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You are Here: Home Principles of Accounting Completion of the Accounting Cycle Steps in Preparing the Worksheet
 
 

Steps in Preparing the Worksheet:

In smaller companies the adjustments are usually entered directly in the journal and posted to the ledger, and the financial statements are prepared directly from the adjusted trial balance. For larger companies, however, which may require many adjusting entries, a worksheet is essential. The work sheet is identified by a heading that consists of the name of the company, the title "Work Sheet", and the period of time covered (as on the income statement). There are five steps in the preparation of a work sheet, as shown below:

 

(i) Entering the Account Balances in the Trial Balance Column:

 

The titles and balances of the accounts are copied directly from the ledger into the trial balance columns. When a work sheet is prepared, a separate trial balance in not required. However, if it has been prepared, the balances may be posted from it in the work sheet.

 

(ii) Entering the Adjustments in the Adjustment Columns:

 

Adjustments have been already explained. The same adjustments are enteredin the adjustment columns of the work sheet as shown in earlier example. As each adjustment is entered, a letter is used to identify the debit and credit parts of the same entry. In practice, this letter may be used to reference supporting computations or documentation underlying the adjusting entry. When all the adjustments have been entered in relevant debit and credit columns, the pair of adjustments columns must be added. This step proves that the debits and credits of the adjustments are equal and generally reduces error in the preparation of the work sheet.

 

(iii) Entering the Account Balances as Adjusted in the Adjusted Trial Balance Columns:

 

The adjusted trial balance prepared by combining the amount of each account in the original trial balance columns with the corresponding amounts in theadjustment's columns and entering the combined amounts on a line by line basis in the adjusted trial balance columns. Adjusted trial balance columns are then footed, that is totaled, to check the arithmetical accuracy of tile cross footing just like that of a normal trial balance.

 

Some accountants prefer to eliminate the adjusted trial balance columns and to extend the adjusted account balances directly to the appropriate statement column for 7 to 12. Such an alternative form of work sheet is especially popular if there are only a few items involved, it would then becalled a "Jen Column Work Sheet".

 

(iv) Extending the Account Balance from the Adjusted Trial Balance Column to the Profit & Loss Columns or the Balance Sheet Columns, (i.e. from column 5 and 6 to column 7 to 12):

 

Every account in the adjusted trial balance is either a balance sheet account or an income statement account. The accounts are sorted, and each account is extended to its proper place as a debit or credit either in the balance sheet columns or in the trading and profit & loss columns. The result of extending the accounts is shown in example-(A). Revenue (profits) and expenses accounts are moved to the profit & loss columns. Assets and liabilities as welt as capital and drawings accounts are then extended to the balance sheet columns. To avoid over looking an account, extend the accounts line by line, beginning with the first line (which is cash) and not omitting any.

 

(v) Totaling the Income Statement Columns and the Balance Sheet Columns. Enter the Net Income or Net Loss in Both Pairs of Columns as a Balancing Figure, and Re-compute Column Totals:

 

This last step as shown in example-(A) is necessary to compute net income or net loss and to prove the arithmetical accuracy of the work sheet. Net income or net loss is equal to the difference between the debit and credit columns of the income statement. In the illustrative example-(A), the revenue has exceeded the expenses. Consequently, the company has a net profit of $45,030. This amount of $45,030 is entered in the debit side of the income statement (PLS A/C) columns to balance the columns and it is entered on the credit side of the balance sheet columns. This is done because excess revenue (net income) increases capital and increases in owner's capital are recorded by credits. If a net loss had occurred, the opposite rule world apply.

 

Example and its Solution for the Preparation of Worksheet:

 

Example-(A):

 

X & Y Company

 

The trial balance of X & Y Company, as on 30th June is given below:

 

  $ $
Cash in hand 680 -
Sundry debtors 46000 -
Discount 300 -
Drawings 11000 -
Opening stock 30000 -
Purchases 75000 -
Sales returns 2700 -
Miscellaneous trade expenses 755 -
Labor wages 3500 -
Salaries 5600 -
Traveling expenses 850 -
Advertising 500 -
Rent and insurance 2800 -
Interest and bank charges 215 -
Bad debts 400 -
Buildings 6000 -
Plant and machinery 10000 -
Furniture 5000 -
Capital - 35000
Purchases returns - 1300
Sales (gross) - 125000
Creditors - 30000
Bank overdraft - 10000
Total $201300 $201300

 

Following additional information is also available:

 

(i) Closing stock on 30th June is $45,000

 

(ii) Charge depreciation at 10% on (a) Plant and machinery (b) Furniture.

 

(iii) Make provision for bad and doubtful debts at 5% of sundry debtors.

 

(iv) $150 on account of insurance are prepaid.

 

Required:

 

Prepare:

 

(a) Trading and P & L Account.

 

(b) Balance sheet as on 30th June.

 

Solution:

 

X & Y Company

Trading, Profit & Loss Account

For the year ended 30th June

 

Opening stock

Purchases                     75000

Less returns                  1300

Net Purchase

Labor charges

Gross profit (carried down)

30000

 

 

 

73700

3500

60100  

Sales

Less returns

Net sales

Closing stock

125000

 

2700

122300

45000

 

Total 167300 Total 167300

Expenses:

Discount

Salaries

Advertising

Rent insurance

Interest & bank charges

Bad debts

Depreciation (machinery)

Depreciation (furniture)

Provision for bad debts

Miscellaneous trade expenses

Traveling expenses

 

Net profit carried to balance Sheet

 

300

5600

500

2650

215

400

1000

500

2300

755

850

 

45030

Gross profit B/d

60100

 

60100

60100

 

X & Y Company

Balance Sheet as on 30th June

 

Capital and Liabilities Assets

Capital                                35000

Add: Profit                           45030

                                          80030

Less: Drawings                   11000

Creditors

Bank Overdraft

 

 

 

69030

30000

10000

Cash in hand

Prepaid insurance

Sundary Debtors                    46000

Less: Provision                       2300

Stocks

Plant & Machinery                  10000

Less: Depreciation                  1000

Furniture                                 5000

Less: Depreciation                   500

Building

680

150

 

43700

45000

 

9000

 

4500

6000

 

109030

109030

 

Example-(B):

 

This solved problem illustrates the use of a work sheet where the columns of trading and profit & loss account has been substituted by Income Statement column .

 

The trial balance for the B & M Delivery Company as on December 31, was as follows:

 

B & M Delivery Company

 

Debit $

Credit $

Cash

10650

Accounts receivable

6400

Supplies on hand

1400

Prepaid insurance

2400

Prepaid rent

40000

Accounts payable

3130

Service Fee received in advance

4500

Capital stock

50000

Dividends (drawings)

3000

Service revenue

10700

Advertising expenses 50  
Gas & oil expenses 680  
Salaries expenses 3600  
Utilities expenses 150  

Total

68330

68330

 

Additional Data:

 

(a) Insurance expense for the month of December $200

 

(b) Rent expense for the month of December $400

 

(c) Supplies used during the month $500

 

(d) Depreciation for December $50

 

(e) One-third of the fees-received in advance account has been earned by 31stDecember.

 

(f) Interest earned but not yet received $600

 

(g) Unbilled service $1000

 

(h) Accrued salaries $180

 

B & M Delivery Company Worksheet as on 31st December

 

Account Title

Trail Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

 

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Cash

10650

10650

10650

Account receivable

6400

6400

6400

Supplies on hand

1400

500

900

 

900

Prepaid insurance

2400

200

2200

2200

Prepaid rent

40000

400

39600

39600

Account payable

3130

3130

3130

Service fee received in advance

4500

1500

3000

3000

Capital stock

50000

50000

50000

Dividends (drawings)

3000

3000

3000

Service revenue

10700

2500

13200

13200

Advertising expenses

50

50

50

Gas and oil expenses

680

680

680

 

Salaries; expenses

3600

180

3780

3780

Utilities expenses

150

150

150

Insurance expense

200

 

200

200

Rent expense

400

400

400

Supplies expense

500

500

500

Depreciation

750

750

750

Accumulated Depreciation

750

750

 

750

Interest receivable

600

600

 

600

Interest revenue

600

600

600

Salaries payable

180

180

180

Service revenue receivable

1000

1000

1000

Net profit

7290

7290

Total

68330

68330

5130

5130

70860

70860

13800

13800

64350

64350

 

Other Articles Related "Steps in Preparing the Worksheet":

 

Necessity For Adjusting Entries in Accounting
Cash Versus Accrual Basis Accounting
Types of Accounting Adjustments
Identifying the Basis for Accounting Adjustments
Example of Adjustment Entries and its Solution
Work Sheet
Specimen Format of the Work Sheet
Steps in Preparing the Worksheet
Financial Statements
Statement of Retained Earning or Profit & Loss Appropriation Account
Balance Sheet
Difference Between Trial Balance & Balance Sheet

 

   Principles of  Accounting

> Basic Accounting Model
> Completion of the Accounting Cycle
> Accounting For Merchandising Operations
> Fixed Assets and Depreciation
> Capital And Revenue
> Accounts For Non-Profit Making Organization

   Cost Accounting

> Role of Cost Accounting
> Materials in Cost Accounting

    Marketing Management

> Introduction to Marketing Management
> Planning For Marketing Management
> Organizing Marketing Management
> Control of Marketing Operations
> Marketing Information System
> Product Management
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