Question

There are various systems of accounting that can be applied by any entity while
maintaining accounting system. Fundamentally, there are two systems of accounting
viz. cash basis and accrual basis which are directly associated with the type and nature
of entity. They have their own pros and cons; however, accrual basis of accounting
system is more suitable for business entities from income recognition and
measurement point of view. Work sheet is a useful device adopted by accountants to
determine financial status and result of such business entities based on accrual basis.
In this regard, justify that work sheet is merely a tool rather than substitution of
financial statements with reference to accounting process.

Answer 1

The financial statement is prepared on fundamental accounting concept of accrual basis. In accrual basis of accounting expenses and income are recognised when incurred and performed respectively. Hence at the end of the accounting period adjusting entries needs to be taken for accrual of expenses and income. For example: Salaries not paid at the end of the period should be accrued. Similarly revenue should be recognised for service performed if balance is there in unearned revenue.

Worksheet is one of the most powerful tools used by accountants for preparation of financial statements. The inbuilt functions of worksheet and its capability help in faster preparation of financial statements. However worksheet is one of the tools that is available for preparation of financial statements and it is not a substitution of financial statements. Even if worksheet is not available financial statements should be prepared at end of the accounting period. Worksheet and ERP systems facilitate the preparation of financial statements as a part of accounting process at the end of the accounting period and not a substitution for financial statements.