Accounting for a Service Business Organized As a Proprietorship

Accounting for a Service Business Organized as a Proprietorship - Chapter 8 -

Worksheet for a Service Business

Julie and her classmates are going to learn how to prepare a wok sheet for Julie’s business and some of the other service businesses her classmates in the class have. To get started we will need to use the general ledger accounts because they contain the information needed to analyze the business transactions that have been made since the beginning of the year. Most businesses will analyze their business activity for a certain length of time. Such a period is called a fiscal PERIOD.

Once the business transactions have been analyzed, the owner or managers summarize how they feel the business is going, determine any changes that must be made if necessary and report their opinions in a meaningful way. The report is usually done near the end of the fiscal period,

A fiscal period can be anywhere from one month, to six months, or a year. *Take note of when the calendar year of the business you are working for starts. Most businesses start on January 1 and end on December 31, however, school calendar years begin in August and end in July.

To summarize the information from the general ledgers a worksheet is used. A WORKSHEET is –

There are four reasons to use a work sheet

Julie wants to take her business transactions to the next level, so she starts to prepare a

10 Column Worksheet which summarizes her business activity

First she will start by preparing the heading of the work Sheet. She will need to:

______

Second she will prepare the trial balance debit and credit columns on the worksheet

A TRIAL BALANCE is used to –

Information for the trial balance is taken from the general ledgers. Notice the account titles are written in the same order as on the chart of accounts..

The following seven steps will be used to prepare the trial balance columns

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00
2 / Petty Cash / 0.00
3 / Supplies / 140.00
4 / Prepaid Insurance / 150.00
5 / Hairagami / 0.00
6 / Sally’s Beauty Supply / 0.00
7 / Julie Junior, Capital / 400.00
8 / Julie Junior, Drawing / 50.00
9 / Income Summary
10 / Sales / 425.00
11 / Advertising Exp. / 0.00
12 / Insurance Expense / 0.00
13 / Miscellaneous Exp. / 0.00
14 / Rent Expense / 0.00
15 / Repair Expense / 0.00
16 / Supplies Expense / 0.00
17 / Utilities Expense / 0.00
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Third Julie will need to plan any adjustments that may need to occur or have occurred.

An ADJUSTMENT is a –

Certain assets have a portion of their value that is used up during a fiscal

period, so the used up portion can no longer be recorded as an asset. The

assets value amount is less than when bought.. (E.g. supplies and prepaid

insurance loses its value, so as you use the supplies or insurance its value

lessens. The amount that is used is taken away (deducted) from the asset

account and also recorded in the expense account. As an expense because

it was used up).

The following four questions need to be considered when analyzing an

adjustment.

Julie knows that she has some adjustments that need to be made to her beginning trial balance. One adjustment is to her hair and nail supplies.

On December 31, before any adjustments, to supplies has been made, the balance of the Supply asset account was $ 190.00, and the balance of the expense account Supplies Expense was zero.

On December 31 Julie Junior counts the Hairagami accessories (supplies) on hand and finds that she’s sold quite a few of the accessories so her Hairagami kit’s value still unused (available) is $ 15.00.

To find out the value the supplies used during the fiscals period and the supplies on

hand, keep in mind the following equation:

Supplies Account Balance on December 31 $______

- Supplies on Hand, December 31 $______

= Supplies Used During the Fiscal Period $______

Supplies Expense Supplies

Left Side Right Side Left Side Right Side

Debit Side Credit Side Debit Side Credit Side

Normal Balance Normal Balance

- + + -

$ 0 (Beginning Balance) $ (Beginning Balance)

$ (Adjustment) $ (Adjustment)

$ (New Balance)

Julie will need to follow the following three steps to record the adjustment to Supplies

1- Write the debit amount in the debit amount column on the line with the account

title Supplies Expense

2- Write the credit amount, in the credit amount column on the line with the

account title Supplies

3- Label the adjustments with a letter a, b, etc.

After Julie successfully records the adjustment to Supplies, she remembers that she has an insurance policy she pay’s each month to cover her in case of any accidents or disgruntled friends, that will have an adjustment.

On December 31, before any adjustments, to Prepaid Insurance have been made, the balance of the Prepaid Insurance asset account was $ 150.00, and the balance of the expense account Prepaid Insurance Expense was zero.

On December 31 Julie Junior looked over her insurance papers and reads that the amount of insurance left for the year (on hand) had a value still unused (available) was $ 12.50.

To find out the value of Prepaid Insurance coverage used during the fiscal period and the Insurance coverage for the remainder of the month, keep in mind the following equation::

Prepaid Insurance Balance, on December 31 $______

- Insurance Coverage Remaining Unused, December 31 $______

= Insurance Coverage Used During the Fiscal Period $______

Insurance Expense Prepaid Insurance

Left Side Right Side Left Side Right Side

Debit Side Credit Side Debit Side Credit Side

Normal Balance Normal Balance

- + + -

$ 0 (Beginning Balance) $ (Beginning Balance)

$ (Adjustment) $ (Adjustment)

$ (New Balance)

Julie will need to follow the following three steps to record the adjustment to Prepaid Insurance

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 33.00
2 / Petty Cash / 0.00
3 / Supplies / 140.00 / 125.00 (a)
4 / Prepaid Insurance / 150.00
5 / Hairagami / 0.00
6 / Sally’s Beauty Supply / 0.00
7 / Julie Junior, Capital / 400.00
8 / Julie Junior, Drawing / 50.00
9 / Income Summary
10 / Sales / 25.00
11 / Advertising Exp. / 0.00
12 / Insurance Expense / 0.00
13 / Miscellaneous Exp. / 0.00
14 / Rent Expense / 0.00
15 / Repair Expense / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a)
17 / Utilities Expense / 52.00
18 / 425.00 / 425.00

After Julie successfully records the adjustment to Prepaid Insurance she is ready to prove the adjustment columns of the worksheet. Remember that to prove the worksheet means you are going to make sure that all debit amount columns equal all credit amount columns.

To prove the worksheet she will need to do the following three steps:

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement / Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00
2 / Petty Cash / 0.00
3 / Supplies / 140.00 / 125.00 (a)
4 / Prepaid Insurance / 150.00 / 137.50 (b)
5 / Hairagami / 0.00
6 / Sally’s Beauty Supply / 0.00
7 / Julie Junior, Capital / 400.00
8 / Julie Junior, Drawing / 50.00
9 / Income Summary
10 / Sales / 425.00
11 / Advertising Exp. / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b)
13 / Miscellaneous Exp. / 0.00
14 / Rent Expense / 0.00
15 / Repair Expense / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a)
17 / Utilities Expense / 52.00
18 / 825.00 / 825.00

Julie has successfully proven the adjustment columns and the debit total amount equals the credit total amount. She realized that there are still four columns that she hasn’t written anything in so she asks her teacher what the columns are used for. The teacher explains that the last four columns to the right are used to prepare up to date account balances for the end of the fiscal period to be used in two special financial reports – the income statement and the balance sheet.

Julie isn’t sure what an income statement is and her teacher explains that the INCOME STATEMENT is -

The balance sheet if you remember reports the value of the assets, liabilities, and owner’s equity on a specific date. The teacher explains that although the balance sheet columns are at the far right of the worksheet we need to start entering (extending) the up to date amounts starting with Cash, working down to Julie Junior, Drawing.

The following three steps help us remember to extend all balance sheet account balances

After extending all of the balance sheet account balances we will extend all of the

income statement account balances

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement /
Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00
2 / Petty Cash / 0.00
3 / Supplies / 140.00 / 125.00 (a)
4 / Prepaid Insurance / 150.00 / 137.50 (b)
5 / Hairagami / 0.00
6 / Sally’s Beauty Supply / 0.00
7 / Julie Junior, Capital / 400.00
8 / Julie Junior, Drawing / 50.00
9 / Income Summary
10 / Sales / 425.00
11 / Advertising Exp. / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b)
13 / Miscellaneous Exp. / 0.00
14 / Rent Expense / 0.00
15 / Repair Expense / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a)
17 / Utilities Expense / 52.00
18 / 825.00 / 825.00 / 262.50 / 262.50

Although all of the income statement account balances have been extended, we are still not finished, it is important to calculate whether the business has net income or a net loss., so that summaries can be concluded to make final decisions regarding the finances of the business.

To calculate the NET INCOME which is –

, we will follow the following five steps

Income Statement Credit Column Total $ ______

- Income Statement Debit column Total $ ______

= Net Income $ ______

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement /
Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00 / 433.00
2 / Petty Cash / 0.00 / 0.00
3 / Supplies / 140.00 / 125.00 (a) / 15.00
4 / Prepaid Insurance / 150.00 / 137.50 (b) / 12.50
5 / Hairagami / 0.00 / 0.00
6 / Sally’s Beauty Supply / 0.00 / 0.00
7 / Julie Junior, Capital / 400.00 / 400.00
8 / Julie Junior, Drawing / 50.00 / 50.00
9 / Income Summary
10 / Sales / 425.00 / 425.00
11 / Advertising Exp. / 0.00 / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b) / 137.50
13 / Miscellaneous Exp. / 0.00 / 0.00
14 / Rent Expense / 0.00 / 0.00
15 / Repair Expense / 0.00 / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a) / 125.00
17 / Utilities Expense / 52.00 / 52.00
18 / 825.00 / 825.00 / 262.50 / 262.50 / 314.50 / 425.00 / 510.50 / 400.00
18 / Net Income
18
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Now that we know what the Net Income (profit) of the business was for the past fiscal period, we need to complete the worksheet by totaling the Income Statement and Balance Sheet columns, as well as rule, to verify the debit amounts equal the credit amounts.,

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement /
Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00 / 433.00
2 / Petty Cash / 0.00 / 0.00
3 / Supplies / 140.00 / 125.00 (a) / 15.00
4 / Prepaid Insurance / 150.00 / 137.50 (b) / 12.50
5 / Hairagami / 0.00 / 0.00
6 / Sally’s Beauty Supply / 0.00 / 0.00
7 / Julie Junior, Capital / 400.00 / 400.00
8 / Julie Junior, Drawing / 50.00 / 50.00
9 / Income Summary
10 / Sales / 425.00 / 425.00
11 / Advertising Exp. / 0.00 / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b) / 137.50
13 / Miscellaneous Exp. / 0.00 / 0.00
14 / Rent Expense / 0.00 / 0.00
15 / Repair Expense / 0.00 / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a) / 125.00
17 / Utilities Expense / 52.00 / 52.00
18 / 825.00 / 825.00 / 262.50 / 262.50 / 314.50 / 425.00 / 510.50 / 400.00
19 / Net Income / 110.50 / 110.50
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Julie sees that she has made $ 110.00. She feels good about that amount because it means that she is making more money than she is spending. She’s right on track. However, she asks the teacher how to calculate and record a net loss if someone was struggling financially.