CHAPTER TWO

THE ACCOUNTIG CYCLE

2.1. Accounting Cycle Defined
It is a complete sequence of accounting procedures that are repeated in the same order
during each accounting period.
The basic procedures/phases in the accounting cycle are:
1. Identifying and analyzing business transaction.
2. Recording business transaction in a journal.
3. Classifying data by posting transactions from the journal to a ledger.
4. Preparation of unadjusted trial balance.
5. Adjusting, correcting, and updating recorded data; completion of the
worksheet.
6. Preparation of financial statements.
7. Closing nominal accounts to summarize the operation of the accounting period.
8. Preparation of post closing trial balance.
9. Reversing certain adjusting entries to facilitate the recording process in the
subsequent accounting period.
2.2. The Use of Accounts for Recording Transaction
The transactions completed by an enterprise during a specific time period may cause
increases and/or decreases in many different asset, liability, owners equity, revenue, and
expense item. To have the details of these transactions readily available and to prepare
financial statements, the effects of these transactions must be recorded in a systematic
manner. The accounting form that is used to record such effects in terms of increase and/or
decrease for each individual asset, liability, owners equity, revenue and expense items is
called an account. A group of related accounts that comprise a complete unit, such as all of
the accounts of a specific business enterprise, is called a ledger.
An account could be of three types:
1. The T account
2. The two-column account, and
3. The four-column account.
The T Account
The T account is the simplest form of an account. It has got its name from the fact that
it resembles the capital letter T.
It has three major parts k
The title - for recording the name of the item.
The debit, or left side- a space for recording the increases and/or decreases
in the amount of an item, in terms of money
The credit, or right side- a space for recording the increases and/or decreases
in the amount of an item, in terms of money

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 The T Account _ Format
Title

Debit = (Left side) Credit = (Right side)

The Two-Column Account

The Two-Column Account _ Format

Account Account number
Date Item P.R Debit Date Item P.R Credit

The Four-Column Account

Advantages of the four column account over the two- column account:-
It uses only one date column i.e., it saves time.
It provides an easy means of analyzing and examining the accounts.
It shows the chronological order (facilitates easily location of accounts)
The most advantage is making balances of accounts always available.

The Four-Column Account _ Format

Account Account number
Balance
Date Item P.R Debit Credit Debit Credit

Notes:
- Often Debits and Credits are abbreviated as Dr and Cr respectively, based on
the Latin terms Debere and Credere
- Amounts entered on the left side of an account, regardless of the account title, are
called debits or charges to the account , and the account is said to be Debited or
Charged
- Amounts entered on the right side of an account, regardless of the account title, are
called credits , and the account is said to be Credited

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2.3. Classification of Accounts
Accounts are classified into five as: Asset, Liability, owners equity, Revenue, and
Expense. According to their common characteristics the first three accounts are known as
Balance Sheet Accounts and the other two accounts are called Income Statement
Accounts.
1. Balance Sheet accounts: are those accounts that are reported on the balance sheet at the
end of the reporting period. It includes:-

a) Assets
They are properties/resources with monetary value that are owned by a business or
individuals. Assets could be tangible or intangible. Tangible assets are those assets
having physical existence, like Cash, Land, Computer, Stationery Materials etc. Intangible
assets are those assets that do not have physical existence like for example: Goodwill,
Copyright, Patent Right etc. On the other hand for the purpose of presentation on the
balance sheet assets are classified into two as Current Assets and Non Current Assets.

i. Current Assets are those assets, which can be used, sold, or converted into cash
within one accounting period. Example: cash, supplies, prepayments, receivables
etc.
ii. Non-current Assets: all assets other than current assets are called non-current
assets. They are also known as plant assets or fixed assets. Examples: land, office
equipment, building, trucks etc.

b) Liabilities
They are debts owed to outsiders (creditors) and frequently described on the balance
sheet by titles that include the word payable. Like assets, liabilities are classified in to
two as Current Liabilities and Non Current Liabilities
i. Current Liabilities: are liabilities that will be due within short time (usually one
year or less). Examples: Accounts Payable, Rent Payable, Salary Payable etc.
ii. Non Current Liabilities: are debts that are not required to be paid within one
accounting period. They are also called long term liabilities. Examples: long term
notes payable, mortgage payable etc.

c) Owners Equity
It is a residual claim against the asset of the business after the total liabilities are
deducted. For a corporation, owners equity is frequently called stockholders equity or
shareholders equity. Examples:
Capital Account- for sole proprietor ship and partnership.
Capital stock and Retained earnings - for corporation
Drawing account for sole proprietor ship and partnership.
Dividend account for corporation.

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 2. Income Statement Accounts: are those accounts that are reported on the income
statement during the accounting period. It includes:-
a) Revenues
They are gross increases in owners equity resulting from the main operations of the
business. Examples of revenue accounts are fees earned, fares earned, sales, interest
income, insurance premium, sales commission etc.
b) Expenses
They are decreases in owners equity in the process of earning revenue. Examples of
expenses are insurance expense, depreciation expense, supplies expense, utilities expense,
rent expense etc.

2.4. Chart of Accounts

It is a listing of the account titles and account numbers (codes) being used by a given
business. In numbering (coding) accounts the first digit indicates the major division of the
ledger in which the account is placed. Accounts beginning with 1 represent assets; 2,
liabilities; 3, owners equity; 4, revenue; 5, expenses. The second digits indicate the position
of the account within its division. It is preferable to use a flexible system of indexing so that
it permits a later insertion of new accounts in their proper sequence without disturbing the
other account numbers.
Example: Look at the following chart of accounts for Bati Transport, a Sole Proprietorship
owned by Ato Yimer.
Bati Transport
Chart of Accounts

1. Assets 2. Liabilities 5. Expenses

21 Accounts Payable 51 Salaries Expenses
11 Cash 22 Notes Payable 52 Rent Expenses
12 Accounts Receivable 53 Utilities Expenses
14 Supplies 3. Owners Equity 54 Supplies Expenses
15 Prepaid Insurance 31 Yimer, Capital 55 Insurance Expenses
16 Equipments 32 Yimer, Drawing 56 Maintenance Expenses
17 Acc. Deprn -Equipments 33 Income Summary 57 Depreciation Expenses
18 Trucks 4. Revenue 58 Truck Expenses
19 Acc. Deprn. -Trucks 41 Service income 59 Misc. Expenses

In the chart of accounts, the asset accounts are listed according to their liquidity.
Liquidity is the ease with which an asset can be converted in to cash. Cash is the most
liquid asset so it is listed first. Accounts other than cash will be listed in their frequency
of use or in alphabetical order. The account number listed in front of each account is a
code to identify accounts. The number could be a two digit, three digit or more digits.
In the above example a two digits code is used. When the chart of accounts is
prepared in an organization we say the ledger is opened.

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2.5. Rules of Debit and Credit
Debit sides signify:
Balance sheet accounts:
Increase in asset accounts
Decrease in liability accounts
Decrease in owners equity accounts_
except for drawing account (increasing)
Income statement Accounts:
Decrease in revenue accounts
Increase in expense accounts
Credit sides signify:
- decrease in asset accounts
- increase in liability accounts
- increase in owners equity accounts _
except for drawing account (decreasing)
- increase in revenue accounts
- decrease in expense accounts

Normal Balance of Accounts (Balance Sides of Accounts)

The sum of the increases recorded in an account is usually equals to or greater than
the sum of the decreases recorded in the account. For this reason, the normal balances of
all accounts are positive rather than negative and it is always recorded in the increasing
side of an account.

- Summary on the Rules of Debits and Credits:

Increase Decrease Normal Balance

Balance sheet accounts:
1. Asset Debit Credit Debit
2. Liability Credit Debit Credit
3. Owner's equity/stock holders equity
Capital Capital Stock Credit Debit Credit
Retained Earnings Credit Debit Credit
Drawing Dividends Debit Credit Debit
Income statement Accounts:
1. Revenue Credit Debit Credit
2. Expense Debit Credit Debit

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2.6. Recording Business Transactions in a Journal
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 therefore referred to as The book of original entry. The
process of recording a business transaction in the accounting record is called
Journalizing. Each one set of debits and credits for a transaction is called a journal
entry. An entry composed of two or more debits or of two or more credits is called
Compound Journal.
The Journal commonly used to record all types of transactions is the General
Journal.

Look at the following format for a two column General Journal.

General Journal Page ________

Date Description P.R Debit Credit
Year
Month day Debited account title XXX XX
Credited account title X XX XX
(Explanation)

There are also other types of Journals like, Special journals that are used to record
specific types of transactions. The cash Journal, for instance, is used to record only
transactions affecting cash. The General Journal is used for illustrations in this chapter.
Special journals will be discussed later on Chapter five.

In recording a business transaction the following three basic questions must be

answered:
1. Which accounts are affected?
2. Is each account increased or decreased?
3. Which account is debited and which is credited?

- Steps in Journalizing a Transaction

The following steps should be followed in recording a transaction in the journal.
1. Record the date - Insert the year, the month, and the date as shown above on the
format.
2. Record the Debit- Insert the account debited in the description column and the
amount of debit in the debit column.
3. Record the credit- Insert the account credited below the debited account and
indented to the right in the description column and the amount of credit in the
credit column.
4. Explanation- Write a brief explanation or reference to source document in the
description column, when necessary.

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Example: On January 10, 2003 3F Company paid Birr 6,000 to its employees as a
salary for the first week of the year.
This business transaction will be analyzed and recorded as follows.
1. Which accounts are affected? Answer: Cash and Salary Expense.
2. Is each account increased or decreased? Answer: cash is decreased and salary
expense is increased.
3. Which account is debited and which is credited? Answer: Salary Expense is
debited because increase in expenses is recorded on the debit side. And cash is
credited because decrease in assets is recorded on the credit side.
4. Prepare the complete Journal entry.

2003 Description P.R Debit Credit

Jan. 10 Salary expense 6000 00
Cash 6000 00
(Payment of salary)

Illustration - 1
Hiwot Beauty Salon and Training Center, a newly established business with the aim of
providing training on beauty salon on fee basis as well as rendering decoration service
to clients has the following accounts in its ledger (chart of accounts).
1. Assets 2. Liabilities
111 Cash 211 A/Payable 5. Expenses
112 A/R 212 Notes Payable 511 Supplies expense
113 Supplies 213 Unearned Revenue 512 Salary expense
114 Prepaid Rent 214 Salary Payable 513 Rent expense
115 Prepaid Insurance 215 Interest Payable 514 Insurance expenses
121 Office Equipt 515 Interest expense
122 Furniture 3. Owners equity 516 Depreciation
123 Machinery 311 Hiwot, Capital expense
124 Land 312 Hiwot, Drawing 517 Utilities expense
125 Acc. Depr -Equpt
n 313 Income Summary 518 Misc. expenses
126 Acc. Deprn -
Furniture 4. Revenue
127Acc. Deprn 411 Fees Earned
Machinery

The following assets and liability were invested by Hiwot, on January 1, 2012 at the
start of the business.
Cash Birr 140,000
Furniture 50,000
Notes payable 100,000 (a bank note due in 5- years with an interest rate of
12 % & equal yearly installment payments)

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The following transactions were took place for the month January, 2012 for Hiwot
Beauty Salon and Training Center.

January 1. Hiwot paid a one year rent of Birr 20, 000

January 1. Purchased machinery at cost of Birr 35,000 by paying Birr 10,000 and agreed
to pay the remaining amount in the near future
January 1. Paid a six month insurance premium for Birr 2,400
January 2. Purchased office equipment for Birr 25,000
January 4. Paid Birr 800 for television advertisement
January 7. Purchased supplies worth of Birr 5,000
January 10. Purchased a land for Birr 60,000 which will be used for future building site
January 15. Received a total of Birr 150,000 advance payment from trainees for a four
month tuition fee starting from January 1
January 17. Received Birr 5,000 form clients for decorating services rendered
January 20. Paid Birr 15,000 partial payment to creditors for the January 1 purchase of
machinery
January 20. Purchased additional supplies on account for Birr 7,000
January 26. Send a bill to customers for the service rendered on account for Birr 12,000
January 26. Paid Birr 6,500 salary to employees
January 28. Paid Birr 1,000 utilities expenses
January 28. Paid to creditors on account for the January 20 purchase of supplies
January 30. Received cash from customer on account for Birr 5,000
January 31. Hiwot withdrew a cash of Birr 5,000 for personal use

Required:
Record the above transactions of Hiwot Beauty Salon and Training Center in a Two
Column General Journal with provided chart of accounts of the business.

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Two Column General Journal Page 1
Date Description PR Debit Credit
2012 1 Cash 111 140,000 00
Jan. Furniture 122 50,00 00
Note payable 212 100,000 00
Hiwot, capital 311 90,000 00
(investment by the owner )
1 Prepaid rent 114 20,000 00
Cash 111 20,000 00
(prepayment for rent )
1 Machinery 123 35,000 00
Cash 111 10,000 00
A/P 211 25,000 00
(purchase of machinery )

1 Prepaid insurance 115 2,400 00

Cash 111 2,400 00
(prepayment for insurance )
2 Office equipment 121 25,000 00
Cash 111 25,000 00
(purchase of office equipt )
4 Miscellaneous expense 518 800 00
Cash 111 800 00
(payment for advertisement )
7 Supplies 113 5,000 00
Cash 111 5,000 00
(purchase of supplies )
10 Land 124 60,000 00
Cash 111 60,000 00
(Purchase of Land )
15 Cash 111 150,000 00
Unearned revenue 213 150,000 00
(advance receipts of tuition fee)
17 Cash 111 5,000 00
Fees earned 411 5,000 00
(fee earned by service giving to
client )
20 A/Payable 211 15,000 00
Cash 111 15,000 00
(payment of liability )
20 Supplies 113 7,000 00
A/Payable 211 7,000 00
(purchase of supplies on account)

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 Two Column General Journal Page 2
Date Description PR Debit Credit
26 A/Receivable 112 12,000 00
Fees earned 411 12,000 00
(fees earned on account)
26 Salary expense 512 6,500 00
Cash 111 6,500 00
(payment for salary )
28 Utilities expenses 517 1,000 00
Cash 111 1,000 00
(payment for utilities )
28 A/Payable 211 7,000 00
Cash 111 7,000 00
(payment of liability )
30 Cash 111 5,000 00
A/Receivable 112 5,000 00
(receipt of cash from customers on
account )
31 Hiwot, drawing 312 5,000 00
Cash 111 5,000 00
(withdrawal by the owner )

Exercise: John has opened a new business so called Bright Consulting. Journalize the
following transactions that are occurred during the month of January, 2012 for Bright
consulting. Use the following pages: For transactions occurred from January 1 up to 12, page
1; for transactions occurred from January 15 up to 30, page 2 with the following Chart of
accounts:
Bright consulting
Chart of Accounts
Assets:
101 Cash Owners equity: Expenses:
142 Office Supplies 311 John, Capital 511 Rent expense
181 Office Equipments 312 John, Drawing 521 Utilities expenses
525 Misc. expenses
Liability: Revenue:
202 Account payable 411 Fees Earned

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Transactions occurred for Bright consulting during January are the following:
January 1: John invested cash in the business, Birr 200,000
January 2: Paid office rent, Birr 1,000
January 5: Purchased office equipments on account, Birr 30,000
January 10: Received cash for services rendered, Birr 1,500
January 12: Paid a magazine subscription, Birr 300
January 15: Purchased office supplies on account, Birr 6,000
January 20: Made a payment on account for January 5 transaction, Birr 3000
January 25: Received cash for services rendered, Birr 7000
January 28: Paid utilities bill, Birr 1700
January 30: John withdrew cash for personal use, Birr 2000

2.7. Posting to the Ledger

After the information about a business transaction has been journalized, that information is
transferred to the specific accounts affected by each transaction. This process of transferring
the information from the journal to a ledger is called Posting.

The steps in posting using the four column account are given below:

1. Write the name of the account and its related identification number (Account number).
2. Enter the year, month, and date of the transaction in the date column.
3. Insert the Journal page number in the P.R (Post Reference) column of the account.
4. Enter the amount by which it is affected in the debit or credit column.
5. Determine the accounts balance & enter it in the appropriate sub-column of the balance
column.

- SHORT SUMMARY:
The flow of accounting data from the time a transaction occurs to its recording in the
ledger is diagramed as follows:

Business Business Entry Entry

TRANSACTION DOCUMENT recorded in posted to
Occurs Prepared JOURNAL LEDGER

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Illustration- 2
Post the recorded transactions of Hiwot Beauty Salon and Training Center, during January
2012, using the four column account.

Account: Cash Account number 111

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 balance 140,000 00
1 1 20,000 00 120,000 00
1 1 10,000 00 110,000 00
1 1 2,400 00 107,600 00
2 1 25,000 00 82,600 00
4 1 800 00 81,800 00
7 1 5,000 00 76,800 00
10 1 60,000 00 16,800 00
15 1 150,000 00 166,800 00
17 1 5,000 00 171,800 00
20 1 15,000 00 156,800 00
26 2 6,500 00 150,300 00
28 2 1,000 00 149,300 00
28 2 7,000 00 142,300 00
30 2 5,000 00 147,300 00
31 2 5,000 00 142,300 00

Account: A/Receivable Account number 112

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 26 2 12,000 00 12,000 00
30 2 5,000 00 7,000 00

Account: Supplies Account number 113

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 7 1 5,000 00 5,000 00
20 1 7,000 00 12,000 00

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Account: Prepaid Rent Account number114
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 20,000 00 20,000 00

Account: Prepaid Insurance Account number 115

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 2,400 00 2,400 00

Account: Office Equipment Account number 121

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 2 1 25,000 00 25,000 00

Account: Furniture Account number 122

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 balance 50,000 00

Account: Machinery Account number123

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 35,000 00 35,000 00

Account: Land Account number 124

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 10 1 60,000 00 60,000 00

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Account: A/Payable Account number 211
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 1 25,000 00 25,000 00
20 1 15,000 00 10,000 00
20 1 7,000 00 17,000 00
28 2 7,000 00 10,000 00

Account: Notes Payable Account number 212

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 balance 100,000 00

Account: Unearned Revenue Account number 213

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 15 1 150,000 00 150,000 00

Account: Hiwot, Capital Account number 311

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 1 balance 90,000 00

Account: Hiwot, Drawing Account number 312

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 31 2 5,000 00 5,000 00

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Account: Fees Earned Account number 411
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 17 1 5,000 00 5000 00
26 2 12,000 00 17,000 00

Account: Salary Expense Account number 512

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 26 2 6,500 00 6,500 00

Account: Utilities Expense Account number 517

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 28 2 1,000 00 1,000 00

Account: Misc. Expense Account number 518

Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 4 1 800 00 800 00

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2.8. The Trial Balance, Its Uses and Limitations
Trial Balance
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. It is a statement
that tests the accuracy of total debits and credits after transactions have been posted to the
ledger.
To prepare a trial balance, perform the following steps.
1. Enter the trial balance headings showing the company name, report title and
closing date for the accounting period.
2. List the account names in the same order as they appear on the financial statements.
Asset
Liability
Owners equity
Revenue, and
Expense
3. Enter the ending balance of each account in the appropriate debit or credit
column(this is obtained from the accounts in the ledger)
4. Total the debit column.
5. Total the credit column.
6. Compare the total debits with the total credits.
Uses of a Trial Balance
It provides the business man with a means of discovering errors which may have
been committed in writing the book of accounts in accordance with the rules of
double entry system.
It is used to check (proof) the accuracy of the ledger. In other words, the proof of the
equality of debits and credits in the ledger ( i.e. Debits = Credits)
It facilitates the preparation of financial statements.

Limitations of Trial Balance

The trial balance does not provide complete proof of accuracy of the ledger. It indicates only
that the debits and credits are equal. The trial balance amounts are equal doesnt mean that the
accounting work is free from error. That is, there are errors that may take place without
affecting the trial balance totals.
Some examples are mentioned below:
Failure to record a transaction or to post a transaction.
Recording the same erroneous amount for both the debit and credit parts of a
transaction.
Recording the same transaction more than once.
Posting part of a transaction to the correct side but the wrong account.
Please Note: All these errors have the same effect (increasing or decreasing) on the debit
totals and credit totals

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 Errors detected through the medium of trial balance

If the total of a trial balance are not equal, (i.e. Debits Credits), it is probably due to
one or more of the following types of errors.
1. Errors in preparing the trial balance
One of the columns of the trial balance was incorrectly added.
A debit balance was recorded on the trial balance as credit or vice versa, or a balance
was omitted entirely.
The amount of an account balance was incorrectly recorded on the trial balance.
2. Errors in posting a transaction in the ledger, such as:
An erroneous amount was posted to the account.
A debit entry was posted as a credit, or vice versa.
A debit or credit posting was omitted.
3. Errors in determining the account balance, such as:
A balance was incorrectly computed
A balance was entered in the wrong balance column.

Procedures in locating errors when the trial balance does not equal:-
1. Re-add the trial balance (specifically if the difference are 10, 100,1000, etc)
2. If the difference is evenly divisible by 2,
Look through the account to see if the amount has been recorded on the
wrong side of an account or check if this amount has been recorded in the
wrong column of the trial balance.
3. If the difference is evenly divisible by 9, the error is as a result of:-
Transpositions: - the erroneous rearrangement of digits such as writing 542
as 524 or 452.
Slides: - implies the entire number is erroneously moved one or more space
to the right or to the left. Example: writing 140 as 14.0 or as1.40.
4. Re compute the balance of each account in the ledger.
5. Trace the posting in the ledger back to the journal.
6. Verify the equality of the debit and credit in the journal.

Illustration- 3
Prepare the Trial balance for Hiwot Beauty Salon and Training Center, at the closing date of
the accounting period (i.e. @ January 31, 2012).

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 Hiwot Beauty Salon and Training Center
Trial balance
January 31, 2012
Cash 142,300 00
A/Receivable 7,000 00
Supplies 12,000 00
Prepaid Rent 20,000 00
Prepaid Insurance 2,400 00
Office Equipment 25,000 00
Furniture 50,000 00
Machinery 35,000 00
Land 60,000 00
Account Payable 10,000 00
Notes Payable 100,000 00
Unearned Revenue 150,000 00
Hiwot ,Capital 90,000 00
Hiwot, Drawing 5000 00
Fees Earned 17,000 00
Salary Expenses 6,500 00
Utility Expense 1,000 00
Miscellaneous Expense 800 00
Total 367,000 00 367,000 00
Exercises:
1. The accounts in the ledger of Alex Company as of June 30, 2012 are listed in alphabetical
order as follows. All accounts have normal balances. The balance of cash account has been
intentionally omitted.
Account Payable _______________________ Birr 21,900
Account Receivable_____________________ 28,500
Cash __________________________________ ?
Alex, Capital___________________________ 150,000
Alex, Drawing__________________________ 28,000
Fees Earned____________________________ 350,000
Insurance Expense______________________ 5,000
Land__________________________________ 125,000
Miscellaneous Expense__________________ 9,900
Notes Payable _________________________ 25,000
Pre Paid Insurance______________________ 3,150
Rent Expense___________________________ 48,000
Salary Expense_________________________ 215,000
Supplies_______________________________ 3,900
Supplies Expense_______________________ 6,100
Utilities Expense________________________ 41,500

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Required: Prepare a trial balance, for Alex Company listing the accounts in their proper
order and insert the missing figure for Cash.

2. Lakeview Carpet Installation, a sole proprietor ship owned by Joan Key, has the following
trial balance as of September 30 of the current year.

Cash 8,820 00
A/Receivable 17,825 00
Supplies 1,800 00
Pre-Paid Insurance 400 00
Equipment 22,500 00
Notes Payable 25,000 00
A/Payable 5,000 00
Joan Key, Capital 36,720 00
Joan Key, Drawing 8,000 00
Sales 59,750 00
Wages Expense 31, 500 00
Rent Expense 1,800 00
Advertising Expense 5,700 00
Gas, electricity& water expense 5, 650 00
Total 103,995 00 126,470 00

The debit and credit totals of the trial balance are not equal as a result of the following errors:-
a. The balance of cash was understated by Br.700.
b. A cash receipt of Br. 470 was Posted as a debit to cash of Br, 740.
c. A credit of Br. 325 to A/R was not posted.
d. A return of Br. 245 of defective supplies was erroneously posted as a Br. 425 credit to
supplies.
e. An insurance policy acquired at a cost of Br. 400 was posted as a credit to pre-paid
insurance.
f. The balance of notes payable was overstated by Br.5, 000.
g. A credit of Br.910 in account payable was over looked when determining the balance of
the account.
h. A debit of Br. 1,000 for a withdrawal by the owner was posted as a debit to wages
expense.
i. The balance of Br. 18,000 in the rent expense was entered as Br. 1,800 in the trial balance.
j. Miscellaneous expense, with a balance of Br. 1,100 was omitted from the trial balance.
Required:-
Prepare a correct trial balance for Lakeview Carpet Installation as of September 30 of the
current year.

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Solutions for the Exercises:
Alex Company
Trial Balance
As Of June 30, 2012
Cash x
Account Receivable 28,500 00
Supplies 3,900 00
Pre Paid Insurance 3,150 00
Land 125,000 00
A/Payable 21,900 00
Notes Payable 25,000 00
Alex, Capital 150,000 00
Alex, Drawing 28,000 00
Fees Earned 350,000 00
Rent Expense 48,000 00
Salary Expense 215,000 00
Supplies Expense 6,100 00
Utilities Expense 41,500 00
Insurance Expense 5,000 00
Miscellaneous Expense 9,900 00
Total X+514,050 00 546,900 00

Cash* = 32,850
Lakeview Carpet Installation
Corrected Trial Balance
September 30, 2012

Cash 9,250 00
A/Receivable 17,500 00
Supplies 1,980 00
Pre-Paid Insurance 1,200 00
Equipment 22,500 00
Notes Payable 20,000 00
A/Payable 5,910 00
Joan Key, Capital 36,720 00
Joan Key, Drawing 9,000 00
Sales 59,750 00
Wages Expense 30, 500 00
Rent Expense 18,000 00
Advertising Expense 5,700 00
Gas, electricity& water expense 5, 650 00
Miscellaneous expense 1,100 00
Total 122,380 00 122,380 00

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