Q1. Discuss three of the accounting principles and assumptions with examples.
Q2. Prepare the journal for each of the following transactions. (Marks 5)
1. On June 1, Sara invested SAR 10,000 cash in her business to start operations.
2. On June 6, Sarah purchased inventory for SAR 6,000 on credit from a supplier.
3. On June 12, Sarah purchased inventory for SAR 2,000 cash from a supplier.
4. On June 15, Sarah borrowed 15,000 from a bank.
5. On June 31, Sarah paid SAR 4,000 cash to the supplier for the inventory purchased on credit earlier in the month.
Q3. Based on the following trial balance for United Co, prepare an income statement, a statement of retained earnings, and a balance sheet. The company made no additional investments in the company during the year.
United Co.
Trial Balance
December 31
Cash SR 7,000
Accounts receivable 475
Supplies 2,500
Equipment 17,000
Accounts payable SR 1220
Common stock 10,000
Retained earnings 11,155
Dividends 36,000
Revenue earned 72,000
Supplies expense 3,400
Rent expense 6,000
Wages expense 22,000
Totals SR94,375 SR94,375
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.
1. June 1:
2. June 6:
3. June 12:
4. June 15:
5. June 31:
Income Statement:
Statement of Retained Earnings:
Balance Sheet:
Note: The ending balance of Accounts Payable is calculated by subtracting the payment made (SAR 4,000) from the original balance (SAR 1,220).