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The Worksheet
A worksheet is a large sheet of paper organized into rows and columns, as on Table 6.1.
Title of Account Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Titles of all general ledger accounts and their respective general ledger balances are recorded on
the rows on the first three columns. Subsequent effects of all adjusting and closing entries are
recorded on the worksheet and each account balance can be traced to the Income Statement and
Balance Sheet columns of a worksheet. A worksheet is not part of the ledger or any formal
accounting records. However, it has become an indispensable aid to the preparation of financial
statements. It is a helpful device for bringing together everything in one place. It provides an
organized means for the following activities undertaken during finalization of accounts.
The worksheet has become so successful that it ushered the development of computer application
packages commonly known as spreadsheets. LOTUS 1-2-3®, Quattro Pro® and MS Excel® are
examples of the most popular packages. Spreadsheet packages have made easier the arithmetic
component of the worksheet. Nevertheless, even with computer application packages, a worksheet
requires sound designing.
a) Copy all general ledger accounts on the rows of the first column, which will usually be
the Title of Account column.
b) Copy the respective debit and credit balances of each listed account on the Trial Balance
debit and credit columns. These will usually be the first pair of columns after the Title of
Account column. Totals of the debit and credit columns should be exactly like the trial
balance totals to make sure no error has been made in copying the amounts.
c) Enter the adjusting entries in the next pair of columns. It is advisable to index each
adjusting entry by using a letter or a number before the debit and credit amounts of each
adjustment. New accounts initiated by adjusting entries, which were not listed in the
original trial balance should be inserted where the original list ended. Totals of the debit
column should equal that of the credit column.
d) Fill up the next pair of columns under Adjusted Trial Balance by incorporating the effects
of adjusting entries on the original trial balance figures. An account with no adjustment is
merely extended with the same amount. Since the original trial balance and the
adjustment pairs of columns agreed, the pairs under adjusted trial balance must also come
to an agreement when summed.
e) Extend each amount in the Adjusted Trial Balance to the appropriate column of either the
Income Statement or Balance Sheet. Expenses and revenue accounts are extended to the
debit and credit columns of the Income Statement respectively. Assets and drawings are
extended to the debit column of the Balance Sheet. Liabilities, contra-assets and owner's
capital are extended to the credit column of the Balance Sheet.
(f) Sum the columns of the Income Statement and the Balance Sheet. The difference
between the debit and credit totals of the Income Statement columns represents a net
profit (if the credit total is larger) or a net loss (if the debit total is larger). The net profit or
loss will serve as the balancing figure in the Income Statement columns and will be
extended to the Balance Sheet. A net profit is extended to the credit column of the
Balance Sheet whereas a net loss is extended to the debit column. The Balance Sheet
total debits and credits should be equal at this point.
Example
Using the trial balance and adjusting entries prepared for B. Asha Grocers in Chapter Five; we can
proceed to prepare the worksheet as follows:
Completion of the Accounting Cycle 101
Example
B. Asha Grocers conducted a stock taking exercise at the end of July, and the following items
were in stock:
Consumable Supplies
The entry required to record the existence of shop supplies stock at the end of an accounting
period is in principle similar to that of an adjusting entry for prepaid expenses. The following
general journal entry shall therefore be made:
This general journal entry reduces the figure of shop supplies in the trial balance from shs. 18,000
to shs. 12,000. This is the value of unused shop supplies which is available for consumption in
August and beyond.
Merchandise stocks
B. Asha Grocers has two stock figures that need attention. These are Stocks 1 st July shs. 500,000
as listed on the trial balance and Stocks, 31 st July shs. 800,000 as derived from the stock taking
exercise. Stocks, 1st July shs. 500,000 is known as Opening Stock while Stocks, 31 st July, shs.
800,000 is known as Closing Stock. The relationship in these two figures is that closing stock in a
current reporting period will be the opening stock for the subsequent accounting period.
Opening Stock
In the example assuming that old items in the store are sold before new arrivals which is common
practice, the stock items which were in store on 1 st July have all been issued out and sold. The
value of shs. 500,000 in stocks is no longer an asset and should now be released as part of the cost
of goods sold. The following general journal entry effects this:
Completion of the Accounting Cycle 103
What the above general journal entry does is to close the opening stock account and to charge its
value against the Trading, Profit and Loss Account.
Closing Stock
The value of shs. 800,000 derived from the stock taking exercise is the cost of merchandise
purchased but not sold. This figure is included in the figure of total purchases as at the end of July.
However, these items are still in store. In this regard the figure of purchases cannot be taken to be
the total cost of goods sold. The total cost of goods sold is the total cost of goods bought
(purchases) as reduced by the total cost of goods bought but still in store and unsold (closing
stock). Because of existence of unsold stocks, the following two events must be recorded in the
accounting records:
The following general journal entry will be made to record the above events:
The effect of the two entries made to record opening and closing stocks would appear in the ledger
accounts as follows:
20X1 20X1
Jul1 Capital, B.Asha GJ1 500,000 Jul31 Trading, Profit and GJ0 500,000
Loss
500,000 500,000
104 Introductory Financial Accounting
20X1 20X1
Jul31 Trading, Profit and GJ0 800,000 Jul31 Balance 800,000
Loss
800,000 800,000
20X1
Aug1 Balance 800,000
Because of the entries Stocks, 1st July shs. 500,000 ceased to exist, while Stocks, 31st July, shs.
800,000 now exists and has a balance of shs. 800,000, an item to be listed on the balance sheet as
a current asset.
In practice, there would only be a single stock account in the ledger and not two as it appears in
the example. There is no need to distinguish between opening and closing stock of the same
category of stocks because the closing stock of the current period is the opening stock for the
subsequent period. If a single stock account was used to record the entries in the example it would
look as follows:
20X1 20X1
Jul1 Capital, B.Asha GJ1 500,000 Jul31 Trading, Profit and GJ0 500,000
Loss
Jul31 Trading, Profit and GJ0 800,000 Jul31 Balance 800,000
Loss
1,300,000 1,300,000
20X1
Aug1 Balance 800,000
In the worksheet, the Opening Stock is extended to the debit column under Income Statement.
The Closing Stock is extended to the credit column under Income Statement and to the debit
column under Balance Sheet. This is consistent with and follows the logic of the general journal
entries made earlier.
An Income Statement can be prepared using the account format or report format. TFASs do not
prescribe a format. Nevertheless, the report format has been adopted as a standard in published
financial statements all over the world. This is the format students of accounting should follow.
However, both formats will be illustrated in this text. For a trading firm it is important that the
first subsection of the income statement shows clearly, how the trading results or gross profit is
arrived at.
Using information in the worksheet of B. Asha Grocers the Income Statement or Trading and
Profit and Loss Account is prepared as follows:
Account format
B. Asha Grocers
Trading and Profit and Loss Account
for the Month ended 31st July, 20X1
shs shs shs Shs
Opening stock 500,000 Sales 370,000
Purchases 500,000 less: Sales returns 8,000
Carriage inwards 5,000 Net sales 362,000
505,000
less: Purchase returns 6,000
499,000
Total goods available for 999,000
sale
less: Closing stocks 800,000
Cost of goods sold 199,000
Gross Profit c/f 163,000
362,000 362,000
Report format
B. Asha Grocers
Income Statement
for the Month ended 31 July, 20X1
shs. shs. shs.
Sales 370,000
less: Sales returns 8,000
Net sales 362,000
Cost of goods sold:
Opening stock 500,000
Purchases 500,000
Carriage inwards 5,000
Total purchases 505,000
less: Purchase returns 6,000
Net purchases 499,000
Cost of good available for sale 999,000
less: Closing stock 800,000
Cost of goods sold 199,000
Gross profit 163,000
Operating expenses:
Rent 10,000
Wages 6,000
Depreciation – furniture 500
Doubtful debts 9,600
Electricity 1,400
Shop supplies 6,000
Total operating expenses 33,500
Net profit 129,500
The report format is also known as the vertical format because it read vertically and flows from
the top to bottom.
Completion of the Accounting Cycle 107
Balance Sheet
This statement shows the financial position of the business at a given date usually the last day of
the accounting period. Such a statement must have a title with the following components:
Like the income statement the balance sheet may be prepared using the account format or report
format. It is important to show clearly in the balance sheet the various classification of accounts
and as much information as possible concerning the financial condition of the business.
Account format
B. Asha Grocers
Balance Sheet as at July 31, 20X1
shs. shs. shs. shs.
Assets: Liabilities and Capital:
Fixed assets Owner's equity
Shop furniture 65,000 B.Asha, Capital 2,000,000
less: Accum. depreciation 500 Accum. profits 1st July 0
Net book value 64,500 Net profit for the year 129,500
Current assets 129,500
Stocks 800,000 less: Drawings 10,000
Debtors 192,000 Accum. profits 31st July 119,500
less: Prov. for doubtful 9,600 Total Owner's equity 2,119,500
debts
Net debtors 182,400 Long term liabilities 0
Shop supplies 12,000 Current liabilities
Prepaid rent 20,000 Trade creditors 194,000
Cash 1,236,000 Accrued electricity 1,400
Total current assets 2,250,400 Total current liabilities 195,400
Total Assets 2,314,900 Total Liabilities and 2,314,900
capital
108 Introductory Financial Accounting
Report format
B. Asha, Grocers
Balance Sheet as at 31 July, 20X1
shs. shs. shs.
Fixed assets
Shop furniture 65,000
Less: Accumulated depreciation 500
Financed by:
Owner's equity
B.Asha, Capital 2,000,000
Accumulated profits 1st July 0
Net profit for the year 129,500
129,500
Less: Drawings 10,000
Accumulated profits 31 July st 119,500
Total Owner's equity 2,119,500
Total Capital employed 2,119,500
Completion of the Accounting Cycle 109
Closing entries
Revenue and expense accounts are temporary accounts. At the end of the accounting period these
accounts are closed and are summarized in the Income Statement. The net result which is profit or
loss is carried on to the Balance Sheet. Net profit increases equity while losses erode the equity
base. The entries to record the closing entries for B. Asha Grocer’s revenue and expense accounts
would be as follows:
Since in both journal entries above the Trading, Profit and Loss Account is being credited, a
compound journal entry is normally prepared as follows:
The compound journal entry is a standard feature of closing entries. The compound journal
entry to close expense accounts is as follows:
110 Introductory Financial Accounting
Stock Accounts
The entries made for opening and closing stocks earlier are actually part of the closing entries
made at the end of an accounting period. They are reproduced here as they had been made.
Accumulated Profits
The figure of profit or loss in the Income Statement has a cumulative effect on equity balances
in the Balance Sheet. The traditional approach was to close the net profit or loss in the Trading,
Profit and Loss Account to the Capital Account as follows:
Completion of the Accounting Cycle 111
The above presentation will in subsequent periods obscure the figure of initial and incremental
equity brought in by the owners. It is better to retain equity balances separate from the
cumulative effect of profits or losses. Conforming to this argument, the net profit or loss is closed
to an Accumulated Profits Account instead of the Capital Account. This entry will be made as
follows:
The capital section of the Balance Sheet will be presented as follows after the above entry has
been effected:
Drawings
Drawings are resources moving from the business to its owners. The traditional closing entry for
drawings was to close it to the Capital account. On the same argument as presented for closure of
net profit to the Capital Account, this treatment is not recommended. Since owners make
drawings against profits it is logical that drawings should be closed and offset against
Accumulated Profits. The entry to close off drawings to Accumulated Profits will be as follows:
112 Introductory Financial Accounting
Presentation of drawings and accumulated profits in the capital section of the balance sheet will be
as illustrated earlier.
B. Asha Grocers
Post-closing Trial Balance
as at 31 July, 20X1
Title of account Dr Cr
Cash 1,236,000
Trade debtors 192,000
Provision for doubtful debts 9,600
Stocks 800,000
Shop supplies 12,000
Shop furniture 65,000
Accumulated depreciation 500
Trade creditors 194,000
Prepaid rent 20,000
B.Asha, Capital 2,000,000
Accumulated profits 119,500
Accrued electricity 1,400
Total 2,325,000 2,325,000
The preparation of the post-closing trial balance completes the accounting cycle. Although the
post-closing trial balance, financial statements, worksheet and trial balance are assumed to have
been prepared at the close of the accounting period, in actual practice, it usually takes more than a
month after the year end for the whole finalization process to complete. This is especially the case
with manual accounting systems. In Tanzania, financial statements must be finalized within three
months of the year-end. Production of audited financial statements must be completed within six
months of the year-end. While finalization of financial statements and audit are in progress
transactions of the new accounting period continue to be recorded. The finalization and audit will
have impact, if any, on only the opening balances of the new accounting period.
Reversing entries
Adjusting entries at the end of the year disturb the routine manner of recording transactions in
revenue and expense accounts. The bookkeeper is used to recording of payment of wages for
example as a debit in the wages expense account. However, if wages for the last week of the
previous accounting period were accrued, the payment for those wages should instead be recorded
Completion of the Accounting Cycle 113
in an accrued wages account to offset a liability. This kind of situation often creates problems in
the first month of the new accounting period.
Reversing entries have been devised to circumvent such problems. Reversing entries reverse the
effects of adjusting entries so that bookkeeping can proceed in the new accounting period as if no
adjusting entries were made. Nevertheless, not all adjusting entries need reversing. The
depreciation and provision for depreciation adjustments for example, do not affect routine
recording of transactions. These kind of adjusting entries do not need reversing.
Example
The following ledger accounts were opened for the payment and accrual of electricity expenses in
Chapter Five:
20X1 20X1
20X1 20X1
68,000 68,000
20X2
Assuming on January 1st 20X2, TANESCO brought bills amounting to shs. 80,000 covering the
period from July, 20X1 to January, 20X2. If B. Asha Grocers paid the bills immediately, not all
of the shs. 80,000 is expense for 20X2. Of that amount only shs. 12,000 is electricity charge for
January, the remainder of shs. 68,000 is towards settling an outstanding liability of bills unpaid
in 20X1. The payment of shs. 80,000 would be recorded in a general journal as follows:
114 Introductory Financial Accounting
This entry when posted will ensure the elimination of the credit balance of shs. 68,000 in the
Accrued Electricity Expenses account and will also record the correct expense of shs. 12,000 in
the Electricity Expenses account.
The work of the bookkeeper can however, be made easier by simply reversing the adjusting entry
on the first day of the new accounting period. Usually a senior accountant does this task. The
reversing entry for the adjustment associated with the above example would be as follows:
When posted to the two ledger accounts, the reversing entry and the payment would look as
follows:
20X1 20X1
20X2 20X2
Jan31 Cash GJ0 80,000 Jan1 Accrued Electricity GJ0 68,000
Expenses
Completion of the Accounting Cycle 115
20X1 20X1
68,000 68,000
20X2 20X2
Notice that the Electricity Expense Account has a credit balance of shs. 68,000 on January 1st
20X2, just after the reversing entry is made. After the payment of shs. 80,000 is posted only a
shs. 12,000 debit balance remains in that account as desired. Notice that a similar effect would
have been achieved if a mixed account were used, in which case no reversing entries would have
been necessary. This is an attractive feature of the mixed account that makes it popular with
accountants, especially in manual accounting systems.
Reversing entries can also be made for accrued revenues, prepaid expenses and unearned
revenues.
1,170,000 1,170,000
Notice that Stocks, 1st July shs. 500,000 is on the debit side together with purchases. However,
Stocks, 31st July shs. 800,000 is on the opposite side. By posting closing stock on the credit side
of the Trading, Profit and Loss Account the effect achieved is the reduction of the sum of
Opening Stock, Purchases and Carriage Inwards by the value of closing stock.
116 Introductory Financial Accounting
If a report format was used to present the same information, it would look as follows:
Income Statement
Shs. Shs.
Sales 370,000
Stocks, 1st July 500,000
Purchases 500,000
Carriage Inwards 5,000
Cost of Goods Available for sale 1,005,000
Less: Stocks, 31st July 800,000
Cost of Goods Sold 205,000
Gross Profit 165,000
Contrasting contents of the two formats it is now possible to observe why opening stock is
debited to the Trading, Profit and Loss Account while the closing stock figure is recorded as a
credit to that account.
Completion of the Accounting Cycle 117
Review questions
1. What is the purpose of an adjusted trial balance?
3. Why are adjusting entries recorded in the general journal and posted to the ledger even
though they are entered on the worksheet?
5. Why are revenue and expense accounts closed but assets, contra-assets, liability and
capital accounts are not?
6. In the "Income Statement columns" of the worksheet the credit column total is shs.
216,000 greater than the debit column total. Would the income statement report a
profit or a loss? Explain.
7. In the following list, identify the accounts that should be closed to Income Statement at
the end of the accounting period.
(a) Debtors (b) Creditors (c) Cash (d) Depreciation expense (e) Capital (f) Drawings
(g) Equipment (h) Prepaid insurance (i) Retained profit (j) Wages payable (k) Salary
expense (l) Sales.
10. Give one example of an adjusting entry that could be reversed and another that could
not be reversed.
118 Introductory Financial Accounting
Exercises
1. Coffee Tree Inn - a hotel is completing the process of finalization of accounts. The
year end is 31st December, 20X2. The following information before adjusting
entries were made is available.
Dr Cr
Cash 24 000
Debtors 14 000
Furniture 30 000
Accumulated Depreciation 9 000
Other Assets 64 000
Creditors 11 000
Bank Loan 21 000
Capital 40 000
Retained Profits 14 000
Revenues 90 000
Expenses 53 000
Total 185 000 185 000
You are to record depreciation of shs. 3,000 for the current year.
Required:
2. Wabonike Company prepared the unadjusted trial balance given below at the end of
the accounting year, 31st December 20X1.
Dr Cr
Cash 330 000
Debtors 270 000
Prepaid Insurance 40 000
Machinery 500 000
Accumulated Depreciation 40 000
Creditors 60 000
Wages Payable
Capital 620 000
Retained Profits 100 000
Drawings 30 000
Revenues 600 000
Expenses 250 000
Total 1 420 000 1 420 000
Required:
Completion of the Accounting Cycle 119
3. Zuakuu Enterprises has finalized its accounts for the current year, ending 31st
December, 20X1. Reversing entries are under consideration for 1st January 20X2 for
two different adjusting entries. Following are the relevant 'T' accounts.
900,000 900,000
Required:-
Do you think a reversing entry on 1st January 20X2 would facilitate the next related
entry for:
Problems
1. AC 100 Consultants, a small service company, keeps its records without the help of an
accountant. After much effort an outside accountant prepared the following unadjusted
trial balance as of the end of the annual accounting period, December 31, 20X1:
Debit Credit
shs. shs.
Cash 300,000
Accounts receivable 310,000
120 Introductory Financial Accounting
Debit Credit
shs. shs.
Service supplies stocks 7,000
Prepaid insurance 8,000
Service truck - 5 years life, no salvage value 200,000
Accumulated depreciation – service truck 80,000
Other assets 104,000
Accounts payable 20,000
Bank loan - 10% each December 31 100,000
Capital 300,000
Retained earnings 95,000
Drawings 20,000
Service revenues 750,000
Other expenses 396,000
i) The supplies inventory count on December 31, 20X1, reflected shs. 20,000
remaining on hand; to be used in 20X2.
iv) Wages earned by employees not yet paid on December 31, 20X1, shs. 5,000.
Required:
a) Complete the financial statements for 20X1 to include the effects of the
transactions listed above.
2. The trial balance of Makini & Co. at December 31, the end of the current financial year
and the data needed to determine year end adjustments are presented below:
Completion of the Accounting Cycle 121
Adjustment data:
Required:
iv) Based on the adjustment data in the worksheet journalize the adjusting entries.
3. The trial balance of Vinyozi Shop at June 30, the end of the current financial year and
the data needed to determine year-end adjustments are presented below:
122 Introductory Financial Accounting
Vinyozi Shop
Trial Balance, June 30, 20X1
Debit Credit
shs. shs.
Cash 31,500
Berber supplies 20,000
Prepaid insurance 15,250
Barber equipment 438,700
Accumulated depreciation 231,250
Accounts payable 22,200
Promissory notes payable 50,000
A.H. Mosele, Capital 250,000
A.H. Mosele, Drawings 250,000
Revenues 720,000
Wages expense 355,000
Rent expense 90,000
Electricity expense 61,000
Miscellaneous expense 12,000
Adjustment data:
Required:
iv) Based on the adjustment data in the worksheet journalize the adjusting entries.
v) Based on the data in the work sheet journalize the closing entries.
4. Mashi Enterprises is completing the accounting information processing cycle for the
year ended December 31, 20X3. The unadjusted trial balance, taken from the ledger
was as follows:
Completion of the Accounting Cycle 123
d) At December 31, 20X3 wages earned but not yet paid or recorded amounted to
shs. 30,000.
e) Interest on the Long Term Loan is paid annually each April 30.
124 Introductory Financial Accounting
Required:
a) Complete a worksheet for the year ended December 31, 20X3. Key the
adjusting entries with letters.
5. Tatunane Transporters has been in operation for several years. It also undertakes storage.
The unadjusted trial balance at December 31 20X1, the end of the current accounting year
is shown below:
Examination of the records and related documents provided the following additional
information that should be considered for adjusting entries:
e) The shs. 300,000 Bank Loan was obtained on October 1, 20X1, 12% interest
is payable every 1st January.
f) Storage fee income collected and recorded as earned before December 31,
20X1, included shs. 4,000 collected in advance from one customer for storage
time to be used in 20X2.
g) Lubricating grease purchased for the vehicles and used during the last two
weeks of December 20X1 amounting to shs. 3,000 has neither been paid for
nor recorded (this is considered maintenance expense).
Required:
a) Enter the unadjusted trial balance on a worksheet; then based on the above
data enter the adjusting entries and complete the worksheet.
c) Using the worksheet prepare the 20X1 adjusting entries in general journal
form.
d) Using the worksheet prepare 20X1 closing entries in general journal form.
6. Pepe Company was organized on January 1, 20X1. At the end of the first year of
operations December 31, 20X1, the bookkeeper prepared the following two trial
balances:
Unadjusted Adjusted
Debit Credit Debit Credit
Revenues 92, 000 90, 000
Expenses 71, 000 82, 000
Total 183,000 183,000 194,000 194,000
Required:
a) Based upon inspection of the two trial balances, give the 20X1 adjusting entries
developed by the bookkeeper (provide brief explanations).
b) Based upon the above data, give the 20X1 closing entries with brief explanations.
i) What was the estimated useful life of the operational assets assuming
no residual value?
ii) What was the amount of interest expense that was included in the
total expenses?
iii) What was the balance of Retained Earnings on December 31, 20X1?
iv) How would the two accounts (a) Rent Receivable and (b) Unearned
Rent Revenue be reported on the balance sheet?
v) When was the insurance premium paid and over what period of
time did the coverage extend?