finance in english language
Content
Part one
Introduction – flowchart – analyzes transactions
– classifies accounts
– Journalize – Post – Trial balance
Part two
Adjusting entries – Adjusted trial balance
– Financial statements – Closing entries
– Post closing trial balance
– Sample of accounting voucher

Introduction:
Accounting is the art of recording, summarizing, classifying and reporting financial
transactions and other events of an enterprise.
The following flowchart shows the steps in the accounting cycle. These are the
accounting procedures normally used by enterprises to record transactions and prepare
financial statements
Transactions (١)
Analyze and
Classify (٢)
Journalize (٣)
General Journal
Posting (٤)
General Ledger
Post Closing
Trial Balance
(١٠)
Closing (٩)
(Nominal
Accounts)
Financial
Statement
Preparation
(٨)
Income
Statement
Trial Balance
Preparation
(٥)
Adjusting Entries (٦)
Accruals
Prepayments
Estimated items
Adjusted trial balance (٧)
THE
ACCOUNTING
Below, the flowchart steps have been explained in detail:
١. Transaction:
The processing of accounting data begins with an economic transaction, where two
or more parties engage in an exchange of goods or services for some form of
consideration. Evidence of this happening is the receipt of some form of a source
document. Common examples of such a source document include:
• A sales receipt - this can be in a variety of forms.
• A purchase invoice.
• A debit/credit memorandum.
• A copy of a contract entered into.
• A billing statement.
• A remittance statement.
There are a multitude of source documents, in type, shapes, and format used to record
the significant data. It is these documents, which become the basis for data input to the
accounting processing. But, prior to the actual data entry, the documents must be
subjected to a series of analysis and classification.
٢. Analyze and classify:
٢٫١. Analyze:
This phase of the accounting process includes the application of several of the
accounting principles, namely:
The Entity Concept - This is probably the most basic of all concepts in accounting.
As applied here in this phase of the accounting process, the analysis must determine
that the transaction in question, first relates to the entity in question. If not it must be
rejected and not allowed to continue through the process.
Monetary Concept - In addition the analysis must determine that the transaction can
be measured in terms of a monetary basis. Those transactions, which cannot be
measured in terms of amount (for e.g., Saudi Riyals), are eliminated from further
consideration for inclusion in the accounting process.
Cost Principle - All transactions are recorded at cost and not at current market value.
Cost is determined from the source documents used as evidence of the transaction.
Once past the analysis phase, the transaction is then properly classified in
preparation for entry into the accounting database, commonly using a Chart of
Accounts.
Chart of Accounts - The design of a good accounting system begins with the Chart
of Accounts. This is a list of the accounts, which comprise the particular accounting
system (it is designed with the particular company and its needs for information).
Accounts are grouped according to their relationship in the accounting equation
(i.e., assets, liabilities, owner's equity, revenues and expenses). The numberings
scheme assigns a block of numbers to the respective groups. A typical assignment
of numbers might be as follows:
Assets ١٠٠-١٩٩
Liabilities ٢٠٠-٢٩٩
Owner’s Equity ٣٠٠-٣٩٩
Revenues ٤٠٠-٤٩٩
Expenses ٥٠٠-٥٩٩
The numbering blocks should provide a convenient manner for adding new
accounts without having to renumber the accounts. Sometimes the account numbers
are designed to provide additional information as to location, cost codes, etc. In any
event they assist in arranging the accounts for convenience of financial statement
preparation, account location, and category identification.
The next consideration is that of determining whether this transaction when
recorded in the account will cause the balance of that account to be increased or
decreased. Depending upon the type of account and what side of the accounting
equation it appears, this means it must be reported as a debit or a credit. Of course
the basic rule of having debits and credits equal must be followed. That means each
transaction will require at lease one debit and one credit identity to be recorded
correctly. Finally, a transaction can affect multiple accounts, requiring more than
one debit and/or one credit in order to properly record it in the accounting process.
٣. Journalize:
This step in the accounting cycle represents the first time that the transaction enters
the accounting database. It is the data entry phase. Here the transaction, having been
analyzed and classified, is recorded in the Accounting Voucher.
In entering the transaction, various types of vouchers depending on the type of
organization are used. However, the most commonly used format of an accounting
voucher is attached in Appendix.
Sometimes, accounting vouchers are not prepared and transactions are directly entered
into Journals and this is for this reason that the journal is referred to as the "book of
original entry." The journal can be likened to a diary in which events are recorded in
chronological order of their occurrence. In the accounting process, two types of
journals are used:
٣٫١. General Journal
In the General Journal, transactions are recorded as they were analyzed and
classified. First the event is dated as to when it actually happened. Then the debit
side of the transaction is recorded first by itemizing the account(s) that must be
debited. The amount(s) to be debited are then entered in the column to the left. This
process is continued until all of the debits have been recorded. The recording shifts
to the account(s) to be credited. The recording(s) for the credits are indented to
offset them from the debit recording(s). After recording the account(s) to be
credited, the amounts are then entered into the column to the left of that of the
debits.
If the transaction required only one debit and one credit, this is referred to as a
simple entry. On the other hand, it is requires more than one debit and/or credit; it is
referred to as a compound entry.
٣٫٢. Special Journals
As their name implies, these journals are used to record uniquely classified
types of transactions by use of specially designed journals. They are designed to
meet the needs of the specific entity, which uses them. There is no common format
for their design, as this is determined by the individual entities. However, the most
commonly used special journals are as follows:
• Sales Journals - generally used to record all credit sales of merchandise
inventory items.
• Purchases Journals - generally used to record all credit purchases of
merchandise inventory items.
• Cash Receipts Journals - generally used to record all inflows of cash.
• Cash Payments (Disbursement) Journals - generally used to record all
outflows of cash.
• NOTE: The check register is sometimes used in place of the Cash Receipts
and Cash Payments Journals.
٤. Post:
Posting refers to the process of transferring or transcribing the information
contained in the journal entries to the appropriate accounts in the general ledger.
During this process debits in the journal entry are posted as debits in the ledger, and
credits in the journal entry are posted as credits in the ledger. Along with the debits and
credits, the information transferred includes the date of the journal entry and the
voucher reference. This cross-reference is the audit trail by which a transaction can be
traced from its entrance into the system via the journal/voucher to the final destination
in the general ledger. This is an important part of the processing of accounting data.
General Ledger
The general ledger is the heart of any accounting system. It is the permanent record
of the consequences resulting from the accumulation of transaction throughout the life
of the entity. Each account in the accounting system has its separate page in the general
ledger. In addition each account has its unique identification in the form of an account
number as specified in the Chart of Accounts.
Subsidiary Ledger
An enterprise constantly needs detailed information about its dealings with
individual customers and creditors. To provide this information, companies with
several thousand customers and creditors, use a subsidiary ledger to keep track of
individual balances. Thus a typical merchandising enterprise has subsidiary ledgers
containing accounts with customers (customers’ ledger) and creditors (creditors’
ledger). An account in the general ledger is maintained that summarizes the details in
the accounts receivable and accounts payable ledgers. This summary account in the
general ledger is called a control account, because the summary account controls the
subsidiary ledger.
٥. Trial balance:
Simply defined, a Trial Balance is a list of all of the general ledger accounts having
a balance amount as of that date. It contains the following columns:
• Account Number (from chart of accounts)
• Account Title(s).
• Applicable debit amounts.
• Applicable credit balance.
A trial balance provides a check on the accuracy of the postings, which occurred during
the period by showing that the total debits posted equals the total credits posted. It is
prepared at any time, following the posting of all journal entries. However, it is
routinely prepared at the end of the accounting period, prior to making any adjustments
to the books. Thus, the trial balance is a test of the mathematical equality of debits and
credits after all postings have been completed. Its preparation is essential to the
processing events leading up to the preparation of the financial statements.
٦. Adjusting entries:
Throughout an accounting period, an entity will continue to be engaged in a variety
of economic transactions. Some of those will affect the current period, while some of
them will affect future periods throughout the life of the entity. At the time that they
occur, each of these transactions, are supported by a source document (see step ١
above). If they are applicable to the current period, their flow through the accounting
system is straight forward and without the need for any special handling or
considerations.
However, those transactions, which effect the present and future accounting periods,
will at some future date require special considerations and handling. The special
considerations are caused by absence of a source document, which gives cause to their
existence. Keep in minds that these transaction either happened in a prior period or
have not yet happened The special handling is a continuation of the special
consideration, in that these transaction must be dealt with in a manner which adjusts
their effects in the current period, by means of special journal entries. Many have
already been recorded in the accounting system. What is needed then is to ensure that
their consequences are applied to the proper accounting period. Some of the examples
of adjusting entries are:
• Accruals
• Amortization of prepayments and intangibles
• Deferred revenues and expenses
Also some, balances have to be reclassified from one account to another for the
purpose of proper presentation in the financial statements. Some of the examples of
such transactions are as follows:
• Reclassification of current portion of long-term loan from long term liability
to current liability
• Reclassification of debit balances in creditors account
• Reclassification of credit balances in debtors account
This, then, is accomplished through the use of Adjusting Entries and Reclassifying
٧. Adjusted trial balance:
After all Adjusting Entries and Reclassifying Entries have been journalized and
posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. It
shows the balance of all accounts, including those that have been adjusted, at the end of
the accounting period. The purpose of an adjusted trial balance is to show the effects
of all financial events that have occurred during the accounting period. The financial
statements are usually prepared from this trial balance.
٨. Financial statements:
The following are the basic financial statements, which are prepared at the end of
each accounting period. Each portrays a different representation of the entities financial
status and results of activities. All of them are linked together in a manner, which
presents the financial position and results of economic activities, and therefore all three
must always be presented together.
Income Statement
Income statement:
• Presents the results of economic activities, which occurred during the
specific accounting period.
• Bridges the balance sheet of the previous accounting period with that
of the current accounting period. Therefore, it covers a period of time.
• Develops the net income for the current accounting period. This is used
to reflect the profitability of that period.
• is linked to the balance sheet via the net income amount, which appears
in both of those statements.
Statement of Changes in Owners’ Equity
Presents the changes that have occurred in the owner's equity as a result of the
current period's activities. Therefore its results represent what occurred within a period
of time. It is linked to the balance sheet via the capital account, retained earnings, and
any reserves.
Balance Sheet
Sometimes referred to as the statement of financial position, reports the assets,
liabilities, and owner’s equity of an enterprise at a specific date.


Statement of Cash Flows
The basic purpose of a statement of cash flows is to provide relevant information
about the cash receipts and cash payments of an enterprise during a period. To achieve
this purpose, the statement of cash flows reports the cash effects of:
• Operations during a period
• Investing transactions
• Financing transactions; and
• Net increase or decrease in cash during the period
٩. Closing entries
Closing an account means to "bring the balance to zero". We close what we call
the temporary (or nominal) accounts. In the closing process all of the revenue and
expense account balances (income statement items) are transferred to a clearing or
suspense account called Income Summary (or Income for the year), which is used only
at the end of each accounting period (yearly). Revenues and Expenses are matched in
the Income Summary account and the net result of this matching, which represents the
net income or net loss for the period, is then transferred to an owners’ equity account
i.e., retained earnings. All closing entries are posted to the appropriate general ledger
accounts.
١٠. Post closing trial balance
A trial balance is prepared after all temporary accounts have been closed. The
accounts, which remain open are called real accounts and include: Asset accounts,
Liability accounts and the Capital account. In other words, the balance sheet accounts
remain open.
Practical Session:
Although, an attempt has been made above to explain how an accounting cycle
works, but in order to make the students understand the whole process of flow of
transactions from beginning till the financial statements are produced, a practical session
including the following steps is recommended:
• A chart of accounts should be created keeping in view requirements of a
service enterprise.
• Accounting vouchers must be prepared for transactions affecting all aspects
of the financial statements using the form in Appendix ١.
• Vouchers must be posted to their individual General Ledger Accounts using
the form in Appendix ٢.
• A trial balance should be prepared using the final balances in general ledger.
• Adjusting and reclassifying entries must be prepared and then posted to
general ledger.
• Adjusted trial balance should be prepared.
• Financial statements should be prepared from the adjusted trial balance.
• Closing process should be performed.
• A post closing trial balance should be prepared.
• Opening of a new accounting period in the books should be demonstrated
using the post closing trial balance.
Account No.______________ Account Description____________________________
Voucher
No. Date Description Debit Credit Balance
Debit/(Credit)
XYZ COMPANY
GENERAL LEDGER
Appendix 2
Classification of accounts
Accounting equation  Debits & Credits
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Contents
Part one
Classification of accounts - Debits & Credits
Part two
General Journal - Journalizing
Part three
Part one
Classification of accounts
Two types of accounts:
First: Accounts belong to the Balance Sheet and represent the basic accounting equation.
These accounts are:
١. Assets ٢. Liabilities ٣.Owners Equity
(Assets must be equal to the sum of Liabilities and Owners equity)
١. Assets
Assets are the cash and non cash resources owned by a business and have economic
value, and used in carrying out future services or benefits to the entity using them.
Classification of assets:
- Current assets
Current assets are cash and other types of assets that are reasonably expected
to be converted into cash, sold, or used up during the normal operating year.
Examples of current assets include:
Cash, Bank, Goods, Accounts Receivable, Prepaid expenses, Inventory and
Marketable securities etc.
- Fixed assets
Fixed assets are those assets that are used in the normal operations of the
entity to produce and sell goods or perform services for customers. Fixed assets
are expected to service for a number of years are not for re-sell.
Examples of fixed assets include:
Lands, cars, buildings, equipments, and furniture etc.
- Intangible assets
Intangible assets are those assets that have no physical substance but they
are expected to provide benefits to the entity for several years.
Examples of intangible assets include:
Patents, trade marks, copyrights, goodwill, franchise fees, and trade name.
٢. Liabilities
Liabilities are claims against assets.
Classification of Liabilities:
- Short-term Liabilities
Short-term liabilities are obligations of the entity that are reasonably
expected to be paid or settled in the next year or the normal operating cycle.
Examples of short-term liabilities include:
Short-term notes payable, accounts payable, salaries and wages payable and
other types of accrued liabilities for services received but not yet paid for.
- Long-term Liabilities
Long-term liabilities are those obligations that do not require payment within
the next year or the normal operating cycle. In other words, liabilities not classified
as short-term are reported in the Long-term liabilities section of the balance sheet.
Examples of long-term liabilities include:
Loan, bonds, and any other obligation that mature in a period more than one
year beyond the balance sheet date is reported as long-term.
٣. Owner’s Equity
Owner’s equity represents the owner’s interest in the assets of the entity. It is
equal to total assets minus total liabilities.
There are two main sources of owner’s equity:
(١) Amounts contributed by the owner (Capital) and (٢) Amount earned by the entity
but not yet taken by the owner.
Second. Accounts belong to the Income Statement and involve in the determination of
net income or net loss of a business entity for a specific period of time. These accounts
are:
١. Expenses ٢. Revenues
١. Expenses
Expenses are the cost of assets consumed or services used in the process of earning
revenue in other words; expenses are outflows or other uses of assets resulting from the
sale or delivery of goods or the provision of services by the entity during specific time
period.
Examples of expenses include:
Utility expenses (electric and water), telephone bill expense, rent expense, wages and
salaries expense and depreciation expense etc.
٢. Revenues
Revenues are cash in-flow result from the sale of goods or the rendered of services.
To illustrate the affect (increase & decrease) of a financial transaction on the above
classified accounts, study the following chart:
Basic Accounting Equation
Basic Equation = +
Expanded
Basic Equation + =
Debit / Credit
Effects
You have already learned the basic accounting equation. However, in the above
illustration note the expansion of the basic accounting equation to show the accounts that
comprise owner’s equity besides expenses and revenues with their effect (increase,
decrease) of the debit /credit rules on each type of account.
To student
Please study the above diagram carefully; it will help you understand the
fundamentals of the double-entry system.
To trainer (instructor)
Please give the student example of transaction analysis for a service entity to
illustrate the effect of the financial transaction on the expanded basic equation. For
example:
Transaction (١) Investment by owner. December ١٠, ٢٠٠٢. Saleh started his
workshop by investing SR ١٠٠،٠٠٠/-, he deposited it in the bank as a capital.
Assets
Dr. Cr.
+ ─ _
Expenses
Dr. Cr.
+ ─
Capital
Dr. Cr.
─ +
Revenue
Dr. Cr.
─ +
Liabilities
Dr. Cr.
─ +
Assets Liabilities Owner equity
Assets + Expenses = Liabilities + Revenue + Owner’s equity
Bank Capital
(١) +١٠٠،٠٠٠ + ٠ = ٠ + ٠ + ١٠٠،٠٠٠
Transaction (٢) purchase of equipment for cheque. at December ١٥, ٢٠٠٢. Saleh
purchased a computer for SR ٢٠،٠٠٠ paid by cheque.
Assets + Expenses = Liabilities + Revenue + Owner’s equity
Bank + Computer = ٠ + ٠ + Capital
١٠٠،٠٠٠ (Old balance) ١٠٠،٠٠٠
(٢) -٢٠،٠٠٠ + ٢٠،٠٠٠
New balance
٨٠،٠٠٠ + ٢٠،٠٠٠ = _______
١٠٠،٠٠٠ ١٠٠،٠٠٠

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