A Worksheet For a service business

1. A Worksheet For a service business Accounting – Chapter 6

2. CONCEPT: Consistent Reporting • The application of the same accounting procedures for each accounting period. • Why is this important? • Comparison • Accuracy

3. Fiscal Period • The length of time for which a business summarizes and reports its financial information • CONCEPT: Accounting Period Cycle • Changes in financial information are reported for a specific period of time in the form of financial statements

4. Determining the Fiscal Period • There is no set rule about the length of a company’s fiscal period • How often do you want to report financial information? • Problems if the cycle is too long • Problems if the cycle is too short • Analysis can be conducted at anytime • Aided by computer based accounting programs

5. Setting the Start Date • Considerations for starting a fiscal period • Often follows the calendar year • Must be done at least once a year • Preparation of financial statements takes time • Examine business activity • Is it better to start/end your fiscal period at a busy or a slow time in a company’s business cycle? • Sole proprietorship income is personal income • Tax considerations

6. Work Sheet • A columnar accounting form used to summarize general ledger information needed to prepare financial statements • Summarize general ledger balances to prove that debits equal credits • Plan needed changes to general ledger accounts to bring account balances up to date • Separate general ledger balances according to the financial statements to be prepared • Calculate the amount of net income/loss for the period

7. Work Sheet Basics • The Work Sheet is a planning tool • Must be prepared in pencil • Heading • Three lines • Name of Company • Name of Report • Date of Report • For the ____ended _____

8. The Trial Balance • A proof of the equality of debits and credits in a general ledger • If quality records are kept, the general ledger is all that is needed to prepare the trial balance • The general journal and source documents might be required if errors are discovered • Errors are found when the trial balance doesn’t result in debits equaling credits

9. Preparing the Trial Balance (pg. 154) • Write the heading on the worksheet • Write the general ledger account (in order of account number) debit balances in the Trial Balance Debit column • Write the general ledger account credit balances in the Trial Balance Credit column • Accounts with no balances are included, but no amounts are entered in the Trial Balance Columns (Income Summary, Supplies Expense and Insurance Expense)

10. Preparing the Trial Balance (cont’d)(pg. 154) • Rule a single line across the two Trial Balance columns below the last line on which an account title is written • Showss that each column is to be added • Add the Trial Balance Debit and the Trial Balance Credit columns. • If they are the same, then they are in balance • If not, recheck your math to locate the error • The remainder of the worksheet cannot be completed until the Trial Balance columns are proved

11. Preparing the Trial Balance (cont’d)(pg. 154) • Write each column’s total below the single ruled line • Rule double lines across both Trial Balance columns. The double lines mean that the Trial Balance column totals have been verified as correct • Complete WT 6.1 with the class • WT61-63.xls

12. Accounting CONCEPT • Matching Expenses with Revenue • Revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period • Provides accuracy in reporting • Provides information about level of expenses required to generate level of revenue

13. Adjustments • Changes recorded on a work sheet to update ledger accounts at the end of a fiscal period • Enables a company to apply the Matching Revenue with Expenses concept • Brings the general ledger accounts up to date • What is the value of supplies used during a specific period? • Transform from assets to expenses • How much prepaid insurance was consumed during a specific period? • Any others?

14. Adjustment Basics • Adjustments are recorded on the worksheet • Changes are not made in general ledger accounts until adjustments are journalized and posted (chapter 8) • Must check for accuracy first!

15. Adjustment to Supplies (pg 158) • Determine the actual supplies balance at the end of the fiscal period (HOW?) • The amount of the adjustment is the Account balance minus the actual balance • Supplies must be credited (reduced) by the amount of the adjustment • Supplies Expense is debited by the amount of the adjustment (the amount used)

16. Adjustment to Supplies (pg 158) • Write the adjustment amount in the Adjustments debit column for Supplies Expense • Write the adjustment amount in the Adjustments credit column for Supplies • Label the two parts of this adjustment with (a) to identify the two amounts are part of the same adjustment

17. Adjustment to Prepaid Insurance (pg 159) • Determine the actual prepaid insurance balance at the end of the fiscal period (HOW?) • The amount of the adjustment is the Account balance minus the actual balance • Prepaid Insurance must be credited (reduced) by the amount of the adjustment • Insurance Expense is debited by the amount of the adjustment (the amount used)

18. Adjustment to Prepaid Insurance (pg 159) • Write the adjustment amount in the Adjustments debit column for Insurance Expense • Write the adjustment amount in the Adjustments credit column for Prepaid Insurance • Label the two parts of this adjustment with (b) to identify the two amounts are part of the same adjustment

19. Proving Adjustments • Once all adjustments have been entered the equality of the debits and credits must be proved • Rule a single line across the two Adjustment Columns on the same line as the single line for the Trial Balance columns • Add both the Adjustment columns • If they are equal, rule a double line across both totals to indicate that the equality has been verified • If not, locate and correct the error • WT61-63.xls

20. A Quick Review • CONCEPT: Consistent Reporting • Accuracy and comparison • CONCEPT: Accounting Period Cycle • Changes in financial information are reported for a specific period of time in the form of financial statements aka Fiscal Period • Timing of the Fiscal Period

21. A Quick Review (cont’d) • Work Sheet • Planning tool prepared in pencil • Trial Balance • List all accounts in the first column • Record debit and credit balances from the General Ledger in the Trial Balance columns • Prove debits = credits by totaling the two Trial Balance Columns • Rule a double line to indicate proof is verified • WT61-63.xls

22. A Quick Review (yes, there’s more) • CONCEPT: Matching Revenue with Expenses • Revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period • Adjustments to specific asset accounts are required to apply this CONCEPT and to update General Ledger balances • Transform assets to expenses • Supplies and Prepaid Insurance

23. A Quick Review (that’s taking so long) • Adjustments are made in the second set of columns of the worksheet • Actual levels of supplies and prepaid insurance are determined • The actual levels of these assets are subtracted from the General Ledger account balances to determine the amount of adjustment

24. Last Review Slide (really) • Adjustments are entered as CREDITS to the asset accounts and DEBITS to the corresponding expense accounts • Small letters in parentheses are included to help match the entries • The adjustment columns are proved by totaling each column at the same point as the Trial Balance • Proof of debits = credits is verified by ruling a double line under the totals

25. Accounting CONCEPT • Accounting Period Cycle • Financial statements are prepared at the end of the accounting period cycle • Can be weekly, monthly, quarterly or annually • A company can prepare statements at any time • SEC requires publically traded corporations to publish financial statements quarterly (10-Q) and annually (10K) • What is the benefit of preparing financial statements?

26. Balance Sheet • A financial statement that reports the assets, liabilities and owner’s equity on a specific date • Snap shot in time • Balance sheet account balances are extended to the Balance Sheet Debit and Credit columns of the Work Sheet • The balance for Supplies and Prepaid Insurance are reduced by the credits in the adjustment columns

27. Income Statement • A financial statement showing the revenue and expenses for a fiscal period • Statement of flow • Up to date balances for income statement accounts are extended to the Income Statement Debit and Credit columns of the worksheet • Supplies Expense and Insurance Expense are included

28. Net Income/Loss • Total revenue – total expenses equals net income or loss for the fiscal period • If revenue>expenses, then Net Income • If revenue<expenses, then Net Loss • Net Income/Loss must be calculated before the Work Sheet can be balanced and ruled

29. Calculating Net Income/Loss • Rule a single line across the Income Stmt and Balance Sheet Columns • Total the columns and record the totals below the single line • Subtract total debits from total credits in the Income Statement columns (Revenue – Expenses)

30. Recording Net Income/Loss • If the result is greater than zero, record the net income below the total in the debit column • If the result is less than zero, record the net loss below the total in the credit • Extend the entry to the balance sheet item • Net Income is recorded as a Credit (why?) • Net Loss is recorded as a Debit (why?) • Rule a single line below the four columns • Total the columns and rule a double line to indicate proof that debits = credits

31. Practice and Review • Turn to page 160 to review the preparation of a Work Sheet using the book overlays • WT61-63.xls

32. Correcting Errors on the Work Sheet • Errors are often detected only during the preparation of the Work Sheet • How do you know there is an error? • Errors on the Work Sheet must be corrected before financial statements can be prepared • It is best to correct all mistakes in the Trial Balance before moving any further • Then, any additional errors occur on the Work Sheet alone

33. Typical Calculation Errors • The difference is 1 ($.01, $.1, etc.) • Math error – Redo calculations • The difference is divisible by 2 • Look for the amount in the trial balance column, it is likely that an item was entered in the wrong column • The difference is divisible by 9 • A slide occurs when numbers are moved one decimal place to the left or right ($25 becomes ($250)

34. Typical Calculation Errors • The difference is an omitted amount • Look for an amount equal to the difference • Often, that item has not been extended to the Work Sheet’s Trial Balance • How do you prevent errors?

35. Checking for Errors in the Work Sheet • Check for errors in the Trial Balance Column • Have all General Ledger account balances been entered and in the correct columns • Check for errors in the Adjustment Columns • Check for errors in the Income Statement and Balance Sheet columns

36. Correcting an Error in Posting to the Wrong Account • Draw a line through the entire incorrect entry • Recalculate the account balance and correct the work sheet • Record the posting in the correct account • Recalculate the account balance and correct the work sheet

37. Correcting an Incorrect Amount in the General Ledger • Draw a line through the incorrect amount • Write the correct amount just aboive the correction in the same space • Recalculate the account balance and correct the balance on the work sheet

38. Correcting an Amount Posted to the Wrong Column • Draw a line through the incorrect item in the account • Record the posting in the correct amount column • Recalculate the balance • Correct the Work Sheet

39. Checking for Errors in Journal Entries • Do debits equal credits? • You can total journal columns on each page to check for accuracy • Were transactions recorded for the correct accounts? • Have all transactions been recorded? • How do you know? • WT 6-4.xls