Published On:Thursday, 8 December 2011

Posted by Muhammad Atif Saeed

Many accountants use a work sheet to prepare the unadjusted trial balance, to assign the adjusting entries to the correct accounts, to create the adjusted trial balance, and then to prepare preliminary financial statements. A work sheet is an optional step in the accounting cycle. It is an informal document that is not considered a financial statement, although it gives management some information about results for a period. Work sheets usually have five sets of debit and credit columns, which are completed from left to right one set at a time. Have a look at the following Greener Landscape Group's work sheet for the month of April.

Use the first set of columns to prepare a trial balance. List all open accounts on the left side of the work sheet and enter each account's debit or credit balance in the appropriate columns immediately to the right.

The second set of columns shows how the adjusting entries affect the accounts. While completing these columns, list additional accounts as needed along the left side of the work sheet. Use a letter to index the debit and credit portion of each adjusting entry so that, latter, it is easier to journalize and post the adjustments. An explanation of each adjustment may be written at the bottom of the work sheet. If an account has more than one adjustment, each is shown separately, using as many lines as necessary. After entering all the adjustments on the work sheet, make sure the column totals are equal.

The third set of columns contains the adjusted trial balance. The adjusted account balances in these columns equal the sum of the trial balance and adjustments columns. Consider the first three accounts on the Greener Landscape Group's work sheet. Since no adjustments affect the cash account, that account's debit balance carries across to the debit column of the adjusted trial balance. Accounts receivable begins with a $150 debit balance and has a $50 debit in the adjustments column. These amounts combine to give the account a $200 debit balance in the adjusted trial balance. In the supplies account, a $50 debit balance combines with a $25 credit in the adjustments column to yield a $25 debit balance. Although each individual account works this way, the totals at the bottom of the trial balance and adjustments columns cannot be combined to determine the column totals at the bottom of the adjusted trial balance—adding $26,070 to $614 clearly does not yield $26,514. After entering each balance in the work sheet's adjusted trial balance, total each column to make sure the debits and credits are equal.

Each account's adjusted trial balance transfers directly to either the fourth or fifth set of columns. Move all revenue and expense account balances to the income statement columns, and move all other account balances (assets, liabilities, owner's capital, and owner's drawing) to the balance sheet columns. Then total each of the final four columns. Unless net income is zero, the columns have unequal debit and credit totals. If total credits are greater than total debits in the income statement columns, the company has net income, and the difference between these columns is added to the work sheet's income statement debit column and balance sheet credit column on a line labeled Net Income. The difference is added to the balance sheet credit column because net income increases owner's equity, and increases to owner's equity are recorded with credits. If total debits are greater than total credits in the income statement columns, a net loss occurs, and the difference between these column totals is added to the work sheet's income statement credit column and balance sheet debit column on a line labeled Net Loss. Once the company's net income or net loss is added to the correct income statement and balance sheet columns, each set of debit and credit columns balance, and the work sheet is complete.

Prepare the income statement, statement of owner's equity, and balance sheet from the completed work sheet. The accounts and balances in the work sheet's income statement columns transfer directly to the income statement, which is prepared first. Next, from the work sheet's balance sheet columns, use the owner's capital and drawing account balances and the company's net income or loss to complete the statement of owner's equity. Complete the balance sheet last. When preparing the balance sheet, be careful not to use the capital account balance on the work sheet because it shows the capital account's beginning balance for the accounting period. Instead, use the ending balance on the statement of owner's equity, which has already adjusted the capital account's balance to reflect the company's net income or loss and any withdrawals made by the owner. After the financial statements are prepared, the adjusting entries are journalized and posted.