THE WORKSHEET

 It is multi-column document which provides an efficient way to

summarize the data for financial statements preparation. The adjusted trial balance is prepared by combining horizontally, line by
line, the amount of each account in the unadjusted trial balance
  columns with the corresponding amounts in the adjustment columns.
The procedure is called cross-footing. (Left to Right) footing (Top to
Importance of the Worksheet Bottom)

 It aids in the transfer of data from the unadjusted trial balance to  Add when the type of adjustment (debit & credit) is the same as
the financial statement. the unadjusted balance
 It simplifies the adjusting and closing process.  Subtract when the type of adjustment (debit & credit) is
 It reveals errors. different from the unadjusted trial balance
 It is a summary device that ease the work of the accountant in the
preparation of the financial statements.  4. Extend the asset, liability and owner’s equity amounts from the
 Not part of ledger & journal neither is a financial statement adjusted trial balance columns to the balance sheet columns. Extend
the income and expense amounts to the income statement columns. 
Total the columns.
 

Step 5. PREPARING THE WORKSHEET Every account is either a balance sheet account or an income statement
account. Asset, liability, capital, and withdrawal accounts are extended
The steps in the preparation of a worksheet are:  to the balance sheet columns. Income and expense accounts are moved
to the income statement columns.
1.  Enter the account and balances in the unadjusted trial
balance columns and total the amounts. Each account’s adjusted balance should appear in only one statement
column. At this stage, the initial totals of the income statement and
a. The account numbers, titles and balances are lifted from the balance sheet columns are not equal.
general ledger to the unadjusted trial balance.
b. The accounts are listed in the worksheet in the order in the 5. Compute for profit or loss as the difference between total revenues
general ledger. and total expenses in the income statement. Enter profit or loss as a
c. Accounts with zero balances are also presented. balancing amount in the income statement,  and in the balance
d. Total debits and total credits must equal. sheet,  and compute the final column totals.
2.  Enter the adjusting entries in the adjustments columns and total the
amounts. Profit or loss is equal to the difference between the debit and credit
columns of the income statement.
a. All adjustments are entered first in the worksheet.

3.  Compute each account’s adjusted balance by combining the

unadjusted trial balance and the adjustment figures. Enter the adjusted  Revenues (Income Statement credit column total)    P71,700
amounts in the adjusted trial balance.
 Expenses (Income Statement debit column total)     36,700

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  Profit                                                       P35,000

The profit or loss should always be the amount by which the debit and
credit columns for income statement, and the debit and credit columns
for the balance sheet differ.  The profit figure is entered in debit column
of the income statement and credit column of the balance sheet. After Exhibit 5-2 Adjustments STEP 2
completion, total debits and total credits in the income statement and
balance sheet columns must equal.

The profit figure is extended to the credit column of the balance sheet
because profit increases owner’s equity and increases in owner’s equity
are recorded as credits. Profit must be added and withdrawals
subtracted to arrive at the ending capital balance; this is done when the
statement of changes in equity is prepared.

Exhibit 5-1 – Unadjusted Trial Balance STEP 1

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Exhibit 5-3  Adjusted Trial Balance STEP 3

Exhibit 5-4  Income Statement and Balance Sheet Columns, and

Computation of Profit STEP 4

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4
ESSENCE OF FINANCIAL STATEMENTS  Notes to Financial Statements provide narrative descriptions or
disaggregation of items presented in the statement and information
 It is the means by which the information accumulated and about them that do not qualify for recognition in the statements.
processed in financial accounting is periodically communicated to
the users. Step 6. PREPARING THE FINANCIAL STATEMENTS
 Sound economic decisions are based from the accounting
information embodied in the financial statement. Statement of Financial Performance
 It provides information about the financial position, financial An entity can present all items of income and expenses recognized in a
performance, and cash flows of an entity. period:

 In a single statement of comprehensive income, or

 In two statements:
COMPLETE SET OF FINANCIAL STATEMENTS       o A statement displaying components of profit or loss (separate
income statement), and
Per revised Philippine Accounting Standards (PAS) No. 1, a complete set o A second statement beginning with profit or loss and displaying
of financial statements comprises: components of other comprehensive income.

1. Statement of financial position as at the end of the period; The 2018 Conceptual Framework does not specify whether the
2. Statement of comprehensive income/financial performance for the statement(s) of financial performance comprise(s) a single statement or
period; two statements.
3. Statement of changes in equity for the period;
The income statement is a formal statement showing the performance of
4. Statement of cash flows for the period;
the enterprise for a given period of time. It summarizes the revenues
5. Notes, comprising a summary of significant accounting policies and
earned and expenses incurred for that period of time.
other explanatory information; and
6. Statement of financial position as at the beginning of the earlier The income statement for Weddings “R” Us is prepared directly from the
comparative period when an entity applies an accounting policy income statement columns of the worksheet in Exhibit 5-4.
retrospective restatement of items in its financial statements or
when it reclassifies items in its financial statements.  Exhibit 5-5 Income Statement

In a nutshell,  Weddings “R’ Us

Income Statement
For the Month Ended May 31, 2019
 Statement of Financial Position (or Balance Sheet) lists all the assets,  
liabilities and equity of an entity as at a specific date. Revenues
 Statement of Financial Performance (or Income Statement) presents a             Consulting Revenues                             P67,700
summary of revenues and expenses of an entity for a specific             Referral Revenues                                      4,000
period.                         Total                                                         P71,700
 Statement of Changes in Equity presents a summary of the changes  
in capital such as investments, profit or loss, and withdrawals. Expenses
 Statement of Cash Flows reports the amount cash received and             Salaries Expense                                     P15,600
disbursed during the period.             Utilities Expense                                        4,400
            Rent Expense                                              4,000
            Depreciation Expense-Service Vehicle          4,000
            Depreciation Expense-Office Equipment      1,000

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            Supplies Expense                                        3,000 Total                                                                                    
            Insurance Expense                                      1,200 P285,000
            Interest Expense                                        3,500 Less: Withdrawals                                                             14,000
             Total                                                                    36,700 Perez-Manalo, Owner’s Equity, 5/31/2019                      P271,000

Profit                                                                        P35,000  

Statement of Changes in Equity

Statement of Financial Position
The statement of changes in equity summarizes the changes that
occurred in owner’s equity. This statement is now a required statement The statement of financial position is a statement that shows the
(per revised Philippine Accounting Standards (PAS) No. 1). Changes in financial position or condition of an entity by listing the assets, liabilities
an enterprise’s equity between two balance sheet dates reflect the and owner’s equity as at a specific date.  The information needed for the
increase or decrease in its net assets during the period. balance sheet items are the net balances at the end of the period, rather
than the total for the period as in the income statement.  This statement
In the case of sole proprietorships, increases in owner’s equity arise is also called the balance sheet.
from
Users of financial statements analyze the balance sheet to evaluate an
 additional investments by the owner, and entity’s liquidity, its financial flexibility, and its ability to generate
 profit during the period. profits, and its solvency. 

While decreases in owner’s equity result from:  Liquidity refers to the availability of cash in the near future after
taking into account the financial commitments over this period.
 withdrawals of the owner, and  Financial flexibility is the ability to take effective actions to alter
 loss for the period. the amounts and timings of cash flows so that it can respond to
unexpected needs and opportunities. This includes the ability to
raise new capital or tap into unused lines of credit. 
The beginning balance and additional investments are taken from the
 Solvency refers to the availability of cash over the longer terms to
owner’s capital account in the general ledger.  The profit or loss figure
meet financial commitments as they fall due.
comes directly from the income statement while withdrawals from the
balance sheet columns in the worksheet.
In preparing the balance sheet, it may be necessary to make further
  analysis of the data. The needed data ae the balances of asset, liability,
and owner’s equity accounts, are available from the balance sheet
Exhibit 5-6 Statement of Changes in Equity columns of the worksheet.  However, the interim balance for owner’s
equity must be revised to include profit or loss and owner’s withdrawals
  for the accounting period.  The adjusted amount for ending owner’s
equity is shown in the statement of changes in equity.
Weddings “R’ Us
Statement of Changes in Equity  
For the Month Ended May 31, 2019
 
 
Perez-Manalo, Owner’s Equity, 5/1/2019                        P250,000
Add: Additional investments by Perez-Manalo   P    0
Profit                                                                   35,000           35,000

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  Liabilities are generally classified and presented based on time of
maturity such that obligations which are currently due are listed
first.

Format

The balance sheet can be presented in either of the following:

It can be observed in Exhibit 5-7 below that the total assets of P546,700
 Report format simply lists the assets, followed by the liabilities then in the balance sheet does not tally with the total debits of P565,700 in
by the owner’s equity in vertical sequence. the balance sheet columns of the worksheet in Exhibit 5-4. Likewise, the
 Account format lists the assets on the left and the liabilities and total liabilities and owner’s equity do not equal to the total credits in the
owner’s equity on the right. same exhibit. The reason for these differences is that accumulated
depreciation and withdrawals are subtracted from their related accounts
in the balance sheet but added in their respective columns in the
Either balance sheet format is acceptable.
worksheet.  The classified balance sheet of Weddings “R” Us in report
format is:
Classification

The revised PAS No. 1 does not prescribe the order or format in which
Exhibit 5-7 Statement of Financial Position
an entity presents items in the statement of financial position; what is
required is the current and non-current distinction for assets and
liabilities.  Assets can be presented current then non-current or vice
versa.  Liabilities and equity can be presented current then non-current
liabilities then equity, or vice-versa.

It is proper to present a classified balance sheet: that is, the assets and
liabilities are separated into various categories. Assets are sub-classified
as current assets and non-current assets; while liabilities as current
liabilities and non-current liabilities. At this point, it is advisable to
review the definitions of the foregoing (refer to Module 2).  Classifying a
balance sheet aids in the analysis of financial statements data.

When presentation based on liquidity provides accounting information

that is reliable and more relevant to decision-makers then an entity
shall present all assets and liabilities in order of liquidity. For example,

 Assets are classified and presented in decreasing order of

liquidity. Cash is the most liquid. Assets that are least likely to be
converted to cash are listed last.

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Statement of Cash Flows

The statement of cash flows provides information about the cash Step 7. ADJUSTMENTS ARE JOURNALIZED AND POSTED
receipts and cash payments of an entity during a period.  It is a formal
statement that classifies cash receipts (inflows) and cash payments The adjustment process is a key element of accrual basis accounting. 
(outflows) into operating, investing and financing activities.  This The worksheet helps in the identification of the accounts that need
statement shows the net increase or decrease in cash during the period adjustments.  The adjusting entries are directly entered in the
and the cash balance at the end of the period; it also helps project the worksheet. Most accountant prepare the financial statements
future net cash flows of the entity.  immediately after completing the worksheet. The adjustments are
journalized and posted as the closing entries are made. This step in the
accounting cycle brings, the ledger into agreement with the data
reported in the financial statements.
RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS
Illustration: The adjustments pertinent to Weddings “R” Us follow:
The financial statements are based on the same underlying data and are
fundamentally related. The following shows the basic interrelationships
among financial statements:

1. The income statement reports all income and expenses during the
period. The profit or loss is the final figure in this statement.
2. The statement of changes in equity considers the profit or loss figure
from the income statement as one of the determining factors that
explain the changes in owner’s equity.
3. The statement of financial position reports the ending owner’s
equity, taken directly from the statement of changes in equity.
4. The statement of cash flows reports the net increase or decrease in
cash during the period and ends with the cash balance reported in
the balance sheet. This statement is prepared on information from
the income statement and the balance sheet.

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Step 8. CLOSING ENTRIES ARE JOURNALIZED AND POSTED 2.   Close the expense accounts

Income, expense and withdrawal accounts are temporary accounts that  Expense accounts have debit balances before the closing entries are
accumulate information related to a specific accounting period. These posted. For this reason, a compound entry is needed crediting each
temporary accounts facilitate income statement preparation. At the end expense account for its balance and debiting the income summary for
of each year, the balances of these   temporary accounts are transferred the total. These data can be found in the debit side of the income
to the capital account. Thus, the balance of the owner’s capital account statement columns of the worksheet.
represents the cumulative net result of income, expense and withdrawal
transactions. This phase of the cycle is called the closing procedure.

A temporary account is said to be closed when an entry is made such

that its balance becomes zero.  Closing simply transfers the balance of
one account to another account.   In this case, the balances of the
temporary accounts are transferred to the capital account.  A summary
account, Income Summary is used to close the income and expense
accounts. The steps in closing the accounts of an entity will be
illustrated using the Weddings “R” Us case.

 
The effect of posting the closing entry is to reduce the expense account
1. Close the income accounts balances to zero and to transfer the total of the account balances to the
debit side of the income summary.
 Income accounts have credit balances before the closing entries are  
posted.  For this reason, an entry debiting each revenue account in the
amount of: 3.   Close the income summary account

After posting the closing entries involving income and expense accounts,
the balance of the income summary account will be equal to the profit or
loss for the period. A profit is indicated by a credit balance and a loss by
the debit balance. The income summary account, regardless of the
nature of its balance, must be closed to the capital account. For
Weddings “R” Us, the entry is as follows:

The dual effect of the entry is to make the balances of the income
accounts equal to zero, and to transfer the balances in total to the credit
side of the income summary account.  Note that the data for closing the
income accounts can be found in the credit side of the income statement
columns of the worksheet in Exhibit 5-4.

  The effect of posting this closing entry is to close the income summary
account balance and to transfer the balance to Perez-Manalo’s capital
account for the profit.

 
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4. Close the withdrawal account Step 10. REVERSING ENTRIES
The withdrawal account shows the amount by which capital is reduced Preparing the post-closing trial balance may not be the last step in the
during the period by withdrawals of cash or other assets of the business accounting cycle. Some entities elect to reverse certain end-of-period
by the owner for personal use. For this reason, the debit balance of the adjustments on the first day of the new period.  A reversing entry is a
withdrawal account must be closed to the capital account as follows: journal entry which is the exact opposite of a related adjusting entry
made at the end of the period. It is basically a bookkeeping technique
made to simplify the recording of regular transactions in the next
accounting period.

It should be emphasized that reversing entries are optional. Also, the act

of reversing a previously recorded adjusting entry should not lead us to
the conclusion that the entries reversed are unnecessary or inaccurate.
The effect of posting this closing entry is to close the income summary Even when an entity follows the policy of making reversing entries, not
account balance and to transfer the balance to Perez-Manalo’s capital all adjusting entries should be reversed. Generally, a reversing entry
account for the profit. should be made for any adjusting entry that increased an asset or a
  liability account. Therefore, all accruals are reversed but only deferrals
initially recorded in income statement, income or expenses accounts are
reversed.

After analyzing the rest of the adjusting entries, the adjustments that
can be reversed are as follows:  prepaid expenses (expense method),
unearned revenues (income  method), accrued expenses and accrued
expenses.

Illustration.  To show how reversing entries can be helpful, consider the

adjusting entry made in the records of Weddings “R” Us to accrue
salaries expense:

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 2. Closing Entry

When the employees are paid on the next regular payday, the entry would be:

3. Reversing Entry

Note that when the payment is made, without a prior reversing entry,
the accountant must look into the records to find out how much of the 4. Payment Entry
P7,200 applies to the current accounting period and how much was
accrued at the beginning of the period.

This step may appear easy in this simple case, but think of the problems
that may arise if the company has many employees, especially if some of
them are paid on different time schedules such as weekly or monthly. A
reversing entry is an accounting procedure that helps to solve this
difficult problem. As noted above, a reversing entry is exactly what its
name implies. It is a reversal of the adjusting entry made.  For example,
observe the following sequence of transactions and their effects on the These transactions had the following effects on salaries expense:
ledger account, salaries expense:
1. Adjusted salaries expense to accrue P1,800 in the proper accounting
1. Adjusting Entry period.
2. Closed the P15,600 in total salaries expense for May to income
summary.
3. Established a credit balance of P1,800 on June 1 in salaries expense
equal to the expense recognized through the adjusting entry on May
31. The liability account salaries payable was reduced to a zero
balance.
4. Recorded the P7,200 payment of two weeks’ salaries in the usual
manner. The reversing entry has the effect of leaving a balance of
P5,400 (7,200 – P1,800) in the salaries expense account. This
P5,400 balance represented the salaries for the nine workdays in
June.

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Making the payment entry was simplified by the reversing entry.
Reversing entries apply to all accrued expenses or revenues.

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