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Adjustments are frrst prepared on the work sheet.
So far in this chapter you have learned:
- That adjustments are necessary if financial statements are to be correct
- How to adjust prepaid expenses such as Supplies, Rent, and Insurance
- How to adjust fixed assets by recording Depreciation Expense In this part of the chapter, you will learn how the adjustments are prepared on the work sheet and how the financial statements are prepared.
Eight-Column Work Sheet
The trial balance for Management Consultant Services is shown in Figure 6-5 on an eight-column work sheet. In Chapter 5, you learned how a six-column work sheet is used to help organize the financial statements. The trial balance is written on a work sheet. The accounts on the trial balance are then transferred to either the income statement section or the balance sheet section of the work sheet. The revenue and expense items are transferred to the income statement section. The difference in the totals of the income statement section is the net income or the net loss for the account- ing period. The difference in the totals of the balance sheet section is also the net income or the net loss. This difference should of course be the same as that obtained in the income statement section. The eight-column work sheet serves the same purpose. It is prepared in the same way as a six-column work sheet, but an adjustments section is added. It is also used by the accountant to rough out or plan the necessary adjustments so that the financial statements will be correct. There are four sections on an eight-column work sheet as shown in Figure 6-5:
- Trial balance
- Section to plan the adjustments
- Income statement section
- Balance sheet section In the next few pages, the work sheet will be completed for Management Consultant Services. The period of time covered by this work sheet will be one full year. The first step in preparing the work sheet is to gather the information required to com- plete the adjustments. This information includes:
- A count made of all supplies on hand shows $400 worth left on December 31.
- On January 1, a three-year insurance policy was purchased. One year of the policy is now expired.
I
ACC
.
.^ ACCOUNT
TITLE
NO.
Cash
100
2
Accounts Receivable
102
3
S~pplies
131
4
Prepaid Insurance
132
5
Prepaid
Rent
133
6
Equipment
141
7
Accuii?-ulated
Depreciation-
Equip.
142
8
Accounts Payable
200
9
Bank
Loan
221
10
J.^
Turner, Capital
300
11
J.
Turner, Drawings
301
12
Fees
Earned
400
13
Salaries Expense
500
"
14
Utilities Expense
;^
501
15
Rent
Expense
502
16
Miscellaneous Expense
503
17 Figure
6-
Eight-column
work
sheet
Management Consultant Services
Work
Sheet
For
the
year ended December 31,
19--
TRIAL
BALANCE
ADJUSTMENTS
INCOME
STATEMENT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
13
0007 0001 0009005 100
I
12
000
I ,r
2
400
~-
1
000 3
000 10
400
'·^
15
000
'>"^
·•
1:
000
l•^
~^
I .
...
i
89
500
r-^ L., ~;·
.^ >:
~~^
-·^
t..
~^ ,;^
!
1
300
"1:
15
300
(^
I
f
.^
~
700
L.,^ ,
I
~·)·^
-~·^
Ff^
,
160
800
160
800
;^ ~
I
BALANCE
SHEET
DEBIT
CREDIT
(^23456). 7 (^891011)
..^
12
..^ ~·
13
'^
..^
14 15 16 17
~
- ~....""1> ..._ N ~ ~ ~~ ~ ,.""1> ~ a.~· c.., ~~ ...~ ~....~ ~ ~ ~ 5".._ V) s~ ~~ ~ N ...... I.J.J
ACC.
ACCOUNT
TITLE
NO.
Cash
100
2
Accounts Receivable
102
3
Supplies
131
4
Prepaid Insurance
132
5
Prepaid
Rent
'^
133
6
Equipment
141
7
Accumulated
Depreciation-
Equip.
142
8
Accounts Payable
200
9
Bank Loan
221
10
J. Turner, Capital
300
..
11
J..
Turner, Drawings
301
12
Fees
Earned
400
13
Salaries Expense
soo
14
Utilities Expense
501
15
.^ Rent
Expense·
S
16
Miscellaneous Expense
503
17 18
Supplies Expense
S
Management Consultant Services
Work
Sheet
For
the year ended December 3
~,
19--
TRIAL BALANCE
ADJUSTMENTS
DEBIT
CREDIT
DEBIT
CREDIT
13
0007 0001 000900
(a)
600 ..^ ~.-~
...^ ....-.:---
s^
100 12
000
2
400 1
000 3
000 10
400
IS
000
144
000
89
5001 300 IS
300700 160
800
160
800
(a)
~
Figure 6-
The
adjustment
for
Supplies
is
shown
on
lines
3
and
18
of
the
work
sheet.
INCOMESTATEMENT
BALANCESHEET
DEBIT
CREDIT
DEBIT
CREDIT
2
/^
3 4 5 6 7 8 9 10
~N^
11
....... N
12 13
14
15
(/) ~ ~
16
~ ........
17
~
18
~^ ~·^ c.-,^ §'^ ~^ ~ ...~^ ~^ ~·^ ~^ ~^ C")^ ~-^ - (/)^ .....^ ~^ ~^ ~^ ~^ ~ - ~ N Vl -
N t-- 0'\ Q ~ ~ "-t 0. g ~ ~ ::::~· a'tl s.~ ~ ('")
Management Consultant Services
Work
Sheet
('") c ~ ~
For
the
year ended December 31,
19--
..... ~- Q
ACC.
TRIAL
BALANCE
ADJUSTMENTS
INCOME STATEMENT
BALANCE
SHEET
ACCOUNT
TITLE
NO.
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
('")
Cash
100
13
000
~ ~
2
"-t ~
2
Accounts Receivable
102
7
000
3
Supplies
131
1
000
(a)
600
3
~
4
~ ~-
4
Prepaid·
Insurance
132
900
(b)
300
5
(1:!
6
5
Prepaid Rent
133
5
100
6
Equipment
141
12
000
7
~-
8
~
7
Accumulated
Depreciation-
Equip.
142
2
400
8
Accounts Payable
200
1 000
9
Bank
Loan
221
3
000
9
10
J. Turner, Capital
300
10
400
10
11
J. Turner, Drawings
301
15
000
11
12
Fees Earned
400
144
000
12
13
Salaries Expense
500
89
500
13
14
Utilities Expense
501
1
300
14
15
Rent
Expense
502
15
300
·^ 1s
16
Miscellaneous Expense
503
700
16
17
160
800
160
800
17
18
Supplies Expense
504
(a)
600
18
19
Insurance Expense
505
(b)
300
19
Figure
6-
The adjustment for
Prepaid
Insurance
is
shown on lines 4 and 19.
N ..... 00 g .§ ~ "'1 0\
Management Consultant Services
,^ ·
~.~
^1
·•·^
g
Work Sheet
.^
••^ .. :··^
'~
~
For
the year ended December 31,
19--
..^
"'^
';.t/
[
r^
~
ACC.
TRIA_L
BALANCE
ADJUSTMENTS
INCOME
STATEMENT
BAUANCE
SHEET
"·^
S.
ACCOUNT
TITLE
.^ .^
~
NO.
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
~
,^ ~^
n n c
Cash
100
13
000
13
000
1
2
Accounts Receivable
102
7
000
7
000
~^
2
s·
3
Supplies
131
1
000
(a)
600
400
3
4
Prepaid
Insurance
132
900
(b)
300
600
4
t
s^
Prepaid
Rent
133
5
100
(c)
5
100
s^
~
6
Equipment
141
12
000
12
000
6
~
7
Accumulated
Depreciation-
Equip.
142
2
4oo
(d)
1 920
r^
4
320
7
~
8
Accounts
Payable
200
1
000
1
000
8
~. n
9
Bank Loan
221
3
000
3
000
9
~
10
J. Turner, Capital
300
10
400
10
400
10
~
11
J. Turner, Drawings
301
15
000
15
000
11
~^ · c,
12
Fees Earned
400
144
000
144
000
12
c,
'
13
Salaries Expense
500
89
500
89
500
13
14
Utilities Expense
501
1
300
1
300
14
15
Rent Expense
502
15
300
(c)
5
100
20
400
15
16
Miscellaneous Expense
503
700
700
16
17
160
.^800
160
800
17
18
Supplies Expense
50
~
(a)
.~
600
600
.^
18
19
Insurance Expense
505
.^
(b)
300
300
19
20
Depreciation
Expense-
Equipment
50
(d)
1
920
__
1
920
__
__
20
21
7
920
7
920
114
720
144
000
48
000
18
720
21
22
Net
Income
29
280
29
280
22
23
144
000
144
000
48
000
48
000
23
Figure
6-
Completed
work
sheet
Unit 12 Work Sheet, Adjustments, Financial Statements 219
and record an expense of $300. This is done by adding the account Insurance Expense to the work sheet. A debit of $300 is written beside Insurance Expense in the adjustments debit column. The asset Prepaid Insurance is reduced by entering a credit of $300 in the adjustments credit column opposite Prepaid Insurance. The work sheet in Figure 6-7 illustrates how Prepaid Insurance is adjusted. The effect of this adjustment is to lower the asset Prepaid Insurance to $600 and to record the Insurance Expense for one year of $300.
Prepaid Rent On October 1, rent of $5 100 was prepaid for October, November, and December. On December 31, the rent for those three months is no longer prepaid. It has been used up and an expense must be recorded. Since there is already a Rent Expense account on the trial balance, all that is re- quired to adjust Prepaid Rent is to decrease the asset by a credit of$5 100. The rent expense for the three months is recorded by debiting Rent Expense $5 100. Because the rent is no longer prepaid, the effect of the credit to Prepaid Rent is to reduce this asset to zero. Figure 6-8 illustrates the rent adjustment.
Equipment Fixed assets such as Equipment depreciate each year. Equipment may be depreciated at a rate of up to 20 per cent a year. For income tax purposes, the declining-balance method must be used. The year's depreciation on Equipment using a 20 per cent rate on the declining balance is $1 920. To record the depreciation, a debit is entered in the Depreciation Expense- Equipment account and a credit is entered in the Accumulated Depreciation - Equipment account. It is necessary to add Depreciation Expense- Equipment to the work sheet. This account is debited $1 920 in the adjustments debit column. The Accumulated Depreciation - Equipment account is credited $1 920 in the adjustments credit column. Figure 6-9 illustrates this adjustment. Four adjustments have now been made on the work sheet and placed in the adjust- ments section; each adjustment has been labelled. For example, the supplies adjust- ment has an (a) beside the debit and an (a) beside the credit. The other adjustments were labelled (b), (c), and (d) respectively. These labels ensure that there is a debit for every credit and provide a reference for checking the adjustments. The mathematical accuracy of the adjustments section of the work sheet is proven by adding the two columns. The debit column total should equal the credit column total. If this is the case, the columns are double-ruled.
Completing the Work Sheet
After the adjustments have been completed and the adjustments columns totalled, the items on the trial balance are transferred to either the income statement or balance sheet sections of the work sheet. The income and expenses are transferred to the income statement section. The assets, liabilities, and equity accounts are transferred to the balance sheet section. For example, Figure 6-9 shows that Cash, $13 000, is transferred to the balance sheet debit column (line 1). Accounts Receivable, $7 000, is also transferred to the
Unit 12 Work Sheet, Adjustments, Financial Statements 221
balance sheet sections of the work sheet. The net income figure is added to both the debit column of the income statement section and to the credit side of the balance sheet. A net loss would be added to the credit side of the income statement section and to the debit side of the balance sheet section. The columns are then double-ruled as shown in Figure 6-9.
Steps in Preparing the Eight-Column Work Sheet
To summarize, these are the steps followed when preparing an eight-column work sheet: (1) Write the heading on the work sheet. (2) Write the trial balance on the work sheet. (3) Gather the data needed to prepare the adjustments. (4) Prepare the adjustments and total, balance, and rule the adjustment columns. (5) Transfer all items .to either the income statement or balance sheet columns. (6) Total the income statement and balance sheet columns and determine the net income or net loss. (7) Balance and rule the work sheet.
Ten-Column Work Sheet Many businesses use a ten-column work sheet instead of the eight-column work sheet. The extra two columns are used to prepare an' 'adjusted trial balance." This trial balance is prepared on the work sheet after the adjustments have been completed. It is prepared to ensure that the ledger accounts are still in balance; that is, to ensure that the debit balances equal the credit balances. If the ledger is still in balance, then the accountant proceeds to complete the work sheet. The work sheet for Manage- ment Consultant Services is shown in Figure 6-10 using the ten-column format. Notice that the adjusted trial balance section comes after the adjustments section and before the financial statement sections.
Steps in Preparing the Ten-Column Work Sheet
These steps are followed when completing a ten-column work sheet:
(1) Write the heading on the work sheet. (2) Write the trial balance on the work sheet. (3) Gather the data needed to prepare the adjustments. (4) Prepare the adjustments and total, balance, and rule the adjustment columns. (5) Transfer all items to the adjusted trial balance columns and recalculate the balances where necessary. Total, balance, and rule the adjusted trial balance columns. (6) Transfer all items from the adjusted trial balance to either the income statement or the balance sheet columns. (7) Total the income statement and balance sheet columns and determine the net income or net loss. (8 ) Balance and rule the work sheet.
NNN (") ~ ~ ~ ""'t
Management Consultant
Services
_0_
~
Work
Sheet
-.^
g
For
the year ended December 31,
19--
~^ ~^ ....
ADJUSTED
~·
ACC.
TRIAL BALANCE
ADJUSTMENTS
TRIAL BALANCE
INCOME
STATEMENT
BALANCE
SHEET
ACCOUNT
TITLE
~
NO.
DEBIT
CREDIT
DEBIT
CREJ.?IT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
~ ("") ("") <:::>
1
Cash
100
13
000
13
000
13
000
1
~ ~
2
Accounts Receivable
102
7
000
7
000
7
000
2
3
Supplies
-'
000
(a)
600
400
400
3
4
Prepaid
Insurance
I
900
(b)
300
600
600
4
("") .......~
5
Prepaid
Rent
I
s IOO
(c)
S^
IOO
s^
~
6
Equipment
141
I
000
12
000
I
000
""'t
6
1=::
7
Ace.
Depreciation-
Equip.
142
2
400
(d)
1
920
4
320
4
320
7
V)
j"^
~
8
Accounts
Payable
200
I^
000
I^ 000
~
I^
000
8
~
I^
....^ .("")
9
Bank
Loan
22I
3
000
3
000
^
3
000
9
~
I^
~
l
10 }.
Turner, Capital
300
10
400
10
400
10
400
10
~ V) .....
11
J.
Turner, Drawings
30I
IS
000
IS
000
IS
000
11
~ ~ V)
12 Fees Earned
400
I
000
I
000
I
000
V)
12
13 Salaries
Expense
soo
89
soo
89
soo
89
soo
13
14 Utilities Expense
S
1
300
I^
300
I^
300
14
15 Rent Expense
S
IS
300
(c)
S^
100
20
400
20
400
15
16 Miscellaneous Expense
S
700
700
700
16
17
160
800
I
800
17
18 Supplies
Expense
S
(a)
600
600
600
18
119
Insurance Expense
sos
(b)
300
300
300
19
20
Depree.
Expense-
Equip.
S
(d)
1
920
1
920
1
920
20
--
--
21
7
920
7
920
I
720
I
720
114
720
144
000
48
000
I
720
21
22
Net
Income
29
280
29
280
22
123
--
I
000
144
000
48
000
48
000
23
--
I
Figure
6-
Ten-column work sheet
224 Chapter 6 Completing the Accounting Cycle for a Service ·Business
Management Consultant Services Balance Sheet December 31, 19-- Assets Current Assets Cash Accounts Receivable Supplies Prepaid Insurance Total Current Assets Fixed Assets Equipment Less: Accumulated Depreciation Total Fixed Assets Total Assets Liabilities and Owner's Equity Current Liabilities Accounts Payable Bank Loan Total Current Liabilities Owner's Equity. J. Turner, Capital January 1 Add: Net Income for the year Less: J. Turner, Drawings Increase in Capital J. Turner, Capital December 31 Total Liabilities and Owner's Equity
Figure 6-12 Balance sheet prepared from the work sheet
What Have I Learned in Unit 12?
- To prepare adjustments on a work sheet for prepaid expenses and depreciation of fixed assets
- To complete an eight-column work sheet
- To complete a ten-column work sheet
If you have learned the material in Unit 12, you are ready to proceed to Unit 13. To determine if you are ready to proceed, your teacher may now wish to give you a review sheet and test for Unit 12.
- To prepare financial statements from a work sheet
Check Your Reading
Questions
- (a) What are the two new columns added.to an eight-column work sheet?
(b) For what are the two new columns used?
- How is the net income or net loss determined on the work sheet?
Unit 12 Work Sheet, Adjustments, Financial Statements 225
- When there is a net loss, which column of the income statement section of the work sheet is greater? Which column of the balance sheet section is greater when there is a net loss?
- When there is a net income, to which columns
on the work sheet is the amount of the net income added?
- List the seven steps in preparing an eight- column work sheet.
- How is the book value of an asset determined? Give an example.
