 Work Sheets Chapter 8

Fiscal Periods  A “fiscal” period (a/k/a “accounting” period) is the amount of time for which a business reports financial information  A business picks a length of time – usually a year – and summarizes and reports financial information for that amount of time  This is the business’s “fiscal period.”

Fiscal Periods (continued)  A fiscal period can begin on any date, but usually starts on the first day of the month.  Many use a calendar year  Short year

Fiscal Period (continued) A business will summarize and report financial information at the end of its fiscal period

Work Sheets  A business uses a Work Sheet to prepare financial statements/reports  It is a planning tool – not a report nor a permanent record.  Usually not seen outside of the business

Work Sheets  A Work Sheet consists of 9 columns (some use 11)  The first column is a list of Account titles – from the General Ledger  Frequently done as an Excel spreadsheet

Work Sheets  Work Sheets have a heading.  Work Sheet headings have 3 parts: (1) Name of the business (2) Name of the report (3) Date of the Report

Sample Work Sheet Heading: Ben Radlick, Sole Proprietorship Work Sheet For Month Ended Sept. 30, 2014

Reasons for Preparing a Work Sheet There are 4 reasons why a business prepares a Work Sheet: Reason #1: Make sure Debits equal Credits Drs. MUST EQUAL Crs.

Trial Balance  Proof that Debits equal Credits is called a trial balance.  Where do we get the amounts of debits and credits for the trial balance? From the general ledger.

Trial Balance  Remember we said that the Work Sheet consists of columns?  The next two columns on the Work Sheet after account titles, are the Trial Balance – debits and credits columns.

Trial Balance (continued) Turn to page 176B in your textbook. This is a sample Work Sheet.

Sample Trial Balance Columns Account TitleTrial Balance Debits Credits Cash Petty Cash Supplies Prepaid Insurance

Preparing a Trial Balance (continued) 1. Write the General Ledger Account Titles in the Account Title Column 2.Write the account balances (from the General Ledger) in either the Trial Balance Debit (if they are debit balances) or the Trial Balance Credit (if the are credit balances) columns.

Preparing a Trial Balance (continued) 3. Prove that debits equal credits (i.e., add up the debits and add up the credits in the trial balance columns.) Debits must equal credits.

Preparing a Trial Balance (continued) 4. Rule the columns (double underline.)

Summarizing the Trial Balance  Remember, all of the information is taken from the General Ledger accounts.  Each account has EITHER a debit balance OR a credit balance. Debit balances go in the debit column, and credit balances go in the credit column.  Remember to prove and rule the trial balance columns. You prove the trial balance by showing that debits equal credits.

Reason to Prepare a Work Sheet Reason #2 for preparing a Work Sheet: To make changes (“adjustments”) to some general ledger accounts, so they are up-to-date

Adjustments  The fourth and fifth columns on the Work Sheet are Adjustments.  One column is debits, and the other Credits.

Sample Adjustments Columns Account TitleTrial Balance Debits Credits Adjustments Debits Credits Cash Petty Cash Supplies Prepaid Insurance

Adjustments  GAAP says you must match revenue and expenses.  That means revenue and expenses related to that revenue, must be reported in the same fiscal, or accounting period.

Adjustments To make sure that expenses are matched to revenue, some general ledger accounts must be “adjusted,” or brought up to date, at the end of a fiscal period.

Adjustments  Supplies is an account that may require adjustment.  We debit the Supplies account whenever we buy supplies.  Supplies are an asset, “stuff” that we own (paper, pencils, ink cartridges, etc.), but we use them up in the business as we earn revenue

Adjustments  The value of the supplies used up in generating revenue, is an expense to the business.  It wouldn’t be practical to credit the Supplies account every time we use up paper, pencils, or ink cartridges.  So, what can we do?

Adjustments  At the end of the fiscal period, we calculate the amount of supplies used up, and record it in the expense account, Supplies Expense.  The amount of Supplies Expense will reduce the Supplies account.

Analyzing an Adjustment 1. What is the balance of Supplies? 2. What should the balance be for Supplies (deduct the amount “consumed”)? 3. What do you need to do to correct the account balance? (i.e., increase or decrease? By how much?) 4. What adjustment is made? (Debit Supplies Expense, Credit Supplies.)

Recording the Adjustment 1. Write the debit amount in the Adjustments Debit column on the line with the account title “Supplies Expense.” 2. Write the credit amount in the Adjustments Credit column on the line with the account title “Supplies.” 3. To show that these changes are related, label each with (a).

Adjustments Another account that may require adjustment is Prepaid Insurance. When we bought Insurance, we “prepaid” for future coverage (because you can’t buy insurance coverage for past events.) We debited the account, “Prepaid Insurance.”

Adjustments If we bought insurance for the fiscal period, a year, then each month part of the insurance (1/12) was used up. The insurance used up is an expense of the business.

Adjustments At the end of the fiscal period, the account, “Prepaid Insurance” must be adjusted to reflect the insurance coverage used up.

Adjustments  The amount of insurance used up is recorded in an expense account, Insurance Expense.  The amount of Insurance Expense must reduce the balance in the Prepaid Insurance account

Analyzing an Adjustment 1. What is the balance in Prepaid Insurance? 2. What should be the balance? (i.e., deduct the amount of insurance used up) 3. What must be done to correct the account balance? (i.e., increase or decrease? By how much?) 4. What adjustment is made? (Debit Insurance Expense. Credit Prepaid Insurance.)

Recording the Adjustment 1. Write the debit amount in the Adjustments Debit column on the line with the account title “Insurance Expense.” 2. Write the credit amount in the Adjustments Credit column on the line with the account title “Prepaid Insurance.” 3. To show that these changes are related, label each with (b).

Prove and Rule Adjustments  After making all of the adjustments, you must prove and rule the adjustments columns.  Add up debits. Add up credits. Debits must equal credits. Double underline totals.

Quiz 1. Name two reasons why accountants prepare a Work Sheet. 2. What are the 3 things in a Work Sheet heading? 3. Where do you get the account titles and balance amounts, to prepare a Work Sheet? 4. Why do you need to make adjustments? What would happen if you didn’t?

Answers 1. Two reasons: (a) to show that debits equal credits, and (b) to make adjustments to certain accounts so they are up-to-date. 2. Name of business, name of report, date of the report. 3. From the general ledger. 4. To make sure the accounts reflect expenses incurred during the fiscal period. If you didn’t, expenses wouldn’t be matched with revenue (GAAP).

Financial Statements At the end of the fiscal (accounting) period, businesses prepare 2 financial statements using the worksheet: 1. Income Statement 2. Balance Sheet

Reason to Prepare a Work Sheet Reason #3 for preparing a Work Sheet: To organize information/accounts, to prepare financial statements

Income Statement The income statement shows the revenue (income) and expenses for the entire fiscal period. It is like a video, recording everything that happened in revenue and expenses during that period.

Balance Sheet The Balance Sheet reports the assets, liabilities, and owner’s equity on a specific date. It is like a digital picture, or snapshot, capturing that specific moment in time.

Balance Sheet Account Columns  The balance sheet account columns are the last 2 columns on the Work Sheet.  To prepare a balance sheet, the up-to-date (i.e., adjusted) balances of the balance sheet accounts are extended to the last 2 columns (debits in the debits column, credits in the credits column.)

Balance Sheet Accounts (100) Assets 110 Cash 120 Supplies 140 Prepaid Insurance (200) Liabilities 210 Accounts Payable (300) Owner’s Equity 310 B. Smith, Capital 320 B. Smith, Drawing Income Statement Accounts (400) Revenue 410 Sales (500) Expenses 510 Advertising Exp. 520 Rent Exp. 530 Misc. Exp. Chart of Accounts p. 100

Balance Sheet Accounts  The balance sheet accounts are the Assets, Liabilities, and Owner’s Equity accounts.  Account balances are reported AFTER adjustment.

Sample Balance Sheet Columns Account Title Trial Balance Drs. Crs. Adjust. Drs. Crs. Balance Sheet Drs. Crs. Cash Petty Cash Supplies (a) Prepaid Insurance (b)

Quiz 1. What kind of balance will Asset accounts normally have, debit or credit? 2. What kind of balance will Liabilities mormally have, debit or credit? 3. What kind of balance will the owner’s Capital account normally have? 4. What kind of balance will the owner’s Drawing account normally have?

Answers 1. Debit 2. Credit 3. Credit 4. Debit If you are having trouble with these, review Chap. 4.

Income Statement Columns  The Income Statement Columns are the 6 th and 7 th columns on the Work Sheet (after Adjustments, before the Balance Sheet columns.)  To prepare an Income Statement, the up-to-date (i.e., adjusted) Income Statement account balances are transferred to the Income Statement columns (debits in the debits column, credits in the credits column.)

Balance Sheet Accounts (100) Assets 110 Cash 120 Supplies 140 Prepaid Insurance (200) Liabilities 210 Accounts Payable (300) Owner’s Equity 310 B. Smith, Capital 320 B. Smith, Drawing Income Statement Accounts (400) Revenue 410 Sales (500) Expenses 510 Advertising Exp. 520 Rent Exp. 530 Misc. Exp. Chart of Accounts p. 100

Income Statement Accounts The Income Statement Accounts are the Revenue (Sales) account and the Expense accounts.

Sample Income Statement Columns Account Title Trial Balance Drs. Crs. Adjust. Drs. Crs. Inc. Statement Drs. Crs. Sales Supp. Expense 2647(a) 2647 Rent Exp 250 Insurance Expense 100(b) 100

Reason to Prepare a Work Sheet Reason #4 for preparing a Work Sheet: To calculate Net Income or Net Loss

Defining Net Income or Loss  Net Income = Sales > Expenses  Net Loss = Sales < Expenses  Break even = Sales = Expenses

Calculating Net Income  When total revenue is greater than total expenses, then you calculate Net Income.  Draw a single line across the Income Statement and Balance Sheet Columns. Add each column.  Write the totals under the single line.

Calculating Net Income (con’d) Income Statement Credit Column Total - Income Statement Debit Column Total = Net Income (Sales – Expenses = Net Income)

Steps to Calculate Net Income 1. Draw a line across the 4 Income Statement and Balance Sheet columns. 2. Add each column. Write each total below the single line.

Steps to Calculate Net Income 3. Subtract the Income Statement debit column total from the Income Statement Credit column total. Inc. Statement Credit Total (Sales) – Inc. Statement Debit Total (Expenses) = Net Income

Steps to Calculate Net Income 4. Write the amount of Net Income below the Income Statement DEBIT column total. Write “Net Income” ON THE SAME LINE in the Account Title column. 5. Extend the amount of Net Income to the Balance Sheet CREDIT column on the same line. (Income increases Owner’s Equity – a credit balance).

Net Income

Total and Rule the Work Sheet 1. Draw a single line across the 4 Income Statement and Balance Sheet columns just below Net Income. 2. Add the subtotal (including Net Income) for each column – this will give you the total for each of the Income Statement and Balance Sheet columns.

Prove and Rule 3. Prove the Income Statement and Balance Sheet columns. (Debit column totals must equal credit column totals.) 4. Rule (double underline) the totals.

Net Income

Calculating Net Loss When total expenses are greater than total revenue, then you calculate Net Loss

Calculating Net Loss (con’d) Income Statement Debit Column Total -Income Statement Credit Column Total = Net Loss (Expenses - Sales = Net Loss)

Steps to Calculate Net Loss 1. Draw a line across the 4 Income Statement and Balance Sheet columns. 2. Add each column. Write each total below the single line.

Steps to Calculate Net Loss 3. Subtract the Income Statement Credit column total from the Income Statement Debit column total. Inc. Statement Debit Total (Expenses) – Inc. Statement Credit Total (Sales) = Net Loss

Steps to Calculate Net Loss 4. Write the amount of Net Loss below the Income Statement CREDIT column total. Write “Net Loss” ON THE SAME LINE in the Account Title column. 5. Extend the amount of Net Loss to the Balance Sheet DEBIT column on the same line. (Losses decrease Owner’s Equity – so losses are debits).

Steps to Calculate Net Loss The remaining steps are the same as for Net Income:

Total and Rule the Work Sheet 1. Draw a single line across the 4 Income Statement and Balance Sheet columns just below Net Loss. 2. Add the subtotal (including Net Loss) for each column – this will give you the total for each of the Income Statement and Balance Sheet columns.

Prove and Rule 3. Prove the Income Statement and Balance Sheet columns. (Debit column totals must equal credit column totals.) 4. Rule (double underline) the totals.

Net Income

ERRORS What do you do if your debits do not equal your credits? If your trial balance doesn’t balance, you need to find and correct the error.

Incorrect Amounts  If you find an incorrect amount on a Work Sheet, you can erase the error and replace it with the correct amount.  If you entered something in an incorrect column, then erase the amount and enter it in the correct column  If the column totals do not balance, add them again.

Arithmetic Errors When your debit and credit columns do not balance, then subtract the smaller from the larger to find the difference. 1. If the difference is 1 (e.g.,.01,.10, 1.00, 10.00, etc.) then the error is most likely addition Example: Debit balance: $1,454 Credit balance: $1, 464 The difference is $10 (1,464 – 1,454). The error is probably in addition. Add them again.

Arithmetic 2. If the difference can be evenly divided by 2, then divide the difference in 2 and look for an entry that is equal to that amount. Check to make sure it is in the correct column. Example: Debit balance is $1,454 Credit Balance is $1,504 Difference is $50 ($1,504 – 1,454) $50 can be divided by 2 evenly; the quotient is 25. Look for a $25 entry and check that it is in the correct column.

Arithmetic 3. If the difference can be evenly divided by 9, look for transposed numbers. Example: The difference between the 2 columns is $72. That can be evenly divided by 9 (quotient is 8). Look for numbers that are transposed – 54 written as 45, for example. It may also be a “slide” – you moved the number over one decimal place, so that $ was recorded as $1,200.00

Arithmetic 4. Check the columns to look for an amount, equal to the difference, that was omitted (left out) Example: The difference is $50. Look for a $50 entry that you left out. Check the accounts and the journals.

Errors in the Trial Balance Columns  Check to be sure that all general ledger account balances were copied correctly, and are in the correct column.  Check your math again.

Errors in the Adjustment Columns  Check to see if the debits equal the credits for each individual adjustment. (Use the small letters to match them up.  Check the amounts to make sure they are correct.  Check your math again.

Errors in the Income Statement and Balance Sheet Columns  Check that each amount was recorded correctly when you transferred it to the Income Statement and Balance Sheet column.  Check that each account balance is extended to the correct Income Statement and Balance sheet column  Did you calculate the Net Income (Loss) correctly?  Check your math again.

Errors in Posting to the General Ledger  If the columns don’t balance, and you can’t find an error on the Work Sheet, then check the posting from the Journal to the General Ledger accounts.  Have all the Journal amounts been posted from the Journal? (Note: if you find an entry that was omitted, the dates in the Ledger may be out of order.)  Were all the amounts posted to the correct accounts? If you find an incorrect posting, draw a line through it, and recalculate the balance.

General Ledger Errors  Check that all amounts were written and transferred correctly  Check that all amounts are in the correct column (debit or credit  If you find an error, draw a line through it and write the correct amount above it.

Errors in Journal Entries  For each entry, do debits equal credits?  Is each journal entry recorded in the correct column?  Are the account titles correct for each entry?  Are the journal column totals balanced (i.e., do debits equal credits)?  Are any transactions missing?

Correcting Journal Errors  If you find an error in a Journal entry, you draw a line through it, and write the correct entry above it.  DO NOT ERASE!  See Chapter 5, pp of the textbook.

Quiz 1. How do you correct errors in the Journal or General Ledger? 2. How do you correct errors in the Work Sheet?

Answers 1. In the Journal or General Ledger, you correct errors by crossing out the incorrect entry, and writing the correct one above it. You never erase. 2. The Work Sheet is a temporary record, a tool for preparing financial statements. It is done in pencil and errors may be erased and corrected.

More Quiz Questions 1. What is the difference between an Income Statement and a Balance Sheet? 2. How do you know if you have Net Income or a Net Loss?

Answers 1. A balance sheet is a snapshot that captures a moment in time; it reports assets, liabilities, and owner’s equity for a business. An income statement is like a video that shows a company’s income over a period of time. 2. If the Income Statement Debits column on the worksheet is larger than the Income Statement Credits column, then you have a Net Loss. If the Income Statement Credits column is larger than Debits, then you have Net Income.

Any Questions?? Test is next week – ask now! People who ask questions usually get better grades.