Chapter 7
WORK SHEET FOR A
SERVICE BUSINESS
Chapter 7 Objectives:
 Define accounting terms related to a work sheet for a
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service business organized as a proprietorship
Identify accounting concepts and practices related
to a work sheet for a service business organized as
a proprietorship
Prepare a heading and a trial balance on a work
sheet
Plan adjustments for supplies and prepaid insurance
Complete a work sheet for a service business
organized as a proprietorship
Identify selected procedures for finding and
correcting errors in accounting records
ACCOUNTING FLOW CHART
Source Document
Journal
Ledger
Work Sheet
Financial Statements
Consistent Reporting
 The same accounting procedures are
followed in the same way in each
accounting period.
– Same figures are calculated, same overall
ratios are calculated, and same analysis
used
 Use same set of procedures for reporting
(for comparisons).
 Begin and end at same time.
 Analyze, summarize, and report financial
information in a consistent manner.
Ch 7-1:
Creating a
Work Sheet
Fiscal Period
 The time period selected by the business to report
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financial information.
– AKA Accounting Period
Accounting Period Cycle: applied when changes in
financial info (ie: profits and losses) are reported for a
specific period of time in the form of financial statements
Common time periods are a quarter (3 months) or a year.
Most businesses use January 1 to December 31 to
correspond to federal and state tax reports.
May also choose time when business activity is low
Encore Music: monthly for now because it is a new
business
– Begin on August 1-August 31 (inclusive)
Worksheet:
 A columnar accounting form used to
summarize general ledger accounts.
 It is prepared by the accountant in pencil.
– Planning tool NOT permanent
 Purpose: Makes it easier for the accountant to
prepare the financial statements.
Four Reasons to Prepare Work Sheet
1. To summarize general ledger account
balances to prove DR=CR.
2. To plan needed changes to general ledgers
accounts to bring balances up to date 
adjustments.
3. To separate accounts for financial
statements - Balance Sheet, Income
Statement
4. To calculate net income or net loss for the
fiscal period.
PREPARING THE HEADING OF A WORK SHEET
1
2
3
1. Who???- Name of Company
2. What??? - Name of Report
3. When??? - Date of Report
*Covers entire fiscal period
Lesson 7-1, page 150
Columns of a Work Sheet
3. Income
1. Trial 2.
4.
Balance Adjustments Statement Balance
Sheet
Trial Balance
 Figures are taken from the general ledger
(in the same order they appear in ledger).
 All accounts are listed in order.
– Listed even if they have a 0 balance
 Must prove equality of debit and credit
columns before completing worksheet.
PREPARING A TRIAL BALANCE ON A WORK SHEET
2
1. Account Titles
2. Account Balances
3. Single Rule
4. Add Totals
5. Write Totals
6. Double Rule
1
3
4
5
6
Lesson 7-1, page 151
Assign:
 Page 152
 Work Together - will be used in
Chapter 7-2, 7-3
CHAPTER 7-2
 Planning Adjusting Entries on a
Work Sheet
Matching Expenses with Revenues
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This is applied when revenue from business activities and
expenses associated with earning that revenue are
recorded in the same accounting period.
– Ie: You must account for buying something in one period
and using it in another period.
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**Amounts that helped earn revenue for a period must be
reported with expenses in the same period
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The ending balance of the supplies account should
represent what is remaining on hand at the end of the
month
All supplies that have been used Reported as Supplies
Expense
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Matching Expenses with Revenue
 Bought supplies on March
1, 2010
 Supply Inventory- April 1,
2010
$100 $100
$100
$100 $100
$100
$100
$100
$100
$100
$100
$100
 Assets:??????
$100 $100
$100
 How to journalize the used
supplies?
Adjustments
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A change recorded to bring an account up to date.
 Assets are used to earn revenue
 The portion of the assets consumed/used in order
to earn revenue become business expenses
 These used portions are no longer assets, but are
NOW expenses
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Once adjustments are made expenses incurred to
earn revenue are reported in same fiscal period as
the revenue is earned and reported Matching
Expenses with Revenue
 Work sheet is used to plan adjustments and THEN
you must journalize each one
Supplies Adjustment
Supplies
4751
When business buys supplies – DR Asset account
Supplies on hand are a value owned by business
until used
Value of supplies used  becomes business expense
Inventory of supplies shows $2187 worth.
Planning Adjustments
 Determine amount
– Account Balance 4751 (what you started with)
– Inventory
-2187 (what is left - asset)
– Adjustment
$2564 (what was used- expense)
Planning Adjustment Entry and Account Balances
 Debit Supplies Expense
 Credit Supplies
Original amount
Amount used
Supplies
4751
2564
Balance $2187 =
value of supplies on
hand
Supplies Expense
2564
SUPPLIES ADJUSTMENT ON A WORK SHEET
2
3
1
1. Write the debit amount – in Adjustment column.
2. Write the credit amount - in Adjustment column.
3. Label the two parts of this adjustment with a
small letter a in parentheses, (a).
Lesson 7-2, page 155
Prepaid Insurance
 Insurance premium is paid in advance and turns
into an expense as each day passes.
 When bought  DR asset account
 Determine amount used
– Account Balance, prepaid insurance
– Inventory, insurance coverage remaining
– Adjustment, Insurance coverage used
 Amount used Expense.
– Debit Insurance Expense ($100)
– Credit Prepaid Insurance ($100)
1200
-1100
$100
PREPAID INSURANCE ADJUSTMENT ON A WORK
SHEET
2
3
1
1. Write the debit amount.
2. Write the credit amount.
3. Label the two parts of this adjustment with a
small letter b in parentheses, (b).
Lesson 7-2, page 156
PROVING THE ADJUSTMENTS COLUMNS OF A WORK
SHEET
1. Rule a single line.
2. Add both the
Adjustments
Debit and Credit
columns.
3. Rule double lines.
1
2
3
Lesson 7-2, page 157
Assign:

Page: 158
 Audit
 Work Together
 On your Own (7-1 and 7-2)
ACCOUNTING FLOW CHART
Source Document
Journal
Ledger
Worksheet
Financial Statements
Chapter 7-1, 7-2 Review:
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4 questions to ask when analyzing adjustments:
1. What is the balance of supplies/prepaid insurance?
2. What should the balance be for this account?
3. What must be done to correct?
4. What adjustments need to be made?
TO DO:
• Application Probs 7-1, 7-2
Explain ‘Matching Expenses with Revenue’ using this
diagram – each square is $100 worth of supplies
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Bought on Jan. 1, 2010
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Supply Inventory- May 31, 2010
Assets:??????
 How to journalize the used
supplies?
Chapter 7-3
Extending Financial Statement
Information on a Work Sheet
 Balance Statement: reports
assets, liabilities, owner’s equity
on a specific date
 Income Statement: reports
revenue and expenses for a fiscal
period
Before Adjustments:
 Assets were overstated
 Expenses were understated
 Profit was overstated
 Paid too much in taxes
Two Financial Statements prepared at end of fiscal
period
 Income Statement
– Revenue
– Expenses
 Balance Sheet
– Assets
– Liabilities
– Owner’s Equity
***MUST extend updated
account balances to
specified columns to
create these two
financial statements
Figure for Income or Loss
 Revenue minus Expenses = Income/Loss
» OR
 CR-DR= Net Income/Loss
 Assets - Liabilities = Owner’s Equity  Balanced
 Net Income: difference between total revenue and
total expenses when total revenue is greater
 Net Loss: difference between total revenue and
total expenses when total expenses are greater
EXTENDING BALANCE SHEET ACCOUNT BALANCES
ON A WORK SHEET
1
2
3
1. Debit Balances without Adjustments
2. Debit Balances with Adjustments
3. Credit Balances without Adjustments
Lesson 7-3, page 159
EXTENDING INCOME STATEMENT ACCOUNT
BALANCES ON A WORK SHEET
1
2
3
1. Sales Balances
2. Expense Balances without Adjustments
3. Expense Balances with Adjustments
Lesson 7-3, page 160
RECORDING NET INCOME, AND TOTALING AND
RULING A WORK SHEET
1. Single Rule
2. Total
3. Net Income
4. Extend Net
Income
5. Single Rule
6. Totals
7. Double Rule
1
4
3
6
2
5
7
Lesson 7-3, page 161
CALCULATING AND RECORDING A NET LOSS ON A
WORK SHEET
1
3
2
4
1. Single Rule
2. Totals
3. Net Loss
4. Extend Net Loss
Lesson 7-3, page 162
Assign:
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GO TO OVERLAYS
Follow steps with overlays as they are read out
loud
Page: 163
Audit you understanding
Work Together
Chapter 7-4: Finding and Correcting Errors
Errors:
1. Forgetting to post a line from the journal
1. Debit to supplies may not have been posted in general
ledger work sheet’s trial balance will not balance
2. Transferred info incorrectly from ledger to work sheet
3. Errors in calculating/recording adjustments
4. Errors in extending amounts to Income Stmt and Balance
Sheet columns
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All errors must be corrected before any further work is
done
If error is found on work sheet erase error and replace it
with correction
CHECKING FOR TYPICAL CALCULATION ERRORS
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When two column totals are not in balance, subtract the smaller
total from the larger total to find the difference.
Check the difference between the two amounts against the
following guides.
1. The difference is 1, such as $.01, $.10, $1.00, or $10.00.
1. Add columns again
2. The difference can be divided evenly by 2.
1. Check debits/credits (recorded in same column)
2. If difference is $48, look for $24 in trial balance columns
3. The difference can be divided evenly by 9.
1. Check transposed #’s (54 and 45)
4. Check for slide ($12.00 is written as $120.00)
5. The difference is an omitted amount.
1. Look for an amount equal to the difference
Lesson 7-4, page 164
CHECKING FOR ERRORS IN THE WORK SHEET
 Check for Errors in the Trial Balance Column
– Have all general ledger account balances been copied in the Trial
Balance column correctly?
– Have all general ledger account balances been recorded in the
correct Trial Balance column?
 Check for Errors in the Adjustments Columns
– Do the debits equal the credits for each adjustment?
– Is the amount for each adjustment correct?
 Check for Errors in Income Statement and Balance Sheet
Columns
– Has each amount been copied correctly?
– Has each amount been extended to the correct column?
– Has the net income/loss been calculated correctly?
– Has the net income/loss been recorded in the correct column?
Lesson 7-4, page 165
CORRECTING AN ERROR IN POSTING TO THE
WRONG ACCOUNT
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If a pair of columns do not balance and error cannot be found
on work sheet look for errors in posting
As each entry in journal is verified, place a check mark next to
it
Have all amounts that need to be posted actually been posted
from the general journal?
– To correct complete posting and recalculate account
balances and make corrections on work sheet
Have all amounts been posted to the correct accounts?
– To correct draw a line through entire incorrect entry in ledger
•
Recalculate and make corrections
– Record posting in correct account
•
Recalculate and correct wkst
CORRECTING AN ERROR IN POSTING TO THE
WRONG ACCOUNT
2
1
1. Incorrect Entry
2. Correct Entry
*Posted to Prepaid Insurance instead of Supplies
Lesson 7-4, page 165
CORRECTING AN INCORRECT AMOUNT AND AN
AMOUNT POSTED TO THE WRONG COLUMN
3
2
1
5
4
6
*Correcting an incorrect amount
1. Cross out the Incorrect Amount
2. Write in the Correct Amount
3. Compute the Correct Balance
*Correcting an amount posted to the wrong column
4. Cross out the Incorrect Entry
5. Write in the Correct Entry
6. Compute the Correct Balance
Lesson 7-4, page 166
Checking for Errors in General Journal Entries
 Do debits = credits for each entry?
 Is each general journal entry amount recorded in
the correct column?
 Is info in the account title column correct for each
entry?
 Have all transactions been recorded?
Assign:
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Page: 167
 Audit
 Work Together
 On your Own 7-3 and 7-4