Accounting principles

Sample Solution

Q1. Three Accounting Principles and Assumptions with Examples

1. Accrual Principle: This principle states that revenues are recognized when earned, regardless of cash receipt, and expenses are recognized when incurred, regardless of cash payment.

Example: A company provides services on credit in December but receives payment in January. The revenue is recognized in December (when earned), and an account receivable is created.

2. Matching Principle: This principle states that expenses incurred to generate revenue should be recognized in the same period as the revenue.

Example: A company pays rent for a year in advance. The rent expense is recorded over the 12-month period (as it matches the related revenue generated), not all at once in the month of payment.

3. Cost Principle: This principle states that assets and liabilities are initially recorded at their historical cost, the amount paid or received to acquire them.

Example: A company purchases office equipment for SAR 5,000. The equipment is recorded in the accounting records at SAR 5,000, not its estimated current market value.

Q2. Journal Entries

1. June 1:

• Debit Cash: SAR 10,000
• Credit Owner's Capital: SAR 10,000

2. June 6:

• Debit Inventory: SAR 6,000
• Credit Accounts Payable: SAR 6,000

3. June 12:

• Debit Inventory: SAR 2,000
• Credit Cash: SAR 2,000

4. June 15:

• Debit Cash: SAR 15,000
• Credit Notes Payable: SAR 15,000

5. June 31:

• Debit Accounts Payable: SAR 4,000
• Credit Cash: SAR 4,000

Q3. Financial Statements

Income Statement:

• Revenue Earned: SAR 72,000
• Less: Expenses
  • Supplies Expense: SAR 3,400
  • Rent Expense: SAR 6,000
  • Wages Expense: SAR 22,000
  • Total Expenses: SAR 31,400
• Net Income: SAR 40,600

Statement of Retained Earnings:

• Beginning Retained Earnings: SAR 11,155
• Add: Net Income: SAR 40,600
• Less: Dividends: SAR 36,000
• Ending Retained Earnings: SAR 15,755

Balance Sheet:

• Assets
  • Cash: SAR 7,000
  • Accounts Receivable: SAR 475
  • Supplies: SAR 2,500
  • Equipment: SAR 17,000
  • Total Assets: SAR 26,975
• Liabilities
  • Accounts Payable: SAR 820 (1,220 - 400)
  • Notes Payable: SAR 15,000
  • Total Liabilities: SAR 15,820
• Shareholders' Equity
  • Common Stock: SAR 10,000
  • Retained Earnings: SAR 15,755
  • Total Shareholders' Equity: SAR 25,755
• Total Liabilities and Shareholders' Equity: SAR 41,575

Note: The ending balance of Accounts Payable is calculated by subtracting the payment made (SAR 4,000) from the original balance (SAR 1,220).