Trade-in allowance L.E 200
Book value 150
Gain L.E 50
=======
Price of new equipment L.E1,400
Less: Unrecognized gain 50
Cost of new equipment L.E1,350

23- Equipment acquired at a cost of L.E1, 000 and depreciated at the rate
of 10% is sold on October 1 of the seventh year of its use. The accumulated
depreciation in the account as of the preceding December 31 is L.E500.
Three different assumptions as to the price at which the equipment is sold:
A- Selling price L.E325, which is exactly equal to the book value of the
asset.
B- Selling price L.E200, which is L.E125 less than the book value of the
asset
C- Selling price L.E425, which is L.E100 greater than the book value of the
asset.
Solution:
Oct. 1 Depreciation Expense – Equipment 75
Accumulated Depreciation - Equipment 75
( To record 9 months’ depreciation on
equipment sold).
Oct. 1 Cash 325
Accumulated Depreciation – Equipment 675
Equipment 1,000
Oct. 1 Cash 200
Accumulated Depreciation – Equipment 675
Loss on Disposal of Plant Assets 125
Equipment 1,000
Oct. 1 Cash 425
Accumulated Depreciation – Equipment 675
Equipment 1,000
Gain on Disposal of Plant Assets 100

24- A pant asset with a cost of L.E100, 000 has an estimated trade-in value
of L.E5, 000 and an estimated life of 10 years.
(a) What is the annual depreciation, computed by the straight-line method?
(b) The annual depreciation is what percent of the cost of the asset?

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25- An asset with an estimated life of 5 years is to be depreciated by the
sum-of-the-years-digits-method.
(a) What is the denominator of the depreciation fraction?
(b) What is the numerator of the fraction for the second year?

26- A building that cost L.E400, 000 has no estimated residual value and
an estimated life of 40 years.
(a) What is the amount of the annual depreciation by the straight-line
method?
(b) What is the amount of accumulated depreciation of the 30 years?
(c) At the beginning of the thirty-first year, the roof is replaced at a cost of
L.E10, 000, with the expectation that the useful life of the building will
be extended 10 years beyond the original estimate. To what account
should this expenditure be charged?
(d) What is the amount of the depreciation for the thirty-first year (straight-
line)?

27- A building acquired on January 12 at a cost of 200,000 has an

estimated life of 40 years. Assuming that it will have no residual value,
determine the depreciation for each of the first two years.
(a) By the straight-line method.
(b) By the declining-balance method, using twice the straight-line rate.

28- An electric generator with a cost of L.E35, 000 and estimated salvage
value of L.E2, 000 is expected to have a useful operating life of 150,000
hours. During October the generator was operated 500 hours. Determine the
depreciation for the month.

29- A plant asset acquired at the beginning of the fiscal year at a cost of
L.E2, 000 and an estimated useful life of 10 years. Determine the following:
(a) The annual depreciation charge by the straight-line method.
(b) The amount of depreciation for the second year computed by the
declining-balance Method (at twice the straight-line rate).
(c) The amount of depreciation for the second year computed by the sum-
of-the-years-digits method.

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 Problems from Exams
May 2000
1-A piece of equipment acquired on January 3, 1991, at a cost of L.E.
25000, has an estimated useful life of 4 years and an estimated residual value
of L.E. 5000.
a. What was the annual amount of depreciation for the years 1991,
1992,1993, using the straight-line method depreciation?
b. What was the book value of the equipment on January 1, 1994?
c. Assuming that the equipment was sold on January 2, 1994 for L.E.
8500, journalize the entry to record the sale.

May 2001
1-ABC Firm sold a small truck that had been used in the business
for three years. The records of the firm showed the followings: ( 2
marks)
-The truck balance L.E. 25000
-Accumulated depreciation L.E.20000
Required: Prepare the journal entries according to the following
assumptions:
a- If the sales price was L.E. 5000
b- If the sales price was L.E. 5400
c- If the sales price was L.E. 4400

May 2002
1- On January 1,2000 ABC Firm purchased a new equipment at a cost of L.E.
220,000 with an estimated useful life of four years and an estimated salvage
value of L.E. 20,000.
Required:
-Prepare the entry to record the depreciation expense at the second year end
(Dec.31, 2001) using the straight-line depreciation method.
-Prepare The partial balance sheet on Dec. 31,2001.
-Prepare the partial income statement for the second year (2001).

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May 2003
1-On January 1,2002, the Hope Company purchased a machine for LE.50000.
The machine has an estimated useful life of 5 years and an expected salvage
value of LE. 2000. The financial year ends on Dec. 31,2002.
Required; Prepare the depreciation expense journal entries under each of the
following methods:
- The straight-line method.
– The declining balance method (depreciation rate is 20%).

2- On January1, 2002, Suez Corporation purchased a machine for a cost of

LE2, 500. It cost LE100 for its delivery, LE80 for its installation and setup,
and LE20 cost of materials for a trial run. The machine had an estimated
residual (salvage) value of $200. The estimated useful life of the machine 5
years or a maximum of 10,000 units over its life. The machine produced
1,000 units in 2002.
Required:
a) What is the cost of the new equipment on January 1, 2002?
b) Determine the amount of annual depreciation expense for the machine
at the end of 2002 under the (1) straight line method, (2) units of-
production method, and (3) double-declining balance method.
c) The machine was sold on December 31. 2005 (end of fourth year) for
LEI,000. Determine the amount of Gain or Loss on Sale on that date,
and prepare the journal entry for the sale, assuming the company is
using the straight-line method.

May 2005
1- XYZ Firm acquired a car at a cost of LE185000 on January 1,2004. The
car is expected to have a residual value of LE5000 at the end of its useful
life of (5) years.
Required:
- Compute the amount to be recorded as depreciation expense for 2004
and 2006 under each of the following methods:
a- Straight-line method.
b- Sum-of-the-years digits method.
- Journalize the adjusting entries needed on Dec. 31, 2004 according to
the straight-line method only and show the effect on the balance sheet
at Dec. 31,2006 according to the Sum-of-the-years-digit method.

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May 2007
1- A truck its cost is L.E 185000 on January 1, 2006. The truck is expected
to have a residual value of L.E 5000 at the end of its useful life of (5) years.
Required: Compute depreciation expenses for 2006 under of the
following methods:
A –Straight- Line method.
B – Sum of- The year’s digits method.
– Journalize depreciation expenses under the straight- line method only.

2-On April 1,2007 Nile Co. purchased an equipment for L.E. 200,000 with
an estimated useful life of 4 years and a residual value of L.E. 10,000.The
financial year ends December 31.
Required: Prepare a depreciation schedule for the equipment over its useful
life under: a-Straight- line method
b- double- declining - balance methods.

3- XYZ Company purchased a fixed asset costs LE 48.000 and has an

estimated salvage value LE6.000. The anticipated useful life is 10 years.
Required: Prepare a table only for the first 3 years showing the annual
depreciation expense, accumulated depreciation, and the year end book
value under the following methods:
a- Double declining balance method.
b- Sum-of-the -years digits method.
Note: Table form;
Accumulated Year- end Book
Year Depreciation Expense
Depreciation Value
1
2
3

4- Camp company purchased factory equipment with an invoice price of

$80,000. Other costs incurred were freight costs, $1,100; installation wiring
and foundation, $ 2,200; material and labor costs in testing equipment, $
700; oil lubricants and supplies to be used with equipment, $ 500; fire
insurance policy covering equipment, $1,400. The equipment is estimated to
have a $ 5,000 salvage value at the end of its 5-year useful service life.
- Compute the acquisition cost of the equipment. Clearly identify each
element of cost.

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May 2009
1-Hesham firm acquired a car at a cost of L.E. 85,000 on January
1,2005.The car is expected to have a residual value of L.E. 5000 at the end
of its useful life of (5) years.
Required:
- Compute the amount to be recorded as depreciation expense for 2008 and
2009 under each of the following methods:
a - Straight-line method,
b - Sum-of-the-year digits method.
-Journalize the adjusting entries needed on Dec.31, 2009 according to the
straight-line method only and show the effect on the balance sheet at Dec.31
2009 according to the Sum-of-the-years-digit method.

May 2012
1- X Y Z company purchased a machine for L .E .30, 000 on January 1,
2011 .The estimated life is six years and the salvage value is LE1,500 .
Compute the annual depreciation using the following methods:
 The straight-line method for the first year.
 The sum- of -the – years digits method for the first three years.
 The double- declining balance method for the first three years.
-Recording acquisition and depreciation of a fixed asset .

May 2013
1-. XYZ Company purchased a piece of equipment on January 1, 2011. The
equipment cost L.E 60,000 and had an estimated life of 8 years and a
salvage value of L.E 8,000. What was the depreciation expense for the asset
for 2012 under the double-defining-balance method?
a- L.E 6,500 b- LE 15,000
c- LE 6,562 d- LE11, 250

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 ‫ ج‬، ‫ ب‬، ‫ أ‬، ‫ مميزة‬: ‫المجمىعت‬ ‫امتحان نهايت الفصل الدراسي الثاني‬ ‫جامعت القاهرة‬
: ‫التاريخ‬ ‫مقدمت في المحاسبت‬: ‫مادة‬ ‫كليت التجارة‬
: ‫الىقت‬ ‫الفرقت االولى‬ ‫قسم المحاسبت‬
Q u esti on ( 1)
First:
Th e f oll owin g w ere sel ected f rom amon g th e transacti ons
comp l eted by El-Hoda Trading Company during April 2015
April 1 Received a note receivable of L.E 10,000 from Giza Co, due at July l,
with interest rate 15% annually. The note was discounted on April 1,
at discount rate of 18%.
April 2: Sold merchandise on account to Cairo Company, list price
L.E.12500, trade discount 20%, terms F.O.B destination 2/10 ,n/30 and
paid freight charges amounted L.E 500.
April 5: Purchased Equipment on account for Arm Company, invoice price
L.E. 6000, terms F.O.B shipping point 2/10, n/30 freight charges
amounted L.E 300 were paid by Amr Co.
April 10: Received the proper amount due from Cairo Company
April 16: Paid rent for the next six months LE 6000 cash
April 17: Wrote off the account of Dina Company L.E2000.
April 18: Received L.E1000 from Reham in payment of her account, which was
written off in the preceding year.
Required:
Record the above transactions in the general journal of El- Hoda
Company.
Second:
Zahran store is a wholesale store maintaining its accounts on a calendar year .At
December 31, 2015 the trial balance appeared as follows:
Account Titles Dr. Cr.
Cash 38.000
Unexpired insurance 4.400
Equipment 22.000
Accumulated depreciation equipment 6,600
Zahran capital 65.000
Sales 397800
Sales returns & allowances 20.000
Sales discounts 60.000
Cost of goods sold 225.000
Rent revenue 28000
Land 128000
Total 497400 497400

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 Other data:
a. The credit manager estimated the doubtful accounts at an amount equal 2%
of net credit sales.
b. The equipment is being depreciated by using the double-declining-balance
method over a 10-years useful life..
c. Insurance premiums expired during the year L.E 5,000.
d. Accrued Rent as of December 31, were L.E 6,000.
Required:
1- Prepare the adjusting entries as at Des. 31,2015.
2- Prepare the classified income statement for the year ended Dec. 31, 2015..

Question (2):
The cash account in the ledger of Sun Company showed a balance of L.E.17000 at
June 30. The Bank Statement, however, showed a balance of L.E.18000 at the same
date. The only reconciling items consisted of the following:
1. Outstanding checks:
No.301 L.E470 No.302 L.E610 No.303 L.E720.
2. Note collected by bank L.E. 13000
3. Deposit in transit L.E. 12500.
4. NSF check of El-Amal Co. L.E. 957.
5. Bank service charge L.E. 43.
6. Expenses were written for L.E. 907 but erroneously recorded as L.E. 607.
Required:
a. Prepare the bank reconciliation of Sun Company at June 30.
b. Prepare the journal entries to update the records of Sun Company.
Question( 3):
First:
On December 31, 2015the unadjusted trial balance of Karnaval Supermarket
included the following accounts:
Accounts Receivable L.E 80000 - Allowance for doubtful accounts L.E 3000
Credit balance.
Other Data:
Estimated uncollectible accounts under the balance sheet approach amounted L.E.
4500.
Required: Prepare the adjusting entry at Dec.31 needed to bring the allowance of
doubtful accounts to the proper amount
Second:
On December 1, 2015, the ABC firm received a LE. 20000, 20%, 3-month note
receivable in a settlement of an account receivable .This note was due on March 1,
2016. Noting that the financial year ends on Dec. 31.
Required:

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 a. Determine the proceeds of the note.
b. Prepare the journal entry needed.
Third:
On January1, 2007 Nile Co. purchased equipment for L.E. 200,000 with an
estimated useful life of 4 years and a residual value of L.E. 10,000.The financial
year ends Dec. 31.
Required
Compute the amount to be recorded as depreciation expense for 2007 and 2008
under Sum-of- the- year digits methods.

Model answer:
Q.(1)
A: Journal entries
Date Ex. Dr. Cr.
Apr.1: Notes Rec. 10,000
Acc. Rec. 10,000
Cash 9908.125
interest ex. 91.875
Notes Rec. 10,000
Maturity value =10,000 +( 10,000×15%×90/360=10375
Bank dis.= 10375×18%×90/360=466.875
Net proceed= 10375-466.875= 9908.125
Apr.2 Cairo Co. 10,000
Sales (2/10, n/30) 10,000
Freight -out 500
Cash 500
Apr.5 Equipment 6000
Amr Co. 6000
Fright- in 300
Amr Co. 300
Apr.10 Cash 9800
Sales dis. 200
Cairo Co. 10,000

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Apr.16 Prepaid rent 6000
Cash 6000
Apr.17 Uncollectible acc. ex. 2000
Acc. Rec. 2.000
Apr.18 Cash 1000
Acc. Rec. Reham 1000
B: Adjusting entries
(1) Uncollectible acc. ex. 6356
Allowance for uncollectible acc. 6356
(397800-20,000-60,000)=317800×2%=6356
(2) Dep. ex. 3080
Accumulated dep. 3080
(22000-6600)×20%= 3080
(3) Insurance ex. 5000
Prepaid insurance 4400
Insurance payable 600
(4) Accrued rent 6000
Rent rev. 6000
Income statement
Sales 397800
- Returns (20,000)
- Dis. (60,000)
Net sales 317800
- cost of goods sold (225000)
Gross profit 92800
- expenses:
Uncollectible acc. ex. 6356
Dep. ex. 3080
Insurance ex. 5000 (14436)
Net profit from operation 78364
+ rent rev.(28000+6000) 34000

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Q.2
bank ledger
balance 18000 balance `17000
- outstanding checks (1800) + collections 13000
+deposit in transit 12500 - NSF (957)
- Charges (43)
- error (300)
28700 28700
Cash 13000
Notes 13000
Rec.
NSF 957
Bank charge 43
Error 300
cash 1300
Q.3:
(1) Uncollectible acc. ex. 1500
Allowance for uncollectible acc. 1500
(2) Interest ex. 333.33
Interest payable (20,000×20%×30/360) 333.333
Proceeds= 20,000+ (20,000×20%×90/360) = 21000
(3) 2007: (200,000 -10,000) ×4/10 =76000
2008: (200,000 – 10,000)×3/10=57000

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 )2 ، 1( ‫ انتساب‬: ‫المجمىعت‬ ‫امتحان نهايت الفصل الدراسي الثاني‬ ‫جامعت القاهرة‬
2112/5/31 : ‫التاريخ‬ ‫مقدمت في المحاسبت‬: ‫مادة‬ ‫كليت التجارة‬
: ‫الىقت‬ ‫الفرقت االولى‬ ‫قسم المحاسبت‬
Us ing you r bu bbl e sh eet, an sw er th e foll owin g MCQ :
1 – M e r c h a n d i s e i n ve n t o r y:
A- Is a current asset. B- Is a long-farm asset C- Includes supplies
D- Is classified with investment on the balance sheet.
E- Must be sold within one month
2 – Accompany purchased L.E.20,000 of merchandise on June 15 with terms of
3/10, n/45, and FOB shipping point. The freight charge was L.E.500. On June 20, it
returned L.E800 of that merchandise. On June 24, it paid the balance owed for the
merchandise taking any discount it is entitled t0. The cash paid on June 24 equals:
A- L.E. 19,224 B- L.E 20,00 C- L.E 19-124 D- L.E 20,300
E- L.E 20,500
3 – When preparing an unadjusted trial balance using a perpetual inventory system,
the amount shown for merchandise inventory Is:
A- The ending inventory amount B- The beginning inventory amount
C- Equal to the cost of goods sold D- Equal to the cost of goods purchased
E- Equal to the gross profit.
4 – An account used in the perpetual inventory system that is not used in the
periodic inventory system is:
A- Cost of goods sold B- Sales C- Sales returns and allowances
D- Accounts payable. E- Income summary.
5 – A company uses the perpetual inventory system and recorded the following
entry:
Cost of goods sold 2,500
Merchandise inventory 2,500
This entry reflects a:
A- Purchase of merchandise on credit B- Return of merchandise
C- Sale of merchandise
D- Payment of the account payable and recognition of 1 2% cash discount taken
E- Payment of the account payable and recognition of a1% cash discount taken
6 – Beginning inventory plus net purchases is:
A- Cost of goods sold B- Merchandise available for sale
C- Ending inventory D- Sales. E- Shown on the balance sheet

- 116 -
7 – A company had sales of L.E. 695,000 and cost of goods sold of L.E. 378,000
its gross margin equals:
A- L.E.(417,000) B- L.E. 317,000 C- L.E. 278,000 D- L.E. 695,000
E- L.E. 973,000
8 – Purchase returns:
A- Refer to merchandise that customers return to the seller after the sale.
B- Refer to reductions in the selling price of merchandise sold to customers.
C- Represent cash discounts. D- Represent trade discounts
E- Refer to merchandise returned to the supplier after the purchase.
9 – A debit to sales returns and allowances and a credit to accounts receivable:
A- Reflects an increase in amount due from a customer
B- Reflects a decrease in amount due a supplier
C- Requires a debit memorandum to recognize the customers return
D- Is recorded when a customer takes a discount.
E- Recognize that a customer returned merchandise and or received an allowance.
10- Net sales less cost of goods sold equals:
A- Net purchases. B- Cost of goods sold. C- Net sales.
D- Gross profit. E- Net income.
11- All of the following accounts would be closed with a debit except?
A- Cost of goods sold. B- Purchase returns and allowances.
C- Purchase discount. D- Revenue. E- Sales.
12- A company has net sales and cost of goods sold of L.E.652,000 and L.E.
543,000, respectively. Its net income is L.E.17,330. The company`s gross margin
and operating expenses ______ and _________, respectively.
A- L.E.227,000 ; L.E. 525,470 B- L.E. 191,470 ; L.E. 209,000
C- L.E. 525,470 ; L.E. 227,000 D- L.E. 209,000 ; L.E. 191,470
E- L.E. 734,000 ; L.E. 191,470
13- Adjusting entries:
A- After both income statement and balance sheet accounts.
B- Affect only balance sheet accounts.
C- Affect only income statement accounts.
D- Affect only cash flow statement accounts.
E- Affect only equity accounts.
14- The main purpose of adjusting entries is to:
A- Record internal transactions and events.
B- Record external transactions and events.

- 117 -
C- Recognize assets purchased during the period
D- Recognize debts paid during the period. E- Correct errors.
15- The broad principle that requires expenses to be reported in the same period as
the revenues that were earned as a result of the expenses is the:
A- Recognition principle B- Cost principle C- Matching principle.
D- Cash basis of accounting E- Time period principle
16- The system of preparing financial statements based on recognizing revenues
when the cash is received and reporting expenses when the cash is paid is called:
A- Accrual basis accounting. B- Operating cycle accounting.
C- Cash basis accounting. D- Revenue recognition accounting.
E- Current basis,
17- The approach to preparing financial statements based on recognizing revenues
when they are earned and matching expenses to those revenues is:
A- Accrual basis accounting. B- The matching principle
C- The time period assumption. D- Cash basis accounting.
E- Revenue basis accounting.
18- Prepaid expenses, depreciation, accrued expenses, unearned revenues, and
accrued revenues are all examples of:
A- Items that require contra accounts. B- Items that require adjusting entries.
C- Asset and equity. D- Asset accounts. E- Income statement accounts
19- A company made no adjusting entry for prepaid rent of L.E.28,000 on
December 31, This oversight would:
A- Understate assets by L.E.28,000. B- Overstate net income by L.E.28,000
C- Have no effect on net income. D- Overstate assets by L.E.28,000.
20- On June 30 Apricot Co. paid L.E.27,500 cash for management services to be
performed over a two year period. Apricot follows a policy of recording all prepaid
expenses to asset accounts at the time of cash payment. On June 30 Apricot should
record:
A- A debit to a prepaid expense for L.E. 27,000
B-A debit to an expense for L.E. 27,500 C-A credit to an expense for L.E.27,000
D- A credit to a prepaid expense for L.E. 7,500 E-A debit to cash for L.E27,500
21- Adjusting entries:
A-Affect only income statement account B-Affect only balance sheet account
C- Affect both income statement and balance sheet accounts.
D- Affect only cash flow statement accounts, E- Affect only equity accounts.

- 118 -
22- A debit to sales returns and allowances and a credit to accounts receivable is
used to record sales returns when using:
A- Perpetual inventory system. B- Periodic inventory system.
C- FOB shipping point. D- CIF shipping point.
E- Both perpetual and periodic inventory system.
23- Adjusting entries made at the end of an accounting period accomplish all of the
following except:
A- Updating liability and asset accounts to their proper balances.
B- Assigning revenues to the periods in which they are earned.
C- Assigning expenses to the periods in which they are incurred.
D- Assuring that external transaction amounts remain unchanged.
24- A company made no adjusting entry for accrued and unpaid employee wages
of L.E.15,000 on December31, This oversight would:
A- Understate net income by L.E15,000 B-Overstate net income by L.E.15,000
C-Overstate net income by L.E.15,000 D-Overstate assets by L.E. 15,000
E- Understate assets by L.E. 15,000
25- An adjusting entry could be made for each of the following except:
A- Prepaid expenses. B- Depreciation. C- Accrued revenues.
D- Unearned revenues. E- Owner capital.
26- If a company failed to make the end-0f- period adjustment to remove from the
unearned management fees account the amount of management fees that were
earned, the omission would cause:
A- An overstatement of net income. B- An overstatement of assets.
C- An understatement of liabilities. D- An overstatement of equity.
E- An overstatement of liability.
27- A company records the fees for legal services paid in advance by its clients in
an account called unearned legal fees. If the company fails to make the end-of-
period adjusting entry to record the portion of these fees that has been earned, one
effect will be:
A- An overstatement of equity. B- An overstatement of assets.
C- An understatement of assets. D- An overstatement of liability.
E- An overstatement of equity.
28- If the company falis to make the end –of- period adjusting entry to record the
portion of unearned revenue that has been earned, all the following effects are
correct except:
A- An understatement of equity. B- An understatement of net profit.

- 119 -
C- An understatement of gross profit. D- An understatement of assets.
E- An overstatement of liability.
29- Which one of the following statements is incorrect?
A- Assets and liabilities normally have credit balances.
B- Liabilities and revenues normally have credit balances.
C- Equity and revenues normally have credit balances.
D- Assets and expenses normally have balances.
30- All of the following are asset accounts except:
A- Supplies expense. B- Buildings. C- Account receivable.
D- Cash. E- Prepaid insurance.
31- All of the following are liability accounts except:
A- Accounts payable. B- Unearned ticket revenue. C- Taxes payable.
D- Prepaid rent. E- Notes payable.
32- A report, in which the total debit balances of asset accounts should equal the
total credit balances of Equity and liability accounts, is called a (n):
A- Account balance. B- Balance sheet. C- Ledger.
D- Chart of accounts, E- Trial balance.
33- While in the process of posting from the journal to the ledger a company failed
to post a L.E.500 debit to the office supplies account. The effect of this error will
be that:
A- The offics supplies account balance will be overstated.
B- The trial balance will not balance.
C- The error will overstate the debits listed in the journal.
D- The total debits in the trial balance will be larger than the total credits.
E- The error will overstate the credits listed in the journal.
34- A L.E.15 credit to sales was posted as a L.E.150 credit. By what amount is
sales in error?
A- L.E. 150 understated B- L.E. 150overstated C- L.E. 135 overstated
D- L.E. 15 understated. E- L.E. 135 understated.
35- Trial balance taken at year-end showed total credits exceeds total debits by
L.E.4,950. The discrepancy could have been caused by:
A- An error in the general journal where a L.E.4,950 increase in accounts
receivable was recorded as an increases in cash.
B- A net income of L.E. 4,950.
C- The balance of L.E.49,500 in accounts payable being entered in the trial balance
as L.E. 4,950.

- 120 -
D- The balance of L.E.5,500 in the office equipment account being entered on the
trial balance as a debit of L.E. 550.
E- An error in the general journal where a L.E. 4,950 increase in accounts payable
was recorded as a decrease in accounts payable.
36- A L.E.130 credit to office equipment was credited to fees earned by mistake,
by what amounts are the accounts under-or-overstated as a result of this error?
A- Office equipment, understated L.E.130; Fees earned, overstated L.E. 130
B- Office equipment, understated L.E.260; Fees earned, overstated L.E. 130.
C- Office equipment, overstated L.E.130; Fees earned, overstated L.E. 130.
D- Office equipment, overstated L.E. 130; Fees earned, understated L.E. 130.
E- Office equipment, overstated L.E. 260; Fees earned, understated L.E. 130.
37- Fatema industries received L.E. 3,000 from a customer for services rendered
and not previously recorded, Fatema`s general journal entry to record this
transaction will be:
A- Debit services revenue, credit accounts receivable.
B- Debit cash, credit accounts payable.
C- Debit cash, credit accounts receivable.
D- Debit accounts payable, credit services revenue.
E- Debit cash, credit services revenue.
38- The entry of: Debit sales; credit income summary, is necessary to:
A- Recognize earned revenues.
B- Close debit balance in temporary accounts to income summary.
C- Close credit balance in temporary accounts to income summary.
D- Close income summary to owners equity. E- Correct errors.
39- The entry of: debit income summary, credit expenses, is necessary to:
A- Recognize earned revenue.
B- Close debit balances in temporary accounts to income summary.
C- Close credit balances in temporary accounts to income summary.
D- Close income summary to owners equity. E- Correct errors.
40- The entry of: income summary; owners equity, is necessary to:
A- Recognize earned revenue.
B- Close credit balances in temporary accounts to income summary.
C- Close debit balances in temporary accounts to income summary.
D- Close income summary to owners equity. E- Correct errors.

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 TABLE OF CONTENTS

The Title Page

CH. 1 Accounting : An Introduction 3
CH. 2 Introduction To Financial Statements 21
CH. 3 Transaction Analysis And Accounting Cycle 47
CH. 4 Accounting For Merchandising Operations 74
CH. 5 Adjusting The Accounts 103
CH. 6 Cash And Short-Term Investment 142
CH. 7 Receivable And Payables 171
CH. 8 Fixed Assets, Depreciation, And Intangible
208
Assets
Work Book For Introduction To Accounting 1 - 121

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