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Lesson 09 (printer-friendly version)

INSTRUCTIONS:

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Chapter 1

Introduction

Wow! Here you are at the beginning of Lesson 9 already. You've learned the basic accounting cycle for a small
business. What you've completed in the course up to this point is all the monthly requirements. You're now ready to
continue with the end-of-the-year work.

This work consists of many different financial reports that show the condition of the business and how it has progressed
during the previous 12 months.

The worksheet is a business report that shows how the business has progressed from January 1 to December 31 of the
same year. It will, when completed, show whether the business had a net income or a net loss for the year.

The worksheet is also a place where adjustments to some of Children's Capers' accounts will be made. We'll discuss
these adjustments at length in Chapter 3. Below is an example of a completed worksheet for you to view as I explain
how to prepare a worksheet. Please feel free to refer to this sample worksheet throughout this lesson or whenever
necessary.

It's important for you to realize that not many bookkeepers know automatically how to complete each and every report,
especially those that are completed only once a year. I've always allowed my students in high school to have access to
an example. The important part is being able to complete the reports accurately with the proper figures.

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J & J Auto Repair Worksheet

Chapter 2

Trial Balance Section of the Worksheet

Look at the form you printed out to complete the worksheet. It has three lines in the heading. On the first line, put the
name of the company, Children's Capers. On the second line, put the name of the financial report, Worksheet. On the
last line, put For the Year Ended December 31, 200-. The date is entered this way on the worksheet because the report
is showing the progression of the business from one point in time, January 1, to another point in time, December 31. If a
financial report shows the condition of the business on a particular date, then only the date is entered, like December
31, 200-.

Before you can continue with the adjustments, you must make two entries in your General Ledger. The first entry will be
a debit to Merchandise Inventory for $7,250.00. Please use December 31, 200- as the date and put a check mark in the
Post Ref. column. This will make this account have a debit balance of $7,250.00. Next, enter a credit to Cash for
$7,250.00, again using December 31, 200- as the date and putting a check mark in the Post Ref. column. This
transaction is necessary because the merchandise inventory account in the General Ledger would, in a real situation,
have a balance from the previous year. Because I had you open General Ledger accounts with no balances for this
course, you need to enter a fictitious balance in Merchandise Inventory. Now you're all set!

Once you've finished the heading, take a look at the columns of the worksheet form. The first column is for account
titles. The second and third columns are labeled Trial Balance Debit and Credit. The next columns are Adjustments
Debit and Credit. Next is Income Statement Debit and Credit and last are Balance Sheet Debit and Credit.

In this chapter, you'll concentrate on the Trial Balance Debit and Credit columns. Using your entire General Ledger,
enter the account titles in the order in which they appear in the ledger. If the account has a debit balance, enter it in the
Trial Balance Debit column. You do not need to list account titles for account numbers 2155, 2160, 2165, 2170, or 6150

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as we will not be using these accounts when preparing the Worksheet. If the account has a credit balance, enter it in the
Trial Balance Credit column. Remember you're only working with the General Ledger, not the Accounts Payable or
Accounts Receivable Ledgers.

When all the account balances in the General Ledger have been entered, add up the amounts in columns 1 and 2.
These two totals must be equal. This, once again, proves the equality of the
debits and credits in the General Ledger.

As usual, if these two columns do not agree, you can't continue. You must
find and correct any errors in the General Ledger or in transferring the
account balances from the General Ledger onto the Trial Balance section of
the worksheet.

Once you've got these two columns balanced, put two lines under the total
to show that they are in agreement.

Chapter 3

Adjustments

You're now ready to make adjustments to some of the asset accounts. As

you know, Children's Capers bought store and office supplies and insurance
coverage throughout the month of December and previous months in the
year. They've also made many purchases for merchandise for resale. These balances will not be the same at the end of
the year as the balance in the General Ledger is showing.

The balances in the General Ledger accounts represent the balance at the beginning of the year. The balances at the
end of the year are different. There are four accounts that need adjustments made to them in order to be up-to-date for
the new year. They are Office Supplies, Store Supplies, Prepaid Insurance, and Merchandise Inventory.

Let me explain adjustments and why they're necessary before you continue. Children's Capers bought store and office
supplies throughout the year and entered those transactions in the respective supplies accounts as debits. These debit
balances represent the dollar amount of supplies Children's Capers has on hand.

Obviously, the business used some of those supplies as the months went by. The ending balance of their supplies
would be smaller than the beginning balance, because some of those supplies have been used. What you need to do is
make an adjustment to the two supply accounts, store supplies and office supplies, in order to bring their debit balances
down to the actual dollar amount you have left on hand at the end of the year.

You do this by taking an inventory of the supplies you have on hand on December 31. Then
you find the difference between what Children's Capers started the year with and what they
have on hand at the end of the year. The difference is the dollar amount of supplies that
were used during the year. This amount needs to be transferred to an expense account so
that it can be subtracted from the sales figure for the year. If you didn't do this, your net
income would be overstated because you have not deducted all the expenses for the
period.

Now, remember when I talked about prepaid insurance? I told you that Children's Capers
pays for insurance coverage in advance and then applies the amount allocated per month
to an expense account at the end of the month. You paid $600.00 for six months' coverage,
so that would be $100.00 a month. You'll make an adjustment to that asset account and put
the $100.00 for December into an expense account. This is done, once again, so you have
a true picture of the net income of the business and all expenses that have been applied to that net income.

The last adjustment is made to the account Merchandise Inventory. Once again, this account represents the value of
merchandise Children's Capers has on hand for resale to their customers. The January 1 merchandise inventory and
the December 31 inventory figures will be quite different, as you have purchased merchandise during the year and sold
some also.

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Now, I'm going to give you the December 31 balances for those four accounts:

Office Supplies: $722.00

Store Supplies: $513.00

Merchandise Inventory: $9,350.00

Prepaid Insurance: $500.00

Let's do Office Supplies first. The balance in that General Ledger account now is $912.00. At the end of December, you
took an inventory of office supplies and found you had $722.00. That means that you've used the difference, $190.00.
You need to make an adjustment to bring the debit balance in Office Supplies down to $722.00.

To do this, in the worksheet, enter a credit of $190.00 in column 4, Adjustments Credit, on line 5, which is the line that
Office Supplies is on. Then, go down to Office Supplies Expense, and enter a debit for $190.00 in column 3,
Adjustments Debit. You've now made the adjusting entry to reduce the asset account Supplies and enter the portion of
supplies used into the expense account, Office Supplies Expense.

Let's do the same thing with Children's Capers' Store Supplies account. The account shows $810.00 in the General
Ledger. The inventory on December 31 is $513.00. The difference is the amount used, or $297.00. Enter this as a credit
on line 6, Store Supplies, in column 4, Adjustments Credit. Then, go down to the line for Supplies Store Expense and
enter the same amount in column 3, Adjustments Debit. That's that!

Next, let's do the adjustment to Prepaid Insurance. Enter a credit on line 7 in column 4, Adjustments Credit, for $100.00.
This is the difference between the balance in the account now, $600.00, and the value of insurance coverage at the end
of December, $500.00. Now, go to line 22 of the worksheet which is the line that Insurance Expense is on and enter a
debit for $100.00 in column 3, Adjustments Debit. One more!

Last but not least, you need to make an adjustment for merchandise inventory. The balance in column 1 is $7,250.00.
The balance on December 31 is $9,350.00. You can see that Children's Capers' merchandise inventory increased. This
account has a debit balance, so to increase that balance you must debit Merchandise Inventory on line 4 in column 3,
Adjustments Debit for the difference, which is $2,100.00. The credit part of this transaction will be to Income Summary,
which is on line 17. Enter a credit for the same amount, $2,100.00, under Adjustments Credit, column 4.

That's it! You've entered four transactions in your two Adjustments columns of the worksheet. You have a debit part and
a credit part for each transaction. Total these two columns, columns 3 and 4, and make sure they are equal. When
they're equal, double rule the totals to show that they are in agreement. And you're ready to move on!

Chapter 4

Completing the Worksheet

There are four columns left on your worksheet forms. The Income Statement columns, numbers 5 and 6, are for those
balances that determine if a business has a net income or a net loss. These accounts are shown from the account titled
Income Summary down through the last expense account title. That means that for each and every account that is
showing a balance in either column 1, 2, 3, or 4, you need to bring that balance over into columns 5 and 6.

If the balance is a debit, it goes to column 5, the Debit column. If the balance is a credit, it goes to column 6, the Credit
column. Remember to bring over your three new expense account balances, Store Supplies Expense, Office Supplies
Expense, and Insurance Expense.

Now, total columns 5 and 6. These two totals should not agree. Time for another surprise! After you finish with columns
7 and 8, I'll let you in on the secret!

Next, bring the remaining accounts, your assets, liabilities, capital, and drawing account balances over into columns 7
and 8, the Balance Sheet columns. When you bring over the accounts that were adjusted, you'll bring over the ending

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balances, those that I gave you in the last chapter. If you look at the Merchandise Inventory line, for example, there is a
balance of $7,250.00 in column l. Then there is a debit adjustment of $2,100.00. The new, adjusted balance in
Merchandise Inventory is $9,350.00, the sum of the two debits. Make sense?

This is how the four accounts you made adjustments to will appear on the Balance Sheet section of the Worksheet,
columns 7 and 8. They will either be increased or decreased by the adjustment you made. In addition, the ending
balances in column 8 will be the numbers I gave you above as your December 31 balances.

Next, total columns 7 and 8. Again, these two columns should not equal. Now for the surprise: the difference between
columns 5 and 6 and the difference between columns 7 and 8 must be the same number. This number represents either
a net loss or a net income.

Take a look at column 5, Income Statement Debit. Your expenses are shown here. In column 6 is your sales figure. If
column 5, expenses, is larger than column 6, income, you have a net loss. If column 6, the sales, is larger than column
5, your expenses, you have a net income. Obviously, a business strives for a net income.

When columns 5 and 6 and 7 and 8 have the same difference, enter that difference under the lower number in each set
of columns and add them down, which will make columns 5 and 6 agree and columns 7 and 8 agree. On the line where
you entered the difference, enter either net income or net loss in the Account Title column. Be sure to double rule the
totals of the last four columns once they agree.

Please feel free to look at the sample worksheet given in this lesson as a guide while you complete the one for
Children's Capers.

As usual, the solution for this lesson's work is in the Supplementary Material section.

Chapter 5

Conclusion

It must seem like you've covered a tremendous amount of material in this chapter, and you did! But isn't it great to have
the knowledge and skills to complete an entire accounting cycle? Remember, you'll always have examples of the work
required by most businesses in your three-ring binder. This can become a valuable asset to you both personally and
professionally. Only three more lessons to go—ahhhh—but very interesting ones!

As usual, when you feel you're ready, there is a short, multiple-choice quiz waiting for you. Good luck!

Supplementary Material

Worksheet
/crs/pix/fun/L09-Worksheet.pdf
This form is used to calculate the net income or net loss of a
business.

Lesson 9 Solutions
/crs/pix/fun/L09-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear

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sideways, so printing may be your better option. If you don't mind

tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper!

Note: Only those forms and accounts with new entries in them will
appear in each lesson's solutions. If you're curious about a
transaction in a previous lesson, you'll have to go back to that
lesson's Solutions link.

FAQs

Q: Why is it necessary to make adjustments to Supplies, Prepaid Insurance, and

Merchandise Inventory accounts?

A: It is necessary to make adjustments to these accounts in order to have these accounts

have up-to-date, accurate balances at the beginning of the new year. If no adjustments were
made, the net income or net loss of the business would not be an accurate figure because all
of the expenses relating to the business for that period of time would not have been
deducted.

Q: What is the main purpose of a worksheet?

A: The main purpose of a worksheet is to show whether the business had a net income or a
net loss for the period.

Q: Why must columns 1 and 2 of the worksheet, Trial Balance Debit and Credit, equal?

A: Columns 1 and 2, Trial Balance Debit and Credit, on the worksheet prove the equality of
the General Ledger. These two columns must equal before the worksheet is completed.

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