Small Business Manual Accounting & Bookkeeping Practice Set

Instructions

Step 1: The Chart of Accounts, Prior Year Balances and Closing General Journal Entry

The Chart of Accounts

The first accounting process step required of any new company is the design and set up of a Chart of Accounts. This has already been done for you and is included with the workpapers (see below for location).

The chart of accounts serves as a framework for the entire accounting system It provides a standardized way to record and report financial transactions. It is a list of all the accounts that a company uses to record its financial transactions.

It provides a systematic way to organize and categorize financial transactions, which forms the basis for preparation of an organization’s financial statements, tax returns, and other financial reporting. The chart of accounts typically includes a numerical code for each account, along with a brief description of the account.

The Chart of Accounts is organized into five categories: assets, liabilities, equity, income, and expenses. It is structured to reflect the accounting equation, a list of company assets (the value of the business) and liabilities and equity (the two categories who ‘own’ the assets, respectively). Remember, income and expense accounts belong to the owner and are a sub-set of equity.

Each account is assigned to a category based on the type of transaction it represents. The Chart of Accounts should always utilize a simple numbering system and have as few accounts as possible in order to increase efficiency and accuracy. It is a flexible document and may be modified as the business changes.

Work to be Performed

The Chart of Accounts has already been created for you. It is located at Step 5: Workpapers (5.2).

1. Remove the Chart of Accounts from the manual and review the account numbers and descriptions to become familiar with the five account categories: assets, liabilities, equity, income, and expenses

2. You will refer to the Chart of Accounts often as you work through and complete the remaining practice set tasks.

Following your review of the Chart of Accounts, enter the prior year account balances into each appropriate General Ledger account, close out the income and expense accounts, and record the previous year net profit to the owner’s equity as explained below.