ACTBAS1 LECTURE 10 Preparing a Worksheet 1. The steps in preparing a work sheet are: a.

. Prepare a trial balance on the work sheet. b. Enter the adjustments in the adjustments columns. c.Enter adjusted balances in the adjusted trial balance columns. d. Extend adjusted trial balance amounts to appropriate financial statement columns. e. Total the statement columns, compute the net income (or loss), and complete the work sheet. A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements. The basic form of a work sheet consists of the following columns:

2.

3.

For each account in the work sheet, the amount in the adjusted trial balance columns is equal to the account balance that will appear in the ledger after the adjusting entries have been journalized and posted. After the work sheet has been completed the statement columns contain all data that are required for the preparation of financial statements. The income statement is prepared from the income statement columns, and the owner's equity statement and balance sheet are prepared from the balance sheet columns. Using work sheet, accountants can prepare financial statements before adjusting entries are journalized and posted. A work sheet is not a journal and it cannot be used as a basis for posting to ledger accounts.

4.

5. 6.

Closing Entries 7. 8. 9. Closing entries formally recognize in the ledger the transfer of net income (or loss) and owner's drawings to owner's capital as shown in the owner's equity statement. Journalizing and posting closing entries is a required step in the accounting cycle. The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset accounts, liability accounts, and the owner's capital account are permanent (real) accounts. A temporary account, Income Summary, is used in closing revenue and expense accounts to minimize the amount of detail in the permanent owner's capital account.

10.

1-1

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11.

In closing the books of a proprietorship: a. Debit each revenue account for its balance, and credit Income Summary for total revenues. b. Debit Income Summary for total expenses, and credit each expense account for its balance. c. Debit Income Summary, and credit Owner's Capital for the amount of net income; conversely, credit Income Summary and debit Owner's Capital if a net loss exists. d. Debit Owner's Capital for the balance in the Owner's Drawing account and credit Owner's Drawing for the same amount.

Post-Closing Trial Balance 12. After all closing entries have been journalized and posted, a post-closing trial balance is prepared. The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.

Steps in the Accounting Cycle 13. The required steps in the accounting cycle are: a. Analyze business transactions. b. Journalize the transactions. c. Post to ledger accounts. d. Prepare a trial balance. e. Journalize and post adjusting entries: Prepayments/Accruals. f. Prepare an adjusted trial balance. g. Prepare financial statements: Income statement, Owner's equity statement, Balance sheet. h. Journalize and post closing entries. i. Prepare a post-closing trial balance. A reversing entry is the exact opposite of an adjusting entry. The preparation of reversing entries is an optional bookkeeping procedure that is not a required step in the accounting cycle. LECTURE OUTLINE

14.

A.

Using a Work Sheet. 1. A work sheet is a multiple-column form that may be used in the adjustment process and in financial statement preparation.

2.

The steps in the preparation of a work sheet: a. Step 1: Prepare a trial balance on the work sheet. b. Step 2: Enter the adjustments in the adjustments columns.

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c. d. e. 3.

Step 3: Step 4: Step 5:

Enter the adjusted balances in the adjusted trial balance columns. Extend the adjusted trial balance amounts to the appropriate financial statement columns. Total the statement columns, compute the net income (or net loss), and complete the work sheet.

A work sheet facilitates the preparation of financial statements because it organizes the account balances and the statements can be prepared before the adjusting entries are journalized and posted.

4.

The use of a work sheet is optional and it is essentially a working tool of the accountant.

5.

A work sheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. Adjusting entries are recorded in the journal, and then are posted to the ledger accounts.

B.

Preparing Closing Entries. 1. Closing entries formally recognize in the ledger the transfer of net income (or net loss) and owners drawing to owners capital. Journalizing and posting closing entries is a required step in the accounting cycle. 2. Closing entries produce a zero balance in each temporary account (revenue and expense accounts and owners drawing account) so that each temporary account may be used to accumulate data in the next accounting period separate from the data of prior periods. 3. There are four closing entries: a. Debit each revenue account for its balance, and credit Income Summary for total revenues. b. Debit Income Summary for total expenses, and credit each expense account for its balance. c. Debit Income Summary and credit Owners Capital for the amount of net income (assuming the company had net income).

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d.

Debit Owners Capital for the balance in the Owners Drawing account, and credit Owners Drawing for the same amount.

C. Preparing a Post-Closing Trial Balance. 1. The purpose of the post-closing trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period. 2. The post-closing trial balance will contain only permanentbalance sheetaccounts since all temporary accounts will have zero balances.

D.

Summary of the Accounting Cycle. 1. 2. 3. 4. 5. 6. 7. 8. 9. Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare a trial balance. Journalize and post adjusting entries: Prepayments/Accruals. Prepare an adjusted trial balance. Prepare financial statements. Journalize and post closing entries. Prepare a post-closing trial balance.

E.

Correcting Entries. 1. Errors that occur in recording transactions should be corrected as soon as they are discovered by journalizing and posting correcting entries. 2. Correcting entries are made whenever an error is discovered, not only at the end of an accounting period.

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3.

To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry in order to identify the accounts and amounts that shouldor should notbe corrected.

4.

Errors may also be corrected by reversing the incorrect entry and then preparing the correct entry.

Work Sheet
Adjusted Incom e la ent Trial Ba nce Adjustm la ents Trial Ba nce Statem Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Bala nce Sheet Dr. Cr.

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ILLUSTRATION 4-1 WORK SHEET FORM AND PROCEDURE

Account Titles

1. Prepa a re tria ba l lance on the work sheet.

2. Enter adjustm ent da . ta

3. Enter adjusted balances.

4. Extend a djusted ba nces la to a ppropria sta ent te tem colum ns. 5. Tota the sta ent colum l tem ns, com pute net incom (or net loss), e, a com nd plete work sheet.

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ILLUSTRATION 4-2 STEP 1: PREPARE A TRIAL BALANCE ON THE WORK SHEET

INTERNATIONAL TRAVEL AGENCY Work Sheet For the Month Ended March 31, 2005 Trial Balance Dr. Cr. 15 5 4 20 4 10 20 2 26 2 2 10 60 60 Step 1
Trial balance am ounts are taken directly from ledg accounts. er

Account Titles Cash Accounts Receivable Prepaid Insurance Office Equipm ent Accum ulated Depreciation Accounts Payable Ace, Capital Ace, Drawing Service Revenue Depreciation Expense Rent Expense Salaries Expense Totals

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ILLUSTRATION 4-3 STEP 2: ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

INTERNATIONAL TRAVEL AGENCY Work Sheet For the Month Ended March 31, 2005
Trial Balance Dr. Cr. 15 5 4 20 4 10 20 2 26 2 2 10 60 60 Adjustm ents Dr. Cr. (a) 1 (b) 2

Account Titles Cash Accounts Receivable Prepaid Insurance Office Equipm ent Accum ulated Depreciation Accounts Payable Ace, Capita l Ace, Drawing Service Revenue Depreciation Expense Rent Expense Salaries Expense Totals Insurance Expense Salaries Payable Totals

(b) 2 (c) 5 (a) 1 (c) 5 8 8

Step 2
Enter adjustm am ent ounts in appropriate colum total ns, adjustm colum and check ent ns for equality.

ADJUSTMENT DATA: (a) Prepaid insurance expired during March, $1. (b) Depreciation expense on office equipm for March, $2. ent (c) Salaries expense incurred at the end of March but not yet paid, $5.

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ILLUSTRATION 4-4 STEP 3: ENTER THE ADJUSTED BALANCES IN THE ADJUSTED TRIAL BALANCE INTERNATIONAL TRAVEL AGENCY Work Sheet For the Month Ended March 31, 2005
Adjusted Trial Balance Adjustm ents Trial Balance Dr. Cr. Dr. Cr. Dr. Cr.

Account Titles
Cash Accounts Receivable Prepaid Insurance Office Equipm ent Accum ulated Depreciation Accounts Payable Ace, Capital Ace, Drawing Service Revenue Depreciation Expense Rent Expense Salaries Expense Totals Insurance Expense Salaries Payable Totals

15 5 4 20

(a) 1 4 10 20 26 (b) 2 (c) 5 (a) 1 (c) 5 8 8 (b) 2

15 5 3 20

2 2 2 10 60

2 4 2 15 1 67

6 10 20 26

60

5 67

Step 3
Com bine trial balance am ounts with adjustm ent am ounts to obtain the adjusted trial balance.

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INTERNATIONAL TRAVEL AGENCY Work Sheet For the Month Ended March 31, 2005

Account Titles

Balance Sheet Dr. Cr. 15 5 3 20 6 10 20 2

ILLUSTRATION 4-5 STEP 4: EXTEND THE ADJUSTED TRIAL BALANCE AMOUNTS TO THE APPROPRIATE FINANCIAL STATEMENTS
5

Cash Accounts Receivable Prepaid Insurance Office Equipm ent Accum ulated Depreciation Accounts Payable Ace, Capital Ace, Drawing Service Revenue Depreciation Expense Rent Expense Salaries Expense Totals Insurance Expense Salaries Payable Totals

Adjusted Incom e ent Trial Balance Adjustm ents Trial Balance Statem Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 15 15 5 5 4 (a) 1 3 20 20 4 (b) 2 6 10 10 20 20 2 2 26 26 26 2 (b) 2 4 4 2 2 2 10 (c) 5 15 15 60 60 (a) 1 1 1 (c) 5 5 8 8 67 67

Extend all revenue and expense account balances to the incom e statem colum Extend all asset, liability, and owner's ent ns. equity account balances to the balance sheet columns.

Step 4

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INTERNATIONAL TRAVEL AGENCY Work Sheet For the Month Ended March 31, 2005

Account Titles

Balance Sheet Dr. Cr. 15 5 3 20 6 10 20 2

ILLUSTRATION 4-6 STEP 5: TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET INCOME (LOSS) AND COMPLETE THE WORK SHEET

Cash Accounts Receivable Prepaid Insurance Office Equipm ent Accum ulated Depreciation Accounts Payable Ace, Capital Ace, Drawing Service Revenue Depreciation Expense Rent Expense Salaries Expense Totals Insurance Expense Salaries Payable Totals Net Income Totals

Adjusted Income ent Trial Balance Adjustm ents Trial Balance Statem Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 15 15 5 5 4 (a) 1 3 20 20 4 (b) 2 6 10 10 20 20 2 2 26 26 26 2 (b) 2 4 4 2 2 2 10 (c) 5 15 15 60 60 (a) 1 1 1 (c) 5 5 8 8 67 67 22 26 4 26 26 45 45 5 41 4 45

Net income is extended to the credit colum of the balance sheet n colum (Net loss would be extended to the debit column.) ns.

Step 5

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ILLUSTRATION 4-7 FINANCIAL STATEMENTS

INTERNATIONAL TRAVEL AGENCY Income Statement For the Month Ended March 31, 2005 Revenue Service Revenue Expenses Salaries expense $15 Depreciation expense 4 Rent expense 2 Insurance expense 1 Total expenses Net income $26

INTERNATIONAL TRAVEL AGENCY Balance Sheet March 31, 2005 Assets Cash Accounts receivable Prepaid insurance Office equipment Less: Accum ulated depreciation Total assets $15 5 3 14 $37

$20 6

22 $ 4

Liabilities and Owners Equity INTERNATIONAL TRAVEL AGENCY Owners Equity Statement For the Month Ended March 31, 2005 Ace, Capital, March 1 Add: Net income Less: Drawing s Ace, Capital, March 31 $20 4 24 2 $22 Liabilities Accounts payable Salaries payable Total liabilities Owners equity Ace, Capital Total liabilities and owners equity $10 5 15 22 $37

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ILLUSTRATION 4-8 CLOSING PROCESS

(Individual) Expenses Dr. Bal. To Income Sum ary m (Individual) Revenues

Owners Drawing

To Incom Cr. Bal. Dr. Bal. To Owners e Sum mary Capital

Temporary Accounts

1 Income Sum ary m Expenses Net Incom e to Owners Capital Revenues Net Loss to Owners Capital

3 Owners Capital

Permanent Accounts

Net Loss Drawing s

Net Income

1 Close revenues to incom sum ary. e m 2 Close expenses to incom sum ary. e m 3 Close incom sum ary to owners ca e m pital. 4 Close owners drawing to owners capital.

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ILLUSTRATION 4-9 CLOSING ENTRIES

GENERAL JOURNAL
Date Account Titles and Explanation Closing Entries (1) Service Revenue Income Summary (To close revenue account) (2) Income Summary Salaries Expense Depreciation Expense Rent Expense Insurance Expense (To close expense accounts) (3) Income Summary Ace, Capital (To close net income to capital) (4) 31 Ace, Capital Ace, Drawing (To close drawing to s capital) 2 Ref. Debit

Page 4 Credit

March 31

26 26

31

22 15 4 2 1

31

4 4