Chapter 8

The Work Sheet and

Financial Statements

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The Six-Column
Work Sheet

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 Purpose of the Work Sheet
A work sheet is an informal business
paper used to organize and plan the
information for the financial statements.
This is a great application for a
computerized spreadsheet program.
In Chapter 9 we will expand the work sheet
to eight columns, allowing for the
adjustments required by certain GAAPs.

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 Control Accounts for Accounts
Receivable and Accounts Payable

In the future, when we prepare a trial

balance, or a work sheet, we will not
display the debtors’ names or creditors’
names associated with Accounts
Receivable and Accounts Payable.
Alternatively, we will use control accounts.
accounts
The Accounts Receivable control account
represents the sum of the balances of all
the individual Accounts Receivable
accounts.
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 Control Accounts for Accounts
Receivable and Accounts Payable

The Accounts Payable control account

represents the sum of the balances of all
the individual Accounts Payable accounts.
Having two control accounts, instead of
dozens or hundreds of individual debtors’
and creditors’ accounts, streamlines the
work sheet.

5
 Steps in Preparing a
Work Sheet

Step 1
Write in the title of the work sheet and all of
the headings:
Accounts
Trial Balance
Income Statement
Balance Sheet 6
Steps in Preparing a
Work Sheet

Step 2
Enter all
accounts,
with their
balances, in
the first two
columns.

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 Steps in Preparing a
Work Sheet

Assets,
Liabilities,
Capital and
Drawings
in the
Balance Sheet
columns.
Revenue and
Expenses in
the Income
Statement
columns.
Step 3
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Extend each of the amounts from the trial balance.
 Steps in Preparing a
Work Sheet

Step 4: Balance the work sheet … (a) take totals

9
 Steps in Preparing a
Work Sheet
If they are not
equal, the work
Make
sheetsure the
does
difference for
not balance.
balance
the Income
Errors must be
Statement
found before
columns
proceeding equals
to
the preparation
the difference
forofthe Balance
financial
Sheet columns.
statements.

Step 4: (b) calc. difference 10

 Steps in Preparing a
Work Sheet

Step 4: (c) Record the balancing figure

(difference) in the appropriate Income Statement
and Balance Sheet columns.
Because revenues (Income Statement credits)
are greater than expenses (debits) the difference
is Net Income and it is recorded in the debit
column.
The balancing figure appears on the credit side
of the Balance Sheet section, because Net
Income represents an increase in capital.
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Steps in Preparing a
Work Sheet

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Steps in Preparing a
Work Sheet

Income
Balance Statement
Sheet Columns
Columns
Net
Revenue
Income (credits)
(the balancing
greater
figure)
than expenses
is on the credit
(debits).
side
as itResult
is an increase
… Net Income.
to capital
Income

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Steps in Preparing a
Work Sheet

Income Statement Columns

Balance Sheet Columns
If the work sheet showed a
If the work sheet showed a
Net Loss,
Loss the expenses (debits)
Net Loss, the balancing
would be greater than the
figure would be on the
revenues (credits).
debit side as it is an
The Net Loss (balancing figure)
decrease to capital.
would be in the credit column.

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The Work Sheet and the
Financial Statements

Review the
format

15
Steps in Preparing a
Work Sheet Review the
format

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 Class Work
p. 260, Exercise 1
For each account listed below, indicate whether it
would be extended to the Income Statement or
Balance Sheet, debit or credit columns.
Accounts Payable Bank Loan
Miscellaneous Expense Accounts Receivable
Revenue Automobile
Advertising Expense Bank
Wages Expense G. Rojek, Drawings
Mortgage Payable Sales
Utilities Expense Bank Charges Expense
Rent Expense
Equipment Supplies
G. Rojek, Capital Trucks
Delivery Expense GST Payable
GST Recoverable
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Class Work
p. 261, Exercise 2
Prepare a work sheet for N. Foreman and
Company for the month ended April 30, 2007.

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How Accountants
use
Balance Sheets

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Balance Sheet
Account Form vs. Report Form
Account Form Report Form
Heading Heading
Assets Liabilities Assets
And
Owner’s
Equity
Total Total Total

Liabilities
And
Owner’s
Equity
Total
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Classified
Balance
Sheet

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 Classified Balance Sheet
Provides useful totals for comparison.
For example, current assets and current
liabilities.
liabilities
 These match up well because the time
frame for both is one year.
The difference between current assets and
current liabilities is known as working capital.
capital
Working capital is an indication of a
company’s ability to meet current obligations.

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 Classified Balance Sheet
Another example, fixed assets and long-
term liabilities.
liabilities
 These match up well because the time
frame for both is greater than one year.
 A comparison of these totals provides
insight into the financing of fixed assets.
 This also provides an indication of what
portion / percentage of fixed assets
continue to be financed through long-
term debt.
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Accountability

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 Accountability
Accounting data is used in many ways, the
most important of which is to provide
information for the financial statements.
Accountability is the company officers’
obligation to show how well they have
been managing the company.
The financial statements provide evidence
of accountability.
accountability

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 Users of Financial
Statements
The five groups who use financial statements
most commonly are:
1. Managers – managers probably us the
financial statements more than any other
group. They use past performance in order to
improve results and efficiency, and to
eliminate weaknesses.
2. Owners – many owners are not directly
involved in managing their companies.
Financial statements help them evaluate the
performance of the management team.
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 Users of Financial
Statements
3. Creditors – particularly bankers, ask for financial
statements to assess the company’s progress
and its ability to meet its loan obligations.
4. Shareholders – the law requires that
corporations provide their shareholders with
financial statements. The shareholders are the
real owners of an incorporated company and can
use this information to assess progress.
5. Investors and brokers – shares of public
corporations are traded through the stock
exchange. Employees of stock brokerage firms
and potential investors stay informed by reading
corporate financial reports. 27
 Quality of Financial
Statements
Users of financial statements expect
accurate, complete, up-to-date, and
reliable information.
Generally Accepted Accounting
Principles (GAAPs) play an important
role in the accountability process …
they provide the users of financial
statements with confidence in the
numbers.
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 Quality of Financial
Statements
An audit is a critical review by a
public accountant of the internal
controls and accounting records of a
company.
The audit makes it possible to
evaluate the fairness of the
company’s financial statements.

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