Octane Service Station
Prof. Sobhesh Kumar Agarwalla
Indian Institute of Management, Ahmedabad
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 1 / 36
Issues
Whose accounts - Octane Oil Co or Octane Service Station?
Nature of business: Operator of a company owned service station
Source of capital - Accounting Entries?
Investment of 100,000 in land and 200,000 in building - Accounting entries?
Goodwill
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 2 / 36
Introduction of Capital
Capital Brought: 20000
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Cash = + Trevino’s Capital
+20000 = + 20000
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Cash ++ 20000 Capital ++ 20000
-Expenses
Net Income Total ++ 20000 Total ++ 20000
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 3 / 36
Payment to Octane Oil Company: Cash of 20000
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Cash Octane Oil Co = +
-20000 +20000 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liab. & OE Amount
Revenues
Cash −− 20000
Octane Oil Co. (Adv) ++ 20000
-Expenses
Net Income Total 0 Total 0
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 4 / 36
Purchase of Equipment
Value of Equipment: 12875 or 2575?;
Octane Oil Co (adj.) : 2575; Equipment Loan: 10300
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Octane Oil Co. +Equipment = Equipment Loan +
-2575 +12875 = 10300 +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Octane Oil Co −− 2575 Equipment Loan ++ 10300
Equipment ++ 12875
-Expenses
Net Income Total ++ 10300 Total ++ 10300
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 5 / 36
Prepaid rent to Octane Oil Co: 1420
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Octane Oil Co. + Prepaid Rent = +
-1420 +1420 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Octane Oil Co −− 1420
Prepaid Rent ++ 1420
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 6 / 36
Inventory Received from Octane Oil Co: 13250
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Octane Oil Co. +Inventory = +
-13250 +13250 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Octane Oil Co −− 13250
Inventory ++ 13250
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 7 / 36
Deposit of amount received from Octane Oil
Company to bank account: 2755
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Octane Oil Co. + Bank = +
-2755 +2755 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Octane Oil Co. −− 2755
Bank ++ 2755
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 8 / 36
Additional Capital
Capital Brought: 7000 (deposited in bank)
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = + Trevino’s Capital
+7000 = + 7000
DR = CR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Bank ++ 7000 Capital ++ 7000
-Expenses
Net Income Total ++ 7000 Total ++ 7000
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 9 / 36
Purchase of Furniture
Furniture purchased by cheque: 1650
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank + Furniture = +
-1650 +1650 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Bank −− 1650
Furniture ++ 1650
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 10 / 36
Prepaid Insurance
Insurance Policy purchased by cheque: 900
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank + Prepaid Insurance = +
-900 +900 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Bank −− 900
Prepaid Insurance ++ 900
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 11 / 36
Cash withdrawn from bank account : 200
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank + Cash = +
-200 +200 = +
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Bank −− 200
Cash ++ 200
-Expenses
Net Income Total Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 12 / 36
To Do?
Check bank balance: Rs. 7005?
Balance in Trevino’s savings account?
Prepare Balance Sheet of Octane Service Station as on May 1?
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 13 / 36
Opening Balance Sheet
Balance Sheet of Julio Trevino Service Station as on 1 May
Assets Amount Liabilities & OE Amount
Equipment 12875 Capital 27000
Furniture 1650
Inventory 13250 Loan for equipment 10300
Prepaid Insurance 900
Prepaid Rent 1420
Bank 7005
Cash 200
Total 37300 Total 37300
Note: There are no entries for closing balances
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 14 / 36
Issues
Trevino worked very hard (60 hours a week)?
Patronage build-up during the first two months?
Let us assume all transactions are bank transactions. Cash balance is always 200.
Accounting period for income statement: May 1 to June 30
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 15 / 36
Cash Sales: 69510
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = + Sales
+69510 = + + 69510
DR = CR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Sales 69510 Bank ++ 69510 Capital (profit) ++ 69510
-Expenses
Net Income 69510 Total ++ 69510 Total ++ 69510
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 16 / 36
Credit Sales: 199
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Accounts Receivable = + Sales
+199 = + + 199
DR = CR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Sales 199 Accounts Receivable ++ 199
-Expenses
Net Income Total ++ 199 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 17 / 36
Cash Parking Rental
Bank/Cash Parking Rental from May 15 to July 15: 500
Unearned rent? 500 * 0.5/2 = 125
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = Unearned rent + Parking Rent
+500 = +125 + + 375
DR = CR CR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Parking Rent 375 Bank ++ 500 Unearned Parking Rent 125
-Expenses
Net Income Total ++ 500 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 18 / 36
Inventory purchased - cash and credit
Purchased inventory for cash/bank: 44694 and for credit: 1804
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Inventory Bank = Accounts Payable +
+46498 -44694 = +1804 +
DR CR = CR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Bank −− 44694 Accounts Payable 1804
Inventory ++ 46498
-Expenses
Net Income Total ++ 1804 Total ++ 1804
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 19 / 36
Inventory Withdrawn
How much should you charge - 79 or 101 ?
∆ Asset = ∆ Liabilities + New Capital - Drawings + Revenues - Expenses
Inventory = - Drawings
-79 = + 79
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Capital
Inventory −− 79 Less: Drawings ++ 79
-Expenses
Net Income Total −− 79 Total −− 79
Alternatively, it can be shown both as COGS and Sales (especially in the case of
companies).
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 20 / 36
Inventory - Closing Balance
The closing balance of inventory was 10018. Any entry for this?
How much shall you Increase(Dr)/ Decrease (Cr) to reach the value of 10,018 ? See your
inventory account
Inventory Account
Debit Amount Credit Amount
Opening Balance 13250 Drawings 79
Purchase - Cash 44694
Purchase - Credit 1804
Evaporation loss 360
COGS (Balancing figure) 49291
Closing balance 10018
Total 59748 Total 59748
Shall we report COGS and evaporation loss separately? Normal losses are part of COGS
whereas abnormal (non-recurring) losses are shown separately.
Inventory Account
Debit Amount Credit Amount
Opening Balance 13250 Drawings 79
Purchase - Cash 44694 Evaporation loss 360
Purchase - Credit 1804 COGS 49291 49651
Closing balance 10018
Total 59748 Total 59748
Record transaction for COGS = 49651
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 21 / 36
Cost of Goods Sold: 49651
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Inventory = COGS
-49651 = + 49651
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses
COGS 49651 Inventory −− 49651
Net Income Total −− 49651 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 22 / 36
Rent Expenses
How much is the rent expense for the period?
Opening prepaid = 1420; Cash paid=2018; Closing Outstanding = 75; Rent Expenses =
1420+2018+75 = 3513
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Prepaid Rent Bank = Outstanding Rent - Rent Expenses
-1420 -2018 = +75 3513
CR CR = CR DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses Prepaid Rent −− 1420 Outstanding Rent 75
Rent 3513 Bank −− 2018
Net Income Total −− 3438 Total ++ 75
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 23 / 36
Payroll Paid and Payable
Payroll expenses? Paid = 9450 and Payable = 232 ; Total expenses = 9682
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = Outstanding Payroll + - Payroll expenses
-9450 = +232 + 9682
CR = CR DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses Bank −− 9450 Outstanding payroll 232
Payroll Expenses 9682
Net Income Total −− 9450 Total ++ 232
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 24 / 36
Utilities Paid and Payable
Utilities expenses? Paid = 445 and Payable = 425 ; Total expenses = 870
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = Outstanding Utilities + - Utilities expenses
-445 = +425 + 870
CR = CR DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses Bank −− 445 Outstanding Utilities 425
Utilities Expenses 870
Net Income Total −− 445 Total ++ 425
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 25 / 36
Advertising Exp.: 690
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = Advertising Exp.
-690 = + 690
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses
Advertising Exp. 690 Bank −− 690
Net Income Total −− 690 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 26 / 36
Miscellaneous Exp.: 355
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Bank = Miscellaneous Exp.
-355 = + 355
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
“
-Expenses
Miscellaneous Exp. 355 Bank −− 355
Net Income Total −− 355 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 27 / 36
Cash Drawings
∆ Asset = ∆ Liabilities + New Capital - Drawings + Revenues - Expenses
Bank = - Drawings
-6750 = + 6750
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
Capital
Bank −− 6750 Less: Drawings ++ 6750
-Expenses
Net Income Total −− 6750 Total −− 6750
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 28 / 36
Depn. - Equipment:
Depreciation amount: 12875 / (5*6) = 429
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Acc. Depn. (Equipment) = Depn.- Equipment Exp.
429 = + 429
CR = DR
Income Statement Balance Sheet
Particulars Amount Assets Amount Liab. & OE Amount
Revenues
-Expenses Equipment 12875
Depn.- Equipment Exp. 429 Acc. Depn. (Equip) −− 429
Net Income Total −− 429 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 29 / 36
Depn. - Furniture:
Depreciation amount: 1650 / (10*6) = 28
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Acc. Depn. (Furniture) = Depn.- Furniture Exp.
28 = + 28
CR = DR
Income Statement Balance Sheet
Particulars Amount Assets Amount Liab. & OE Amount
Revenues
-Expenses Furniture 1650
Depn.- Furniture Exp. 28 Acc. Depn. (Furniture) −− 28
Net Income Total −− 28 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 30 / 36
Insurance
Insurance expenses: 150
∆ Asset = ∆ Liabilities + ∆ Capital + Revenues - Expenses
Prepaid Insurance = Insurance Exp.
-150 = + 150
CR = DR
Income Statement Balance Sheet
Particulars Details Amount Assets Amount Liabilities & OE Amount
Revenues
-Expenses
Insurance Exp. 150 Prepaid Insurance −− 150
Net Income Total −− 150 Total
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 31 / 36
Issues
Bad Debt: 2% of all outstanding
I Wealthy widow friend : 143
I Regular customer : 56
Obligation to meet married son’s bank loan?
What is the closing bank balance?
Bank Account
Debit Amount Credit Amount
Opening Balance 7005 Inventory 44694
Cash Sales 69510 Rent 2018
Parking Rent 375 Payroll 9450
Unearned Parking 125 Utilities 445
Advertising 690
Miscellaneous 355
Drawings 6750
Total 77015 Total 64402
Closing balance 12613
Prepare the income statement for the period 1 May to 30 June.
Prepare the balance sheet as on 30 June.
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 32 / 36
Income Statement
Income Statement of Julio Trevino Service Station for the period 1 May to 30 June
Particulars Detail Amount
Revenues
Sales Revenue 69709
Parking Rent 375
Total Revenue 70084
Expenses
COGS 49651
Rent 3513
Payroll 9682
Utilities 870
Advertising 690
Depreciation - Equipment 429
Depreciation - Furniture 28
Insurance 150
Miscellaneous 355
Prov. for bad debt -
Total Expenses 65368
Profit for the period 4716
Cash sales and credit sales should be shown together
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 33 / 36
Closing Balance Sheet
Balance Sheet of Julio Trevino Service Station as on 30 June
Assets Amount Liabilities & OE Amount
Equipment 12875 Capital - Op. bal. 27000
(-)Acc. Depn. 429 12446 Add: Profit 4716
Furniture 1650 Less: Drawings (6750+79) 6829 24887
(-)Acc. Depn. 28 1622
Inventory 10018 Loan for equipment 10300
Prepaid Insurance 750 Unearned Parking 125
Accounts Receivable 199 Accounts payable 1804
Bank 12613 Rent payable 75
Cash 200 Utilities payable 425
Wages payable 232
Total 37848 Total 37848
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 34 / 36
Issues
Cleanliness
Detail of transaction relating to a particular head
Audit trail
Solution: Provided by Luca Pacioli in 1494
Concept of T-Accounts - Temporary and permanent (or real) accounts
Debit and Credit
Steps: Analyze transactions → Journalize transaction → Post in ledger → Identify,
journalize and post adjusting entries → Journalize and post closing entries → Prepare
financial statements
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 35 / 36
Thanks!
Comments/suggestions
Prof. Sobhesh Kumar Agarwalla (IIMA) Octane Service Station 36 / 36
