4 - 1 the accounting cycle continued – preparing worksheets and financial statements chapter 4

4 - 1

The Accounting Cycle Continued –

Preparing Worksheetsand Financial Statements

Chapter 4

4 - 2

Following GAAP

GAAP is Generally Accepted Accounting Principles.

Accrual based accounting is used. Revenue is recognized when earned. Expenses are recorded in order to be

matched against the generated revenue.

4 - 3

Following GAAP

What are adjusting entries? Adjusting entries are made to bring

accounts to correct balances before preparing financial statements.

Worksheets assist in this process.

4 - 4

The Accounting Cycle

BusinessTransactions

BusinessTransactions

Book ofOriginal Entry

Book ofOriginal Entry

Book ofFinal Entry

Book ofFinal Entry

1 2 Journal 3 Ledger

Trial BalanceTrial Balance

4

WorksheetWorksheet

5

4 - 5

The Accounting Cycle

Statement ofOwner’s Equity

Statement ofOwner’s Equity

BalanceSheet

BalanceSheet

6 FinancialStatements

Adjusted Trial Adjustments Trial Income BalanceBalance Balance Statement Sheet

Worksheet

Income Statement

Income Statement

4 - 6

Learning Objective 1

Adjustments: prepaid rent,office supplies, depreciation on

equipment, and accrued salaries.

4 - 7

Learning Unit 4-1

Preparing a worksheet: A worksheet is used to facilitate the

preparation of adjusting entries and financial statements.

The worksheet is not a formal report. Correct heading information is used.

4 - 8

Learning Unit 4-1

Adjusting entries: Assets must be adjusted to show amounts

used or allocated to periods and are recorded as expenses.

– supplies used– prepaid rent expired over time– equipment depreciated

4 - 9

Learning Unit 4-1

Expenses incurred must be recorded in the correct period before the period closes.

What is an example?– accrued salaries which have not been

previously recorded

4 - 10

Learning Unit 4-1

Depreciation is a unique adjustment. Equipment and other long-lived assets help

produce revenue over long periods of time. Original cost (amount paid) is also known

as historical cost.

4 - 11

Learning Unit 4-1

Historical cost of the asset remains in the financial statements.

This cost remains in the records as a balance in the asset account.

This cost is allocated to expense over the life of the asset.

What is the accompanying account?

4 - 12

Learning Unit 4-1

The accompanying (contra-asset) account is called Accumulated Depreciation.

This account is used for the yearly credited amounts.

The normal balance is a credit balance.

4 - 13

Learning Unit 4-1

Worksheet Sections– The Trial Balance– The Adjustments– The Adjusted Trial Balance

IncomeStatement

IncomeStatement

BalanceSheet

BalanceSheet

4 - 14

IncomeStatement:

List Revenues& Expenses

OnlyBalances

with the netincome/loss.

IncomeStatement:

List Revenues& Expenses

OnlyBalances

with the netincome/loss.

BalanceSheet:

Balanceswith the netincome/loss.A = L + OE

BalanceSheet:

Balanceswith the netincome/loss.A = L + OE

Learning Unit 4-1

4 - 15


Preparation of adjusted trial

balance on the worksheet.

4 - 16

Adjustments Example

What are the adjusting entries for supplies? Journal: Debit Credit

Supplies Expense x Supplies (record correct amounts) x

The balance in the supplies account after adjusting entries will be equal to the dollar amount of the supplies on hand at the end of the accounting period.

4 - 17

Adjustments Example

Adjusting entries for depreciation. Journal: Debit Credit

Depreciation Expense x Accum. Depr. Equip. x

To record the proper amounts for all relevant asset accounts

4 - 18

Adjustments Example

What are the adjusting entries for accrued service revenue?

Journal: Debit Credit Accounts Receivable x

Revenue x To record the proper amounts for relevant asset and revenue accounts

4 - 19

Adjustments Example

Adjusted Trial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableCapitalRevenueVarious expensesSupplies expenseDepreciation expense

Totals

4,065850300

1,200

1,205

7,620

1705,00

02,45

0

7,620

4 - 20

Adjustments Example

a The business has earned revenue of $1,000 that will be collected next month.

b Inventory of supplies at month end totaled $100.

c Depreciation for the period was calculated as $50.

4 - 21

Adjustments Example



Totals

4,065850300

1,200

1,205

7,620

1705,00

02,45

0

7,620

a) 1,000

b) 200c) 50

1,250

b) 200

c) 50

a) 1,000

1,250

4 - 22

Adjustments Example



Totals

4,065850300

1,200

1,205

7,620

1705,00

02,45

0

7,620

a) 1,000

b) 200c) 50

1,250

b) 200

c) 50

a) 1,000

1,250

4,0651,850

1001,200

1,205200

508,670

50170

5,0003,450

8,670

4 - 23


The income statement and

balance sheet sectionsof the worksheet.

4 - 24

Adjustments Example

Adjusted Income Balance Trial Balance Statement Sheet


Totals

50170

5,0003,450

8,670

4,0651,850

1001,200

1,205200

508,670

3,450

3,450

1,205200

501,455

1,995

4,0651,850

1001,200

7,215

50170

5,000

5,220

1,995

4 - 25


Preparing financial statements

from the worksheet.

4 - 26

Learning Unit 4-2

Preparing the financial statements from the worksheet

The Income Statement Revenue and expenses are reported on the

income statement.

4 - 27

Learning Unit 4-2

The Statement of Owner’s Equity It uses the beginning capital balance from

the balance sheet columns. Subtract withdrawals amount and net loss

and then add net income.

4 - 28

Learning Unit 4-2

The Balance Sheet Use the asset and liability balances from

the balance sheet columns. Use the corrected owner’s equity amounts

from the Statement of Owner’s Equity.

4 - 29

End of Chapter 4

4 - 1 the accounting cycle continued – preparing worksheets and financial statements chapter 4

Documents

n expenses

n depreciation

n equipment

n revenue

n journal

n assets

n worksheets

n accrual