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The Accounting Cycle: A Mini Case
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Original concept published as:
Yopp, M., & Kitchel, A. (2007). Incorporating an Accounting Unit
in a Business Plan Project. NBEA Business Education Forum,
61(3), 18-25.
Presentations & Curriculum prepared by:

Allen Kitchel, Ph.D.
Assistant Professor
Business & Marketing Teacher Education
University of Idaho
[email protected]
Case Development-Step 1:
Your Own Business
• Decide on a service business
– A service business
• Sells services, not merchandise
• Less complex and thus is a preferred scenario when
time is limited
• For purposes of the provided case, the service
business is:
– “LightSpeed Networks: A Gaming Service”
Case Development-Step 2: Assets
• Determine what “things” are needed to start
the business
• “Things” that a business has possession and
control of; we call these “things” ASSETS.
Case Development-Step 3: Liabilities
• Determine what liabilities the business may
need to incur.
• Plan to purchase at least one item “onaccount.”
– This entails the use of a liability account,
representing the amount owed for a purchase. The
amount owed is called a LIABILITY.
Case Development-Step 4:
Revenues & Expenses
• Anticipate Revenues & Expenses for the
business.
– What are some examples of different revenues and
expenses?
– Brainstorm time!
Case Development-Step 5:
Chart of Accounts
• Assign appropriate account numbers to each
identified account
– Assets (100), Liabilities (200), Owners Equity
(300), Revenues (400), & Expenses (500)
• Create a Chart of Account based on the
numbered accounts
– See the next slide for the accounts associated with
the sample case.
Chart of Accounts for the Sample Case
•
Assets
101 Cash
102 Office Equipment
103 Supplies
104 Office Furniture
Revenue
401 Sales Revenue
Liabilities
201 Accounts
Payable/Computer’s Inc.
Expenses
501 Rent Expense
502 Supplies Expense
503 Telephone Expense
504 Electricity Expense
Owner’s Equity
301 <Owner’s Name>, Capital
302 <Owner’s Name>, Drawing
310 Income Summary
Case Development-Step 6:
General Ledger
• Create the General Ledger Accounts
– Use the General Ledger forms provided
• Beginning balances should be recorded for those
accounts that have them.
• Sample case: Three accounts have a beginning
balance:
–
–
–
–
Cash (debit) $10,000
Supplies (debit) $500
Owners Name, Capital (credit) $10,500.
All other accounts begin with a zero balance.
Case Development-Step 7:
Journalizing Business Transactions
• Account names need to be entered ONLY if there
is NOT a special column.
– Mini-Case
• One line is sufficient for most transactions.
• Exception - purchasing a computer system on account from
Computers, Inc. requires two entry lines in the general
columns.
• If two special columns are used, such as debiting
CASH and crediting REVENUE, a check mark is
placed in the ACCOUNT column
Case Development-Step 7:
Journalizing Transactions (continued)
• Record the given transactions within the journal.
Use the current month and year.
Date
1
5
8
14
15
20
27
28
29
30
Transaction
Purchased Office Furniture for $5,000. Issued Check 101.
Rent Expense for month is $800. Issued Check 102.
Sales Revenue equaled $4,500.
Purchased Supplies for $250. Issued Check 103.
Purchased Office Equipment for $2,500 on account from Computers, Inc.
Telephone Expense for month is $75. Issued Check 104.
Sales Revenue equaled $2,800.
Paid Computers, Inc. $500 on account. Issued Check 105.
Personal withdrawal of $750 by the owner. Issued Check 106.
Electricity expense for month is $100. Issued Check 107.
Case Development-Step 8:
Posting
• After recording the transactions in the journal,
they need to be posted to the General Ledger.
• Before posting the journal entries, ensure the
Cash (debit), Supplies (debit), and <Owner’s
Name>, Capital (credit) ledger accounts have a
Beginning Balance.
• Post only the totals of the three special columns
(Revenue, Cash debit, and Cash credit).
• For the General column, each transaction must be
posted individually
Case Development-Step 9:
Trial Balance
• Record the end of period General Ledger
account balances in the Trial Balance columns
of the worksheet
– Use the blank Worksheet file
Case Development-Step 10:
Adjusting Entries
• The sample case has one adjusting entry.
– In the Multicolumn Journal write “Adjusting
Entries” as a heading in the Item Column
– The rows that follow are used to record any
necessary adjusting entries
– An inventory of supplies reveals $150 of supplies
used during the month.
• Which account needs to be Debited and for how much?
• Which account needs to be Credited and for how much?
Case Development-Step 10:
Adjusting Entries (continued)
• Post the two adjusting entries to the General
Ledger.
– Remember to put the Ledger account numbers in
the PR (post reference) column
• After posting - record the adjusting entries in
the Adjustment Columns of the eight-column
worksheet.
Case Development-Step 11:
Adjusted Balances
• Use the adjusting entry values to update the
account balances for each adjusted account
• Place the adjusted account balances, as well as
all others, in the Balance Sheet or the Income
Statement Columns within the worksheet
Case Development-Step 12:
Income or Loss
• After the adjusted Trial Balance account totals
are extended to the worksheet’s Balance Sheet
and Income Statement Columns, it is time to
determine whether the business made a profit
or suffered a loss during the financial period.
• Total the Revenue & Expense worksheet
columns
Case Development-Step 12:
Income or Loss (continued)
• Subtract total expenses from total revenue (Revenue
minus Expenses = Net Income (profit) or Net Loss.
– Enter this value into the worksheet below TOTALS to
balance the Income Statement and Balance Sheet Columns.
– This entry will be either a debit (Net Income) or credit (Net
Loss) in the Income Statement columns; and either a debit
(Net Loss) or credit (Net Income) in the Balance Sheet
columns.
• The amount of the Net Income or Net Loss is important
for preparing financial statements and closing entries.
Case Development-Step 13:
Closing Entries
• Complete all closing entries for the fiscal
period
• In the Multicolumn Journal write “Closing
Entries” as a heading in the Item Column
– The rows that follow are used to record any
necessary closing entries
• All closing entries should be dated the last day
of the fiscal period.
Case Development-Step 13:
Closing Entries (continued)
• Journalize all closing entries for the sample
case
• Once the closing entries are recorded in the
journal, post them to the General Ledger and
determine the ending balances for each
account.
Case Development-Step 14:
Balance Sheet & Income Statement
• Use the completed eight-column worksheet to
prepare the Balance Sheet and Income
Statement
Case Development-Step 15:
Owner’s Equity Statement
• Use the completed eight-column worksheet to
prepare the Owner’s Equity Statement
Case Development-Step 16:
Review & Critique
• Review the completed financial statements.
• Is this business a good candidate for a business loan?
– Why / why not?
– Would you invest your savings into this business?
– What else needs to be known?
• Determine missing transactions not accounted for.
• Discuss “Vertical” and “Horizontal” analysis.
• Vertical: Each amount on a financial statement as a percentage of
another item. Allows comparison to other businesses.
• Horizontal: Compares financial statements across fiscal periods. Is
also referred to as “Trend Analysis.”
SUMMARY
• Understanding the basics of double entry
accounting will help you with future
entrepreneurial plans or business projects.
• We hope this project enables you with a better
grasp of financial management – the backbone
of any effective business plan.
The End