CHAPTER 6

1. CHAPTER 6 Work Sheet for a Service Business

2. Chapter 6 Objectives • Define accounting terms. • Identify accounting concepts and practices. • Prepare a heading and a trial balance on a work sheet. • Plan adjustments for supplies and prepaid insurance • Complete a work sheet. • Identify selected procedures for finding and correcting errors.

3. Introduction • Information from a general ledger needs to be analyzed, summarized, and reported in a meaningful way so companies can make informed decisions.

4. 6-1 Creating a Work Sheet • Fiscal period – length of time for which a business summarizes and reports financial information. (Accounting Period Cycle) • Usually a year but it does not have to be a calendar year (Jan 1 – Dec 31) • Military fiscal period (October 1 – Sept 30) • School fiscal period (August 1 – July 31)

5. Financial info may be analyzed, summarized, and reported on any date; however, financial info is always summarized and reported at the end of a fiscal period.

6. Work Sheet A columnar accounting form used to summarize the general ledger info needed to prepare financial statements.

7. Reasons accountants use a work sheet: • To prove that debits equal credits • To bring account balances up to date (adjusting entries) • To separate general ledger account balances according to the financial statements (Income Statement & Balance Sheet) • To calculate the amount of net income or net loss for a fiscal period

8. Work SheetHeading • Who • What • When

9. Work SheetTrial Balance • Proof of the equality of debits and credits • Info is taken from the general ledger listing all accounts in numerical order • Single Rule both columns • Total both columns • Double rule the debit and credit columns to prove that they are equal

10.      

11. 6-2 Planning Adjusting Entries on a Work Sheet • CONCEPT: Matching Expenses with Revenue - revenue and expenses associated with earning that revenue are to be recorded in the same accounting period. • Example – TechKnow Consulting buys supplies in quantity in August, but some of the supplies are not used until September. Only the value of the supplies used in August should be reported as expenses in August so that August revenue and the supplies expense associated with earning the August revenue are recorded in the same accounting period.

12. Accuracy of the adjustments are first recorded on the work sheet. • Adjustments are then journalized. • Adjustments are finally posted.

13. Adjustments – bringing accounts up to date. • Supplies • Prepaid Insurance

14. Supplies Adjustment on a Work Sheet Credit  On August 31, before adjustments, the balance of Supplies is $1,025.00, and the balance of Supplies Expense is zero, as shown in the T accounts. Label  Debit  On August 31, Ms. Park counted the supplies on hand and found that the value of supplies still unused on that date was $310.00. BEFORE ADJUSTMENT Supplies Expense Supplies Aug. 31 Bal. 1,025.00

15. The value of supplies used is calculated as follows. Supplies Account Balance, August 31 $1,025.00 Supplies on Hand, August 31 $310.00 Supplies Used During August $715.00 - - = =

16. Four questions are asked in analyzing the adjustment for the asset account, Supplies. • What is the balance of Supplies? • $1,025.00 • What should the balance be? • $310.00 • What is the difference? • $715.00 the amount USED and the amount that needs to be adjusted • What account is debited? • Supplies Expense $715.00 • What account is credited? • Supplies $715.00

17. Prepaid Insurance Adjustment On A Work Sheet Credit  On August 31, before adjustments, the balance of Prepaid Insurance is $1,200.00 and the balance of Insurance Expense is zero. Label  Debit  On August 31, Ms. Park checked the insurance records and found that the value of insurance coverage remaining was $1,100.00. BEFORE ADJUSTMENT Insurance Expense Prepaid Insurance Aug. 31 Bal. 1,200.00

18. The value of insurance coverage used during the fiscal period is calculated as follows. Prepaid Insurance Balance, August 31 $1,200.00 Insurance Coverage Remaining Unused, August 31 $1,100.00 Insurance Coverage Used During August $100.00 - - = =

19. Four questions are asked in analyzing the adjustment for the asset account, Prepaid Insurance. • What is the balance of Prepaid Insurance? • $1,200.00 • What should the balance be? • $1,100.00 • What is the difference? • $100.00 the amount USED and the amount that needs to be adjusted • What account is debited? • Insurance Expense - $100 • What account is credited? • Prepaid Insurance - $100

20. The asset account, Prepaid Insurance, is decreased by a credit, $100.00, the value of insurance used. The debit balance, $1,200.00, less the credit adjustment, $100.00, equals the new balance, $1,100.00. the new balance of Prepaid Insurance is the same as the amount of insurance coverage unused on August 31. AFTER ADJUSTMENT Insurance Expense Adj. (b) 100.00 Prepaid Insurance Aug. 31 Bal. 1,200.00 (New Bal. 1,100.00) Adj. (b) 100.00

21. Proving The Adjustments Columns Of A Work Sheet • Single rule the two Adjustment columns • Total the two Adjustment columns to verify that debits equal credits • Double rule the two columns

22.   

23. 6-3Extending Financial Statement Information On A Work Sheet • Two financial statements • Balance Sheet (one specific date) • Assets, Liabilities, and Owner’s Equity • Income Statement (covers a fiscal period) • Revenue and Expenses

24.   

25.   

26. Recording Net Income, And Totaling And Ruling A Work Sheet

27. Calculating And Recording A Net Loss On A Work Sheet    

28. When you add up the debit column and credit column of the Income Statement, it will NOT be equal • When you add up the debit column and credit column of the Balance Sheet, it will NOT be equal • The difference is NET INCOME or NET LOSS

29. Net Income • The difference between total revenue and total expenses when revenue is greater • Add it to the debit column of the Income Statement so that the debit and credit columns will equal • Since you made a debit you need an equal credit, so credit the Balance Sheet column so that those two columns will equal

30. Total and Rule Financial Statements • Single Rule across Income Statement and Balance Sheet columns • Total all four columns • Find and record net income/net loss • Total all four columns again • Income Statement debit column should now equal the Income Statement credit column • Balance Sheet debit column should now equal the Balance Sheet credit column • Double rule all four columns

31. Net Loss • The difference between total revenue and total expenses when expenses are greater • Add it to the credit column of the Income Statement so that the debit and credit columns will equal • Since you made a credit you need an equal debit, so debit the Balance Sheet column so that those two columns will equal

32. 6-4Finding and Correcting Errors On The Work Sheet • Many errors can occur when keeping financial records for a business • an amount was not posted from the journal • Wrong amount was transferred to work sheet • Column was added incorrectly • Extension made to the wrong financial statement • If the error is made on the work sheet, you may erase the error to correct it

33. Checking for Typical Calculation Errors 1. When two column totals are not in balance, find the difference • If the difference is 1 ($.01, $.10, $1.00 or $10.00) the error is most likely in addition so add the columns again. Debit $14,657.00 Credit $14,658.00 1.00

34. 2. If the difference can be divided evenly by 2, look for the divided amount in the work sheet Debit $14,657.00 Credit $14,609.00 48.00 ÷ 2 = 12.00 The amount might have been put in the wrong column (say in the debit column when it should have been recorded in the credit column of the trial balance).

35. 3. If the difference can be divided evenly by 9, look for transposed numbers like • 54 written as 45 • 19 written as 91 • or check for a slide like • $12.00 recorded as $120.00 • $350.00 recorded as $35.00

36. 4. Look for an amount equal to the difference, since it might have been omitted.

37. Checking For Errors In The Work Sheet • Check for Errors in the Trial Balance Column • Have all general ledger account balances been copied in the trial balance column correctly? • Have all general ledger account balances been recorded in the correct Trial Balance column?

38. Check for Errors in the Adjustments Columns • Do the debits equal the credits for each adjustment? Use the small letters that label each part of an adjustment to help check accuracy and equality of debits and credits. • Is the amount for each adjustment correct?

39. Check for Errors in the Income Statement and Balance Sheet Columns • Has each amount been copied correctly when extended to the Income Statement or Balance Sheet column? • Has each account balance been extended to the correct Income Statement or Balance Sheet column? • Has the net income or net loss been calculated correctly? • Has the net income or net loss been recorded in the correct Income Statement or Balance Sheet column?

40. Correcting An Error In Posting To The Wrong Account • Were all journal entries posted? • Were they posted to the correct account? • Was the amount transferred correctly? • Are the balances of the ledger accounts correct?

41. Correct  Entry Incorrect  Entry

42. Correcting a Posting Error • Since the journal and ledger should be completed in ink, you should never try to erase or white out an error, instead draw a line through the incorrect amount and write the correct amount above it. • Record the posting in the correct account and recalculate the account balance, and correct the work sheet.

43. Correcting An Incorrect Amount And An Amount Posted To The Wrong Column Correct Amount Correct Amount Incorrect Amount   Incorrect Entry  Correct Entry

44. Checking For Errors In Journal Entries • Do debits equal credits in each journal entry? • Is each journal entry amount recorded in the correct journal column? • Is information in the Account Title column correct for each journal entry? • Are all of the journal amount column totals correct? • Does the sum of debit column totals equal the sum of credit column totals in the journal? • Have all transactions been recorded?

45. Preventing Errors • The best way to prevent errors is to work CAREFULLY and check your work at each step. • Use a calculator—most errors are math errors.

46. REVIEW • Know these terms: • Adjustments • Balance sheet • Fiscal period • Income statement • Net income • Net loss • Trial balance • Work sheet

47. TEST Application • Complete a Work Sheet • Heading • Account Names (in order of account number) • Trial Balance (balances in general ledger) • Debit column must equal Credit column • Adjustments (supplies & prepaid insurance) • Debit column must equal Credit column • Income Statement (revenue & expenses) • Balance Sheet (assets, liabilities, O.E.) • Net Income/Net Loss • What is needed to make Debit & Credit columns equal • Double Rule Work Sheet amount columns

48. Accounting Concepts • Matching Expenses with Revenue Concept is recording revenue from business activities and expenses associated with earning that revenue in the same accounting period • Consistent Reporting Concept is following the same accounting procedures in the same way in each accounting period • Accounting Period Cycle Concept is reporting changes in financial info for a specific period of time in the form of financial statements

49. Net Income – when the Income Statement creditcolumn (total sales) is greater than the Income Statement debit column (total expenses) • the difference must be added to the debit column of the Income Statement and the credit column of the Balance Sheet so that debits will equal credits • Net Loss – when Income Statement credit column (total sales) is less than the Income Statement debit column (total expenses) • The difference must be added to the credit column of the Income Statement and the debit column of the Balance Sheet so that debits will equal credits

50. Business usually choose their fiscal period to end during a period of low business activity • To find the up-dated balance of supplies you must subtract amount of supplies currently on hand from supplies account balance in the general ledger (the answer is what was used and is the expense)