This expanded discussion illustrates how to prepare a
10-column work sheet using the periodic inventory method. The
following discussion can be substituted for the discussion in
chapter 3 of the text, which illustrates preparation of a work sheet
under the perpetual inventory method.
To facilitate the end-of-period (monthly, quarterly,
or annually) accounting and reporting process, a work sheet is often used. A work
sheet is a columnar sheet of paper used to adjust the account
balances and prepare the financial statements. Use of a work sheet
helps the accountant prepare the financial statements on a more
timely basis. It is not necessary to delay preparation of the
financial statements until the adjusting and closing entries are
journalized and posted. The 10-column work sheet shown in
Illustration 1 below provides columns for the first trial balance,
adjustments, adjusted trial balance, income statement, and balance
The work sheet does not replace the financial
statements. Instead, it is an informal device for accumulating and
sorting information needed for the financial statements. Completing
the work sheet provides considerable assurance that all of the
details related to the end-of-period accounting and statement
preparation have been properly brought together.
Adjustments Entered on the Work Sheet
Items (a) through (f) below serve as the basis for the
adjusting entries made in the work sheet shown in Illustration
- Furniture and equipment is depreciated at the
rate of 10% per year based on original cost of $67,000.
- Estimated bad debts, one-quarter of 1% of
- Insurance expired during the year, $360.
- Interest accrued on notes receivable as of
December 31, $800.
- The Rent Expense account contains $500 rent
paid in advance, which is applicable to next year.
- Property taxes accrued December 31, $2,000.
The adjusting entries shown on the December 31, work
sheet are as follows:
|Depreciation Expense -
Furniture and Equipment
Depreciation - Furniture and Equipment
|Bad Debts Expense
| Allowance for
| Property Tax
These adjusting entries are transferred to the
Adjustments columns of the work sheet, and each may be designated by
letter. The accounts that are set up as a result of the adjusting
entries and that are not already in the trial balance are listed
below the totals of the trial balance, as illustrated on the work
sheet. The Adjustments columns are then totaled and balanced.
The illustration does not include in the Adjustments
columns the adjustments for cost of goods sold. Although these
adjustments are sometimes included in these columns on a 10-column
work sheet, this illustration assumes that these entries will be
made during the closing process.
Adjusted Trial Balance Columns
The amounts shown in the Trial Balance columns are
combined with the Adjustments columns and are extended to the
Adjusted Trial Balance columns. For example, the $2,000 shown
opposite the Allowance for Doubtful Accounts in the Trial Balance
Cr. column is added to the $1,000 in the Adjustments Cr. column. The
$3,000 total is then extended to the Adjusted Trial Balance Cr.
column. Similarly, the $900 debit opposite Unexpired Insurance is
reduced by the $360 credit in the Adjustments column. The result,
$540, is shown in the Adjusted Trial Balance Dr. column. The
Adjusted Trial Balance debit and credit columns are then totaled and
determined to be in balance.
Income Statement and Balance Sheet Columns
All the debit items in the Adjusted Trial Balance
columns are extended into the balance sheet or income statement
columns to the right. All the credit items in the Adjusted Trial
Balance columns are similarly extended.
Note that the January 1 inventory is extended to the
Income Statement Dr.column, because beginning inventory will appear
as an addition in the cost of goods sold section of the income
The December 31 inventory, $40,000, is not in either
of the trial balances but is listed as a separate item below the
accounts already shown. It is listed in the Balance Sheet Dr. column
because it is an asset at the end of the year, and in the Income
Statement Cr. column because it will be used as a deduction in the
cost of goods sold section of the income statement.
Use of a Work
Income Taxes and Net Income
The next step is to total the Income Statement
columns; the figure necessary to balance the debit and credit
columns is the pretax income or loss for the period. The income
before income taxes of $15,640 is shown in the Income Statement Dr.
column because the revenue exceeded expenses by that amount.
The federal and state income tax expense and related
tax liability are then computed. The company applies an effective
rate of 22% to arrive at $3,440. Because the Adjustments columns
have been balanced, this adjustment is entered in the Income
Statement Dr. column as Income Tax Expense and in the Balance Sheet
Cr. column as Income Tax Payable. The following adjusting journal
entry is recorded on December 31 and posted to the general ledger as
well as entered on the work sheet.
|Income Tax Expense
| Income Tax
Next the Income Statement columns are balanced with
the income taxes included. The $12,200 difference between the debit
and credit columns in this illustration represents net income. The
net income of $12,200 is entered in the Income Statement Dr. column
to achieve equality and in the Balance Sheet Cr. column as the
increase in retained earnings.
Statements from a Work Sheet The work sheet provides the
information needed for preparation of the financial statements
without reference to the ledger or other records. In addition, the
data have been sorted into appropriate columns, which facilitates
the preparation of the statements. Thus the income statement under
the periodic method, prepared from the 10-column work sheet, is
shown in Illustration 2
An Income Statement,
Periodic Inventory Method
Note that the balance sheet and statement of retained
earnings would be the same as that prepared under the perpetual
method (and as illustrated in the