If you use a computerized accounting system, you don’t have to create a worksheet at all. In fact, computerized systems don’t offer a worksheet re- port option. Instead, the system generates fi nancial statements directly.
However, you still need to be aware of any accounts that need adjusting, and then enter the adjustments as general journal entries. It’s a good idea to run your accounting program’s trial balance report and use it to review your account balances.
Your Income Statement Debit column total is $35,000. The Income Statement Credit column total is $28,000. What was your total revenue? What were your total expenses? Did you have a net income or a net loss? What was the amount? Which worksheet columns will you use to enter this amount?
SELF-CHECK
1. Name the fi nancial statement sections of the worksheet. How many
columns are in the fi nancial statement sections?
2. How do you determine the amounts to be entered in the fi nancial statement sections?
3. How do you use the worksheet to determine net income or net loss? 4. Does a computerized accounting system generate a worksheet? Why
or why not? Apply Your Knowledge
Section 6.1
• The worksheet is an internal tool used to com-
pute the adjusted trial balance as a preliminary step for the fi nancial statements.• The six sections of the worksheet are Ac-
count, Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet.131
• To begin the worksheet, you transfer informa-
tion from the trial balance to two worksheet sections: Account and Trial Balance.Section 6.2
• Adjusting journal entries are used to record
certain non-cash transactions at the end of the accounting period; adjustments often result in an increase in expenses and a decrease in assets.• The adjusting journal entries follow the match-
ing principle, which requires that expenses be matched with revenue in the correct accounting periods.• Three common adjustments are assets depre-
ciation, prepaid expenses, and bad debt.• The decrease in a fi xed asset’s value is recorded
in the Accumulated Depreciation account, which is a contra asset. The actual assets account remains unchanged.
• The amount depreciated over the asset’s
expected useful life is the asset’s cost minus salvage value.• The straight-line depreciation method spreads
the amount evenly over the asset’s expected useful life, resulting in the same depreciation expense in each accounting period.• Prepaid Expenses are not expenses, despite
the name. Prepaid expenses are assets. Pay- ment for something that will be used up in fu- ture periods is recorded as an asset. This isbecause the payment buys a future claim to something. Common prepaid expenses include prepaid insurance and prepaid rent.
• As you consume the thing (use up the asset’s
utility or usefulness) that was previously paid for, it converts from an asset to an expense.• When you accept that a customer won’t pay
your invoice, you record the expense as a bad debt and decrease the value of your accounts receivable.
• The allowance method applies an estimated
percentage to sales or Accounts Receivable. One entry is made for all estimated bad debts in a single accounting period.Section 6.3
• Determine net income or net loss (the difference
between the Debit and Credit columns in both the Income Statement section and Balance Sheet section).• If you have a net income, enter it in the Debit
column of the Income Statement section and the Credit column of the Balance Sheet section. Do the opposite if you have a net loss.• Computerized accounting systems provide a
trial balance, but not a worksheet. The work- sheet isn’t necessary because the system gen- erates fi nancial statements without requiring this preliminary step. However, you still have to be mindful of any end-of-period adjustments that might be needed.ASSESS YOUR UNDERSTANDING
Go to www.wiley.com/college/epstein to assess your knowledge of how to adjust journal entries and use worksheets.
UNDERSTAND: WHAT HAVE YOU LEARNED?
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APPLY: WHAT WOULD YOU DO?
1. Which of the following assets are depreciated? For each asset, state
the reason why it is (or isn’t) depreciated. a. Cash
b. Cash Registers c. Prepaid Advertising d. Accounts Receivable e. Delivery Van
2. On a worksheet, why is the net income amount entered in the Debit column of the Income Statement section?
3. On July 1, 200X, Beautiful Day Salon bought chairs for styling sta- tions. The chairs cost a total of $1,900 and the owner estimates she will use them for ten years, and then sell them for scrap for $100 total. She will use the straight-line method of depreciation. a. What is the expected useful life of the chairs?
b. What is the cost?
c. What is the salvage value?
d. What amount will be depreciated over the useful life? e. How much is depreciated in the fi rst month (July 200X)?
f. What is the balance of the Accumulated Depreciation account after the July adjustment?
g. How much is depreciated in the sixth month (December 200X)? h. What is the balance of the Accumulated Depreciation account after
the December adjustment?
i. Journalize the December adjustment for depreciation.
4. On September 19, 200X, Solid Foundation Flooring paid $2,640 for a color ad in a monthly magazine. The ad will run for two years and will begin in two weeks (the October issue).
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a. Is an adjustment required on September 30? Why or why not? b. Is an adjustment required on October 31? Why or why not?
c. After the December 31 adjustment in the fi rst year, what is the balance of the Prepaid Advertising account?
d. Journalize the December 31 adjustment in the fi rst year.
5. On 6/30/200X, the balance of Creative Software’s Accounts Receivable
account in the general ledger was $8,450. The following outstanding invoices made up the balance:
Date Customer Invoice Amount
2/28/200X Supply Warehouse 290 300.00
4/03/200X Dewey Law Offi ce 301 2,700.00
5/30/200X Custom Designs 319 1,650.00
6/05/200X Ontiveros Tax Consulting 322 800.00 6/22/200X Midtown Taxi Service 327 3,000.00
Creative Software’s policy is to write off specifi c customer accounts
after 90 days if aggressive collection attempts do not succeed. So far Creative has not been able to collect on the outstanding accounts.
a. Journalize the adjustment for June 30, 200X.
b. Suppose that on June 30 the past-due customers made arrangements with Creative to pay the invoices over the next two months. Would you make an adjustment on June 30? Why or why not?
6. On December 31, 200X, Critters Pet Care had the following account balances in the general ledger for the month of December. All accounts have normal balances.
101 Cash in Checking $ 2,750 105 Cash in Savings 4,000 110 Accounts Receivable 950 120 Prepaid Advertising 600 130 Prepaid Insurance 2,400 151 Equipment 2,112 152 Accumulated Depreciation—Equipment 440 161 Vehicle 15,600 162 Accumulated Depreciation—Vehicle 1,750 201 Accounts Payable 900
260 Loan Payable—Vehicle 9,900 301 John Ross, Capital 14,192 305 John Ross, Withdrawals 5,000
401 Pet Grooming Income 7,000
601 Advertising 0 605 Bad Debt 0 607 Gasoline 100 610 Insurance 0 615 Postage 60 620 Printing 80 625 Supplies—Offi ce 50 630 Supplies—Pet 250 635 Telephone 80 640 Vehicle Maintenance 150 651 Depreciation—Equipment 0 661 Depreciation—Van 0 Prepare the fi rst two sections of the worksheet for Critters Pet Care.
7. Using the information for Critters Pet Care and the following infor-
mation, complete the Adjustments section and the Adjusted Trial Bal- ance section of the Critters Pet Care worksheet.
a. Critters Pet Care’s equipment has zero salvage value and an ex- pected useful life span of 24 months. The company uses the straight- line depreciation method for all its fi xed assets.
b. The vehicle has an expected useful life span of 36 months and an estimated salvage value of $3,000.
c. On December 1, 200X, the company entered a six-month advertis- ing contract to begin immediately and paid $600 to cover the entire six months.
d. On December 1, 200X, the company bought an insurance policy and paid the entire premium of $2,400 for 12 months of coverage, effective immediately.
e. A credit customer, Jane Jones, moved out of state with no forward- ing address. The company has been unable to contact her. She has an outstanding invoice in the amount $75.00 (Invoice 155). The com- pany uses the direct write-off method.
8. Using the information for Critters Pet Care, fi nish the worksheet, includ-
ing the Net Income entries.
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