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A Training program in Accounting Joe's Old Shoe Shop You are Joe. You decide to go into the Shoe Sales and repair business. You open a bank account and put $5,000 of your own money in the bank. You borrow $10,000 from the bank at 10% interest for a term of three years. You rent a storefront at $400 per month including utilities. You buy a shoe repair machine for $7,000. You hire a cobbler named Sam Jones to repair shoes for you. You will pay Sam every two weeks: $100 salary + $2.00 per hour worked + 50% of revenue he generates from shoe repairs. Sam will work from 25 to 55 hours per week. You hire a saleslady named Martha Smith You pay Martha $6.00 per hour Martha works from 35 to 45 hours per week. You pay Martha weekly. You withhold $40.00 per week from Martha's pay for health insurance. Martha wants you to take an extra $5.00 per week from her pay for additional federal withholding. You buy 500 pairs of shoes at $50.00 per pair. Your supplier, Acme Shoes, gives you credit to be paid by paying $1,000 pre month in addition to shoes purchased that month. You price the shoes at $75.00 per pair. Your telephone requires a $150.00 deposit for installation. Your telephone bill runs from $40 to $100 per month. You sell from 40 to 60 pairs of shoes per week and add sales tax to the sale amount. Sam brings in $100 to $200 per week in shoe repair charges. You maintain your inventory weekly, add the cost to your accounts payable and pay your supplier, Acme Shoes, once a month. You must make monthly payments on your bank debt. You pay your sales tax and payroll withholdings monthly. A Training program in Accounting Joe's Old Shoe Shop Page -2- First we go to the utilities menu 4. Utilities? 6 Access GL chart of accounts? 1 Print Chart of Accounts? The Chart of Accounts is reproduced below: JOE'S OLD SHOE SHOP:GUEST - T Chart of Accounts 10-23-1999 18:43:36 ASSETS: + BA 103.00 Bank Account AC R 110.00 Accounts Receivable AR INVT 120.00 Inventory Value AI ADJ 190.00 Adjustments AX LIABILITIES: - P 210.00 Accounts Payable LP FED W/H 232.00 Federal payroll W/H tax LW State WH 233.00 State payroll W/H tax LW FICA WH 234.00 FICA tax W/H LW MC WH 235.00 Medicare tax W/H LW D1 241.00 Payroll Deduction 1 LW D2 242.00 Payroll deduction 2 LW D3 243.00 Payroll deduction 3 LW D4 244.00 Payroll deduction 4 LW D5 245.00 Payroll deduction 5 LW D6 246.00 Payroll deduction 6 LW FUTA lib 248.00 FUTA liability LW SUTA lib 249.00 State unemployment tax liab. LW EQUITY: - CE 280.00 Current Earnings OP PE 282.00 Previous Earnings OR CAPITAL 284.00 Capital investment OC REVENUES: - CC 310.00 Carrying Charge RC SALES 320.00 Inventory Sales RS EXPENSES: + COST 420.00 Cost of Sales EC PAYROLL 430.00 Payroll EP FICA EMP 433.00 Employer's Share of FICA ET FUTA exp 434.00 Federal Unemployment Tax ET SUTA exp 438.00 State Unemployment Tax ET A Training program in Accounting Joe's Old Shoe Shop Page -3- Now we have to decide how we will set up our chart of accounts. The $5,000 of our own money we put in the bank will be a debit (+) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a credit (-) to the owner's equity Capital investment account: CAPITAL 284.00 Capital investment OC Owner's Capital The $10,000 borrowed from the bank will be a a debit (+) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a credit (-) to the Liability Bank Note 1 account: NOTE1 220.00 Bank Note 1 LN Note Liability (Since the NOTE1 account doesn't yet exist in the chart of accounts, we will have to create it with: 4. Utilities? 6 Access GL chart of accounts? 2 Add New Account? ) Storefront monthly rent will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the Rent Account RENT 450.00 Store Rent EO Operating Expense (This account too must be created.) The $7,000 shoe repair machine will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the Equipment Asset Account EQUIP 130.00 Equipment AE Equipment Assets (This account too must be created.) Sam's payroll expenses will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the cobbler payroll account PAYROLL1 430.10 Payroll - 1 cobbler EP Payroll Expense (This account too must be created.) Martha's payroll expenses will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the sales payroll account PAYROLL2 430.20 Payroll - 2 sales EP Payroll Expense (This account too must be created.) We handle payroll this way so that we can get separate totals for our sales expenses as opposed to our shoe repair expenses. Shoes purchased will be a debit (+) $50 per pair to the asset inventory account: INVT 120.00 Inventory Value AI Inventory Assets (Edit this account to add Q to flags to keep track of Quantity on hand.) and a credit (-) to the accounts payable account. P 210.00 Accounts Payable LP Payable Liabilities Be sure to set up a vendor account for Acme Shoes because both Accounts Payable and Accounts Receivable transactions require a vendor. Shoes sold will be a credit (-) $50 per pair to the asset inventory account: INVT 120.00 Inventory Value AI Inventory Assets and a debit (+) to the cost of sales account. COST 420.00 Cost of Sales EC Cost Expenses Shoes sold will also be a debit (+) $75 per pair to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a credit (-) to the sales account SALES 320.00 Inventory Sales RS Sales Revenue (Edit this account to add Q to flags to keep track of Quantity sold.) Sales tax collected will also be a debit (+) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a credit (-) to the Sales tax Liability account: ST 250.00 Sales Tax Liability LT (This account too must be created.) The $150.00 deposit for installation of your telephone will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the Asset Deposits Account DEPOSITS 150.00 Utility Deposits AX Other Assets (This account too must be created.) Your monthly Phone bill will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the phone expense account PHONE 460.00 Phone EO Operating Expense (This account too must be created.) Shoe repair charges collected will be a debit (+) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a credit (-) to the sales cobbler account COBBLER 330.00 Cobbler Sales RS Sales Revenue (This account too must be created.) We may also decide to set up a profit center # 1 for shoe sales and a profit center # 2 for shoe services (cobbler). 4. Utilities? 14 Name profit centers? Your monthly payment to your shoe supplier will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to accounts payable P 210.00 Accounts Payable LP Payable Liabilities Your monthly payment on your bank debt will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to notes liabilities NOTE1 220.00 Bank Note 1 LN Note Liability and a debit (+) to interest expenses INTEREST 470.00 Interest payments EI Interest Expenses (This account too must be created.) See the amortization schedule for payment amounts. Your monthly payment on your sales tax liability will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the Sales tax Liability account: ST 250.00 Sales Tax Liability LT Your monthly payment on your payroll withholding tax liability will be a credit (-) to the asset bank account: BA 103.00 Bank Account AC Cash Asset and a debit (+) to the w/h tax Liability accounts: FED W/H 232.00 Federal payroll W/H tax LW State WH 233.00 State payroll W/H tax LW FICA WH 234.00 FICA tax W/H LW MC WH 235.00 Medicare tax W/H LW D1 241.00 Payroll Deduction 1 LW D2 242.00 Payroll deduction 2 LW D3 243.00 Payroll deduction 3 LW D4 244.00 Payroll deduction 4 LW D5 245.00 Payroll deduction 5 LW D6 246.00 Payroll deduction 6 LW Then we go to the utilities menu again 4. Utilities? 6 Access GL chart of accounts? 1 Print Chart of Accounts? Be sure to set up employee files for Sam and Martha and set up vendor files for Acme, the bank, the phone company, etc. Now we are ready to begin accounting posting transactions and generating financial reports. The general procedure is: 1. Post transactions and pay employees for each transaction post: the date. the type which is a GL account, usually a bank account or other asset account. the check or invoice number. the amount of money involved signed plus or minus to indicate its effect on the "type" account. the offsetting GL account which will be affected in the way opposite to the "type" account. if a vendor is involved identify the vendor. (vendors are required for AP and AR.) if necessary enter profit center, quantity, number or sales tax status. input remarks for this transaction. if the transaction is AP or AR and it is needed then input the due date. See Posting hints 2. Review trial balance to check account totals 3. When totals are correct and transactions are posted properly in the temporary file then post them to the main accounts. 4. Print reports as needed but particularly at the end of the month. (see below) 5. End the accounting period and start over. 2. Reports? 1 General Ledger? 1 Balance Sheet? (see Figure 2-1-1) 2 P&L Report? (see Figure 2-1-2) 3 Audit Trails 1 Bank Account Checks (see Figure 2-1-3-1) 2 Bank Acct Ck detail 3 Payroll Cks. detail 4 Payroll Date/Emp. 5 Payroll Date/Acct. 6 Payroll Acct/Emp. 7 Payroll Acct/Date 8 Payroll Emp./Date 9 Payroll Emp./Acct 10 General Ledger 2 Payroll? 1 Employee Payroll Report? 2 General Payroll Report? 3 Vendor? 1 Vendor Report? (see Figure 2-3-1) 2 Bill Vendors? (see Figure 2-3-2) 3 Vendor List? (see Figure 2-3-3) 4 Aged Accounts Report (see Figure 2-3-4)
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Last revised November 26, 1999.
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