Chapter 4 Completing the Accounting Cycle A worksheet is a multiple column form used in the adjustment process and in preparing financial statements Using a Worksheet Working tool Not a permanent accounting record neither a journal or a part of the ledger Used in preparing adjusting entries and the financial statements Use of a worksheet is optional Steps in Preparing a Worksheet Step 1 Prepare a Trial Balance on the Worksheet Enter all ledger accounts with balances in the account titles space Enter debit and credit amounts from the ledger in the trial balance columns Step 2 Enter the Adjustments in the Adjustments Columns Enter all adjustments in the adjustments columns use applicable trial balance accounts If additional accounts are needed insert them on the lines below the trial balance totals Use letters to identify debits and credits for each adjusting entry This is known as keying Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements Step 3 Enter Adjusted Balances in the Adjusted Trial Balance Columns Determine the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account For each account the amount in the adjusted columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries Step 4 Extend Adjusted Trial Balance Amounts to the Appropriate Financial Statement Columns Extend adjusted trial balance amounts to the income statement and balance sheet columns of the worksheet Accumulated Depreciation gets extended to the balance sheet credit column because Accumulated Depreciation is a contra asset account with a credit balance Because the worksheet does not have columns for retained earnings statement Common Stock and Retained Earnings get extended to the balance sheet debit column because it is a stockholders equity account with a debit balance Expense and revenue accounts such as Salaries and Wages Expense and Service Revenue are entered in the appropriate income statement columns Step 5 Total the Statement Columns Compute the Net Income or Net Loss and Complete the Worksheet Company now must total each of the financial statement columns Net income or net loss is the difference between the totals of the two income statement columns If there is a net income the words Net Income are included in the account titles space and then enters the amount in the income statement debit column and the balance sheet credit column The debit amount balances the income statement columns the credit amount balances the balance sheet columns Same process if there was a net loss Preparing Financial Statements from a Worksheet Use data from the worksheet to prepare financial statements Income Statement prepared from income statement columns the balance sheet and retained earnings are prepared from the balance sheet columns Using a worksheet companies can prepare financial statements before they journalize and post adjusting entries Completed worksheet is not a substitute for formal financial statements Worksheet is a working tool for accountants not to be distributed to management and other parties Preparing Adjusting Entries from a Worksheet A worksheet is not a journal and it cannot be used as a basis for posting to ledger accounts To adjust the accounts the company must journalize adjustments and post to ledger Adjusting entries are prepared from adjustment columns of the worksheet The journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used Chapter 4 Pg 1 Closing the Books At the end of each accounting period the company makes the accounts ready for the next period Closing the Books Temporary Accounts relate only to a given period In closing the books the company distinguishes between temporary and permanent accounts Include income statement accounts and the Dividends account Company closes all temporary accounts at the end of the period Permanent Accounts relate to one or more future accounting periods Not closed from period to period Company carries forward the balances of permanent accounts into the next given accounting period Temporary Get Closed Permanent Not closed All revenue accounts All expense accounts Dividends Preparing Closing Entries All asset accounts All liability accounts Stockholders equity At the end of the accounting period the company transfers temporary account balances to the permanent stockholders equity account Retained Earnings by means of closing entries Closing Entries formally recognize in the ledger the transfer of net income or net loss and Dividends to Retained Earnings Produces a zero balance in each temporary account Then they are ready to accumulate data in the next accounting period Journalizing and posting entries is a required step in the accounting cycle the resulting net income or net loss from this account to the Retained Earnings Companies generally journalize and post closing closing entries only at the end of the annual accounting period Companies close the revenue and expense accounts to another temporary account Income Summary and they transfer Companies record closing entries in the general journal Companies generally prepare closing entries directly from the adjusted balances in the ledger 1 Debit revenue accounts for its balance credit Income Summary for total revenues 2 Debit Income Summary for total expenses 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 credit Dividends for the same amount 1 Avoid unintentionally doubling the revenue and expense balanced rather than zeroing them 2 Do not close Dividends through the Income Summary account Some cautions when preparing closing entries Dividends are not an expense and they are not a factor in determining net income Posting Closing Entries Preparing a Post Closing Trial Balance All temporary accounts should have zero balances after posting the closing entries Balance in Retained Earnings represents the accumulated undistributed earnings of the corporation at the end of the accounting period Shown on the balance sheet and is the ending amount reported on the retained earnings statement Lists permanent accounts and their balances after journalizing and posting of closing entries After journalizing and posting closing