3

THE RECORDING PROCESS

The Double Entry System

Learning Objectives

After studying this chapter you should be able to:

1. Identify the basic issues involved in recording transactions

2. Define and use accounting terms like journal, ledger, debit, credit, etc
3. Identify the steps in recording process
4. Explain the usefulness of each recording step
5. Explain the rule of recording in term of debit and credit
6. Record transactions in general journal
7. Prepare a trial balance
 The Recording Process 51

Scenario

W
aheed-ud-Din Jamali joined the Water and Power
Development Authority (Wapda) in 1975 after graduating
as electrical engineer from the University of Engineering
and Technology, Lahore. He is presently posted in Quetta
as Senior Engineer. Since 1985, he has been handling different
projects or managing different zones independently. Initially, he was
heading a subdivision office, later a division and then a circle office. All
these responsibilities involved considerable collection of revenue and
disbursement of expenses. Each month, he had to sign a trial balance
– a statement he never could comprehend. He always had to believe
his accountants. His accountants would tell him how difficult it was to
pass the entries, post them to ledgers and draw a trial balance. As the
trial balance had two columns – for debit and credit – which were
always equal, Mr Waheed was confident that it is correct and no fraud
or misappropriation was being done. It was in 1992, when he was
suspended and charge-sheeted for some fraudulent act, which he
never knew of. It was only after a great deal of embarrassment, tension
and waste of time, that he could prove himself innocent.
It was after this incidence that he decided to take one of the
management training programmes at Wapda Staff College. He was
surprised to know that debit and credit are just the names of two
columns and does not mean anything else. It was shocking for him to
know that trial balance is no guarantee against frauds or even basic
accounting errors.
Just imagine how many project managers, divisional heads and
chief executive officers in the country sign accounting statements
without basic understanding.

Point to Think
a What impact such an attitude can have on a project’s success?
b How can this affect the resource utilization in the economy?
52 Financial Accounting: A Managerial Perspective

T
he business transactions are economic events affecting the composition of the
accounting equation, which portrays the financial position of an enterprise. So
far, the analysis of transactions has been illustrated with reference to their
effect on accounting equation. However, in accounting we do not use
mathematical style of equations, as it is not possible to record hundreds of
transactions in that form. The prime objective of any accounting system is to record,
classify and summarize financial data in most economical and efficient way and
convert it into information, which is useful for different interested groups. The
financial information is conveyed to these groups through financial statements. The
preparation of financial statements involves different sequential steps. However,
before the mechanics of the recording procedure is discussed it is important to
understand the following basic issues:
The Recognition Issue
The first issue is when a business transaction should be recorded. Take a simple
example of purchases of office furniture by the Khan Autos. The purchase process
involves the following actions:
i placing the order
ii receiving the furniture
iii making the payment
Which of these actions constitute a recordable event? In this particular case the
transaction is recorded when the title of ownership is transferred from seller to the
buyer. However, in certain situations it really becomes difficult to decide the timings
of recognition. It is particularly true in long-term contracts or services like developing
an advertising campaign or a construction work spread over a period of more than
one year. The transfer of title of ownership happens at the conclusion of purchase or
sale agreement. The forms of agreement are numerous ranging from an informal to a
very formal act. For example, purchase of land or building would involve a lot of
paperwork and signing of the papers and making payment in a court, whereas
purchase of grocery on credit from the shop in the neighbourhood requires only a
verbal commitment. Accounting tradition is to record the transaction when the title of
ownership is transferred from seller to the buyer. The transfer depends on agreement.
The nature of agreement differs from one business to another business.
 The Recording Process 53

The problem of recognition is also faced in case of expenses and other transactions.
The accuracy and reliability of net profit or loss depends how accurately the events
are recognized.

Point to Think
Raja Asghar is a dealer in grain market (ghalla mandi) in Rawalpindi. On
December 10, 1997, he telephoned Ghous Bux Chandio – a fellow dealer in
Hyderabad – to send two truckloads of white grams as the month of Ramazan
was approaching. Mr Chandio dispatched the shipment on Dec 12, 1997.
When should Raja Asghar record this purchase in his books of accounts?

The Valuation Issue

As per Generally Accepted Accounting Principles (GAAP), the business transactions
are recorded at original cost that is defined as the exchange price associated with the
business transaction at the time of recognition. It is often called historical cost. It is
said that the purpose of accounting is not to account for value but to account for the
cost. The value may change immediately after the occurrence of the transaction. The
cost principle is used because of its being objective and verifiable. The determination
of value is a subjective phenomenon. Even the determination of cost at times depends
on the assumptions being used, e.g. the cost of closing stock.
The Classification Issue
The classification of a transaction is important because it affects both balance sheet
and the income of a period. For example, how to treat purchase of small tools?
Should it be treated as an asset or an expense? Each transaction is to be classified
properly to represent its effect correctly. If purchase of small tools is treated as an
expense, the net profit of the period would decrease and similarly the assets on the
balance sheet would also be understated.
THE RECORDING PROCESS
The financial data generated by a large business enterprise is enormous. The method
of recording the data should be such that retrieval may be quick and the information
provided is timely and reliable for economic decision making. The steps involved in
recording the transactions, right from the analysis of transactions to the preparation of
financial statements, are collectively called accounting cycle. Its steps are as follows:
i Analyze the transaction in terms of its effects on accounting equation, i.e.
increase or decrease in assets, liabilities and capital.
ii Pass the entry in the journal.
iii Post the entry to ledger.
iv Balance the accounts and extract the trial balance.
v Pass and post adjusting entries.
54 Financial Accounting: A Managerial Perspective

vi Extract the adjusted trial balance.

vii Pass and post the closing entries.
viii Extract post-closing trial balance.
ix Prepare financial statements.
This chapter deals with the first four steps. The remaining steps are discussed in
chapter 4.
Analysis of Transaction
This step has already been discussed in Chapter 2. It was demonstrated that every
transaction affects the accounting equation in terms of increase or decrease in assets,
liabilities or capital. The change could be in one or more components.

Point to Think
The following are the possible impacts of a transaction on accounting equation:
i Increase in an asset and a decrease in another asset.
ii Increase in asset and an increase in liability.
iii Decrease in asset and a decrease in liability.
iv Increase in asset and an increase in capital.
v Decrease in asset and a decrease in capital.
vi Increase in all the three, i.e. assets, liabilities and capital.
vii Decrease in all the three i.e. assets, liabilities and capital.
viii Decrease in liability and increase in capital.
ix Increase in liability and decrease in capital.
Think of a transaction for each of the above situations.

The Journal
A general journal is the first accounting record. It is just like a shopping bag in which
all transactions are recorded in order of their occurrence. It is called the original book
of entry. The following is a format of a general journal.
Date Description Post Ref. Dr. Cr.

It is the first recording step. It records transactions in chronological order. Every

transaction is to be recorded in journal. It is important to know, however, that in
 The Recording Process 55

practical accounting systems the journal is divided into parts known as special
journals or subsidiary journals. Even in day-to-day shopping, different bags are used
for different types of items. Similar items can be put in one shopping bag. The special
journals are discussed in Chapter 6. The general journal is the most effective tool to
understand the recording concepts.
Let us understand each column of the format. A brief description is as follows:
Date
The date of the transaction is recorded in this column. The date includes the day,
the month and the year. The recording date is determined according to
recognition criterion. The month and the year need not to be repeated for each
entry until a new page or month starts.
Description
This column records the name of asset, liability, capital, revenue or expense,
which has been affected by the particular business transaction. The names used
should be the same as appearing in the ledger accounts.
Post Reference
The recording of transaction in the journal is the first step. The second step is to
sort it out, i.e. to classify and transfer these items to relevant ledger accounts –
the proper place for each item. This column records the reference to that ledger
account in the shape of account’s number or code number identifying that
account.
Debit and Credit
The amount by which different accounts have been affected is recorded in these
two columns according to the rules explained below. It must be clearly
understood at this stage that debit and credit are just the names of the columns
and does not have any specific meaning. Their abbreviations Dr. and Cr. have
been taken from Latin words debere and credere respectively. These two
columns are used to record the changes in the components of accounting
equation.
The Rule
Increase to be recorded in: Decrease to be recorded in:
Assets Debit Credit
Liabilities Credit Debit
Capital Credit Debit
Revenue Credit Debit
Expense Debit Credit
The recording of transaction in the journal is called passing or Journalising the entry.
To pass an entry the following points are to be kept in mind:
i The item to be debited is written first and without leaving any space with date
column and the amount is mentioned on the same line in debit column.
56 Financial Accounting: A Managerial Perspective

ii The item to be credited is written on the next line by leaving some space from the
date column and the amount is mentioned on the same line in credit column.
iii After writing debit and credit the transaction is described. It is called narration.
An entry having more than one debit and/or credit is called a compound entry.
Recording the Journal Entry
Transaction: Mr Khan invested Rs. 500,000 in Khan Autos.
Analysis: Mr Khan’s investment in business increased its asset – the bank. His
investment also increased the owner’s capital, i.e. owner’s claim in
the business entity.
Apply the rule: Increase in asset is to be recorded in debit. The asset – bank – has
increased; record it in debit. Increase in owner’s capital is to be
recorded in credit; record Khan’s capital in credit.
Date Accounts and Explanation Post Ref. Debit Credit
Jan 1, 1990 Bank 1 500,000
Capital 2 500,000
Being investment by Mr Khan

Point to Think
Why increase in asset is recorded in debit and increase in liability in credit?
Why to write debits first and credits on the second line?
Before we find an answer to this, did you ever consider?
Why is it that in cricket if a batsman is caught he gets out?
Why is it that when the ball touches a player’s foot in hockey, it is foul?
Why is it that in football you can’t touch the ball with hand?
Why do all the team members wear the same uniform?
These are the rules of the games. Different teams play in different styles –
or the systems – but follow the same rules. Similarly, within the same
framework of rules one can adopt different styles, which we may call the
accounting systems.

For each debit there is an equal credit. Each entry has equal debit and credit. This is
known as double entry system.
The double entry system is based on the principle of duality, which means that all
events of economic importance have two aspects – efforts and rewards, sacrifice and
benefits, sources and uses – that offset or balance each other. All accounting systems,
no matter how sophisticated, are based on this principle.
 The Recording Process 57

THE LEDGER
Each item recorded in journal constitutes an accounting head. For each head an
account is opened which records increases or decreases in that head. The accounts
collectively are known as general ledger. So there will be an account each for cash,
furniture & fixture, building, creditors, etc. In its simplest form, an account has three
parts:
i a title
ii a debit side, i.e. the left side
iii a credit side, i.e. the right side
It is known as T account because it resembles the letter ‘T’. It appears as follows:
Title of Account
Debit side Credit side

The more formal and practical version of a ledger account called multi-column or
running-balance account appears as follows:
Date Explanation Post Ref. Debit Credit Balance

The transfer of amounts from journal to ledger is known as posting. The process
of posting follows the same rules of recording. Increase in assets or expenses, is
recorded on debit side and decrease on credit side. Increase in liabilities, capital or
revenue is recorded on credit side whereas decrease appears on debit side.
The journal records the transactions in chronological order. The debit and credit
for one transaction appears at the same place. However, the journal does not provide
a summarized information about any particular head of account; the ledger does it.
For example, if we want to know how much is the balance in the bank on January 20,
1997, we need to refer to the ledger. The cash account summarizes all the cash
increases and decreases, as a result of different transactions. It would provide
information about the reason for increase and decrease in cash and also the balance at
that date. Every other ledger account does the same.
The process of posting is simple and involves the following steps:
i The debit part of the journal entry is recorded on the debit side of the relevant
account, e.g. Rs. 5,000 will be recorded on the debit side of bank account.
ii The credit part of the journal entry is recorded on the credit side of the
relevant account, e.g. Rs. 5,000 will be recorded in the credit side of capital
account.
iii In the reference column of general journal the code or page numbers of
ledger accounts are noted.
58 Financial Accounting: A Managerial Perspective

iv In the reference column of ledger accounts the page number of journal on

which a particular transaction is recorded is noted.
Fig 3.1 Procedures to Follow in Posting a General Journal Entry
General Journal
J1
Post
Date Account and Explanation Ref. Debit Credit
1998
Jan. 1 Bank 1 500,000
Capital 2 500,000
Investment by Mr Khan

General Ledger

Bank 1
Post
Date Description Ref. Debit Credit Balance
1998
Jan. 1 J1 500,000 500,000

Capital 2
Post
Date Description Ref. Debit Credit Balance
1998
Jan. 1 J1 500,000 500,000

In case, the simple T accounts are used cross references of accounts for each debit
and credit are provided. It would appear as follows:
Bank
1998
Jan. 1 Capital 500,000

Capital
1998
Jan. 1 Bank 500,000

Balancing the Accounts

If simple T accounts are being used then the next step is to find out the balance in
each account at the end of each accounting period or when needed. The process to
find out the balance is:
i Find the total of debit side.
ii Find the total of credit side.
 The Recording Process 59

iii Calculate the difference between the two sides. This is the balance (The
balancing figure between the two sides).
iv Write the balance on the smaller side. However, the balance will be known
by the larger side i.e. if the debit side is greater than the credit side, the
balance will be known as debit balance and vice versa.
Let us learn this with the help of the following bank account.
Bank
Capital 500,000 Land 20,000
Service revenue 30,000 Prepaid rent 120,000
Service revenue 3,000 Creditors 40,000
Debtors 30,000 Tools 80,000
Workshop supplies 9,000
Salaries 15,000
Gas and electricity 5,000
Drawings 15,000
Balance c/d 259,000
563,000 563,000
i Total of debit side is Rs. 563,000.
ii Total of credit is Rs. 304,000.
iii The difference is Rs. 259,000.
iv As the debit side is greater, the account has a debit balance.
v The credit side is smaller. The balance is entered on credit side.
vi After entering the balance, both sides become equel.
If multicolumn ledger account format is used, a running balance is achieved
whenever a transaction is entered into it. In that case, the balancing step is not
needed.
Transaction Analysis, Journalising and Posting Illustrated
1 Transaction: Mr Khan invested Rs. 500,000 in Khan Autos by depositing the
amount in bank.
Analysis: Mr Khan’s investment in the business increased its asset – cash
in bank; to record this increase, debit the bank. His investment
also increased the owner’s equity; to record this increase, credit
Khan’s capital.
Journal Bank 500,000
entry Khan’s capital 500,000
Initial investment by owner
Ledger accounts
Bank
(1) Capital 500,000
60 Financial Accounting: A Managerial Perspective

Khan’s Capital
(1) Bank 500,000

2 Transaction : Paid Rs. 20,000 by cheque for land as a future factory location.
Analysis: The purchase decreased bank, therefore, credit the bank. The
purchase increased the asset land; to record this increase, debit
land.
Journal Land 20,000
entry Bank 20,000
Paid for purchase of land.
Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000

Land
(2) Bank 20,000

3 Transaction: Paid Rs. 120,000 by cheque as one-year advance rent for

workshop premises.
Analysis: Prepaid rent – an asset – increased; debit prepaid rent. The cash
at bank decreased; credit bank.
Journal Prepaid rent 120,000
entry Bank 120,000
Paid advance rent for workshop premises.

Ledger Accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(3) Prepaid rent 120,000
Prepaid Rent
(3) Bank 120,000

4 Transaction: Purchased office supplies of Rs. 50,000 on credit.

Analysis: The credit purchase of office supplies increased this asset; to
record this increase, debit office supplies. The purchase also
 The Recording Process 61

increased the liability. To record this increase, credit accounts

payable or creditors.
Journal Office Supplies 50,000
entry Creditors 50,000
Purchased office supplies on account.
Ledger accounts
Office Supplies
(4) creditors 50000

Creditors
(4) Office supplies 50,000

5 Transaction: Paid Rs. 40,000 to creditors.

Analysis: The payment decreased the cash at bank, therefore, credit bank.
The payment also decreased the liability, creditors; to record this
decrease, debit creditors.
Journal Creditors 40,000
entry Bank 40,000
Paid cash on account.
Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(3) Prepaid rent 120,000
(5) Creditors 40,000
Creditors
(5) Creditors 40,000 (4) Office supplies 50,000

6 Transaction: Mr Khan renovated his personal residence by spending Rs. 5,000

from another personal account.
Analysis: This is not a transaction of the Khan Autos, so no entry is
required.
7 Transaction: Paid Rs. 80,000 by cheque for purchase of tools.
Analysis: The asset – tools – increased; therefore debit tools. The cash at
bank decreased; therefore credit bank.
Journal Tools 80,000
entry Bank 80,000
Purchase of tools
62 Financial Accounting: A Managerial Perspective

Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(3) Prepaid rent 120,000
(5) Creditors 40,000
(7) Tools 80,000
Tools
(7) Bank 80,000

Each journal entry posted to the ledger is keyed by date. In this way, any
transaction can be traced from the journal to the ledger and, if needed, back to the
journal. This linking allows you to locate efficiently any information needed.
Until this point the transactions affecting assets, liabilities and capital accounts
have been discussed. The transactions affecting revenue and expense accounts
are discussed below.
8 Transaction: Repaired the engines of the cars of two clients and collected Rs.
30,000. The cash was immediately deposited in the bank.
Analysis: The asset bank is increased; therefore, debit bank. The revenue is
earned; therefore, credit service revenue.
Journal Bank 30,000
entry Service revenue 30,000
Performed service and received cheque.
Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(8) Service Revenue 30,000 (3) Prepaid rent 120,000
(5) Creditors 40,000
(7) Tools 80,000
Service Revenue
(8) Bank 30,000

9 Transaction: Repaired the engines of two buses of International Islamic

University and sent two bills, one for Rs. 30,000 and the other
for Rs. 20,000.
Analysis: The asset debtors increased; therefore, debit debtors. The
revenue is earned; therefore, credit service revenue.
Journal Debtors 50,000
entry Service revenue 50,000
Performed service and on credit.
Ledger accounts
 The Recording Process 63

Debtors
(9) Service Revenue 50,000

Service Revenue
(8) Bank 30,000
(9) Debtors 50,000

10 Transaction: Provided services to a client and billed him for Rs. 7,000. He
paid Rs.3,000 immediately by cheque. The balance payable
within ten days.
Analysis: The assets bank and debtors have increased; therefore, debit bank
and debtors. The revenue is earned; therefore, credit service
revenue.
Journal Bank 3,000
entry Debtors 4,000
Service revenue 7,000
Performed service and received part payment
Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(8) Service Revenue 30,000 (3) Prepaid rent 120,000
(10) Service revenue 3,000 (5) Creditors 40,000
(7) Tools 80,000
Debtors
(9) Service Revenue 50,000
(10) Service revenue 4,000

Service Revenue
(8) Bank 30,000
(9) Debtors 50,000
(10) Bank 3,000
(10) Debtors 4,000
11 Transaction: The following expenses were paid by cheque:
Workshop supplies Rs.9,000; employees salaries Rs.15,000; gas
and electricity Rs. 5,000. The total became Rs. 29.000
Analysis: The expenses were incurred; therefore, debit expenses. The bank
decreased; therefore, credit bank.
Journal Workshop supplies 9,000
entry Salaries 15,000
Gas and electricity 5,000
Bank 29,000
64 Financial Accounting: A Managerial Perspective

Performed service and received part payment

Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(8) Service Revenue 30,000 (3) Prepaid rent 120,000
(10) Service revenue 3,000 (5) Creditors 40,000
(7) Tools 80,000
(11) Salaries 15,000
(11) Workshop Supplies 9,000
(11) Gas and Electricity 5,000
Workshop Supplies
(11) Bank 9,000

Salaries Expenses
(11) Bank 15,000

Gas and Electricity

(11) Bank 5,000

Telephone Charges
Jan. 11 Creditors 12,000

12 Transaction: Received telephone bill of Rs. 12,000 for the month.

Analysis: The expenses were incurred; therefore, debit expense. The
liability increased; therefore, credit accounts payable or creditors.
Journal Telephone expense 12,000
entry Creditors 12,000
Received telephone bill for January
Ledger accounts
Telephone Expenses
(12) Creditors 12,000

Creditors
(5) Bank 40,000 (4) Office supplies 50,000
(12) Telephone expense 12,000
13 Transaction: Mr. Khan withdrew Rs. 15,000 from the bank for personal use
Analysis: The owner’s capital decreased; therefore, debit Drawing (it being
a contra to capital). Remember withdrawal by owner is not an
expense. The bank decreased; therefore, credit bank.
 The Recording Process 65

Journal Drawings 15,000

entry Bank 15,000
Mr. Khan withdrew cash for personal use
Ledger accounts
Bank
(1) Capital 500,000 (2) Land 20,000
(8) Service Revenue 30,000 (3) Prepaid rent 120,000
(10) Service revenue 3,000 (5) Creditors 40,000
(7) Tools 80,000
(11) Salaries 15,000
(11) Workshop Supplies 9,000
(11) Gas and Electricity 5,000
(13) Drawings 15,000
Drawings
(13) Bank 15,000

14 Transaction: Received Rs. 30,000 from International Islamic University

against a previous bill.
Analysis: The bank increased; therefore, debit bank. The debtors
decreased; therefore, credit debtors.
Journal Bank 30,000
entry Debtors 30,000
Received from Intern. Islamic University

Ledger accounts
Debtors
(9) Service Revenue 50,000 (14) Bank 30,000
(10) Service revenue 4,000

Bank
(1) Capital 500,000 (2) Land 20,000
(8) Service Revenue 30,000 (3) Prepaid rent 120,000
(10) Service revenue 3,000 (5) Creditors 40,000
(14) Debtors 30,000 (7) Tools 80,000
(11) Salaries 15,000
(11) Workshop Supplies 9,000
(11) Gas and Electricity 5,000
(13) Drawings 15,000
66 Financial Accounting: A Managerial Perspective

Point to Think

Why not post the entries directly in to the ledger?

i. The journal shows all information about a transaction at one place and provides
an explanation about it.

ii. The journal provides a chronological record of all the events in the life of the
business. It facilitates referring to a transaction of a particular date.

iii. The use of journal helps to prevent errors in recording.

 The Recording Process 67

Fig 3.2 General Journal

Date Description Debit Credit
1990 Jan 1 Bank 500,000
Khan’ capital 500,000
Initial investment by owner
2 Land 20,000
Bank 20,000
Paid cash for land
3 Prepaid rent 120,000
Bank 120,000
Paid advance rent for workshop
4 Office supplies 50,000
Creditors 50,000
Purchased office supplies on account.
5 Creditors 40,000
Bank 40,000
Paid cash on account.
6 No entry
7 Tools 80,000
Bank 80,000
Purchase of tools
8 Bank 30,000
Service revenue 30,000
Performed services and received cash.
9 Debtors 50,000
Service revenue 50,000
Performed services on account.
10 Bank 3,000
Debtors 4,000
Service revenue 7,000
11 Workshop supplies 9,000
Salaries 15,000
Gas and electricity 5,000
Bank 29,000
Paid expenses by cheque
12 Telephone charges 12,000
Creditors 12,000
Received telephone bill for the month.
13 Drawings 15,000
Bank 15,000
Withdrew cash for personal use.
14 Bank 30,000
Debtors 30,000
Received cheque from Int. Islamic University.
68 Financial Accounting: A Managerial Perspective

General Ledger
Bank
Jan. 1 Capital 500,000 Jan. 2 Land 20,000
8 Service revenue 30,000 3 Prepaid Rent 120,000
10 Service revenue 3,000 5 Creditors 40,000
14 Debtors 30,000 7 Tools 80,000
11 Salaries 15,000
11 Workshop Supplies 9,000
11 Gas and Electricity 5,000
13 Drawings 15,000
Balance c/d 259000

563,000 563,000
Capital
Balance c/d 500,000 (1) Bank 500,000
500,000 500,000
Land
(2) Bank 20,000 Balance c/d 20,000
20,000 20,000
Advance Rent
(3) Bank 120,000 Balance c/d 120,000
120,000 120,000
Office Supplies
(4) Creditors 50,000 Balance c/d 50,000
50,000 50,000
Creditors
(5) Bank 40,000 (4) Office supplies 50,000
(12) Telephone 12,000
Balance c/d 22,000
62,000 62,000
Service Revenue
Balance c/d 87,000 (7) Bank 30,000
(9) Debtors 50,000
(10) Bank 3,000
(10 ) Debtors 4,000
87,000 87,000

Tools
(7) Bank 80,000 Balance c/d 80,000
 The Recording Process 69

80,000 80,000
Debtors
(9) Service Revenue 50,000 (14) Bank 30,000
(10) Service Revenue 4,000 Balance c/d 24000
54,000 54,000
Workshop Supplies
(11) Bank 9,000 Balance c/d 9,000
9,000 9,000
Salaries Expenses
(11) Bank 15,000 Balance c/d 15,000
15,000 15,000
Gas and Electricity
(11) Bank 5,000 Balance c/d 5,000
5,000 5,000
Telephone Charges
(12) Creditors 12,000 Balance c/d 12,000
12,000 12,000
Drawings
(13) Bank 15,000 Balance c/d 15,000
15,000 15,000
TRIAL BALANCE
Once all the accounts have been balanced, the next step is to prepare a list of all
accounting heads along with their balances. The asset and expense accounts normally
have debit balances whereas the liabilities, capital and revenue accounts have credit
balances. The sum of debit balances must be equal to the sum of credit balances. The
statement prepared to prove this accuracy is called trial balance. In fact, the equality
of debit and credit balances is frequently checked by preparing trial balance on
monthly basis. The basic purpose of a trial balance is to check mathematical accuracy
of debits and credits. It ensures that for every debit posted to general ledger an equal
credit has also been posted and vice versa. The trial balance is a working paper that
facilitates the preparation of financial statements. It is helpful in indicating errors
made in journalizing, posting and balancing of accounts. It is not intended for
distribution to others. The procedure of preparing a trial balance is as follows:
i Listing the account titles and their balances. Debit balances in debit column and
credit balances in credit column.
ii Finding the totals of debit and credit columns.
iii Proving the equality of the two columns.
70 Financial Accounting: A Managerial Perspective

KHAN AUTOS
Trial Balance
as at January 31, 1990
Dr. Cr.
Bank 259,000
Land 20,000
Creditors 22,000
Debtors 24,000
Capital 500,000
Advance rent 120,000
Office supplies 50,000
Service revenue 87,000
Tools 80,000
Workshop supplies 9,000
Salaries expense 15,000
Gas and electricity 5,000
Drawings 15,000
Telephone charges 12000
609,000 609,000

If totals of debit and credit columns of trial balance are not equal, the error can be
discovered using the following stepwise procedure:
i Check the totals again. It may be a totalling error.
ii Find the difference of the two columns. Try to locate the figure in ledger accounts.
It may have happened because either the debit or the credit was omitted during
posting.
iii Divide the difference by 2. Try to locate the resulting figure. An error of recording
an account with debit balance as credit, or vice versa, would result in a
difference, which is, double the original figure. It could also happen while
posting, i.e. posting a debit into a credit, or vice versa.
iv Divide the difference by 9. If divisible by 9, it is a transferring error. For example,
transferring Rs.620 of utility expenses from journal as Rs.260 in ledger account.
It is also called transposition error.
v Another common error is the incorrect placement of decimal point. For example
transferring Rs.620 as Rs.6.20. The difference of 617.4 is also divisible by 9.
vi If none of the above identifies the error, computation of balance of each account is
necessary.
vii If all the balances are correct, the posting of each entry is to be checked.
The stepwise approach to locate error can save time and effort.
 The Recording Process 71

Limitations of Trial Balance

The debit and credit columns being equal do not prove that the transactions have been
correctly analyzed and recorded. The errors not resulting in a difference between a
debit and a credit are not indicated by the trial balance. Such errors and the
corrections required are given below:
i A transaction is not journalized. This is called error of omission. If a transaction is
not recorded it cannot affect the trial balance. For example, Imran Service Station
serviced the vehicles of Kohistan Roadways on credit on March 15, 1997. The
accountant forgot to bill Kohistan for Rs. 2,000. The monthly trial balance as at
March 31, balanced. The omission was discovered on April 20, 1997. To correct
the error the following entry is required.
1997
April 20 Kohistan Roadways 2,000
Service revenue 2,000
To record the services provided on Mar 15 but not recorded.
ii Incorrect accounts used to journalize.
a Instead of debiting Kohistan Roadways on March 15, the accountant debited
Cholistan Roadways. This is called error of commission. A wrong account in
the same category. A wrong debtor in this case. The error made the
accountant to call Cholistan Roadways for recovery. The error was detected
on April 10. The following entry is required:
1997
April 10 Kohistan Roadways 2,000
Cholistan Roadways 2,000
Being correction of Mar 15 transaction wrongly debiting
Cholistan Roadways.
b Lahore Pharmaceuticals got their office building painted on July 8, 1997. The
accountant debited Rs. 10,000 to building account instead of building repairs
and maintenance, making an entry in the wrong category of accounts, i.e.
debiting an asset instead of an expense account. This is error of principle. The
correcting entry is:
1997 Building repairs and maintenance 10,000
Buildings account 10,000
Being correction of a July 8 entry.
iii Incorrect amounts used in journalizing. Rawal Foods Ltd purchased a
calculator for Rs. 5,000. While making the entry on June 1, 1997 office
equipment was debited by Rs. 500. The bank was credited by the same amount.
This is error of original entry. The correcting entry is:
72 Financial Accounting: A Managerial Perspective

1997 Office equipment 4,500

Bank 4,500
Being correction of a June 1 entry.
iv Complete reversal of entry. This type of error occurs when the account supposed
to be debited is credited and the one to be credited is debited.

v Compensating error It is in fact the situation where error in the debit of one
entry, by coincidence, equals an error in the credit of another entry.

Point to Think
i Construct an illustrative transaction for error of complete reversal and show
the correcting entry also.
ii Construct an illustrative transaction for compensating error l and show the
correcting entry also.

Point to Think
A student remembered that the side toward the window in the classroom was
the debit side of an account. The student took an examination in a room where
the windows were on the other side of the room and became confused and
consistently reversed debit and credits. Will the student’s trial balance have
equal debit and credit totals? If there were no existing balances in any of the
accounts to begin with, will the error prevent the student from preparing
correct financial statements? Why or why not?

CHART OF ACCOUNTS
As the recording process involves transfer of data from one stage to the other, it is a
common practice to assign code to each account for easy reference. With the
computers taking over the bookkeeping part of accounting, the coding system has
become even more essential.
A chart of accounts is a list of the titles and numbers of all accounts found in the
general ledger. The accounts are grouped by, and in order of, the major categories,
i.e. assets, liabilities, capital, revenue and expenses. The codes used generally refer to
these categories. The other digits may identify the sub-classification like current
asset, fixed assets, other assets, etc., the section and location. An example of a simple
chart of accounts is provided below.

KHAN AUTOS
Chart of Accounts
Current assets: 101 Cash
 The Recording Process 73

102 Bank Long-term liabilities:

103 Debtors 221 Loans
104 Workshop supplies Capital:
Fixed assets: 301 Khan’s capital
121 Tools 302 Khan’s drawings
122 furniture & fixture Revenues:
123 Provision for depreciation – F&F 401 Service revenue
124 Plant & machinery 402 Sale of spare parts
125 Provision for depreciation – P&M Expenses:
Current liabilities: 501 Rent expenses
201 Creditors 502 Wages expense
202 Utilities payable 503 Supplies and parts expenses
203 Unearned service revenue 504 Utilities expenses
204 Salaries payable 505 Depreciation expenses
74 Financial Accounting: A Managerial Perspective

Demonstration Problem
Islamabad Riding Club, owned by Mr Aslam Khan, had the following balance sheet on June 30, 1997:

ISLAMABAD RIDING CLUB

Balance Sheet
June 30, 1997
Assets
Cash Rs. 70,000
Debtors 54,000
Land 400,000
Total assets Rs. 524,000
Liabilities and Owner’s Capital
Liabilities:
Creditors Rs. 8,000
Loan payable 400,000
Total liabilities Rs. 408,000
Capital:
Aslam’s capital 116,000
Total liabilities and capital Rs. 524,000

Transaction for July 1997 were as follows:

July 1 The owner invested additional cash of Rs. 250,000.
1 Paid for a prefabricated building constructed on the land at a cost of Rs. 240,000.
8 Paid to a creditor Rs. 8,000.
10 Collected from a debtor Rs. 54,000.
12 Horse feed to be used in July was purchased on credit for Rs. 11,000.
24 A miscellaneous expense of Rs. 8,000 for July was paid.
28 The owner withdrew Rs. 7,000 cash for personal use.
31 Salaries of Rs. 16,000 for the month were paid.
31 Riding and lesson fees for July were billed to customers in the amount of Rs. 36,000.
Payment is due by August 10.
31 Billed the customers for horse boarding fees amounting to Rs. 45,000.
Required
i Prepare the journal entries to record the transactions for July 1997.
ii Post the journal entries to the ledger accounts after entering the beginning balances in those
accounts. Insert cross-indexing references in the general journal and ledger. Use the following chart
of accounts:

Cash 101 Land 120 Misc Expense 403 Creditors 201

Debtors 102 Building 121 Horse Boarding fee 501 Loan Payable 220
Feed exp. 402 Aslam’s capital 300 Riding and lesson fee 502 Drawing 301
Salaries expense 401
iii Prepare a trial balance.
 The Recording Process 75

Solution

General Journal
Date Description Debit Credit
1997
July 1 Bank 250,000
Aslam’s capital 250,000
Owner invested additional cash.
1 Building 240,000
Bank 240,000
Paid for prefabricating a building.
8 Creditor 8,000
Bank 8,000
Paid to a creditor.
10 Bank 54,000
Debtors 54,000
Received from debtors.
12 Feed expense 11,000
Creditor 11,000
Purchased feed on credit.
24 Miscellaneous expense 8,000
Bank 8,000
Paid a miscellaneous expense.
28 Drawing 7,000
Bank 7,000
Owner withdrew cash for personal use.
31 Salaries expense 16,000
Bank 16,000
Paid salaries for July
31 Debtor 36,000
Riding and lesson fees revenue 36,000
Billed riding and lesson fees for July.
31 Debtors 45,000
Horse boarding fees revenue 45,000
Billed boarding fees for July.
ii
General Ledger
Capital
Date Description Rs. Date Description Rs.
1997 1997
July 31 Balance c/d 366,000 June 30 Balance b/d 116,000
July 1 Cash 250,000
366,000 366,000
August 1 Balance b/d 366,000

Cash
76 Financial Accounting: A Managerial Perspective

Date Description Rs. Date Description Rs.

1997 1997
June 30 Balance b/d 70,000 July 1 Building 240,000
July 1 Owner’s investment 250,000 8 Creditors 8,000
10 Debtors 54,000 24 Miscellaneous expense 8,000
28 Owner withdrawal 7,000
31 Salaries expense 16,000
31 Balance c/d 95,000
374,000 374,000
August 1 Balance b/d 95,000

Debtors
Date Description Rs. Date Description Rs.
1997 1997
June 30 Balance b/d 54,000 July 10 Cash 54,000
July 31 Riding and lesson fees 36,000 31 Balance c/d 81,000
31 Horse boarding fees 45,000
135,000 135,000
August 1 Balance b/d 81,000

Land
Date Description Rs. Date Description Rs.
1997 1997
June 30 Balance b/d 400,000 July 31 Balance c/d 400,000
400,000 400,000
Aug 1 Balance b/d 400,000

Building
Date Description Rs. Date Description Rs.
1997 1997
July 1 Cash 240,000 July 31 Balance c/d 240,000
240,000 240,000
August 1 Balance b/d 240,000

Creditors
Date Description Rs. Date Description Rs.
1997 1997
July 8 Cash 8,000 June 30 Balance b/d 8,000
July 31 Balance c/d 11,000 12 Feed Expense 11,000
19,000 19,000
August 1 Balance b/d 11,000
 The Recording Process 77

Loan Payable
Date Description Rs. Date Description Rs.
1997 1997
July 31 Balance c/d 400,000 June 30 Balance b/d 400,000
400,000 400,000
August 1 Balance b/d 400,000
Drawings
Date Description Rs. Date Description Rs.
1997 1997
July 28 Cash 7,000 July 31 Balance c/d 7,000
7,000 7,000
August 1 Balance b/d 7,000
Horse Boarding Fees Revenue
Date Description Rs. Date Description Rs.
1997 1997
July 31 Balance c/d 45,000 July 31 Debtors 45,000
45,000 45,000
August 1 Balance b/d 45,000
Riding and Lesson Fees Revenue
Date Description Rs. Date Description Rs.
1997 1997
July 31 Balance c/d 36,000 July 31 Debtors 36,000
36,000 36,000
August 1 Balance b/d 36,000
Salaries Expense
Date Description Rs. Date Description Rs.
1997 1997
July 31 Cash 16,000 July 31 Balance c/d 16,000
16,000 16,000
August 1 Balance b/d 16,000

Feed Expense
Date Description Rs. Date Description Rs.
1997 1997
July 12 Creditors 11,000 July 31 Balance c/d 11,000
11,000 11,000
August 1 Balance b/d 11,000

Miscellaneous Expense
Date Description Rs. Date Description Rs.
1997 1997
July 24 Cash 8,000 July 31 Balance c/d 8,000
8,000 8,000
August 1 Balance b/d 8,000

iii ISLAMABAD RIDING CLUB

78 Financial Accounting: A Managerial Perspective

Trial Balance
As of July 31, 1997
Description Debits Credits
Bank 95,000
Debtors 81,000
Land 400,000
Buildings 240,000
Creditors 11,000
Loan payable 400,000
Capital 366,000
Drawing 7,000
Horse boarding fees revenue 45,000
Riding and lesson fees revenue 36,000
Salaries expense 16,000
Feed expense 11,000
Miscellaneous expense 8,000
858,000 858,000

Questions for Class Discussion

1 Describe the steps in recording and posting the effects of a business transaction.
2 Give some examples of source documents.
3 Define an account. What are the two basic forms (styles) of accounts illustrated in the chapter?
4 What does the term double-entry procedure, or duality, mean?
5 Describe how you would determine the balance of a T account.
6 Define debit and credit. Name the types of accounts that are:
c Increased by a credit.
a Increased by a debit. d Decreased by a credit
b Decreased by a debit.
Do you think this system makes sense? Can you conceive of other possible methods for recording
changes in accounts?
7 Why are expense and revenue accounts used when all revenues and expenses could be shown
directly in the owner’s equity account?
8 What is the purpose of the owner’s drawing account and how is it increased?
9 Describe the nature and purposes of the general journal. What does journalizing mean? Give an
example of a compound entry in the general journal.
10 Describe a ledger and a chart of accounts. How do these two compare with a book and its table of
contents?
11 Describe the act of posting. What difficulties could arise if no cross-indexing existed between the
general journal and the ledger accounts?
12 Which of the following cash payments would involve the immediate recording of an expense?
Why?
a Paid a creditor.
 The Recording Process 79

b Paid for land to use as a future plant site.

c Paid the current month’s rent.
d Paid salaries for the last half of the current month.
13 You have found that the total of the debit column of the trial balance of Iqra Publishing House is
Rs. 2,000,000, while the total of the credit column is Rs. 1,800,000. What are some of the possible
causes of this difference? If the difference between the columns is divisible by 9, what type of error
is possible?
14 Store equipment was purchased for Rs. 15,000. Instead of debiting the store equipment account, the
debit was made to delivery equipment. Of what help will the trial balance be in locating this error?
Why?

True and False

1 A transaction must be journalised in the journal before it can be posted to the ledger accounts.
2 The left side of any account is the credit side.
3 Revenues, liabilities, and owner’s capital accounts are increased by debits.
4 The owner’s drawing account is increased by debits.
5 If the trial balance has equal debit and credit totals, it cannot contain any errors.
6 A journal entry must have equal debits and credits.
7 The first issue that when a business transaction should be recorded is known as
Recognition Issue.
8 The classification issue is not important from balance sheet perspective.
9 The first step in recording a financial transaction is to make an entry in a ledger.
10 A compensating error is not disclosed by the trial balance.

Fill-ins
1 Accounting is a system for transforming raw data into ---------------.
2 The journal is often called the book of --------------- entry.
3 A list of all the accounts a firm uses is called a ---------------.
4 The balances in the ------------ are used to prepare financial statements.
5 Items held for resale by merchandising firms are recorded in the --------- account.
6 Stock that is sold is classified as part of the expense account ---------------.
7 Land, buildings, furniture and fixtures are often referred to as ------------- assets.
8 Obligations of the firm to make future payments or to provide goods or services are referred to as --
-------------.
9 The owner’s original investment in the firm is represented by the --------------- account(s).
80 Financial Accounting: A Managerial Perspective

10 A --------------- is a means of accumulating the effect of numerous transactions on a specific

account.
11 To debit an account means to make an entry on the ---- side of the ledger account.
12 In recording any transaction, debits must equal ---------------.
13 Transferring information from a journal to a ledger is referred to as ---------------.

Self-Study Questions
Test your knowledge of the chapter by choosing the best answer for each item below:
1 Deciding whether to record a sale when the order for services is received or when the services are
performed is an example of:
a Recognition issue c Classification issue
b Valuation issue d Communication issue
2 Which of the following statements is true?
a The chart of accounts is most often presented in alphabetical order.
b The general ledger contains all the accounts found in the chart of accounts.
c The general journal contains a list of the chart of accounts.
d Most companies use the same chart of accounts.
3 Which of the following is a liability account?
a Debtors c Creditors
b Rent expense d Drawings
4 The left side of an account is referred to as:
a The balance c A credit
b A debit d A footing
5 Although debits may be used to increase assets, they may also be used to:
a Decrease assets. c Increase expenses
b Increase capital d Increase liabilities
6 Payment for a two-year insurance policy requires a debit to:
a Prepaid insurance c Cash
b Insurance expense d Creditors
7 An agreement to spend Rs. 10,000 a month on advertising beginning next month requires:
a A debit to advertising c A debit to prepaid advertising
expense d A credit to cash
b No entry

8 Transactions are initially recorded in the:

a Trial balance c T account
b Journal d Ledger
9 In posting from the general journal to the general ledger, the page number on which the transaction
is recorded will appear in the:
a Post .Ref .column of the general c Post. Ref. column of the general journal
ledger
b Item column of the general d Description column of the general
ledger journal
10 The equality of debits and credits is tested periodically by preparing a:
a Trial balance c T account
b General journal d Ledger
11 Credit means:
a Entries on the left-hand side of accounts d An increase in expenses
b Entries on the right-hand side of accounts e An increase in assets
c A decrease in liabilities
12 Data input into the accounting system must be:
a Quantifiable c Both of the above
b Verifiable d Neither of the above
13 An acquisition normally is recognized in the accounting records:
a Prior to the point of transfer of title c After the point of transfer of title
b At the point of transfer of title d None of the above
14 Accounts in the chart of accounts are numbered:
a Randomly c Only in even numbers
b Sequentially d Only in odd numbers
15 Under the accrual basis of accounting, expenses are recognized when:
a Goods or services are consumed by the c The cash inflow takes place.
firm in generating revenues. d Goods are purchased to help generate
b The cash outflow takes place. revenues.

Exercises
E3.1 Which of the following events would be recognised and recorded in the accounting records of
the Waleed Marble Traders on the date indicated?
Jan 15 The firm offers to purchase land for Rs. 740,000. There is a high likelihood that the
offer will be accepted.
Feb 2 The firm receives notice that its rent will be increased from Rs. 15,000 per month to
Rs. 16,000 per month, effective March 1997.
Mar 29 The firm receives its electricity bill of Rs. 6,870 for the month of March. The bill is
not due until April 9.
June 10 The firm places an order for new office equipment costing Rs. 21,000.
July 6 The office equipment ordered on June 10 arrives. Payment is not due until August 1.

E3.2 Analyse each of the following transactions, using the form shown in the example below:
a Yasir set up Royal Barber Shop by placing Rs. 30,000 in a bank account.
82 Financial Accounting: A Managerial Perspective

b Purchased furniture for Rs. 15,000.

c Paid two months’ rent in advance, Rs. 6,000.
d Purchased supplies on credit, Rs. 2,600.
e Received cash for barbering services during the first week, Rs. 1,500.
f Paid for supplies purchased in d.
g Paid electricity bill, Rs. 1,360.
h Took cash out of business for personal expenses, Rs. 500.
Example
The asset bank increased; increases in assets are recorded by debits; debit bank, Rs. 30,000.
The owner’s equity – Yasir’s capital – increased; increase in owner’s equity is recorded by
credits; credit Yasir’s capital, Rs. 30,000.
E3.3 Open the following T accounts: bank; cash in hand; repair supplies; repair equipment;
creditors; Jamal’s capital; Jamal’s withdrawals; repair fees earned; salary expense; and rent
expense. Record the following transactions for the month of June directly in the T accounts;
use the letters to identify the transactions in your T accounts. Determine the balance in each
account.
a Jamal Bhatti opened the Bhatti Electronic Services by investing Rs. 43,000 in cash and
Rs. 16,000 in repair equipment. He deposited the cash immediately in a bank account.
b Paid Rs. 4,000 for current month’s rent.
c Purchased repair supplies on credit, Rs. 5,000.
d Purchased additional repair equipment for cash, Rs. 3,000 paying by cheque.
e Paid salary to a helper, Rs. 4,500 by cheque.
f Paid Rs. 2,000 of amount purchased on credit in c.
g Withdrew Rs. 6,000 from business for personal use.
h Received cash for repairs completed, Rs. 8,600.
E3.4 Record the following transactions in the journal.
Dec 14 Purchased an item of equipment for Rs. 6,000 paying Rs. 2,000 as down payment.
28 Paid Rs. 3,000 of the amount owed on the equipment.
Prepare three ledger accounts with multiple columns. Use the following account numbers:
cash, 111; equipment, 143; and creditors, 212. Then post the two transactions from the general
journal to the ledger accounts, at the same time making proper posting references.
Assume that the cash account has a debit balance of Rs. 8,000 a day prior to these
transactions.
E3.5 The following alphabetical list shows the account balances as of April 30, 1997, for Waqar
Construction Company.
Creditors Rs. 13,900 Prepaid insurance Rs. 4,600
Debtors 10,120 Revenue earned 57,400
Bank ? Supplies expense 7,200
Construction supplies 1,900 Utility expense 2,420
Equipment 24,500 Waqar’s capital 40,000
Loan 20,000 Waqar’s withdrawals 7,800
Office equipment 32,200 Wages expense 18,800
Prepare a trial balance for the enterprise with the proper heading and with the accounts in
balance sheet sequence. Determine the correct balance for the bank account on April 30, 1997.
E3.6 The following accounts contain seven transactions keyed together with letters. Write a short
explanation of each transaction with the amount or amounts involved.
 The Recording Process 83

Cash Camera equipment Khuram’s capital

(a) 3,500 (b) 1,800 (a) 2,800 (a) 11,800
(e) 1,250 (c) 300 (d) 4,700
(f) 1,200
(g) 3,50
Photography supplies Darkroom equipment Photograph fees earned
(c) 300 (a) 5,500 (e) 1,250
(d) 100
Prepaid rent Creditors Advertising expenses
(b) 1,800 (f) 1,200 (d) 4,800 (g) 350

E3.7 Examine each of the following transactions and prepare general journal entries to record only
the revenue transactions. Explain why the remaining transactions are not revenue transactions.
a Received Rs. 1,500 cash for plumbing services provided to customer.
b Received Rs. 20,000 cash from Ghulam Rasul, the owner of the business.
c Received Rs. 300 from a customer in partial payment for services provided last week.
d Rendered services to a customer on credit, Rs. 600.
e Borrowed Rs. 10,000 from a bank.
f Received Rs. 1,600 from a customer in payment for services to be rendered next year.
E3.8 Examine each of the following transactions and prepare general journal entries to record only
the expense transactions. Explain why the remaining transactions are not expense transactions.
a Paid Rs. 21,000 cash for shop equipment.
b Paid Rs. 2,400 in partial payment for supplies purchased 30 days before.
c Paid utility bill of Rs. 1310.
d Paid Rs. 900 to owner of the business for his personal use.
e Paid Rs. 4,750 wages of shop employee.
E3.9 Prepare the following columnar form. Then enter the word debit or credit in each of the last
three columns to indicate the action necessary to increase the account, to indicate the action
necessary to decrease the account, and to show the normal balance of the account.
Kind of Account Increase Decrease Normal Balance
Revenue
Asset
Owner’s withdrawals
Liability
Expense
Owner’s capital
E3.10 Which of the following posting errors would cause the debit and credit columns of the trial
balance not to balance? Briefly explain your reasoning.
a A receipt of cash from a payment on account was posted by debiting cash for Rs. 25,000
and crediting debtors for Rs. 250,000.
b A purchase of stock on account was posted by debiting stock for Rs. 10,000 and crediting
cash for Rs. 10,000.
c When the following journal entry was posted, the debit to creditors was left out by
mistake:
Creditors 12,000
Cash 12,000
84 Financial Accounting: A Managerial Perspective

d The purchase of supplies for cash was posted as a debit to cash and a credit to supplies for
Rs. 5,000, respectively.
e When the following journal entry was posted, the debit to cash was actually posted as a
credit:
Cash 100,000
Capital stock 100,000

Problems
P3.1 Raja Tasleem Aslam opened a secretarial school called Rawal Vocational Centre (RVC). He
contributed the following assets to the business:
Cash Rs. 57,000
Word processors 43,000
Office equipment 36,000

a Deposited cash in the bank except Rs. 7000 that was kept in hand.
b Hired a building for his business and paid the first month’s rent, Rs. 5,000 by cheque.
c Paid by cheque Rs. 2,000 for advertisement announcing the opening of the centre.
d Received applications from three students in a four-week computer programme. The
students paid Rs. 13,000 in cash.
e Purchased stationery on credit, Rs. 13,300.
f Purchased a word processor, Rs. 34,800, and office equipment, Rs. 23,800, on credit.
g Paid cheque for supplies purchased on credit in e above.
h Repaired broken word processor, paid cash, Rs. 400.
i Billed new students who enrolled late in the course, Rs. 44,400.
j Deposited Rs. 10,000 in bank.
k Transferred Rs. 13,000 to personal bank account.
l Received payment from students previously billed, Rs. 40,800 by cheque.
m Paid utility bill for the current month, Rs. 1,900 in cash.
n Paid salaries, Rs. 20,200 by cheque.
o Received cash revenue from another new student, Rs. 2,500.
Required
i Set up T accounts for: cash; debtors; supplies; word processors; office equipment; creditors;
Raja’s capital; Raja’s withdrawals; fee revenue; rent expense; advertising expense; salary
expense; repair expense; and utility expense.
ii Record transactions by entering debits and credits directly in the T accounts, using the
transaction letter to identify each debit and credit.
iii Prepare a trial balance using the current date.

P3.2 Nasir Bajwa, an interior decorator, completed the following transactions during the month of
April 1997:
April 2 Began his business with equipment valued at Rs. 123,000 and placed Rs. 2,00,000 in
a business bank account.
3 Purchased a used Suzuki pickup costing Rs. 50,000 and paid by cheque.
4 Purchased supplies on account, Rs. 3,200.
5 Completed painting a two-storey house and billed the customer, Rs. 24,800.
7 Received cash for painting two rooms, Rs. 5,000. It was kept in the cash till.
8 Hired assistant to work with him, to be paid Rs. 100 per day.
10 Purchased supplies for Rs. 14,600 and paid by cheque.
 The Recording Process 85

11 Received cheque from customer previously billed, Rs. 4,800.

12 Paid by cheque Rs. 10,000 on insurance policy for 18 months’ coverage.
13 Billed customer for painting job, Rs. 6,200.
14 Paid assistant for six-day work, Rs. 600 in cash.
15 Paid cash Rs. 150 for tuning of the pickup.
18 Paid cheque for supplies purchased on April 4.
20 Purchased new (equipment for Rs. 600 and supplies for Rs. 2,900, on account.
22 Received telephone bill to be paid next month, Rs. 600.
23 Received cash from customer previously billed, Rs. 3,300. It was deposited in the
bank.
24 Transferred Rs. 3,000 to personal bank account.
25 Received cheque for painting five-room apartment, Rs. 33,600.
29 Paid assistant for 15 days’ work, Rs. 1,500 in cash.
Required
i Prepare journal entries to record the above transactions in the general journal.
ii Set up the T accounts and post all the journal entries.
iii Prepare a trial balance.
P3.3 Babar began A-1 Cleaners, a carpet cleaning business, on October 1 and completed the
following transactions during the month:
Oct 1 Began business by transferring Rs. 60,000 from his personal bank account to the
business bank account.
2 Ordered cleaning supplies, Rs. 5,000.
3 Purchased cleaning equipment for Rs. 14,000. Payment made by cheque.
4 Leased a van by making two months’ lease payment in advance, Rs. 10,000 by
cheque.
5 Withdrew Rs. 10,000 from bank account for business use.
7 Received the cleaning supplies ordered on October 2 and agreed to pay half the
amount in ten days and the rest in 30 days.
9 Paid for repairs on the van, Rs. 400 by cheque.
12 Received cash for cleaning carpets, Rs. 4,800.
17 Paid half of the amount owed on supplies purchased on October 7, Rs. 2,500 by
cheque.
21 Billed customers for cleaning carpets, Rs. 26,700.
24 Paid by cheque for additional repairs on the van, Rs. 400.
27 Received Rs. 13,000 from the customers billed on October 21 by cheque.
31 Withdrew Rs. 3,500 from the bank for personal use.
Required
i. Prepare journal entries to record the above transactions in the general journal.
ii. Post the entries.
iii. Prepare a trial balance for A-1 Cleaning Service as of October 31, 1999.
P3.4 Zahid Gardening Services completed the following transactions During August.
Aug 1 Paid for supplies purchased on credit last month, Rs. 1,400 by cheque.
2 Billed customers for services, Rs. 4,100.
3 Paid lease on pickup for August, Rs. 2,900 by cheque.
5 Purchased supplies on credit, Rs. 1,500.
7 Received cash from customers not previously billed, Rs. 3,000. It was kept in the
cash till.
8 Purchased new equipment from Agri Manufactures on account, Rs. 13,000.
9 Received bill for oil change on pickup, Rs. 400.
86 Financial Accounting: A Managerial Perspective

12 Returned a portion of equipment that was defective, Rs. 3,200. Purchase was made
on August 8.
13 Received payment from customers previously billed, Rs. 1,900 by cheque.
14 Paid cash for the bill received on August 9.
16 Took Rs. 1,100 from bank for personal use.
19 Paid for supplies purchased on August 5 by cheque.
20 Billed customers for services, Rs. 12,700.
21 Purchased equipment from a friend who is retiring, Rs. 12,800. Payment was made
from personal account but equipment will be used in the business.
25 Received payment from customers previously billed, Rs. 3,900 by cheque.
27 Purchased gasoline for pickup with cash, Rs. 300.
29Paid Rs. 6,000 to creditors by cheque.
The trial balance at the end of July, 97 is given below.
ZAHID GARDENING SERVICES
Trial Balance
July 31, 1997
Cash (111) Rs. 1,000
Bank (112) 30,000
Debtors (113) 2,200
Supplies (115) 4,600
Prepaid insurance (116) 4,000
Equipment (141) 44,000
Creditors (212) Rs. 37,000
Zahid’s capital (311) 42,000
Zahid, withdrawals (312) 4,200
Service revenue (411) 14,000
Lease expense (412) 2,900
Pickup expense (413) 100
Rs. 93,000 Rs. 93,000
Required
i Prepare journal entries to record the August transactions in the general journal.
ii Open ledger accounts for the accounts shown in the trial balance. Enter the July 31 trial
balance amounts in the ledger accounts.
iii Post the entries to the ledger accounts.
iv Prepare a trial balance as of August 31.

P3.5 The trial balance of Mother & Childcare as on January 31, is given below.

MOTHER & CHILDCARE

Trial Balance
January 31, 1997
Bank (111) Rs. 68,700
Debtors (113) 47,000
Equipment (141) 180,400
Motor vehicles (143) 424,000
Bank loan (211) Rs. 150,000
Creditors (212) 116,400
 The Recording Process 87

Fatima’s capital (311) 453,700

Rs. 520,100 Rs. 520,100

During the month of February, the enterprise completed the following transactions:
Feb 2 Paid this month’s rent, Rs. 6,700 by cheque.
3 Received fees for this month’s services, Rs. 46,500. Out of this Rs. 40,000 was
deposited in bank.
4 Purchased supplies on account, Rs. 8,500.
5 Reimbursed bus driver for gas expenses Rs. 1,400 in cash.
6 Ordered playground equipment, Rs. 10,000.
7 Paid part-time assistants for two weeks’ services, Rs. 3,000 in cash.
8 Paid Rs. 52,700 cheque on account.
9 Received Rs. 12,000 from customers on account by cheque.
10 Billed customers who had not yet paid for this month’s services, Rs. 37,000.
11 Paid cheque for supplies purchased on February 4.
13 Received playground equipment ordered on Feb 6.
14 Withdrew Rs. 1,100 from bank for personal expenses.
17 Additional equipment invested in business by owner, Rs. 12,900.
19 Paid this month’s electricity bill, Rs. 1,450 by cheque.
21 Paid part-time assistants for two weeks’ services, Rs. 3,000.
22 Received Rs. 5,000 by cheque for one month’s services from a customer previously
billed.
27 Purchased petrol and oil for bus on account, Rs. 5,350.
28 Paid Rs. 2,900 for a one-year insurance policy by cheque.

Required
i Enter the above transactions in the general journal.
ii Open accounts in the ledger for the accounts in the trial balance plus the following:
Supplies (115); Prepaid insurance (116); Fatima’s withdrawals (312); Service revenue
(411); Rent expense (511); Motor expense (512); Wages expense (513); and Eelectricity
expense (514).
iii Enter the January 31 account balances from the trial balance.
iv Post the entries to the ledger accounts. Be sure to make the appropriate posting references
in the journal and ledger as you post.
v Prepare a trial balance as of February 28, 1997.
P3.6 Abdul Qadeer established a small business, Computer Literacy Centre, to teach individuals
how to use spreadsheet analysis, word processing and other techniques on computers. Qadeer
began by transferring the following assets to the business:
Cash in bank Rs. 92,000
Furniture 31,000
Computer 73,000

Following transactions occurred during the month.

a Paid the first month’s rent, Rs. 4,000 by cheque.
b Purchased computer software on credit, Rs. 7,500.
c Paid for an advertisement in the newspaper, Rs. 2,000 by cheque.
d Received applications from five students for a five-day course to start next week.
Each student will pay Rs. 2,000 if he or she actually begins the course.
e Transferred Rs.10,000 from bank in tyo cash till
88 Financial Accounting: A Managerial Perspective

f Paid salaries to a part-time employee, Rs. 1,500 in cash.

g Received cash payment from three of the students enrolled in c, Rs. 6,000.
h Billed two other students in e who attended but did not pay in cash, Rs. 4,000.
i Paid utility bill in cash for the current month, Rs. 1,100.
j Made payment towards software purchased in c, Rs. 2,500 by cheque.
k Received payment from one student billed in h, Rs. 2,000 by cheque.
l Purchased a second computer for cash, Rs. 47,000.
m Transferred cash to personal bank account, Rs. 3,000.
Required
i Set up T accounts for: bank; debtors; software; furniture; computers; creditors; Abdul
Qadeer’s capital; Abdul Qadeer’s withdrawals; tuition revenue; rent expense; salaries
expense; advertising expense; and utility expense.
ii Record transactions by entering debits and credits directly in the T accounts, with proper
references.
iii Prepare a trial balance using the proper heading and the current date.
P3.7 Mian Hassan Ali opened bicycles rent shop. During the month of June, Hassan completed the
following transactions for his bicycle rental business:
June 2 Began business by placing Rs. 72,000 in a business bank account.
3 Purchased supplies on account, Rs. 11,500.
4 Purchased 10 bicycles for Rs. 25,000, paying Rs. 12,000 by cheque and agreeing to
pay the balance in 30 days.
5 Purchased a small shed to hold the bicycles and to use for other operations for Rs.
29,000. Paid by cheque.
6 Made an addition to the shed for Rs. 4,000. Paid by cheque
8 Received cash of Rs. 14,700 for rentals during the first week of operation.
13 Hired two part-time assistants to help at Rs. 100 per day.
14 Paid a maintenance person Rs .375 in cash.
15 Received cash, Rs. 15,000 for rentals during the second week of operation.
Deposited the receipts in bank.
16 Paid the assistants for week’s work, Rs. 1200.
20 Paid by cheque for the supplies purchased on June 3, Rs. 11,500.
21 Paid repair bill on bicycles, Rs. 550 in cash.
22 Received cash for rentals during the third week of operation, Rs. 15,500. Deposited
in bank.
23 Paid the assistant for the week’s work, Rs. 1200.
26 Billed a customer for bicycle rentals Rs. 1,100.
28 Received cash for rentals during the week, Rs. 4,100. Deposited in bank.
29 Paid the assistant for a week’s work, Rs. 1,200.
30 Withdrew Rs. 15,000 for personal use.
Required
i Prepare journal entries to record the above transactions in the general journal.
ii Set up appropriate T accounts and post all the journal entries.
iii Prepare a trial balance as of June 30, 1997.
P3.8 Mohammad Naseem Lashari opened Lashari Studios, a photography and portrait studio, on
March 1 and completed the following transactions during the month:
Mar 1 Began business by depositing Rs. 50,000 in the business bank account.
2 Paid two months’ rent in advance for a studio, Rs. 9,000 by cheque.
3 Transferred personal photo equipment valued at Rs. 24,300 to the business.
 The Recording Process 89

4 Ordered additional photography equipment, Rs. 12,500.

5 Purchased office equipment for Rs. 17,800 paid by cheque.
8 Received photo equipment ordered on March 4. Payment made by cheque.
10 Purchased photography supplies on credit, Rs. 700.
15 Received cash for portraits, Rs. 3,800.
16 Billed a customer for portrait, Rs. 750.
21 Paid for one-half the supplies purchased on March 10, Rs. 350 by cash.
24 Paid utility bill for March, Rs. 1,200 by cash.
25 Paid telephone bill for March, Rs. 700 by cheque.
29 Received payment from customers billed on March 16, Rs. 750 by cheque.
30 Paid wages to an assistant, Rs. 400 in cash.
31 Withdrew cash for personal expenses, Rs. 1,200.
Required
i Prepare journal entries to record the above transactions in the general journal.
ii Set up the following ledger accounts and post the journal entries: cash; bank; debtors;
photography supplies; prepaid rent; photography equipment; office equipment; creditors;
Lashari’s capital; Lashari’s withdrawals; portrait revenue; wages expense; utility expense;
and telephone expense.
iii Prepare a trial balance for Lashari Studios as of March 31, 1997.
P3.9 Khyber Security Service provides security personnel for bank and other offices. During May,
Khyber made the following transactions:
May 1 Received cheques from customers billed last month, Rs. 42,000.
2 Made payment to creditors, Rs. 31,000 by cheque.
3 Purchased new one-year insurance policy in advance. Paid Rs. 36,000 by cheque.
5 Purchased supplies on credit, Rs. 4,300.
6 Billed client for security services, Rs. 22,000.
7 Made rent payment for May, Rs. 8,000.
9 Received cash from customers for security services, Rs. 16,000.
14 Paid wages Rs. 14,000 by cash.
16 Ordered equipment, Rs. 58,000.
17 Paid current month’s utility bill, Rs. 4,000 by cash.
18 Received and paid for equipment ordered on May 16, Rs. 28,000 by cheque.
19 Returned for full credit some of the supplies purchased on May 5 for Rs. 1,200
because they were defective.
24 Withdrew cash for personal expenses, Rs. 10,000 from bank.
28 Paid for supplies purchased on May 5, less returns on May 19.
29 Billed a customer for security services performed, Rs. 18,000.
31 Paid wages in connection with security services, Rs. 10,500 by cheque.
Khyber’s trial balance at the end of April was as shown below:

KHYBER SECURITY SERVICE

Trial Balance
April 30,1997
Cash in hand Rs. 3,000
Bank 130,000
Debtors 94,000
Supplies 5,600
Prepaid insurance 6,000
Equipment 78,000
90 Financial Accounting: A Managerial Perspective

Creditors Rs. 53,000

Nadir Khan’s capital 211,600
Nadir Khan’s withdrawals 20,000
Security services revenue 280,000
Wages expense 160,000
Rent expense 32,000
Utility expense 16,000
Rs. 544,600 Rs. 544,600

Required
i Prepare journal entries to record the above transactions in the general journal.
ii Open ledger accounts for the accounts shown in the trial balance. Enter the April 30 trial
balance amounts in the ledger.
iii Post the journal entries to the ledger.
iv Prepare a trial balance as of May 31, 1997.
P3.10 Ambassadors Private Limited is a public relations firm. On July 31, 1997, the company’s trial
balance was as shown below:

AMBASSADORS (PVT) LTD

Trial Balance
July 31, 1997
Cash in hand (110) Rs. 2,000
Bank (111) 100,000
Debtors (113) 55,000
Supplies (115) 6,100
Office equipment (141) 42,000
Creditors (211) Rs. 26,000
Kamran’s capital (311) 179,100
Rs. 205,100 Rs. 205,100

During the month of August, the company completed the following transactions:
Aug 2 Paid rent for August, Rs. 6,500 by cheque.
3 Received cash from customers on account, Rs. 23,000 out of which Rs. 20,000 were
immediately deposited in bank.
7 Ordered supplies, Rs. 3,800.
10 Billed customers for services provided, Rs. 28,000.
12 Made payment to creditors, Rs. 11,000 by cheque.
15 Paid salaries for first half of August, Rs. 19,000 by cheque.
16 Received the supplies ordered on August 7 and agreed to pay for them in 30 days.
17 Discovered some of the supplies were not as ordered and returned them for full
credit, Rs. 8,00.
19 Received cash from a customer for services provided, Rs. 48,000.
24 Paid utility biπll for August, Rs. 4,600 by cash.
25 Paid telephone bill for August, Rs. 2,200 by cash.
26 Received a bill, to be paid in September, for advertisements placed during the month
of August in the local newspaper Rs. 7,000.
29 Billed customer for services provided, Rs. 27,000.
30 Paid salaries for last half of August, Rs. 19,000 in cash.
31 Withdrew cash for personal use, Rs. 12,000 from bank.
 The Recording Process 91

Required
i Enter the above transactions in the general journal.
ii Open accounts in the ledger for the accounts in the trial balance plus the following
accounts: Kamran’s withdrawals (312); public relations fees (411); salaries expense
(511); rent expense (512); utility expense (513); telephone expense (514); and advertising
expense (515).
iii Enter the July 31 account balances from the trial balance to the appropriate ledger account.
iv Post the entries to the ledger accounts. Be sure to make the appropriate posting references
in the journal and ledger as you post.
v Prepare a trial balance as of August 31, 1997.