Topic 5

1. Topic 5 Worksheet and Preparation of Financial Statement PowerPoint presentation by AFSH

2. Worksheet • A multicolumn form that may be used in the adjustment process and in preparing financial statements. • The worksheet starts with columns for the trial balance. It is followed by columns for adjustment, adjusted trial balance, income statement and finally balance sheet.

3. The Adjusted Trial Balance • The adjusted trial balance is prepared after all adjusting entries have been made. • It is used to prove the equality of total debit balances and total credit balances after the adjusting entries have been made. • The adjusted trial basis is the main basis for preparation of the financial statements.

4. Preparing Financial Statements • Income Statement prepared from revenue and expense accounts. • Current period profit (or loss) and dividends paid transferred to retained profits account. • Balance Sheet prepared from asset, liability, equity and balance of retained earnings accounts.

5. WONG PTY LTD Trial Balances as at 31 October 2008 Before adjustment After adjustment Dr Cr Dr Cr Cash $15 200 $15 200 Commissions Receivable 200 Advertising Supplies 2 500 1 000 Prepaid Insurance 600 550 Office Equipment 5 000 5 000 Accumulated Depreciation – Office Equipment $ 40 Accounts Payable $ 2 500 2 500 Interest Payable 50 Service Revenue Received in Advance 1 200 800 Salaries Payable 1 200 Bank Loan 5 000 5 000 Share Capital 10 000 10 000 Retained Earnings -- -- Dividends 500 500 Service Revenue 10 000 10 400 Commissions Revenue -- 200 Salaries Expense 4 000 5 200 Advertising Supplies Expense 1 500 Rent Expense 900 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 Profit $28 700 $28 700 $30 190 $30 190

6. WONG PTY LTD Adjusted Trial Balance as at 31 October 2008 AccountDebitCredit Cash $15 200 Commissions Receivable 200 Advertising Supplies 1 000 Prepaid Insurance 550 Office Equipment 5 000 Accumulated Depreciation- Office Equipment $ 40 Accounts payable 2 500 Interest payable 50 Service Revenue Receivedin Advance 800 Salaries Payable 1 200 Bank Loan 5 000 Share Capital 10 000 Retained Earnings -- Dividends 500 Service Revenue 10 400 Commissions Revenue 200 Salaries Expense 5 200 Advertising Supplies Expense 1 500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 $30 190 $30 190 Sample appropriate for Company WONG PTY LTD Income Statement for the month ended 31 October 2008 Revenues Service revenue $10 400 Commissions revenue 200 $10 600 Expenses Salaries expense $5 200 Advertising supplies expense 1 500 Rent expense 900 Insurance expense 50 Interest expense 50 Depreciation expense 40 Total expenses 7 740 Profit $ 2 860 WONG PTY LTD Calculation of Retained Earnings for the month ended 31 October 2008 Retained earnings, 1 October $ -- Add: Profit 2 860 2 860 Less: Dividends 500 Retained earnings, 31 October $2 360

7. WONG PTY LTD Adjusted Trial Balance as at 31 October 2008 AccountDebitCredit Cash $15 200 Commissions Receivable 200 Advertising Supplies 1 000 Prepaid Insurance 550 Office Equipment 5 000 Accumulated Depreciation- Office Equipment $ 40 Accounts payable 2 500 Interest payable 50 Service Revenue Receivedin Advance 800 Salaries Payable 1 200 Bank Loan 5 000 Share Capital 10 000 Retained Earnings -- Dividends 500 Service Revenue 10 400 Commissions Revenue 200 Salaries Expense 5 200 Advertising Supplies Expense 1 500 Rent Expense 900 Insurance Expense 50 Interest Expense 50 Depreciation Expense 40 $30 190 $30 190 Sample appropriate for Company WONG PTY LTD Balance Sheet as at 31 October 2008 Assets Cash $15 200 Commissions Receivable 200 Adverting Supplies 1 000 Prepaid Insurance 550 Office Equipment $5 000 Less: Accumulated Depreciation 40 4 960 Total assets $21 910 Liabilities and shareholders’ equity Liabilities Accounts payable $2 500 Interest payable 50 Service Revenue Receivedin Advance 800 Salaries Payable 1 200 Bank Loan 5 000 Total liabilities $ 9 550 Shareholders’ equity Share Capital 10 000 Retained Earnings 2 360 Total shareholders’ equity 12 360 Total liabilities and shareholder’s equity $21 910 Balance at 31 Oct. from calculation of retained earnings on previous slide

8. Closing The Books • Temporary accounts relate to only a given accounting period • i.e., revenues, expenses, dividends • Permanent accounts are carried forward to future accounting periods • i.e., assets, liabilities, equity

9. Closing The Books (cont'd) Closing entries • are used to transfer the temporary account balances to the permanent equity account, retained earnings. • produce a zero balance in each temporary account.

10. Preparing Closing Entries • Each revenue and expense account is closed to the Profit and Loss Summary, another temporary account. • The Profit and Loss Summary account is closed to retained earnings. • This will result in all temporary accounts having a closing balance of zero.

11. Dt Sales Ct Profit and loss summary (Closing of Sales account) Dt Profit and loss summary Ct Sales return (Closing of sales return account) Dt Other revenue accounts Ct Profit and loss summary (Closing of other revenue account) Dt Profit and loss summary Ct Purchase (Closing of purchase account) Dt Purchase return Ct Profit and loss summary (Closing of purchase return account) Dt Profit and loss summary Ct other expenses account (Closing of other expenses account) Preparing Closing Entries

12. Dt Profit and loss summary Ct retained profit (Closing of profit and losss summary account at profit) Dt Retained profit Ct Capital (Closing of retained profit account to capital account) Dt Retained profit Ct Profit and loss summary account (Closing of profit and loss summary account at loss) Dt Capital Ct Retained profit (Closing or retained profit account to capital account) Preparing Closing Entries- (Cont’d)

13. Post-Closing Trial Balance • A post-closing trial balance is a list of all permanent accounts and their balances after closing entries are journalised and posted. • The purpose of the post-closing trial balance is to prove the equality of the permanent accounts that are carried forward to the next accounting period.