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CHAPTER ( 4 ) CURRENT ASSETS

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Accounting in English …………………………..…… Chapter (4) Current Assets

CHAPTER
(4)
CURRENT ASSETS

1- Accounting for Inventory

 Classes of Inventory
 Methods of Inventory Valuation
 Inventory Systems
2- Accounts Receivable
 Trade Receivable
 Other Receivable
 Valuation of Trade Receivable
 Notes Receivable
3- Commercial Papers
 Cheques
 Promissory Note
 Bill of exchange
4- Securities Investments
 Classification of Securities
 Accounting Treatment of Marketable Securities
 Valuation and Presentation of Marketable Securities
5- Cash and Bank Reconciliation
 Cash Shortage and Overage
 Bank Reconciliation Statement

♦ Questions and Exercises 

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Accounting in English …………………………..…… Chapter (4) Current Assets

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Accounting in English …………………………..…… Chapter (4) Current Assets

CHAPTER
(4)
CURRENT ASSETS
‫ةلوادتمال لوصلأا‬

Current assets represent the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of
business. Current assets include inventory, accounts receivable, marketable
securities, cash, prepaid expenses and other liquid assets that can be readily
converted to cash. In personal finance, current assets are all assets that a
person can readily convert to cash to pay Accrued debts and cover liabilities
without having to sell fixed assets. In other words, current assets are
anything of value that is highly liquid.
1- ACCOUNTING FOR INVENTORY ‫نوزخمال‬
‫ ةبساحم‬A merchandising business or retail store is mainly
involved in
selling goods. The merchandise it has on hand for resale is called inventory.
Inventory is classified as a current asset since it will be converted into cash
within one year. For a manufacturing business, three types of inventories
exist: raw materials, goods in process, and finished goods.
Inventories represent one of the most important elements of a
business. Much of a company's resources are invested in this asset, which is
usually its chief source of revenue. In recent years, accountants have given
much consideration to the primary inventory problems of (1) determining
quantity and (2) determining the value, which are discussed here in this
subject.

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Accounting in English …………………………..…… Chapter (4) Current Assets

A- Classes of inventories ‫نوزخمال فانصأ‬

In a merchandising business at the retail or wholesale level,
inventories consist of goods held for sale in the same form as purchased and
are designated merchandise inventory. A manufacturing business, in
contrast, has several types of inventories: finished goods, goods in process
and raw materials.

(1) Finished Goods ‫ةمات ةعاضب‬

Finished goods are completed products awaiting sale. All costs (i.e.
those for raw materials, direct labor and manufacturing overhead) have been
incurred. Finished parts of assemblies purchased or produced for use in the
completed product, however, are classified as raw materials.

(2) Goods in Process ‫ليغشتلا تحت ةعاضب‬

Goods in process or work in process consists of partly completed

goods. Generally, the cost of raw material, direct labor and manufacturing
overhead applied to date can be identified and included in the cost of goods
in process.

(3) Raw Materials ‫ةيلوأ داوم‬

Raw materials may be obtained directly from natural resources or

from production. Thus, they may be produced by the company
manufacturing the finished product or purchased as the finished product of
another company. Raw materials cost includes the purchase price, freight,
receiving, storage and/or other charges necessary to make the finished goods
ready for use. Factory supplies are auxiliary materials that do not become an
integral part of the finished product, such as cleaning supplies, lubricating
oils and fuels.

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Accounting in English …………………………..…… Chapter (4) Current Assets

B- Inventory Systems ‫نوزخمال درج ةمظنأ‬

The two principal systems for determining the inventory quantities
on hand are the periodic system and the perpetual system. Both systems may
be used simultaneously by companies with different classes of inventory.
(1) Periodic inventory system ‫يرودال درجال ماظن‬
Under a periodic inventory system, no entries are made to the
inventory account during the period. Thus, acquisitions of inventory goods
are debited to "Purchases" while issuances are not recorded, so that at any
point of time the balance in the inventory account reflects the amount of the
beginning of the period. At the end of each accounting period, the cost of
inventory (unsold units) is determined by counting units of each product on
hand, multiplying the count for each product by its cost, and adding costs of
various products. Cost of goods sold (CGS) is a residual amount obtained by
subtracting the ending inventory from the sum of beginning inventory and
purchases.
♦ Example:
The balance of inventory as of Dec, 31, 2011 is IQD 6000000 For
Zain Company. The total amount of purchases on account is IQD 54000000.
In June, 30, 2012 the inventory is counted and priced, its value is IQD
10000000. The sales for the period are IQD 75000000 on credit.
Required: Record the transactions in the general Journal of Zain’s
Company if this Company used a periodic inventory system.
Find gross profit for that company by preparing the first part of
income statement.
♦ Entries:
Date particulars Debit Credit
Jan.- June 2012 Purchases A/c Dr. 54000000
To Accounts payable A/c 54000000
Jan.- June 2012 Accounts receivable A/c Dr. 75000000
To Sales A/c 75000000
th
30 , June, Ending inventory A/c Dr. 10000000
2012 To Income summary 10000000

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Income statement
Income statement of Zain’s company
for the period ended…………..
Particulars IQD IQD
Sales 75000000
Less: cost of goods sold
Beginning inventory 6000000
+ Cost of purchases 54000000
Cost of goods available for sale 60000000
less: Ending inventory (10000000) (50000000)
Gross profit 25000000

(2) Perpetual inventory system ‫رمتسمال درجال ماظن‬

Under the perpetual inventory system, a continuous record is
maintained of items entering into and issued from inventory. The balance in
the inventory account at any time reveals the inventory that should be on
hand. Furthermore, cost of goods sold can be directly obtained from the
inventory records.
In other words, the perpetual inventory is an inventory system in
which an individual record is kept for each product of the units on hand at
the beginning, the units purchased, the units sold, and the new balance after
each purchase or sale.

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 Accounting in English …………………………..…… Chapter (4) Current Assets

When the company uses a perpetual inventory system, the entries are as
follow:
No Particulars Dr. Cr.
IQD IQD
1 ▪ The company purchased goods, the entry is:
Stores (Inventory) control A/c Dr. xxx
To accounts payable A/c xxx
(Purchase goods on credit)
2 ▪ The company sold goods, the entry is:
Cost of goods sold A/c Dr. xxx
To stores (Inventory) control A/c xxx
3 Accounts receivables A/c Dr. xxx
To Sales revenues A/c xxx
(Sell goods on credit)
4 Sales returns and allowances A/c Dr. xxx
To accounts receivables A/c xxx
(Return goods sold on credit)
5 Accounts payable A/c Dr. xxx
To Purchases returns and allowances A/c xxx
(Return goods purchased on credit)

Exercise (1)
The following transactions are incurred in books of Khalid Company
during the year 2012:-
st
(1) The balance of inventory at 1 January 2012 is IQD 100000 (5000 units
for IQD 20 for per unit).
(2) On 5/2 bought goods on credit from Mazen for IQD 120000 (6000 units
for IQD 20 for per unit).
(3) On 10/2 return some of goods which purchased from Mazen its value
IQD 10000 (500 units, the cost of unit IQD 20).
(4) On 3/8 sold goods on credit to Marwan stores for IQD 320000 (8000
units cost of unit IQD 20).

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Accounting in English …………………………..…… Chapter (4) Current Assets

(5) On 15/8 Marwan stores return goods valued IQD 40000 (1000 units, cost
of unit IQD 20) .
(6) )On 11/12 bought goods by cheque valued IQD 60000 ( 3000 units for
price IQD 20 for per units).
Required :-Record the transactions in the general journal of Khalid Co.
assume:
(1) The company used a periodic inventory system.
(2) The company used a perpetual inventory system
Solution:
♦ Periodic inventory system
Date Particulars Dr. Cr.
IQD IQD
5/2 Purchases A/c Dr. 120000
To Accounts Payable(Mazen)A/c 120000
10/2 Accounts Payable(Mazen) A/c Dr. 10000
To Purchases Returns A/c 10000
3/8 No Entry 160000 160000
3/8 Accounts Receivable (Marwan) A/c Dr. 320000
To Sales A/c 320000
15/8 No Entry 20000 20000
15/8 Sales Returns A/c Dr. 40000
To Accounts Receivable (Marwan) A/c 40000
11/12 Purchases A/c Dr. 60000
To Bank A/c 60000

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Perpetual inventory system

Date Particulars Dr. IQD Cr. IQD
5/2 Stores(Inventory) Control A/c Dr. 120000
To Accounts Payable (Mazen) A/c 120000
10/2 Accounts Payable(Mazen) A/c Dr. 10000
To Stores(Inventory)Control A/c 10000
3/8 Cost of goods Sold A/c Dr. 160000
To Stores(Inventory)Control A/c 160000
3/8 Accounts Receivable (Marwan) A/c Dr. 320000
To Sales A/c 320000
15/8 Stores(Inventory)Control A/c Dr. 20000
To Cost of goods Sold A/c 20000
15/8 Sales Returns A/c Dr. 40000
To Accounts Receivable (Marwan) 40000
A/c
11/12 Stores(Inventory) Control 60000
To Bank A/c 60000

C- Methods of Inventory Valuation ‫نوزخمال مييقت قرط‬

There are various methods of determining the value of inventory
when identical goods are acquired at different time’s prices. The methods
used for evaluation of the inventory are cost flow. The concept of a cost
flow refers to the entire flow of costs through the system, from purchase or
production of goods to their sale. The main cost flow methods are: first-in,
first-out (FIFO), last-in, first-out (LIFO), and weighted average and specific
identification.

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:
The following data will be used to illustrate the first three methods:
Date/Type Units Cost per Unit IQD Total Cost
IQD
Jan. 1 Inventory 150 8 1200
Feb. 20 : Purchases 200 9 1800
Apr. 12 Purchases 250 10 2500
Sept. 20 Purchases 200 11 2200
Goods available for 800
7700 sale

Assume that the physical inventory on December 31 is 430 units.

(1) First-In, First-Out (FIFO) Method ‫لاوأ جرخي لاوأ دري ام ةقيرط‬
This method assumes that merchandise is sold in the order of its
receipt.

♦ Example:
Under the FIFO method, merchandise on hand is considered to be
that which was most recently received .Hence, year-end inventory of 430
units is valued as follow:
Particulars Calculation IQD
▪Last purchase (Sept.20) 200 units × IQD 11 2200
▪Next most recent purchase (Apr.12) 230 units × IQD 10 2300
Total 430 4500

The FIFO method really turns out to be first-price-in, first-price-out.

Hence, cost of goods sold is based on the older costs. Ending inventory is
reflected at the latest costs.

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Accounting in English …………………………..…… Chapter (4) Current Assets

(2) Last-In First-Out (LIFO) Method ‫لاوأ جرخي اريخأ دري ام ةقيرط‬
In this method we assume that goods are sold in the reverse order of
their acquisition.

♦ Example:
Under the LIFO method, ending inventory is reflected at the
beginning costs of the purchases made. Therefore, cost of goods sold is
based upon the most recent costs. The year-end inventory is computed as
follows:
Particulars Calculation IQD
Initial purchase (Jan. 1) 150 units@ IQD 8 1200
Next purchase (Feb. 20) 200 units@ IQD 9 1800
Next later purchase (Apr. 12) 80 units @ IQD 10 800
Total 430 units 3800

LIFO has two advantages over FIFO. First, LIFO matches most
recent costs with current sales. Therefore, in a rising cost spiral net income
and thus tax would be reduced. Second, LIFO results in a more accurate
measurement of net income in an inflationary period because current costs
are matched against current revenue.

(3) Weighted – Average Method ‫نوزومال لدعمال ةقيرط‬

To obtain a weighted-average unit cost, the total cost of goods
available for sale is divided by the total units available for sale. This average
unit cost is then used to determine inventory and cost of goods sold. The
advantage of the method is that costs are assigned equally to both inventory
and goods sold.

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:
The average unit cost is computed as follows:
Cost per unit = Cost of goods available ÷Unit available =
IQD 7700 ÷800 = 9.63 IQD
The value of the ending inventory is therefore:
430 units ×IQD 9.63 = IQD 4141
Compares the results of the three methods discussed above in terms
of ending inventory and cost of goods sold. It should be remembered that:
Cost of goods available for sale - Ending inventory = Cost of goods Sold
The tabulated results of these three methods reveal the following
comparisons:
Particulars FIFO LIFO Weighted
Average
Cost of goods available for sale 7700 7700 7700
Less: Ending inventory, Dec.31 (3800) (4141)
(4500) 3900 3559
Cost of goods Sold 3200

It is to be noted that if the ending inventory is overstated, then the

cost of goods sold will be understated income overstated. On the other side,
if the ending inventory is understated, then the cost of goods is overstated
and net income understated. It is thus evident that the method selected can
have a material effect upon the entity's net income and related tax. It also
has an effect upon the balance sheet in term of the inventory valuation.
Exercise (2)
The beginning inventory and various purchases of product (B) were
as follows:
Date Type Units Cost per unit IQD
January.1 Balance 8 10
March.5 Purchase 12 11
June.20 Purchase 16 12
Aug.20 Purchase 15 13
Nov.1 Purchase 18 14

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Accounting in English …………………………..…… Chapter (4) Current Assets

An inventory count under the periodic system disclosed that (30)

units of product (B) were on hand.
Required: Determine the ending inventory cost by (a) First in-first-out (b)
Last in- first-out (c) Weighted average.
(a) FIFO
Particulars Calculation IQD
Purchase 1.Nov. 18 units @ IQD 14 IQD 252
Purchase 20. Aug. 12 units @ IQD 13 IQD 156
Total 30 units IQD 408
(b) LIFO
Particulars Calculation IQD
Jan.1 Balance 8 units @ IQD 10 IQD
March. 5 80
June 9 12 units @ IQD 11 IQD
Total 132 10 units @ IQD 12
IQD 120
30 IQD332
(c) Weighted average
Date Type Units Cost per unit IQD Cost IQD
January.1 Balance 8 10 IQD 80
March.5 Purchase 12 11 IQD 132
June.20 Purchase 16 12 IQD 192
Aug.20 Purchase 15 13 IQD 195
Nov.1 Purchase 18 14 IQD 252
Total 69 IQD 851
The average of cost per unit = IQD 851 / 69 = IQD 12.33
The cost on ending inventory is calculated as follow:
30 units @ IQD 12.33 = IQD 370

(4) Specific Identification ‫صاخال زييمتلا ةقيرط‬

A fourth method identifies the actual costs by reference to the
specific invoices. It is often used when the cost per unit is very high.

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:
Particulars Calculation IQD
Purchase invoice #1,416(Feb. 20) 180 units x IQD 9
Purchase invoice #1,453 (Apr. 12) 1620 130 units x IQD 10
Purchase invoice #1,498 (Sep. 20) 1300 120 units x IQD 11
Total 1320
430 4240

(5) Lower of Cost or Market Method ‫لقا امهيأ قوسلا رعس وأ ةفلكلا‬
‫ ةقيرط‬Inventories are generally estimated at lower - of - cost - or
- market
(LCM) as an application of conservatism constraint.
A conservative means of valuing inventory is derived from the use
of the lower of cost or market method. The decline in inventory value is
reflected as a loss for the period; regardless of the fact that the inventory has
not been sold. Under the method, the lower of the unit cost (as determined
under FIFO or weighted average) or market price (current replacement cost)
of the item is used. The tax law not allows the use of this approach in
conjunction with the LIFO method. Increases in value of inventory are not
shown since this would violate the conservatism principle.
The lower of cost or market rule is also applicable when the
inventory consists of separate lots. Assume the following data:

Lot Quantity Unit Total Lower of Cost

Unit in Units Cost Replacem Total Replacement or Market
ent Cost Cost Cost Value
W 200 7.0 7.50 1400 1500 1400
X 250 9.00 10.00 2250 2500 2250
Y 300 10.00 9.00 3000 2700 2700
Z 400 11.00 12.00 4400 4800 4400
Total 11050 11500 10750

If the lower of cost or market rule is applied on an item-by-item

basis, inventory would be valued at 10750. However, an alternative means
of applying the rule is to take the lower of the total cost or total market

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Accounting in English …………………………..…… Chapter (4) Current Assets

value of the inventory. In this case, inventory would be reflected at IQD

11050. A third alternative approach is to apply the lower of cost or market
value concept to the categories of inventory rather than individual items.

(6) Gross Profit Method ‫يلامجلإا حبرلا ةقيرط‬

Under, the method, the expected gross profit rate (gross profit to net
sales) for the period is used. The ending inventory can be computed by
preparing a partial income statement starting with sales and ending with
gross profit. The amounts for the beginning inventory, net purchases, and
net sales are entered in the partial income statement.
The gross profit method can be used to estimate the inventory at the
end of an interim period (e.g., quarterly, monthly). The method can also be
used to estimate the inventory at the date of a fire for insurance
reimbursement.

♦ Example:
Assume that the beginning inventory is IQD 15000, net purchases
are IQD 90000, and net sales are IQD 200000. Gross profit rate has been
running 60 percent of net sales.
Income Statement (partial)
Particulars IQD IQD
Net Sales 200000
Less: Cost of Goods Sold:
Beginning Inventory 15000
Net Purchases 90000
Cost of Goods Available 105000
Less: Ending Inventory ?
Cost of Goods Sold 80,000
Gross Profit on Sales (60% x 200000) 120000

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Accounting in English …………………………..…… Chapter (4) Current Assets

Since cost of goods available less ending inventory is equal to cost

of goods sold, the ending inventory must be IQD 25000. The proof is:
Cost of Goods Available - Ending Inventory = Cost of Goods Sold
105000 - 25000 = IQD 80000
(7) Retail Method ‫ةئزجتلا ةقيرط‬
Mainly used by department stores and other types of retail
establishments, the retail method is based on the relationship between the
cost of the goods available for sale and the retail price of such goods. The
ending inventory at retail is the difference between the retail prices of the
goods available for sale less the sales for the period. The inventory is
converted from retail to cost based upon the ratio of cost to selling price.
♦ Example:
Cost Retail
Merchandise Inventory, December 1 45000 60000
Purchases 50000 68000
Merchandise Available for Sale 95000 128000
Sales for December 100000
Merchandise Inventory, December 31, at retail 28000
Merchandise Inventory, December 31, at cost 20776*

* Ratio = Cost ÷ Retail = 95000 ÷128000 = 74.2%

28000 x 74.2% = 20776
The method is beneficial in that it provides inventory figures for
interim reporting and assists in detecting inventory shortages. However, a
complication may arise in practice, if frequent markups markdowns modify
the initially established sales prices.
The topics of purchase discounts, purchase returns and allowances,
and transportation have already been discussed in previous chapter of this
book.

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Accounting in English …………………………..…… Chapter (4) Current Assets

2- ACCOUNTS RECEIVABLE ‫ةنيدملا ممذال تاباسح‬

The term accounts receivable generally denotes ( ‫ينعي‬، ‫ي ى ع يي‬
) all claims involving a future inflow of cash. These accounts receivable
result from business transactions involving sales of goods and services,
loans and miscellaneous ( ‫يىونتم‬، ‫ )تيت‬claims. Accounts receivable are
representing as amounts due to the firm in exchange for goods or services
provided.
A- Trade Accounts Receivable ‫ةيراجتال ممذال‬
Trade receivables represent the sale of goods and services in the
normal course of business operations and account for the major portion of a
firm's revenue-producing activities. The open account, or trade account,
created by a transaction between business concerns is generally unsecured
(an informal arrangement rather than a legal agreement) and non-
interest-bearing.
Trade receivables sometimes take the form of commercial credit
instruments such as promissory notes or time drafts. Since these are signed
agreements, a measure of legal commitment is provided and the holder may
borrow against them.

B- Other Receivables ‫ىرخلأا ممذال‬

Revenue is sometimes generated from sources other than trade
receivables. Among these are short-term advances to customers or
subcontractors, insurance claims, claims for rebates ( ‫ )تاليزنت‬on taxes or
other overpayments, sale of plant and equipment and accruals of interest,
rent, royalties, etc. Such receivables are properly classified as current assets
when collection is expected within one year and as other assets or
miscellaneous assets if a longer collection period is anticipated.

C- Valuation Trade Receivables ‫ةيراجتال ممذال مييقت‬

Trade receivables are generally recognized at the time goods are sold
and title passes, or when the service provided is actually performed. The
valuation placed on the receivables depends on the amount due, the time of
collection and the probability of collection.

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Accounting in English …………………………..…… Chapter (4) Current Assets

♦ determining the amount due ‫قحتسمال غلبمال ديدحت‬

The amount actually paid by the customer often includes a variety of
charges and discounts which the seller may impose on the quoted price.
(1) Trade discounts represent the difference between the gross or
recommended list price and the net price to the buyer before other discounts
and charges. The receivable and resulting revenue are both recorded at the
net price.

(2) Cash discounts are offered as an incentive for prompt payment. They
represent the difference between the cash price and the amount realized.

♦ Example:
When the Sincerely Yours Greeting Card Company shipped Cards
Unlimited's IQD 1100000 order on May 1, its invoice carried the terms
2/10, n/30. Taking advantage of the cash discount, Cards Unlimited remitted
IQD 539000 (IQD 1100000 – IQD 550000 – IQD 11000) on May 8. The
additional 2% discount represents the saving of an effective interest rate of
36.7% per annum to the buyer.

The seller may record cash discounts as they are taken or by

establishing a system for anticipating them. The latter method more closely
records receivables and revenues at their net realizable amounts. When cash
discounts are anticipated and the customer pays after the discount period,
the allowance account is offset by a credit to Sales Discounts Forfeited.
♦ Example:
Suppose that Sincerely Yours records cash discounts when they are
taken. The accounting entry on May 1 reflects the gross amount (or the
amount after trade discount):
Date Particulars Dr. IQD Cr. IQD
May 1 Accounts Receivable A/c Dr. 550000
To Sales 550000

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Accounting in English …………………………..…… Chapter (4) Current Assets

When Cards Unlimited payment is received on May 8, the entry is

Date Particulars Dr. IQD Cr. IQD
May 8 Cash A/c Dr. 539000
Cash Discount A/c Dr. 11000
To Accounts Receivable 550000
If instead, Sincerely Yours followed the practice of anticipating cash
discounts, the entries might have been
Date Particulars Dr. IQD Cr. IQD
May 1 Accounts Receivable A/c Dr. 550000
To Sales 539000
To Allowance for Cash Discounts 11000
May 8 Cash A/c Dr. 539000
Allowance for Cash Discounts A/c Dr. 11000
To Accounts Receivable A/c 550000

(3) Sales returns and allowances recognize the probability that some
merchandise will be returned or that an adjustment will be made on sales
price.
♦ Example:
The Sincerely Yours Greeting Card Company knows that its sales
returns average 5% of accounts receivable at the end of any period. At the
end of May, the following entry is made to adjust IQD 500000 in Accrued
trade receivables.
Date Particulars Dr. Cr.
Sales Returns and Allowances A/c Dr. 25000
To Allowance for Sales Returns and 25000
Allowances A/c

Thus restating its receivables at their net realizable amount.

♦ Time of collection ‫ليصحتلا تقو‬
It is generally acknowledged that a given amount of money is worth
less today than a year from now. Therefore, when it is known that a

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Accounting in English …………………………..…… Chapter (4) Current Assets

receivable will not be collected for a long period of time and no interest is
being charged, it is customary to assign a present value to that account
based on an appropriate rate of interest.
♦ Example:
If a receivable for IQD 3180000 is to be Accrued for an entire year
and money is worth 6% per annum, the entry at the time of sale would be:
Date Particulars Dr. Cr
Accounts Receivable A/c Dr. 3180000
To Sales A/c 3000000
To Interest Income A/c 180000

♦ Probability of collection ‫ليصحتلا ةيلامتحا‬

While the probability of any receivable being ultimately
uncollectible is very low, it is a necessary consideration with respect to
valuation accuracy ( ‫قد‬، ‫)طبض‬. Uncollectibles are estimated to prevent
an overstatement of assets and revenues; the estimate serves to reduce
gross receivables to an approximation of the net realizable value of
short-term funds due from customers.
The valuation account carries a credit balance and is variously titled
Allowance for Doubtful Accounts or Allowance for Uncollectible Accounts.
On the income statement, the estimated allowance may be shown as a contra
asset reducing gross sales, but is more often included as an operating
expense or other expense representing a failure of management.
The two principal methods for estimating uncollectibles are an
estimate based on a percentage of sales and an estimate based on an analysis
of receivables at the end of the accounting period. Uncollectibles may also
be recognized on a direct write-off basis. Finally, the possibility does exist
that some accounts deemed ( ‫ )ربتعي‬uncollectible and written off
may eventually be collected.

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Accounting in English …………………………..…… Chapter (4) Current Assets

(1) Estimate based on sales ‫تاعيبمال ساسأ ىلع ريدقتلا‬

When the percentage of sales method is used, the seller examines the
relationship between credit sales and uncollectible in past periods to derive a
percentage applicable to credit sales in the current period. This method
attempts to match costs and revenues in each period. It assumes a fairly
stable relationship between credit sales and uncollectible and provides a
basis for estimation which is in essence an average reflecting past
experience. Since this method relies heavily on past experience, it is
important to test the adequacy of the established percentage on a periodic
basis to allow for any changes in business conditions.
♦ Example:
The Paradise Company found that uncollectible in 2010 and 2011
averaged 3% of credit sales in each year. Using this percentage to estimate
uncollectible on first quarter 2012 credit sales of IQD 1000000, the journal
entry is:
Date Particulars Dr. IQD Cr. IQD
Provision for Doubtful Accounts A/c Dr. 30000
To Allowance for Doubtful
Accounts A/c 30000
(To record provision for doubtful
accounts in the first quarter based on 3%
of IQD 1000000 in sales).

(2) Estimate based on accounts receivable ‫ةنيدمال ممذال ساسأ ىلع ريدقتلا‬
This method of estimating uncollectible depends on an analysis of
receivables by age group and probability of collection. It assumes that there
is a strong relationship between the age of a receivable and its eventual
collection. It has the advantage of identifying specific accounts in need of
special attention. The procedure is to prepare an aged trial balance at the end

17
Accounting in English …………………………..…… Chapter (4) Current Assets

of the accounting period, classifying the Accrued amounts according to

whether the account is not due or past due, based on varying lengths of time.
♦ Example:
The Rafidein Company has asked its accountant to prepare an aged
trial balance of accounts receivable as a basis for estimating the amount of
its uncollectible accounts. It is presented below.
The Rafidein Company
Aged Trial Balance December 31, 2011
(Amounts in IQD Thousands)

Not Yet Past-Due Days

Customer Amount Due Under 30 31-60 61-90 91-120 121- Over

180 180
Brought 601000 359600 79700 58500 48600 24800 9900 19900
forward
Adnan 1600 1500 100
Bassim 300 300
Bassil 400 400
Kamil 200 100 100
Kassim 1500 1300 200
Totals 605000 360000 80000 60000 50000 25000 10000 20000

Once the amount of receivables has been determined for each of the
aging categories, experience percentages are applied to arrive at the
estimated uncollectible amount. Following is the schedule prepared by the
accountant for the Rafidein Company.

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Accounting in English …………………………..…… Chapter (4) Current Assets

The Rafidein Company

Estimation of Uncollectible Receivables
December 31, 2011
Classification Balances Uncollectible Estimated ncollectible
IQD % Amount IQD
Not yet due 360000 2 7200
Under 30 days past due 80000 5 4000
31 to 60 days past due 60000 6000
10 61 to 90 days past due 50000 7500
15 91 to 120 days past due 25000 5000
20 121 to 180 days past due 10000 4500
45 Over 180 days past due 20000 15000
75 49200
Totals 605000

It is important to note that actual write-off of uncollectibles rarely

agrees with the balance in the allowance account. If the differences are
nominal, it is not necessary to change the balance. Major differences,
however, require charges to the current period's Uncollectible Accounts
Expense or a similar account before computing extraordinary items. They
should not be recorded as extraordinary items or prior period adjustments.

(3) Direct write-off method ‫رشابمال بطشلا ةقيرط‬

Under the direct write-off method, bad debts are recorded only
when specific accounts are determined to be definitely uncollectible. Losses
are recorded by crediting Accounts Receivable and debiting Bad Debts
Expense.

(4) Collection of receivables previously written- off ‫اقباس ةبوطشمال‬

‫ ممذلا ليصحت‬When a firm uses the allowance method
for estimating
uncollectibles, the actual write-off of a receivable is a charge to Allowance
for Doubtful Accounts and a credit to Accounts Receivable. If the firm uses
the direct charge-off method, the charge is to Bad Debt Expense and a credit
to Accounts Receivable.

18
Accounting in English …………………………..…… Chapter (4) Current Assets

D- Notes Receivable ‫ضبقال قاروأ‬

For accounting purposes, the term notes receivable refers to
promissory notes, bills of exchange or trade acceptances. Notes receivable
are distinguished by the fact that they are written contractual arrangements
for the payment of a specific amount of money, generally plus interest, at a
stated time. They are usually negotiable or transferable instruments which
enable the holder to use them for cash generation in much the same way as
is done with accounts receivable.
▪ Valuation of notes receivable ‫ضبقلا قاروأ مييقت‬
A note is generally recorded at its face value. However, when no
interest rate is specified, the face amount of a note is assumed to include
some provision for interest. Such non-interest-bearing notes are recorded at
face value less an interest charge based on a percentage that is assumed to
be reasonable. The Discount on Notes Receivable is taken into income over
the life of the note.
♦ Example:
A one-year note with a face value of IQD 26500 and no stated
interest rate would be recorded as follows, using 6% as a reasonable rate of
interest.
Date Particulars Dr. Cr.
(1) At acquisition ( ‫)ءانتقلاا دنع‬
Notes Receivable A/c Dr. 26500
To Discount on Notes Receivable A/c 1500
To Sales A/c 25000
(2) Monthly entry to record interest earned.
Discount on Notes Receivable A/c Dr. 125
To Interest Earned A/c 125
(3) At maturity ( ‫)قاقحتسلاا دنع‬
Cash A/c Dr. 26500
To Notes Receivable A/c 26500

18
Accounting in English …………………………..…… Chapter (4) Current Assets

▪ Discounting notes receivable ‫ضبقال قاروأ مصخ‬

Notes receivable may be sold or discounted. When a note is sold to
a bank or finance company without recourse, the seller assumes no future
liability should the maker of the note default. Discounting, on the other
hand, is usually done on a recourse basis (i.e. money is borrowed using the
note as collateral and the borrower, who endorses the note, becomes
contingently liable should the maker default). The proceeds or cash received
when a note is discounted may be computed in one of two ways:

(1) The interest or discount charged by the lender is deducted from the face
value of the note, or
(2) The discount rate may be applied to the maturity value of the note.

♦ Example:
Assume that the non-interest-bearing note for IQD 26500 (Example
9) is discounted at the local bank the day it is received at a rate of 6%. The
amount of cash that the company will receive is computed as follows:
Particulars IQD
Face amount of note, less interest 25000
Interest included therein 1500
Maturity value 26500
Less: Discount at 6% 1590*
Cash received (proceeds) 24910
*(26500x6%) – (2500 x 6%) = 1590 – 1500 = 90 finance charge for bank.

The discount is computed on the maturity value of IQD 26500 while

the interest (assumed to be 6%) is computed on the principal of IQD 25000.
The IQD 90 difference between these computed amounts represents an
additional finance charge by the bank. Keeping in mind that this note was
probably given in exchange for IQD 25000 worth of sales merchandise, this
arrangement can be likened to factoring accounts receivable, where a
percentage of the actual value is withheld by the factor as a fee. In both

18
Accounting in English …………………………..…… Chapter (4) Current Assets

cases, the seller receives slightly less than the present cash value of the
receivable.
When the note is discounted, the entry to record this would be:
Date Particulars Dr. Cr.
Cash A/c Dr. 24910
Discount on Notes Receivable A/c Dr. 1500
Financing Expense A/c Dr. 90
To Notes Receivable Discounted A/c 26500
When the note is paid the following entry would be made:
Date Particulars Dr. Cr.
Notes Receivable Discounted A/c Dr. 25000
To Notes Receivable A/c 25000
If the note is dishonored at maturity (the maker fails to pay the seller
as promised), the entries are:
Date Particulars Dr. Cr.
Accounts Receivable A/c Dr. 26500
To Cash A/c 26500
Notes Receivable Discounted A/c Dr. 26500
To Notes Receivable A/c 26500

3- COMMERCIAL PAPERS (NOTES) ‫ةيراجتال قارولأا‬

Commercial paper is generally issued by corporations or by large

banking institutions. The main function is usually to provide funds for the
company’s Accounts Receivable in order to handle short-term obligations.
Commercial paper is a certificate acceptable for exchange as a
payment instrument through endorsement ( ‫ )ريهظت‬or delivery ( ‫)مي ست‬.
The kinds of Commercial papers are the following:
 Cheques.
 Promissory notes.
 Bill of exchange.
18
Accounting in English …………………………..…… Chapter (4) Current Assets

A- Cheques ‫تاكيش‬
Cheque is an orderly written paper from the drawer ( ‫)بحاسال‬
to drawee ) ‫( (هي ى بوحسملا‬a bank) to pay a specified amount of money at
sight for a third party the drawer or the bearer ( ‫ )لماحلا‬or beneficiary( ‫يفتس‬
‫(مال‬.
B- Promissory Note ‫ةلايبمك ةقرو‬
Promissory Note is a certificate the maker obliged himself to pay
amount of money at sight or at a certain date for a beneficiary. If the maker
of a promissory note is a merchant the promissory note will be a commercial
paper.
Promissory notes are a form of debt similar to a loan. Companies
issue these notes to finance any aspect of their business, from launching new
products to repaying more expensive debt. In return for the loan, companies
agree to pay investors a fixed return over a set period of time.

C- Bill of exchange ‫بحس ةقرو‬

Bill of exchange is unconditional written order (instrument) made
by a drawer to a drawee to pay a specified amount of money for a third party
either a bearer or the beneficiary on demand or at a fixed or determinable
future date.
Bill of exchange is a commercial paper not a financial paper since it
is a result of business transactions.
Legally, cheque is a bill of exchange drawn on a banker, payable on
demand.
In practice, check is a direction in writing to a bank to pay a stated
sum of money on demand to a named person or organization, or to his or
their order, or to bearer.
In practical accounting profession, cheques are treated as cash.
Promissory notes and withdrawals are either a note receivable for the payee
(receiver) or a note payable for the maker (issuer).

18
Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:

Ismail Mussa Company sold goods at IQD 4000000 for AL-Taqwa

Company with a promissory note due after three months.
The journal entry in books of Ismail Mussa Co. is:
Notes receivable A/c Dr 4000000
To sales A/c 4000000
The journal entry in Al-Taqwa company is:
Purchases A/c Dr 4000000
To notes payable A/c 4000000
Notes receivables are assets while notes payable are liabilities.
Suppose a note receivable was written to settle ( ‫ )د سي يوسي‬an
open account receivable, the entry of the receipt of the note at payee journal
book
i
s:

Notes receivable A/c Dr 3000000

To accounts receivable A/c 3000000
The journal entry at the issuer journal book is:
Accounts payable A/c Dr 3000000
To notes payable A/c 3000000

♦ Example:

The balance sheet presentation of receivables:

Particulars Amounts IQD

Notes receivables 16000000
Accounts receivables 34000000
Other receivables 3000000
Total receivables 53000000
Less: Allowance for doubtful account (13000000)
Net receivables 40000000

18
Accounting in English …………………………..…… Chapter (4) Current Assets

4 - SECURITIES INVESTMENTS ‫ةيلامال قارولأا‬

‫ تارامثتسا‬When an economic entity has a plenty ( ‫ )ةرفو‬of
cash that is not
needed in its operations in the current period, it tries to obtain a return
thereupon ( ‫ )ى هي ى كلذ‬through investing it. Such investment takes
the form of purchasing securities (i.e. shares and bonds) of another
economic entity. The return on shares is the dividend while it is the
interest on bonds (debentures).
A- Classification of Securities ‫ةيلامال قارولأا‬
)1( ‫ فينصت‬Marketable Securities ‫قيوستلل ةلباق‬
‫ةيلام قاروأ‬
This class of securities is expected to be held by the economic entity
for a relatively short period, i.e. maximum one year. When the need for cash
arises, this security should normally be sold and its return be received.
Hence, these securities belong to current assets group in balance sheet
statement.
(2) Long - term Securities ‫لجلأا ةليوط ةيلام قاروأ‬
This type of investments is intended to be held in order to exercise a
significant degree of control over the firm which issues the shares or the
debentures held. These investments belong to non - current assets group in
balance sheets statement.
B- Treatment of Marketable Securities
‫قيوستلل ةلباقلا ةيلاملا قارولأل ةيبساحملا‬
‫ةجلاعملا‬
Marketable securities are recorded at cost upon acquisition. Cost
includes the actual purchase price plus brokers' fees ( ‫)ةرسامسال باعتأ‬,
transfer taxes and any other costs incidental (‫ضرى‬، ‫ )ئراط‬to acquisition.
When the securities are acquired (purchased), they are recorded in
the journal at acquisition cost as follows:
Date Particulars Dr. Cr.
Marketable Securities (bonds) or (shares) A/c Dr xxx
To Cash/Bank A/c xxx
[(Being cash purchases of Marketable Securities
(bonds) or (shares)]

18
Accounting in English …………………………..…… Chapter (4) Current Assets

Example:
On January 2, Assia Electronics Incorporated was purchased IQD
100000 (IQD 100 par value) of a new bond issue at par (، ‫ميقلاب‬، ‫)ئفاكمال‬.
These were 6% bonds with interest payable on June 30 and December 31.
The cash outlay ( ‫ )قافنا‬is:
Particulars IQD
Cash outlay: Bonds ( ‫)تا نس‬ 10000
0 Brokerage fees ( ‫)ةرسمس باعتأ‬ 7
500 Total cash outlay
107500
The journal entry required to record the transaction is:
Particulars Dr. Cr.
Marketable Securities ( Bonds) A/c Dr. 107500
To Cash A/c 107500

Example:
st
On 1 , October 2011 Mussa & Company, purchased securities (100
bonds, IQD 1000 for each bond with interest rate of 8%) including the
broker fees.
Journalize the above transaction in the book of Mussa & Co.
In the book of Mussa & Co. 1st. October 2011
D Particulars Dr. Cr
ate
st Marketable Securities (bonds) A/c Dr 100000
1
To Cash A/c 100000
October
[(Being Cash purchase of Marketable
2011
Securities (Bonds)]

(1) Adjusting entries of Interest ‫ةدئافال ةيوست دويق‬

st
Assume that the bonds pay Interest Semi – annually on 1 October,
st
and 1 April. On 31.12.2011, the accrued Interest on bonds is computed as
follows:
The accrued Interest = 100000 x 8% x (3 ÷12) = IQD 2000
The Adjusting entry in the Journal of Mussa and Co. is as follows:

18
Accounting in English …………………………..…… Chapter (4) Current Assets

Date Particulars Dr. Cr

31.12.2011 Accrued bonds Interest A/c Dr. 2000
To Interest Revenues A/c 2000
[(Being to record accrued interest for 3
months on securities (bonds)]

(2) Receiving Cash Interest on Securities ‫ةيلامال قارولأا ىلع ةيدقن‬

‫ ةدئاف مالتسا‬Referring to the same illustrated exercise, the interest
on bonds is
receivable Semi - annually. The entries of receiving interest in Journal are as
follows:
Date Particulars Dr Cr
1st, April, Cash A/c Dr. 4000
2011 To Accrued bonds interest A/c 2000
To Interest Revenues on Securities 2000
(bonds ) A/c
(Being record receipt of Interest on bonds
for 6 months)

(3) Sale of Securities ‫ةيلامال قارولأا عيب‬

st
Assuming that on 1 April, 2011 the securities (i.e. bonds) was sold
by IQD 101000 in cash. The entry of sale would be:
Date Particulars Dr. Cr
1st, Cash A/c Dr 101000
April, To Marketable Securities (bonds) A/c 100000
2011 To Gain on sale of Securities A/c 1000
(To record the sale of securities with profit)
If the securities were sold by IQD 95000 and received by cheque the
entry would be as follows:
Date Particulars Dr. Cr
st
1 Cash A/c Dr 95000
April, Loss on sale Marketable Securities (bonds) A/c Dr 5000
2011 To Marketable Securities (bonds) A/c 100000
(To record the sale of securities with Loss)

18
Accounting in English …………………………..…… Chapter (4) Current Assets

It is to note that investment in shares is similar to the bonds with

regard to the accounting treatment. If securities represent shares, the
purchase cost = purchase price + commission paid to the broker ( ‫)طيسولا‬.
♦ Example:
F st
aissal & Co. purchased 100 shares of Gulf bank LTD on 1
December 2011 with IQD 380 per share. IQD 1900 commission was paid to
a broker handled transaction at Iraqi Financial Securities Market.
The Purchased cost of shares = (IQD 380 x 100) + 1900 = IQD 39900
The entry of shares purchase in Journal would be as follows:
Date Particulars Dr. Cr
st
1 Dec. Marketable securities (shares) A/c Dr. 39900
2011 To Cash A/c 39900
(Being Cash purchased securities
(shares))
st
Assume, that on 31 December 2011, the dividend on these shares
has been IQD 500, the adjusting entry to record this accrual is as below :
Date Particulars Dr Cr
st
31 Dec., Accrued Dividend A/c Dr. 500
2011 To Revenues Earned A/c 500
(Being to record accrued Dividend on
Securities (shares)
Suppose that this dividend is receivable on 5th, January, 2012 as follows:
Date Particulars Dr Cr
5th, Cash /Bank A/c Dr. 500
Jan., To Accrued Dividend A/c 500
2012 (To record receipt of dividend on shares)
Note
If the shares are being sold more than their original cost, the result
would be gain ( ‫)بستكم‬. On the contrary if sold less than original cost,
the result is Loss ( ‫)ةراسخ‬. The entries as we did in securities (bonds).
Finally, the gains or Losses resulting from securities sale are transferred
(closed) to the profit and Loss Account at the end of the year.

19
Accounting in English …………………………..…… Chapter (4) Current Assets

C- Valuation and Presentation of Marketable Securities ‫ة‬

‫ينازيمال يف اهضرعو ةيلامال‬
‫قارولأا مييقت‬
Generally accepted accounting principles dictate that marketable securities,
particularly shares are to be reported (shown) on the balance sheet at either
the original cost or market value which is lower. This implies that
comparison must be made between the market value and the cost of the
marketable securities.
As a result, if the cost is less than the market value, the securities
appear on balance sheet at cost. In case the cost is more than market value at
the time of finalization of accounts the necessary an adjustment should be
made in the following entry:
Date Particulars Dr. Cr
st
31 , Dec., Loss to reduce marketable securities cost
to market value A/C Dr xxx
To Provision to reduce marketable
securities to market value A/c xxx

By definition, marketable securities represent highly liquid assets.

As such, their financial statement presentation is of special interest to
creditors and other analysts concerned with a firm's debt-paying ability. In
the current asset section of the balance sheet, these temporary investments
may be listed in one of two ways:
(1) At cost, with a parenthetical( ‫ )نيسوق نيب‬notation showing
current market value, or
(2) At lower-of-cost-or-market ( ‫ف كلا‬، ‫)لقا امهيأ قوسال وأ‬, which
requires the establishment of a separate valuation account for
reduction of the asset. This method is not allowed for income tax
purposes.

19
Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:
st
On 31 December, 2011 the market value of the 40 shares of Gulf
Bank was IQD 15000 although its cost is IQD 15960. The adjusting entry to
reduce the cost to the market value is as follows:
Solution:
Date Particulars Dr. Cr
st
31 Loss to reduce marketable securities cost to
Dec. market value A/c Dr. 960
2011 To Provision to reduce marketable values
of securities A/c 960

The anticipated Loss (i.e. IQD 960) is transferred to profit and Loss
account as follows:
Date Particulars Dr. Cr
st
31 Profit and Loss A/c Dr. 960
,Dec. To Loss to reduce cost to market value of
2011 securities A/c 960

Consequently on Balance sheet, the Marketable securities appear in

current assets group as follows:

Balance Sheet as at 31 -12 – 2011

Assets IQD IQD Liabilities IQD
Marketable securities (shares) 15960
Less Provision to reduce cost to (960) 15000
market value

19
Accounting in English …………………………..…… Chapter (4) Current Assets

5- CASH AND BANK RECONCILIATION

‫كنبال ةقباطمو‬
‫ دقنلا‬Cash consist of coins ( ‫ )تاكوكسم‬and currency ( ، ‫)مى‬,
cheques money
orders, and money on deposit in bank, including deposits in current or
savings accounts and time deposits, Cash includes any item that banks will
accept for immediate deposit; thus, post - dated cheques are not cash.
The comparison between the real cash balance and its book balance
may be made interesting during the fiscal year as daily, weekly, and
monthly or by the year end as a part of finalization process. As a result of
such a comparison, the difference between the real balance and book
balance of cash is usually recorded in an account entitled "cash shortage &
overage"( ‫)قنلا زجىو ضئاف‬.

A- Cash shortage & overage ‫دقنلا ضئافو زجع‬

Cash shortage and overage balance is debit in the books when the
real cash amount is less than the cash balance in the books, and it is credit
when the real cash balance is more than book balance of cash.
(1) Cash shortage & overage during the year ‫ةنسال للاخ دقنلا ضئافو‬
‫ زجع‬The simplest example of it is the cash sales. If the actual
cash
received from sales is less than the amount indicated by cash sales register,
the entry in the books would be as follows:

Date Particulars IQD IQD

Cash A/c Dr. xxx
Cash shortage & overage A/c Dr. xxx
To Sales A/c xxx

19
Accounting in English …………………………..…… Chapter (4) Current Assets

♦ Example:
th
Suppose on 5 , January, 2012, the sales day book shows that cash
sales amounted to IQD 30000, the really cash received from sales is IQD
29980. The entry in the books is as follows:
Date Particulars IQD IQD
5th, Jan, Cash A/c Dr. 29980
2012 Cash shortage & overage A/c Dr. 20
To Sales A/c 30000

On the contrary, if the cash received from selling goods of IQD

30000 is more, say IQD 30015, the entry to be passed in journal is as
follows:
Date Particulars Dr. Cr.
IQD IQD
Cash A/c Dr. 30015
To Cash shortage & overage A/c 15
To Sales A/c 30000

(2) Cash Shortage & Overage by the Year End ‫ةنسال ةياهن للاخ دقنال‬
‫ ضئافو زجع‬As a part of auditor’s duties implying verification, and
checking the accounts in order to certify that the final accounts are
true and fair, a comparison between the real cash available in treasury
and cash balance in the books is made also by him, in case shortage is
found, it is usually
recorded in the books as follows:
Date Particulars IQD IQD
Cash shortage & overage A/c Dr xxx
To Cash A/c xxx
In case of discovering that overage of cash exists, it is recorded in
the books as follows:

Date Particulars IQD IQD

Cash A/c Dr xxx
To Cash shortage & overage A/c xxx

19
Accounting in English …………………………..…… Chapter (4) Current Assets

By the year end "Cash shortage & overage" balance, if reasonable,

should be transferred to the profit and loss account. If its balance is credit, it
is considered as revenue. If it is debit, it is considered as administrative and
general expenses. In case the balance amount of cash shortage and overage
in un-reasonable (i.e. large), it must be investigated.
♦ Example:
st
On 31 , December, 2011, it was found that real cash balance is IQD
2800000, while the book balance of cash is IQD 3000000. The shortage (i.e.
IQD 200000) is recorded in Journal as:
Date Particulars Dr. Cr.
Cash shortage & overage A/c Dr 200000
To Cash A/c 200000
This entry makes real balance and book balance of cash equal.
Assuming that the amount of cash shortage is relatively large. The
investigation thereof showed is for the following reasons:

(a) Cash payment of IQD 100000 as wages but not recorded in the
books. This transaction should be recorded by the following adjusting entry:
Date Particulars Dr. Cr.
Wages A/c Dr 100000
To Cash Storage & overage A /c 100000

(b) Deficiency in internal control system of cash. This deficiency enabled

the cashier to rob IQD 60000 from treasury). This reason is passed in
journal by the following entry
Date Particulars Dr. Cr.
Accounts Receivable/Cashier A/c Dr 60000 60000
To Cash Shortage &
overage A/c
The rest of shortage (i.e.: IQD 40000) is treated as a loss transferred
to the profit and loss account because its amount is small and it lacks
reasoning. The transfer entry thereof is:

19
Accounting in English …………………………..…… Chapter (4) Current Assets

Date Particulars Dr. Cr.

Profit and Loss A/c Dr 40000 40000
To Cash Shortage & Overage A/c
40000

(3) Investment of Idle Cash ‫ضئافال دقنلا رامثتسا‬

Idle cash is defined as those funds which will not be needed in the
immediate future for the daily operations of the business. Such funds are
invested in marketable securities (generally short-term notes or bonds) to
generate additional income. Marketable securities are those which have
relatively stable prices and are salable on a day-to-day basis.

B- Bank Reconciliation Statement ‫كنبلا ةقباطم فشك‬

When a firm deals with a Bank, it keeps records of its Bank
transactions in the Bank column of the cash book. Similarly, the Bank also
keeps a record of the same transactions in its own Book.
As such, theoretically both the balance must agree. But in practice
this does not happen. Bank balance as shown by bank column of the Cash
Book.
(1) Reconciliation of Bank Balances ‫كنبال ةدصرأ ةقباطم‬
The cash balance on a company's books seldom ( ‫ )ام اردان‬agrees
with the balance on its monthly bank statement. Differences between these
two amounts result from one or more of the following:
1. Cash received at the end of the month which is not deposited in the
bank until the following month (deposit in transit).
2. Checks issued by the company which have not cleared the bank
(Accrued checks).
3. Bank charges for services rendered during the past month.
4. Notes receivable collected by the bank.
5. Recording and handling errors made by either the bank or the
company.

19
Accounting in English …………………………..…… Chapter (4) Current Assets

The process of reconciling these two amounts requires a review of

all cash transactions for the period on the company's books and on the bank
statement. Many differences involve time lags which are self-correcting
over time. However, errors on the company's books must be corrected, and
the bank must be advised if there are errors in its records.
(2) Forms of Bank Reconciliation ‫كنبال ةقباطم لاكشأ‬
There are two principal forms for reconciling bank accounts:
1. Reconciling the bank balance to the book balance,
2. Reconciling both bank and book balances to corrected balances.
The first form, that used in the preceding reconciliation, is similar
to the form generally used in reconciling other accounts. It simply shows the
items which account for the difference between the bank balance and the
book balance.
The second form has two sections, one pertaining ( ‫ـب ق عتي مئلاي‬
) to the bank data, the other to company data. If the bank makes an error
such as charging the account for a check drawn by another company, it
is not necessary for the company to make an entry on its books. The
bank will ordinarily make the correction of its balance promptly after the
company has notified the bank. Many accountants prefer this form because
all reconciling items which require entries on the books are shown together
in the company section, which facilitates recording.
Exercise (3)
The record of Al-Zamman Printing Company showed the following
information for the month of April, 2012(Amounts in IQD thousands):-
(1) Cash balance per books April 30, IQD 30000.
(2) Cash balance per bank statement April 30, IQD 25700.
(3) On April 30, the following checks were Accrued:-
Check No. 510 IQD 92
Check No. 541 IQD 986
Check No. 547 IQD 178
Check No. 601 IQD 82

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Accounting in English …………………………..…… Chapter (4) Current Assets

(4)The following two customer checks deposited by Al-Zamman were

returned to the company and were marked NSF (not sufficient funds):-
ABC shirts IQD 600
Sign Inc. IQD 1680
(5) A deposit of IQD 6200 was made on April 30 but was not included on
the bank statement.
(6)The bank service collected a IQD 4000 note for Al- Zamman from the
uniform company.
(7) The bank service charge was IQD 50.
(8)The bank charges Al-Zamman IQD 1054 in error.
Required:-
(1) Prepare bank reconciliation as of April 30, 2012.
(2)Prepare the adjustment entries.
Solution:
(1) Bank Reconciliation
Particulars IQD IQD Particulars IQD IQD
Balance per books 30000 Balance per bank 25700
Add: Note 4000 Add:
receivable Deposit in transit 6200
collected Bank error 1054 7254
Total 34000 Total 32954
Less: Less:
NSF check 2280 No.510 92
Service charge 50 (2330) No.541 986
No.547 178
No.601 28 (1284)
Adjusted Balance 31670 Adjusted Balance 31670
(2) Entries
Date Particular Dr. Cr.
Cash A/c Dr. 4000
To Note Receivable A/c 4000
NSF Check A/c Dr. 2280
Service charge A/c Dr. 50
To Cash A/c 2330

19
Accounting in English …………………………..…… Chapter (4) Current Assets

Exercise (4)
Prepare the bank reconciliation of Salem Insurance Agency as of
November, 30. 2012 using the following information and prepare
appropriate adjusting entries.
1- Balance per depositor’s records IQD 23100.
2- Balance per bank statement IQD 33680.
3- Accrued checks IQD 4884.
4- Erroneous recording of check No.1558 for telephone expense IQD (342)
Actual amount issued by check IQD 234.
5- Bank service charge IQD 12.
6- Deposit in transit IQD 5520.
7- Note collected by bank aching as Salem's agent IQD 12800.
8- NSF check of Hussein IQD 1680.
Solution:
♦ Bank Reconciliation Statement
Particulars IQD IQD Particulars IQD IQD
Balance per depositor's 23100 Balance per bank 33680
records statement
Add: Add:
Note receivable Deposit in transit 5520
collected 12800
Error in check 108 12908
(No.1558)
Total 36008 Total 39200
Deduct: Deduct:
Bank service charge 12 Accrued checks (4884)
NSF check of Hussein 1680 (1692)
Adjusted Balance 34316 Adjusted Balance 34316
♦ Adjusting Entry
Date Particulars Dr. Cr.
Cash A/c Dr. 12908
To Note receivable A/c 12800
To Telephone Expense A/c 108

Bank service charge Dr. A/c 12

Accounts Receivable Dr. A/c 1680
To Cash A/c 1692

19
Accounting in English …………………………..…… Chapter (4) Current Assets

Terminology ‫تاحلطصمال‬
Accounts receivable ‫ةنيدم تاباسح‬ Idle cash ‫ضئاف‬
‫دقن‬
Accrued amounts ‫ةقحتسم‬ ‫ما ليغشتال تحت ةعاضب‬ Instrument Interest Earned
Acquisition ‫غلابم‬ ‫حبرال لمجم‬ Inventory Inventory Systems
Allowances ‫ءانتقا‬ Inventory Valuation Last-In First-Out
Amount due ‫تاحامس‬ Long - term Securities
Bank Reconciliation ‫قحتسم‬
Banking institutions ‫غلبم‬ Lower of Cost or Market Marketable
Bearer ‫ةيفرصم‬ Securities Maturity
‫ةقباطم‬ Merchandising business Notes Receivable
Beneficiary ‫ةيفرصم‬ Periodic inventory Perpetual inventory
Bill of exchange ‫تاميلعت‬ Probability of collection Promissory notes
Bonds ‫ءيش لماح‬ Provision for Doubtful A/cs
Brokerage fees Raw Materials Retail establishments
Cash discount ‫ديفتسم‬ Retail Method
Cash overage ‫ةيراجت‬ Sales returns Securities investment
Cash shortage ‫ةقرو‬ Short-term obligations Specific
Cheques. ‫تادنس‬ Identification Time of collection Trade
Commercial paper ‫ةطاسو‬ discounts
Current assets ‫باعتا‬
‫يدقن‬ Trade receivables Uncollectibles
Customer ‫مصخ‬ Weighted – Average
Department stores
Direct write-off ‫ةيدقن‬
Discounting notes ‫صقن‬
Doubtful Accounts ‫تاكيش‬
Drawee ‫ةيراجت‬
Drawer ‫ةقرو‬
Finished Goods ‫ةلوادتم‬
First-In, First-Out ‫لوصا‬

Funds ‫كلهت‬
Goods in Process ‫سم‬
Gross Profit ‫ماسقا‬
‫نزاخم‬
‫رشابم‬
‫بطش‬
‫ةموصخم‬
‫قاروا اهيف‬
‫كوكشم‬
‫تاباسح ةيلع‬
‫بوحسمال‬
‫بحاسال‬
‫ةمات‬
‫ةعاضب‬
‫جرخي لاوا‬
‫لخديام لاوا‬
‫لاو‬
‫ة‬ ‫ن‬ ‫باقمهسا‬
‫ا‬ ‫ن‬ ‫ل‬ ‫قاقحتسلاا خيرات‬
‫د‬ ‫و‬ ‫خ‬ ‫ةيراجت‬
‫ا‬ ‫ز‬ ‫د‬ ‫ةاشنم ضبق‬
‫خ‬ ‫ي‬ ‫قاروا يرود‬
‫ة‬ ‫م‬ ‫ا‬ ‫درج ءيجافم‬
‫ل‬ ‫ل‬ ‫م‬ ‫درج ليصحتال‬
‫ص‬ ‫ا‬ ‫لجلاا ةليوط‬ ‫ةيلامتحا‬
‫ح‬ ‫مهسا‬ ‫دهعت قاروأ‬
‫م‬ ‫م‬ ‫اهيف كوكشم تاباسح صصخم‬
‫ي‬ ‫ل‬
‫ة‬ ‫ي‬ ‫ق‬ ‫ةيلوا داوم‬
‫د‬ ‫ق‬ ‫ا‬ ‫ةئزجت‬
‫ئ‬ ‫ت‬ ‫ا‬ ‫ةاشنم‬
‫ا‬ ‫م‬ ‫ةئزجتال‬
‫ف‬ ‫ل‬ ‫ه‬ ‫ةقيرط‬
‫ن‬ ‫ا‬ ‫يا‬ ‫تاعيبم‬
‫و‬ ‫و‬ ‫ق‬ ‫تادودرم‬
‫ز‬ ‫ا‬ ‫و‬ ‫مهسا‬
‫خ‬ ‫س‬ ‫رامثتسا‬
‫م‬ ‫ج‬ ‫ال‬ ‫لجلاا ةليوط‬
‫ر‬ ‫وا‬ ‫تادنس صاخال‬
‫د‬ ‫خ‬ ‫ة‬ ‫زييمتال‬
‫ر‬ ‫ي‬ ‫فل‬ ‫ليصحتال تقو‬
‫ج‬ ‫ك‬ ‫يراجت مصخ‬
‫ل‬ ‫ا‬ ‫ال‬
‫ا‬ ‫ر‬ ‫لو‬ ‫ةيراجت‬
‫ي‬ ‫اد‬ ‫ممذ‬
‫م‬ ‫خ‬ ‫تل‬ ‫ةلصحم‬
‫ظ‬ ‫ل‬ ‫ريغ‬
‫ا‬
‫ةل‬ ‫نوزوملا لدعمال‬

‫‪20‬‬
Accounting in English …………………………..…… Chapter (4) Current Assets

QUESTIONS AND EXERCISES

A- QUESTIONS
1-Fill the following blanks
(1) Inventory is reported in the balance sheet as a (n) ……………….asset
(2) When a daily record is kept of the inventory balance after purchases and
sales are made ………….. Inventory method is being used.
(3) Retail businesses generally use the…………. method to determine
inventory value.
(4) The inventory valuation method which assumes that goods are sold in
the order in which they are received is called the……………… method.
(5) The inventory valuation method which assumes that goods are sold in
acquisition is known as the……………..method.
(6) The inventory valuation method which is based upon the determination
of unit price, by dividing the total cost of goods available for sale by the
total number of available units is known as the ……………….method.
(7) A company should select the…………….inventory method if it wishes
to keep its taxes to minimum.
(8) Cost of goods available for sale less ending inventory is equal
to……………
(9) If ending inventory is understated, net income will be……………..
2- Explain theoretically and using entries the periodic inventory system
and the perpetual inventory system.
3- What is meant by Investment in securities?
4- Classify the Securities and explain each class thereof?
5- What is the basis of valuation of securities by the year end?
6- Define a cheque, promissory note, bill of exchange.
7- In preparing a Book Reconciliation for Al-Hilal Corporation, you note a
number of reconciling items. For each item listed below , place an (X) in the
appropriate column to indicate how you would treat it in order to produce
equal adjusted balances for the books and bank.

20
Accounting in English …………………………..…… Chapter (4) Current Assets

No. items Increase Decrease Increase Decrease No

Book Book Bank Bank effect
Balances Balances Balances Balances
1 Accrued check
2 Accrued
certified check
3 Deposit in
transit
4 Proceeds of a
customer note
collected by the
bank
5 Proceeds of a
loan made to
the company by
the bank
6 A customers
bounced check
7 Bank service
charge

8- Choose the correct answer:

(1) Which of the following statements is correct about promissory notes
a. The party making the promise to pay is called the payee.
b. The party to whom payment is to be made is called the maker.
c. A Promissory note is a negotiable instruction.
d. A Promissory note is more liquid than an account receivable.
(2) If cement company accepts IQD 1000000, 3- month, 10% promissory
note in settlement of an account. The entry to record this transaction is to
debit:
a. Notes receivable by IQD 1030000.
b. Notes receivable by IQD 1000000
c. Accounts receivable by IQD 1030000.

20
Accounting in English …………………………..…… Chapter (4) Current Assets

d. Accounts receivable by IQD 1000000

(3) If Arabic Emirates Company holds $ 10000000, 120-day, 9% notes, the
entry made by the Arabic Emirates company is to credit:

a- Cash 10300000
b- Notes receivable 10300000
c- Notes receivable 10000000
Interest revenue 300000
d- Cash 9700000
Interest expense 300000

(4) We credit cash in bank in the following except:

(a) Purchase goods by cheque, (b) Pay salaries by cheque, (c) Collect a
revenue by cheque, (d) Pay a liability by cheque.
(5) The promissory note is a note payable when:
(a) Sale an asset by a promissory note. (b) Collect revenue by promissory
note. (c) A client pays his obligation by endorsing a promissory note. (d) An
expense is settled by a promissory note.
(6) Which of the following from commercial papers?
ot
aren

(a) Accounts receivable (b) Cheques. (c) Promissory note (d) Withdrawals
(7) When a company purchased a machine by a promissory note we credit:
(a) A machine A/c (b) Notes receivable (c) Notes payable (d) Cash

20
Accounting in English …………………………..…… Chapter (4) Current Assets

B- EXERCISES
1- The White Sea Company had inventory and purchases for the year
as follow:

Particulars Units Costs Amounts IQD

Inventory ,January 1 2000 2.00 4000
Purchase No.1 1000 2.50 2500
Purchase No.2 1500 2.75 4125
Purchase No.3 1500 2.85 4275
Purchase No.4 2000 3.00 6000
Total 8000 20900

The physical inventory count at December was 3000 units.

Required: Compute the cost of the December 31 inventory based on
the following inventory methods:
(a) FIFO
(b) LIFO
(c) Average Cost.
2- (a) Yasser Mussa purchased goods IDs 5000 on credit from
Mohamed Ahmed 10% trade discount on 2 nd, March 2011.
(b) Mohamed signed a promissory note to settle his obligation for
Yasser.
Required:
(1)Record the above two transactions in Yasser journal and then in
Mohamed journal.
(2)Post the transactions to ledgers accounts for both of them.

20
Accounting in English …………………………..…… Chapter (4) Current Assets

3- Information necessary for the preparation of a bank reconciliation

and related journal entries for the Stores Corporation at November 30
is listed below:
(1)The balance per records of the Stores Corporation is IQD 1042309.
(2)The bank statement shows a balance of IQD 915457 as of
November 30.
(3)Two debit memorandum accompanied the bank statement: one for
IQD 13 was for service charges for the month; the other for IQD
86460 was attached to an NSF (Not Sufficient Funds) check from
Tahssen.
(4)The paid checks returned with the November bank statement
disclosed two errors in the cash records. Check no. 832 for IQD 92348
had been erroneously recorded as IQD 93248 in the cash payments
journal, and check No. 851 for IQD 6633 had been recorded as IQD
3366. Check No. 832 was issued in payment for a store display
counter; check No. 851 was for advertising expense.
(5)A collection charge for IQD 10000 (not applicable to Stores
Corporation) was erroneously deducted from the account by the bank.
(6)Cash receipts of November 30 amounting to IQD 62525 were
mailed to the bank too late to be included in the November bank
statement.
(7)Checks Accrued as of November 30 were as follows: No. 860 for
IQD 16000, No. 870 for IQD 7520, and No. 880 for IQD 12280.
Required:
1) Prepare bank reconciliation at November 30.
2) Prepare the necessary adjusting entries in general journal form.

20
Accounting in English …………………………..…… Chapter (4) Current Assets

4- The bank statement received by Mounir at the end of Nov. 2011

shows a balance of IQD 6380(Amounts in IQD thousands). The cash
account of Mounir shows a balance of IQD 7190 at the same date.
Analysis of Mounir’s records together with the bank statement shows
the following:
(1) The following checks were issued by Mounir but do not appear
on
the bank statement:
check No. 3025 for IQD 20050
check No. 3026 for IQD 31250
check No. 3028 for IQD 48700
(2) A deposit of IQD 2000 was made on Nov. 30, but does not
appear on the bank statement
(3) The following notes were attached to the bank statement:
♦ Credit note No. 116 for IQD 500 collected on a note
receivable and added to Mounir's account
♦ Debit note No. 20 for a NSF check drawn by Walled - one of
Mounir's customer - for IQD 300. The check had been
deposited by Mounir on Nov. 21.
♦ Debit note No. 1311 for IQD 10 service charges.
Required :
a) Bank reconciliation statement.
b) The cash balance which should appear on Mounir's balance
sheet at Nov. 30, 2012.

20
Accounting in English …………………………..…… Chapter (4) Current Assets

5- Suzan Equipment routinely invests seasonally idle cash in

common stock. The following transactions took place in 2011.
th
1) Jan, 5 Suzan purchased 1000 shares of Jamal tools Company
for IQD 1500 per share. A IQD 75000 broker's Commission
was paid.
th
2) March, 4 Suzan bought 2500 shares of Iraq steel for IQD 4500
per share plus a broker's Commission of IQ 120000.
th
3) April, 15 A IQD 5000 per share quarterly dividend was
received on the Jamal stock.
th
4) June, 12 thirty shares of the Jamal stock were sold. The net
cash received after deducting broker's fees was IQD 48000
th
5) July. 14 Fifty shares of Jordan stock were sold for IQD 5600
per share. A brokerage Commission of IQD 200 per share must
be deducted from the sales price in determining the amount
received by Suzan.
th
6) Oct. 15 IQD 5000 per share quarterly dividend was received
on the Jamal stock.
st
7) Dec. 31 IQD 200 per share annual dividend was received on
the Iraq stock.
st
8) Dec. 31 entries were made to close all temporary accounts.
Required:
(a) Prepare Journal entries to record the transactions and events
listed above (your entries should be supported by clearly
Labeled calculations).
(b) Assume that on December 31. 2011 the market price of the Iraq
stock was IQD 1600 per share and the market Iraq of the price
stock was IQD 5500 per share, at what amount will the

20
Accounting in English …………………………..…… Chapter (4) Current Assets

marketable securities appear on the 31st December, 2011.

Balance sheet?
 Answers to question (7):
No. items Increase Decrease Increase Decrease No effect
Book Book Bank Bank
Balances Balances Balances Balances
1 Accrued check x
2 Accrued x
certified check
3 Deposit in x
transit
4 Proceeds of a x
customer note
collected by
the bank
5 Proceeds of a x
loan made to
the company
by the bank
6 A customers x
bounced check
7 Bank service x
charge

 Answers to question (8):

No a b c d
(1)
x (2) x
(3)
x (4)
x
(5) x
(6) x
(7) x

20
 Accounting in English …………………………..…… Chapter (4) Current Assets

 Answer to Exercise (1)

a) FIFO: IQD 8850 {(2000@ IQD 3.00 ) + (1000@ IQD 2.85) =
IQD 6000 + IQD 2850}
b) LIFO: IQD 6500 [(2000@ IQD 2.00) + 1000 @ IQD 2.50 ) =
IQD 4000 + IQD 2500]
c) Average cost : IQD 7830 [(3000 @) IQD 2.61), from ( IQD
20900 ÷ 8000 = IQD 2.61)]



20

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