BUS103: Introduction to Financial Accounting

The work sheet is a columnar sheet of paper or a computer spreadsheet on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements. Usually, they save these work sheets to document the end-of-period entries. A work sheet is only an accounting tool and not part of the formal accounting records. Therefore, work sheets may vary in format; some are prepared in pencil so that errors can be corrected easily. Other work sheets are prepared on personal computers with spreadsheet software. Accountants prepare work sheets each time financial statements are needed – monthly, quarterly, or at the end of the accounting year.

This chapter illustrates a 12-column work sheet that includes sets of columns for an unadjusted trial balance, adjustments, adjusted trial balance, income statement, statement of retained earnings, and balance sheet. Each set has a debit and a credit column. (See Exhibit 20.)

Accountants use these initial steps in preparing the work sheet. The following sections describe the detailed steps for completing the work sheet.

• Enter the titles and balances of ledger accounts in the Trial Balance columns.
  
• Enter adjustments in the Adjustments columns.
  
• Enter adjusted account balances in the Adjusted Trial Balance columns.
  
• Extend adjusted balances of revenue and expense accounts from the Adjusted Trial Balance columns to the Income Statement columns.
  
• Extend any balances in the Retained Earnings and Dividends accounts to the Statement of Retained Earnings columns.
  
• Extend adjusted balances of asset, liability, and capital stock accounts from the Adjusted Trial Balance columns to the Balance Sheet columns.
  

Instead of preparing a separate trial balance as we did in Chapter 2, accountants use the Trial Balance columns on a work sheet. Look at Exhibit 20 and note that the numbers and titles of the ledger accounts of MicroTrain Company are on the left portion of the work sheet. Usually, only those accounts with balances as of the end of the accounting period are listed. (Some accountants do list the entire chart of accounts, even those with zero balances.) Assume you are MicroTrain's accountant. You list the Retained Earnings account in the trial balance even though it has a zero balance to (1) show its relative position among the accounts and (2) indicate that December 2010 is the first month of operations for this company. Next, you enter the balances of the ledger accounts in the Trial Balance columns. The accounts are in the order in which they appear in the general ledger: assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Then, total the columns. If the debit and credit column totals are not equal, an error exists that must be corrected before you proceed with the work sheet.

As you learned in Chapter 3, adjustments bring the accounts to their proper balances before accountants prepare the income statement, statement of retained earnings, and balance sheet. You enter these adjustments in the Adjustments columns of the work sheet. Also, you cross-reference the debits and credits of the entries by placing a key number or letter to the left of the amounts. This key number facilitates the actual journalizing of the adjusting entries later because you do not have to rethink the adjustments to record them. For example, the number (1) identifies the adjustment debiting Insurance Expense and crediting Prepaid Insurance. Note in the Account Titles column that

the Insurance Expense account title is below the trial balance totals because the Insurance Expense account did not have a balance before the adjustment and, therefore, did not appear in the trial balance.

Work sheet preparers often provide brief explanations at the bottom for the keyed entries as in Exhibit 20. Although these explanations are optional, they provide valuable information for those who review the work sheet later.

The adjustments (which were discussed and illustrated in Chapter 3) for MicroTrain Company are:

Exhibit 19: Steps in the accounting cycle

• Entry (1) records the expiration of USD 200 of prepaid insurance in December.
  
• Entry (2) records the expiration of USD 400 of prepaid rent in December.
  
• Entry (3) records the using up of USD 500 of supplies during the month.
  
• Entry (4) records USD 750 depreciation expense on the trucks for the month. MicroTrain acquired the trucks at the beginning of December.
  
• Entry (5) records the earning of USD 1,500 of the USD 4,500 in the Unearned Service Fees account.
  
• Entry (6) records USD 600 of interest earned in December.
  
• Entry (7) records USD 1,000 of unbilled training services performed in December.
  
• Entry (8) records the USD 180 accrual of salaries expense at the end of the month.
  

Often it is difficult to discover all the adjusting entries that should be made. The following steps are helpful:

• Examine adjusting entries made at the end of the preceding accounting period. The same types of entries often are necessary period after period.
  
• Examine the account titles in the trial balance. For example, if the company has an account titled Trucks, an entry must be made for depreciation.
  
• Examine various business documents (such as bills for services received or rendered) to discover other assets, liabilities, revenues, and expenses that have not yet been recorded.
  
• Ask the manager or other personnel specific questions regarding adjustments that may be necessary. For example: "Were any services performed during the month that have not yet been billed?"
  

MICROTRAIN COMPANY Work Sheet For the Month Ended 2010 December 31

Acct. Account Titles

Exhibit 20: Completed worksheet

(1) To record insurance expenses for December.

(2) To record rent expenses for December.

(3) To record supplies expenses for December.

(4) To record depreciation expenses for December.

(5) To transfer fees for service provided in December from the liability account to the revenue account.

(6) To record one month's interest revenue.

(7) To record unbilled training services performed in December.

(8) To accrue one day's salaries that were earned but are unpaid.

After all the adjusting entries are entered in the Adjustments columns, total the two columns. The totals of these two columns should be equal when all debits and credits are entered properly.

After MicroTrain's adjustments, compute the adjusted balance of each account and enter these in the Adjusted Trial Balance columns. For example, Supplies on Hand (Account No. 107) had an unadjusted balance of USD 1,400. Adjusting entry (3) credited the account for USD 500, leaving a debit balance of USD 900. This amount is a debit in the Adjusted Trial Balance columns.

Next, extend all accounts having balances to the Adjusted Trial Balance columns. Note carefully how the rules of debit and credit apply in determining whether an adjustment increases or decreases the account balance. For example, Salaries Expense (Account No. 507) has a USD 3,600 debit balance in the Trial Balance columns. A USD 180 debit adjustment increases this account, which has a USD 3,780 debit balance in the Adjusted Trial Balance columns.

Some account balances remain the same because no adjustments have affected them. For example, the balance in Accounts Payable (Account No. 200) does not change and is simply extended to the Adjusted Trial Balance columns.

Now, total the Adjusted Trial Balance debit and credit columns. The totals must be equal before taking the next step in completing the work sheet. When the Trial Balance and Adjustments columns both balance but the Adjusted Trial Balance columns do not, the most probable cause is a math error or an error in extension. The Adjusted Trial Balance columns make the next step of sorting the amounts to the Income Statement, the Statement of Retained Earnings, and the Balance Sheet columns much easier.

Begin by extending all of MicroTrain's revenue and expense account balances in the Adjusted Trial Balance columns to the Income Statement columns. Since revenues carry credit balances, extend them to the credit column. After extending expenses to the debit column, subtotal each column. MicroTrain's total expenses are USD 6,510 and total revenues are USD 13,800. Thus, net income for the period is USD 7,290 (USD 13,800 – USD 6,510). Enter this USD 7,290 income in the debit column to make the two column totals balance. You would record a net loss in the opposite manner; expenses (debits) would have been larger than revenues (credits) so a net loss would be entered in the credit column to make the columns balance.

Next, complete the Statement of Retained Earnings columns. Enter the USD 7,290 net income amount for December in the credit Statement of Retained Earnings column. Thus, this net income amount is the balancing figure for the Income Statement columns and is also in the credit Statement of Retained Earnings column. Net income appears in the Statement of Retained Earnings credit column because it causes an increase in retained earnings. Add the USD 7,290 net income to the beginning retained earnings balance of USD 0, and deduct the dividends of USD 3,000. As a result, the ending balance of the Retained Earnings account is USD 4,290.

Now extend the assets, liabilities, and capital stock accounts in the Adjusted Trial Balance columns to the Balance Sheet columns. Extend asset amounts as debits and liability and capital stock amounts as credits.

Note that the ending retained earnings amount determined in the Statement of Retained Earnings columns appears again as a credit in the Balance Sheet columns. The ending retained earnings amount is a debit in the Statement of Retained Earnings columns to balance the Statement of Retained Earnings columns. The ending retained earnings is a credit in the Balance Sheet columns because it increases stockholders' equity, and increases in stockholders' equity are credits. (Retained earnings would have a debit ending balance only if cumulative losses and dividends exceed cumulative earnings.) With the inclusion of the ending retained earnings amount, the Balance Sheet columns balance.

When the Balance Sheet column totals do not agree on the first attempt, work backward through the process used in preparing the work sheet. Specifically, take the following steps until you discover the error:

MICROTRAIN COMPANY

Income Statement For the Month Ended 2010 December 31

Exhibit 21: Income statement

• Re-total the two Balance Sheet columns to see if you made an error in addition. If the column totals do not agree, check to see if you did not extend a balance sheet item or if you made an incorrect extension from the Adjusted Trial Balance columns.
  
• Re-total the Statement of Retained Earnings columns and determine whether you entered the correct amount of retained earnings in the appropriate Statement of Retained Earnings and Balance Sheet columns.
  
• Re-total the Income Statement columns and determine whether you entered the correct amount of net income or net loss for the period in the appropriate Income Statement and Statement of Retained Earnings columns.