CHAPTER TWO

ACCOUNTING CYCLE FOR SERVICE-GIVING BUSINESS

Introduction
A service is any activity or benefit that one party can offer to another, which is essentially
intangible and does not result in the ownership of anything. Its production may or may not be
tied to a physical product.
Services are economic activities that create value and provide benefits for customers at specific
times and places as a result of bringing about a desired change in – or on behalf of – the recipient
of the service. – Christopher Lovelock
A service business is one in which the perceived value of the offering to the buyer is determined
largely by the services provided to him than the products offered.
2.1. Characteristics of an account
An account is an individual record of increases and decreases in a specific asset, liability,
stockholders’ equity, revenue, or expense item.

The simplest way of providing accounting information or preparing financial statements is to

record and summarize transactions on the accounting equation format. An accountant
accumulates the effects of individual transaction on a separate record for each item to meet the
goal of providing information. These separate records show increases in the item, decreases in
item and balance in item. The type of separate records used for the purpose of recording all
transactions related to individual item is called an Account. An account is a subdivision under
the three elements of the accounting equation used to record the changes over a single element in
the financial statements. A group of accounts are called ledger.
An account has three parts, Title, Debit, and credit because the format of an account resembles
the letter T; it is known as T-account.
Title
Debit Credit
Dr Cr
Title: - the account name.
Debit – is the left-hand side of an account –Debit is represented as ‘Dr.’ When an amount is
entered on the left side of an account; we say the account is debited or charged.
Credit – is the right-hand side of an account. Credit is designated as Cr. An account is said to
be credited when an amount is entered on the right-hand side of the account.
2.2. Classification of Accounts
Accounts in a ledger are classified based on common characteristics as a balance sheet accounts
or income statement accounts.
Statement of Financial Position (balance sheet) Accounts

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Statement of Financial Position Accounts further classified into three and is listed in the ledger in
the order of Assets, Liability and Owners Equity.
A) Assets- An asset is defined as a present economic resource controlled by the entity as a result
of past events. An economic resource is defined as a right that has the potential to produce
economic benefits. Assets are classified in the two groups as current assets and plant assets
1. Current Assets-are any assets that may reasonably be realized in cash or sold or consumed
within a year or less period. For example: Cash, Accounts Receivable, supplies,
2. Plant Assets-these are used in the business operations and are of permanent nature. For
example, Equipment, machinery, building, furniture, land, etc
B) Liability- the two categories occurring most frequently are:
1. Current liabilities- are liabilities that will be due within short period of time usually a year
or less that have to be paid out current asset. For example: salary payable, interest payable,
tax payable, and accounts payable
2. Long term liabilities- are liabilities that will be paid or due or matured comparatively for
long period of time usually more than one year. For example, mortgage payable, notes
payable
C) Owner’s Equity- represents the owner's claims on the assets of a business after all liabilities
have been deducted. C) Owner’s equity is a residual claim against the asset of the business
after liability is fully deducted. For a corporation owners’ equity is called stock holder’s
equity.
D) Drawing represents the amount of cash or other assets taken out of the business for personal
use. Drawing refers to the withdrawal of funds or other assets by the owner(s) of a business
for personal use. This concept is most commonly associated with sole proprietorships and
partnerships.
Statement of Profit or Loss Accounts
Income Statement Accounts are listed in the order of revenue first and expense second.
Revenue is increase in capital by gross amount as a result of:
 Sale of goods and service
 Renting real-estate and other properties
 Providing professional service
 Sale of assets
Expense is a result of consuming assets or using up of services.
Expenses represent decreasing in capital by gross amount as a result of business operation.
Expenses are the costs incurred by a business or individual to generate revenue or sustain
operations. They can be classified into various categories, such as operating expenses, capital
expenses, and non-operating expenses.
2.3. Chart of Accounts
The chart of accounts is the list of all the accounts used to record financial transactions in the
general ledger of an organization. The accounts are usually listed in the order of appearance in
the financial reports. Accounts are usually grouped into categories, such as assets, liabilities,
equity, revenue and expenses. Accounts may be associated with an identifier (account number)
and a caption or header and coded by account type. Account numbers can use numerical,
alphabetic, or alpha-numeric characters. The number and name of accounts used by an
organization depends on the nature of its operation. The list of accounts along with their numbers
showing the sequence of account in the ledger is called Chart of Accounts.
According to their order in the financial statements’ asset comes first and then followed by
liabilities, capital, revenues and expenses.
In the chart of accounts, the asset accounts are listed according to their liquidity. Liquidity is
ability of an asset can be easily converted in to cash. Cash is the most liquid asset so it is listed
first. The number could be a two-digit or more than two digits. The number of digits given may
vary depending up on the size and nature of the business. In the below chart of accounts, 2
digits are assigned. The first digit shows the division of the item in the ledger and the second
digit indicates the position of the item in the division.

The chart of accounts AB Transportation Trading PLC as follows:

AB Trading PLC
Chart of Accounts
Asset Account number

Cash---------------------------------------------------------------------------11
Accounts Receivable------------------------------------------------------ 12
Supplies-----------------------------------------------------------------------13
Prepaid Insurance------------------------------------------------------------14
Equipment------------------------------------------------------------------- 15
Accumulated Depreciation –Equipment----------------------------------16
Truck---------------------------------------------------------------------------17
Accumulated depreciation – Truck----------------------------------------18
Liabilities
Accounts Payable-------------------------------------------------------------21
Notes Payable-----------------------------------------------------------------22
Owners’ Equity
Bimerk, Capital---------------------------------------------------------------31
Bimerk Drawing--------------------------------------------------------------32
Income Summary-------------------------------------------------------------33
Revenue
Service income----------------------------------------------------------------41
Expense
Salaries Expense --------------------------------------------------------------51
Rent Expense ------------------------------------------------------------------52
Utilities Expense---------------------------------------------------------------53
Supplies Expense--------------------------------------------------------------54
Insurance Expense-------------------------------------------------------------55
Maintenance Expense---------------------------------------------------------56
Depreciation Expense---------------------------------------------------------57
Truck Expense-----------------------------------------------------------------58
Miscellaneous expense--------------------------------------------------------59

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2.4. Rules of debit and credit
Double-entry system
Each transaction must affect two or more accounts to keep the basic accounting equation in
balance. Recording can be done by debiting at least one account and crediting at least one other
account. DEBITS must be equals to CREDITS.
If the sum of Debit entries are greater than the sum of Credit entries, the account will
have a debit balance.
If the sum of Credit entries are greater than the sum of Debit entries, the account will
have a credit balance.

2.5. Normal balances of accounts

The sum of increases recorded in an account is usually greater than or equal to the sum of
decreases recorded in an account. For this reason, the normal balance of all accounts is positive
rather than negative. Thus, the normal balance of any account is the increasing side.
 Assets-the increasing side of all assets account is the debit side and the decrease is the
credit side.
 Liabilities-the increase side of all liabilities is the credit side and the decreasing side is the
debit side.
 Capital -the increase side of capital account is the credit side and the decreasing side is the
debit side.
 Revenue- the increase side of all Revenue accounts is the credit side and the decreasing
side is the debit side.
 Expenses -the increasing side of all expenses account is the debit side and the decrease is
the credit side.
 Drawing- the increasing side drawing is the debit side and the decrease side is the credit
side.
 Issuance of share capital and revenues increase equity (credit).
 Dividends and expenses decrease equity (debit).
Summaries normal balances of an accounts

Items Increasing Side Decreasing Side Normal Balance

Assets Debit Credit Debit

Liabilities Credit Debit Credit

Capital Credit Debit Credit

Drawing Debit Credit Debit

Revenues Credit Debit Credit

Expenses Debit Credit Debit

2.6. Analyzing and recording transactions

Analysis of a transaction is a three steps procedure:

  Determining the accounts affected by the transaction
 Determining the effect of a transaction as increases and decreases
 Analyzing the increases and decreases as Debit and Credit.
When a business transaction takes place, source documents will be obtained and recorded. The
accounting record in which a transaction is initially recorded is known as a journal. The journal
is referred to as “the book of original entry”. The group of accounts used by an organization is
called ledger. The process of recording a business transaction in the accounting record or journal
is called journalizing. The Journal commonly used to record all types of transactions is the
General Journal. This Journal entry includes the following parts:
 The date of the transaction
 The title of the account debited
 The title of the account credited
 The amount of debit and credit
 Brief explanation of the entry or reference to the source document
Recording Transaction in a Journal
After analyzing transactions, they are recorded in a book called journal in an orderly manner.
Journal provides for transactions:
 Permanency-it is permanent record of transactions for reference
 Orderliness or chronology-transactions are recorded sequentially
 Accuracy or Approval- before transactions are recorded in their account approval will be
made
The journal makes several significant contributions to the recording process:
1. It discloses in one place the complete effects 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
easily compared.
There are two types of journals:
General Journal- is a journal in which any type of transaction is recorded upon.
Special journal- is a journal in which one type of transaction with recurrent nature is recorded
upon. Special journal is used to record specific types of transactions.
Examples of Journal entry
Date Description P.R Debit Credit
Year
Month Da Debited account title XXX
y Credited account title X XX
Explanation
On January 10, 2016 AB transport trading paid Birr 6,000 to its employees as a salary for the
first week of the year.
2016 Description
Jan. 10 Salary expense 6000
Cash 6000
Payment of salary

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Illustration
To illustrate the complete accounting cycle, we will consider the following list of selected
transactions. The transactions were completed by AB Transport trading in the month of January
2016.
January 1. Mr. Bimerk took Birr 450,000 from his personal savings and deposited it in the name
of AB transport.
January 2. AB Transport purchased two used trucks for Birr 150,000 each, on cash.
January 4. AB Transport received a check for Birr 650 for services given to Abdi Trading.
January 4. Received an invoice for truck expenses Birr 90
January 11. Paid Birr 600 for Awash Insurance Company to buy an insurance policy for
its trucks
January 16. Mr. Bimerk issued a check for Birr 9,400 to the workers as a salary two weeks.
January 20. AB trading Billed Mustefa Supermarket for goods transported from Djibouti to
Gondar Birr 2,650.
January 21. Mr. Bimerk wrote a check for birr 450 to have one of the trucks repainted.
January 21. AB trading purchased stationary materials and other supplies of Birr 740 on account.
January 22. Office equipment of Birr 11,600 is bought on account.
January 23. Purchased an additional truck for Birr 250,000 paying birr 100,000 in cash and
issuing a note for the difference.
January 23. Recorded services billed to customers on account birr 14,600.
January 25. Received cash from customers on account Birr 15,000
January 27. The owner withdrew Birr 500 in cash for his personal use.
January 28. Paid Birr 9,400 to workers as a salary for the last two weeks of the month
January 30. Paid telephone expense of Birr 95 and electric expenses of Birr 125 for the month
January 30. Paid other miscellaneous expenses Birr 50
January 31. Paid Birr 4,000 as a rent for a building used for office space
These transactions are journalized as follows:
Date Description Debit Credit

2016 Cash 450,000

Jan.1 Bimerk, Capital 450,000
To record investment by owner
2 Truck 300,000
Cash 300,000
Purchase of trucks
4 Cash 650
Service Income 650
Cash received from customers

4 Truck Expenses 90
Accounts Payable 90
Service received in advance
11 Prepaid Insurance 600
Cash 600
Purchase of insurance policy
16 Salary Expense 9,400
Cash 9,400
Payment of salary
20 Accounts Receivable 2,650
Service Income 2,650
Provision of service
21 Truck Expense 450
Cash 450
Cash paid to repaint truck
21 Supplies 740
Accounts Payable 740
Purchase of supplies of account
22 Office Equipment 11,600
Accounts Payable 11,600
Purchase of equipment

23 Truck 250,000
Cash 100,000
Notes Payable 150,000
Purchase of truck
23 Accounts Receivable 14,600
Service Income 14,600
Provision of service on account
25 Cash 15,000
Accounts Receivable 15,000
Collection of cash
27 Drawings 500
Cash 500
Owner withdrawals
28 Salary Expense 9,400
Cash 9,400
Payment of salary
30 Utilities Expense 220
Cash 220
Payment for telephone, electricity
30 Miscellaneous Expenses 50
Cash 50
Payment for various expenses
31 Rent Expense 4,000
Cash 4,000
Payment of Rent
2.7. Preparing a trial balance

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A trial balance is a list of accounts and their balances at a given time. Debit balances appear in
the left column and credit balances in the right column. A trial balance is a two-column listing of
the accounts in the ledger and their balance to make sure that the total of debit balances equals
the total of credit balances. The trial balance proves the mathematical equality of debits and
credits after posting. A trial balance may also uncover errors in journalizing and posting.
A trial balance may also uncover errors in journalizing and posting. In addition, a trial balance is
useful in the preparation of financial statements.
AB Transport
Trial Balance
January 31, 2016
Cash 41,030

Accounts Receivable 2,250

Supplies 740

Prepaid Insurance 600

Office equipment 11,600

Truck 550,000

Accounts payable 12,430

Notes payable 150,000

Bimerk, capital 450,000

Bimerk, drawing 500

Service income 17,900

Salary expense 18,800

Rent expense 4,000

Utilities expense 220

Maintenance expense 450

Truck expense 90

Miscellaneous expense 50

Total 630,330 630,330

2.8. The usefulness and limitations of a trial balance

Usefulness of trial balance
 Verification of Arithmetic Accuracy
  Foundation for Financial Reports
 Internal Control and Auditing
 Adjustments and Closing Entries
Limitations of a Trial Balance
 Does Not Ensure Completeness or Accuracy of Records
 Does Not Ensure Correct Classification
 Does Not Provide Financial Health
 No Fraud Detection
2.9. The adjusting process-accrual vs. cash basis of accounting
Accrual- Versus Cash-Basis of Accounting
Accrual-Basis of Accounting
 Transactions recorded in the periods in which the events occur.
 Companies recognize revenues when they perform services (rather than they receive
cash).
 Expenses are recognized when incurred (rather than paid).
Cash-Basis of Accounting
 Revenues are recorded when cash is received.
 Expenses are recorded when cash is paid.
 Cash-basis of accounting is not in accordance with International Financial Reporting
Standards (IFRS).
Example: Stationary materials totaling Birr 1,900.00 were purchased and recorded during
December 31, 2016. At the end of the year, only Birr 150 of the supplies is left in hand.
The adjusting entry prepared at the end of the year to adjust the supplies account will be

2016 Supplies expense 1,750

Dec31 Supplies 1,750

Adjustment: All the transactions recorded above in the journalizing step are the result of daily
transactions.
2.10. WORKSHEET FOR FINANCIAL STATEMENTS
Most of the data required to prepare the accounting reports (financial statements) is now
gathered. The data will now be presented in a convenient form. The worksheet is a large
columnar sheet prepared to arrange in a convenient form all the accounting data required to
prepare financial statements. The worksheet has a heading and a body.
The heading has three parts:
i) Name of the Organization
ii) Name of the form (worksheet)
iii) Period of time covered.
The body contains five main parts each of them with two main columns. These parts are
1. The trial balances
2. The adjustment
3. The adjusted trial balances

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 4. The income statements
5. The balance sheets.
The worksheet for AB Transport is given below.
AB Transport
Work Sheet
For the month ended Jan.31, 2016

Account Title Trial Balance Adjustment Adjusted Trial Income Balance sheet
balance statement
1 Cash 41,030 41,030 41,030
©
2 Account 2,250 7,400 9,650 9,650
receivable
(a)
3 Supplies 740 340 400 400
(b)
4 Prepaid 600 450 150 150
Insurance
5 Office 11,600 11,600 11,600
equipment
6 Truck 550,000 550,000 550,000
7 Accounts 12,430 12,430 12,430
payable
8 Notes payable 150,000 150,000 150,000
9 Bimerk Capital 450,000 450,000 450,000
10 Bimerk 500 500 500
drawing
©
11 Service income 17,900 7,400 25,300 25300
12 Salary expense 18,800 18,800 18,800
13 Rent expense 4,000 4,000 4,000
14 Utilities 220 220 220
expense
15 Maintenance 450 450 450
expense
16 Truck expense 90 90 90
17 Miscellaneous 50 50 50
Expense
18 630,330 630,330
(a)
19 Supplies 340 340 340
expense
(b)
20 Insurance 450 450 450
expense
21 7290 7290 636,830 636,830
1. The trial balance column – this is the same trial balance we have prepared before. The trial balance
column of the work sheet can be brought direct from the ledger or from a separate trial balance.
2. The Adjustment column – As mentioned previously, some account balances have to be adjusted at the
end of the year.
The accounts in the ledger of our illustration that require adjustment and the adjusting entry for the
accounts are presented below.
a) Supplies – The supplies account has a debit balance of Birr 740. The cost of supplies in hand on July
31 is determined to be Birr 400. The following adjusting entry is required to bring the balance of the
account up to date:
Supplies expense…………………………….340
Supplies……………………………………...340
b) Prepaid insurance – Analysis of the policy showed that three – fourth of the policy is expired. That is
only Birr 150 of the policy is applicable to future periods. The adjusting entry to transfer the expired part
of the insurance to expense will be.
Insurance expense ……………………….450
Prepaid insurance………………………...450
c) Service Income – At the end of the month unbilled fees for services performed to clients totaled Birr
7,400. This amount refers to an income earned but to be collected in the future. The journal entry to
record it will be
Accounts receivable………………………….7, 400
Service income………………………………7,400
All the above adjusting entries will be inserted in the adjustment column of the worksheet in front of the
accounts affected.
Note – The letters a, b & c are used to cross-reference the debits and credits to help future review of the
worksheet.
3. The Adjusted Trial Balance Column – The accounts that require adjustment are now adjusted.
Transferring the trial balance column amounts combined with the adjustment column amounts will
complete the adjusted trial balance column of the worksheet.
4. The Statement of Profit or Loss and the Statement of Financial Position columns – Transfer the income
statement account balances (revenue &expenses) to the Statement of Profit or Loss and balance sheet
account balances (Asset, Liability & owners’ equity) to the Statement of Financial Position columns.
2.11. FINANCIAL STATEMENT PREPARATION
IAS 1 does not prescribe the sequence or format in which items should be presented in the statement of
financial position. Thus, for example, in a standard classified statement of financial position, non- current
assets may be presented before or after current assets, and within the current assets, cash can be presented
as the first or the last line item. However, the standard stipulates the following list of minimum line items,
which are sufficiently different in nature or function to justify separate presentation in the statement.
Here, we will prepare necessary financial statements for AB Transport form the worksheet.
1. Income statement- all the data required to prepare the income statement is brought from the
worksheet.
AB Transport
Statement of profit or loss

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 For the month ended. Jan 31, 2016
Service Income …………………………………………………………Birr 25,300
Operating expenses
Salary expense………………………...Birr 18,800
Rent …………………………………….4, 000
Maintenance expense ……………………… 450
Insurance ……………………………450
Supplies …………………………….340
Utilities ……………………………...220
Truck ……………………………....90
Miscellaneous ……………………………….50
Total operating expense……………………………………….24, 400
Net Income……………………………………………………Birr 900
1. Statement of owner’s equity – This statement shows the beginning balance of capital and the
changes that affected it. The balance of the owners’ equity account (Bimerk capital) in the worksheet
may not be the beginning one. Therefore, the ledger has to be reviewed to see if there was an
additional investment during the period or not.
AB Transport
Statement of Owner’s equity
For the month ended January 31, 2016
Bimerk, capital January 1, 2016………………………………Birr 450,000
Net income for the month…………………. birr 900
Less: Withdrawal…………………………………...500 400
Bimerk, capital, January 31, 2016……………….……………….. Birr 450,400
3. Statement of Financial Position – Assets, liabilities and equity are presented separately in the
statement of financial position. In accordance with IAS 1, companies should make a distinction between
current and non- current assets and liabilities, except when a presentation based on liquidity provides
information that is more reliable or relevant. As a practical matter, the liquidity exception is primarily
invoked by banks and some other financial organizations, for which fixed investments (e.g., in property
and equipment) are dwarfed by financial instruments and other assets and liabilities. According to the
IASB, each entity may change the content, sequencing and format of presentation and the descriptions
used for line items to achieve fair presentation in that entity’s particular circumstances. For example, the
illustrative statement of financial position presents non-current assets followed by current assets, and
presents equity followed by non-current liabilities and then by current liabilities (i.e., the most liquid
items being presented last), but many entities are used to reversing this sequencing (i.e., the most liquid
items being presented first). Note that assets and liabilities are classified as current and non – current.
AB Transport
Statement of Financial Position
 January 31, 2016
Assets
Plant Asset (None-Current Assets):
Truck……………………………………………… Birr 550, 000
Office equipment……………………………................110,600
Total plant asset Birr 561,600
Current Assets:
Prepaid insurance……………………………...…... Birr 150
Supplies………………………………………………… 400
Accounts Receivable…………………………….............9,650
Cash…………………………………………… ……….41, 030
Total current assets…………………………………….. 51,230
Total asset……………………………………….…Birr 612,830
Equity and Liability
Equity
Mr Bimerk, Capital……………………………………,Birr 450,400
Liabilities
Non-current liabilities
Notes payable……………………………………..........Birr 150,000
Current liabilities
Accounts payable……………………………………….Birr 12,430
Total liabilities…………………………………………..Birr 16 2,430
Total equity and liability …………………………..…... Birr 612, 830

2.12. Adjusting and Closing entries

Adjusting Entries
Adjusting entries ensure that the revenue recognition and expense recognition principles are
followed. Adjusting entries are required every time a company prepares financial statements.
Every adjusting entry will include one income statement account and one balance sheet account.
Types of Adjusting Entries
Adjusting entries are classified as either deferrals or accruals.
Deferrals: To defer means to postpone or delay. Deferrals are expenses or revenues that are
recognized at a date later than the point when cash was originally exchanged. The two types of
deferrals are prepaid expenses or prepayments and unearned revenues.
1. Prepaid expenses: Expenses paid in cash before they are used or consumed. Common
examples of prepayments are insurance, supplies, advertising, and rent.
2. Unearned revenues: Cash received before services are performed. Unearned revenues are
recognized as revenue at the time services are performed. The common examples of unearned
revenues are rent, airline ticket, magazine, subscription, and customers deposit for the future.
Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
Accrued revenues may accumulate (accrue) with the passing of time, as in the case of interest
revenue.

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2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. The common
examples of accrued expenses are interest, taxes, and salaries.
Summary of Adjusting Entries

Closing entries
Some of the accounts in the ledger are temporary accounts used to classify and summarize the
transactions affecting capital (owners’ equity). These accounts will be closed after financial
statements are prepared. That is, their balances will be transferred to the Capital account.
The temporary accounts that have to be closed are revenue, expense and withdrawal accounts.
Companies generally journalize and post-closing entries only at the end of the annual accounting
period. Closing entries produce a zero balance in each temporary account.
Steps in closing:
1. Closing revenue accounts - Debit each revenue account by its balance and credit the
‘Income Summary’ account by the total revenue for the period.
Note: Income summary is an account used to close revenue and expense accounts.
This account will immediately be closed to the capital account at the end of the closing process.
2. Closing expense accounts – Debit the income summary account by the total of expenses for
the period and credit each expense account by its balance.
3. Closing the income summary account – Income summary will be closed to the capital
account. The balance of his account depends on the nature of operation; credit if result is
profit and debit if result is loss.
4. Closing Withdrawal – Debit the owners’ equity account by the total of drawings for the
period and credit the drawing account.
The temporary accounts of AB transport are closed as follows.
2016 Service income…………………………25,300
January Income summary…………………….….25, 300
31 Closing revenue
31 Income summary……………………………24,400
Salary expense………………………………..18,800
Rent expense…………………………….….…4,000
Maintenance expense………………….............450
Insurance expense………………………...........450
Supplies expense……………………………….340
Utilities expense………………………………..220
Truck expense ……………………………….…90
Miscellaneous expense………………………….50
Closing expenses
2016 Income summary……………………………900
January 31 Bimerk, Capital……………………………………...900
Closing net income
31 Bimerk, capital………………………………..500
Bimerk, drawing………………………….…………...500
Closing with drawl
2.13. Post-closing trial balance
After the closing entries have been journalized and posted, a trial balance is prepared to prove
the equality of the general ledger before recording the New Year’s transactions.
It should be noted that this trial balance includes only Statement of financial position accounts.
This is because the temporary income statement accounts are closed during the closing process.
This trial balance is called the post – closing trial balance.
In practice the ledger balance after closing may be checked by a simple calculator print out rather
than a formal trial balance. The post-closing trial balance for AB Transport is presented below:

AB Transport
Post – Closing trial balance
January 31, 2016
Truck…………………………. Birr 550,000 Bimerk, capital……………… Birr 450,400
Office equipment…………………..11,600
Prepaid insurance………………..…150 Note payable………………………150,000
Supplies………………………....….400
Accounts Receivable ……………...9, 650 Accounts payable………………Birr 12,430
Cash………………………………..41, 030
Total equity and liability……..Birr 612,830
Total Asset ……………………Birr 612,830

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Exercise

1. on March 1, 2018, Mr. Adam Boris forms an athletic shoe consulting business. The
marketing plan for the business is to focus primarily on consulting with schools, sports
clubs, amateur athletes, and other who places order of athletic shoes with manufacturers.
Boris is the owner and the manager of his new company named Fast Forward. The following are
the financial activities of the enterprise during the month of Mar. 2018.
Mar. 1. Adam Boris invested $ 30,000 cash in fast forward.
3. Fast Forward pays $2,500 cash for supplies.
5. Fast Forward pays $ 26,000 for equipment
8. Fast Forward purchased $ 7,100 of supplies on account
11. Fast forward provides consulting services and collected $4,200 Cash.
12. Fast Forward entered in to a contract with a client to provide 30 days consulting service for a
fixed fee of $ 2,700.
15. Fast Forward pays $1.000 cash for the March rent
16. Fast Forward pays $700 cash in employees’ salaries
19. Fast forward provides consulting services of $1,600 and rents its test facilities for $300. The
customer is billed $ 1,900 for these services.
21. Fast Forward receives $ 1,900 cash from the client billed on Mar. 19.
23. Fast Forward pays $ 4,000 cash for supplies purchased on Mar. 8
24. Adam Boris withdrew $ 600 cash from Fast Forward for personal expense.
26. Fast Forward receives $ 3,000 cash advance collection from client promising to
provide consulting service for fixed fee of $ 3,000 for 60 day starting from May 27 th.
27. Fast Forward pays $ 2,400 cash for insurance policy premium covering two years, starting
Mar. 1, 2018.
28. Fast Forward pays $ 120 cash for supplies
29. Fast Forward pays $ 230 cash for Mar. Utilities
30. Fast Forward pays $ 700 cash in employees’ salaries.
Required:
1. Record the above Transactions in the General Journal
2. Open the Ledger accounts and post the recorded journal entries to appropriate accounts in the
ledger.
3. Prepare the unadjusted trial balance from the ledger account balances as of Mar. 31. 2018.
Additional Information
i. The cost of supplies used during Mar. was $1, 050.
ii. Fast Forward depreciates its equipment 17.31% of its cost per year.
iii. On Mar. 29, 2018 Fast forward hired a new employee who earns $ 70 per day. As of Mar. 31,
2018 three days of this employee’s salary was accrued.
iv. As of Mar. 31, Fast Forward provides 20 days consulting service for the contract signed on
Mar.12.
Required
4. Record all the necessary Adjusting entries as of Mar, 31, 2018.
5. Post the adjusting entries from the journal to ledger accounts.
6. Complete a ten-column work sheet
7. Prepare the following financial statements.
a. Statement of Profit or Loss for the month of Mar.
b. Statement of owner’s equity, and
c. Statement of Financial position for as Mar. 31. 2018.
8. Journalize and post all the necessary closing entries.
9. Prepare a post-closing Trial Balance

17 Fundamentals of Accounting I Lecture Note by: Tadesse H.

2024