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Chapter 7

Chapter 7. WORK SHEET FOR A SERVICE BUSINESS. Chapter 7 Objectives:. Define accounting terms related to a work sheet for a service business organized as a proprietorship Identify accounting concepts and practices related to a work sheet for a service business organized as a proprietorship

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Chapter 7

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  1. Chapter 7 WORK SHEET FOR A SERVICE BUSINESS

  2. Chapter 7 Objectives: • Define accounting terms related to a work sheet for a service business organized as a proprietorship • Identify accounting concepts and practices related to a work sheet for a service business organized as a proprietorship • Prepare a heading and a trial balance on a work sheet • Plan adjustments for supplies and prepaid insurance • Complete a work sheet for a service business organized as a proprietorship • Identify selected procedures for finding and correcting errors in accounting records

  3. ACCOUNTING FLOW CHART Source Document Journal Ledger Work Sheet Financial Statements

  4. Consistent Reporting • The same accounting procedures are followed in the same way in each accounting period. • Same figures are calculated, same overall ratios are calculated, and same analysis used • Use same set of procedures for reporting (for comparisons). • Begin and end at same time. • Analyze, summarize, and report financial information in a consistent manner.

  5. Ch 7-1: Creating a Work Sheet

  6. Fiscal Period • The time period selected by the business to report financial information. • AKA Accounting Period • Accounting Period Cycle: applied when changes in financial info (ie: profits and losses) are reported for a specific period of time in the form of financial statements • Common time periods are a quarter (3 months) or a year. • Most businesses use January 1 to December 31 to correspond to federal and state tax reports. • May also choose time when business activity is low • Encore Music: monthly for now because it is a new business • Begin on August 1-August 31 (inclusive)

  7. Worksheet: • A columnar accounting form used to summarize general ledger accounts. • It is prepared by the accountant in pencil. • Planning tool NOT permanent • Purpose: Makes it easier for the accountant to prepare the financial statements.

  8. Four Reasons to Prepare Work Sheet • To summarize general ledger account balances to prove DR=CR. • To plan needed changes to general ledgers accounts to bring balances up to date  adjustments. • To separate accounts for financial statements - Balance Sheet, Income Statement • To calculate net income or net loss for the fiscal period.

  9. PREPARING THE HEADING OF A WORK SHEET 1 2 3 1. Who???- Name of Company 2. What??? - Name of Report • 3. When??? - Date of Report • *Covers entire fiscal period Lesson 7-1, page 150

  10. Columns of a Work Sheet

  11. Trial Balance • Figures are taken from the general ledger (in the same order they appear in ledger). • All accounts are listed in order. • Listed even if they have a 0 balance • Must prove equality of debit and credit columns before completing worksheet.

  12. PREPARING A TRIAL BALANCE ON A WORK SHEET 2 1. Account Titles 1 2. Account Balances 3. Single Rule 4. Add Totals 5. Write Totals 6. Double Rule 3 4 5 6 Lesson 7-1, page 151

  13. Assign: • Page 152 • Work Together - will be used in Chapter 7-2, 7-3

  14. CHAPTER 7-2 • Planning Adjusting Entries on a Work Sheet

  15. Matching Expenses with Revenues • This is applied when revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period. • Ie: You must account for buying something in one period and using it in another period. • **Amounts that helped earn revenue for a period must be reported with expenses in the same period • The ending balance of the supplies account should represent what is remaining on hand at the end of the month • All supplies that have been used Reported as Supplies Expense

  16. Bought supplies on March 1, 2010 Supply Inventory- April 1, 2010 $100 Assets:?????? How to journalize the used supplies? Matching Expenses with Revenue $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100

  17. Adjustments • A change recorded to bring an account up to date. • Assets are used to earn revenue • The portion of the assets consumed/used in order to earn revenue become business expenses • These used portions are no longer assets, but are NOW expenses • Once adjustments are made expenses incurred to earn revenue are reported in same fiscal period as the revenue is earned and reported Matching Expenses with Revenue • Work sheet is used to plan adjustments and THEN you must journalize each one

  18. Supplies Adjustment Supplies 4751 When business buys supplies – DR Asset account Supplies on hand are a value owned by business until used Value of supplies used becomes business expense Inventory of supplies shows $2187 worth.

  19. Determine amount Account Balance 4751(what you started with) Inventory -2187 (what is left - asset) Adjustment $2564 (what was used- expense) Planning Adjustments

  20. Planning Adjustment Entry and Account Balances • Debit Supplies Expense • Credit Supplies Supplies Amount used Original amount 4751 2564 Balance $2187 = value of supplies on hand Supplies Expense 2564

  21. 3 SUPPLIES ADJUSTMENT ON A WORK SHEET 2 1 1. Write the debit amount – in Adjustment column. 2. Write the credit amount - in Adjustment column. 3. Label the two parts of this adjustment with a small letter a in parentheses, (a). Lesson 7-2, page 155

  22. Prepaid Insurance • Insurance premium is paid in advance and turns into an expense as each day passes. • When bought  DR asset account • Determine amount used • Account Balance, prepaid insurance 1200 • Inventory, insurance coverage remaining -1100 • Adjustment, Insurance coverage used $100 • Amount used Expense. • Debit Insurance Expense ($100) • Credit Prepaid Insurance ($100)

  23. 3 PREPAID INSURANCE ADJUSTMENT ON A WORK SHEET 2 1 1. Write the debit amount. 2. Write the credit amount. 3. Label the two parts of this adjustment with a small letter b in parentheses, (b). Lesson 7-2, page 156

  24. 3 PROVING THE ADJUSTMENTS COLUMNS OF A WORK SHEET 1. Rule a single line. 2. Add both the Adjustments Debit and Credit columns. 3. Rule double lines. 1 2 Lesson 7-2, page 157

  25. Assign: • Page: 158 • Audit • Work Together • On your Own (7-1 and 7-2)

  26. ACCOUNTING FLOW CHART Source Document Journal Ledger Worksheet Financial Statements

  27. Chapter 7-1, 7-2 Review: • 4 questions to ask when analyzing adjustments: • What is the balance of supplies/prepaid insurance? • What should the balance be for this account? • What must be done to correct? • What adjustments need to be made? TO DO: • Application Probs 7-1, 7-2

  28. Bought on Jan. 1, 2010 Supply Inventory- May 31, 2010 Assets:?????? How to journalize the used supplies? Explain ‘Matching Expenses with Revenue’ using this diagram – each square is $100 worth of supplies

  29. Chapter 7-3 Extending Financial Statement Information on a Work Sheet • Balance Statement: reports assets, liabilities, owner’s equity on a specific date • Income Statement: reports revenue and expenses for a fiscal period

  30. Before Adjustments: • Assets were overstated • Expenses were understated • Profit was overstated • Paid too much in taxes

  31. Income Statement Revenue Expenses Balance Sheet Assets Liabilities Owner’s Equity ***MUST extend updated account balances to specified columns to create these two financial statements Two Financial Statements prepared at end of fiscal period

  32. Figure for Income or Loss • Revenue minus Expenses = Income/Loss • OR • CR-DR= Net Income/Loss • Assets - Liabilities = Owner’s Equity Balanced • Net Income: difference between total revenue and total expenses when total revenue is greater • Net Loss: difference between total revenue and total expenses when total expenses are greater

  33. 1 2 3 EXTENDING BALANCE SHEET ACCOUNT BALANCES ON A WORK SHEET 1. Debit Balances without Adjustments 2. Debit Balances with Adjustments 3. Credit Balances without Adjustments Lesson 7-3, page 159

  34. 2 3 EXTENDING INCOME STATEMENT ACCOUNT BALANCES ON A WORK SHEET 1 1. Sales Balances 2. Expense Balances without Adjustments 3. Expense Balances with Adjustments Lesson 7-3, page 160

  35. 1 2 4 5 7 3 6 RECORDING NET INCOME, AND TOTALING AND RULING A WORK SHEET 1. Single Rule 2. Total 3. Net Income 4. Extend Net Income 5. Single Rule 6. Totals 7. Double Rule Lesson 7-3, page 161

  36. 1 3 2 4 CALCULATING AND RECORDING A NET LOSS ON A WORK SHEET 1. Single Rule 2. Totals 3. Net Loss 4. Extend Net Loss Lesson 7-3, page 162

  37. Assign: • GO TO OVERLAYS • Follow steps with overlays as they are read out loud • Page: 163 • Audit you understanding • Work Together

  38. Chapter 7-4: Finding and Correcting Errors Errors: • Forgetting to post a line from the journal • Debit to supplies may not have been posted in general ledger work sheet’s trial balance will not balance • Transferred info incorrectly from ledger to work sheet • Errors in calculating/recording adjustments • Errors in extending amounts to Income Stmt and Balance Sheet columns • All errors must be corrected before any further work is done • If error is found on work sheeterase error and replace it with correction

  39. CHECKING FOR TYPICAL CALCULATION ERRORS • When two column totals are not in balance, subtract the smaller total from the larger total to find the difference. • Check the difference between the two amounts against the following guides. • The difference is 1, such as $.01, $.10, $1.00, or $10.00. • Add columns again • The difference can be divided evenly by 2. • Check debits/credits (recorded in same column) • If difference is $48, look for $24 in trial balance columns • The difference can be divided evenly by 9. • Check transposed #’s (54 and 45) • Check for slide ($12.00 is written as $120.00) • The difference is an omitted amount. • Look for an amount equal to the difference Lesson 7-4, page 164

  40. 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? • Check for Errors in the Adjustments Columns • Do the debits equal the credits for each adjustment? • Is the amount for each adjustment correct? • Check for Errors in Income Statement and Balance Sheet Columns • Has each amount been copied correctly? • Has each amount been extended to the correct column? • Has the net income/loss been calculated correctly? • Has the net income/loss been recorded in the correct column? Lesson 7-4, page 165

  41. CORRECTING AN ERROR IN POSTING TO THE WRONG ACCOUNT • If a pair of columns do not balance and error cannot be found on work sheet look for errors in posting • As each entry in journal is verified, place a check mark next to it • Have all amounts that need to be posted actually been posted from the general journal? • To correct complete posting and recalculate account balances and make corrections on work sheet • Have all amounts been posted to the correct accounts? • To correct draw a line through entire incorrect entry in ledger • Recalculate and make corrections • Record posting in correct account • Recalculate and correct wkst

  42. CORRECTING AN ERROR IN POSTING TO THE WRONG ACCOUNT 2 1 1. Incorrect Entry 2. Correct Entry *Posted to Prepaid Insurance instead of Supplies Lesson 7-4, page 165

  43. CORRECTING AN INCORRECT AMOUNT AND AN AMOUNT POSTED TO THE WRONG COLUMN 3 2 1 5 4 6 *Correcting an incorrect amount 1. Cross out the Incorrect Amount 2. Write in the Correct Amount 3. Compute the Correct Balance *Correcting an amount posted to the wrong column 4. Cross out the Incorrect Entry 5. Write in the Correct Entry Lesson 7-4, page 166 6. Compute the Correct Balance

  44. Checking for Errors in General Journal Entries • Do debits = credits for each entry? • Is each general journal entry amount recorded in the correct column? • Is info in the account title column correct for each entry? • Have all transactions been recorded?

  45. Assign: • Page: 167 • Audit • Work Together • On your Own 7-3 and 7-4

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