Basic Accounting Lesson 7: Worksheet and Financial Statements

BASIC ACCOUNTING
LESSON 7
Worksheet
and
Financial Statements
LEARNING OBJECTIVES
 Describe the flow of accounting information from the
unadjusted trial balance into the adjusted trial balance
and finally, into the income statement and balance
sheet columns.
 Prepares accurately and in good form a ten-column
worksheet.
 Understand and appreciate the usefulness of financial
statements.
 Develop skills in the preparation of financial
statements.
 Explain how the financial statements are interrelated.
THE WORKSHEET
 This multi-column document provides an efficient way
to summarize the data for financial statement.
 The accountant generally prepares a worksheet when
it is time to adjust the accounts and prepare financial
statements.
 The worksheet simplifies the adjusting and closing
process. It can also reveal errors.
 It is a summary device used by accountants for his
convenience.
PREPARING THE WORKSHEET
 Steps in preparing the worksheet:
1. Enter the account balances in the unadjusted trial
balance columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns
and total the amounts.
3. Compute each account’s adjusted balance by combining
the unadjusted trial balance and the adjustment figures.
Enter the adjusted amounts in the adjusted trial balance
columns.
PREPARING THE WORKSHEET
 Steps in preparing the worksheet:
4. Extend the Asset, Liability and Owner’s Equity amounts
from the adjusted trial balance columns to the Balance
Sheet columns. Extend the income statement amounts
(Revenues and Expenses) to the Income Statement
columns. Total the Statements columns.
5. Compute profit or loss as the difference between total
revenues and total expenses in the income statement.
Enter the profit or loss as a balancing amount in the
Income Statement and in the Balance Sheet and compute
the final column totals.
CLASSIFICATION OF ACCOUNTS
 Accounts are also classified as to:
I. Permanent – also known as Real Accounts – these are
the accounts whose balances are carried over from one
accounting period to another. These accounts are seen on
the Company’s balance Sheet and represent the actual
worth of the company at a specific point of time.
• The accounts that fall into permanent accounts are:
• Assets
• Liabilities
• Owner;s Equity – except Withdrawal accounts
CLASSIFICATION OF ACCOUNTS
II. Temporary – also known as Nominal Accounts – These
are the accounts whose balances are not carried forward
from one accounting period to another. These accounts
are closed or transferred to permanent accounts at the
end of an accounting period.
 The accounts that fall into the temporary account classification
are:
1. Revenue
2. Expenses
3. Drawings or Withdrawal
EXERCISE 1- WORKSHEET PREPARATION
 The May 31, 2020 trial balance for Abella Surveyor is presented as
follows: Abella Surveyors
Trial Balance
May 31, 2020
Debit Credit
Cash 210,000
Accounts Receivable 930,000
Prepaid Advertising 360,000
Engineering Supplies 270,000
Survey Equipment 1,890,000
Accum. Depreciation - Survey Equipment 640,000
Accounts Payable 190,000
Unearned Survey Revenues 120,000
Notes Payable 500,000
Abella, Capital 1,120,000
Abella, Withdrawals 700,000
Survey Revenues 6,510,000
Salaries Expense 3,270,000
Rent Expense 960,000
Insurance Expense 250,000
Utilities Expense 160,000
Miscellaneous Expense 80,000
Total 9,080,000 9,080,000
 The following information pertaining to the year-end adjustments
were available:
a) The ₱360,000 prepaid advertising represents expenditure made
on Nov. 1, 2019 for monthly advertising over the next 18 mos.
b) A count of the ending supplies at May 31, 2020 amounted to
₱90,000
c) Depreciation on the surveying equipment amounted to ₱160,000
d) One-third of the unearned survey revenues has been earned at
year-end.
e) At year-end, salaries in the amount of ₱140,000 have accrued.
f) Interest of ₱60,000 on the notes payable has accrued at year
end.
Required: Prepare the adjustments on the worksheet and complete
the worksheet.
ESSENCE OF FINANCIAL STATEMENTS
 The financial statements are the means by which
information accumulated and processed in
financial accounting is periodically
communicated to the users.
COMPLETE SET OF FINANCIAL STATEMENTS
 Per revised PAS No. 1, a complete set of financial
statements comprises:
1. A statement of financial position at the end of the
period;
2. A statement of financial performance for the period;
3. A statement of changes in equity for the period;
4. A Statement of Cash Flows for the period
5. Notes, comprising a summary of significant
accounting policies and other explanatory
information;
6. A statement of financial position at the beginning of
the earliest comparative period when an entity
applies an accounting policy retrospectively or makes
retrospective restatement of items in its financial
statements or when it reclassifies items in its
financial statements.
STATEMENT OF FINANCIAL POSITION
 The statement of financial position lists all
the assets, liabilities and equity of an entity
as at a specific date.
 The information needed for this statement

are the net balances at the end of the period.
 This statement is also called Balance Sheet

Format
 The balance sheet can be presented in either
of the following format:
1. Report format
 Simple lists the assets, followed by the
liabilities then by the owner’s equity in
vertical sequence.
2. Account format
 Lists the assets on the left and the liabilities
and owner’s equity on the right.
Report
Format
Account Format
INCOME STATEMENT
 The Income Statement is a statement
showing the performance of the enterprise for
a given period of time.
 Itsummarizes the revenues earned and

expenses incurred for that period of time.
STATEMENT OF CHANGES IN EQUITY
 The
statement of changes in equity
summarizes the changes that occurred in
owner’s equity.
 Changes in the enterprise’s equity between

two balance sheet dates reflect the increase
or decrease in its net assets during the
period.
STATEMENT OF CASH FLOWS
 The statement of cash flows provides
information about the cash receipts and cash
payments of an entity during a period.
 It is a formal statement that classifies cash
receipts (inflows) and cash payments
(outflows) into:
 Operating
 Investing; and
 Financing activities
 Classification of
Cash Flow
Activities
 Operating Activities
 Are the cash flows
derived primarily
from the principal
revenue producing
activities of an
entity.
Examples of Cash flows from operating
activities:
a) Cash receipt from sale of goods and rendering
services.
b) Cash receipt from royalties, rental, fees,
commissions and other revenue
c) Cash payments to suppliers for goods and services.
d) Cash payments for selling, administrative and
other expenses.
e) Cash receipts and cash payments of an insurance
enterprise for premium and claims, annuities and
other policy benefits.
f) Cash payments or refunds of income taxes unless
they can be specifically identified with financing
and investing activities.
g) Cash receipt and payments for securities held for
dealing or trading purposes.
 Investing Activities
 Investing activities are the cash flows derived
from the acquisition and disposal of long-term
assets and other investments not included in
cash equivalent.
 Investing activities include cash flows from
transactions involving non-operating assets.
 Examples of Cash Flows from investing
activities
a) Cash payments to acquire property, plant
and equipment, intangibles and other long-
term assets.
b) Cash receipts from sales of property, plant
and equipment, intangibles and other long-
term assets.
c) Cash payments to acquire equity or debt
instruments of other entities and interests
in joint venture. (current and long-term
investments)
d) Cash advances and loans to other parties
(other than advances and loans made by
e) Cash receipts from sales of equity or debt instruments of
other entities and interest in joint ventures.
f) Cash receipts from repayment of advances and loan made
to other parties.
g) Cash payments for future contract, forward contract,
option contract and swap contract.
h) Cash receipts from future contract, forward contract,
option contract and swap contact.
 Financing Activities
 Financing activities are
the cash flows derived
from the equity capital
and borrowings of the
entity.
 Financing activities are
the cash flows that result
from transactions:
 Between the entity and
the owners – equity

financing
 Between the entity and
the creditor – debt

financing
 Examples of Cash flows from financing
activities:
a) Cash receipts from issuing shares or other
equity instruments.
b) Cash payments to owners to acquire or
redeem the enterprise’s shares.
c) Cash receipts from issues loans, notes,
bonds, mortgages and other short or long
term borrowings.
d) Cash payments for amounts borrowed
e) Cash payments by a lessee for the reduction
of the outstanding principal lease liability.
BASIC GUIDELINES
 Operating activities include the cash
effects of transactions that enter into the
determination of net income.
 Investing activities include the cash
effects of transactions involving non-
operating assets.
 Financing activities include the cash
effects of transactions involving nontrade
liabilities and equity.
REPORTING CASH FLOWS FROM
OPERATING ACTIVITIES
 An entity shall report cash flows from operating
activities using either:
1. Direct Method
2. Indirect Method
DIRECT METHOD
 The direct method shows in detail or itemizes the
major classes of gross cash receipts and gross cash
payments.
 The cash receipts are listed one by one, the cash
payments are listed one by one, and the difference
represents the net cash flow from operating
activities. i.e.:
 Cash received from customers
 Cash payments to Creditors
 Payment for operating expenses
INDIRECT METHOD
 The indirect method means that the net income
or loss is adjusted for the effects of transactions
of a noncash nature, any deferrals or accruals of
past or future operating cash receipts and
payments and items of income or expense
associated with investing and financing
activities.
 The indirect method of presenting cash flow
begins with the accrual basis net income and
applies a series of adjustments to convert the
income to a cash basis.
FORMULA
The following is the indirect method formula to
calculate net cash flow from operating activities:
Net income
+ Non-Cash Expenses:
(Depreciation, Depletion & Amortization Expense)
+ Non-Operating Losses:
(Loss on Sale of Non-Current Assets)
− Non-Operating Gains:
(Gain on Sale of Non-Current Assets)
+ Decrease in Current Assets:
(Accounts Receivable, Prepaid expenses, Inventory etc.)
− Increase in Current Assets
+ Increase in Current Liabilities:
(Accounts Payable, Accrued Liabilities, Income Tax Payable etc.)
− Decrease in Current Liabilities
= Net Cash Flow from Operating Activities

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BASIC ACCOUNTING

 The information needed for this statement

 This statement is also called Balance Sheet

 Itsummarizes the revenues earned and

 Changes in the enterprise’s equity between

the owners – equity

the creditor – debt

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