Accounting
Chapter 7
Lesson 7-1
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Accounting Concept #6: Consistent Reporting
Fiscal Period
Accounting Concept #7: Accounting Period Cycle
Each business chooses a fiscal period that meets its needs – usually 1
year because state and federal taxes due yearly
Usually choose a period with an ending date during a period of low
business activity
Work sheet
Why use work sheets?
To summarize general ledger account balances – debits = credits
To plan needed changes to general ledger accounts to bring balances up
to date
To separate general ledger account balances according to financial
statements to be prepared
To calculate net loss or net income for fiscal period
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Journals and ledgers are permanent records so should be written in ink
Work sheets are planning tools and are NOT permanent so written in
pencil
Heading: Name of business, name of report, date of the report
Trial Balance
Info for trial balance comes from general ledger
Listed in order on Chart of Accounts
Listed even if have a zero balance
Steps to preparing a work sheet
Write general ledger account titles in work sheet’s Account Title column
Write balances in appropriate trial balance column (leave blank if no
balance)
Rule (draw) single line under last amounts in trial balance columns
Add trial balance debits and credits – should be equal
Write total of each column below single line
Rule double lines below both columns – indicates totals have been verified
Lesson 7-2
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At times a business will pay cash for supplies in one fiscal period but not
use until another
Accounting Concept #8: Matching Expenses with Revenues
If buy supplies in August (1 month fiscal period) and don’t use some until
Sept. need to make an adjustment
Supplies on hand are items owned by a business until the supplies are
used
Value of the used supplies becomes an expense
Amount of the supplies used must be deducted from the asset account
Supplies and added to the expense account, Supplies Expense
Prepaid Insurance and Insurance Expense work the same way
Adjustment
Assets of business are used to earn revenue
Portion of assets consumed to earn the revenue are expenses
After adjustments are made, expenses incurred to earn revenue are
reported in same fiscal period as the revenue is earned
A work sheet is used to plan adjustments
Changes are not made to general ledger accounts until adjustments
journalized and posted
Questions to ask when making adjustments
What is the balance of ______ (asset account)?
What should the balance be for this account?
What must be done to correct the account balance?
What adjustment is made?
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Recording adjustments on a Work Sheet
Write debit amount in Adjustments debit column
Write credit amount in Adjustments credit column
Label the 2 parts of the adjustment with a small letter (a), (b), etc
depending on number of adjustments made
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Proving Adjustments columns
Draw a single line under columns
Add the 2 columns – if totals match then balanced
Draw a double line indicating totals have been verified
Lesson 7-3
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At end of each fiscal period, 2 financial statements are created – income
statement (IS) and balance sheet (BS)
Up-to-date account balances are extended to the columns for the
appropriate statement
Extend assets, liabilities, and O.E. to BS columns
Must make adjustments to accounts like Supplies, and Prepaid Insurance
Income Statement
Extend expense and revenue accounts to IS columns (all accounts below
Sales)
Net Income
Steps to calculate net income on work sheet
Draw a single line across last four columns
Add both IS and BS columns and record
Calculate net income (IS credit – IS debit) write Net Income on line below
all accounts
Extend amount of net income to BS credit column (capital account is
increased by a credit and Net Income)
Draw single line below totals for IS and BS
Add subtotal and net income amount for each column to get proving total
– the debits and credits should be equal for the IS and BS columns
Draw double lines under totals
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Steps to calculate and record Net Loss
and 2. same as net income
3. IS debit – IS credit = net loss - write net loss below account titles
Extend amount of net loss to BS debit (capital account is decreased by a
debit and Net Loss)
Finish like on net income
Lesson 7-4
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Any errors found on a work sheet must be corrected before move on
o erase the error and replace with correct amount
Typical Calculation Errors – when 2 column totals don’t balance
subtract the smaller amount from larger amount to find the difference
The difference is 1, .01, .10, 1.00, 10.00 the error is likely addition – re
add
The difference can be evenly divided by 2
if that amount on Trial Balance be sure it is in correct column
check in general ledger and journals to be sure listed in correct
account
The difference can be evenly divided by 9
Look for transposed numbers (45 s/b 54)
Look for “slide” when # moved to left or right (13.00 s/b 130.00)
The difference is an omitted amount
look for an amount that is same
A # may not have gotten extended or accounts in journal or ledger
forgotten
Work Sheet Errors
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Trial Balance: are all ledger accounts and account balances copied to work
sheet right?
Adjustments: do debits = credits? is the adjustment amount correct?
IS, BS: amounts copied correctly when extended? extended to correct
columns? net income or loss calculated correctly? and recorded correctly?
For all errors above correct and re-add
If can’t find errors on work sheet need to go to journal and ledgers to
check for accuracy
As each item is verified place a checkmark next to it
Posting Error – Wrong Account
draw line though incorrect entry
recalculate balance and correct work sheet
record the posting in correct account
recalculate the account balance and correct work sheet
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Posting Error – Wrong Amount
Draw line through incorrect amount
Write correct amount just above incorrect amount
recalculate and correct worksheet
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Posting Error – Wrong Column
Draw line through entry in wrong column
Record in correct column
Recalculate and correct
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Checking General Journal for Errors
Do debits = credits in each entry?
Are amounts in correct columns?
Info in account title correct?
All transactions recorded?
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Best way to prevent errors is to work CAREFULLY!!!