The unadjusted trial balance shown in Exhibit 1 acts as a bright line between nonattest and attest services.
The original interpretation required management to designate "an individual who possesses suitable skill, knowledge, and/or experience." Practitioners often interpreted this to mean that someone within management must have some form of accounting or bookkeeping background in order to record transactions and produce the unadjusted trial balance. The revised interpretation adds a key phrase to this requirement: "The member [CPA] should be satisfied that such individual [client] understands the services to be performed sufficiently to oversee them.
The other perspective starts with an unadjusted trial balance, then the preparation of cash-basis financial statements, followed by adjustments made directly to the financial statements.
In this chapter, you will learn how to prepare an income statement, statement of owner equity, balance sheet, and statement of cash flows from an unadjusted trial balance and from an adjusted trial balance.
Using the format for the income statement that you learned about in Chapter 1, you can prepare the income statement with the information from the revenues, expenses, gains, and losses accounts on either the adjusted or unadjusted trial balance. Figure 5-2 demonstrates the process of preparing a cash-basis income statement from the Farmers' unadjusted trial balance in Appendix E.
The Farmers use the unadjusted trial balance and the net cash income from the cash-basis income statement.
We use the unadjusted trial balance and the owner equity at the end of the year from the statement of owner equity in Figure 5-3 to prepare the balance sheet.
Their usefulness was limited by their inability to produce tailored financial statements and the requirement that, to use the posting capabilities, the CPA had to return to the office with unadjusted trial balance and journal entries in hand, get in line for computer time, and then wait for the system to post and print the entries.
These packages give the accountants the ability to key in an unadjusted trial balance, make journal entries, and have a tailored financial statement and tax return run on site.
The process begins with the least experienced staff member on the job entering the client's year-end unadjusted trial balance. The manager gets the first run of the current year balances compared with the prior year, and reviews the audit strategy.
In about 11 days, a rough program using an electronic spreadsheet was developed to allow the accountants to enter unadjusted trial balances and the adjusting journal entries.
The pivot table eliminates the need for T-accounts; it can be used for unadjusted trial balances
, pre-closing trial balances, and postclosing trial balances.