1 The Work Sheet and Financial Statements Chapter 8

2 8.1 The Six-Column Work Sheet

3 Purpose of the Work Sheet work sheet A work sheet is an informal business paper used to organize and plan the information for the financial statements. This is a great application for a computerized spreadsheet program. work sheet In Chapter 9 we will expand the work sheet to eight columns, allowing for the adjustments required by certain GAAPs.

4 Control Accounts for Accounts Receivable and Accounts Payable In the future, when we prepare a trial balance, or a work sheet, we will not display the debtors’ names or creditors’ names associated with Accounts Receivable and Accounts Payable. control accounts Alternatively, we will use control accounts. Accounts Receivable control account The Accounts Receivable control account represents the sum of the balances of all the individual Accounts Receivable accounts.

5 Control Accounts for Accounts Receivable and Accounts Payable Accounts Payable control account The Accounts Payable control account represents the sum of the balances of all the individual Accounts Payable accounts. Having two control accounts, instead of dozens or hundreds of individual debtors’ and creditors’ accounts, streamlines the work sheet. The details about the accounts of individual debtors and creditors are kept in separate records. This will be covered in more detail in Chapter 11.

6 Steps in Preparing a Work Sheet Step 1 Write in the title of the work sheet and all of the headings: Accounts Trial Balance Income Statement Balance Sheet

7 Steps in Preparing a Work Sheet Step 2 Enter all accounts, with their balances, in the first two columns.

8 Steps in Preparing a Work Sheet Step 3 Extend each of the amounts from the trial balance. Assets, Liabilities, Capital and Drawings in the Balance Sheet columns. Revenue and Expenses in Income the IncomeStatement columns.

9 Steps in Preparing a Work Sheet Step 4: Step 4: Balance the work sheet … (a) take totals

10 Steps in Preparing a Work Sheet Step 4: Step 4: (b) calc. difference Make sure the difference for Income the IncomeStatement columns equals the difference Balance for the Balance Sheet Sheet columns. If they are not equal, the work sheet does not balance not balance. Errors must be found before proceeding to the preparation of financial statements.

11 Steps in Preparing a Work Sheet Step 4: Step 4: (c) Record the balancing figure (difference) in the appropriate Income Statement and Balance Sheet columns. Net Income Because revenues (Income Statement credits) are greater than expenses (debits) the difference is Net Income and it is recorded in the debit column. Net Income The balancing figure appears on the credit side of the Balance Sheet section, because Net Income represents an increase in capital.

12 Steps in Preparing a Work Sheet

13 Steps in Preparing a Work Sheet Income Statement Columns Revenue (credits) greater than expenses (debits). Net Income Result … Net Income. Balance Sheet Columns Net Income Net Income (the balancing figure) is on the credit side as it is an increase to capital

14 Steps in Preparing a Work Sheet Income Statement Columns If the work sheet showed a Net Loss Net Loss, the expenses (debits) would be greater than the revenues (credits). Net Loss The Net Loss (balancing figure) would be in the credit column. Balance Sheet Columns If the work sheet showed a Net Loss, Net Loss, the balancing figure would be on the debit side as it is an decrease to capital.

15 The Work Sheet and the Financial Statements Review the format

16 Steps in Preparing a Work Sheet Review the format

17 Accounts Payable Miscellaneous Expense Revenue Advertising Expense Wages Expense Mortgage Payable Utilities Expense Equipment G. Rojek, Capital Delivery Expense HST Recoverable Bank Loan Accounts Receivable Automobile Bank G. Rojek, Drawings Sales Bank Charges Expense Rent Expense Supplies Trucks HST Payable Class Work Exercise 1 For each account listed below, indicate whether it would be extended to the Income Statement or Balance Sheet, debit or credit columns.

18 Class Work Exercise 2 Prepare a work sheet for N. Foreman and Company for the month ended April 30, 2007.

19 Class Work p. 262, Exercise 4 Locate errors and make necessary corrections.