Chapter 7 7-1, 7-2, & 7-3

Terms Concept: Consistent Reporting Applied when the same accounting procedures are followed in the same way in each accounting period Fiscal Period: The length of time for which a business summarizes and reports financial information Most businesses use a one year fiscal period Can begin on any date – but is usually 1st of Month Usually ends during a period of low business activity

Terms Concept: Accounting Period Cycle When changes in financial information are reported for a specific period of time in the form of financial statements

Work sheet Work sheet Four Reasons for a Work sheet A columnar accounting form used to summarize the general ledger information needed to prepare financial statements Planning tool- not considered a permanent accounting record – prepared with a pencil Four Reasons for a Work sheet To prove equality of debits and credits in the general ledger (Trial Balance) To bring account balances up to date (Adjustments) To separate account balances according to the financial statements To calculate the amount of net income or loss

Preparing the Heading of the Worksheet Consists of three lines The name of the business The name of the report (Work Sheet) Date (For Year Ended December 31, 2009)

Preparing the Trial Balance A proof of the equality of debits and credits Information comes from the general ledger Accounts listed in the same order as the Chart of Accounts All account titles are listed even if no balances (Income Summary, Insurance Expense, Supplies Expense will have 0 balances)

Trial Balance

Planning Adjustments Concept: Matching Expenses with Revenue When revenue from business activities and expenses associated with those earning that revenue are recorded in the same fiscal period Adjustments Changes recorded on the work sheet to update general ledger accounts Why? Assets consumed in order to earn revenue become expenses of the business

Adjustments Supplies Adjustment Beg. Balance – Ending Balance=Supplies Used (expense) DR – Supplies Expense CR – Supplies

Adjustments Prepaid Insurance Adjustment Beg. Balance – Ending Balance=Insurance Used (expense) DR – Insurance Expense CR – Prepaid Insurance

Proving Adjustments

Financial Statements Balance Sheet Income Statement Reports Assets, Liabilities, and Owner’s Equity on a specific date Income Statement Shows the revenue and expenses for a fiscal period

Recording Net Income/Loss To determine Net Income Revenue – Expenses (Income Statement Credit – Debit) If Net Income Reported as: DR in Income Statement column CR in the Balance Sheet column If Net Loss Reported as: CR in Income Statement column DR in Balance Sheet column

Extending Balances on the Work Sheet