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The Accounting Cycle: A Mini Case Action Slides Only – No supporting content 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