In this Chapter you will be able to:I. Prepare financial statementsII. Record adjusting entriesIII. Prepare post-closing trial balance, andIV. Prepare reversing entriesThe remaining steps will be illustrated using an accounting devise known as Worksheet.
Accounting WorksheetA 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 WorksheetThe 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:WorksheetAccount 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 WorksheetThe 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 WorksheetCase Facts:The trial Balance of Tacobello Service Company at December 31, 2018, the end of its fiscal year, is presented below:Tacobello Service CompanyTrial BalanceDecember 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.Required:Prepare the accounting worksheet of Tacobello Service Company for the year ended December 31, 2018. Preparation of the Financial StatementsIn 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 EquityTacobello Service CompanyIncome StatementDecember 31, 2018 Revenue Service Revenues ? 6,600,000.00 Expenses 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 CompanyStatement of Owner’s EquityDecember 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 StatementTacobello Service CompanyBalance SheetDecember 31, 2018 Assets 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 2,200,000 Furniture and fixtures ? 2,000,000 Less: Accumulated Depreciation 1,200,000 800,000 Total non-current assets ? 3,000,000 Total Assets ? 14,640,000 Liabilities and Owner’s Equity Liabilities 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 EntriesThe 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 JournalAdjusting EntriesDecember 31, 2018a. 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 advanceClosing the AccountsClosing 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 JournalClosing EntriesDecember 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 BalanceA 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 CompanyPost-Closing Trial BalanceDecember 31, 2018 Debit CreditCash ? 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 PeriodReversing 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 expenses2. Accrual of revenues3. 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, and2. Credit the account(s) originally debited in the adjusting entry.Illustrative Case II.
Reversing EntriesThe 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.
Required:(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 recordedDr. 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 JournalReversing EntriesJanuary 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.”END OF THE TOPIC”