Process Financial TNXN TTLM Nigussie B
Process Financial TNXN TTLM Nigussie B
Process Financial TNXN TTLM Nigussie B
Learning Guide
Unit of Competence: Process Financial Transactions and Extract Interim
Reports
Module Title: Processing Financial Transactions and Extract
Interim Reports
o Read through the Learning Guide carefully. It is divided into sections that
cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each
section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask
your trainer to show you the correct way to do things or talk to more
experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.
GAAP are not universally accepted and static principles like principles of natural sciences. They
are generally accepted by accounting practitioners and theoreticians, and other concerned parties,
in a given country or continent, as guidelines for accounting and reporting the financial affairs of
economic entities operating in the same country or continent.
Accounting standards are influenced by the economic, political, legal and social environment in
which they are established and applied, thus, subject to revision or change in line with the
changes in the previously mentioned environmental factors. Members of the accounting
profession, through associations and individual input into the process, have over time worked to
The following sections discuss some of the basic accounting assumptions, principles, and
concepts that guide the accounting and reporting practices for the financial affairs of commercial
economic entities.
2. Economic Entity Assumption - According to this assumption, each economic entity exists
separate from and independent of its owner/s and other economic entities under the same or
different owner/s. Thus, economic events can be identified with a particular unit of
accountability. And the economic activities of an accounting entity can be and should be kept
separate and distinct from its owner/s and all other entities. For instance, records and reports of
particular business should not reflect its owner’s personal economic activities, assets and
liabilities and that of another business other than its own economic affairs. This assumption
establishes limit/boundary as to what information to include in the accounting records and
reports of an economic entity and thus makes the financial accounting and reporting practices
manageable. The accounting entity concept, however, does not necessarily refer to a legal entity.
For instance, accounting assumes all types of business organizations (i.e. sole proprietorship,
partnership and corporation) as separate and independent economic entities. However, it is only
corporation that is legally treated as separate and independent entity.
4. Accrual Concept - This concept requires that financial affairs of an economic entity should be
recognized (i.e. recorded and reported) as they occur regardless of the timing of the in/out flows
of cash associated with the economic events. According to this principle, for instance, revenue
should be recorded and reported when goods are delivered or services are rendered to customers,
and expenses should be recognized when goods and services are consumed. The timing of the
Evidences supporting the financial affairs of an entity are not always conclusive. Keeping
accounting records and preparing reports may rely on judgments, estimates and other subjective
factors. In such cases, the records and reports should be based on the most objective evidence
available and be kept in such a way that an independent individual (e.g. an auditor) could verify
their accuracy or reliability. This means that the independent individual should be able to arrive
at the same information using the bases the information is recorded in the accounting records and
reported on the financial statements.
6. Historical Cost Principle - This principle states that goods and services purchased or sold
should be recorded in the accounting records and then reported on the financial statements at the
initial amount of cash or cash equivalent given up to acquire them or received in exchange for
selling them rather than on an estimated/appraised/assessed or market value. Such amount is
retained in the accounting records until such time that the goods and services are consumed, sold
or liquidated and removed. The justification for using the historical cost as a basis for recording
and reporting financial affairs is the fact that it is the most reliable figure usually supported by
objectively determinable evidences.
According to this assumption, only those economic activities capable of being expressed in terms
of money should be recorded in the accounting records and ultimately reported on the financial
reports of an economic entity. However, many factors affecting economic activities and future
prospects of an economic entity cannot be expressed in monetary terms. For instance, such
factors as the capabilities, dedication and trust of employees including management,
environmental impact (costs and benefits) of the existence of the economic entity, and the
relative strengths and weaknesses of competitors cannot be expressed in monetary terms.
Although such matters are important to and highly affect the operations and performances of an
economic entity, at the present time, accountancy does not assume responsibility for recording
and reporting information of such kind. Besides, accountancy does not assume responsibility for
recording and reporting the effects of changes in purchasing power of money on previously
recorded values of goods and services.
a. Assets - include any tangible and intangible items that have monetary value to and owned by a
business. Assets are further divided into current and non-current.
o Current assets - include cash and other assets that are expected to be converted into cash,
sold or consumed within a very short period of time usually one year or less. Examples
include
Cash - coins and paper money on hand or deposited at bank.
Accounts Receivable - claims against customers (debtors) for goods and services sold on
credit. They are based on oral promise or good faith rather than supported by written
evidences.
Notes Receivable - claims against customers supported by written evidences.
Merchandise Inventory - finished goods held for resale.
Prepaid Expenses (assets) - include consumable items such as supplies and advance
payments for such items as insurance (Prepaid Insurance) and rent (Prepaid Rent).
b. Liabilities - refer to obligations of a business to pay cash, perform service or deliver goods to its
creditor. Liabilities are further divided into current and non-current.
o Current liabilities - refer to obligations that must be paid/settled within one year or less.
They include Accounts Payable, Notes Payable, Salary Payable, Income/Sales Tax Payable
and Rent Payable.
o Non-current liabilities - also called long-term liabilities refer to obligations that are expected
to be settled over an extended period of time usually more than a year. Examples include
Mortgage Notes Payable and Bonds Payable. A part of a long-term debt, which is due within
a year or less, is reclassified and reported as current liability.
c. Owner’s Equity - refers to residual claim of the owner against the assets of a business. For sole
proprietorship and partnership forms of businesses, owner’s equity accounts include:
o Capital - used to accumulate investments made by the owner/partner and profit earned by the
business but not withdrawn by the owner/partner. Capital account is identified by the name
of the owner/partner and the word capital. E.g. Alemu, Capital.
o Drawing - used to accumulate money or other assets taken out of the business by the
owner/partner for personal consumption. Drawing decreases capital of a business. Like
capital, drawing account is identified by the name of the owner/partner and the word
drawing. E.g. Alemu, Drawing.
o Income Summary - used to summarize effects of revenues and expenses on the capital of
business.
ii. Income statement accounts - refer to accounts that appear on the income statement. They
include revenue and expense accounts. These accounts are used to temporarily accumulate
5. Normal balance of an Account - Account balance refers to the difference between total increase
and total decrease recorded in an account. Total increase recorded in an account is usually greater
than the total decrease recorded in the same account. Thus, the usual (normal) balance of an account
is positive. This implies that the normal balance of an asset, an expense or a drawing account is
debit while that of a liability, capital or revenue account is credit.
The following table summarizes the rules of debit and credit and the normal balances of accounts.
Normal
Account Type Increases Decreases
balance
Balance Sheet Accounts
Asset Debit Credit Debit
Liability Credit Debit Credit
Owner’s Equity
Capital Credit Debit Credit
Drawing Debit Credit Debit
Income Summary May have a credit/debit balance for income/loss
Income Statement Accounts
Revenue Credit Debit Credit
Expense Debit Credit Debit
6. Chart of Accounts - refers to the list of the titles and related identification numbers of all general
ledger (to be discussed in the next sections) accounts a business uses for recording its financial
affairs. Below is an example of chart of accounts for a certain business.
Business Transactions - are economic activities of a business that bring monetary changes in its assets,
liabilities, capital, revenues and expenses and should be recorded in the accounting records of the
business. They include buying and selling goods and services and collecting and paying money.
Business transactions are raw materials or inputs to the accounting process.
Unadjusted
Source Analyzing Journalizing Posting trial balance
3.
Adjusting
entries
Adjusted
Post closing Closing Financial trial balance
trial balance entries statements
2.5 Journalizing
2. Definition - Journalizing refers to the process of recording business transactions in journals.
3. Steps - The following steps may be carried out to journalize business transactions:
Collect source documents - Source documents show that a transaction has really occurred and
give complete information about the transaction such as date of the transaction, parties and
amount of money involved, terms of payment, etc.
Analyze transactions - This involves determining specific accounts affected (cash, fees earned,
etc) by the transaction, classification of the accounts affected (asset, liability, etc), direction of
the effect (increase or decrease), monetary amount of the effect ($400, $100, etc) and how to
record the increase and decrease (debit or credit).
Journalize - Record the dual effects of transactions in chronological order using the rules of debits and
credits. Below are sample general journal and additional steps needed to journalize business
transactions.
2.6 Posting
1. Definition - Posting refers to the process transferring monetary amounts of debit and credit
entries from the general journal to the accounts in the ledger which are affected by the debit
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and credit entries. Posting is necessary to classify and group similar business transactions in
terms of their effects on specific asset, liability, capital, revenue and expense items.
Roble and Rahel, the two outstanding New Millennium College students and the first batch
graduates of the accounting department had operated a super snak in Rahel’s parents’ home on
their extra time. As of January 2002, after graduation, they decided to open a new metal and
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wood work shop and moved to rented campus and to devote full time to the business, which is to
be known as “2 R lovers shaping” service. Assume a fiscal /accounting year of January to
December and entered the following transitions during January
January 1 the following assets were received (transferred) from the super snak to the shop
Cash --------------------------------------------Br. 7500
Accounts receivable -------------------------------900
Supplies ---------------------------------------------1,250
Service equipment---------------------------------11,000
Solution: Dear learner! The answers for the problem are presented step-by-step by explaining
the accounting procedures involved in the accounting cycle. Therefore, the steps, the answers
depending on the steps are illustrated as follows
After these steps using the forms (General Journal and a ledger) let’s return back to the
transactions and record and post them. To do that first let us open the ledgers given and use a
general journal.
Journal page 1
Post
Date Description Ref Debit Credit
2002
Jan 1 Prepaid rent 15 Br.2250 00
Cash 11 2250 00
2 Prepaid insurance 16 1740 00
Cash 11 1740 00
4 Service equipment 18 2500 00
Accounts payable 21 2500 00
6 Cash 11 500 00
Accounts receivable 12 500 00
9 Miscellaneous expe. 59 110 00
Cash 11 110 00
11 Accounts payable 21 1250 00
Cash 11 1250 00
Post
Date Description Ref Debit Credit
2002
Jan 27 Cash 11 1200 00
Accounts receivable 12 1200 00
27 Salary expense 51 500 00
Cash 11 500 00
30 Miscellaneous expense 59 75 00
Cash 11 75 00
30 Miscellaneous expense 59 140 00
Cash 11 140 00
30 Cash 11 950 00
Service revenue 41 950 00
30 Account receivable 12 800 00
Service revenue 41 800 00
30 2R- Drawing 32 1500 00
Cash 11 1500 00
31 Adjusting entries
Insurance expense 55 145 00
Prepaid insurance 16 145 00
Supplies expense 53 680 00
Supplies 14 680 00
Depreciation ex. Stor.eq. 54 100 00
Accumulated dep.exp. 19 100 00
Salary expense 51 100 00
Salary payable 22 100 00
Rent expense 750 00
Prepaid rent 15 750 00
These accounts which are described in the following few pages are answers to question # 1 and
3 opening an account and posting. All are completed accounts at the end of the month after the
adjusting and the closing entries are posted.
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Account receivable 12
Balance
Supplies 14
Balance
1520
After adjustment
Prepaid Rent 15
Balance
After adjustment
Prepaid insurance 16
Balance
Before
Date Item Post ref Debit Credit Dr. Cr. adjustm
ent
2002
balance
Jan 2 1 1740 1740
31 Adjusting entry 145 1595
1595
After adjustment
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Service equipment 18
Balance
Accounts payable 21
Balance
Salary Payable 22
Balance
100
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2R - Capital 31
Balance
2R drawing 32
Balance
Income summary 33
Balance
Service revenue 41
Balance
Salary Expense 51
Balance
Rent expense 52
Balance
Supplies expense 53
Balance
Insurance expense 55
Balance
Miscellaneous expense 59
Balance
After posting all the entries, including adjusting and closing, the end balances and tittles of 2R-
shopping service using the trial balance is shown as below.
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2R –shopping service
Trial balance
On January 31, 2002
Title Debit Credit
Cash 4085 00
Accounts receivable 1700 00
Supplies 2200 00
Prepaid rent 2250 00
Prepaid insurance 1740 00
Service equipment 13500 00
Accounts payable 1250 00
2R- lovers capital 20650 00
2R- drawing 1500 00
Service revenue 6400 00
Salary expense 1000 00
Miscellaneous expense 325 00
Total 28,300 00 28,300 00
(The above trial balance which is computed and completed is answer to question # 4)
The trial balance does not provide the complete proof of accuracy of the ledger. It indicates only
that debits and credits are equal.
If the two totals of the trial balance are not equal it is probably due to the following errors.
Errors in preparing the trial balance was incorrectly added: it may be due to one of the
following activates
One of the columns of the trial balance may be incorrectly determined
Omitting balance of an account
Incorrect listing of an account
Accrual basis: under this method of accounting revenues are recorded and reported in
the period in which they are earned (goods are sold or services are performed regardless
of collection of cash). Expenses are recorded and reported in the period in which they are
incurred (assets are consumed or expired; services are received regardless of payment of
cash).
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Activity one: an enterprise has provided services to a customer in March and the customer paid
for the service in April. When should the revenue be recorded and reported using cash basis? Or
Accrual basis?
iii. Matching principle: this principle states that in determining net income / net loss for a given
period, all expenses incurred in that period should be deducted from the revenues earned in that
period, i.e. the income statement should match the revenues earned and the expenses incurred in
a certain period to determine net income/ net loss of that period.
At the end of an accounting period, many of the balances of accounts in the ledger can be
reported, with out change, in the financial statements. Some accounts in the ledger, however,
require updating. The process of updating the balances of accounts by recording unrecorded
transactions at the end of the accounting period is called an adjusting process; and the journal
entries needed are called adjusting entries. By their nature, all adjusting entries affect at least
one income statement and one balance sheet account. Thus, an adjusting entry will always
involve revenue or an expense account and an asset or a liability account.
Accruals: are created by failure to record an expense that has been incurred or revenue
that has been earned. Examples include unrecorded wage (accrued expense/ accrued
liabilities) and unrecorded fees earned (accrued revenue often called accrued assets)
Plant assets: the expired cost of plant assets due to usage and passage of time is called
depreciation.
‘Accumulated depreciation’ is a contra plant asset account whose balance must be deducted from
the original cost of a plant asset.
Unearned revenues: are liabilities created by receiving cash in advance for provision of
goods or services
Note: deferrals are cash received or paid in the current period but revenues or expanse recorded
in the future period
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-Accruals are revenues or expenses recorded in the current period but cash received or paid is the
future period.
- Journalizing and posting adjusting entries is used to bring the balance of accounts in the general
ledger in to agreement with the balances shown on the financial statements, i.e. to update
balances. The entries should be recorded on the Journal and posted to the respective ledgers.
For the example given above, 2R- shopping service the adjustment data is given. From the
adjustment data adjusting entries are recorded on the journal at the end of the month (January 31)
and posted to the respected ledgers on that time. Let’s see the effect, of the adjusting entries
using a worksheet
Adjustment data:
If the tittles of some of the accounts to be adjusted do not appear in the trial balance, they should
be inserted in the account title column, below the trial balance totals, as needed. On the
adjustment column let’s see the adjustment given by letter
a) Prepaid insurance: The prepaid insurance as of January the beginning of the month has a
balance of Br. 1,740, which represents advance payment for the year. For the month of January
out of the total balance Br. 145 was expired. Therefore as January 31 of the total balance 145
was expensed but the remaining 1595 (1740-145) is entered by writing (a) insurance expenses in
the account title column and (a) in the adjustments debit column
b) Supplies: The supplies account including the purchase has a balance of Br. 2200. But after
physical inventory or count the supplies on hand was found Br. 1520, therefore, Br. 680 (2200-
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1520) i.e. the expired or consumed amount which is supplies expense. The adjustment is entered
by writing (b) Br. 680 in the adjustments debit column on the same line as supplies expense ad
(b) Br. 680 in the line as supplies
c) Depreciation expense: Depreciation for the equipment for the month is Br. 100. The
adjustment is entered by writing(c) depreciation expense in the account title column Br. 100
adjustment debit column the same line as depreciation expense but accumulated depreciation in
the account title column Br. 100 in the adjustment credit column on the same line as accumulated
depreciation
d) Accrued salary: The amount Br. 100 for January is an increase in expense and increase in
liabilities. The adjustment is entered by writing (d) Br. 100 in the adjustments debit column on
the same line as salary expenses (d) salary payable in the account title column, and (d) Br. 100 in
the adjustment credit column on the same line as salary payable.
e) Prepaid rent: Of the total amount paid in advance for three months Br. 750 (2250/3) is
expired, rent expense. The adjustment is entered as rent expense Br. 750 in the same line in the
debit side of the adjustment column and (e) Br. 750 in the credit side of the adjustment column
the same line as the prepaid rent line moth adjustment column
The adjustment columns are totaled to verify the mathematical accuracy of the adjustment data.
The total of the debit column must equal the total of the credit column
Note: The adjusted trial balance amounts are determined by extending the trial balance amounts
plus or minus the adjustments. For example, supplies account debit balance Br. 1520 on the
adjusted trial balance is the trial balance amount of Br. 2200 minus the Br.680 of the adjustment
credit. Accordingly, the worksheet is completed as shown in the worksheet. (Procedure 7 is
completed)
Procedures /step 7: financial statements preparation. The financial statements are directly
derived from the work sheet. The statements are, therefore, prepared as follows
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2R shopping service
Statement of owner’s equity
For month ended January 31, 2002
2R- capital, January 2002 ..................................................................Br. 20650
Revenues, expenses and drawing /dividend account are temporary accounts used to accumulated
effects of some transaction on owner’s equity account for a specific period. At the end of the
accounting period the balances of revenue and expense accounts are summarized in one another
temporary account called the income summary. The balance in the income summary is
transferred/closed to the capital (owner’s equity) account. The balance on the drawing /divided
account is directly closed to the capital (retained earnings account).
The process of transferring balances of temporary accounts to the capital account is called
closing entry; and these entries should be posted to the respective ledgers after journalization.
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This closing of accounts is used to transfer net income or net loss and drawing /dividend to
capital/retained earning, account. Moreover; it is used to reduce the balance of temporary
accounts to zero so that they will be ready for the next accounting period.
For our example, 2R-shopping service, the closing entries are journalized on the journal and
posted to the respective ledgers. See them on the journal and on their respective ledgers.
Procedure / step 9: post closing trial balance: It is a trial balance prepared after all adjusting
and closing entries are posted. It is prepared to check the equality of the total debit and the total
credit of the balance of the real accounts. It is the last step on the accounting cycle/ process the
post-closing trial balance for the 2R-shopping service is prepared and presented as follows.
Activity-
1. If the supplies account, before adjustment on May 31, indicated a balance of Br. 2,250 and
an inventory of supplies on hand at May 31, totaled Br. 950, the adjusting entry would be:
A. debit supplies, Br. 950; credit supplies Expense, Br. 950.
B. debit supplies, Br. 1,300; credit supplies Expense, Br. 1,300.
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6. In accounting for depreciation on equipment, what is the name of the account that would be
referred to as a contra asset account?
7. Which of the following accounts in the ledger of a corporation will ordinarily appear in the
post closing trial balance?
a) Accounts Receivable g) equipment
b) Accumulated depreciation h) Retained earnings
c) Cash i) Dividends
d) Supplies j) Capital stock
e) Depreciation expense k) wages expense
f) Wages payable l) Sales
8. A business enterprise pays weekly salaries of Br.12, 000 on Friday for a five-day week ending
on that day, Journalize the necessary adjusting entry at the end of the fiscal period, assuming
that the fiscal period ends. (a) On Monday (b) On Wednesday
9. The balance in the supplies account, before adjustment at the end of the year, is Br.2, 750. The
inventory of supplies at the end of the year was determined to be Br.600. The estimated
depreciation on equipment used during the year is Br.1, 600. Journalize the adjusting entries
required at the end of the year to recognize a) supplies used during the year and b)
depreciation expense for the year.
10. The trial balance of west side Laundromat at July 31, 1991, the end of the fiscal year, and the
data needed to determine year-end adjustments are as follows.
Westside Laundromat
Trial balance
July 31, 1991
Account Title Debit Credit
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Adjustment data:
(a) Inventory of Laundry supplies at July 31 ............................................. Br. 1,840
(b) Insurance premiums expired during the year ....................................... 1,500
(c) Depreciation on equipment during the year .......................................... 5,720
(d) Wages accrued but not paid at July 31 .................................................. 850
Instructions:
1. Record the trial balance on a ten-column worksheet and complete the worksheet.
2. Prepare an income statement, a statement of owner’s equity and a balance sheet. (No
additional investments were made during the year).
3. On the basis of the adjustment data in the worksheet, journalize the adjusting & closing
entries.
11. J. F. M. D. Outz has been practicing as a cardio list for three years. During April Outz
completed the following transactions in her practice of cardiology.
April 1. Paid office rent for April, Br.800
3. Purchase equipment on account, Br.2,100
5. Received cash on account from patients, Br.3,150
8. Purchase X-ray film and other supplies on account, Br.245
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9. One of the item of equipment purchase on April 3 was defective. If was returned with
the permission of the supplier, who agreed to reduce the account for the amount
charged for the item, Br.325.
12. Paid cash to creditors on account, Br.1,250.
17. Paid cash for renewal of a six-month property Insurance policy, Br.370.
20. Discovered that the balances of the cash account and of the accounts payable account
as of April were overstated by Br.200. A payment of that amount of creditor in
March had not been recorded. Journalize the Br.200 payment as of April 20.
24. Paid cash for laboratory analysis, Br.545
27. Paid cash for business bank account for personal and family expense. Br.1,250..
30. Recorded the cash received in payment of service (on a cash basis) to patients during
April, Br.1,720.
30. Paid salaries of receptionist and nurses, Br.1,725.
30. Paid various utility expenses, Br.260.
30. Recorded fees charge to patients on account for service performed in April,
Br.5,145.
30. Paid miscellaneous expenses, Br.132.
Outz’s account title, members and business as of April 1 (all normal balances) are listed as
follows:
Cash, 11, Br.4,123; Accounts Receivable, 12, Br.6,725; Supplies, 13, Br.290; Prepaid Insurance,
14, Br.465; Equipment, 18, Br.19,745; Accounts payable, 22, Br.765; J.F. outz, Capital, 31,
Br.30,583, J.F. Outz, Drawing, 32, Professional Fees, 41, Salary expense, 51, Rent Expense, 53,
Laboratory expense, 55, Utility expense, 56, Miscellaneous Expense,, 59.
Instructions
5. Open a ledger of standard four-column accounts for Dr. Outz as of April 1 of the current year.
Enter the balances in the appropriate balance columns and place a check mark () in the
posting reference column. (it is advisable to verify the equality of the debit and credit
balances in the ledger before proceeding with the next instruction).
6. Journalize each transaction in a two-column journal.
7. Post the journal to the ledger, extending the month-end balance to the appropriate balances
columns after each posting.
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