Unit 2 The Basic Accounting Cycle

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Chapter 3 Business Transactions and the Accounting Equation

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 6 Recording Transactions in a General Journal

Chapter 7 Posting Journal Entries to General Ledger Accounts

Chapter 8 The Six-Column Work Sheet

Chapter 9 Financial Statements for a Sole Proprietorship

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What You’ll Learn

Explain the purpose of the work sheet.

Describe the parts of a six-column work sheet.

Prepare a six-column work sheet.

Calculate net income and net loss.

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What Do You Think?

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Main Idea

The work sheet organizes general ledger account information for the financial statements.

You Will Learn

the purpose of a work sheet.

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Key Terms

work sheet

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The Sixth Step of the Accounting Cycle:

The Work Sheet

A work sheet is a working paper used to collect

information from the ledger in one place. An accountant uses a work sheet to:

gather information to prepare financial statements.

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The Work Sheet Sections

There are five work sheet sections:

1. the heading

2. the Account Name section 3. the Trial Balance section

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The Work Sheet Heading

The heading contains three kinds of information:

Who – The name of the business

What – The name of the accounting form

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The Account Name Section

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The Trial Balance Section

The Trial Balance section contains each account’s end-of-period balance from the general ledger. A line is drawn

through the normal balance column of accounts with a zero balance.

There are two steps to follow after this section is complete:

ruling the Trial Balance section

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Ruling the Trial Balance Section

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Totaling the Trial Balance Section

A ledger is in balance if the total debits equal the total

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Key Terms Review

work sheet

A working paper used to collect information from the ledger accounts for use in completing end-of-period activities.

ruling

Drawing a line; a single rule (line) drawn under a column of figures indicates that the entries above the rule are to be added or subtracted. If an

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What Do You Think?

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Main Idea

After completing the work sheet, you will know the net income or net loss for the accounting period.

You Will Learn

how amounts are entered in the work sheet sections.

how to calculate net income.

how to enter totals.

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Key Terms

matching principle

net income

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The Balance Sheet and Income Statement

Sections

There are two financial statements prepared at the end of the accounting period:

Balance Sheet

Income Statement

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The Balance Sheet Section

In this section, amounts are transferred, or extended, from the Trial Balance section for these account types:

asset

liability

owner’s equity

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The Income Statement Section

In this section, amounts are extended from the Trial Balance section for these account types:

revenue

expense

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Totaling the Income Statement and

Balance Sheet Sections

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Showing Net Income or Net Loss on the

Work Sheet

Matching expenses with revenue in the same period will provide a measure of profit. The results of this

matching principle are used by managers for:

analyzing results.

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Showing Net Income or Net Loss on the Work Sheet

To find the net income on net loss, subtract the total

expenses from the total revenues. There are three steps to show net income or net loss on the work sheet:

A - After the last account, skip a line and enter the words

Net Income or Net Loss in the Account Name column.

B - On the same line, enter the net income total under the Income Statement Debit column or the net loss under the Credit column.

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Completing the Work Sheet

D - Draw a single rule across the four Income Statement and Balance Sheet columns below net income.

E - Bring down the Income Statement Debit and Credit column totals (after adding net income or net loss).

F - Bring down the Balance Sheet Debit and Credit column totals (after adding net income or net loss).

G - Draw a double rule under the four Balance Sheet and Income Statement totals.

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Showing net income

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A Review of the Steps in Preparing a

Six-Column Work Sheet

There are eight steps to preparing a six-column work sheet:

Enter the heading.

Enter account numbers, names, and balances.

Show that Trial Balance debits and credits are equal.

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A Review of the Steps in Preparing a

Six-Column Work Sheet

Total the Income Statement and Balance Sheet columns.

Determine the net income or net loss.

Enter the net income or net loss in the Income Statement and Balance Sheet columns.

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Key Terms Review

matching principle

Principle requiring that the expenses incurred in an accounting period are matched with revenue earned in the same period.

net income

The amount by which total revenue exceeds total expenses for the accounting period.

net loss

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Question 1

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Answer 1

Step 1: Write the heading on the work sheet.

Step 2: Enter the account numbers, names, and balances for all general ledger accounts in the Account Name and Trial Balance sections.

Step 3: Prove the equality of the Trial Balance total debits and credits.

Step 4: Extend the amounts of the Trial Balance section to the appropriate columns of the Balance Sheet and Income Statement sections.

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Answer 1

Step 5: Total the columns in the Income Statement and Balance Sheet sections.

Step 6: Determine the amount of the net income or net loss for the period.

Step 7: Enter the net income or net loss amount in the appropriate columns of the Income Statement and Balance Sheet sections.

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Question 2

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Answer 2

The Trial Balance will be equal, but when the revenue and expense items (temporary capital accounts) are

separated from the Balance Sheet accounts, the Income Statement and Balance Sheet columns will be out of

balance by the same amount. This happens because revenues increase and expenses decrease the owner’s equity account (capital). Net income occurs when

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