A Worksheet Approach
Occasionally, one may desire to prepare financial statements that take into account necessary adjustments, but without actually updating journals and ledgers. Why? A manager may desire monthly financial reports even though the business may not formally prepare and book adjusting entries every month. A worksheet approach can be used for this purpose. Or, an auditor may use a worksheet to prepare financial statements that take into account recommended adjustments, before proposing that the actual journal/ ledger be updated. The accounting department could be requested to prepare financial statements at any point in time; rather than break routine and book entries outside of the normal cycle, they might instead simply prepare financial statements via an informal worksheet.
The following illustrates a typical worksheet. The data and adjustments correspond to information previously presented for England. The first set of columns is the unadjusted trial balance. The next set of columns reveals the end-of-period adjustments. The information in the first two sets of columns is combined to generate the adjusted trial balance columns. The last three pairs of columns in the worksheet are the appropriate financial statement extensions of amounts from the adjusted trial balance columns. For example, Cash is an asset account with a debit balance, and is "appropriately" extended to the debit column of the balance sheet pair of columns. Likewise, Service Revenue is an income statement account with a credit balance; notice that it is extended to the income statement credit column. This extension of accounts should occur for every item in the adjusted trial balance. Look at the worksheet, and then consider the additional comments that follow.
After all adjusted trial balance amounts have been extended to the appropriate financial statement columns; the income statement columns are subtotaled. If credits exceed debits, the company has more revenues than expenses (e.g., $32,800 vs. $30,200 = $2,600 net income)). On the other hand, an excess of debits over credits would represent a net loss. To complete the worksheet, the amount of net income or loss is entered in the lower portion of the income statement columns in a manner which causes total debits to equal total credits. England Tours had a $2,600 net income, and a debit is needed to balance the income statement pair. An offsetting credit is entered in the lower portion of the retained earnings columns. This credit represents income for the year that must be added to retained earnings to complete the preparation of a formal statement of retained earnings. Within the retained earnings columns, the subtotal indicates that ending retained earnings is $1,600 (noted by the excess of credits ($2,600) over debits ($1,000)); this amount is debited in the retained earnings columns and credited in the balance sheet columns - thereby bringing both sets of columns into final balance.
ENGLAND TOURS COMPANY WORKSHEET TO PREPARE FINANCIAL STATEMENTS DECEMBER 31, 20X3
An Additional Illustration
The illustration shown assumed England Tours was formed early in 20x3. As such, there was no beginning retained earnings balance. You may wonder how the worksheet would be influenced by a beginning retained earnings balance. If you were to look at England's 20x4 worksheet, the $1,600 ending retained earnings from 20x3 would carry over to become the beginning balance for 20x4.
8 The Accounting Cycle and Closing Process
Reflecting on the accounting processes thus far described reveals the following typical steps:
• transactions are recorded in the journal
• journal entries are posted to appropriate ledger accounts
• a trial balance is constructed
• adjusting entries are prepared and posted
• an adjusted trial balance is prepared
• formal financial statements are produced (perhaps with the assistance of a worksheet)
It appears that we have completed the accounting cycle - capturing transaction and event data and moving it through an orderly process that results in the production of useful financial statements. And, importantly, we are left with substantial records that document each transaction (the journal) and each account's activity (the ledger). It is no wonder that the basic elements of this accounting methodology have endured for hundreds of years.