Working Papers and Work Sheet

Before journalizing and posting adjustments similar to those just described, it is necessary to determine and assemble the relevant data. For example, it is necessary to determine the cost of supplies on hand and the salaries accrued at the end of the period. Such details, as well as other compilations of data, preliminary drafts of the profit and loss account and balance sheet and other analyses prepared by professional accountants are characterized generally as working papers.

A particular type of working paper frequently used by accountant for the purpose of the preparation of the profit and loss account and balance sheet has come to be called a work sheet. Its use reduces the possibility of overlooking the need for an adjustment, it provides a convenient means of verifying arithmetical accuracy, and it provides for the arrangement of data in a logical form.The Twelve Sacred Traditions of Magnificent Mothers-in-Law

Complete Adjusting Process

The entries required at the end of an accounting period to record internal transactions are called adjusting entries. In a broad sense they may be said to be corrections to the ledger. But the necessity for bringing the ledger up-to-date is a planned part of the “accounting entries” is therefore more appropriate than “correcting entries.”

The illustrations of adjusting entries that follow are based on the ledger of XYZ, Company. T accounts are used for illustrative purposes and the adjusting entries, which are presented directly in the accounts, appear in bold face type to differentiate them from items that were posted during the month.

Supplies and Prepaid Expenses

According to XYZ, Company‘s trial balance as we presented above in the trial balance section, the balance in the supplies account on 30^th June is $750. Some of these supplies (paper, ink, etc.) have been sued during the month and some are still in stock at the end of the month. If the amount of either is known, the other can be readily determined. It is more economical to determine the cost of the supplies on hand at the end of the month and to assume that the remainder has been used than it is to keep a record of those used from day to day. Assuming that the inventory of supplies on 30^th June is determined to be $230, the amount to be transferred from the asset account to the expense account is computed as follows:

            Supplies available (balance on account)………….  $750

            Supplies on hand (inventory)……………………...  $230

            Supplies used (amount of adjustment)……………  $520

Increases in expense accounts are recorded as debits and decrease in asset accounts are recorded as credit. Hence the adjusting entry required is a debit to Supplies Expense of $520 and a credit to Supplies of $520. After the adjustment, the asset account has a debit balance of $230 and the expense account has a debit balance of $520.

            SUPPLIES                                          SUPPLIES EXPENSE

______________________                            ____________________

Jun.  2    400    Jun. 30   520                            Jun.   30   520

        20  350                           

Prepaid Rent is another mixed account that needs to be adjusted at the end of the accounting period. The debit balance in this account represents in part an expense of the current period and in part a prepayment of expense of future periods. The portion that is expense should be transferred to the expense account, Rent Expense.

The debit of $600 in the prepaid rent account illustrated below represents payment of rent of three months, June, July and August. At the end of June, the rent expense account should be increased (debited) and the prepaid rent account should be decreased (credited) for $200, the rental for none month. The two accounts appear as follows after the adjusting entry has been recorded:

            PREPAID RENT                                           RENT EXPENSES

_____________________________              ___________________________

Jun.    2       600           Jun.   30   200              Jun.   30    200

The prepaid rent account now has debit balance of $400, which is an asset; the rent expense account has a debit balance of $200, which is an expense.

If adjustments for these prepayments were not made, assets and capital would be both overstated on the balance sheet for 30^th June and net profit would be overstated on the profit and loss account for the month of June.

Fixed Assets

As was explained earlier, all fixed assets except land depreciate. The adjusting entry to record depreciation is similar to those illustrated in the preceding section in that there is a transfer from an asset account to an expense account. The amount to be transferred to expenses, however, must be based on an estimate rather than on verifiable fact, as in the case of expiration of rent and other prepaid expenses. Because of this and the desire to present both the original cost and the accumulated depreciation on the balance sheet, the reduction of the asset is credited to an account titled, Accumulated Depreciation.

The adjusting entry to record depreciation for June is illustrated in the T accounts below. The estimated amount of depreciation for the month is $50

            OFFICE EQUIPMENT                     ACCUMULATED DEPRECIATION

________________________________        ________________________________

Jun.  2   4,200                                                                                      Jun.   30  50

        3   1,800 

                                                                              DEPRECIATION EXPENSE

                                                                        ________________________________

                                                                        Jun.   30   50

The accumulated depreciation account is called a contra asset account. The increase of $50 in the account represents a subtraction from the cost recorded in the corresponding asset account. The asset account and the related contra account are component parts of the asset, the difference between the two balances being customarily referred to as the written down value or book value of the asset.

The balance in both the asset and contra asset account, together with the written down value may be presented on the balance sheet in the following manner.

            Fixed assets:

                        Office equipment----------------------$5,000

                        Less accumulated depreciation----------50    $5,950

Accrued Expenses (Liabilities)

As has been explained, it is customary to pay for some type of services and commodities, such as insurance and supplies, before they are used. It is also not unusual for services or commodities to be used before payment has been made for them. An example f this type of situation, which is known as an accrual, is services performed by employees but not paid during the period. The salary expense accrues day by day but payment is made usually in the beginning of the following month.

If salaries or wages are paid in the month following that to which they related, there is an expense and a liability that must be recorded in the accounts by an adjusting entry.

The salary of part time employees of XYZ Company for the month of June amounted to $708, which was paid to them on 1^st July. This amount is an expense of June and it should, therefore, be debited to salary expense account for that month. It is also a liability as on 30^th June and it should therefore be credited to accrued salaries account. The two accounts appear as follows after the adjusting entry has been recorded:

            ACCRUED SALARIES                                SALARY EXPENSE

_______________________________          _____________________________

                                    Jun.   30  708               Jun.   30   708

The debit balance of $708 in salary expense account is the actual expense for the month, and the credit balance of the same amount in accrued salaries account is the liability for salaries owed to employees as on 30^th June. If the accrual is overlooked when preparing the profit and loss account and balance sheet as at the end of June, the net profit reported on the profit and loss account would be overstated; and on the balance sheet, liabilities would be understated and capital overstated.Xbox 360 12 Month Live Gold Card

What is Mixed Account and Business Operation

An account with a balance that is partly a balance sheet amount and partly a profit and loss account amount is called mixed account. Again using supplies as an example, the balance reported on the trial balance is composed of two elements, the supplies on hand at the end of the period, which is an unexpired cost or asset, and the supplies used during the period, which is an expired cost or expense, before the profit and loss account and balance sheet are prepared, it is necessary to determine the amount allocable to the asset and the amount allocable to the expense.

The amount of the asset can be determined by counting the quantity of each of the various commodities, multiplying each quantity by the unit cost of that particular commodity and totaling the rupee amounts thus obtained. The resulting figure represents the amount of the supplies inventory (asset). The cost of the supplies consumed (expense) is then determined by deducting the amount of the inventory from the balance of the supplies account on the basis of this information, the cost of the supplies used can be transferred from the asset account to the supplies expense account.

An alternative to initially recording the cost of supplies and other prepaid expenses as assets is to record them as expense. When this procedure is adopted, supplies expenses and other expense accounts would be mixed accounts at the end of the period, and it would be necessary to transfer the unexpired cost relating to future accounting periods from the expense accounts to appropriate asset accounts. In the meantime all expenses that include prepayments of expense for future periods will be initially recorded as assets. It is important to note that, before preparing the profit and loss account and balance sheet, it is always necessary to determine the portion of mixed account allocable to asset and the portion allocable to expenses, regardless of the recording procedure employed.

Prepayment of expenses applicable solely to a particular accounting period are sometime made at the beginning of the period to which they apply. When this is the case, the expenditure is ordinarily recorded as an expense rather than as an asset. The expense account debited will be a mixed account during the accounting period, but it will be wholly expense at the end of the period. For example, if rent for March is paid on 1st March, it is almost entirely as asset at the time of payment. The asset expires gradually from day to day, and at the end of the month the entire amount has become an expense. Therefore, if the expenditure is initially recorded as a debit to rent expense, no additional attention need be given to the matter at the close of the period.

Trial Balance and Final Accounts

The summary of the ledger at the end of an accounting period, as set forth in the trial balance, is a convenient starting point in the preparation of the profit and loss and balance sheet. Assuming no errors in journalizing or posting, many of the amounts listed are acceptable for presentation on the profit and loss account and balance sheet. For example, the balance of the cash account probably represents the amount of that asset owned by the enterprise on the last day of the accounting period. Similarly, the balance in creditors account is likely to represent the total amount of that type of liability owned by the enterprise on the last day of the accounting period.

Certain accounts listed on the trial balance are not yet ready for inclusion in the profit and loss account and balance sheet. The amounts listed on the trial balance for supplies and prepaid assets are ordinarily overstated. The reason for the overstatement is that the day to day usage or expiration of such assets has, for reasons of practicability, not yet been recorded. For example, the balance in the supplies account represents the cost of the supplies on hand at the beginning of the period plus the cost of those purchased during the period. Some of the supplies would inevitably have been consumed during the period; hence the balance listed on the trial balance is overstated. In the same manner, the balance in Prepaid Insurance represents the beginning balance plus the cost of policies acquired during the period, and no entries were made for the premiums as they expired, the benefit of which was received during the period. The effect of not recording the reduction in prepaid assets is two fold: (1) asset accounts are overstated and (2) expense accounts are understated.’

Other data needed for the profit and loss account and balance sheet may be entirely omitted from the ledger and the trial balance because of income or expense applicable to the period that has not been recorded. For example, salary for the last month of the accounting period, if paid in the following month, would not ordinarily be recorded in the accounts because salaries are customarily recorded only when they are paid. Such salaries are an expense of the period, however, because the services were rendered and benefit was received during the period; they also represent a liability on the last day of the period because they are owed to the employees.Kingston 4 GB Class 4 SDHC Flash Memory Card SD4/4GB

What is Trial Balance

Form time to time the equality of debits and credits in the ledger should be verified. In any event the verification should be performed at the end of each accounting period. Such a verification, which is called a trial balance, may be in the form of adding machine tape or in the form illustrated below. The summary listing of both the balances and titles of the accounts is also useful in preparing the profit and loss account and balance sheet.

XYZ Company

Trial Balance

30^th June, 2009

Cash                                                                          1702

Debtors                                                                        585

Supplies                                                                       750

Prepared Rent                                                              600

Office Equipment                                                        6000                 

Creditors                                                                                              1400

XYZ, Capital                                                                                        6300   

XYZ, Drawing                                                              500

Sales                                                                                                    2540

Miscellaneous Expenses                                                103                 

                                                                                 10,240.00         10,240.00                    

As the first step in preparing the trial balance all accounts having two or more debits or credit are pencil footed. Four accounts having both debits and credit, the memorandum balance is also indicated. The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and credits are equal. This proof is of value, however, because errors frequently affect the equality of debits and credits. If the two totals of a trial balance are not equal, it is probably due to one or more of the following type of errors:

1.                  Error in preparing the trial balance, such as:

a.                   One of the columns of the trial balance was incorrectly added.

b.                  The amount of an account balance was incorrectly recorded on the trail balance.

c.                   A debit balance was recorded on the trial balance as a credit, or vice versa, or a balance was omitted entirely.

2.                  Error in determining the account balance, such as:

a.                   A balance was incorrectly computed.

b.                  A balance was entered on the wrong side of an account.

c.                   One side of an account was incorrectly totaled.

3.                  Errors in recording a transaction in the ledger, such as:

a.                   An erroneous amount was posted to the account.

b.                  A debit entry was posted as a credit or vice versa.

c.                   A debit or a credit posting was omitted.

      Among the types of errors that will not cause an inequality in the trial balance totals are the following:

1.                    Failure to record a transaction or to post a transaction.

2.                    Recording the same erroneous amount for both the debit and the credit parts of a transaction.

3.                    Recording the same transaction more that one.

4.                    Posting a part of a transaction to the wrong account.

      It is readily apparent that care should be exercised both in recording transactions in the journal and in posting to the accounts. The desirability of accuracy in determining account balances and reporting them on the trial balance is equally obvious.