Question

a) How is profit or loss reflected on the worksheet?

b) Give two examples of when adjusting entries are needed, show the proper entry and explain why they are required.

c) How do you determine where the balance sheet begins and ends on the worksheet?  

There is no specific worksheet, It was just asking about the worksheet in general.

Answer 1

a) How is profit or loss reflected on the worksheet?

The two columns to the right of the 'adjusted trial balance' in the worksheet, one for debit and one for credit, are meant for the Income summary.

To the debit column, all the expenses from the adjusted trial balance are transferred and to the credit column all revenues from the adjusted trial balance are transferred.

The debit and credit columns of the 'Income Summary' are totaled. Obviously, they would not be equal. If the credit side is higher, the difference is a net profit, which is shown after the total of debits and and added to the total of debits. Now the total of debit column and the total of credit column will be equal.

If it is loss, the total of debit column will be higher and the difference would be added to the total of the credit column.

b) Give two examples of when adjusting entries are needed, show the proper entry and explain why they are required.

1) Prepaid insurance:

Insurance is paid in advance and when paid is debited to Prepaid insurance as the benefit of insurance is for the future period. At the end of the reporting period, the insurance premium for the period elapsed, is to be expensed.

For instance, if premium of $1000 for 1 year is paid on 1st July and the accounts are made up as at 31st December, then half of the premium paid is to be expensed through the following adjusting entry:

Insurance expense Debit $500

Prepaid insurance Credit $500

If this entry is not made, the insurance expense would not be recorded resulting in overstatement of income/Equity. Further, the current asset of 'Prepaid Insurance' and current assets/total assets would be overstated.

1) Unearned revenue:

At times revenue would be received in advance for which good/services are to be provided in future.

When such amount is received, it should be credited to a current liability called 'Unearned Revenue'. As and when the goods are supplied or service is rendered, the amount related to such goods supplied or service rendered should be transferred to Revenue by an adjusting entry:

Debit Unearned revenue

Credit Revenue

If the entry is not made, Revenue, Income and Equity would be understated and current liability/total liability would be overstated

c) How do you determine where the balance sheet begins and ends on the worksheet?  

The balance sheet is the last two columns on the right side. After all income statement amounts are transferred to the Income summary, the amounts remaining would be those of assets and liabilities. These are to be entered in the debit and credit columns of the balance sheet portion of the worksheet.

To the retained earnings the profit or loss is added/deducted before entering in the balance sheet portion of the worksheet. The dividend paid is also deducted from the retained earnings. These two transfers would be the final two adjustments to be carried out in the worksheet.