Question

On January 3, 2003, Alemu Haba, an ex-manager of the CBE Finfine Branch, established his own consultancy business. He named his business "AH Consultancy Services". The objective of the business is to render financial consultancy services to clients on a fee basis. The following business activities occurred during the first month of operations of the business (January 3 to January 31, 2003).

1. Alemu deposited $20,000 cash in a bank account in the name of his business - AH Consultancy Services. He has $250,000 cash in his personal bank account with Dashen Bank and $50,000 cash in a safe deposit box at his residence.

2. Alemu transferred furniture worth $30,000 from his home for office purposes by AH Consultancy Services. He also has extra home furniture, residential house and personal car worth $620,000, $800,000 and $360,000, respectively.

3. Alemu purchased office supplies worth $5,000 from various suppliers agreeing to pay the sum in the near future. Two-fifth of the supplies will be used for personal purposes while the remaining is for use by AH. Three-fifth of the liability is arranged to be settled from business cash sources.

4. AH received $20,000 cash for consultancy services it rendered to a cash client.

5. AH paid $3,000 cash for advertising aired through ETV.

6. AH forecasted that services fees in the next two weeks will amount to $5,000.

7. AH received $10,000 additional cash investment from Alemu - its owner.

8. AH rendered consultancy services worth $15,000 to clients promising to pay in the near future.

9. AH sold one of the furniture invested by its owner for $5,000 cash. The furniture had a recorded value of $5,000.

10. AH collected $5,000 cash from clients who received services in item-7 above.

11. AH paid $2,000 cash to suppliers on credit.

12. AH purchased a used car for business purposes. The business paid $8,000 cash for the car. Brokers estimated that the car currently worth only $5,000 and the Inland Revenue assessed the car at $12,000 for property tax purposes.

13. AH borrowed $4,000 cash from Dashen Bank. The loan is repayable over ten months.

14. AH employed an accountant and a secretary for monthly salary of $1,200 and $700, respectively.

15. AH incurred and paid for the following expenses

16. Wages................................................. $6,000

17. Rent.................................................... 4,500

18. Utilities................................................ 1,200

19. Others.................................................. 800

20. AH determined that cost of supplies remained on hand at the end of the current month total $1,300.

21. AH paid $450 cash to Dashen Bank consisting of $400 principal and $50 one month interest on the loan due in January.

22. AH paid its owner $5,000 cash for personal uses (to pay house utility expenses).

Required:

Analyze the above transactions and record them in the accounting records of AH Consultancy Services and

Answer 1

AH Consultancy Services engaged in several transactions during its first month of operations. Cash, assets, liabilities, revenue, and expenses were recorded in the accounting records to reflect the financial activities of the business.

Here is a summary of the transactions and their accounting treatment for AH Consultancy Services:

1. Alemu deposited $20,000 cash into a bank account in the name of AH Consultancy Services. This increases the cash account and creates a corresponding increase in the company's capital.
2. Furniture worth $30,000 was transferred from Alemu's home to the office of AH Consultancy Services. The furniture is recorded as an asset at its fair value.
3. Office supplies worth $5,000 were purchased from various suppliers. Two-fifth of the supplies are for personal use and the remaining is for business use. The liability is recorded and will be settled using a combination of personal and business cash sources.
4. AH received $20,000 in cash from a client for consultancy services rendered. This increases the cash account and revenue is recognized.
5. Advertising expenses of $3,000 were paid in cash.
6. Services fees of $5,000 are expected in the next two weeks and are considered revenue.
7. AH received an additional cash investment of $10,000 from its owner, Alemu.
8. Consultancy services worth $15,000 were rendered to clients on credit. This creates an accounts receivable and revenue is recognized.
9. One of the furniture items was sold for $5,000 in cash. The gain or loss is determined by comparing the selling price with the recorded value of the furniture.
10. $5,000 in cash was collected from clients who received services on credit.
11. $2,000 in cash was paid to suppliers on credit, reducing the accounts payable.
12. A used car was purchased for $8,000 in cash. The car is recorded as an asset at its cost.
13. AH borrowed $4,000 in cash from Dashen Bank, creating a liability.
14. An accountant and a secretary were employed for monthly salaries of $1,200 and $700, respectively. These are recorded as expenses.
15. Various expenses totaling $13,500 were incurred and paid in cash.
16. The cost of supplies remaining on hand at the end of the month is $1,300 and is recorded as an asset.
17. AH made a payment of $450 cash to Dashen Bank, consisting of $400 principal and $50 interest on a loan due in January.
18. AH paid its owner, Alemu, $5,000 in cash for personal uses, decreasing the cash account.