MODULE 2

Financial Accounting and Reporting

SESSION TOPIC 2: Review of Worksheet Preparation

LEARNING OUTCOMES
The following specific learning objectives are expected to be realized at the end of the session:
1. Recall the accounting cycle and its role in financial accounting and reporting.
2. Recall how to make worksheet in order to facilitate making the financial statements.
3. Recall the different types of financial statements.

KEY POINTS
Accounting Accounting Cycle Worksheet Financial Statements

CORE CONTENT
Introduction:
This module focuses on the review of the accounting cycle, particularly worksheet preparation. Steps in preparing
the worksheet will be discussed in order to facilitate the next step in the accounting cycle. An introduction of the financial
statements will also be discussed as a precursor to the next topics in this course.

IN-TEXT ACTIVITY
The Worksheet
Accountants often use a worksheet to help transfer data from the unadjusted trial balance to the financial statements. This
multi-column document provides an efficient way to summarize the data for financial statements. The accountant
generally prepares a worksheet when it is time to adjust the accounts and prepare the financial statements. Note,
however, that it is possible to prepare financial statements directly from the adjusted trial balance at the end of the
accounting period if the business has relatively few accounts. The worksheet simplifies the adjusting and closing process.
It can also reveal errors.

Preparing the Worksheet (Step 5)

The steps in the preparation of a worksheet are as follows:
1. Enter the account balance in the unadjusted trial balance columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns and total the amounts.
3. Compute each account’s adjusted balance by combining the unadjusted trial balance and the adjustment figures.
Enter the amounts in the adjusted trial balance columns.
4. Extend the asset, liability and owner’s equity amounts from the adjusted trial balance columns to the balance
sheet columns. Extend the income and expense amounts to the income statement columns. Total the statement
columns.
5. Compute for profit or loss as the difference between total revenues and total expenses in the income statement.
Enter the profit or loss as a balancing amount in the income statement and in the balance sheet and compute the
final column totals.

Example:
Following the Hyrule Motors example from the previous module and assuming that there are no other transactions that
occurred during the year for simplicity purposes, the worksheet can be created as follows:

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 Hyrule Motors
Worksheet
For the Year Ended December 31, 2020
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
No. Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
11 Cash P240,000 P240,000 P240,000
0
12 Accounts Receivable 400,000 P25,000 425,000 425,000
0
13 Office Supplies 50,000 50,000 50,000
0
14 Prepaid Rent 360,000 P270,000 90,000 90,000
0
15 Machineries 500,000 500,000 500,000
0
16 Computer Equipment 240,000 240,000 240,000
0
17 Furniture and Fixtures 400,000 400,000 400,000
0
21 Accounts Payable P200,000 P200,000 P200,000
0
22 Utilities Payable 50,000 50,000 50,000
0
23 Unearned Revenue 90,000 45,000 45,000 45,000
0
31 Link, Capital 1,000,000 1,000,000 1,000,000
0
41 Service Revenue 1,000,000 70,000 1,070,000 P1,070,000
0
51 Utilities Expense 100,000 50,000 150,000 P150,000
0
52 Rent Expense 270,000 270,000 270,000
0
P2,290,000 P2,290,000 P390,000 P390,000 P2,365,000 P2,365,000 P420,000 P1,070,000 P1,945,000 P1,295,000
Profit 650,000 650,000
P1,070,000 P1,070,000 P1,945,000 P1,945,000

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Preparing the Financial Statements (Step 6)
A complete set of financial statements comprises:
1. A statement of financial position as the end of the period;
2. A statement of financial performance for the period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes, comprising a summary of significant accounting policies and other explanatory information; and
6. A statement of financial position as at the beginning of the earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when
it reclassifies items in its financial statements.

One the worksheet is completed, it is easy to prepare the financial statements for the account balances have been
extended to the appropriate income statement and balance sheet columns. Most of the information needed to prepare the
income statement, statement of changes in equity and balance sheet are available from the worksheet.

Statement of Financial Position

A statement that shows the financial position or condition of an entity by listing the assets, liabilities and owner’s equity as
at a specific date. The information needed for this statement are the net balances at the end of the period, rather that the
total for the period as in the income statement. This statement is also called the balance sheet.
Users of the financial statements analyze the balance sheet to evaluate an entity’s liquidity, its financial flexibility, and its
ability to generate profits, and its solvency.
 Liquidity – refers to the availability of cash in the near future after taking account of the financial commitments
over this period.
 Financial flexibility – refers to the ability to take effective actions to alter the amounts and timing of cash flows
so that it can respond to unexpected needs and opportunities.
 Solvency – refers to the availability of cash over the longer term to meet financial commitments as they fall due.

Statement of Financial Performance

An entity can present all items of income and expense recognized in a period: in a single statement of comprehensive
income or in two statements: a statement displaying components of profit and loss (separate income statement) and a
second statement beginning with profit or loss and displaying components of other comprehensive income. The income
statement is a statement showing the performance of the enterprise for a given period of time.
Information about the performance of an enterprise, in particular its profitability, is required to in order to assess potential
changes in the economic resources that it is likely to control in the future. It is also useful in predicting thee capacity of the
enterprise to generate cash flows from its existing resource base.

Statement of Changes in Equity

The statement of changes in equity summarizes the changes that occurred in owner’s equity. Changes in an enterprise’s
equity between two balance sheet dates reflect the increase or decrease in its net assets during the period.
In case of sole proprietorships, increases in owner’s equity arise from additional investments by the owner and profit
during the period. Decreases result from withdrawals by the owner and profit during the period.

Statement of Cash Flows

The statement if cash flows provides information about the cash receipts and cash payments of an entity during a period.
It is a formal statement that classifies cash receipts (inflows) and cash payments (outflows) into operating, investing and
financing activities. The statement shows the net increase or decrease in cash during the period and the cash balance at
the end of the period.
 Cash Flows from Operating Activities – Operating activities generally involve providing services and producing
and delivering goods. Cash flows from operating activities are generally the cash effects of transactions and other
events that enter into the determination of profit or loss.
 Cash Flows from Investing Activities – Investing activities include making and collecting loans; acquiring and
disposing investments in debt or equity securities; and obtaining and selling of property and equipment and other
productive assets.
 Cash Flows from Financing Activities – Financing activities include obtaining resources from owners and
creditors.

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SESSION SUMMARY
The preparation of the worksheet is an optional step in the accounting cycle. It is used to facilitate an easier preparation of
the financial statements. It usually contains columns for the unadjusted trial balance, the adjusting entries, the adjusted
trial balance, the income statement and the balance sheet. The income statement column and the balance sheet column
will then be used to prepare the actual financial statements: the statement of financial position, the statement of
comprehensive income, the statement of changes in equity, the statement of cash flows and the notes to financial
statements.

SELF-ASSESSMENT
1. Discuss how to prepare the worksheet.
2. Enumerate and briefly explain the five components of a complete set of financial statements.

REFERENCES
Refer to the references listed in the syllabus of the subject.

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