Chapter 6 WORKSHEET FOR A BUSINESS

What we are going to learn:  Introduce the 8 Column Work Sheet  In order to complete a work sheet  Adjustments must be made  This chapter describes adjustments for a proprietorship  Supplies and Prepaid Insurance  Principles in Accounting Introduced  Consistent Reporting,  Accounting Period Cycle  Matching Expenses with Revenue

LESSON 6-1 CREATING A WORKSHEET

Terms  Fiscal Period  Length of time for which a business summarizes and reports financial information.  Also known as accounting period  Work Sheet  A columnar accounting form used to summarize the general ledger information needed to prepare financial statements.  Planning document  Trial Balance  A proof of the equality of debits and credits in a general ledger.

Consistent Reporting  General Ledger accounts contain information needed by managers and owners  Before information can be used it must be analyzed, summarized, and reported in a meaningful way.  Accounting Concept Consistent Reports  is applied when the same accounting procedures are followed in the same way in each accounting period.

Example  In one year a delivery business might report the number of deliveries made.  The next year, the same business reports the amount of revenue received for the deliveries made.  The information for the two years cannot be compared because the business has not been consistent in reporting information about deliveries.

4 Reasons to Complete a Worksheet  Summarize general ledger account balances to prove debits equal credits  Plan needed changes to general ledger accounts to bring account balances up to date  Separate general ledger account balances according to the financial statements to be prepared  Calculate the amount of net income or net loss for a fiscal period.

Fiscal Periods  Accounting Concept  Accounting Period Cycle  Applied when changes in financial information are reported for a specific period of time in the form of financial statements  Most businesses are on a one year fiscal period due to taxes.

PREPARING THE HEADING OF A WORK SHEET Name of Company 1 Name of Report 2 Date of Report 3 All financial statement headings answer the questions: Who? What? And When?

Preparing a Trial Balance on a Work Sheet  The total of all debit account balances must equal the total of all credit balances.  A proof of the equality of debits and credits in a general ledger is called a trial balance  Information for the trial balance is taken from the general ledger  General ledger account titles are listed on a trial balance in the same order as they are listed on the chart of accounts.  All the account titles are listed even if some accounts do not have balances.

1.Write the general ledger account titles. 2.Write the general ledger debit account balances. Write the general ledger credit account balances. 4.Add both the Trial Balance Debit and Credit columns. 3.Rule a single line across the two Trial Balance columns. 5.Write each column’s total below the single line. 6.Rule double lines across both Trial Balance columns. PREPARING A TRIAL BALANCE ON A WORK SHEET

TERMS REVIEW  fiscal period  work sheet  trial balance

Audit Your Understanding  What is written on the three-line heading on a work sheet?  Name of business, name of report, date  What general ledger accounts are listed in the Trial Balance Columns of a work sheet?  All of them even if an account does not have a balance

6.2 Planning Adjusting Entries on a Work Sheet

Objectives  Plan adjustments for Supplies and Prepaid Insurance  Learn how to analyze adjustments for Supplies and Prepaid Insurance  Adjustments  Changes recorded on a work sheet to update general ledger accounts at the end of a fiscal period.  Portions of assets consumed in order to earn revenue become expenses of the business.

Planning Adjustments on a Work Sheet  TechKnow buys supplies in quantity in August but some of the supplies are not used until Sept.  Only the value of the supplies used in Aug. should be reported as expenses in Aug.  Aug. revenue and the supplies expense associated with earning the Aug. revenue are recorded in the same accounting period.  Accounting Concept: Matching Expenses with Revenue

Planning Adjustments on a Work Sheet  In order to give accurate information the Supplies account will need to be brought up to date.  TechKnow debits an asset account, Supplies, each time supplies are bought.  Supplies on hand are items of value owned by a business until the supplies are used.  The value of supplies that are used becomes an expense to the business.

Supplies Expense  Recording an expense each time an individual supply, such as pencil is used is impractical. – This is why we do adjustments  On Aug 31, the balance of the asset account Supplies, is the value of all supplies bought rather than the value of the supplies that have not yet been used.  The amount of supplies that have been used must be deducted from the asset account, Supplies and recorded in Supplies Expense

Prepaid Insurance Expense  The amount of insurance that has been used during the fiscal period is also an expense of the business  When insurance premium for a year of insurance coverage is paid, the entire amount is debited to an asset account – Prepaid Insurance.  At the end of the fiscal period the amount of the insurance coverage used must be deducted from the asset account Prepaid Insurance and recorded in the expense account, Insurance Expense

Adjustments  Changes recorded on a work sheet to update general ledger accounts at the end of a fiscal period are called adjustments  Assets of a business such as supplies and prepaid insurance are used to earn revenue.  After the adjustments are made, the expenses incurred to earn revenue are reported in the same fiscal period as the revenue is earned and reported.  Accounting Concept – Matching Expenses with Revenue

Adjustments  A work sheet is used to plan adjustments  Changes are not made in general ledger accounts until adjustments are journalize and posted  On Aug. 31, before adjustments, the balance of Supplies is $1, and the balance of Supplies Expense is zero

On Aug. 31 supplies were counted and found that the value of supplies still unused on that date was $ The value of the supplies used is calculated as follows:  Supplies Account Balance, Aug Supplies on Hand, Aug. 31 = Supplies Used During Aug. $1, = $715.00

4 Questions to ask when making Adjustments  What is the balance?  1,025  What should the balance be for this account?  310  What must be done to correct the account balance?  715  What adjustment is made?  Debit Supplies Expense –  Credit Supplies

SUPPLIES ADJUSTMENT ON A WORK SHEET Write the debit amount. 2.Write the credit amount. 3.Label the two parts of this adjustment.

PREPAID INSURANCE ADJUSTMENT ON A WORK SHEET Write the debit amount. 2.Write the credit amount. 3.Label the two parts of this adjustment.

PROVING THE ADJUSTMENTS COLUMNS OF A WORK SHEET 3.Rule double lines. 2.Add both the Adjustments Debit and Credit columns. Write each column’s total. 1.Rule a single line

TERM REVIEW  adjustments

Audit Your Understanding  Explain how the concept of matching Expenses with Revenue relates to adjustments. An expense should be reported in the same fiscal period that it is used to produce revenue.  List the four questions asked in analyzing an adjustment on a work sheet.  What is the balance of the account? What should the balance be for this account? What must be done to correct the account balance? What adjustment is made?

LESSON 6-3 EXTENDING FINANCIAL STATEMENT INFORMATION ON A WORK SHEET

Financial Statements  Balance Sheet  Reports assets, liabilities and Owner's Equity on a specific date  Income Statement  Shows revenues and expenses for a fiscal period.  Net Income  Difference between total revenue and total expenses when total revenue is greater  Net Loss  Difference between total revenue and total expenses when total expenses are greater

EXTENDING BALANCE SHEET ACCOUNT BALANCES ON A WORK SHEET 1.Debit balances without adjustments 2.Debit balances with adjustments 3.Credit balances without adjustments 3 2 1

EXTENDING INCOME STATEMENT ACCOUNT BALANCES ON A WORK SHEET 1.Sales balance 2.Expense balances without adjustments 3.Expense balances with adjustments 1 3 2

1.Single rule 2.Totals 3.Net income RECORDING NET INCOME, AND TOTALING AND RULING A WORK SHEET 4.Extend net income6.Totals Single rule7.Double rule

CALCULATING AND RECORDING A NET LOSS ON A WORK SHEET 2.Totals 3.Net loss 4.Extend net loss 1.Single rule

PREPARING A WORK SHEET 1.Write the heading. 2.Record the trial balance. 3.Record the supplies adjustment. 4.Record the prepaid insurance adjustment. 5.Prove the Adjustments columns. 6.Extend all balance sheet account balances. 7.Extend all income statement account balances. 8.Calculate and record the net income (or net loss). 9.Total and rule the Income Statement and Balance Sheet columns.

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(b) (a) Net Income

TERMS REVIEW  balance sheet  income statement  net income  net loss

Audit Your Understanding  Which accounts are extended into the Balance Sheet columns of the worksheet?  Asset Liability and OE accounts  Which accounts are extended in to the Income statement columns of the work sheet?  Revenue and expense accounts  In which Balance Sheet column do you record net income on the work sheet?  Balance Sheet Credit Column  In which Balance sheet columns do you record net loss on the work sheet?  Balance Sheet Debit Column

LESSON 6-4 FINDING AND CORRECTING ERRORS ON THE WORK SHEET

CORRECTING AN ERROR IN POSTING TO THE WRONG ACCOUNT 1.Draw a line through the entire incorrect entry. Recalculate the account balance and correct the work sheet. 2 Correct entry 1 Incorrect entry 2.Record the posting in the correct account. Recalculate the account balance, and correct the work sheet.

44 LESSON 6-4 CORRECTING AN INCORRECT AMOUNT page Draw a line through the incorrect amount. 2.Write the correct amount just above the correction in the same space. 3.Recalculate the account balance, and correct the account balance on the work sheet.

45 LESSON CORRECTING AN AMOUNT POSTED TO THE WRONG COLUMN 546 page Recalculate the account balance, and correct the work sheet. 5.Record the posting in the correct amount column. 4.Draw a line through the incorrect item in the account.