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KARDAN UNIVERSITY
Sc EconomicsPrepared By: Sajad Ahmad
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The system under which the double effectof every transaction is recorded is called
double entry system.
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A device which contains a systematicrecord of increase or decrease in an itemduring a particular period.
It has three parts:A title name of the accountsLeft hand side which is usually called Debit
sideRight hand side which is usually called Credit
side.
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All the accounts maintained by a businesscan be divided into two categories.
1.Real Accounts
2.Nominal accounts
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1- Real Accounts :
These are the accounts of assets, liabilitiesand owners equity.
ORThese accounts have their existence even
after the close of a year.
Examples
Land, building, A/P, Owners Capital
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2- Nominal Accounts:
These are the accounts of revenues andexpenses.
ORThese accounts are closed at the end of an
year.
ExamplesSalaries, rent, revenues etc2
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As an account has two parts i.e. Debit (Dr)left hand side and credit (Cr) right handside.
When we write an amount on left hand sideit is called as debiting an account andwhen we write an amount on the righthand side it is called as crediting an
account.
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Increase in assets Decrease in Liability Decrease in Owner Equity
Decrease in Revenue Increase in expense Increase in withdrawals
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Decrease in assets Increase in liabilities Increase in owner equity
Increase in revenue Decrease in expense Decrease in withdrawals
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When increase in assets is debited the decrease in assets must becredited.
When increase in assets is debited the increase in liability must becredited and hence decrease in liability must be debited.
Owner Equity is also regarded as claim against assets hence increasein capital is credited and decrease in capital is debited.
When income increases owners equity also increases, when incomedecrease owners equity decreases therefore increase in income
must be credited and decrease in income must be debited.
When expenses increases the owners equity decreases as suchincrease in expense is debited and decrease in expense is credited.
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Any dealing between two or more person for goods andservices which effect the financial position of a businessand also can be measured in terms of money is called
business transactions.
Example:
Business purchased land for $52,000 and pay cash for it.
Here business is receiving land which is an asset but foracquiring one asset it gives another asset cash andamount of transaction is $52,000.
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There are two types of Transactions:
Cash TransactionsCredit Transactions
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The transaction where immediate cashreceipts or payments is involved is calledcash transaction.
For ExampleOwner invest $80,000 in business.Business pay $200 salary to an employee.
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The transaction where cash collection or payments aremade at some future time is called credit transaction.
Examples.
1.The business sells merchandise of price $400 and theamount will be received after 15 days.
2.The business purchased computer at $300 andpromise that amount will be paid after 20 days.
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The sequence of accounting procedures used torecord, classify and summarize accountinginformation is termed as accounting cycle.
Journal
LedgerTrial Balance
Adjustment
Adjusted Trial Balance
Financial Statements
Closing Entries
After Closing Trial Balance
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Journal is a book containing the originalrecord of a transaction in order ofoccurrence.
ORJournal is a chronological (day-by-day)
record of business transactions.The simplest type of journal is called general
journal and is shown as follow
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Date Description PostReference
Debit$
Credit$
2006
Mar1
2
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The process of recording the transaction ingeneral journal is called as journalizing ormaking an entry. The following is the procedurefor recording transactions in general journal.
Date column.In this column the date on which transaction is
completed, is recorded. year of account iswritten at the top and month below it. themonth is written only on the top of the page
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The dates are recorded in smaller column forevery transaction.
Description column.
In this column the account to be debited isinserted at the extreme left, and account tobe credited below it after providing somespace on left side. Brief explanation of entry
is also recorded in this column, generallyknown as narration.
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Post reference column. This account is completed when postings are
made into ledger. the students are advisedto insert a tick mark while posting the
entries from journal to ledger. Amounts column. Two amounts column are provided in
journal. The amount of transaction is
recorded in the debit column against theaccount to be debited and the amount ofthe account(s) to be credited are recordedin credit column.
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If we are given a business transaction and want tofind accounts to debited and accounts to be creditedin that particular transaction we have to proceed asunder.
By the analysis of transaction find out the two ormore accounts which are involved in that transaction.
The account so found are classified in to assets,liabilities, capital, Revenue expense or withdrawals.Increase and decrease in account(s) are determine.
Finally rule is applied.
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QUESTION NO1
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Nov 1: Assad started business by depositing $80,000 in acompany bank account.
Nov 3: Purchase land for $52,000 by paying cash. Nov 5: Purchased a building for $36,000 paying$6,000 in cash
and issuing a note payable for the remaining $30,000 .
Nov 17: Purchased tools and equipments on account for $13,800 Nov 20; sold some of the tools at the price equal to their cost
$1800 collectable within 45 days. Nov 25: Received $600 in partial collection of the account
receivable from the sale of the tools. Nov 26: Paid $6,800 in partial payment of an account payable
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Date Accountsinvolved
Classification
Increase orDecrease
Debit orCredit
2006
NOV1
Cash
Asad capital
Asset
ownerequity
Increase
increase
Dr
Cr
3 Land
cash
Asset
asset
Increase
decrease
Dr
Cr
5 BuildingCash
Notespayable
AssetAsset
liability
IncreaseDecrease
Increase
DrCr
Cr
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NOV
17
Tools &equipment
Accountpayable
Asset
liability
Increase
increase
Dr
Cr
20 Tools &
equipment
Accountreceivable
Asset
asset
Decrease
increase
Cr
Dr
25 Cash
Accountreceivable
Asset
asset
Increase
decrease
Dr
Cr
26 Cash
Account
payable
Asset
liability
Decrease
decrease
Cr
Dr
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JOURNAL ENTRIESOF QI
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Date Accounts titleExplanation
Debit$
Credit$
2006Nov 1
CashAssad Capital
owner invested cash inthe business
80,00080,000
3 LandCash
Purchased land for business
52,00052,000
5 BuildingCash
Notes PayablePurchased building paid partCash,balance payable within 90days
36,0006,000
30,000
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17 Tools and EquipmentsAccounts Payable
Purchased tools andequipments on credit
13,80013,800
20 Accounts Receivable Tools
and EquipmentsSold unused tools andequipment at cost
1,800
1,800
25 CashAccounts Receivable
Collected part of accountreceivable
600600
26 Accounts PayableCash
Made partial payment ofaccounts payable
6,8006,800
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Oct 1. The owner Fahad invested an additional $80,000 cashin the business.
Oct 5. Purchased a plot for $102,000 of which $30600 waspaid in cash , a note payable was issued for balance.
Oct15.Issued a check for $976 in full payment of an accountpayable.
Oct18.Borrowed $30,000 cash from the bank by signing a 90day note payable.
Oct23. Collected an account receivable of $2900 from
customerOct30. Acquired office equipment for $6200 made a cash
down payment of $1500,balance to be paid with in 30days.
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Date Accountsinvolved
Classification
IncreaseorDecrease
Debit orCredit
2007
Oct1
Cash
Fahadcapital
Asset
ownerequity
Increase
increase
Dr
Cr
5 Land
Cash
Notespayable
Asset
Asset
liability
Increase
Decrease
Increase
Dr
Cr
Cr
Oct15 Account Liability Decrease Dr
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Oct15 Accountpayable
Cash
Liability
Asset
Decrease
Decrease
Dr
Cr
18 Cash
Notespayable
Asset
Liability
Increase
increase
Dr
Cr
23 CashAccountreceivable
Assetasset
Increasedecrease
DrCr
30 Office
EquipmentCash
Accountpayable
Asset
asset
liability
increase
Decrease
Increase
Dr
Cr
Cr
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Solution ofQuestion 2
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Date Description Debit
$
Credit
$
2007
Oct 1
Cash
Fahad Capital
Owner invested additionalcash in the business
80,000
80,000
5 Landcash
Notes payable
Purchased land paid apart in cash & issue a
note payable
102,00030,600
71,400
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Oct 15 Accounts payablecash
Paid accounts payable
976976
18 Cash
Notes payableBorrowed from bank on90 days note
30,000
30,000
23 Cash
Account ReceivableCollected accountreceivable fromcustomer
2,900
2,900
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Oct 30 Office EquipmentCash
Account payable
Acquired office
equipment
6,2001,500
4,700
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Ledger is a book in which every account isallotted a separate page , and all thetransactions relating to that account arewritten on that page in a summary form.
ORLedger is a book which contains a condensed
record of all the business transaction.
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Transactions are1st recorded in journal, andthen it is posted to ledger.
Posting simply means updating the ledgeraccounts for the effect of transactionsrecorded in journal.
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JOURNAL ENTRIES
OF QI
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Date Accounts titleExplanation
Debit$
Credit$
2006Nov 1
CashAssad Capital
owner invested cash inthe business
80,00080,000
3 LandCash
Purchased land for business
52,00052,000
5 BuildingCash
Notes PayablePurchased building paid partCash,balance payable within 90days
36,0006,000
30,000
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17 Tools and EquipmentsAccounts PayablePurchased tools andequipments on credit
13,800 13,800
20 Accounts Receivable
Tools and EquipmentsSold unused tools andequipment at cost
1,800
1,800
25 CashAccounts Receivable
Collected part of accountreceivable
600600
26 Accounts PayableCash
Made partial payment ofaccounts payable
6,8006,800
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Nov 30: Recorded $2,200 of sale revenue receivedin cash.
Nov 30: Paid $1,400 of operating expenses in cash,$200 for utilities and $1200 for wages.
Here revenue is more than expenses and businessis making profit, profit is added to owner equityand if it is received in cash, it increase asset(cash).
Profit = Revenues Expenses Profit = 2200 1400 Profit = $800 Because of $800 profit the cash and capital
balances for the month of Nov will increase by$800.
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LEDGER
ACCOUNTS OF
Q1
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Date Debit$
Credit$
Balance$
2006
NOV. 1
35
25
26
30
80,000
600
800
52,0006,000
6,800
80,000
28,00022,000
22,600
15,800
16,600
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This format is known as a running balanceformat.
This form does not shows that the balance iseither debit or credit.
But we know that assets normally have debitbalance and liability and owner equitys hascredit balances.
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Date Debit$
Credit$
Balance$
2006
NOV. 20
25
1,800
600
1,800
1,200
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Date Debit$
Credit$
Balance$
2006
NOV. 3 52,000 52,000
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Date Debit$
Credit$
Balance$
2006
NOV. 5 36,000 36,000
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Date Debit$
Credit$
Balance$
2006
NOV. 17
20
13,800
1,800
13,800
12,000
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Date Debit$
Credit$
Balance$
2006
NOV. 5 30,000 30,000
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Date Debit$
Credit$
Balance$
2006
NOV. 17
6,800
13,800 13,800
7,000
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Date Debit$
Credit$
Balance$
2006
NOV. 1
30
80,000
800
80,000
80,800
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The time period for which a business measures its profit andloss is called accounting period.
OR
The period of time covered by an income statement of abusiness is called accounting period.
If a business measure its revenue and expenses for 3 monthsits accounting period will be 3 months.
If a business measure its revenue and expenses for one year
then its accounting period will be one year.One year accounting period is known as a fiscalyear.
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The price of goods sold or services rendered iscalled revenue.
For Example If business sell 1000 pens @ 5 per penthen 5000 is its revenue.
If 20 patient comes to a Doctor and he charge 200fee from every patient then 20 * 200 =4000 is itsrevenue.
Revenue increases owner equity ,because when
business sell goods or provide services it eitherreceive cash or generate Account receivable bothare assets and on the right side liability do notincreases so it increase owner equity.
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Repair service revenueSalesFee earned
Commission earned Interest revenue
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Realization principle indicates that revenuesshould be recognized at the time goods soldor services are rendered.
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The cost of doing business is called expense.OR
The cost of goods and services used up in theprocess of earning revenue is called expense.
Examples. salaries, utility bills, rent etcAn expense always causes a decrease in owner
equity.Expense will decrease assets or increase
liability, if expenses are paid in cash (asset) it
will decreases and if it will not be paid untillater it increase liability.
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Matching principle says that revenue shouldbe offset (match) by all the expensesincurred in producing that revenue.
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Many expenditures made by a businessbenefit more than one accounting period.
Let suppose car benefit a business for 10years. If business prepares annual incomestatement a portion of the cost of the carshould be recorded as a depreciationexpense.
If the car cost $4000 then( 4000/10=400) willbe the depreciation expense of car for oneyear.
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The policy of recognizing revenue in theaccounting records when it is earned andrecognizing expenses when the related goodsare services are used is called Accrual basis
of Accounting.The Accrual basis of Accounting measures the
profitability of the business for the period oftime
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The policy of recognizing revenue in theaccounting records when cash is collectedfrom the customer and recognizing expenseswhen it is paid is called the Cash basis of
Accounting.The Cash basis of Accounting measures cash
receipts and payments during a period.
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Withdrawals of owner means when ownerwithdraw some cash or assets from thebusiness for personal use.
Withdrawal reduce assets and owner equity
of the business.Withdrawals are not expenses because
expenses are incurred for the purpose ofgenerating revenue and withdrawals of
owner do not serve this purpose.Drawings decrease owner equity so it isrecorded by debit.
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The excess amount of revenue over theexpense of a business is called Profit.
For Example if a revenue is $ 100 andexpense is $ 80 then profit is $ 20.
As income statement covers a period of time,so income must be related to a period oftime.
Profit is added with owner equity.
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The excess amount of expenses over therevenue of a business is called loss.
Example. If revenue is $100 and expenses are$130 then $30 is loss.
Loss is subtracted from owner equity.
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Dec. 1; Paid Daily Tribune $360 cash for news paperadvertising to be run during December. Dec. 2; Purchased radio advertising from KRAM to
be aired in December. The cost was $470 , payable
within 30 days.Dec. 4;Purchased various shop supplies cost $1,400,
due in 30 days. These supplies are expected tomeet overnights needs for three or four months.
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Dec. 15; Collected $4,980 cash for repairsmade to vehicles.
Dec. 23;Asad the owner , withdrew $3,100cash from the companys bank account forhis personal use.
Dec. 29;Asad found that he did not need allof the cash he had withdrawn on Dec 23, sohe redeposit $1000 in Overnights (business)bank account.
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Dec. 31;Billed Harbor Cab Co. $5,400 formaintenance and repair services renderedduring December. The agreement withHarbor Cab calls for payment to be received
by January 10. Dec. 31;Paid all employees wages for
December ,$4,900
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Date Accountsinvolved Classification Increase orDecrease Debit orCredit
Dec1 Cash
Advertisement
Asset
expense
Decrease
increase
Cr
Dr
2 Advertisement
A/P
expense
Liability
Increase
increase
Dr
Cr4 supplies
accountpayable
Asset
liability
Increase
Increase
Dr
Cr
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Date Accountsinvolved Classification Increase orDecrease Debit orCredit
Dec15 Cash
Revenue
Asset
Revenue
increase
increase
Dr
Cr
23 Withdrawal
Cash
Withdrawal
Asset
Increase
decrease
Dr
Cr29 Cash
Ownerequity
Asset
Ownerequity
Increase
Increase
Dr
Cr
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Date Accountsinvolved Classification Increase orDecrease Debit orCredit
Dec31 A/R
Revenue
Asset
Revenue
increase
increase
Dr
Cr
31 wages
Cash
expense
Asset
Increase
decrease
Dr
Cr
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Date Description Debit$
Credit$
2006
Dec 1
Advertising expense
Cash
Purchased newspaperadvertising & pay cash
360
360
2 Advertising expense
Account payablePurchased radioadvertising on account
470
470
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Date Description Debit$
Credit$
2006
Dec 4
Shop supplies
Account payable
Purchased shopsupplies on account
1,400
1,400
15 Cash
Repair service Rev
Repair servicesrendered
4,980
4,980
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Date Description Debit$
Credit$
2006
Dec 23
Asad drawings
Cash
Owner withdrew cash
3,100
3,100
29 Cash
Asad capital
Owner invested cash
1,000
1,000
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Date Description Debit$
Credit$
2006
Dec 31
Account receivable
Repair service Rev
Billed Harbor cab forservices rendered
5,400
5,400
31 Wages expenses
Cash
Paid wages
4,900
4,900
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Date Debit$
Credit$
Balance$
2006
NOV. 30
DEC. 115
23
29
31
16,600
4,980
1,000
360
3,100
4,900
16,600
16,24021,220
18,120
19,120
14,220
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Date Debit$ Credit$ Balance$
2006
NOV. 30
DEC. 31
1,200
5,400
1,200
6,600
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Date Debit$
Credit$
Balance$
2006
DEC. 4 1,400 1,400
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Date Debit$
Credit$
Balance$
2006
NOV. 30 52,000 52,000
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Date Debit$
Credit$
Balance$
2006
NOV. 30 36,000 36,000
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Date Debit$
Credit$
Balance$
2006
NOV. 30 12,000 12,000
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Date Debit$
Credit$
Balance$
2006
NOV. 30 30,000 30,000
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Date Debit$
Credit$
Balance$
2006
NOV. 30
DEC. 24
7,000
4701,400
7,000
7,4708,870
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Date Debit$
Credit$
Balance$
2006
DEC. 23 3,100 3,100
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Date Debit$
Credit$
Balance$
2006
DEC. 15
31
4,980
5,400
4,980
10,380
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Date Debit$ Credit$ Balance$
2006
DEC. 1
2
360
470
360
830
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Date Debit$ Credit$ Balance$
2006
DEC. 31 4,900 4,900
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The proof of the equality of Debit and Creditbalances is called Trial Balance.
A Trial Balance is a two column schedule listingthe names and balances of all the accounts in the
order in which they appear in the ledger; the debitbalances are listed in the left hand column and thecredit balances in the right hand side column. Thetotal of two columns should agree. Trial balancecontains Income statement as well as Balance
sheet accounts. A Trial balance taken from Overnights ledger
follows
OVERNIGHT AUTO SERVICETrial Balance
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December 31, 2006
Description Debit Balance
$
Credit Balance
$
Cash
Account Receivable
Shop Supplies
Land
Building
Tools and EquipmentNotes Payable
Account Payable
Asad Capital
Asad Drawing
Repair Service Revenue
Advertising ExpenseWages Expense
14,220
6,600
1,400
52,000
36,000
12,000
3,100
8304,900
30,000
8,870
81,800
10,380
TOTAL $131,050 $131,050
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Many transactions affects the revenues orexpenses of two or more accounting periods.e.g depreciable assets, supplies, insurancepolicy, prepaid expenses etc
Initially the costs of such items are recordedas assets, because they will benefit thebusiness in future accounting periods.Overtime these assets are used up, and their
cost becomes expenses of the periods inwhich the goods are services are used.
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Business allocate the costs of such assets toexpenses over a span of several accountingperiod by making adjusting entries at theend of each accounting period.
The purpose of these entries is to assign toeach accounting period the appropriateamount of revenue and expenses.
These entries adjust the balances ofvarious ledger accounts, therefore it isknown as a adjusting entries.
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A business can make dozen of adjustingentries, but here we assume that Overnightsaccount require only three adjusting entriesat December 31.
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On December 4,Overnight purchased for $1400 aquantity of shop supplies expected to last for 3 or 4months. At the date of purchase, this $1400 cost wasdebited to an asset account (shop supplies), becauseit was expected to benefit future accounting periods.
But as these supplies are used this asset graduallybecomes an expense.
Assume that during December, $400 worth ofOvernights shop supplies was used in businessoperations and that approximately $1000 worthremains on hand available for use in future periods.
The $400 of supplies used during December should berecognized as expense in that month; the $1000 insupplies still on hand should appear in the Dec 31balance sheet as an asset.
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GENERAL JOURNALDate Account Titles and
ExplanationDebit
$
Credit
$
2006
Dec 31
Supplies expense
Shop supplies
To recognize asexpense the cost ofshop supplies used in
December
400
400
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Depreciable assets are all those assets whichhave a limited useful life. e.g Building, Car,Machinery and Furniture etc
They are not physically consumed but their
economic values diminishes overtime.Each period a portion of a depreciable assets
usefulness expires. Therefore, acorresponding portion of its cost is
recognized as depreciation expense.
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The systematic allocation of the cost of adepreciable asset to expense over the assetuseful life is called depreciation.
The appropriate amount of depreciation
expense is only an estimate. Because wecannot look at a building or a piece ofequipment and determine precisely howmuch of its economic usefulness has expired
during the current period.
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The most widely used method of calculatingdepreciation is Straight line depreciationmethod. Under the straight line approach,an equal portion of the assets cost is
allocated to depreciation expense in everyperiod of the assets estimated useful life.The formula for calculating depreciationexpense by the straight line method is:
Depreciation expense (per period) = Cost of the asset/Estimated usefullife
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Overnight purchased its building for$36000.And Asad owner estimate that itsuseful life is 20 years. Annual depreciationexpense of the building is equal to
(36000/20)=$1800 and per monthdepreciation expense is equal to(1800/12)=$150.
The adjusting entry to record depreciation
on this building for the month of Decemberappears below
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Depreciation Expense; Building
Accumulated Depreciation; Building
To record one months depreciation onbuilding
150
150
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The depreciation expense account willappear in Overnights income statement forDecember, along with other expenses for themonth.
The accumulated depreciation account willappear in the balance sheet as a deductionfrom the balance of the building account asshown below;
OVERNIGHT AUTO SERVICEPartial Balance SheetDecember 31 ,2006
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AssetsCash $14,220Account Receivable 6,600Shop supplies .. 1,000Land ......................................... 52,000Building .......$36,000Less; Accumulated Depreciation... 150 35,850
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Overnight also must record depreciation onits tools and equipment. These assets cost$12,000, and management estimates thatthey will remain in service for about 5 years.
Thus per year depreciation expense is equalto (12000/5)=$2400 and monthlydepreciation expense is equal to(2400/12)=$200.
The adjusting entry to recognize this monthlyexpense is;
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Depreciation Expense; Tools & Equip
Accumulated Depreciation; Tools & Equip
To record one months depreciation on toolsand equipment
200
200
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Similar adjusting entries to recognizedepreciation expense on the building andtools and equipment will be made eachmonth through out the assets useful lives.
Depreciation begins when the assets areplaced in use for business purpose. Oncethese assets have become fully depreciatedthat is, their total cost has been recognized
as depreciation expense, the recognition ofdepreciation will stop.
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LEDGER ACCOUNTSAFTERADJUSTING
ENTRIES
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 115
23
29
31
16,600
4,980
1,000
360
3,100
4,900
16,600
16,24021,220
18,120
19,120
14,220
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 31
1,200
5,400
1,200
6,600
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 4
31
1,400
400
1,400
1,000
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 52,000 52,000
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 36,000 36,000
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 150 150
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 12,000 12,000
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 200 200
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 30,000 30,000
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 2
4
7,000
470
1,400
7,000
7,470
8,870
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 29 1,000
80,800
81,800
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 23 3,100 3,100
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 15
31
4,980
5,400
4,98010,380
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 1
2
360
470
360
830
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 4,900 4,900
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 400 400
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 150 150
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 200 200
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After all the necessary adjusting entries havebeen journalized and posted, an adjustedtrial balance is prepared to prove that theledger is still in balance.
It also provide a complete listing of theaccount balances to be used in preparing thefinancial statements.
The following is the adjusted trial balance of
Overnight Auto Service.
OVERNIGHT AUTO SERVICEAdjusted Trial Balance
December 31, 2006
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Description Debit Balance
$
Credit Balance
$
Cash
Account Receivable
Shop Supplies
Land
Building
Accumulated Depreciation; BuildingTools and Equipment
Accumulated Depreciation; Tools & Equipment
Notes Payable
Account Payable
Asad Capital
Asad Drawing
Repair Service Revenue
Advertising Expense
Wages Expense
Supplies Expense
Depreciation Expense; Building
Depreciation Expense ;tools & equipment
14,220
6,600
1,000
52,000
36,000
12,000
3,100
830
4,900
400
150
200
150
200
30,000
8,870
81,800
10,380
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Standard FormatShare informationStake holderMonetary informationOR It is a set of different report which is provided by a
business to interested parties. OR
It is simply a declaration of what is believed to betrue communicated in terms of monetary unit.
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Financial statements prepared for shorter than oneyear is called interim financial statements.
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1. The Income Statement2. The Statement of Owners Equity3. The Balance Sheet4. The Statement of Cash Flows
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OVERNIGHT AUTO SERVICEI St t t
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Income StatementFor the Month ended December 31 ,2006
Revenue:Repair Service Revenue . $ 10,380
Expenses:Advertising expense . $ 830
Wages Expense 4,900Supplies Expense .. 400Depreciation Expense: Building 150Depreciation Expense: Tools & Equip 200 6,480
Net Income . $3,900Net Income increase owners equity. so owner equity will
increase by an amount of $3900 because of this profit.
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The Statement of Owners Equity summarizethe increases and decreases in the amount ofowners equity during the accounting period.
Increases result from earning net profit and
from additional investment by the owner.Decreases result from losses and from of
assets by the owner
OVERNIGHT AUTO SERVICESt t t f O E it
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Statement of Owners EquityFor the Month ended December 31 ,2006
Asad, Capital, Nov. 30, 2006 .. $ 80,800Add: Net Income for December .. 3,900
Additional investment by owner . 1,000Subtotal .. $ 85,700
Less: Withdrawals by owner .. 3,100Asad, Capital, December 31, 2006 . $ 82,600
The ending balance of owners equity ($82,600) appears inbalance sheet.
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The statement which shows that what business hasand what it has to pay at a particular time is calledbalance sheet.
The statement which list the assets liabilities and
owner equity of a business is called Balance sheet.
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1= Current Assets.The assets utilized or that gives benefits within oneaccounting period.
Examples
Cash , accounts receivable ,Notes receivable ,inventory ,supplies etc.
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Account receivable (A/R):The amounts due from customer.
Example. You have sold 10 marker @ 5 per maker and youhaven't received the amount. so 50 is your accountreceivable
Notes receivable:
A note or bill receivable from some one.
Example. You have given $ 500 to some one and has taken
written promise from him that he will pay the amountafter 90 days.
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Inventory:Merchandise on hand that is goods remaining unsold.
You purchase merchandise of worth $1000 at thestart of the month and on the day of preparing
balance sheet the remaining goods worth $200 soinventory is of $200.
Supplies:
The small materials used in the business operation.
Like markers , papers etc in kardan university
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2=Fixed Assets or Long Term asset:Those assets which we utilize in more than one
accounting period .Land ,building, furniture, machinery ,car etc
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3=Tangible Assets:Those assets which we can touch.OrThose assets which have a physical existence are
called tangible assets.Examples Inventory ,land, car etc
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TYPES OF TANGIBLE ASSETS.1.Depreciable assets.Those assets which have a limited useful life.ExamplesBuilding ,car ,furniture ,machinery etc2.Non depreciable assets.Those assets which have an unlimited useful life.
Example LAND
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1.Current Liability:
The obligation payable with in one accountingperiod.
Examples
Accounts payable , notes payable ,salariespayable ,interest payable, utility bills payable ,accrued expenses etc
Accrued expenses:
The expenses incurred but not yet paid.
Salaries payable, rent payable ,interest payable etc
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Accounts payable:The amounts payable to supplier.
You have purchased goods of worth $400 and youhavent pay for it so 400 is your accounts payable.
Notes payable:A written promise to repay the amount to some one
by a particular date.
Like if you have received $800 from some one andyou have made a written promise that I will pay theamount after 60 days .so $800 is your Notes payable
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2.Long term liability:
The obligations payable in more than oneaccounting period.
Example
Long term loan payable
The residual claim of the owner on the assets of the
OWNERS EQUITY
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The residual claim of the owner on the assets of thebusiness.
Owner equity increases from
1.Investment of cash or other assets by the owner
2.Earnings from profitable operation of the business.
Owner equity decreases from
1.Withdrawl of cash or other assets by the owner
2.Losses from unprofitable operation of the business.
Owner Equity.
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The heading of balance sheet communicate threethings1.The name of the business2.The name of the financial statement
3.Date
OVERNIGHT AUTO SERVICEBalance Sheet
December 31 ,2006
A Li bili i & O i
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Assets Liabilities & Owner s equityCash $ 14,220 Liabilities;Account receivable 6,600 Notes payable . $ 30,000
Supplies 1,000 Accounts payable 8,870Land ... 52,000 Total liabilities $ 38,870Building . 36,000 Owner s equity;Less: Accumulated Dep 150 35,850
Tools & Equipment 12,000Less: Accumulated Dep 200 11,800 Asad Capital 82,600
Total Assets .. $121,470 Total liabilities & O.Eq $121,470
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OVERNIGHT AUTO SERVICE
Statement of Cash FlowsFor the Month Ended December 31 ,2006
Cash flows from operating activities;Cash received from revenue transactions .. $ 4,980
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Cash paid for Advertising expenses (360)Cash paid for wages expenses . (4,900)
Net cash provided (used) by operating activities .. $( 280)Cash flows from investing activities; . 0Cash flows from financing activities;
Cash Invested by Asad, owner 1,000Cash withdrawn by Asad, owner (3,100)
Net cash provided (used) by financing activities $ (2,100)Net increased (decreased) in cash for the month of December $ ( 2,380)
Add: Cash balance, December 1 , 2006 16,600Cash balance on , December 31, 2006 .. $ 14,220
THE CASH BALANCE ON DECEMBER, 31, 2006 APPEARS IN BALANCE SHEET .THE RELATIONSHIP BETWEEN FINANCIAL STATEMENT IS CALLED ARTICULATION.
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The revenues, expenses and drawings accounts arecalled temporary accounts or nominal accounts,Because we close it at the end of every accountingperiod.
Revenues increases owners equity, expenses and
drawing decreases owners equity. The process of transferring the balances of
temporary accounts into the owners capitalaccount is called closing the accounts.
The journal entries made for the purpose of closingthe temporary accounts are called closing entries.
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Revenues and expenses accounts are closedat the end of each accounting period bytransferring their balances to a summaryaccount called income summary.
If the revenues (credit balances) exceed theexpenses (debit balances) the incomesummary account will have a credit balancerepresenting net profit.
Conversely, if expenses exceed revenue, the
income summary account will have debitbalance representing loss.
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Revenue accounts have credit balances,therefore closing a revenue account meanstransferring its credit balance to the incomesummary account.
This transfer is accomplished by a journalentry debiting revenue account in an amountequal to its credit balance, with an offsettingcredit to the income summary account.
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Repair Service Revenue
Income Summary
To close the repair service revenueaccount.
10,380
10,380
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After this closing entry has been posted,repair service revenue will have a zerobalance, whereas income summary will havea credit balance of $10,380.
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Expense accounts have debit balances,therefore closing an expense account meanstransferring its debit balance to the incomesummary account.
This transfer is accomplished by a journalentry crediting expense account in anamount equal to its debit balance, with anoffsetting debit to the income summary
account.
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Income Summary
Advertising Expense
Wages ExpenseSupplies Expense
Depreciation Expense: Building
Depreciation Expense: Tools &Equipment
To close the expense accounts.
6,480
830
4,900400
150
200
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After this closing entry has been posted, theincome summary account has a creditbalance of $3,900 ($10,380-$6,480), and thefive expenses accounts have zero balances.
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The net income (Revenue-Expenses) $3,900(10,380-6,480) earned during Decembercauses the owners equity to increase.
The credit balance of the income summary
account is, therefore transferred to theowners equity account, by debiting incomesummary account for $3,900 and creditingAsad capital account for $3,900.
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Income Summary
Asad Capital
To close the Income summary accountfor December by transferring the netincome to the owners capital account.
3,900
3,900
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After this closing entry has been posted, theincome summary account has a zero balance,and the net income for December will appearas an increase or credit entry in the owners
capital account.
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If the Expenses of a business are more thanits revenue, the income summary accountwill have a debit balance, representing a lossfor the Accounting Period.
In that case, the closing of the incomesummary account requires a debit to ownerscapital account and an offsetting credit toincome summary account.
The owners Equity will of course, be
reduced by the amount of the loss debited tothe capital account.
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Drawings by the owner do not constitute anexpense, the owners drawing account is notclosed into the income summary account,but it is closed directly to the owners
capital account.The following is the closing entry for owners
drawing account,
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GENERAL JOURNAL
Date Account Titles and Explanation Dr
$
Cr
$
2006
Dec 31
Asad Capital
Asad Drawing
To close the owner Drawing account.
3,100
3,100
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After this closing entry has been posted, thedrawing account will have zero balance, andthe amount withdrawn by owner Asad duringDecember will appear as a deduction or debit
entry in his Capital account.
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LEDGERACCOUNTSAFTERCLOSING ENTRIES
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 1
15
23
29
31
16,600
4,980
1,000
360
3,100
4,900
16,600
16,240
21,220
18,120
19,120
14,220
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 31
1,200
5,400
1,200
6,600
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 4
31
1,400
400
1,400
1,000
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 36,000 36,000
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 150 150
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 12,000 12,000
bi C di l
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31 200 200
D t D bit C dit B l
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30 30,000 30,000
D t D bit C dit B l
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 2
4
7,000
470
1,400
7,000
7,470
8,870
D t D bit C dit B l
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Date Debit
$
Credit
$
Balance
$
2006
NOV. 30
DEC. 29
31
31 3,100
1,000
3,900
80,800
81,800
85,700
82,600
D t D bit C dit B l
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 23
31
3,100
3,100
3,100
0
D t D bit C dit B l
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 15
31
31 10,380
4,980
5,400
4,98010,380
0
Date Debit Credit Balance
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 1
2
31
360
470
830
360
830
0
Date Debit Credit Balance
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31
31
4,900
4,900
4,900
0
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Date Debit Credit Balance
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31
31
150
150
150
0
Date Debit Credit Balance
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31
31
200
200
200
0
Date Debit Credit Balance
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Date Debit
$
Credit
$
Balance
$
2006
DEC. 31
31
31
6,480
3,900
10,380 10,380
3,900
0
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1. Close the various revenue accounts by transferring theirbalances into the income summary account.
2. Close the various expense accounts by transferring theirbalances into the income summary account.
3. Close the Income summary account by transferring itsbalance into the owners capital account.
4. Close the owners Drawing account into the ownerscapital account. (The balance of the owners capitalaccount in the ledger will now be the same as the amountof owners equity appearing in the Balance Sheet)
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After the revenue and expense accounts have beenclosed, it is desirable to prepare an after closingtrial balance, which will consist of balance sheetaccounts only.
The after closing trial balance is prepared from the
ledger. The after closing trial balance gives assurance that
the accounts are in balance and ready for therecording of the transactions of the newaccounting period.
The following is the after closing trial balance ofOvernight Auto Service,
OVERNIGHT AUTO SERVICEAfter Closing Trial BalanceDecember 31, 2006
Description Debit Balance
$
Credit Balance
$
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Cash
Account Receivable
Shop Supplies
Land
Building
Accumulated Depreciation; Building
Tools and Equipment
Accumulated Depreciation; Tools & Equipment
Notes Payable
Account Payable
Asad Capital
14,220
6,600
1,000
52,000
36,000
12,000
150
200
30,000
8,870
82,600
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