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Using a Worksheet

LEARNING OBJECTIVE 1 Prepare a worksheet.

A worksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As its name suggests, the worksheet is a working tool. It is not a permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is merely a device used in preparing adjusting entries and the financial statements. Companies generally computerize worksheets using an electronic spreadsheet program such as Excel. Illustration 4-1 shows the basic form of a worksheet and the five steps for preparing it. Each step is performed in sequence. The use of a worksheet is optional. When a company chooses to use one, it prepares financial statements from the worksheet. It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it has prepared the financial statements. Thus, worksheets make it possible to provide the financial statements to management and other interested parties at an earlier date.

Illustration 4-1 Form and procedure for a worksheet

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Steps in Preparing a Worksheet We will use the October 31 trial balance and adjustment data of Pioneer Advertising Agency Inc., from Chapter 3, to illustrate how to prepare a worksheet. We describe each step of the process and demonstrate these steps in Illustration 4-2 and transparencies 4-3A, B, C, and D.

Illustration 4-2 Preparing a trial balance

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Illustration 4-3A Entering the adjustments in the adjustments columns

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Illustration 4-3B Entering adjusted balances in the adjusted trial balance columns

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Illustration 4-3C Extending the adjusted trial balance amounts to appropriate financial statement columns

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Illustration 4-3D Computing net income or net loss and completing the worksheet

STEP 1. PREPARE A TRIAL BALANCE ON THE WORKSHEET Enter all ledger accounts with balances in the account titles space. Enter debit and credit amounts from the ledger in the trial balance columns. Illustration 4-2 shows the worksheet trial balance for Pioneer Advertising Agency Inc. This trial balance is the same one that appears in Illustration 2-32 and Illustration 3-3.

STEP 2. ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS Turn over the first transparency, Illustration 4-3A. When using a worksheet, enter all adjustments in the adjustments columns. In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals. A different letter identifies the debit and credit for each adjusting entry. The term used to describe this process is keying. Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements. The adjustments for Pioneer Advertising Agency Inc. are the same as the adjustments in Illustration 3-23. They are keyed in the adjustments columns of the worksheet as follows.

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(a) Pioneer debits an additional account, Supplies Expense, $1,500 for the cost of supplies used, and credits Supplies $1,500. (b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance that has expired, and credits Prepaid

Insurance $50. (c) The company needs two additional depreciation accounts. It debits Depreciation Expense $40 for the month's depreciation,

and credits Accumulated Depreciation—Equipment $40. (d) Pioneer debits Unearned Service Revenue $400 for services provided, and credits Service Revenue $400. (e) Pioneer debits an additional account, Accounts Receivable, $200 for services provided but not billed, and credits Service

Revenue $200. (f) The company needs two additional accounts relating to interest. It debits Interest Expense $50 for accrued interest, and

credits Interest Payable $50. (g) Pioneer debits Salaries and Wages Expense $1,200 for accrued salaries, and credits an additional account, Salaries and

Wages Payable, $1,200. After Pioneer has entered all the adjustments, the adjustments columns are totaled to prove their equality.

STEP 3. ENTER ADJUSTED BALANCES IN THE ADJUSTED TRIAL BALANCE COLUMNS Turn over the second transparency, Illustration 4-3B. Pioneer determines the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has a $600 debit balance and a $50 credit in the adjustments columns. The result is a $550 debit balance recorded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries. The balances in these columns are the same as those in the adjusted trial balance in Illustration 3-25. After Pioneer has entered all account balances in the adjusted trial balance columns, the columns are totaled to prove their equality. If the column totals do not agree, the financial statement columns will not balance and the financial statements will be incorrect.

STEP 4. EXTEND ADJUSTED TRIAL BALANCE AMOUNTS TO APPROPRIATE FINANCIAL STATEMENT COLUMNS

Helpful Hint Every adjusted trial balance amount must be extended to one of the four statement columns.

Turn over the third transparency, Illustration 4-3C. The fourth step is to extend adjusted trial balance amounts to the income statement and balance sheet columns of the worksheet. Pioneer enters balance sheet accounts in the appropriate balance sheet debit and credit columns. For instance, it enters Cash in the balance sheet debit column, and Notes Payable in the credit column. Pioneer extends Accumulated Depreciation—Equipment to the balance sheet credit column; the reason is that accumulated depreciation is a contra-asset account with a credit balance. Because the worksheet does not have columns for the retained earnings statement, Pioneer extends the balance in Common Stock and Retained Earnings, if any, to the balance sheet credit column. In addition, it extends the balance in Dividends to the balance sheet debit column because it is a stockholders' equity account with a debit balance. The company enters the expense and revenue accounts such as Salaries and Wages Expense and Service Revenue in the appropriate income statement columns. Illustration 4-3C shows all of these extensions.

STEP 5. TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET INCOME (OR NET LOSS), AND COMPLETE THE WORKSHEET Turn over the fourth transparency, Illustration 4-3D. The company now must total each of the financial statement columns. The net income or loss for the period is the difference between the totals of the two income statement columns. If total credits exceed total debits, the result is net income. In such a case, as shown in Illustration 4-3D, the company inserts the words “Net Income” in the account titles space. It then enters the amount in the income statement debit column and the balance sheet credit column. The debit amount balances the income statement columns; the credit amount balances the balance sheet columns. In addition, the credit in the balance sheet column indicates the increase in stockholders' equity resulting from net income. What if total debits in the income statement columns exceed total credits? In that case, the company has a net loss. It enters the amount of the net loss in the income statement credit column and the balance sheet debit column. After entering the net income or net loss, the company determines new column totals. The totals shown in the debit and credit income statement columns will match. So will the totals shown in the debit and credit balance sheet columns. If either the income statement columns or the balance sheet columns are not equal after the net income or net loss has been entered, there is an error in the worksheet. Illustration 4-3D shows the completed worksheet for Pioneer Advertising Agency Inc.

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Preparing Financial Statements from a Worksheet After a company has completed a worksheet, it has at hand all the data required for preparation of financial statements. The income statement is prepared from the income statement columns. The balance sheet and retained earnings statement are prepared from the balance sheet columns. Illustration 4-4 shows the financial statements prepared from Pioneer's worksheet. At this point, the company has not journalized or posted adjusting entries. Therefore, ledger balances for some accounts are not the same as the financial statement amounts.

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Illustration 4-4 Financial statements from a worksheet

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The amount shown for common stock on the worksheet does not change from the beginning to the end of the period unless the company issues additional stock during the period. Because there was no balance in Pioneer's retained earnings, the account is not listed on the worksheet. Only after dividends and net income (or loss) are posted to retained earnings does this account have a balance at the end of the first year of the business.

Using a worksheet, companies can prepare financial statements before they journalize and post adjusting entries. However, the completed worksheet is not a substitute for formal financial statements. The format of the data in the financial statement columns of the worksheet is not the same as the format of the financial statements. A worksheet is essentially a working tool of the accountant; companies do not distribute it to management and other parties.

Preparing Adjusting Entries from a Worksheet

Helpful Hint Note that writing the explanation to the adjustment at the bottom of the worksheet is not required.

A worksheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. To adjust the accounts, the company must journalize the adjustments and post them to the ledger. The adjusting entries are prepared from the adjustments columns of the worksheet. The reference letters in the adjustments columns and the explanations of the adjustments at the bottom of the worksheet help identify the adjusting entries. The journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used. The adjusting entries on October 31 for Pioneer Advertising Agency Inc. are the same as those shown in Illustration 3-23.

DO IT! Worksheet Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.

Cash Accumulated Depreciation Accounts Payable Dividends Service Revenue Salaries and Wages Expense

Action Plan ✓ Balance sheet: Extend assets to debit column. Extend liabilities to credit column. Extend contra assets to credit column.

Extend dividends account to debit column. ✓ Income statement: Extend expenses to debit column. Extend revenues to credit column.

Solution Income statement debit column—Salaries and Wages Expense Income statement credit column—Service Revenue Balance sheet debit column—Cash; Dividends Balance sheet credit column—Accumulated Depreciation; Accounts Payable

Related exercise material: BE4-1, BE4-2, BE4-3, E4-1, E4-2, E4-5, E4-6, and 4-1.

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.

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