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 akitchel@uidaho.edu

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 “on-account.” 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 Transaction 1 Purchased Office Furniture for $5,000. Issued Check 101. 5 Rent Expense for month is $800. Issued Check 102. 8 Sales Revenue equaled $4,500. 14 Purchased Supplies for $250. Issued Check 103. 15 Purchased Office Equipment for $2,500 on account from Computers, Inc. 20 Telephone Expense for month is $75. Issued Check 104. 27 Sales Revenue equaled $2,800. 28 Paid Computers, Inc. $500 on account. Issued Check 105. 29 Personal withdrawal of $750 by the owner. Issued Check 106. 30 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