The Accounting Cycle Continued – Preparing Worksheets and Financial Statements

1. The Accounting Cycle Continued –Preparing Worksheetsand Financial Statements Chapter 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.

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. The Accounting Cycle 1 3 Ledger 2 Journal Book of Final Entry Business Transactions Book of Original Entry 4 5 Worksheet Trial Balance

5. The Accounting Cycle Worksheet Adjusted Trial Adjustments Trial Income Balance Balance Balance Statement Sheet 6 Financial Statements Balance Sheet Statement of Owner’s Equity Income Statement

6. Adjustments: prepaid rent, office supplies, depreciation on equipment, and accrued salaries. Learning Objective 1

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.

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

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

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.

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?

12. Learning Unit 4-1 • The accompanying (contra-asset) account is called AccumulatedDepreciation. • This account is used for the yearly credited amounts. • The normal balance is a credit balance.

13. Learning Unit 4-1 Worksheet Sections • The Trial Balance • The Adjustments • The Adjusted Trial Balance Income Statement Balance Sheet

14. Learning Unit 4-1 Income Statement: List Revenues & Expenses Only Balances with the net income/loss. Balance Sheet: Balances with the net income/loss. A = L + OE

15. Preparation of adjusted trial balance on the worksheet. Learning Objective 2

16. Adjustments Example • What are the adjusting entries for supplies? • Journal: DebitCredit 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.

17. Adjustments Example • Adjusting entries for depreciation. • Journal: DebitCredit Depreciation Expense x Accum. Depr. Equip. x To record the proper amounts for all relevant asset accounts

18. Adjustments Example • What are the adjusting entries for accrued service revenue? • Journal: DebitCredit Accounts Receivable x Revenue x To record the proper amounts for relevant asset and revenue accounts

19. Adjustments Example Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Capital Revenue Various expenses Supplies expense Depreciation expense Totals 4,065 850 300 1,200 1,205 7,620 170 5,000 2,450 7,620

20. Adjustments Example • The business has earned revenue of $1,000 that will be collected next month. • Inventory of supplies at month end totaled $100. • Depreciation for the period was calculated as $50.

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

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

23. The income statement and balance sheet sections of the worksheet. Learning Objective 3

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

25. Preparing financial statements from the worksheet. Learning Objective 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.

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.

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.

29. End of Chapter 4