In records. The worksheet is not a

In this Chapter you will be able to:
I. Prepare financial statements
II. Record adjusting entries
III. Prepare post-closing trial balance, and
IV. Prepare reversing entries

The remaining steps will be illustrated using an accounting devise known as Worksheet.
Accounting Worksheet
A worksheet is a devise that is used by accountants in summarizing the data from the unadjusted trial balance to the financial statements. It is frequently prepared at the end of the period, but before the adjusting entries are formally recorded in the accounting records. The worksheet is not a part of the books of accounts nor financial statements it is used rather for the convenience in the preparation of the financial statements.
The term worksheet is a holdover from the days when schedules were still arranged manually on large sheets of paper. In the modern day, most worksheets were done using various software such as Lotus 1-2-3, Excel, Dac-Easy or Peachtree. When a worksheet is prepared by computer, the only step that the accountant needed to do is to enter the necessary adjustments then the computer will automatically compute the adjusted account balances.
Once the worksheet is complete, it can now serve as a source of records and will also give a preview of what will appear in the Financial Statements.
Format of the Worksheet
The heading of the worksheet names the business, identifies the document and states the accounting period.
The top portion of the worksheet shows the five sections and sources of the data.

For further illustration see the example below:
Account Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Mechanics in the Preparation of the Worksheet
The preparation of a worksheet involves five basic steps. The step-by-step description of its preparation is as follows:
1. Entering the ledger account balances in the Trial Balance columns. The worksheet begins with an Unadjusted trial balance – that is, a listing of the ledger account balances at the end of the period prior to making any adjustments.

2. Entering the adjustments in the Adjustments columns. The next step is to enter the appropriate end-of-period adjustments in the Adjustments column.

3. Preparing an adjusted trial balance. The balance in the original trial balance are adjusted by cross-footing the amounts in the Adjustments columns. Cross-footing is the process of horizontal addition or subtraction.

4. Extending the adjusted trial balance amounts into the appropriate financial statement columns. The balance sheet accounts – assets, liabilities, and owner’s equity – are extended in to the Balance Sheet columns; income statement accounts – revenue and expenses – into the Income Statement columns.

5. Totaling the financial statement columns; determine and record net income or net loss. This is the step where we total and balance each set of columns.

When the Income Statement and Balance Sheet columns are first totaled, the debit and credit columns will not be settled. But each set of columns should be out-of-balance by the same amount – and that amount should be the amount of net income or loss for the period.
In order to bring both sets of columns into balance, we enter the net income (or net loss) on the next line. The same amount will appear in both the Income Statement columns and the Balance Sheet columns. But in one set of columns it appears as a debit, and in the other, it appears as a credit. After this amount is entered, each set of columns should balance.

Illustrative Case 1. Preparation of Accounting Worksheet
Case Facts:
The trial Balance of Tacobello Service Company at December 31, 2018, the end of its fiscal year, is presented below:

Tacobello Service Company
Trial Balance
December 31, 2018

Cash ? 3,960,000.00
Accounts Receivable 7,400,000
Supplies 120,000
Furniture and fixtures 2,000,000
Accumulated depreciation – furniture and fixture ? 800,000.00
Building 5,000,000
Accumulated Depreciation – building 2,600,000
Accounts Payable 7,600,000
Salary Payable
Unearned service revenue 900,000
Wynonna Earp, Capital 5,860,000
Wynonna Earp, Withdrawal 1,300,000
Service Revenues 5,720,000
Salary Expense 3,440,000
Supplies Expense
Depreciation expense – furniture and fixtures
Depreciation expense – building
Miscellaneous expense 260,000
TOTAL ? 23,480,000.00 ? 23,480,000.00

Data needed for the adjusting entries include:
a. Supplies on hand at year end, P40,000.
b. Depreciation on furniture and fixtures, P400,000.
c. Depreciation on building, P200,000.
d. Salaries owed but not yet paid, P100,000.
e. Accrued service revenue, P240,000.
f. Of the P900,000 balance of Unearned Service Revenue, P640,000 was earned during 2018.
Prepare the accounting worksheet of Tacobello Service Company for the year ended December 31, 2018.

Preparation of the Financial Statements
In the preparation of the financial statements the accounts were sort to the proper income statement and balance sheet columns. This will be illustrated in Figures 10-2 and 10-3 of the financial statements of Tacobello Service Company.
Figure 10-2. Income Statement; Statement of Owner’s Equity
Tacobello Service Company
Income Statement
December 31, 2018

Service Revenues ? 6,600,000.00
Salary Expense ? 3,540,000.00
Supplies Expense 400,000
Depreciation expense – furniture and fixtures 200,000
Depreciation expense – building 80,000
Miscellaneous expense 260,000
Total Expenses 4,480,000
Net Income ? 2,120,000.00

Tacobello Service Company
Statement of Owner’s Equity
December 31, 2018

Wynonna Earp, Capital, January 1, 2018 ? 5,860,000.00
Add: Net Income 2,120,000
Total ? 7,980,000.00
Less: Withdrawals 1,300,000
Wynonna Earp, Capital, December 31, 2018 ? 6,680,000.00

Figure 10-3. Balance Sheet Statement
Tacobello Service Company
Balance Sheet
December 31, 2018


Current Assets
Cash ? 3,960,000
Accounts Receivable 7,640,000
Supplies 40,000
Total current assets ? 11,640,000

Non-Current Assets
Building ? 5,000,000
Less: Accumulated Depreciation 2,800,000
Furniture and fixtures ? 2,000,000
Less: Accumulated Depreciation 1,200,000
Total non-current assets ? 3,000,000
Total Assets ? 14,640,000

Liabilities and Owner’s Equity


Current Liabilities
Accounts Payable ? 7,600,000
Salaries Payable 100,000
Unearned service revenue 260,000
Total current liabilities ? 7,960,000

Owner’s Equity

Wynonna Earp, Capital ? 6,680,000

Total Liabilities and Owner’s Equity ? 14,640,000

Recording the Adjusting Entries
The worksheet helps identify what accounts need adjustment. Adjusting entries assign the revenues to the period in which they are earned, and expenses to the period they are incurred which are crucial in determining the correct income or loss for the period. The journalization and posting of these entries can be done before the closing entries are made.
Figure 10-4 summarizes the adjusting entries for Tacobello Service Company.
General Journal
Adjusting Entries
December 31, 2018

a. Supplies expense 80,000
Unused Supplies 80,000
To record supplies used

b. Depreciation expense – furniture & fixture 400,000
Accumulated depreciation – furniture & fixture 400,000
To record depreciation of furniture & fixture

c. Depreciation expense – building 200,000
Accumulated depreciation – building 200,000
To record depreciation of building

d. Salary Expense 100,000
Salary payable 100,000
To record salaries owed but not yet paid

e. Accounts Receivable 240,000
Service Revenue 240,000
To take up accrued revenue

f. Unearned service revenue 640,000
Service revenue 640,000
To take up earned portion of service revenue received in advance

Closing the Accounts
Closing the accounts is made to set up the accounts for recording transactions of the next period. This step consists of journalizing and posting the entries. The process of closing sets the balance of all nominal (temporary) accounts to zero. These nominal accounts are the – revenue, expenses and the owner’s withdrawal account.
Assets, Liabilities and Owner’s Permanent accounts are not closed because their balances are not used to measure income thus, these amounts were carried over to become the beginning balances of the next period.
There are three steps in closing the nominal (temporary) accounts namely:
1. Debit each revenue account for the amount of its credit balance. This entry transfers the sum of revenues to the credit side of income summary.
2. Credit each expense account for the amount of its debit balance. This entry transfers the sum of expenses to the debit side of income summary.
3. Debit Income Summary for the amount of its credit balance (revenues minus expenses) and credit the capital account. If expense is bigger than revenue, then Income Summary is credited to transfer the loss.
4. Credit the withdrawals or Drawing account for the amount of its debit balance. Debit the Capital account of the proprietor. This entry transfers the withdrawal account to the debit side of the Capital account.

The Closing Entries for Tacobello Service Company are as follows:
General Journal
Closing Entries
December 31, 2018

a. Service revenue 6,000,000
Income summary 6,000,000
To close revenue account to Income Summary

b. Income summary 4,480,000
Salary expense 3,540,000
Supplies expense 80,000
Depreciation expense – furniture & fixture 400,000
Depreciation expense – building 200,000
Miscellaneous expense 260,000
To close expense account to Income Summary

c. Income Summary 2,120,000
Wynonna Earp, Capital 2,120,000
To close net income for the year to Santos, Capital

d. Wynonna Earp, Capital 1,300,000
Wynonna Earp, Withdrawal 1,300,000
To close withdrawal account to capital account

Preparation of the Post –Closing Trial Balance
A Post-Closing Trial Balance is made after closing the nominal accounts to prove the equality of the debit balances and credit balances of the open accounts in ledger. This equality shows the correctness of the adjusting, closing, and balancing that has been made. The post- closing trial balance will contain only the real counts – the asset, liability, and capital accounts. Below is the post-closing trial balance of Tacobello Service Company.
Tacobello Service Company
Post-Closing Trial Balance
December 31, 2018

Debit Credit
Cash ? 3,960,000
Accounts Receivable 7,640,000
Supplies 40,000
Furniture and fixtures 2,000,000
Accumulated depreciation – furniture and fixture ? 1,200,000
Building 5,000,000
Accumulated Depreciation – building 2,800,000
Accounts Payable 7,600,000
Salary Payable 100,000
Unearned service revenue 260,000
Wynonna Earp, Capital 6,680,000
? 18,640,000 ? 18,640,000

Reversing Entries: The Optional First Step in the Next Accounting Period
Reversing Entries are journal entries that are the exact opposite of a related adjusting entry made at the end of the period. These entries are made after closing and preparing a post-closing trial balance.
The preparation of reversing entries is optional. It is done mainly for convenience and to maintain consistency in handling of accrued and deferred items. It can also be used to simplify the analysis and recording of routine transactions that occur in the following period. A typical example is accrued wages owed to employees at the end of a period. If there has been an adjusting entry for accrued wages expense, the first payment of wages in the following period would certainly include accrual. In the absence of some special provisions, wages payable must be debited in the amount owed for the earlier period and Wages Expense must be debited for the portion of the payroll that represents expenses for the later period. To avoid the potential error and confusion, a reversing entry may be made for the adjustment made at the end of the preceding month and just follow the regular procedure for recording the payroll.
Not all adjusting entries have to be reversed. Only the adjusting entries for the following items are reversed:
1. Accrual of expenses
2. Accrual of revenues
3. Unearned income, if the income account is credited when the income is received in advance (Income Method)
4. Prepaid expenses, if the expense account is debited when payment is made in advance (Expense Method).
The basic procedure in preparing reversing entries that need to be reversed is simply.
1. Debit the account(s) originally credited in the adjusting entry, and
2. Credit the account(s) originally debited in the adjusting entry.
Illustrative Case II. Reversing Entries
The following data from Wayhaught Consulting Services are used to illustrate the use of reversing entries.
a. Wages are paid on the second and fourth Fridays for the two-week periods ending on those Fridays.
b. The wages accrued for Monday and Tuesday, December 30 and 31, 2017 are P25,000.
c. Wages paid on Friday, January 10, 2018 total P127,500.
(1) What adjusting entry should be made on December 31, 2017?
The adjusting entry for the accrued wages of December 31, 2017 is as follows:
Dr. Wages Expense 25,000
Cr. Wages Payable 25,000

(2) What possible error may be committed by the accountant if no reversing entry for the adjusting entry is made as of the first day of year 2018?
After the adjusting entry has been made and posted, the general ledger will show the following:

After the closing process, Wages expense will now have a zero balance. Without a reversing entry, it is necessary to record the P127,500 payroll on January 10 as follows:
Jan. 10 Wages Payable 25,000
Wages Expense 102,500
Cash 127,500

Before recording the entry on January 10th the in-charged employee must refer to the prior period’s adjusting entry to determine the amount of the debits to Wages Payable and Wages Expense. Because if not, there is a great chance that an error may occur.
(3) How will the preparation of the reversing entry reduce the error that might be committed when the January 10th transaction is recorded?
Dr. Wages Payable 25,000
Cr Wages Expense 25,000
If a reversing entry is prepared on January 1, 2018 for the accrued wages expense, the entry would be

The reversing entry would result to a zero balance in the Wages Payable account and a credit balance of P25,000 in the Wages Expense account. When the payroll is paid on January 10, the following entry is recorded
Dr. Wages Expense 127,500
Cr. Cash 127,500

The sequence of entries, including adjusting, closing and reversing entries is illustrated in the following accounts.

To summarize, preparing appropriate reversing entries at the beginning of the following period, commission of possible errors will therefore be avoided.

For Tacobello Service Company, the following reversing entries may be prepared:
General Journal
Reversing Entries
January 1 ,2019

a. Salary payable 200,000
Salary expense 200,000
To reverse adjusting entry for accrued expense

b. Service revenue 240,000
Accounts receivable 240,000
To reverse adjusting entry for accrued revenue

Notes: No reversing entries are made for the following adjusting entries – Unearned Service Revenue, Prepaid Expense (supplies), Adjustments valuation for Depreciation expense and valuation of assets – because these accounts are correctly stated at the end of the year after such adjustments were made. In the succeeding accounting period, the accountant will debit/credit these accounts to record transactions that would affect them.


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