WORKSHEET The worksheet worksheet is a columnar columnar sheet of paper paper on which accountants have summarized information information needed to make the adjusting and closing entries and to prepare prepare the nancial statements! " worksheet is onl# a tool used $# accountants and is not part of the formal accounting records! Worksheets ma# $e used each time nancial statements are to $e prepared% that is& monthl#% 'uarterl#% or at the end of the accounting #ear! The steps in the preparation preparation of the the worksheet are are as follows( )! Enter the titles and $alances of ledger accounts in the Trial *alance columns! +! Enter adjustments in the "djustments columns! ,! Enter adjusted account $alances in the "djusted Trial *alance columns! -! E.tend adjusted $alances of revenues and e.pense accounts from the "djusted Trial *alance columns to the /ncome Statement columns! 0! E.tend adjusted $alances of assets% lia$ilities% and owner1s e'uit# accounts form the "djusted Trial Trial *alance columns columns to the the *alance Sheet columns! columns!
The Trial Balance Columns The trial $alance $alance prepared prepared after after posting is copied in the trial $alance $alance column of the worksheet! worksheet! The titles of of each ledger accounts accounts are are entered on the description description column of of the worksheet! 2suall#% onl# those accounts with $alances as of the end of the accounting period are listed! "lternativel#% "lternativel#% all of the account titles in the chart of accounts could $e listed% even those with zero $alances! The $alances of the ledger accounts are entered in the rst two amount columns of the worksheet% and the columns are totaled! /f the de$it and credit column totals are not e'ual% an error e.ists and will need to $e found and corrected $efore proceeding with the worksheet! To To illustrate illustrate the preparation preparation of a worksheet% worksheet% assume assume the following following trial $alance $alance for 3ruz Service 3enter(
The Adjustment Columns "s #ou learned earlier% adjustments are re'uired to $ring the accounts up4to4date prior to preparing the nancial statements! "djustments are entered in the worksheet in the "djustments columns! The de$its and credits of the entries are cross4referenced $# placing a ke# letter to the left of each amount! This ke# letter facilitates the actual journalizing journalizing of the adjusting entries later without having to 5rethink5 the adjustments in order to record them! 6or e.ample% the adjustment de$iting Supplies E.pense and crediting supplies is identied $# the letter 7a8! 9ote that in the "ccount Titles column% the Supplies E.pense account is written $elow the totals $ecause it did not have a $alance prior to adjustment!
"fter all adjusting entries have $een entered in the "djustments columns% the two columns are totaled! The totals of the two columns should $e e'ual if all de$its and credits have $een entered properl#! The adjustment for 3ruz Service 3enter are as follows( 7a8 Supplies on hand as of :anuar# ,)% ;)% --
The Adjusted Trial Balance Columns "n adjusted trial $alance is the original trial $alance plus or minus the adjustments! /f the item appears as a de$it in the Trial *alance% and there is a credit in the "djustment column% su$tract the two amounts and e.tend the di?erence on the "djusted Trial *alance on the side of the larger amount! /f the item appears as a de$it in the Trial *alance% and the "djustment is also a de$it amount% add and e.tend the total on the de$it side of the "djusted Trial *alance! We add also accounts with credit $alances in the trial $alance and credit amounts in the adjustments! "ll accounts having $alances are e.tended to the "djusted Trial *alance columns! 9ote that some account $alances remain the same $ecause no adjustments have a?ected them! These account $alances are simpl# e.tended to the "djusted Trial *alance columns in the worksheet! The "djusted Trial *alance de$it and credit columns are totaled and the totals must $e e'ual $efore taking the ne.t step in completing the work sheet! /f the Trial *alance columns and the "djustments columns $oth $alance $ut the "djusted Trial *alance columns do not% a math error or an error in e.tension in e.tension are the most likel# causes! The "djusted Trial *alance columns are not essential% $ut the# make the ne.t step of sorting the amounts to the /ncome Statement and *alance Sheet columns much easier!
The Income Statement Columns "ll revenue and e.pense account $alances in the "djusted Trial *alance columns are e.tended to the /ncome Statement columns! Since revenues carr# credit $alances% the# are e.tended to the credit column& e.penses are e.tended to the de$it column!! each column is then su$totaled! /f the total revenue e.ceeds the total e.penses% the di?erence is the net income which is added to the de$it column in order to $ring the two columns into agreement!
The Balance Sheet Columns "ssets% lia$ilities% and owner1s e'uit# accounts listed in the "djusted Trial *alance columns are e.tended to the *alance Sheet column@assets as de$its and lia$ilities and owner1s e'uit# amounts as credits! 9ote that the $eginning% rather than the ending% $alance of owner1s capital is carried into the credit column $ecause closing entries have not #et $een prepared and posted! 9ote also that the net income that was determined in the /ncome Statement columns appears again in the *alance Sheet columns! The net income amount was shown as a de$it in the /ncome Statement columns in order to force $alance those columns! 9et income is shown as a credit in the *alance Sheet columns $ecause it increases owner1s e'uit# or capital% an increase in owner1s e'uit# is accounted for as credits! With the inclusion of the net income amount% the *alance Sheet columns $alance!
PREPARING FINANCIAL STATEMENTS FROM TE !OR"SEET When the worksheet has $een completed% all the information needed to prepare the income statement% statement of owner1s e'uit#% and $alance sheet is readil# availa$le! 9ow the information onl# needs to $e recast into the appropriate nancial statement format!
Income Statement
/nformation needed to prepare the income statement can $e taken form the /ncome Statement columns in the worksheet! The income statement for 3ruz Service 3enter is illustrated $elow #
Ca$ital Statement The capital statement 7also called statement of owner1s e'uit#8 is a nancial statement that summarizes the transactions a?ecting the owner1s capital account $alance! /nformation needed to prepare this nancial statement is taken form the *alance Sheet columns in the worksheet! Such a statement is prepared $# showing the $eginning capital account $alance% adding net income 7 or deducting net loss8% and then su$tracting the owner1s withdrawals! The ending capital $alance is then carried forward to the $alance sheet! The capital statement helps to relate income statement information to $alance sheet information& it indicates how net income% shown on the income statement relates to the amount of owner1s capital% shown on the $alance sheet under owner1s e'uit#!
The Classi%ed Balance Sheet The $alance sheet presented a$ove is a classied $alance sheet! " classied $alance sheet su$divided some of the three major categories in order to provide more specic information for the users of nancial statements! 6or e.ample% assets ma# $e su$divided into man# di?erent categories! "t this point% we will divide assets into 7)8 current assets and 7+8 propert#% plant% and e'uipment! Aia$ilities ma# $e classied as either current or ling4term! Owner1s e'uit# for a single proprietorship cannot $e su$divided into classications!
Current assets are cash and other assets that will $e converted into cash or used up $# the $usiness in relativel# short period of time% usuall# a #ear or less! 3urrent assets commonl# found in a service4t#pe $usiness include cash% accounts and notes receiva$le% and prepaid e.penses! 3urrent assets are normall# listed in order or li'uidit#% or how easil# the# are converti$le into cash! ;ropert#% plant% and e'uipment are assets ac'uired for use in a $usiness rather than for resale! Pro$ert&' $lant' and e(ui$ment also are termed plant assets% or .ed assets! To agree with the order in the heading% items within propert#% plant% and e'uipment are usuall# listed in that order 7propert# rst and e'uipment last8 and are called 5.ed5 assets $ecause the# are used for long4term purposes! Current lia)ilities are de$ts% usuall# due within one #ear% the pa#ment of which normall# will re'uire the use of current assets! 3urrent lia$ilities are normall# listed in order of how soon the# must $e paid& the sooner a lia$ilit# must $e paid% the earlier it normall# is listed! Lon*+term lia)ilities are those de$ts not due for a relativel# long period of time% usuall# more than one #ear! Baturit# date should $e shown in the $alance sheet for all long4term lia$ilities! 9ormall#% the ones with the earliest due date are listed rst! ,O-RNALI.ING AN/ POSTING TE A/,-STING ENTRIES The adjusting entries recorded in the worksheet must also $e recorded in the journal and later posted to the ledger so that the $alances of the accounts in the ledger will conform with the $alances shown in the nancial statements! "djusting entries are recorded on the ne.t availa$le space in the journal! These entries ma# or ma# not $e e.plained! /f no e.planation is re'uired% the series ma# $e presented rst entr#! These entries are also posted in the usual manner e.cept that the word 5"djusting5 is written on the items column to di?erentiate it from other posted entries! The preparation of a worksheet does not eliminate the need to prepare and post adjusting entries $ecause the worksheet is onl# an accounting tool and is not part of the formal accounting records! The adjusting entries of 3ruz Service 3enter are journalized as follows(
TE CLOSING PROCESS The closing entries are series of entries re'uired at the end of the scal period to $ring the $alances of the temporar# accounts to zero so that the# will $e read# to receive data for the ne.t accounting period! These temporar# accounts are the revenue% e.penses% and drawing accounts!
The# are closed at the end of each period so that their $alances ma# $e identied $# the #ear of their occurrence! Hence% we sa# the sales of )CC+ must not include the sales of )CC,! /n the closing process% we use a clearing account called 5/ncome Summar#5! "fter all revenue and e.pense account $alances have $een transferred to /ncome Summar#% its $alance represents the net income or net loss for the period! The $alance in the /ncome account is then closed% or transferred to the owner1s capital account% resulting in a zero $alance in /ncome Summar#! The other terms used are E.pense and Revenue Summar#% or ;rot and Aoss Summar#! The steps in the closing process are as follows(
01 3losing the revenue account7s8! The $alance in the revenue accounts are transferred to the /ncome Summar# account! a! Each Revenue account is de$ited for the amount of its $alance and% )1 The income summar# account is credited for the total revenue! 21 3losing the e.pense accounts! The $alances in the e.pense accounts are transferred to the /ncome Summar# account! a1 The income summar# account is de$ited for the total e.penses% and )1 Each e.pense account is credited for the amount of its $alance! 31 3losing the /ncome Summar# account! The $alance of the income summar# account is transferred to owner1s capital! a1 " credit $alance in the income summar# account represented net income and it is closed $# de$iting income summar# and crediting the capital account! )1 " de$it $alance in the income summar# account represent net loss and it is closed $# de$iting the capital account and crediting the income summar# account! 41 3losing the owner1s drawing account! The $alance of the owner1s drawing account is transferred to the owner1s capital account! a1 The capital account is de$ited for the amount of the withdrawals% and% )1 The drawing account is credited for its $alance! These closing entries are recorded on the ne.t availa$le space in the journal right after the adjusting entries! The# are also posted in the usual manner e.cept that the word 5closing5 is written on the /tems column to di?erentiate it from other posted entries! The closing entries of 3ruz Service 3enter appear on the following page!
"fter closing% some of the accounts a?ected are shown in the following T4accounts! 9ote that e.cept for the owner1s capital account% the other accounts now have zero $alance!
POST+CLOSING TRIAL BALANCE The trial $alance prepared after the adjusting and closing processes is called a post4closing trial $alance! Sometimes it is also called a $alance sheet in a trial $alance form% $ecause the items appearing in the post4closing trial $alance consists of assets% lia$ilities% and capital! The temporar# accounts have $een closed% hence% the# are no longer included! " post4closing trial $alance of 3ruz Service 3enter as of :anuar# ,)% )C"
TE INTERIM STATEMENTS The statements prepared at the middle of the #ear are called interim statements! /f the compan# prepares nancial statements ever# end of the month!% the statements prepared from :anuar# to 9ovem$er are interim statements! The statements prepared at the end of =ecem$er are called #ear4end statements!
RE5ERSING ENTRIES 6or certain t#pes of adjusting entries% reversing entries ma# $e prepared as of the rst da# of the ne.t accounting period! Reversing entries are so named $ecause the# reverse the e?ects of
the adjusting entr# to which the# relate! The purpose of the reversing entr# is to simplif# the rsts entr# relating to that same item in the ne.t accounting period! Recall the adjusting entr# made $# Cruz Service Center to recognize accrued salaries of ;)>
:an ,) Salaries E.pense
)><
Salaries ;a#a$le )><
7+8 Entries when reversing entr# is used
Salaries E.pense )><
)><
Salaries ;a#a$le
To adjust the accrued salaries
To adjust the accrued salaries.
6e$ ) 9o entr#!
Salaries ;a#a$le
)>< Salaries E.pense )>< To reverse the adjusting entry made on Jan. 31.
6e$ )< Salaries ;a#a$le
)><
Salaries E.pense
Salaries E.pense ,% >-<
,% D<<
3ash
,%
D<< 3ash
,% D<<
Paid salaries to employees
Paid salaries to employees
Whether or not a reversing entr# is used% the adjusting entries as of :anuar# ,) are the same! The reversing entr# dated 6e$ruar# )% shown on the right4hand column a$ove is the e.act reverse of the de$it and credit used in the adjusting entr#! The use of the reversing entr# simplies the entr# made on 6e$ruar# )o have alread# $een recorded! When the ;,% D<< pa#ment is made% the entr# is simpl# a de$it to Salaries E.pense and a credit to 3ash for ;,% D<
The T4accounts as the# appear when a reversing entr# is used!
9ot all adjusting entries ma# $e reversed on the rst da# of the ne.t period! /deal entries for reversal are those relating to situations where cash is going to $e paid or received in an adjusting entr#! E.amples of such items would include accrued salaries and un$illed revenues! "djustments for items that will not result in a su$se'uent receipt or pa#ment of cash% such as the adjustment for depreciation% are not reversed! " general rule to follow is that all adjusting journal entries that increase assets or lia$ilities ma# $e reversed 7since the# will result in a future cash receipt or pa#ment8% $ut those adjusting entries that decreases assets or lia$ilities ma# not $e reversed! Thus% adjusting entries that involve accruals of assets 7accrued revenues8 and lia$ilities 7accrued e.pense8 ma# $e reversed! We also reverse adjusting entries for prepaid e.pense recorded under the e.pense method% and unearned revenues% recorded under the revenue method! Since the revenue and e.pense accounts are a?ected $# the closing entries made at the end of the period% there is a need for reversing entries in order to revert $ack to the original method used& namel#% the e.pense method for prepaid e.penses and the revenue method for unearned revenue!