chapter 7

Chapter 7Chapter 7

WORK SHEET FOR A SERVICE BUSINESS

Chapter 7 Objectives: 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

ACCOUNTING FLOW CHARTACCOUNTING FLOW CHART

Source Document

Journal

Ledger

Work Sheet

Financial Statements

Consistent ReportingConsistent 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.

Ch 7-1: Ch 7-1: Creating a Creating a Work SheetWork Sheet

Fiscal PeriodFiscal 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)

Worksheet: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.

Four Reasons to Prepare Work SheetFour Reasons to Prepare Work Sheet

1. To summarize general ledger account balances to prove DR=CR.

2. To plan needed changes to general ledgers accounts to bring balances up to date adjustments.

3. To separate accounts for financial statements - Balance Sheet, Income Statement

4. To calculate net income or net loss for the fiscal period.

PREPARING THE HEADING OF A WORK SHEETPREPARING THE HEADING OF A WORK SHEET

1

3

2

3. When??? - Date of Report

*Covers entire fiscal period

1. Who???- Name of Company

2. What??? - Name of Report

Lesson 7-1, page 150Lesson 7-1, page 150

Columns of a Work SheetColumns of a Work Sheet

1. Trial Balance

2. Adjustments

3. Income Statement

4. Balance Sheet

Trial BalanceTrial 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.

PREPARING A TRIAL BALANCE ON A WORK SHEETPREPARING A TRIAL BALANCE ON A WORK SHEET

1

34

2

3. Single Rule

1. Account Titles

4. Add Totals

2. Account Balances

56

5. Write Totals

6. Double Rule


Assign: Assign:

Page 152 Work Together - will be used in

Chapter 7-2, 7-3

CHAPTER 7-2CHAPTER 7-2

Planning Adjusting Entries on a Work Sheet

Matching Expenses with RevenuesMatching 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

Matching Expenses with Revenue Matching Expenses with Revenue

Bought supplies on March 1, 2010

Supply Inventory- April 1, 2010

$100

Assets:?????? How to journalize the used

supplies?

$100 $100 $100 $100

$100

$100

$100$100

$100 $100

$100$100

$100$100

AdjustmentsAdjustments

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

Supplies AdjustmentSupplies 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.

Planning AdjustmentsPlanning Adjustments

Determine amount– Account Balance 4751 (what you started with)

– Inventory -2187 (what is left - asset)– Adjustment $2564 (what was used- expense)

Planning Adjustment Entry and Account BalancesPlanning Adjustment Entry and Account Balances

Debit Supplies Expense Credit Supplies

Supplies4751 2564

Balance $2187 = value of supplies on hand Supplies Expense

2564

Original amountAmount used

SUPPLIES ADJUSTMENT ON A WORK SHEETSUPPLIES ADJUSTMENT ON A WORK SHEET

1

2

3. Label the two parts of this adjustment with a small letter a in parentheses, (a).

1. Write the debit amount – in Adjustment column.

2. Write the credit amount - in Adjustment column.

3


Prepaid InsurancePrepaid 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)

PREPAID INSURANCE ADJUSTMENT ON A WORK PREPAID INSURANCE ADJUSTMENT ON A WORK SHEETSHEET

1

2

3. Label the two parts of this adjustment with a small letter b in parentheses, (b).

1. Write the debit amount.

2. Write the credit amount.

3


PROVING THE ADJUSTMENTS COLUMNS OF A WORK PROVING THE ADJUSTMENTS COLUMNS OF A WORK SHEETSHEET

12

3. Rule double lines.

1. Rule a single line.

2. Add both the Adjustments Debit and Credit columns.

3


Assign: Assign:

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

ACCOUNTING FLOW CHARTACCOUNTING FLOW CHART

Source Document

Journal

Ledger

Worksheet

Financial Statements

Chapter 7-1, 7-2 Review: Chapter 7-1, 7-2 Review:

4 questions to ask when analyzing adjustments:

1. What is the balance of supplies/prepaid insurance?

2. What should the balance be for this account?

3. What must be done to correct?

4. What adjustments need to be made?

TO DO:

• Application Probs 7-1, 7-2

Explain ‘Matching Expenses with Revenue’ using this Explain ‘Matching Expenses with Revenue’ using this diagram – each square is $100 worth of suppliesdiagram – each square is $100 worth of supplies

Bought on Jan. 1, 2010 Supply Inventory- May 31, 2010

Assets:?????? How to journalize the used

supplies?

Chapter 7-3Chapter 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

Before Adjustments:Before Adjustments:

Assets were overstated Expenses were understated Profit was overstated Paid too much in taxes

Two Financial Statements prepared at end of fiscal Two Financial Statements prepared at end of fiscal periodperiod

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

Figure for Income or LossFigure 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

2. Debit Balances with Adjustments

1. Debit Balances without Adjustments

EXTENDING BALANCE SHEET ACCOUNT BALANCES EXTENDING BALANCE SHEET ACCOUNT BALANCES ON A WORK SHEETON A WORK SHEET

3. Credit Balances without Adjustments

1

2

3


EXTENDING INCOME STATEMENT ACCOUNT EXTENDING INCOME STATEMENT ACCOUNT BALANCES ON A WORK SHEETBALANCES ON A WORK SHEET

3. Expense Balances with Adjustments

1. Sales Balances

2. Expense Balances without Adjustments

1

3

2


RECORDING NET INCOME, AND TOTALING AND RECORDING NET INCOME, AND TOTALING AND RULING A WORK SHEETRULING A WORK SHEET

1. Single Rule

3 7

25

6

1

4

7. Double Rule

2. Total

3. Net Income

4. Extend Net Income

5. Single Rule

6. Totals


CALCULATING AND RECORDING A NET LOSS ON A CALCULATING AND RECORDING A NET LOSS ON A WORK SHEETWORK SHEET

3. Net Loss

1. Single Rule

4. Extend Net Loss

2. Totals

4

3

1

2


Assign: Assign:

GO TO OVERLAYS Follow steps with overlays as they are read out

loud Page: 163 Audit you understanding Work Together

Chapter 7-4: Finding and Correcting ErrorsChapter 7-4: Finding and Correcting Errors

Errors:

1. Forgetting to post a line from the journal

1. Debit to supplies may not have been posted in general ledger work sheet’s trial balance will not balance

2. Transferred info incorrectly from ledger to work sheet

3. Errors in calculating/recording adjustments

4. 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

CHECKING FOR TYPICAL CALCULATION ERRORSCHECKING 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.

1. The difference is 1, such as $.01, $.10, $1.00, or $10.00.

1. Add columns again

2. The difference can be divided evenly by 2.

1. Check debits/credits (recorded in same column)

2. If difference is $48, look for $24 in trial balance columns

3. The difference can be divided evenly by 9.

1. Check transposed #’s (54 and 45)

4. Check for slide ($12.00 is written as $120.00)

5. The difference is an omitted amount.

1. Look for an amount equal to the difference


CHECKING FOR ERRORS IN THE WORK SHEETCHECKING 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?


CORRECTING AN ERROR IN POSTING TO THE CORRECTING AN ERROR IN POSTING TO THE WRONG ACCOUNTWRONG 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

CORRECTING AN ERROR IN POSTING TO THE CORRECTING AN ERROR IN POSTING TO THE WRONG ACCOUNTWRONG ACCOUNT


1. Incorrect Entry

2. Correct Entry

2

1

*Posted to Prepaid Insurance instead of Supplies

CORRECTING AN INCORRECT AMOUNT AND AN CORRECTING AN INCORRECT AMOUNT AND AN AMOUNT POSTED TO THE WRONG COLUMNAMOUNT POSTED TO THE WRONG COLUMN


5

1

3

4

2

3. Compute the Correct Balance

1. Cross out the Incorrect Amount

4. Cross out the Incorrect Entry

2. Write in the Correct Amount

5. Write in the Correct Entry

6

6. Compute the Correct Balance

*Correcting an amount posted to the wrong column

*Correcting an incorrect amount

Checking for Errors in General Journal EntriesChecking 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?

Assign: Assign:

Page: 167 Audit Work Together On your Own 7-3 and 7-4

chapter 7

Documents

work sheetto

work sheet13423

work sheet1323

accounting procedures

work sheetplan adjustments

work sheetmatching expenses

specific period of time

accounting terms