After a work sheet has been completed; the statement columns contain all the data that are required for the preparation of financial statements. The income statement is prepared from the income statement columns, and the balance sheet and owner’s equity statement are prepared from the balance sheet columns. The financial statements prepared from the work sheet for Pioneer Advertising Agency are shown in Illustration 4-4. At this point, adjusting entries have not been journalist and posted. Therefore, the ledger does not support all financial statement amounts.
The amount shown for owner’s capital on the work sheet is the account balance before considering drawings and net income (or loss). When there have been no additional investments of capital by the owner during the period, this amount is the balance at the beginning of the period. Read more… …
What you have learned in this chapter is the accrual basis of accounting. Accrual basis accounting means that transactions that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. For example, using the accrual basis to determine net income means recognizing revenues when earned rather than when the cash is received, and recognizing expenses when incurred rather than when paid. Information presented on an accrual basis reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are generally recognized when services are performed so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful for decision-making purposes.
Under cash basis accounting, revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid. Read more… …
After all adjusting entries have been journalistic
and posted, another trial balance is prepared from the ledger accounts. This trial balance is called an adjusted trial balance. It shows the balances of all accounts, including those that have been adjusted, at the end of the accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. The procedures for preparing an adjusted trial balance are identical to those described in Chapter 2 for preparing a trial balance.
An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments have been made. The proof provided by an adjusted trial balance, like the proof contained in a trial balance, extends only to the mathematical accuracy of the ledger. Because the accounts contain all data that are needed for financial statements, the adjusted trial balance provides the primary basis for the preparation of financial statements. Read more… …
