CHAPTER 6

Work Sheet for a Service Business

Chapter 6 Objectives Define accounting terms. Identify accounting concepts and

practices. Prepare a heading and a trial balance

on a work sheet. Plan adjustments for supplies and

prepaid insurance Complete a work sheet. Identify selected procedures for finding

and correcting errors.

Introduction

Information from a general ledger needs to be analyzed, summarized, and reported in a meaningful way so companies can make informed decisions.

6-1 Creating a Work Sheet

Fiscal period – length of time for which a business summarizes and reports financial information. (Accounting Period Cycle)

Usually a year but it does not have to be a calendar year (Jan 1 – Dec 31)

Military fiscal period (October 1 – Sept 30) School fiscal period (August 1 – July 31)

Financial info may be analyzed, summarized, and reported on any date; however, financial info is always summarized and reported at the end of a fiscal period.

Work Sheet A columnar accounting form used

to summarize the general ledger info needed to prepare financial statements.

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--

AccountTitle

Trial Balance Adjustments Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit Debit Credit

Reasons accountants use a work sheet: To prove that debits equal credits To bring account balances up to date

(adjusting entries) To separate general ledger account

balances according to the financial statements (Income Statement & Balance Sheet)

To calculate the amount of net income or net loss for a fiscal period

Work Sheet Heading

Who What When

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--

AccTitle

Trial Balance

Adjustment

Income Statement

Balance Sheet

Dr Cr Dr Cr Dr Cr Dr Cr

Work Sheet Trial Balance

Proof of the equality of debits and credits

Info is taken from the general ledger listing all accounts in numerical order

Single Rule both columns Total both columns Double rule the debit and credit

columns to prove that they are equal

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--P

Account Title Trial Balance Adjustments Income Statement

Balance Sheet

Debit Credit Debit Credit

Debit Credit

Debit Credit

Cash 4964

Petty Cash 100

Accts. Rec.—Oakdale School 150

Accts. Rec.—Campus Internet Cafe

100

Supplies 1025

Prepaid Ins 1200

Accts. Pay.—Supply Depot 200

Accts. Pay.—Thomas Supply Co.

50

Kim Park, Capital 5000

Kim Park, Drawing 625

Income Summary

Sales 3565

Advertising Expense 213

Insurance Expense

Miscellaneous Expense 28

Rent Expense 300

Supplies Expense

Utilities Expense 110

8815 8815

6-2 Planning Adjusting Entries on a Work Sheet

CONCEPT: Matching Expenses with Revenue - revenue and expenses associated with earning that revenue are to be recorded in the same accounting period.

Example – TechKnow Consulting buys supplies in quantity in August, but some of the supplies are not used until September. Only the value of the supplies used in August should be reported as expenses in August so that August revenue and the supplies expense associated with earning the August revenue are recorded in the same accounting period.

Accuracy of the adjustments are first recorded on the work sheet.

Adjustments are then journalized.

Adjustments are finally posted.

Adjustments – bringing accounts up to date.

Supplies

Prepaid Insurance

Supplies Adjustment on a Work Sheet

Account Title Trial Balance Adjustments

Debit Credit Debit Credit

Supplies 1025 (a) 715

Supplies Expense (a) 715

Label

Debit

Credit

BEFORE ADJUSTMENT

Supplies Expense

Supplies

Aug. 31 Bal. 1,025.00

On August 31, before adjustments, the balance of Supplies is $1,025.00, and the balance of Supplies Expense is zero, as shown in the T accounts.

On August 31, Ms. Park counted the supplies on hand and found that the value of supplies still unused on that date was $310.00.

The value of supplies used is calculated as follows.

Supplies Account

Balance,

August 31

$1,025.00

Supplies on

Hand,

August 31

$310.00

Supplies Used

During

August

$715.00--

==

Four questions are asked in analyzing the adjustment for the asset account, Supplies.

What is the balance of Supplies? $1,025.00

What should the balance be? $310.00

What is the difference? $715.00 the amount USED and the amount that needs to be

adjusted

What account is debited? Supplies Expense $715.00

What account is credited? Supplies $715.00

Prepaid Insurance Adjustment On A Work Sheet

Account Title Trial Balance Adjustments

Debit Credit Debit Credit

Prepaid Insurance 1200 (b) 100

Insurance Expense (b) 100

Label

Debit

Credit

BEFORE ADJUSTMENT

Insurance ExpensePrepaid Insurance

Aug. 31 Bal. 1,200.00

On August 31, before adjustments, the balance of Prepaid Insurance is $1,200.00 and the balance of Insurance Expense is zero.

On August 31, Ms. Park checked the insurance records and found that the value of insurance coverage remaining was $1,100.00.

The value of insurance coverage used during the fiscal period is calculated as follows.

Prepaid

Insurance

Balance,

August 31

$1,200.00

Insurance Coverage

Remaining

Unused,

August 31

$1,100.00

Insurance

Coverage Used

During

August

$100.00

-

-

=

=

Four questions are asked in analyzing the adjustment for the asset account, Prepaid

Insurance.

What is the balance of Prepaid Insurance? $1,200.00

What should the balance be? $1,100.00

What is the difference? $100.00 the amount USED and the amount that needs to be adjusted

What account is debited? Insurance Expense - $100

What account is credited? Prepaid Insurance - $100

AFTER ADJUSTMENTInsurance Expense

Prepaid Insurance

Adj. (b) 100.00

Aug. 31 Bal. 1,200.00

(New Bal. 1,100.00)

Adj. (b) 100.00

The asset account, Prepaid Insurance, is decreased by a credit, $100.00, the value of insurance used. The debit balance, $1,200.00, less the credit adjustment, $100.00, equals the new balance, $1,100.00. the new balance of Prepaid Insurance is the same as the amount of insurance coverage unused on August 31.

Proving The Adjustments Columns

Of A Work Sheet

Single rule the two Adjustment columns

Total the two Adjustment columns to verify that debits equal credits

Double rule the two columns

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--P

Account Title Trial Balance Adjustments Income Statement

Debit Credit Debit Credit Debit

Credit

Supplies 1025 (a) 715

Prepaid Insurance 1200 (b) 100

Insurance Expense (b) 100

Miscellaneous Expense 28

Rent Expense 300

Supplies Expense (a) 715

Utilities Expense 110

8815 8815 8815 8815

6-3Extending Financial Statement Information On A Work Sheet

Two financial statements

Balance Sheet (one specific date) Assets, Liabilities, and Owner’s Equity

Income Statement (covers a fiscal period)

Revenue and Expenses

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--

Account TitleTrial Balance Adjustments Income

StatementBalance Sheet

Dr Cr Dr Cr Dr Cr Dr Cr

Cash 4964 4964

Petty Cash 100 100

Accts. Rec.—Oakdale School 150 150

Accts. Rec.—Campus Internet Cafe

100 100

Supplies 1025 (a) 715

310

Prepaid Insurance 1200 (b) 100

1100

Accts. Pay.—Supply Depot 200 200

Accts. Pay.—Thomas Supply Co. 50 50

Kim Park, Capital 5000 5000

Kim Park, Drawing 625 625

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--

AccountTitle

Trial Balance Adjustments Income Statement

Balance Sheet

Dr Cr Dr Cr Dr Cr Dr Cr

Income Summary

Sales 3565 3565

Advertising Expense 213 213

Insurance Expense (b) 100

100

Miscellaneous Expense

28 28

Rent Expense 300 300

Supplies Expense (a) 715

715

Utilities Expense 110 110

8815 8815 815 815

TechKnow ConsultingWork Sheet

For Month Ended August 31, 20--

Account TitleTrial Balance Adjustments Income Statement Balance Sheet

Dr Cr Dr Cr Dr Cr Dr Cr

Cash 4964 4964

Petty Cash 100 100

Accts. Rec.—Oakdale School 150 150

Accts. Rec.—Campus Internet Cafe 100 100

Supplies 1025 (a) 715 310

Prepaid Insurance 1200 (b) 100 1100

Accts. Pay.—Supply Depot 200 200

Accts. Pay.—Thomas Supply Co. 50 50

Kim Park, Capital 5000 5000

Kim Park, Drawing 625 625

Income Summary

Sales 3565 3565

Advertising Expense 213 213

Insurance Expense (b) 100 100

Miscellaneous Expense 28 28

Rent Expense 300 300

Supplies Expense (a) 715 715

Utilities Expense 110 110

8815 8815 815 815 1466 3565 7349 5250

Net Income 2099 2099

3565 3565 7349 7349

Recording Net Income, And Totaling And Ruling A Work Sheet

Calculating And Recording A Net Loss On A Work Sheet

ACCOUNT TITLEINCOME STATEMENT BALANCE SHEET

DEBIT CREDIT DEBIT CREDIT

2200.00 1800.00 5100.00 5500.00

Net Loss 400.00 400.00

2200.00 2200.0 5,500.00 5,500.00

When you add up the debit column and credit column of the Income Statement, it will NOT be equal

When you add up the debit column and credit column of the Balance Sheet, it will NOT be equal

The difference is NET INCOME or NET LOSS

Net Income The difference between total revenue and

total expenses when revenue is greater Add it to the debit column of the Income

Statement so that the debit and credit columns will equal

Since you made a debit you need an equal credit, so credit the Balance Sheet column so that those two columns will equal

Total and Rule Financial Statements

Single Rule across Income Statement and Balance Sheet columns

Total all four columns Find and record net income/net loss Total all four columns again

Income Statement debit column should now equal the Income Statement credit column

Balance Sheet debit column should now equal the Balance Sheet credit column

Double rule all four columns

Net Loss The difference between total revenue and

total expenses when expenses are greater Add it to the credit column of the Income

Statement so that the debit and credit columns will equal

Since you made a credit you need an equal debit, so debit the Balance Sheet column so that those two columns will equal

6-4Finding and Correcting

Errors On The Work Sheet

Many errors can occur when keeping financial records for a business an amount was not posted from the journal Wrong amount was transferred to work sheet Column was added incorrectly Extension made to the wrong financial statement

If the error is made on the work sheet, you may erase the error to correct it

Checking for Typical Calculation Errors

1. When two column totals are not in balance, find the difference

If the difference is 1 ($.01, $.10, $1.00 or $10.00) the error is most likely in addition so add the columns again.

Debit $14,657.00 Credit $14,658.00 1.00

2. If the difference can be divided evenly by 2, look for the divided amount in the work sheet

Debit $14,657.00Credit $14,609.00

48.00 ÷ 2 = 12.00 The amount might have been put in the wrong

column (say in the debit column when it should have been recorded in the credit column of the trial balance).

3. If the difference can be divided evenly by 9, look for transposed numbers like

54 written as 45 19 written as 91

or check for a slide like $12.00 recorded as $120.00 $350.00 recorded as $35.00

4. Look for an amount equal to the difference, since it might have been omitted.

Checking For Errors In The Work Sheet

Check for Errors in the Trial Balance Column

1. Have all general ledger account balances been copied in the trial balance column correctly?

2. Have all general ledger account balances been recorded in the correct Trial Balance column?

Check for Errors in the Adjustments Columns

1. Do the debits equal the credits for each adjustment? Use the small letters that label each part of an adjustment to help check accuracy and equality of debits and credits.

2. Is the amount for each adjustment correct?

Check for Errors in the Income Statement and Balance Sheet Columns

1. Has each amount been copied correctly when extended to the Income Statement or Balance Sheet column?

2. Has each account balance been extended to the correct Income Statement or Balance Sheet column?

3. Has the net income or net loss been calculated correctly?

4. Has the net income or net loss been recorded in the correct Income Statement or Balance Sheet column?

Correcting An Error In Posting To The Wrong Account

Were all journal entries posted? Were they posted to the correct

account? Was the amount transferred

correctly? Are the balances of the ledger

accounts correct?

Account Prepaid Insurance Account No. 140

Date Item Post

Ref

Debit Credit Balance

Debit Credit

2006Feb.

91 600.00 600.00

1 1 50.00 650.00

Account Supplies Account No. 130

Date Item PostRef

Debit Credit Balance

Debit Credit2006Feb. 1 1 400.00 400.00

25 2 90.00 490.00

12 1 50.00 540.00Correct Entry

Incorrect Entry

Correcting a Posting Error Since the journal and ledger should be

completed in ink, you should never try to erase or white out an error, instead draw a line through the incorrect amount and write the correct amount above it.

Record the posting in the correct account and recalculate the account balance, and correct the work sheet.

Account Utilities Expense Account No. 550

Date Item PostRef

Debit Credit Balance

Debit Credit2006Sept. 8 1

70.00

700.0070.00

700.00

17 1 27.00 27.00

97.00

673.00

Correct Entry

Incorrect

Entry

Correcting An Incorrect Amount And An Amount Posted To The Wrong Column

Incorrect Amount

Correct Amount

Correct Amount

Checking For Errors In Journal Entries

1. Do debits equal credits in each journal entry?

2. Is each journal entry amount recorded in the correct journal column?

3. Is information in the Account Title column correct for each journal entry?

4. Are all of the journal amount column totals correct?

5. Does the sum of debit column totals equal the sum of credit column totals in the journal?

6. Have all transactions been recorded?

Preventing Errors

The best way to prevent errors is to work CAREFULLY and check your work at each step. Use a calculator—most errors are math errors.

REVIEW Know these terms:

Adjustments Balance sheet Fiscal period Income statement Net income Net loss Trial balance Work sheet

TEST Application Complete a Work Sheet

Heading Account Names (in order of account

number) Trial Balance (balances in general ledger)

Debit column must equal Credit column

Adjustments (supplies & prepaid insurance) Debit column must equal Credit column

Income Statement (revenue & expenses) Balance Sheet (assets, liabilities, O.E.) Net Income/Net Loss

What is needed to make Debit & Credit columns equal

Double Rule Work Sheet amount columns

Accounting Concepts

Matching Expenses with Revenue Concept is recording revenue from business activities and expenses associated with earning that revenue in the same accounting period

Consistent Reporting Concept is following the same accounting procedures in the same way in each accounting period

Accounting Period Cycle Concept is reporting changes in financial info for a specific period of time in the form of financial statements

Net Income – when the Income Statement credit column (total sales) is greater than the Income Statement debit column (total expenses) the difference must be added to the debit

column of the Income Statement and the credit column of the Balance Sheet so that debits will equal credits

Net Loss – when Income Statement credit column (total sales) is less than the Income Statement debit column (total expenses) The difference must be added to the credit

column of the Income Statement and the debit column of the Balance Sheet so that debits will equal credits

Business usually choose their fiscal period to end during a period of low business activity

To find the up-dated balance of supplies you must subtract amount of supplies currently on hand from supplies account balance in the general ledger (the answer is what was used and is the expense)

ALL general ledger accounts are listed on the work sheet, even if an account has a zero balance

Accountants can erase on a Work Sheet

Know the various methods used to find errors in the work sheet

Income Statement on a Work Sheet

Contains the following accounts Revenue Expenses Net Income or Net Loss

Balance Sheeton the Work Sheet

Contains the following accounts Assets Liabilities Owner’s Equity (Capital & Drawing) Net Income or Net Loss