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Principles of Accounting, Volume 1: Financial Accounting

4.5 Prepare Financial Statements Using the Adjusted Trial Balance

Principles of Accounting, Volume 1: Financial Accounting4.5 Prepare Financial Statements Using the Adjusted Trial Balance
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  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. Financial Statement Analysis
  19. Time Value of Money
  20. Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index

Once you have prepared the adjusted trial balance, you are ready to prepare the financial statements. Preparing financial statements is the seventh step in the accounting cycle. Remember that we have four financial statements to prepare: an income statement, a statement of retained earnings, a balance sheet, and the statement of cash flows. These financial statements were introduced in Introduction to Financial Statements and Statement of Cash Flows dedicates in-depth discussion to that statement.

To prepare the financial statements, a company will look at the adjusted trial balance for account information. From this information, the company will begin constructing each of the statements, beginning with the income statement. Income statements will include all revenue and expense accounts. The statement of retained earnings will include beginning retained earnings, any net income (loss) (found on the income statement), and dividends. The balance sheet is going to include assets, contra assets, liabilities, and stockholder equity accounts, including ending retained earnings and common stock.

Your Turn

Magnificent Adjusted Trial Balance

Magnificent Landscaping Service, Adjusted Trial Balance, April 30, 2018. Debit accounts: Cash $2,950; Accounts Receivable 575; Office Supplies 40; Prepaid Insurance 240; Equipment 2,500; Dividends 1,000; Gas Expense 53; Advertising Expense 35; Depreciation Expense: Equipment 35; Supplies Expense 85; Salaries Expense 420, Total Debits $7,933. Credit accounts: Accumulated Depreciation: Equipment 35; Accounts Payable 28; Salaries Payable 420; Unearned Lawn Mowing Revenue 100; Common Stock 5,000; Lawn Mowing Revenue 2,350; Total Credits $7,933.

Go over the adjusted trial balance for Magnificent Landscaping Service. Identify which financial statement each account will go on: Balance Sheet, Statement of Retained Earnings, or Income Statement.

Solution

Balance Sheet: Cash, accounts receivable, office supplied, prepaid insurance, equipment, accumulated depreciation (equipment), accounts payable, salaries payable, unearned lawn mowing revenue, and common stock. Statement of Retained Earnings: Dividends. Income Statement: Lawn mowing revenue, gas expense, advertising expense, depreciation expense (equipment), supplies expense, and salaries expense.

Income Statement

An income statement shows the organization’s financial performance for a given period of time. When preparing an income statement, revenues will always come before expenses in the presentation. For Printing Plus, the following is its January 2019 Income Statement.

Printing Plus, Income Statement, For the Month Ended January 31, 2019. Revenues: Interest Revenue $140; Service Revenue 10,100; Total Revenues $10,240. Expenses: Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Expenses 5,575. Net Income $4,665.

Revenue and expense information is taken from the adjusted trial balance as follows:

Printing Plus, Income Statement, For the Month Ended January 31, 2019. Revenues: Interest Revenue $140; Service Revenue 10,100; Total Revenues $10,240. Expenses: Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Expenses 5,575. Net Income $4,665. The Printing Plus Adjusted Trial Balance at January 31, 2019 is to the right of the Income Statement with lines connecting the Income Statement accounts from the Adjusted Trial Balance to the same accounts on the Income Statement. Printing Plus, Adjusted Trial Balance, January 31, 2019. Debit accounts: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment; 3,500; Dividends 100; Supplies Expense 100; Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Debit $35,715. Credit accounts; Equipment $75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Credit $35,715.

Total revenues are $10,240, while total expenses are $5,575. Total expenses are subtracted from total revenues to get a net income of $4,665. If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. This net income figure is used to prepare the statement of retained earnings.

Concepts In Practice

The Importance of Accurate Financial Statements

Financial statements give a glimpse into the operations of a company, and investors, lenders, owners, and others rely on the accuracy of this information when making future investing, lending, and growth decisions. When one of these statements is inaccurate, the financial implications are great.

For example, Celadon Group misreported revenues over the span of three years and elevated earnings during those years. The total overreported income was approximately $200–$250 million. This gross misreporting misled investors and led to the removal of Celadon Group from the New York Stock Exchange. Not only did this negatively impact Celadon Group’s stock price and lead to criminal investigations, but investors and lenders were left to wonder what might happen to their investment.

That is why it is so important to go through the detailed accounting process to reduce errors early on and hopefully prevent misinformation from reaching financial statements. The business must have strong internal controls and best practices to ensure the information is presented fairly.3

Statement of Retained Earnings

The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time. The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period. The statement of retained earnings is prepared before the balance sheet because the ending retained earnings amount is a required element of the balance sheet. The following is the Statement of Retained Earnings for Printing Plus.

Printing Plus, Statement of Retained Earnings, For Month Ended January 31, 2019. Beginning Retained Earnings (January 1) $0. Plus Net Income 4,665. Minus Dividends (100). Ending Retained Earnings (January 31) $4,565.

Net income information is taken from the income statement, and dividends information is taken from the adjusted trial balance as follows.

Printing Plus, Statement of Retained Earnings, For Month Ended January 31, 2019. Beginning Retained Earnings (January 1) $0. Plus Net Income 4,665. Minus Dividends (100). Ending Retained Earnings (January 31) $4,565. To the right of the Statement of Retained Earnings is the Printing Plus Income Statement with a line from Net Income to Net Income on the Statement of Retained Earnings. Below the Income Statement is the Printing Plus Adjusted Trial Balance with a line from Dividends to Dividends on the Statement of Retained Earnings. Printing Plus, Income Statement, For the Month Ended January 31, 2019. Revenues: Interest Revenue $140; Service Revenue 10,100; Total Revenues $10,240. Expenses: Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Expenses 5,575. Net Income $4,665. Printing Plus, Adjusted Trial Balance, January 31, 2019. Debit accounts: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment; 3,500; Dividends 100; Supplies Expense 100; Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Debit $35,715. Credit accounts; Equipment $75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Credit $35,715.

The statement of retained earnings always leads with beginning retained earnings. Beginning retained earnings carry over from the previous period’s ending retained earnings balance. Since this is the first month of business for Printing Plus, there is no beginning retained earnings balance. Notice the net income of $4,665 from the income statement is carried over to the statement of retained earnings. Dividends are taken away from the sum of beginning retained earnings and net income to get the ending retained earnings balance of $4,565 for January. This ending retained earnings balance is transferred to the balance sheet.

Balance Sheet

The balance sheet is the third statement prepared after the statement of retained earnings and lists what the organization owns (assets), what it owes (liabilities), and what the shareholders control (equity) on a specific date. Remember that the balance sheet represents the accounting equation, where assets equal liabilities plus stockholders’ equity. The following is the Balance Sheet for Printing Plus.

Printing Plus, Balance Sheet, January 31, 2019. Assets: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; less Accumulated Depreciation: Equipment (75); Equipment (net) 3,425; Total Assets $29,965. Liabilities: Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Total Liabilities 5,400. Stockholders’ Equity: Common Stock 20,000; Ending Retained Earnings 4,565; Total Stockholders’ Equity 24,565. Total Liabilities and Stockholders’ Equity $29,965.

Ending retained earnings information is taken from the statement of retained earnings, and asset, liability, and common stock information is taken from the adjusted trial balance as follows.

Printing Plus, Balance Sheet, January 31, 2019. Assets: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; less Accumulated Depreciation: Equipment 75; Equipment (net) 3,425; Total Assets $29,965. Liabilities: Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Total Liabilities 5,400. Stockholders’ Equity: Common Stock, 20,000; Ending Retained Earnings 4,565; Total Stockholders’ Equity 24,565. Total Liabilities and Stockholders’ Equity $29,965. To the right of the Balance Sheet is the Printing Plus Adjusted Trial Balance with lines point from the balance sheet accounts to the same accounts on the Balance Sheet. Below the Adjusted Trial Balance is the Printing Plus Statement of Retained Earnings with a line pointing from Ending Retained Earnings to the same account on the Balance Sheet. Printing Plus, Adjusted Trial Balance, January 31, 2019. Debit accounts: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment; 3,500; Dividends 100; Supplies Expense 100; Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Debit $35,715. Credit accounts; Equipment $75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Credit $35,715. Printing Plus, Statement of Retained Earnings, For Month Ended January 31, 2019. Beginning Retained Earnings (January 1) $0. Plus Net Income 4,665. Minus Dividends (100). Ending Retained Earnings (January 31) $4,565.

Looking at the asset section of the balance sheet, Accumulated Depreciation–Equipment is included as a contra asset account to equipment. The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425). The accounting equation is balanced, as shown on the balance sheet, because total assets equal $29,965 as do the total liabilities and stockholders’ equity.

There is a worksheet approach a company may use to make sure end-of-period adjustments translate to the correct financial statements.

IFRS Connection

Financial Statements

Both US-based companies and those headquartered in other countries produce the same primary financial statements—Income Statement, Balance Sheet, and Statement of Cash Flows. The presentation of these three primary financial statements is largely similar with respect to what should be reported under US GAAP and IFRS, but some interesting differences can arise, especially when presenting the Balance Sheet.

While both US GAAP and IFRS require the same minimum elements that must be reported on the Income Statement, such as revenues, expenses, taxes, and net income, to name a few, publicly traded companies in the United States have further requirements placed by the SEC on the reporting of financial statements. For example, IFRS-based financial statements are only required to report the current period of information and the information for the prior period. US GAAP has no requirement for reporting prior periods, but the SEC requires that companies present one prior period for the Balance Sheet and three prior periods for the Income Statement. Under both IFRS and US GAAP, companies can report more than the minimum requirements.

Presentation differences are most noticeable between the two forms of GAAP in the Balance Sheet. Under US GAAP there is no specific requirement on how accounts should be presented. However, the SEC requires that companies present their Balance Sheet information in liquidity order, which means current assets listed first with cash being the first account presented, as it is a company’s most liquid account. Liquidity refers to how easily an item can be converted to cash. IFRS requires that accounts be classified into current and noncurrent categories for both assets and liabilities, but no specific presentation format is required. Thus, for US companies, the first category always seen on a Balance Sheet is Current Assets, and the first account balance reported is cash. This is not always the case under IFRS. While many Balance Sheets of international companies will be presented in the same manner as those of a US company, the lack of a required format means that a company can present noncurrent assets first, followed by current assets. The accounts of a Balance Sheet using IFRS might appear as shown here.

International Company, Balance Sheet, December 31, 2020. Assets, Noncurrent Assets: Buildings $1,500,000; Equipment 800,000; Total Noncurrent Assets $2,300,000. Current Assets: Investments $100,000; Inventories 500,000; Accounts Receivable 400,000; Cash 200,000; Total Current Assets 1,200,000. Total Assets $3,500,000. Share Equity and Liabilities, Share Equity: Share Capital, $550,000; Retained Earnings 750,000; Total Share Equity $1,300,000. Long-term Liabilities: Pensions $875,000; Note Payable 325,000; Total Long-Term Liabilities 1,200,000. Current Liabilities: Short-term Note Payable $650,000; Accounts Payable 350,000; Total Current Liabilities 1,000,000. Total Share Equity and Liabilities $3,500,000.

Review the annual report of Stora Enso which is an international company that utilizes the illustrated format in presenting its Balance Sheet, also called the Statement of Financial Position. The Balance Sheet is found on page 31 of the report.

Some of the biggest differences that occur on financial statements prepared under US GAAP versus IFRS relate primarily to measurement or timing issues: in other words, how a transaction is valued and when it is recorded.

Ten-Column Worksheets

The 10-column worksheet is an all-in-one spreadsheet showing the transition of account information from the trial balance through the financial statements. Accountants use the 10-column worksheet to help calculate end-of-period adjustments. Using a 10-column worksheet is an optional step companies may use in their accounting process.

Here is a picture of a 10-column worksheet for Printing Plus.

Printing Plus, Ten-column Worksheet, For Month Ended January 2019. From left to right, columns are Account Name, Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet. Trial Balance columns. Accounts with debit balances: Cash 24,800; Accounts Receivable 1,200; Supplies 500; Equipment 3,500; Dividends 100; Salaries Expense 3,600; Utility Expense 300; Total Debits 34,000. Accounts with credit balances: Accounts Payable 500; Unearned Revenue 4,000; Common Stock 20,000; Service Revenue 9,500; Total Credits 34,000. Adjustment columns. Debit adjustments include: Interest Receivable 140; Unearned Revenue 600; Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 1,500; Total debit adjustments 2,415. Credit adjustments include: Supplies 100; Accumulated Depreciation Equipment 75; Salaries Payable 1,500; Interest Revenue 140; Service Revenue 600; Total credit adjustments 2,415. Adjusted Trial Balance columns. Adjusted debit balances: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; Dividends 100; Supplies Expense 100; Depreciation Expense Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Adjusted Debits $35,715. Adjusted credit balances: Accumulated Depreciation Equipment 75; Accounts Payable, 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Adjusted Credits $35,715. Income Statement columns. Credit column: Interest Revenue 140; Service Revenue 10,100; Total Credit Column 10,240. Debit column: Supplies Expense 100; Depreciation Expense Equipment 75; Salaries Expense 5,100; Utility Expense 300; Sub-Total Debit Column 5,575; Net Income 4,665; Total Debit Column 10,240. Balance Sheet columns. Debit column: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; Dividends 100; Total debit column 30,140. Credit column: Accumulated Depreciation Equipment 75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Sub-total credit column 25,475; Net Income 4,665; Total credit column 30,140.

There are five sets of columns, each set having a column for debit and credit, for a total of 10 columns. The five column sets are the trial balance, adjustments, adjusted trial balance, income statement, and the balance sheet. After a company posts its day-to-day journal entries, it can begin transferring that information to the trial balance columns of the 10-column worksheet.

Excerpt from Printing Plus ten-column worksheet: Account Name column and Trial Balance column. Accounts with debit balances: Cash 24,800; Accounts Receivable 1,200; Supplies 500; Equipment 3,500; Dividends 100; Salaries Expense 3,600; Utility Expense 300; Total Debits 34,000. Accounts with credit balances: Accounts Payable 500; Unearned Revenue 4,000; Common Stock 20,000; Service Revenue 9,500; Total Credits, 34,000.

The trial balance information for Printing Plus is shown previously. Notice that the debit and credit columns both equal $34,000. If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000.

Printing Plus, Unadjusted Trial Balance, January 31, 2019. Debit accounts: Cash $24,800; Accounts Receivable 1,200; Supplies 500; Equipment 3,500; Dividends 100; Salaries Expense 3,600; Utility Expense 300; Total Debits $34,000. Credit accounts: Accounts Payable 500; Unearned Revenue 4,000; Common Stock 20,000; Service Revenue 9,500; Total Credits $34,000.

Once the trial balance information is on the worksheet, the next step is to fill in the adjusting information from the posted adjusted journal entries.

Excerpt from Printing Plus ten-column worksheet, adding the Adjustments column. Debit adjustments include: Interest Receivable 140; Unearned Revenue 600; Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 1,500; Total debit adjustments 2,415. Credit adjustments include: Supplies 100; Accumulated Depreciation: Equipment 75; Salaries Payable 1,500; Interest Revenue 140; Service Revenue 600; Total credit adjustments 2,415.

The adjustments total of $2,415 balances in the debit and credit columns.

The next step is to record information in the adjusted trial balance columns.

Excerpt from Printing Plus ten-column worksheet, adding the Adjusted Trial Balance. Adjusted debit balances: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; Dividends 100; Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Adjusted Debits $35,715. Adjusted credit balances: Accumulated Depreciation Equipment 75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Adjusted Credits $35,715.

To get the numbers in these columns, you take the number in the trial balance column and add or subtract any number found in the adjustment column. For example, Cash shows an unadjusted balance of $24,800. There is no adjustment in the adjustment columns, so the Cash balance from the unadjusted balance column is transferred over to the adjusted trial balance columns at $24,800. Interest Receivable did not exist in the trial balance information, so the balance in the adjustment column of $140 is transferred over to the adjusted trial balance column.

Unearned revenue had a credit balance of $4,000 in the trial balance column, and a debit adjustment of $600 in the adjustment column. Remember that adding debits and credits is like adding positive and negative numbers. This means the $600 debit is subtracted from the $4,000 credit to get a credit balance of $3,400 that is translated to the adjusted trial balance column.

Service Revenue had a $9,500 credit balance in the trial balance column, and a $600 credit balance in the Adjustments column. To get the $10,100 credit balance in the adjusted trial balance column requires adding together both credits in the trial balance and adjustment columns (9,500 + 600). You will do the same process for all accounts. Once all accounts have balances in the adjusted trial balance columns, add the debits and credits to make sure they are equal. In the case of Printing Plus, the balances equal $35,715. If you check the adjusted trial balance for Printing Plus, you will see the same equal balance is present.

Printing Plus, Adjusted Trial Balance, January 31, 2019. Debit accounts: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies 400; Equipment 3,500; Dividends 100; Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Debits $35,715. Credit accounts: Accumulated Depreciation: Equipment 75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Interest Revenue 140; Service Revenue 10,100; Total Credits $35,715.

Next you will take all of the figures in the adjusted trial balance columns and carry them over to either the income statement columns or the balance sheet columns.

Your Turn

Income Statement and Balance Sheet

Magnificent Landscaping Company, Worksheet, April 30, 2018. Trial Balance Columns. Debit entries: Cash $2,950; Accounts receivable 575; Office supplies, 85; Prepaid insurance 240; Equipment 2,540; Dividends 1,000; Gas expense 53; Advertising expense 35; Total debits $7,478. Credit entries: Accounts payable 28; Unearned lawn mowing revenue 200; Common stock 5,000; Lawn mowing revenue 2,250; Total credits $7,478. Adjustment Columns. Debit Adjustments: Unearned lawn mowing revenue (d) 100; Depreciation expense: equipment (a) 35; Supplies expense (b) 40 and (c) 45; Salaries expense (e) 420; Total debit adjustments 640. Credit adjustments: Office supplies (c) 45; Equipment (b) 40; Lawn mowing revenue (d) 100; Accumulated depreciation: equipment (a) 35; Salaries payable (e) 420; Total credit adjustments 640. Adjusted Trial Balance Columns. Debit entries: Cash $2,950; Accounts receivable 575; Office supplies 40; Prepaid insurance 240; Equipment 2,500; Dividends 1,000; Gas expense 53; Advertising expense 35; Depreciation expense: equipment 35; Supplies expense 85; Salaries expense 420, Total debits $7,933. Credit entries: Accumulated depreciation: equipment 35; Accounts payable 28; Salaries payable 420; Unearned lawn mowing revenue 100; Common stock 5,000; Lawn mowing revenue 2,350; Total credits $7,933. The Income Statement and Balance Sheet columns are blank.

Take a couple of minutes and fill in the income statement and balance sheet columns. Total them when you are done. Do not panic when they do not balance. They will not balance at this time.

Solution

Magnificent Landscaping Company, Worksheet, April 30, 2018, adding the Income Statement and Balance Sheet columns. Income Statement Columns. Debit entries: Gas expense 53; Advertising expense 35; Depreciation expense: equipment 35; supplies expense 85; Salaries expense 420; Total debits: 628. Credit entries: Lawn mowing revenue 2,350; Total credits 2,350. Balance Sheet columns. Debit entries: Cash 2,950; Accounts receivable 575; Office supplies 40; Prepaid insurance 240; Equipment 2,500; Dividends 1,000; Total debits 7,305. Credit entries: Accounts payable 28; Unearned lawn mowing revenue 100; Common stock 5,000; Accumulated depreciation: equipment 35; Salaries payable 420; Total credits 5,583.

Looking at the income statement columns, we see that all revenue and expense accounts are listed in either the debit or credit column. This is a reminder that the income statement itself does not organize information into debits and credits, but we do use this presentation on a 10-column worksheet.

Excerpt from Printing Plus worksheet, adding the Income Statement columns. Credit column: Interest Revenue 140; Service Revenue 10,100; Total Credit Column 10,240. Debit column: Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Sub-Total Debit Column 5,575; Net Income 4,665; Total Debit Column 10,240.

You will notice that when debit and credit income statement columns are totaled, the balances are not the same. The debit balance equals $5,575, and the credit balance equals $10,240. Why do they not balance?

If the debit and credit columns equal each other, it means the expenses equal the revenues. This would happen if a company broke even, meaning the company did not make or lose any money. If there is a difference between the two numbers, that difference is the amount of net income, or net loss, the company has earned.

In the Printing Plus case, the credit side is the higher figure at $10,240. The credit side represents revenues. This means revenues exceed expenses, thus giving the company a net income. If the debit column were larger, this would mean the expenses were larger than revenues, leading to a net loss. You want to calculate the net income and enter it onto the worksheet. The $4,665 net income is found by taking the credit of $10,240 and subtracting the debit of $5,575. When entering net income, it should be written in the column with the lower total. In this instance, that would be the debit side. You then add together the $5,575 and $4,665 to get a total of $10,240. This balances the two columns for the income statement. If you review the income statement, you see that net income is in fact $4,665.

Printing Plus, Income Statement, For Month Ended January 31, 2019. Revenues: Interest Revenue $140; Service Revenue 10,100; Total Revenues $10,240. Expenses: Supplies Expense 100; Depreciation Expense: Equipment 75; Salaries Expense 5,100; Utility Expense 300; Total Expenses 5,575. Net Income $4,665. Printing Plus Worksheet, adding the Balance Sheet columns. Debit column: Cash $24,800; Accounts Receivable 1,200; Interest Receivable 140; Supplies, 400; Equipment 3,500; Dividends 100; Total debit column 30,140. Credit column: Accumulated Depreciation Equipment 75; Accounts Payable 500; Salaries Payable 1,500; Unearned Revenue 3,400; Common Stock 20,000; Sub-total credit column 25,475; Net Income 4,665; Total credit column 30,140.

We now consider the last two columns for the balance sheet. In these columns we record all asset, liability, and equity accounts.

When adding the total debits and credits, you notice they do not balance. The debit column equals $30,140, and the credit column equals $25,475. How do we get the columns to balance?

Treat the income statement and balance sheet columns like a double-entry accounting system, where if you have a debit on the income statement side, you must have a credit equaling the same amount on the credit side. In this case we added a debit of $4,665 to the income statement column. This means we must add a credit of $4,665 to the balance sheet column. Once we add the $4,665 to the credit side of the balance sheet column, the two columns equal $30,140.

You may notice that dividends are included in our 10-column worksheet balance sheet columns even though this account is not included on a balance sheet. So why is it included here? There is actually a very good reason we put dividends in the balance sheet columns.

When you prepare a balance sheet, you must first have the most updated retained earnings balance. To get that balance, you take the beginning retained earnings balance + net income – dividends. If you look at the worksheet for Printing Plus, you will notice there is no retained earnings account. That is because they just started business this month and have no beginning retained earnings balance.

If you look in the balance sheet columns, we do have the new, up-to-date retained earnings, but it is spread out through two numbers. You have the dividends balance of $100 and net income of $4,665. If you combine these two individual numbers ($4,665 – $100), you will have your updated retained earnings balance of $4,565, as seen on the statement of retained earnings.

Printing Plus, Statement of Retained Earnings, For Month Ended January 31, 2019. Beginning Retained Earnings (January 1) $0; plus Net Income 4,665; minus Dividends (100); Ending Retained Earnings (January 31) $4,565.

You will not see a similarity between the 10-column worksheet and the balance sheet, because the 10-column worksheet is categorizing all accounts by the type of balance they have, debit or credit. This leads to a final balance of $30,140.

The balance sheet is classifying the accounts by type of accounts, assets and contra assets, liabilities, and equity. This leads to a final balance of $29,965. Even though they are the same numbers in the accounts, the totals on the worksheet and the totals on the balance sheet will be different because of the different presentation methods.

Your Turn

Frank’s Net Income and Loss

What amount of net income/loss does Frank have?

Frank Investment Advisers, Worksheet, December 31, 2016. Income Statement columns. Debit column: Insurance expense 3,000; Salaries expense 37,000, Supplies expense 1,000; Interest expense 4,000; Rent expense 8,000; Depreciation expense: equipment 2,800; total debit column 55,800. Credit column: Service revenue 55,100; total credit column 55,100. Balance Sheet columns. Debit column: Cash 28,000; Accounts receivable 46,000; Office supplies 4,000; Equipment 28,000; Dividends 20,000; total debit column 126,000. Credit column: Accumulated depreciation: equipment 16,800; Accounts payable 16,000; Salaries payable 2,000; Unearned revenue 1,900; Notes Payable (long term) 23,000; Common stock 15,000; Retained earnings 52,000; total credit column 126,700.

Solution

Frank Investment Advisers, Worksheet, December 31, 2016. Income Statement columns. Debit column: Insurance expense 3,000; Salaries expense 37,000, Supplies expense 1,000; Interest expense 4,000; Rent expense 8,000; Depreciation expense: equipment 2,800; total debit column 55,800. Credit column: Service revenue 55,100; subtotal credit column 55,100; Net Loss 700; Total 55,800. Balance Sheet columns. Debit column: Cash 28,000; Accounts receivable 46,000; Office supplies 4,000; Equipment 28,000; Dividends 20,000; subtotal debit column 126,000; net loss 700; total debit column $126,700. Credit column: Accumulated depreciation: equipment 16,800; Accounts payable 16,000; Salaries payable 2,000; Unearned revenue 1,900; Notes Payable (long term) 23,000; Common stock 15,000; Retained earnings 52,000; total credit column 126,700.

In Completing the Accounting Cycle, we continue our discussion of the accounting cycle, completing the last steps of journalizing and posting closing entries and preparing a post-closing trial balance.

Footnotes

  • 3 James Jaillet. “Celadon under Criminal Investigation over Financial Statements.” Commercial Carrier Journal. July 25, 2018. https://www.ccjdigital.com/200520-2/
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