This article explains the structure of the document, adjustments and corresponding workpapers and final results. It is an intermediate level lesson and if the reader is not aware or well versed in the basic understanding of the trial balance; then please read the following in order as prerequisites to this lesson:
- Bookkeeping – Chart of Accounts (Lesson 11)
- Bookkeeping – Trial Balance (Lesson 16)
- Bookkeeping – Chart of Accounts and Numbering System (Lesson 18)
- Trial Balance – Introduction
Structure of the Document
The goal of the document is to take existing information, make adjustments and generate results in accordance with GAAP. The final balances are used for reporting purposes. In effect, the working trial balance has three sections as follows:
Section 1 – the trial balance as it exists in the books of record
Section 2 – adjustments necessary to take existing information and transform into final balances
Section 3 – final balances
The document consists of three sets of column groups per the above. One column group is the beginning balance of each account by row. The second column group consists of adjustments along with notes. The final section is the ending balance for each account.
The following explains in detail each section of the working trail balance.
Section One – Initial Balances
This section is merely the trial balance as an output from the accounting software. Its layout looks like this:
. Beginning Balances .
Account # Account Name Account Type Account Group DR CR
1101 Petty Cash Asset Current 79.46
1102 Operations Checking Asset Current 23,761.17
This list continues with all the accounts and their corresponding balances. As verification, always ensure that all debits in summation equal credits in summation.
Some technology advice is appropriate at this point. Most small business accounting, software do not have a working trial balance sub-program. A good example is QuickBooks. Simply export the trial balance to a new Excel workbook. Name the workbook ‘Work Papers TB Ending Month-Day-Year’ which means the trial balance for the period ending a particular month, day and year. The very first tab has the ‘Working Trial Balance – Date’ as its title. Sections two and three will get added and formatted as you progress.
Separate each of the major sections with a single compressed column.
Section Two – Adjustments and Workpapers
The heart of the working trial balance is located in section two. All information is processed here. The goal is to transform existing financial information into GAAP compliant balances. Existing information may be in the form of management based reporting, job costing format or in the form of traditional interim financial status.
Each account is reconciled to a source document or via a procedure to vouch (confirm) its value. As an example:
Long-Term Debt – These loans are vouched to a lender’s statement for principle balance. In addition, an amortization schedule is included calculating the current portion of long-term debt due over the course of twelve months. A tab is created in the workbook for this respective loan. On that spreadsheet exists the following information:
- Loan Number – link to actual PDF file of loan note, terms and collateral agreement
- Loan’s Principle Balance – link to PDF of lender’s year-end or month-end statement Loan’s Current Portion – copy of section of the amortization schedule to calculate the current portion of principle due over the next twelve months
- Loan’s Interest Paid – link to PDF of Form 1099-I from the lender
Here are examples of source documents for the respective accounts:
- Cash – bank statements
- Inventory – inventory summation document for physical inspection at year-end
- Accounts Receivable – trace of payments and deposits for the respective accounts for the following three months after the close of the accounting cycle
- Prepaid Expenses – statements from vendors including govermental authorities
- Fixed Assets – physical inventory
- Other – legal documents of existence and ownership
- Accounts Payable – vendor statements
- Credit Card Accounts – statements
- Accrued Payroll – employee breakout of benefits earned, timesheets, bonuses etc.
- Accrued Expense – spreadsheet of various items and source documents and vendor terms
- Accrued Taxes – notices from governmental authorities
- Line of Credit – statement from the bank
- Loans – statements from lenders
- Equity – common stock includes list of shareholders and corresponding ownership
- Retained Earnings – reconciliation schedule for the previous five years
- Distributions and Dividends – schedule of payments made
There are several columns in section two and include the following along with a short description:
ID – A unique identifier dated the last day of the period of adjustment. For example:
. EOY-ZZ Identifies this as ‘End-of-Year’ item and its corresponding sequence number.
. EOM-ZZ (BPH) Identifies this as ‘End-of-Month’ and unique sequence number along with the intials of the accountant creating the entry.
Journal – Identifies which journal the entry is posted per the following:
- SJ – Sales Journal
- PR – Payroll
- FA – Fixed Assets
- CD – Cash Dispursements PJ – Purchases Journal CR – Cash Receipts
- GL – General Ledger
- WP – Workpaper assigned to the entry; corresponds to the tab used in the Excel workbook.
Description – A short description of the entry made such as ‘Book Depreciation – Asset T-03’.
DR/CR – Debits and credits for the respective entry are entered in the respective columns.
This section is formatted as below along with a sample entry:
. Adjustments .
ID Journal WP Description DR CR
EOY-17 SJ Contract #20160207 Accrue Kissner 18,201.43
. Contract Earned Revenue
Since the entry is on a row assigned to a particular account as noted in section one; the information relates to the change in that account. Since it is obvious that this entry is for the contract sales account used in construction, its offset debit may be in either accounts receivable or contractual unearned income depending on which method of construction accounting is used.
Notice the connection to the workpapers? This is the key to the working trial balance as this single piece of information ties to a supporting source document, schedule, reconciliation document or legal contract. In a typical working trial balance, I’ve seen as few as two adjustments to as many as 30 for a small business. It all depends on the type of interim accounting conducted and the level of expertise of the bookkeeper.
Section Three – Ending Balances
Each row is evaluated for any debits and credits to determine the final ending balance. The ending balances section is merely the final ending balance for the respective account. The ending balances section is two columns, one for debit values and the other for credit values. Sometimes accountants add a third column noting the respective tab in the Excel Workbook for that particular account. Finally, make sure that all debits in summation equal credits in summation for all three sections.
Adjustments and Corresponding Workpapers
As stated above, section two ‘Adjustments’ is the heart of the working trial balance. Each entry must tie to a unique or set of working papers (source documents, reconcilation schedules, schedules and/or legal forms). The customary format is to have a set of working papers with an Excel workbook acting as the table of contents and master guide to the supporting sources of information. The tab schedules follow this pattern:
Tab # Name Description
1 Working Trial Balance Contains Sections 1, 2 & 3
2 Entry List List of sequential entries similar to a general ledger including debits and offsetting credits
3 Cash Accounts One worksheet per account
4 Inventory Reconcilation schedules and physical inventory
5 Accounts Receivable Master list, aging report, uncollectible accounts, collection schedules
6 Prepaids Vendor statements
7 Fixed Assets Ties to fixed asset schedules including depreciation schedules and legal documents (titles, receipts, bills of lading)
8 Accounts Payable Vendor statements, list reports, aging report, cash disbursement schedule in follow-up months
9 Credit Cards Account statements and adjustment schedules
10 Accrued Items Payroll schedule benefits accounting schedules for accrued items (expenses)
11 Accrued Taxes Payroll tax schedules, income tax schedules/payments, meals and sales taxes due
12 Debt Items Current portion of long-term debt, line of credit statements
13 Long-Term Loans Each loan has its own tab
14 Equity Individual owner tabs, schedules and capital account issues
15 Dividends/Distributions Schedule of actual payments made
16 Sales Specifically contract income or accounting of revenue sources per top 7 customers
17 Cost of Sales Reconciliation schedule to inventory and work in process
18 Payroll Multiple schedules including owner’s compensation, management compensation, production; front and back office, benefits and tax compliance
19 Interest Paid Copies of Form 1099-I’s and reconciliation schedule to loan accounts and interest paid account; amortization schedules
20 Depreciation Depreciation schedules for book purposes
21 Amortization Amortization schedules
If certain expenses are legally mandated such as licenses and certification, the accountant should have a separate tab for each. Most small businesses will include tabs for insurance, marketing and escrow issues.
Each individual tab has a reconciliation schedule to the final balance in section three and if an adjustment applies from section two; it is duely noted. Most accountants include links to supporting documentation such as contracts, legal forms, filed forms, other schedules, tax forms, statements and communication entries. This entire workbook comprises all working papers for the period identified.
The ending balances in section three are used to generate the final set of financial reports and corresponding notes. Often drafts of notes are written on the respective tab associated with the note. Some accountants have an additional column in the final balances section tying the balance for that account to the respective tab in the workbook.
The working trial balance tab is usually prepared in the landscape format due to the number of columns involved.
Summary – Working Trial Balance
The working trial balance is an accountant’s tool to create the final set of Generally Accepted Accounting Principles based financial statements and corresponding notes. It is divided into three distinct sections. Section one is the existing trial balance as generated by the accounting software.
Section two is the heart of the working trial balance and includes adjusting journal entries with links to working papers. Section three contains the final balances for purposes of creating financial reports. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.