1. 1 First Accounting Cycle—1, Classifying Accounting Data Using Excel In this module, students will use a simple Excel model to enter financial transactions. A table lookup function is employed to allow classification of entries by account type. The module is designed to work with Chapter 1 of any beginning accounting text. Prepared for SSAC by Michael P. O’Neill and Yilin Sun, Seattle Central Community College © The Washington Center for Improving the Quality of Undergraduate Education. All rights reserved. 2007 Core Quantitative Concept Manipulating Tabular Data SSAC2007.HF5635.MPO1.1 Specifically – Organizing and classifying data Visual display of data Lookup Function (Excel)

2. 2 Slide 3 The Problem Statement Slide 4 Chart of Accounts Slides 5 Account Codes Slides 6,7 Chart of Accounts Slides 8-13 Creating the Journal in Excel Slides 14-21 Assessments and References Overview of Module The fundamental accounting cycle consists of 1. recording transactions in a journal; 2. classifying transactions by account; and 3. summarizing effects of the transactions in the form of an income statement, owner’s equity statement, and balance sheet. These tasks can easily be accomplished using Excel. Using predefined account types, journal entries can be classified as to whether they affect an Asset, a Liability, an Owner’s Equity account, a Revenue, or an Expense.

3. 3 You invest money in a business and operate it for one month. Can you create a journal-entry table that classifies each transaction by its account type—asset, liability, owner’s equity, revenue, or expense? Problem Can you create a data-entry system that indicates, for each entry, the accounting element affected?

4. 4 The Accounts We Will Use—The Chart of Accounts Assets (Account numbers 100-199) –101 Cash: Cash on hand or in a checking account –104 Accounts Receivable: amounts owed to you, the owner –106 Supplies: Items that are used up in the production of revenue –110 Equipment: Vehicles, computers, and other tools for producing revenue Liabilities (Accounts 200-299) –201 Accounts Payable: Short term debts you owe –202 Notes Payable: a bank loan for which you sign a promissory note Owner’s Equity: what the owner owns after the debts have been paid— includes four separate items: –301 Owner’s Capital—the owner’s claim in the business –302 Owner’s Drawing—the owner’s withdrawals from the business –401 Service Revenue—used when the owner provides a service or a product –501-599: Expenses: costs incurred in the process of earning revenue. Examples include rent, advertising, salaries, utilities, travel expenses.

5. 5 Classifying the Accounts Using a Code In addition to the account numbering system, we will need to add a classification CODE so that each entry can be categorized so that we can create financial reports—income statement, balance sheet and owner’s equity statement. ASSETSAccount numbers between 100 and 199 CODE = “A” LIABILITIES Account numbers between 200 and 299 CODE = “L” OWNER’S EQUITY: The Capital account: 301 CODE = “OE” The Drawing account 302 CODE = “OE” Revenue accounts 401-499 CODE = “R” Expense accounts 501-599 CODE = “E” NOTE: Although the revenues and expenses are owner’s equity accounts, we must code them separately in order to create an income statement. The income statement provides information to show how the owner of the business increased the owner’s equity by providing a service or product to customers.

6. 6 The Complete Chart of Accounts NumberAccountType 101CashA 104Accounts ReceivableA 106SuppliesA 110EquipmentA 201Accounts PayableL 202Note PayableL 301Johnson CapitalOE 302Johnson DrawingOE 401Service RevenueR 501Rent ExpenseE 502Advertising ExpenseE 503Utilities ExpenseE Note: Print out this chart of accounts for the next step.

7. 7 Create the Chart of Accounts in Sheet1 Open a new Excel worksheet, and in Sheet1, type in the following Chart of Account data. Create three columns—Number, Account and Type. Use the account numbering scheme on the previous slide. At the bottom of your sheet, rename the sheet tab from Sheet1 to Chart. To do so, double-click the tab “Sheet1”, and type in “Chart”. Note that the account data (not including the headers) occupies Block B3:D14 of Chart and occupies three columns. Type in the account data, with headers at the top. Observe that the Number, Account, and Type are located in Block B3:D14. Rename Sheet1 to Chart by double-clicking on it.

8. 8 The Transactions for January Now that we have a Chart of Accounts, our next task is to enter the transactions for the month of January. Here are the transactions that occurred during the month. 1/1/07: Johnson invested $10,000 cash in the business, Johnson Consulting. 1/2/07: Johnson borrowed $20,000 from Bank of America and issued a note payable in that amount. 1/3/07: Johnson purchased equipment for $5,000; the account must be paid in 30 days. 1/4/07: Johnson paid rent for January in cash, $1,000. 1/5/07: Johnson performed consulting services for a client in the amount of $2,000. Cash of $1,000 was received; the rest is due in 30 days. 1/6/07: Johnson placed an advertisement in the Seattle Times. The cost was $300, which is payable in 30 days. 1/7/07: Johnson withdrew $500 for personal use, in cash. Print out this list of transactions so that you can enter them into the worksheet.

9. 9 Create The Journal in Sheet2 Double-click on Sheet2, and rename it “Journal”. We will create a Journal here to record the transactions. The first transaction is: on 1/1/07, Johnson invested $10,000 cash in the business, Johnson Consulting. Type in date and account number, as shown below. Here’s your account list for reference. In Cell D3, type: =VLOOKUP(C3,CHART!$B$3:$D$14,2,FALSE) Use the “Chart” list to the right for reference.

10. 10 A Few Words About the VLOOKUP function In Journal, Cell D3, type: =VLOOKUP(C3,CHART!$B$3:$D$14,2,FALSE) Translation: Using the account number in C3, (“101”), go to the Chart sheet, Block B3:D14; look for a match in the leftmost column. (Find “101”, in other words.) If you find a match, bring back the item on the same row as the match, but in the Column 2. In this case, a match on “101” in Column 1 will bring back a value of “Cash”, the item in Column 2. In the Journal, C3 contains the account number, 101. The Chart contains a two dimensional array of data, from B3 to D14. Note: we have put the account numbers in numeric order in the Chart, though the VLOOKUP function will work even if they are out of order…as long as you insert FALSE in the rightmost position of the VLOOKUP function.

11. 11 Composing One More VLOOKUP for the Account Type To review, this is the array in the Chart sheet, Cells B3:D14. To look up Account, we used: We need one more VLOOKUP formula, to look up the Account type (A, L, OE, R, or E). The general formula for the VLOOKUP function is: =VLOOKUP(searchvalue, array, column, FALSE) Can you compose this formula? Your result for account 101 should result in a type of “A” as demonstrated above. =VLOOKUP(C3,CHART!$B$3:$D$14,2,FALSE)

12. 12 Copy the VLOOKUP formulas down the sheet. To automate the remainder of the data entry, we need to copy the VLOOKUP formulas down the sheet. Place your cursor on Cell D3. Click Edit | Copy; then select Block D4:D18 and click Edit | Paste. Copy Cell E3 down the sheet in similar fashion. Because there is no account number in column C, Excel will report #N/A for the copied cells. The formula will execute however, when you type in each account number.

13. 13 The Journal, Complete When complete, the journal should appear as shown above.

14. 14 Assignment 1. Describe the format of the VLOOKUP function in Excel. 2. What convenience does the VLOOKUP function provide—why not just type in all the data needed, rather than using a VLOOKUP function? 3. Using the final set of journal entries, by what process would you calculate the total Cash balance? What is the final Cash balance? 4. What is the net income for January? (Use the formula, Revenues minus Expenses = Net Income) 5. Can you compute the final owner’s equity balance? Include the beginning Capital, add Net Income and subtract Drawings. 6. Calculate the total assets figure, total liabilities, and owner’s equity. Do Assets = Liabilities + Owner’s Equity?

15. 15 Assignment, Continued 7. Go to a new sheet in your workbook, or use INSERT | WORKSHEET to get a new worksheet. Enter the following transactions for February. 2/1/07 Johnson paid the account payable owed to the Seattle Times, $300. 2/2/07 Johnson paid the rent for February, $1,000 cash. 2/3/07 Johnson paid $1,000 owed to the equipment dealer, in cash. 2/4/07 Johnson provided consulting services to a client in the amount of $5,000. The client paid $3,000 immediately, in cash; the rest will be received in one month. 2/25/07 Johnson paid an assistant $1,500 cash for work done in February. You will need to add an account titled 511 Wages Expense to your chart of accounts. 2/28/07 Johnson earned revenues of $3500 on account.

16. 16 Assignment, Continued 8. Donna wishes to create a household budget, with costs generally classified as follows: Housing Expenses (H): Rent, Gas, Electricity, Water Food Expenses (F): Meat, Vegetables, Dairy Products, Snacks Transportation Expenses (T): Auto, Fuel, Bus Fares Design a data entry form in Excel that will allow Donna to enter each expense individually, but also categorize each expense into the its general classification. The expense types and classification information will go in Sheet1 and the cost data in Sheet 2. For March, Donna’s estimates for the budget are: Rent=$2500, Gas=$200, Electricity=$75, Water=$50. Food Expenses are Meat=$100, Vegetables=$50, Dairy=$50. Transportation Expenses are: Auto=$100, Fuel=$300, Bus=$40.

17. 17 References More information about the Excel VLOOKUP function can be found in the Excel Help files.