Accounting cycles

Identification and measurement of

transaction and other events

Journalization
 General journal
 Cash receipt journal
 Cash disbursements
Reversing Entries journal
(Optional)  Purchase journal
 Sales journal
 Other special
journal
The Accounting
Cycles

Posting
Post-closing trial General ledger (monthly)
balance Subsidiary ledgers (daily)

Closing Trail balance

(Nominal Accounts) preparation

Statement preparation Adjustments

Income statement
Worksheets Accruals
Retaining Earning
Statement financial position (Optional) Prepayments
Statement of cash flows Estimates item

Adjusted trial balance

 When steps have been completed, the sequence starts over again in the next accounting
period.

Page 1 of 11
 Practical Exercise of Completing Accounting Cycle

Global Company was incorporated on January 1, 2018 with an initial capital of 5,000 shares of
common stock having Birr 20 par value. During the first month of its operations, the company
engaged in following transactions:

Date Transaction
Jan 2: An amount of Birr 36,000 was paid as advance rent for three months.
Jan 3: Paid Birr 60,000 cash on the purchase of equipment costing Birr 80,000. The remaining
amount was recognized as a one year note payable with interest rate of 9%.
Jan 4: Purchased office supplies costing Birr 17,600 on account.
Jan 13: Provided services to its customers and received Birr 28,500 in cash.
Jan 13: Paid the accounts payable on the office supplies purchased on January 4.
Jan 14: Paid wages to its employees for first two weeks of January, aggregating Birr19, 100.
Jan 18: Provided Birr 54,100 worth of services to its customers. They paid Birr32, 900 and
promised to pay the remaining amount.
Jan 23: Received Birr 15,300 from customers for the services provided on January 18.
Jan 25: Received Birr 4,000 as an advance payment from customers.
Jan 26: Purchased office supplies costing Birr 5,200 on account.
Jan 28: Paid wages to its employees for the third and fourth week of January: Birr19, 100.
Jan 31: Paid Birr 5,000 as dividends.
Jan 31: Received electricity bill of Birr 2,470.
Jan 31: Received telephone bill of Birr 1,494.
Jan 31: Miscellaneous expenses paid during the month totaled Birr 3,470
Required:
(a) Record the above transactions on page 10 of a two-column general journal
(b) Post the entries to the accounts in the ledger
(c) Prepare trial balance as of January 30, 2018
(d) Prepare adjusted trial balance based the following information
i. Global company Office supplies having original cost Birr 4,320 were unused
till the end of the period.

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 ii. on January 4, global company prepaid insurance of Birr 36,000 was paid for
the months January, February and March
iii. Global company on January 5, Birr 3,000 worth of service has been provided
to the customer who paid advance amount of Birr 4,000.
iv. Global company signed a one-month note payable in the amount of 20,000 on
January 1. The note requires interest at an annual rate of 9% percent.
(e) Prepare adjusting entries and prepare adjusting trial balance
(f) Based on adjusted trial balance prepare financial statements
(g) Close temporary accounts
(h) Prepare post-closing trial balance

Solution question No 1
The following table shows the two –column journal entries for the above events.
General Journal
Date Description P.R Debit Credit
Jan 1 Cash 100,000 00 00
Share - Capital 100,000
Jan 2 Prepaid Rent 36,000 00
Cash 36,000 00
Jan 3 Equipment 80,000 00
Cash 60,000 00
Notes Payable 20,000 00
Jan 4 Office Supplies 17,600 00
Accounts Payable 17,600 00
Jan 13 Cash 28,500 00
Service Revenue 28,500 00
Jan 13 Accounts Payable 17,600 00
Cash 17,600 00

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Jan 14 Wages Expense 19,100 00
Cash 19,100 00
Jan 18 Cash 32,900 00
Accounts Receivable 21,200 00
Service Revenue 54,100 00
Jan 23 Cash 15,300 00
Accounts Receivable 15,300 00
Jan 25 Cash 4,000 00
Unearned Revenue 4,000 00
Jan 26 Office Supplies 5,200 00
Accounts Payable 5,200 00
Jan 28 Wages Expense 19,100 00
Cash 19,100 00
Jan 31 Dividends 5,000 00
Cash 5,000 00
Jan 31 Electricity Expense 2,470 00
Utilities Payable 2,470 00
Jan 31 Telephone Expense 1,494 00
Utilities Payable 1,494 00
Jan 31 Miscellaneous Expense 3,470 00
Cash 3,470 00
At the end of the period, all the journal for the period are posted to the ledger accounts

1. Posting to ledger

Account: Cash Account No.101

Balance
Date Item Post Debit Credit
Ref Debit Credit

2018
jan 1 1 100,000 0 100,000 00
0
Jan 2 1 36000 00 64000 00
Jan 3 1 60,000 4000 00

Jan 13 1 28,500 0 32,500 00

0
Jan 13 17,600 00 14900 00

Page 4 of 11
Jan 14 19,100 00 (4200) 00

Jan 18 32,900 0 28700 00

0
Jan 23 15,300 0 44000 00
0
Jan 25 4,000 0 48000 00
0
Jan 28 19100 00 28900 00
Jan 31 5000 00 23900 00
3,470 00 20,430 00

Account: Account Receivable Account No. 102

Balance
Date Item P.R Debit Credit Debit Credit

20 21,200 00 21,200 00
18 18
jan
Jan 23 15,300 00 5900 00

Account: Office supplies Account No.104

Page 5 of 11
 Balance
Date Item Post Debit Credit Debit Credit
Ref
2018 4 17,600 00 17,600 00
jan
Jan 26 5,200 00 22800 00

Account: Prepaid rent Account No.105

Balance
Date Item Post. Debit Credit Debit Credit
Ref
2018 2 1 36000 00 36000 00
Jan

Account: Office Equipment Account No.108

Balance
Date Item Post. Debit Credit Debit Credit
Ref
201 3 1 80,000 00 80,000 00
8
Jan

Account: Accounts Payable Account No. 201

Balance
Date Item Post Debit Credit Debit Credit
Ref.
2016 4 2 17,600 00 5,200 00
Jan
Jan 13 2 17,600 00 0 00
Jan 26 5,200 00 5,200 00

Account: Notes Payable Account No. 202

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 Balance
Date Item Post. Debit Credit Debit Credit
Re
2018 3 2 20,000 00 20,000 00
Jan

Utilities Payable Account No. 204

Balance
Date Item Post Debit Credit Debit Credit
Ref
2018 2 2,470 00 2,470 00
Jan 31
Jan 31 2 1,494 00 3964 00
Account: Unearned Revenue Account No. 206
Balance
Date Item P.R Debit Credit Debit Credit

2018 2 4,000 00 4,000 00

Jan 25

Account: Common Stock Account No. 303

Post Balance
Date Item Ref Debit Credit Debit Credit

2018 3 100,000 00 100,000 00

Jan 1

Account: Service Revenue Account No. 401

Balance
Date Item Post Debit Credit Debit Credit
Ref
2018 13 4 28,500 00 28,500 00
Jan
Jan 18 54,100 00 82600 00

Account: Dividend Account No. 304

Page 7 of 11
 Balance
Date Item Post Debit Credit Debit Credit
Ref
2018 31 5000 00 5000 00
Jan 4

Account: Wage Expense Account No. 502

Balance
Date Item Post Debit Credit Debit Credit
Ref.
2018 14 5 19,100 00 19,100 00
Jan
Jan 28 5 19,100 00 38200 00
Account: Miscellaneous Expense Account No. 504
Post Balance
Date Item Ref Debit Credit Debit Credit

2016 31 5 3,470 00 3,470 00

Jan

Account: Electricity Expense Account No. 506

Balance
Date Item P.R Debit Credit Debit Credit

2016 31 5 2,470 00 2,470 00

Jan

Account: Telephone Expense Account No. 508

Balance
Date Item Post Debit Credit
Debit Credit
Ref
2018 31 5 1,494 00 1,494 00
Jan
The ledger accounts step of accounting cycle completes here. The next step is the preparation of
unadjusted trial balance.
2. Unadjusted trail balance
Following is the unadjusted trial balance prepared from the ledger accounts of Global Company.

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 Global Company
Unadjusted Trial Balance
January 31, 2018

Debit Credit
Cash Birr20,430
Accounts Receivable 5,900
Office Supplies 22,800
Prepaid Rent 36,000
Equipment 80,000
Accounts Payable Birr 5,200
Notes Payable 20,000
Utilities Payable 3,964
Unearned Revenue 4,000
Common Stock 100,000
Service Revenue 82,600
Wages Expense 38,200
Miscellaneous Expense 3,470
Electricity Expense 2,470
Telephone Expense 1,494
Dividend 5,000
Total Birr 215,764 Birr 215,764

adjusted trial balance was prepared after posting the adjusting entries of Company A to its
general ledger and calculating new account balances:
Global company
Adjusted Trial Balance
January 31, 2018
Debit Credit
Cash Birr20,430
Accounts Receivable 5,900
Office Supplies 4,320
Prepaid insurance 24,000
Equipment 80,000
Accumulated Depreciation-Equipment Birr1,100
Accounts Payable 5,200
Utilities Payable 3,964
Unearned service Revenue 1,000
Interest Payable 150
Notes Payable 20,000
Common Stock 100,000
Service Revenue 85,600
Wages Expense 38,200

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 Supplies Expense 18,480
Rent Expense 12,000
Miscellaneous Expense 3,470
Electricity Expense 2,470
Telephone Expense 1,494
Depreciation Expense 1,100
Interest Expense 150
Dividend 5,000
Total Birr 217,014 Birr217,014
Temporary accounts include:

1. Closing the revenue accounts—transferring the credit balances in the revenue accounts to
a clearing account called Income Summary.
2. Closing the expense accounts—transferring the debit balances in the expense accounts to a
clearing account called Income Summary.
3. Closing the Income Summary account—transferring the balance of the Income Summary
account to the Retained Earnings account.
4. Closing the Dividends account—transferring the debit balance of the Dividends account to

the Retained Earnings account.

The following example shows the closing entries based on the adjusted trial balance of Global Company.

General journal

Note Date Account Debit Credit

1 Jan 31 Service Revenue 85,600
Income Summary 85,600
2 Jan 31 Income Summary 77,364
Wages Expense 38,200
Supplies Expense 18,480
Rent Expense 12,000
Miscellaneous Expense 3,470
Electricity Expense 2,470
Telephone Expense 1,494
Depreciation Expense 1,100
Interest Expense 150
3 Jan 31 Income Summary 8,236
Retained Earnings 8,236
4 Jan 31 Retained Earnings 5,000
Dividend 5,000

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Post-Closing Trial Balance
The following post-closing trial balance was prepared after posting the closing entries of Global
Company to its general ledger and calculating new account balances:

Global Company
Adjusted Trial Balance
January 31, 2018
Debit Credit
Cash Birr20,430 −
Accounts Receivable 5,900 −
Office Supplies 4,320 −
Prepaid Rent 24,000 −
Equipment 80,000 −
Accumulated Depreciation − Birr 1,100
Accounts Payable − 5,200
Utilities Payable − 3,964
Unearned Revenue − 1,000
Interest Payable − 150
Notes Payable − 20,000
Common Stock − 100,000
Retained Earnings − 3,236
Total Birr134,650 Birr134,650

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