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ACCOUNTINGPRINCIPLES
Juruteradalam Masyarakat (MFG4812)
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Prepared by:
Mrs. Nor Asiah YaakubFaculty of Economics & MuamalatUniversity Sains Islam Malaysia
COURSE OUTLINE
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DEFINITION OF ACCOUNTING
Generally accepted definition:“accounting is the process of identifying,measuring, summarizing andcommunicating economic information topermit informed judgments and decisions
by users of the information.”
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PURPOSE OF ACCOUNTING
• Provide useful information to users.
• Provide assistance in decision making.
• Performance evaluation tools.
• Controlling purposes.
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FIELDS IN ACCOUNTING
Accounting
FinancialAccounting
ManagementAccounting
Auditing
AccountingInformation
System
Taxation &Zakat
Public SectorAccounting &
Non profitOrganization
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ACCOUNTING PROFESSION
• Accountants employed by a business firm / non-for-profit organization
• Management Accountants
• Eg: industrial or cost accountants• Certified Management Accountant
(CMA)/Certified Internal Auditor (CIA)
PrivateAccounting
• Accountants and their staff who provideservices on a fee basis
• Individual or Public Accountants• Certified Public Accountant (CPAs)
PublicAccounting
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AccountingProfessional
Bodies
MICPA
MIA
MASB
FRF
ETHICS IN ACCOUNTING
Intergrity
Objectivity
Independence
Confidentiality
Professional competenceand due care
Compliance with technical standards
Professional behavior
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REGULATIONS IN ACCOUNTING
• Companies Act 1965• Section 167
• Section 169
• Ninth Schedule
• Financial Reporting Act 1997
• Accounting Standards
• MASB
• IAS
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• Who want to be an entrepreneur @ businessman?
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TYPES OF BUSINESS
ManufacturingTo change basic inputs into products that are
sold to individual customers.
MerchandisingSells product to customer. Rather than making
the products, they purchase them from otherbusinesses.
Service Provide services rather than products to
customer.
11 TYPES OF BUSINESSORGANIZATION
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SoleProprietorship
•Owned by one individual•Simple to establish•Owner controlled•Limited resources
Partnership
• •Owned by 2 or more•Shared control
•Broader skills andresources
Corporation
(company)
•
•Organized by stateor federal
•Ownership divide byshares of stocks
•Easier to raise funds•No personal liability
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USERS OF ACCOUNTING INFORMATION
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Internal External
PART 2: ACCOUNTINGCYCLE
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BUSINESS TRANSACTIONS
Definition: Business transaction is an economic event or condition
that directly changes an entity's financial condition ordirectly affects its result of operation
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Resources
The Accounting Equation
What are an organization’s resources called?
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Assets
Resources = Sources
The Accounting Equation
What are thesources of the
assets?
Cost ofresources usedin the business
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Assets
Liabilities
Owner’s Equity
Resources = Sources
Cost ofresources usedin the business
Resourcessupplied by
creditors andowners
The Accounting EquationThe Accounting Equation20
ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
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•Assets are the economic resources of a business that
are expected to be of benefit in the future.
•Ex: cash, office, supplies, merchandise, furniture,
land and buildings
•Liabilities are the economic obligation( a debt)
payable to an individual or an organization outside
the business.
•Owner’s Equity - the claim of a business owner to
the assets of the business. Also call capital.
The Accounting Equation22
a.Auni deposits RM25,000 in a bank account forMuslimah Apparel
ASSETS
=OWNER’S Equity
Cash25,000
LIABILITIES
Auni,Capital25,000
The Accounting Equation
23Business Transactions
b. Muslimah Apparel buys land for RM20,000.
ASSETS
=
OWNER’S EQUITY
LIABILITIES
Cash(20,000)
Land20,000+
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ASSETS
=OWNER’S EQUITY
LIABILITIES
c. Muslimah Apparel buys supplies for RM1,350,agreeing to pay the supplier in the near future.
Accounts Payable1,350
Supplies1,350
Business Transactions
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ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash7,500
Fees Earned7,500
d. Muslimah Apparel provided services to customers,earning fees of RM7,500, receiving cash.
Business Transactions26
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash(3,650)
Expenses(3,650)
e. Muslimah Apparel paid: wages, RM2,125; rent,RM800; utilities, RM450; and miscellaneous, RM275.
Business Transactions
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ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash(950)
Accounts Payable(950)
f. Muslimah Apparel pays $950 to creditors on account.
Business Transactions28
ASSETS
=OWNER’S EQUITY
LIABILITIES
g. At the end of the month, the cost of supplies onhand (not yet used) is RM550. RM800 (RM1350-
RM550) was used and is treated as an expense.
Supplies(800)
SuppliesExpenses
(800)
Business Transactions
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ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash(2,000)
Auni, Drawing(2,000)
h. Auni withdraws RM2,000 in cash from the business forpersonal use.
Business Transactions30
Transaction Summary
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash 5,900Supplies 550Land 20,000
Accts. Payable 400
Auni, Capital 25,000Auni , Drawing (2,000)Fees Earned 7,500Wages Expense (2,125)Rent Expense (800)Supplies Expense (800)Utilities Expense (450)Misc. Expense (275)
Balance = 26450
Assets = Liabilities + Owner’s Equity ?
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OWNER’S EQUITY
Effects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased by increased by
NET INCOME
TEST YOUR MIND
• Paid rent for the current month
• Received cash on account from customers
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ASSETS LIABILITY OWNER’S EQUITY
THE ACCOUNTING CYCLE33
Source
Documents
Journal
Ledger Trial BalanceAdjustments
Adjusted
Trial Balance
Financial
Statements
Closing
EntriesPost Closing
Trial Balance
FISCAL YEAR VS CALENDAR YEAR
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Fiscal year
Calendar year
1st day of a month and ends
twelve months later on the
last day of a month.
1st January to 31st December
THE RULES OF DEBITS AND CREDITSTHE RULES OF DEBITS AND CREDITS
• Assets :• Debit => increase
• Credit => decrease
• Liabilities and Owner’s Equity :• Debit => Decrease
• Credit => Increase
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DR CR
36EXPANDED BASIC EQUATION ANDDEBIT/CREDIT RULES AND EFFECTS
EXPANDED BASIC EQUATION ANDDEBIT/CREDIT RULES AND EFFECTS
LiabilitiesAssets Owner’s Equity
= + -
+=
+ -
Assets
Dr. Cr.
+ -
Liabilities
Dr. Cr.
- +
Dr. Cr.
Owner’s
Drawing
+ -
Dr. Cr.
Revenues
- +
Dr. Cr.
Expenses
+ -
Dr. Cr.
Owner’s
Capital
- +
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DOUBLE-ENTRY SYSTEMDOUBLE-ENTRY SYSTEM
each transaction effects at least2 accounts.
total Dr must equal the total Crand the accounting equation willalways stay in balance.
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Assets Liabilities Equity
NORMAL BALANCENORMAL BALANCEEvery account classification has a normal
balance, whether it is a debit or credit.
For that particular account, the oppositeside entries should never exceed thenormal balance.
If an account which normally has a debitbalance but suddenly has creditbalance,(or vice versa) an error mayhave occurred or an unusual situationmay exist.
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Increase and Normal Balance
Dr Cr
ASSETS
DRAWINGS
LIABILITIES
OWNER’S EQUITY
ASSET + EXPENSES = LIABILITIES + EQUITY + REVENUE
Statement of Financial Position
INCOME STATEMENT ACCOUNTS:
EXPENSES REVENUES
THE JOURNALTHE JOURNAL
The journal makes several significantcontributions to the recording process:
1 discloses in one place the completeeffect of a transaction.
2 provides a chronological record oftransactions.
3 helps to prevent or locate errorsbecause the debit and credit amounts
for each entry can be compared.
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JOURNAL41
Name of the journal
Date Particular Folio Debit Credit
SIMPLE AND COMPOUNDJOURNAL ENTRIES
SIMPLE AND COMPOUNDJOURNAL ENTRIES
If an entry involves only two accounts, onedebit and one credit, it is considered asimple entry.
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When three or more accounts are requiredin one journal entry, the entry is referred toas a compound entry.
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THE LEDGERTHE LEDGER
Ledger is a group of accounts in abusiness entity.
A general ledger contains all the assets,liabilities, and owner’s equity accounts.
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GENERALLEDGER
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THE GENERAL LEDGERTHE GENERAL LEDGER
Individual
Liabilities
Interest Payable
Salaries Payable
Accounts Payable
Notes Payable
Individual
Owner’s Equity
Salaries Expense
Fees Earned
J. Lind, Drawing
J. Lind, Capital
Individual
Assets
Equipment
Land
Supplies
Cash
Acc. receivable
Cash
CHARACTERISTIC OF AN ACCOUNT
T account is the simplest form tounderstand the process of recording
1 the title of the account,
2 a left (debit side),
3 a right (credit side).
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Debit (Dr)
Title of Account
Credit (Cr)
Debit balance Credit balance
$ 8,050
46TABULAR SUMMARY COMPARED TO
ACCOUNT FORMTABULAR SUMMARY COMPARED TO
ACCOUNT FORM
Tabular Summary
Cash
$15,000- 7,000
1,2001,500
- 1,700- 250
600- 1,300
Cash
Debit Credit
15,0001,2001,500
600
7,0001,700
1,300250
Balance
Account Form
(Debit)$8,050
18,300 10,250
ACCOUNT47
Name of the account
Debit Credit
Date Particular Folio Total
Date Particular Folio Debit Credit Balance
Name of the account
T-Account
Three Columns Account
Chart of accounts lists the accounts and the accountnumbers which identify their location in the ledger.Accounts are listed in order in which they appear inFinancial Statement
48CHART OF ACCOUNTSCHART OF ACCOUNTS
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INVESTMENT OF CASH BY OWNERINVESTMENT OF CASH BY OWNER
Basic
Analysis
Debit-Credit
Analysis
TransactionOctober 1, Auni invests $10,000 cash in an
advertising venture to be known as the
Muslimah Apparel.
The asset Cash is increased $10,000, and
owner’s equity Auni, Capital is increased
$10,000.
Debits increase assets: debit Cash $10,000.
Credits increase owner’s equity: credit
Auni,
Capital $10,000.
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INVESTMENT OF CASH BY OWNERINVESTMENT OF CASH BY OWNERJOURNAL ENTRY
POSTING
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PAYMENT OF MONTHLY RENTPAYMENT OF MONTHLY RENT
Basic
Analysis
Debit-Credit
Analysis
TransactionOctober 3, office rent for October is paid in
cash, $900.
The expense Rent is increased $900
because the payment pertains only to the
current month; the asset Cash is
decreased $900.
Debits increase expenses: debit Rent
Expense $900. Credits decrease assets:
credit Cash $900.
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PAYMENT OF MONTHLY RENTPAYMENT OF MONTHLY RENT
JOURNAL ENTRY
POSTING
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HIRING OF EMPLOYEESHIRING OF EMPLOYEES
Basic
Analysis
Debit-Credit
Analysis
Transaction
October 9, hire four employees to begin work on
October 15. Each employee is to receive a weeklysalary of $500 for a 5-day work week, payable every
2 weeks -- first payment made on October 26.
A business transaction has not occurred. There is
only an agreement between the employer and the
employees to enter into a business transaction
beginning on October 15.
A debit-credit analysis is not needed because there is
no accounting entry.
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PAYMENT OF SALARIESPAYMENT OF SALARIES
Basic
Analysis
Debit-Credit
Analysis
TransactionOctober 26, employee salaries of $4,000 are owed
and paid in cash. (See October 9 transaction.)
The expense account Salaries Expense is increased
$4,000; the asset Cash is decreased $4,000.
Debits increase expenses: debit Salaries Expense
$4,000. Credits decrease assets: credit Cash $4,000.
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PAYMENT OF SALARIESPAYMENT OF SALARIES
JOURNAL ENTRY
POSTING
THE TRIAL BALANCETHE TRIAL BALANCE
A trial balance is a list of accounts and theirbalances at the end of accounting period.
Purpose:- to prove (check) that the debits equal the credits
in the ledger after posting.- To ensure that no error made in posting the debit
& credit from journal to ledger
The procedures for preparing a trial balanceconsist of:
1 List the account titles and their balances in theledger.
2 Total the debit and credit columns.
3 Prove the equality of the two columns.
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The totaldebits must
equal thetotal credits.
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A TRIAL BALANCEA TRIAL BALANCE
DEPRECIATION
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• Plant Asset – Long lived tangible assets suchas land, building and equipment-used in theoperations of a business.
• Depreciation- The allocation of a plant asset’scost to expense over its useful life.
• TIP: An expense is recorded whenever a goodor service is used. As plant assets are used,the portion of the cost that is used during theperiod is called depreciation.
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• Depreciation is the allocation of the cost of anasset to expense over its useful life in a rationaland systematic manner.
• Depreciation is an estimate rather than a factualmeasurement of the cost that has expired.
• In recording depreciation, Depreciation Expense is debited and a contra asset account,
Accumulated Depreciation , is credited
• The difference between the cost of anydepreciable asset and its related accumulateddepreciation is referred to as the book value ofthe asset.
DEPRECIATION
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DepreciationMethods
Straight Line Method
Reducing Balance Method
DEPRECIATION
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Straight-linedepreciation allocates equal amountof an assets net cost to depreciation during theestimated useful life.
Eg: Equipment costing RM26,000, estimated to have auseful life of 4 years and expected to be sold forRM8,000 at the end of the 4th year.
Formula: Cost - Scrap Value
Estimated useful life
DEPRECIATION
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Calculation: RM26,000 - RM8,000
4 years
= RM4,500 per year
Adjustingentries:
Dr. Depreciation Expense 4,500
Cr. Accumulated Depn. 4,500
DEPRECIATION
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Depreciation Expense
Accumulated Depn.Acc. Eqpt. 4,500
Depn. Exp. 4,500 Assets
Equipment
Bal 25,000
DEPRECIATION
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BOOK VALUE
The statement of financial position shows therelationship between Equipment andaccumulated Depreciation.
The asset’s cost minus accumulated
depreciation.Statement of Financial Position:
Assets:Equipment 26,000Less Accumulated depreciation (4500)Book value 21,500
DEPRECIATION
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Reducing Balance depreciation :
Eg: Equipment costing RM35,000, accumulated depreciationRM5,250. The depreciation rate is 15% on book value.
Formula: Net Book Value x Depreciation rate
(Cost - Accumulated Depn) x Depreciation rate
DEPRECIATION
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Calculation:(RM35,000 - RM5,250) x 15%
= RM4,463 per year
Adjustingentries:
Dr. Depreciation Expense 4,463
Cr. Accumulated Depn. 4,463
DEPRECIATION
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Statement of Financial Position: Assets:Equipment 35,000Less Accumulated depreciation (9713)Book value 25,287
DEPRECIATION
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PREPARING THE FINANCIALSTATEMENTS
• The income statement is prepared from therevenue and expense accounts.
• The owner’s equity statement is derived fromthe owner’s capital and drawing accounts andthe net income (or net loss) from the incomestatement.
• The Statement of Financial Position is thenprepared from the asset and liability accounts andthe ending owner’s capital balance as reported inthe owner’s equity statement.
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Income Statement
Muslimah ApparelIncome Statement
For the Month Ended November 30, 2015
Fees earned $7,500Operating expenses:
Wages expense $2,125Rent expense 800Utilities expense 450Miscellaneous expense 275Supplies expense 800
Total operating expenses 4,450Net income $3,050
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Muslimah ApparelStatement of Owner’s Equity
For the Month Ended November 30, 2015
Statement of Owner’s Equity
Auni, capital, November 1, 2014 $ 0Investment on November 1, 2014 $25,000Net income for November 3,050
$28,050Less withdrawals 2,000Increase in owner’s equity 26,050Auni, capital, November 30, 2015 $26,050
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Muslimah ApparelStatement of Financial Position
November 30, 2015
Balance Sheet
AssetsCash $5,900Supplies 550Land 20,000
Total assets $26,450Liabilities
Accounts payable $ 400Owner’s Equity
Auni, capital 26,050Total liabilities andowner’s equity $26,450
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CLOSING ENTRIES
Temporary /
Nominal Accounts
Permanent /
Real Accounts
All revenue accounts
All expense accounts
Owner’s drawings
All asset accounts
All liability accounts
Owner’s capital account
CL
O
S
E
C
N L
O O
T S
E
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CLOSING ENTRIES
Revenues
Expenses
Income
Summary
Drawings
Owner’s
Capital
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CLOSING ENTRIES
Drawings Dr. Owner’s Capital
Cr. Drawings Account
Income
Summary
Loss
ProfitDr. Income Summary
Cr. Owner’s Capital
Dr. Owner’s Capital
Cr. Income Summary
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POST CLOSING TRIALBALANCE
• The last procedure for a period
• The purpose to make sure that the ledger is inbalance at the beginning of the next period.
• Since all temporary accounts have zero balances,the post closing trial balance will contain onlypermanent Statement of Financial Positionaccounts.
PART 3: ACCOUNTINGFOR MERCHANDISING
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• The activities of service business is different fromthose of a merchandising business.
• The revenue activities of a service business involveproviding services to customers.
• The revenue activities of a merchandising businessinvolve the buying and selling of merchandise.
• When this merchandise is sold, the revenue isreported as sales, and its cost is recognized as anexpense called the cost of merchandise sold.
• Merchandise on hand at the end of anaccounting period is called merchandiseinventory.
NATURE OF MERCHANDISINGBUSINESS
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Merchandising and Inventory
Merchandising involves selling inventory Inventory is usually an important asset
Inventory must be accounted for
periodically or perpetually
Traditional periodic method is often being
replaced by perpetual inventory accounting
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Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. so ld 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
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Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
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Muslimah ApparelMerchandising Chart of Accounts
Statement of Financial Position Accounts
200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable
300 Owner ’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing
312 Income Summary
100 Assets110 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115 Merchandise Inventory116 Office Supplies
117 Prepaid Insurance120 Land
123 Store Equipment124 Accumulated Depreciation—Store Equipment
125 Office Equipment126 Accumulated Depreciation—
Office Equipment
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Muslimah ApparelMerchandising Chart of Accounts
Income Statement Accounts
600 Other Income610 Rent Income611 Interest Income
700 Other Expense710 Interest Expense
400 Revenues410 Sales411 Sales Returns and
Allowances412 Sales Discounts
500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—
Store Equipment523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense
531 Rent Expense532 Depreciation Expense—
Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense
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Income Statement
a)Multiple-Step Form
Contains several sections, subsections and subtotals.
b)Single-Step Form
The total of all expenses is deducted in one step from the
total of all revenues.
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Revenue from sales:Sales $720,185Less:Sales returns and allow. $ 6,140
Sales discounts 5,790 11,930Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
MUSLIMAH APPARELINCOME STATEMENT (MULTIPLE-STEP)
FOR THE YEAR ENDED DECEMBER 31, 2015
Continued
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Operating expenses:Selling expenses:
Sales salaries expense $60,030Advertising expense 10,860Depr. expense–store equip. 3,100Miscellaneous selling expense 630
Total selling expenses $ 74,620Administrative expenses:
Office salaries expense $21,020Rent expense 8,100Depr. expense–off ice equip. 2 ,490Insurance expense 1,910Office supplies expense 610Misc. admin. expenses 760
Total admin. expenses 34,890Total operating expenses 109,510
Income from operations $ 73,440
Continued
86
Other income:Interest revenue $ 3,800Rent revenue 600
Total other income $ 4,400Other expense:
Interest expense 2,440 1,960
Net income $75,400
87
Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600
Total revenues $712,655Expenses:
Cost of merchandise so ld $525,305Selling expenses 74,620
Administrative expenses 34,890Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
MUSLIMAH APPARELINCOME STATEMENT (SINGLE-STEP)
FOR THE YEAR ENDED DECEMBER 31, 2002
88
MUSLIMAH APPARELSTATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Continued
AssetsCurrent assets:
Cash $ 52,950Notes receivable 40,000Accounts receivable 60,880Interest receivable 200Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650
Total current assets $219,310
89
MUSLIMAH APPARELSTATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Property, plant, andequipment:
Land $ 10,000Store equipment $ 27,100
Less accum. depreciation 5,700 21,400
Office equipment $ 15,570Less accum. depreciation 4,720 10,850
Total property, plant, andequipment 42,250
Total assets $261,560
Continued
90
MUSLIMAH APPARELSTATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
LiabilitiesCurrent liabilities:
Accounts payable $ 22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800
Total current liabilities $30,360Long-term liabilities:
Note payable (due 2004) 20,000
Total liabilities $ 50,360Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560