Accounting: The Language of Business - Vol. 2 (Intermediate: Part 40)

Derivative trading with mark-to-market accounting degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

Charlie Munger

Review of the Accounting Cycle (Part Q)

by

Charles Lamson

Using a Worksheet 

A worksheet is a multiple column form that may be used to simplify the adjustment process and the preparation of the financial statements. It includes columns for the account titles, the unadjusted trial balance, adjusted journal entries (AJEs), adjusted trial balance, income statement, and balance sheet. Exhibit 4B.1 presents the standard form of the worksheet.

EXHIBIT 4B.1 Format of the Worksheet

The unadjusted trial balance and the adjusted trial balance columns reflect the account balances in the ledger at these two points in the accounting cycle. The adjustments column reflects the adjusting journal entries. After the worksheet has been completed, the income statement and balance sheet columns allow for the preparation of financial statements: The income statement is prepared from the income statement columns, and the statement of stockholders' equity and balance sheets are prepared from the balance sheet columns.

The steps in preparing a worksheet are as follows:

1. Prepare an unadjusted trial balance (see part 28). prepare the unadjusted trial balance directly on the worksheet---there is no need for a separate document.

2. Enter the adjusting journal entries (part 29) in the adjustments columns. Note the AJE must also be recorded in the journal. 

3. Compute the adjusted balances (part 32) in the adjusted trial balance columns.

4. Place adjusted trial balance amounts in appropriate income statement and balance sheet columns.

5. Total the statement columns, compute the net income (or loss), and complete the worksheet.

A sample worksheet outlining the five steps is presented in Exhibit 4B.2 

EXHIBIT 4B.2 Sample Worksheet

In Part 41, we will examine Example 4B.1, which illustrates worksheet preparation. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 161-162*

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