Chapter 8 the six column work sheet
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Chapter 8 – The six-Column Work Sheet. May 16, 2012. What is the purpose of Accounting?. To make wise business decisions. Work Sheet. An informal business paper used to organize and plan the information for the financial statements.

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Chapter 8 – The six-Column Work Sheet

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Chapter 8 – The six-Column Work Sheet

May 16, 2012


What is the purpose of Accounting?


To make wise business decisions


Work Sheet

  • An informal business paper used to organize and plan the information for the financial statements.


Specifically for this Chapter you will learn how to use a 6-column work sheet


You will learn about 8-column work sheet in Chapter 9


Control Accounts

  • Accounts used to represent the sum of individual accounts of the same type.

  • Example: Accounts Receivable control accounts is the sum of all the individual Accounts Receivables.


Steps for Preparing a Work Sheet

  • Step 1 – Write in the heading.


Step 1

  • The heading from left to right:

  • Company name

  • “Work Sheet”

  • Year Ended December 31, 20--


Steps for Preparing a Work Sheet

  • Step 1 – Write in the heading.

  • Step 2 – Enter all accounts with their balances in the first two columns under “Trial Balance.” Ensure it is in balance.


Steps for Preparing a Work Sheet

  • Step 1 – Write in the heading.

  • Step 2 – Enter all accounts with their balances in the first two columns under “Trial Balance.” Ensure it is in balance.

  • Step 3 - Extend the amounts to the corresponding columns on the right.


Step 3

  • Assets and Liabilities go in the two farthest columns under “Balance sheet.”

  • Sales/Revenue and Expenses go to the middle columns under “Income Statement.”


Steps for Preparing a Work Sheet

  • Step 1 – Write in the heading.

  • Step 2 – Enter all accounts with their balances in the first two columns under “Trial Balance.” Ensure it is in balance.

  • Step 3 - Extend the amounts to the corresponding columns on the right.

  • Step 4 – Balance the worksheet


Step 4

  • The income statement and Balance Sheet, alone, are not expected to balance

  • The difference between Sales/Revenue and Expenses represents the Net income/loss

  • The Net Income should also match the difference between assets and liabilities


Net Income  or Net Loss 

  • Net Income: Sales/Revenue > Expenses

  • Represented as a Debit under the Income statement and a Credit under the Balance Sheet columns

  • Net Loss: Sales/Revenue < Expenses

  • Represented as a CR under the Income statement and a DR under the Balance Sheet columns


Test your knowledge


What is the purpose of Accounting?


What is the purpose of Accounting?

  • To make wise business decisions


How do you tell if a company has made a profit or loss?


How do you tell if a company has made a profit or loss?

  • If Sales/Revenue is greater than expenses


What are the six steps of the accounting cycle learned so far?


What are the six steps of the accounting cycle learned so far?

  • Transactions occur

  • Transactions journalized

  • Journal entries posted to ledger

  • Trial Balance prepared

  • Worksheet prepared

  • Income statement and balance sheet prepared


Chapter 8 – How Accountants use Income Statements

May 17, 2012


Comparing Income Statements

  • Used to calculate the change as either a dollar amount($) or percentage (%)


Example


This is just one example looking specifically at Car Expense


Accountants will use this analysis with several accounts and try to implement changes to make the company more profitable / efficient


Try it yourself

20102011

Wages Expense$21,000$39,000

Calculate both the dollar change and percentage change.


Try it yourself

20102011

Wages Expense$21,000$39,000

Calculate both the dollar change and percentage change.

Dollar Change = 39,000-21,000 = 18,000

Percent Increase = 18,000/21,000 = 85.7%


Trend Analysis

  • Shows financial data over a number of consecutive periods.


When looking at the final results only, important information on variance is ignored


How to compare companies of different sizes


Common-Size Income Statements

  • Income statements of two companies compared side by side while expense accounts are shown as a percentage of sales.


Common-size Equation


How Accountants Use Balance Sheets

May 23, 2012


Test your knowledge


What is the purpose of Accounting?


What is the purpose of Accounting?

To make wise business decisions


The 3 financial documents on a six-column work sheet are:


The 3 financial documents on a six-column work sheet are:

  • Trial Balance

  • Income Statement

  • Balance Sheet


Fill-in the blank

  • When creating a six-column worksheet drawings is add to the ___________ column.


Fill-in the blank

  • When creating a six-column worksheet drawings is add to the Balance Sheet debit column.


True / False

  • In a six column work sheet, the difference between the assets and the liabilities/capital is the net income/loss.


True


Fill-in the blanks

  • Net income occurs when the total _________ of the balance sheet are greater than the total __________ of the balance sheet.


Fill-in the blanks

  • Net income occurs when the total debits of the balance sheet are greater than the total credits of the balance sheet.


Question

  • Which techniques have you learned so far to analyze income statements?


Techniques

  • Amount changes

  • Percent changes

  • Trend analysis

  • Common-size income statements


How can two companies’ income statements of different sizes be compared?


How can two companies’ income statements of different sizes be compared?

  • Divide all account values by the total sales and show changes as percentages.


How Accountants Use Balance Sheets

May 23, 2012


You have learned the account form of the balance sheet


Account form of the balance sheet

  • Assets listed on the left side

  • Liabilities and Capital listed on the right


Assets

Liabilities

Capital

Heading


Report form of the balance sheet

  • Assets on the top

  • Liabilities and Capital on the bottom

  • Allows for easier analysis


Assets

Liabilities

Capital

Heading


Classified Balance Sheet

  • Data grouped according to major categories


The categories are:


Current Assets

  • Assets that will be converted into cash (or used up) during the next year.


Fixed Assets

  • Long-term (plant and equipment): assets held for their usefulness in producing goods or services


What do you think Current Liabilities are?


Current Liabilities

  • Short-term debts, payment of which is expected to occur within one year (of the balance sheet date).


Long-term liabilities

  • Debts of the business that are not due within one year.


Capital

  • Shows starting Capital

  • Net income/Loss

  • Drawings

  • Current Capital


“Working Capital” and the Ability to pay Debts


Working Capital

Working Capital = Current Assets – Current liabilities

  • Used to determine the ability of a company to pay debts

  • Higher the working capital the better


Example

Dares Bikes:

  • Current Assets = $50,000

  • Current Liabilities = $30,000

  • What information does this give us regarding Dares Bikes?


Working Capital

  • Working Capital = 50,000-30,000 = 20,000

  • Dares Bikes within the next year expects to receive $50,000 from sources and must pay $30,000. With a working capital of $20,000, Dares Bikes has an excellent ability to pay off debts. Dares Bikes may in fact wish to borrow more money to expand business.


Comparative statements, Trend analysis and common-size statements


Comparative Statements

  • Compares statements of a previous year to the current year and shows the increase/decrease for each account (as an amount and percent)


Example

  • P272


Trend Analysis

  • Used to show changes over several periods

  • Example p 273


Common-Size Statements

  • All account balances are divided by total assets


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