Question

What tasks are aided by a work sheet? Why are the debit and credit entries in the Adjustments columns of the work sheet identified with letters? What is meant by the term “operating cycle?”

Answer 1

a) Accounting worksheets are most often used in the accounting cycle process to draft an unadjusted trial balance, adjusting journal entries, adjusted trial balance, and financial statements.The main purpose of a worksheet is that it reduces the likelihood of forgetting an adjustment and it also reveals arithmetic errors. A worksheet acts as a tool for an accountant and it is not usually intended to be used by third parties.

The major tasks aided by a worksheet are :

Preparing Unadjusted Trial Balances: Listing the current balances for all of a company’s accounts provides accountants a starting point for preparing financial statements.

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. For example,adjustments may be made for accruals, depreciation or inventory adjustments.

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.

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 journalise and post adjusting entries.

b) As each adjustment is entered in the adjustment column of the worksheet , a letter is used to identify the debit and credit parts of the same entry. In practice, this letter may be used as references to supporting computations or documentation underlying the adjusting entry.

c) The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods.

A manufacturer's operating cycle is amount of time required for the manufacturer's cash to be used to:

• pay for the raw materials needed in its products
• pay for the labor and overhead costs needed to convert the raw materials into products
• hold the finished products in inventory until they are sold
• wait for the customers' cash payments to be collected