MAKING OF WORKSHEET LEAD TO FINANCIAL STATEMENT

THIS WORKSHEET IS BEING PREPARED LEADING TO THE PREPARATION OF PROFIT AND LOSS STATEMENT AND BALANCE SHEET.

ALTHOUGH THIS IS AN OPTIONAL ACCOUNTING PROCESS , THIS IS A BETTER TOOL FOR ACCOUNTING STUDENTS TO LEARN THE PROCESS LEADING TO THE FINANCIAL STATMENT PREPARATION.

MAYBE , VERY FEW COMPANIES USES THIS WORKSHEET  DURING THIS AGE OF COMPUTERIZATION.   WHAT IS BEING USED NOWADAYS IS AFTER MAKING THE ADJUSTING ENTRIES AND POSTING TO THE GENERAL LEDGERS,  THE  TRIAL BALANCE CAN BE PREPARED DIRECTLY FROM THE BALANCES OF THE GENERAL LEDGER ACCOUNTS ,and at the same time the PROFIT AND LOSS STATEMENT AND BALANCE SHEET IS PREPARED .

AT ANY RATE , LET ME  SHOW YOU THE FORMAT OF THE WORKSHEET.

                                                  ROMA ENTERPRISE
                                                   working paper
                                                    2014
acct. name          trial balance        adjustments    adj. trial bal            profit /loss   balance sheet
                        dr       cr               dr     cr             dr       cr            dr        cr        dr          cr
cash                200                                               200                                         200             
a/rec.              150                                                150                                         150
inv. beg           200                               200             0
prep insurace     60                                35             25                                           25
rent                  120                                90            30                                            30
prepaid int.         14                                  4           10                                             10
notes rece.         60                                                60                                            60
building            500                                              500                                           500
accu.depn                    5                      25                        30                                              30
acts payable               75                                                  75                                              75
loans payable           100                                                 100                                            100
unearned rent             72            42                                   30                                              30
sales                         800                                                 800                  800
purchase        200                                200
advertise          50                                                  50                 50
salaries            120                     20                      140               140
int. expense                                36                         36                36
interest income            40                       55                      95                      95
capital                       282                                               282                                                282
 ret.earning                 300                                               300                                               300
 inventory                                 100                   100                                               100
 cost of sales                             400     100       300                    300
 depn                                          25                     25                     25
salaries payable                                     20                      20                                                 20
insurance exp                              35                     35         35        35
prep rent                                    90                      90                                               90
interest exp payable                                32                     32                                                  32
interest receivable                      55                      55                                                55    
rent income                                            42                      42                      42
profit                                                                                            351                                 351
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total            1674   1674         803       803         1806  1806       937      937        1220      1220
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additional information.


1.    the ending inventory of merchandise is 100.  PERIODIC METHOD IS USED
2.    building useful life is 20 years.
3.    the estimated bad debts is 10% of receivable balance
4.    the payroll cut of  is the 25th.  so there is 5 days work not recorded
5.    the insurance paid was good 1 year but this is paid last august only, it was debitied to asset account
6.    the rent expense was paid last october but it is covering a one year advance.
7.    part of the loans payable of 70  was obtained last sept 1 with 20% the interest was deducted by the creditor in advance.
8.   the other half of the loans payable of 30 was obtained last may 1 with interest of 10% payable on may next year.
8.   the notes receivable was issued last february 10 at 10%, payable every feb 10 including interest.
9.    the unearned rent income is a collection received last  june 1 for the rent on year.


the adjusting journal entries

1.       cost of sales                    200
                inventory beg                    200
         to close inventory and charge to cost of sales( presumed sold  so charged to cost of sales)
 
          cost of sales                    200
               purchases                           200
        to close purchases account and charge to cost of sales( presumed sold)

          INVENTORY                100
               COST OF SALES               100
         to set up the actual inventory and credit to cost of sales ( all  beg inv. and purchase were debited to cost of sales hence those that unsold should be credited to cost of sales.

2.    depreciation expense                25
           accu. depn                                 25
        to record depn.    500  divide 20 years = 25

3.      salaries                     20
              accrued salaries                20
         salaries for 5 days
4.      insurance                25
             prepaid insurance              25
      to record the actual insurance expense  and to adjust the prepaid insurance account  
           60 divide 12mos   =5 per month x 5 month from aug to dec  =25, the prepaid exp balance must be 35

5.   prepaid rent                90
               rent exp                  90
       to adjust the over debit to rent expense, should be 30 only and to recognized the advance payment of rent of 9 months    120 divide 12 months  =10 a mo. x 3 =30

6. interest expense     4
        prepaid interest      4
 to record the interest expense from sept to dec  or 4 months , and to correct the debit to prepaid interest.
         60 x 20% =12 per annum divide 12 mos x 4 months = 4 pesos,

7.  interest  exp                32
           interest exp payable    32
      to accrue the interest of the 40 loans payable obtained last may 1 but payable on may next year.
        40 x 10% =4 x  8 mos -32.

8.  interest receivable       55
              interest income                  55
     to record the  interest income accruing from feb 1 to dec 31 but collectibe on feb 1 next year
     60  x 10% =6 divide 12mos  x 11 months   =55

9.  unearned rent income     42
           rent income                     42
     to record the actual rent income from june 1 to dec  and to adjust the unearned income acct.
    72 divide 12=  6 a month x 7 mos     42
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I think all adjustment can be easily understood , what is difficult to  understand maybe is the cost of sales thing,  especially the method where the  beg inventory and the ending inventory is closed to INCOME AND EXPENSE SUMMARY  and the purchases account is left open.

you may asked , if this is the entry , no cost of sales account can be seen in the profit and loss statement. There is no problem with that because , in the preparation of the profit and loss especially how is cost of  sales , it is not required that the cost of sales shall come from the ledger of cost of sales.  the cost of sales in the profit and loss are just mathematically computed as ff:

                         income and expense summary                 300
                         purchases                                               100
                              cost of sales                                       400
this will be the presentation of the P/L  if you will based on ledger account BUT , IF YOU ARE THE ACCOUNTANTS YOU WILL PREPARE IT THIS WAY.

                           BEG INVE                                  600     debited to income exp. summ
                           PURCHASES                             100
                           END INVENT.                            300   credited to income exp summ.
                                 COST OF SALES                 400

You may also asked also that how come in another method , PERPETUAL METHOD,  the beg. inventory and purchases  are debited in total to cost of sales while we are not sure that it was sold.\
 this is is just an assumption that all the beg inventory, and the purchases were sold, BUT , TAKE NOTE THAT IN THE EVENT THAT THERE WILL BE A REMAINING INVENTORY , THAT OUTRIGHT DEBIT TO COST OF SALES OF BEG INV. AND PURCHASES SHALL BE CORRECTED BECAUSE THE ENTRY ON THE END INVENTORY IS

                    INVENTORY                 300
                        COST OF SALES              300

 that means the unsold portion that was part of the debits to cost of sales is now corrected because it was already credited as shown by the entry above.

LET ME MAKE A PROBLEM RELATIVE TO THIS COST OF SALES.

1.   The cost of sales is   300 and the ending inventory is 200, how much is the total beg inventory and purchases or the available for sale.
2.  the inventory for sale that is  available  is   200, how much is the cost of  sales if  the end inventory is 50.

after you have finished this worksheet,  the PROFIT AND LOSS STATEMENT AND THE  BALANCE CAN NOW BE PREPARED USING THIS WORKSHEET OR USING THE GENERAL LEDGER BALANCES WHICH MUST BE THE SAME AMOUNT WITH THE WORKSHEET.

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 THE CLOSING OF ALL NOMINAL ACCOUNTS OR THE PROFIT AND LOSS ACCOUNTS OR THE INCOME AND EXPENSE ACCOUNT

1.   all income accounts shall be debited and credit in total to INCOME AND EXP SUMMARY .
2   all expense and cost shall be credited and debited to income and expense summary.
3.  after all these entries are made the income and expense accounts are all in zero balance .
4. the income and expense summary account  has a balance or no balance .\
5. if the income exp summary has a credit balance , that means it is the profit , if it has a debit balance there is a loss, if  no balance , its break even.
6. any balances of the income exp. summary shall be closed to RETAINED EARNINGS..
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