Chapter 4. Completing the accounting circle.

1-Using a Worksheet

A worksheet is a multiple-column form used in preparing financial statements. It’s not a

permanent accounting record. It’s neither a journal nor a part of a general ledger. It’s a device
used in preparing adjusting entries and the financial assets. They may be a computerized
worksheet using an electronic spreadsheet program such as Excel. The use of the worksheet is
optional. It’s prepared using a five-step process.

1-Prepare a trial balance on the worksheet.

It consists on including all ledger accounts with balances in the account titles column. Include
all the debit and credit balance of both types of accounts.

2-Enter the adjustments in the adjustment’s columns.

It consists on adding additional accounts as needed. Companies don’t journalize the
adjustments until after they complete the worksheet and prepare the financial statements.
Finally, equality must be proved.

3-Complete the adjusted trial balance columns.

It consists on total the adjusted trial balance columns and check for equality. For each account,
the amount in the adjusted trial balance columns is the balance that will appear in the ledger
after journalizing and posing the adjusting entries.

4-Extended adjusted trial balance amounts to appropriate financial statement columns.

In consists in extending all revenues and expenses accounts’ balances to the income statement
columns.

5-Total the statement columns, compute the net income/loss, and complete the Worksheet.
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 the net income. The debit
amount balances the income statement columns; the credit amount balances the statement of
financial position columns.
If the debits exceed total credits in the income statement columns, the company has a net loss,
which might be entered in the income statement credit column and the statement of financial
position debit column.

2-Preparing financial statements from a Worksheet.

Income statement is prepared from the income statement columns.

Statement of financial position and retained earnings statement are prepared from the
statement of financial position columns.
Companies can prepare financial statements before they journalize and post adjusting entries.

Preparing adjusting entries from a Worksheet.

Adjusting entries are prepared from the adjustments’ columns of the worksheet.
Journalizing and posting of adjusting entries follows the preparation of financial statements
when a worksheet is used.
3-Preparing closing entries.

Closing entries are recognized in the ledger the transfer of the net income/loss and dividends
to Retained earnings.
Companies journalize and post-closing entries only at the end of the annual accounting period.
Closing entries produce a zero balance in each temporary account or nominal accounts.
Permanents accounts or real accounts are those which are not closed from period to period.

Companies close the revenue and expense accounts to another temporary account, Income
Summary, and they transfer the resulting net income or loss from this account to Retained
Earnings.

1-Debit each revenue account for its balance, and credit Income Summary for total revenues.
2-Debit Income Summary for total expenses, and credit each expense account for its balance.
3-Debit Income Summary and credit Retained Earnings for the amount of net income.
4-Debit Retained Earnings for the balance in the dividends account, and credit dividends for
the same account.
4-Preparing a Post-closing trial balance.

Lists permanent accounts and their balances after the journalizing and posting of closing
entries.
Purpose is to prove the equality of the permanent account balances carried forward into the
next accounting period.
Only contains balances for permanent—statement of financial position—accounts.
All temporary accounts will have zero balances.

Correcting Entries- An avoidable step.

Corrections are done whenever an error is discovered. Instead of preparing a correcting entry,
it is possible to reverse the incorrect entry and then prepare the correct entry. Correcting
entries may involve any combination in need of correction, correcting entries must be posted
before closing entries.

6-Statement of financial position.

It presents a snapshot at a point in time, normally at the end of the accounting period. In order
to improve understanding, companies group similar assets and similar liabilities together.
1-Assets.
Intangible assets: assets that do not have physical substance.
Property, Plant, and Equipment: Long useful lives, use in operations, depreciation (allocating
the cost of assets to a number of years), accumulated depreciation (total amount of
depreciation expensed thus far in the asset’s life).
Long-term investments: investments in ordinary shares and bonds of other companies, and
investments in non-current assets such as land or buildings that a company is not using in its
operating activities.
Current assets: Assets that a company expects to convert to cash or use up within one year or
the operating cycle, whichever is longer.
Operating cycle is the average time it takes from the purchase of inventory to the collection of
cash from customers.
2-Equity
Proprietorship: one capital account.
Partnership: capital account for each partner.
Corporation: share capital and retained earnings.
3-Liabilities
Non-current liabilities: obligations a company expects to pay after one year.
Current liabilities: obligations that a company is to pay within the coming year or its operating
cycle, whichever is longer.
Usually list notes payable first, followed by accounts payable. Other items follow in order of
magnitude.
Liquidity: ability to pay obligations expected to be due within the next year.