Video Transcript: The Accounting Cycle Summarized

Hello and welcome back. Now we're going to discuss the account summarize  the accounting cycle, a worksheet. This is a column sheet of paper or a  computerized spreadsheet on which accounts summarize information needed to make the adjusting and closing entries and to prepare the financial statements,  usually they save these worksheets to document the end of period entries. A  worksheet is only an accounting tool and not part of the formal accounting  records. Therefore worksheets may vary in format. Some are prepared in pencil  so that errors can be correctly corrected easily. Other worksheets are prepared  on personal computers with spreadsheet software. Accountants prepare  worksheets each time financial statements are needed, monthly, quarterly or at  the end of the accounting year. This unit illustrates a 12 column worksheet that  includes sets of columns, for an unadjusted trial balance adjustments, adjusted  trial balance, income statement, statement of retained earnings and a balance  sheet. Each set has a debit and a credit column. See exhibit 20. Accountants  use these initial steps in preparing the worksheet, the following sections  describe the detailed steps for completing the worksheet. Enter the titles and  balances of the ledger accounts in the trial balance columns. Enter adjustments  in the adjustment columns. Enter adjustment account balances in the adjusted  trial balance columns extend adjusted balances of revenue and expense  accounts from the adjusted trial balance columns to the income statement  columns extend any balances in the retained earnings and dividend accounts to  the statement of retained earning columns, and then extend adjusted balances  of assets, liabilities, capital stock accounts from the adjusted trial balance  columns to the Balance Sheet Columns, and this worksheet, again, prepares  you for the documentation of your balance sheet and your income statement.  Worksheet preparers often provide brief explanations at the bottom for the  keyed entries, as in Exhibit 20. Although these explanations are optional, they  provide valuable information for those who review the worksheet later, the  adjustment which were discussed in illustrating unit four for the Microtrain  company, are as follows. And again, this is the accounting summary you want to  analyze your transactions. Are they journalized, or are they not? You're going to  post them to your journal and into the into the ledger, and you're going to  prepare a post closing trial balance, and then you're going to prepare your  financial statements. So number one, your entry number one, will record the  expiration of the $200 of prepaid insurance in December. The second entry will  record the expiration of 400 of prepaid rent. Third the 500 of supplies used  during the month. And the fourth entry reads seven $50 depreciation expense  on the trucks, the trucks for the month. Microtrain acquired the trucks at the  beginning of December. Entry five records the earnings of 1500 of the 4500  unearned service fees account the sixth entry records the $600 of interest  earned in December the seventh. Entry records the $100 1,000 of unbilled  training services performed in December. And entry eight records the $180 pool 

of salary expense at the end of the month. Often it is difficult to discover all the  adjusting entries that should be made. The following steps are helpful. Examine  adjusting entries made at the end of the preceding accounting period. The same types of entries often are necessary period after period. Examine the account  titles and the trial balance. For example, if the company has an account titled  trucks, an entry must be made for depreciation exam various business  documents, such as bills for services received or rendered to discover other  assets, liabilities, revenues and expenses that have not yet been recorded, ask  the manager. Or other professional specific questions regarding adjustments  that may be necessary, for example, or any services performed during the  month that have not yet been billed. Okay, so going back to number one, you're  going to record the expiration of the $200 prepaid insurance. So this is our  worksheet. We have our trial balance column, our adjustments, adjusted trial  balances, the balance after you've adjusted and then from the adjusted trial  balance, these balances are going to carry over to your income statement, or  your retained earnings statement, or your balance sheet statement, depending  on what type of account they are. So for the $200 insurance expense. So if you  scroll down and look at account 512 insurance expense and number one  represents the first transaction, which is the $200 so in your debit column, you're going to debit the $200 expense, and then up in your prepaid insurance column, your credit, you're going to credit for $200 so there you have A debit and a credit entry, and it's taking away from the prepaid amount that's been used up and  recording as such as an expense, okay? And you're going to continue to do that  with every entry. And as you can see, the number in parentheses is the number  of the entry back here, like entry one records the prepaid insurance. Entry two,  the prepaid rent. So you can follow along with the entry number along on the  worksheet, and it will show you how to adjust. Then, once you have your  Adjusted Trial Balance, okay, so what goes on your income statement, revenue  and expenses. So and your income statement column, you are only going to  carry over to that column, revenues and expenses, your statement of retained  earnings. What goes on that okay. So retained earnings, the 300 the dividend.  Okay. So you have your characters, your all your entity, your capital owners,  capital owners, drawing revenues, stockholders, equities, those types of  equities, in, excuse me, account 300 those are being carried over to the  statement of retained earnings, your Balance Sheet accounts are your 100  accounts your liabilities. So then on your balance sheet, the accounts that are  being carried over are your 100 accounts and your 200 accounts. And then that  will summarize your balance sheet. And from here you have your income  statement as one statement, and your numbers for it. And then your balance  sheet and your statement of retained earnings will make up your balance sheet  after all of the adjusting entries are entered into the adjustment columns total the two columns, the totals of these two columns should be equal when all debits 

and credits are entered properly after Microtrains, adjustments, compute the  adjusted balance of each account and enter these in the adjusted trial balance  columns. For example, supplies on hand had an unadjusted balance of 1400  adjusting entry three credited the account for 500 leaving a debit balance of  nine. This account is a debit in the adjusted trial balance columns. Next extend  all accounts having balances to the adjusted trial balance column. Note carefully how the rules of debit and credit apply in determining whether an adjustment  increases or decreases the account balance. For example, salaries, expense,  which is number 507 has a 3600 debit balance in the trial balance column, $180  debit adjustment increases this account which has a $3,780 debit balance in the adjusted trial balance column, some account balances remain the same  because no adjustments have affected them. For example, the balance in  accounts payable does not change and is simply extended to the adjusted trial  balance columns. Now total the adjusted trial balance debit and credit columns,  the totals must be equal before taking the next step in completing the  worksheet, when the trial balance and the adjustment columns both balance, but the adjusted trial balance columns do not the most probable cause of the mess  there. Error or an error in extension the adjusted trial balance columns make the next step of sorting the amounts to the income statement, the statement of  retain earnings and the Balance Sheet Columns, much easier. Begin by  extending all of Microtrains revenue and expense account balances in the  adjusted trial balance column to the income statement column, since revenues  carry credit balances, extend them to the credit column after extending  expenses to the debit column, subtract each column. Microtrains. Total  expenses are 6510 and total revenues are $13,800 thus net income for the  period is $7,290 enter this set, enter that amount in the debit column. To make  two column totals balance, you would record a net loss in the opposite manner,  expenses would have been larger than revenues. So a net loss would be  entered in the credit column to make the columns balance. Next, complete the  statement of retained earnings column, enter the 7290 net income amount for  December in the credit statement of retained earnings column. Thus this net  income amount is the balancing figure for the income statement column, and is  also the credit statement of retained earnings column. Net Income appears in  the statement of retained earnings credit column because it causes an increase  in retained earnings. Add the 7290 net income to the beginning retained  earnings balance of zero and deduct the dividends of 3000 as a result, the  ending balance of the retained earnings account is $4,290 now extend the  assets, liabilities and capital stock accounts in the adjusted trial balance  columns to the balance sheet extend asset amounts as debits and liability and  capital stock amounts as credits. Note that the ending retained earnings amount determined in this statement of retained earnings columns, appears again as a  credit in the Balance Sheet Columns, the ending retained earnings amount is a 

debit in the statement of retained earnings columns to balance the statement of  retained earnings, the ending retained earnings is A credit in the Balance Sheet  Columns because it increases the stockholders equity and increases the  stockholders equities or credits retained earnings would have a debit ending  balance only if cumulative losses and dividends exceed cumulative earnings  with The inclusion of the ending retained earnings, amount, the balance sheet  column balance when the Balance Sheet Columns totals do not agree on the  first attempt, work backwards to the process used in preparing the worksheet.  Specifically take the following steps until you discover the error retotal the two  Balance Sheet Columns to see if you made an error. In addition, if the column  totals do not agree, check to see if you did not extend a balance sheet item or if  you made an incorrect extension from the adjusted trial balance columns retotal  the statement of retained earnings column and determine whether you extended the correct amount of retained earnings in the appropriate statement of retained  earnings and the Balance Sheet Columns, or retotal the income statement  columns and determine whether you entered the correct amount of net income  or net losses for the period in The appropriate income statement and statement  of retained earning columns.