Steps in Preparing the Worksheet:

In smaller companies the adjustments are usually entered directly in the journal and posted to the ledger, and the financial statements are prepared directly from the adjusted trial balance. For larger companies, however, which may require many adjusting entries, a worksheet is essential. The work sheet is identified by a heading that consists of the name of the company, the title "Work Sheet", and the period of time covered (as on the income statement). There are five steps in the preparation of a work sheet, as shown below: (i) Entering the Account Balances in the Trial Balance Column: The titles and balances of the accounts are copied directly from the ledger into the trial balance columns. When a work sheet is prepared, a separate trial balance in not required. However, if it has been prepared, the balances may be posted from it in the work sheet. (ii) Entering the Adjustments in the Adjustment Columns: Adjustments have been already explained. The same adjustments are entered in the adjustment columns of the work sheet as shown in earlier example. As each adjustment is entered, a letter is used to identify the debit and credit parts of the same entry. In practice, this letter may be used to reference supporting computations or documentation underlying the adjusting entry. When all the adjustments have been entered in relevant debit and credit columns, the pair of adjustments columns must be added. This step proves that the debits and credits of the adjustments are equal and generally reduces error in the preparation of the work sheet. (iii) Entering the Account Balances as Adjusted in the Adjusted Trial Balance Columns: The adjusted trial balance prepared by combining the amount of each account in the original trial balance columns with the corresponding amounts in the adjustment's columns and entering the combined amounts on a line by line basis in the adjusted trial balance columns. Adjusted trial balance columns are then footed, that is totaled, to check the arithmetical accuracy of tile cross footing just like that of a normal trial balance. Some accountants prefer to eliminate the adjusted trial balance columns and to extend the adjusted account balances directly to the appropriate statement column for 7 to 12. Such an alternative form of work sheet is especially popular if there are only a few items involved, it would then be called a "Jen Column Work Sheet". (iv) Extending the Account Balance from the Adjusted Trial Balance Column to the Profit & Loss Columns or the Balance Sheet Columns, (i.e. from column 5 and 6 to column 7 to 12): Every account in the adjusted trial balance is either a balance sheet account or an income statement account. The accounts are sorted, and each account is extended to its proper place as a debit or credit either in the balance sheet columns or in the trading and profit & loss columns. The result of extending the accounts is shown in example-(A). Revenue (profits) and expenses accounts are moved to the profit & loss columns. Assets and liabilities as welt as capital and drawings accounts are then extended to the balance sheet columns. To avoid over looking an account, extend the accounts line by line, beginning with the first line (which is cash) and not omitting any. (v) Totaling the Income Statement Columns and the Balance Sheet Columns. Enter the Net Income or Net Loss in Both Pairs of Columns as a Balancing Figure, and Re-compute Column Totals: This last step as shown in example-(A) is necessary to compute net income or net loss and to prove the arithmetical accuracy of the work sheet. Net income or net loss is equal to the difference between the debit and credit columns of the income statement. In the illustrative example-(A), the revenue has exceeded the expenses. Consequently, the company has a net profit of $45,030. This amount of $45,030 is entered in the debit side of the income statement (PLS A/C) columns to balance the columns and it is entered on the credit side of the balance sheet columns. This is done because excess revenue (net income) increases capital and increases in owner's capital are recorded by credits. If a net loss had occurred, the opposite rule world apply. Example and its Solution for the Preparation of Worksheet: Example-(A): X & Y Company The trial balance of X & Y Company, as on 30th June is given below: $ $ Cash in hand 680 - Sundry debtors 46000 - Discount 300 - Drawings 11000 - Opening stock 30000 - Purchases 75000 - Sales returns 2700 - Miscellaneous trade expenses 755 - Labor wages 3500 - Salaries 5600 - Traveling expenses 850 - Advertising 500 - Rent and insurance 2800 - Interest and bank charges 215 - Bad debts 400 - Buildings 6000 - Plant and machinery 10000 - Furniture 5000 - Capital - 35000 Purchases returns - 1300 Sales (gross) - 125000 Creditors - 30000 Bank overdraft - 10000 Total $201300 $201300 Following additional information is also available: (i) Closing stock on 30th June is $45,000 (ii) Charge depreciation at 10% on (a) Plant and machinery (b) Furniture. (iii) Make provision for bad and doubtful debts at 5% of sundry debtors. (iv) $150 on account of insurance are prepaid. Required: Prepare: (a) Trading and P & L Account. (b) Balance sheet as on 30th June. Solution: X & Y Company Trading, Profit & Loss Account For the year ended 30th June Opening stock Purchases                     75000Less returns                  1300 Net Purchase Labor charges Gross profit (carried down) 30000 73700 350060100   Sales Less returns Net sales Closing stock 125000 2700 122300 45000 Total 167300 Total 167300 Expenses: Discount Salaries Advertising Rent insurance Interest & bank charges Bad debts Depreciation (machinery) Depreciation (furniture) Provision for bad debts Miscellaneous trade expenses Traveling expenses Net profit carried to balance Sheet 300 5600 500 2650 215 400 1000 500 2300 755 850 45030 Gross profit B/d 60100 60100 60100 X & Y Company Balance Sheet as on 30th June Capital and Liabilities Assets Capital                                35000 Add: Profit                           45030                                           80030 Less: Drawings                   11000 CreditorsBank Overdraft 69030 3000010000 Cash in hand Prepaid insurance Sundary Debtors                    46000 Less: Provision                       2300 Stocks Plant & Machinery                  10000 Less: Depreciation                  1000 Furniture                                 5000 Less: Depreciation                   500 Building 680 150 43700 45000 9000 4500 6000 109030 109030 Example-(B): This solved problem illustrates the use of a work sheet where the columns of trading and profit & loss account has been substituted by Income Statement column . The trial balance for the B & M Delivery Company as on December 31, was as follows: B & M Delivery Company Debit $ Credit $ Cash 10650 Accounts receivable 6400 Supplies on hand 1400 Prepaid insurance 2400 Prepaid rent 40000 Accounts payable 3130 Service Fee received in advance 4500 Capital stock 50000 Dividends (drawings) 3000 Service revenue 10700 Advertising expenses 50 Gas & oil expenses 680 Salaries expenses 3600 Utilities expenses 150 Total 68330 68330 Additional Data: (a) Insurance expense for the month of December $200 (b) Rent expense for the month of December $400 (c) Supplies used during the month $500 (d) Depreciation for December $50 (e) One-third of the fees-received in advance account has been earned by 31st December. (f) Interest earned but not yet received $600 (g) Unbilled service $1000 (h) Accrued salaries $180 B & M Delivery Company Worksheet as on 31st December Account Title Trail Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 10650 10650 10650 Account receivable 6400 6400 6400 Supplies on hand 1400 500 900 900 Prepaid insurance 2400 200 2200 2200 Prepaid rent 40000 400 39600 39600 Account payable 3130 3130 3130 Service fee received in advance 4500 1500 3000 3000 Capital stock 50000 50000 50000 Dividends (drawings) 3000 3000 3000 Service revenue 10700 2500 13200 13200 Advertising expenses 50 50 50 Gas and oil expenses 680 680 680 Salaries; expenses 3600 180 3780 3780 Utilities expenses 150 150 150 Insurance expense 200 200 200 Rent expense 400 400 400 Supplies expense 500 500 500 Depreciation 750 750 750 Accumulated Depreciation 750 750 750 Interest receivable 600 600 600 Interest revenue 600 600 600 Salaries payable 180 180 180 Service revenue receivable 1000 1000 1000 Net profit 7290 7290 Total 68330 68330 5130 5130 70860 70860 13800 13800 64350 64350