Question

Describe why worksheets are required for accounting transactions. What is the purpose of adjusting entries?

Answer 1

*  Accounting worksheets help businesses prepare those financial statements. Though they are not required, worksheets allow companies to see account balances and how adjusting entries would affect their ledgers before they prepare their financial statements. Businesses usually do not share their informal accounting worksheets with investors.

* planning Ahead

Accounting worksheets show managers how a company’s finished financial statements could look. Worksheets also could be used for preparing interim financial statements. Managers can use such information to make decisions, like whether to purchase equipment or hire staff based on how the company is performing.

* Checking Calculations

Accounting worksheets are typically 10-column spreadsheets with credits and debits for trial balances, adjustments, adjusted trial balances, income statements and balance sheets. Accountants can confirm if accounting entries are derived correctly by checking formulas and calculations within the spreadsheet before preparing a company’s formal financial statements.

* Preparing Unadjusted Trial Balances

Listing the current balances for all of a company’s accounts provides accountants a starting point for preparing financial statements. Accountants can review balances for accuracy before making further calculations. This gives the accountant a heads up as to whether anything looks off before they start performing the calculations.

* Entering Adjusted Trial Entries

Accountants can write out any information that they would need to adjust balances before actually doing so. They can provide a thorough assessment of a company’s financial activity by explaining each adjustment for an account. Adjustments may be made for accruals, depreciation or inventory adjustments, for example

* Entering Adjusted Balances

Accounting worksheets show how adjusted entries would affect the relevant accounts. Debits and credits should equal out, providing an accurately adjusted trial balance that would allow the adjusting entries to be put into the company’s general ledger. If the books are not balanced, accountants can review entries for mistakes or omissions, and make any necessary corrections.

* Entering Relevant Adjusted Balances to Income Statements

After an accountant has confirmed that adjusted trial balances are correct, they can transfer all revenue and expense account balances to the income statement columns on an accounting worksheet. They can then use this income statement as the basis for their formal financial statements.

* Entering Relevant Adjusted Balances to Balance Sheets

If the company has earned a profit, credits will outweigh debits and the resulting net income would be added to the balance sheet. If debits exceed credits, a net loss is posted to the company’s balance sheet. All other account balances not included in the accounting worksheet’s income statement columns also are transferred to the balance sheet columns. These include account balances like assets, liabilities and owner’s capital and drawing. Accountants can then prepare the statement of owner’s equity, prepare the company’s financial statements and journalize and post adjusting entries.

The main purpose of adjusting entries is to update the accounts to conform with the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts.

* If adjusting entries are not prepared, some income, expense, asset, and liability accounts may not reflect their true values when reported in the financial statements. For this reason, adjusting entries are necessary.

Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following:

1. Accrued Income – income earned but not yet received
2. Accrued Expense – expenses incurred but not yet paid
3. Deferred Income – income received but not yet earned
4. Prepaid Expense – expenses paid but not yet incurred