Chapter 5 lecture notes
In this chapter you are introduced to the worksheet – this is not a formal
financial statement, but a tool to aid in the preparation of financial
statements.
The first column on the worksheet is the Account Name, which is where you
will record the accounts. The next column is the trial balance – you will
prepare the trial balance directly on the worksheet, it is done exactly the
same as in chapter 3, only using the worksheet tool. Only accounts with a
balance will show up in the trial balance, as adjustments are made additional
accounts may need to be added.
The adjustments are in the next column of the worksheet. In previous
chapters all transactions occurred within one accounting period; however,
this is not usually the case – so adjusting entries will need to be made in
order to match revenues and expenses within an accounting period. The
adjustments usually include one balance sheet account and one income
statement account. Examples of adjustments are on pages 133 – 138. Note
in the explanation of adjusting for depreciation that the adjustment is
recorded in a contra account – accumulated depreciation. The contra
account has a normal balance that is opposite of the related account, but will
be listed on the balance sheet in the same category. For example, equipment
is an asset; accumulated depreciation – equipment is a contra asset account,
but will be listed in the asset section. These contra accounts are listed
directly under their related accounts. (*This is important to remember –
you do NOT put contra asset accounts in the liability section! You put them
in the asset section). Depreciation is important because this is how you
allocate the cost of an item over the period it is used (this is done for items
such as equipment or buildings that are expected to be used for more than
one year).
The next step is to complete the adjusted trial balance section of the
worksheet. This is done by combining the figures from the trial balance
section and the adjustments section – see the box at the bottom of page 139
for a reminder of when to add and when to subtract. When footing the
columns, the totals must be equal.
The next two sections of the worksheet are the income statement and
balance sheet sections. These are used to organize information for the
financial statements. The accounts at the top of the worksheet are balance
sheet accounts and are transferred over to the balance sheet, and the
accounts at the bottom are income statement accounts and are transferred
over to the income statement section. Once the information is transferred
you must foot all four columns – they will NOT balance. The difference
between the columns in the income statement section is the net income or
net loss – see the completed worksheet on pages 142-143 for an example.