"Completing the Accounting Cycle", Part I

Internal Working Papers

• Internal working papers are used by accounting information preparers to record, report, and communicate information to both internal and external users (decision makers).
• Internal documents are called working papers and assist CPAs in summarizing business information.
• A common working paper is a worksheet, useful for preparing financial statements (income statement, statement of owner's equity, balance sheet, and statement of cash flows).
• The worksheet is not a GAAP requirement, but it is extremely useful and commonly completed at the end of the accounting period.
• Worksheets can be prepared manually or electronically (e.g., using Excel).

Benefits of Worksheet

• Aids in preparing financial statements (income statement and balance sheet).
• Helps reduce errors by constantly showing the equality of debits and credits. If columns are not in balance, it indicates a possible error.
• Links accounts and adjustments to the financial statements.
• Helps prepare interim reports (e.g., monthly financial statements).
• Assists in audits by providing a manual and electronic trail for analyzing accounts and transactions.

Complete Worksheet

• Includes a list of all accounts based on the chart of accounts and general ledger.
• Shows account balances throughout the various stages of the accounting cycle.
• Sorts accounts into their respective financial statements.
• Provides two columns each for the unadjusted trial balance, adjusted trial balance, income statement, and balance sheet, representing debits and credits.

Steps to Prepare a Worksheet

1. Enter the Unadjusted Trial Balances:
   • Information comes from the general ledgers (T-accounts) for all business accounts.
2. List All Adjustments:
   • Includes deferrals (revenues and expenses) and accruals (revenues and expenses).
   • Deferrals: Postponements; cash is paid/collected in advance.
   • Accruals: Occur daily; cash not yet recorded, and expense/revenue not yet recognized.
   • Accruals need to update and adjust the books.
3. Prepare the Adjusted Trial Balance:
   • Ensures the equality of debits and credits. (Left Side = Right Side).
4. Sort the Adjusted Trial Balance to Financial Statements:
   • Income Statement.
   • Balance Sheet.
5. Total All Numbers:
   • Ensure total debits equal total credits at every step.
   • The worksheet updates the capital account through the transferring of the income statement, even though there is not a column for the statement of owner's equity.

Example Steps Explained

1. Step 1: Prepare a Trial Balance:
   • Use the general ledger.
2. Step 2: Enter Adjustment Information:
   • Comes from adjusting entries in the general journal, then posted to the general ledger.
   • Add additional accounts as needed for unrecorded accruals.
   • Total to ensure left and right sides are equal.
3. Step 3: Prepare the Adjusted Trial Balance:
   • Ensure equality of debits and credits; cash is not used in adjusting entries.
4. Step 4: Transfer Information to Financial Statements:
   • Income statement includes revenues and expenses.
   • Balance sheet includes assets, liabilities, and owner's capital.
   • the drawing account is transferred to the balance sheet column to create a statement of owner's equity.
5. Step 5: Total All Numbers:
   • Calculate net income or net loss (Revenues - Expenses).
   • If revenues > expenses, there is net income; if expenses > revenues, there is a net loss.
   • Transfer net income to the credit column on the balance sheet to balance totals.
   • Drawings decrease the owner's claim, while net income increases it.

Review Questions

• Where do amounts in the unadjusted trial balance come from?
  • The general ledger or T-accounts.
• Where do amounts in the adjusted trial balance come from?
  • Adding or subtracting unadjusted amounts and adjusting entries.
• How is net income/loss calculated?
  • Total credit amount (revenues) minus total debit amount (expenses) in the income statement column. Net income is transferred to the credit column of the balance sheet.
• Does GAAP require a worksheet?
  • No, it is not required but is prepared internally due to its usefulness in preparing financial statements.