"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).

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.

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.

Enter the Unadjusted Trial Balances:
- Information comes from the general ledgers (T-accounts) for all business accounts.
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.
Prepare the Adjusted Trial Balance:
- Ensures the equality of debits and credits. (Left Side = Right Side).
Sort the Adjusted Trial Balance to Financial Statements:
- Income Statement.
- Balance Sheet.
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.

Step 1: Prepare a Trial Balance:
- Use the general ledger.
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.
Step 3: Prepare the Adjusted Trial Balance:
- Ensure equality of debits and credits; cash is not used in adjusting entries.
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.
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.

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.