The Accounting Cycle Continued

–
Preparing Worksheets
and Financial Statements

Chapter
4
4-
 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.

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 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.

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 The Accounting Cycle

1 2 Journal 3 Ledger
Business
Business Book
Book ofof Book
Book of
of
Transactions
Transactions Original
Original Entry
Entry Final
Final Entry
Entry

5 4

Worksheet
Worksheet Trial
Trial Balance
Balance

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 The Accounting Cycle
Worksheet
Adjusted
Trial Adjustments Trial Income Balance
Balance Balance Statement Sheet

6 Financial
Statements
Balance
Balance Statement
Statement of
of Income
Income
Sheet
Sheet Owner’s
Owner’s Equity
Equity Statement
Statement

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 Learning Objective 1

Adjustments: prepaid rent,

office supplies, depreciation on
equipment, and accrued salaries.

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 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-
 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

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 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

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 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.

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 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?

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 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.

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 Learning Unit 4-1

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

Income
Income Balance
Balance
Statement
Statement Sheet
Sheet
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 Learning Unit 4-1

Income
Income
Statement:
Statement: Balance
Balance
List
List Revenues
Revenues Sheet:
Sheet:
&& Expenses
Expenses Balances
Balances
Only
Only with
with the
the net
net
Balances
Balances income/loss.
income/loss.
with
with the
the net
net AA == LL ++ OE
OE
income/loss.
income/loss.
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 Learning Objective 2

Preparation of adjusted trial

balance on the worksheet.

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 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.
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 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

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 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

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 Adjustments Example
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,065
Accounts receivable 850
Supplies 300
Equipment 1,200
Accum. depreciation
Accounts payable 170
Capital 5,00
Revenue 0
Various expenses 1,205 2,45
Supplies expense 0
Depreciation expense
Totals 7,620

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0 4-1
 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.

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 Adjustments Example
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,065
Accounts receivable 850 a) 1,000
Supplies 300 b) 200
Equipment 1,200
Accum. depreciation c) 50
Accounts payable 170
Capital 5,00
Revenue 0 a) 1,000
Various expenses 1,205 2,45
Supplies expense 0 b) 200
Depreciation expense c) 50
Totals 7,620 1,250 1,250

7,62
0 4-2
 Adjustments Example
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,065 4,065
Accounts receivable 850 a) 1,000 1,850
Supplies 300 b) 200 100
Equipment 1,200 1,200
Accum. depreciation c) 50 50
Accounts payable 170 170
Capital 5,00 5,000
Revenue 0 a) 1,000 3,450
Various expenses 1,205 2,45 1,205
Supplies expense 0 b) 200 200
Depreciation expense c) 50 50
Totals 7,620 1,250 1,250 8,670 8,670

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0 4-2
 Learning Objective 3

The income statement and

balance sheet sections
of the worksheet.

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 Adjustments Example
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,065 4,065
Accounts receivable 1,850 1,850
Supplies 100 100
Equipment 1,200 1,200
Accum. depreciation 50 50
Accounts payable 170 170
Capital 5,000 5,000
Revenue 3,450 3,450
Various expenses 1,205 1,205
Supplies expense 200 200
Depreciation expense 50 50
Totals 8,670 8,670 1,455 3,450 7,215 5,220
1,995 1,995
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 Learning Objective 4

Preparing financial statements

from the worksheet.

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 Learning Unit 4-2

Preparing the financial statements

from the worksheet
The Income Statement
 Revenue and expenses are reported on the
income statement.

4-2
 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.

4-2
 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.

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End of Chapter
4

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