Completing the Accounting Cycle for a
A worksheet is used to assist the Accountant in the preparation of the financial statement.
It is used to organize the data for the financial statements. The worksheet provides the
overall picture of the accounting process and so helps to eliminate errors. It is not a
formal statement but it’s the Accountants working papers or rough copy.
The six column worksheet has the column, Account titles, Trial Balance, Incomes
Statement, Balance Sheet – page 168
The matching principal states that the revenue of a specific time period should be
matched against expenses incurred in that same time period. Due to this, we have to
adjust our records so that our balances for that time period are correct as well as our
Expense payments made ahead of time are called prepaid expenses and are classified as
current assets, e.g. rent, insurance, supplies. When they are used up, the asset account
will decrease and will now become an expense. The balance sheet is adjusted and the
income statement will show the expense. This is called an adjusting entry. e.g.
1. Dr. Insurance Exp. 100
Prepaid Insurance 100
2. Dr. Supplies Exp. 600
Each year most fixed assets except for land tend to lose a portion of their value. The
value that is lost should be allocated to an expense account for that year or accounting
period. The costs or expense is shown in the income statement for that year. The using up
of this fixed asset is called depreciation or amortization. The cost of the fixed asset is
allocated over the useful life of the asset as the value of the asset decreases; the value is
debited to the depreciation expense account which is in the income statement.Accumulated depreciation is deducted from the asset to give the new balance of the asset
for the next accounting period.
Depreciation is the method used in accounting to spread the cost of the fixed asset over
the useful life of the asset. This cost is converted into expense over the time that the asset
is used in the business.
The asset account has the original cost of the asset. The accumulated depreciation
account holds the total amount of depreciation recorded over the years. It records any
deduction made from the related asset. It therefore reduces the value of the asset on the
balance sheet each accounting period and so is called a contra account or valuation
Valuation or Contra Account:
Accumulated depreciation is used to arrive at the present value of the asset and so it’s
called a Valuation account. It is called a contra asset account because it carries a credit
balance rather than the normal debit balance of an asset. It subtracts from the cost of an
asset so as to get to the correct net book value e.g.
Less: Acc. Depre. 4000 16,000
The 16,000 does not mean that this is the new value of the asset or that it can be sold for
this amount. It just means that 16,000 remains to be depreciated, the $16,000 is the book
value at the end of the accounting period
Methods of Calculating Depreciation
1. Straight line method – the same amount is deducted each fiscal period for
depreciation until the life of the asset has expired.
Ex- Cost= $10 000; e