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Steven, M.Acc.
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Category: Business and Finance Homework
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Experience:  Instructor and accountant. Master's degree in Accounting.
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To understand accounts presented in the income statement and

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To understand accounts presented in the income statement and balance sheet you will create a chart of accounts for a business type of your choice.

This chart of accounts will have at least the following number of accounts by category:

5 asset accounts
2 liability accounts
2 capital accounts
1 revenue account
5 expense accounts
Assign a logical account numbering system and discuss the basis and rationale for selecting the accounts in the chart.

not really sure how to start this off a little help would go along way
Hi there,

As you can probably imagine, almost every business will have some accounts in common, such as Cash, Supplies, Accounts Payable, Accounts Receivable, Sales Revenue, and Utilities Expense. However, other accounts will vary depending on the business type. For example, a manufacturing company will have different accounts than will a merchandising company, particularly when it comes to inventories; a cash-basis entity will have different accounts than an accrual-basis entity.

For this assignment, let's select a merchandising company, like a camp store that rents out nonmotorized boats during the fishing season. The company has a single owner, established as a sole proprietor, who utilizes accrual accounting, uses a perpetual inventory system, and has one or more employees.

Here, then, is a sample chart of accounts, with the basis and rationale after each section:

100 — Cash
110 — Supplies
120 — Accounts Receivable
130 — Merchandise Inventory
131 — Cost of Goods Sold
140 — Prepaid Insurance
141 — Prepaid Rent
150 — Boats
151 — Equipment
152 — Fixtures and Displays
160 — Accumulated Depreciation – Boats
161 — Accumulated Depreciation – Equipment
162 — Accumulated Depreciation – Fixtures and Displays

Basis and rationale: Standard items for any company are Cash, Supplies, and Accounts Receivable. A merchandising company that uses a perpetual inventory system needs to use Merchandise Inventory and Cost of Goods Sold. As a retailer, the company likely pays insurance and rent, hence the Prepaid Insurance and Prepaid Rent accounts. And, according to the scenario, the company has Boats, Equipment, and Fixtures and Displays (and, therefore, the accumulated depreciation accounts to go with them).

200 — Accounts Payable
210 — Interest Payable
220 — Notes Payable
230 — Payroll Taxes Payable
240 — Sales Tax Payable
250 — Wages Payable

Basis and rationale: A standard item for any company is Accounts Payable. The company likely acquired its boats using short-term financing, hence Notes Payable and Interest Payable. As an employer, the company needs to pay its employees and accrue payroll if an accounting period ends between two paydays, hence Wages Payable and Payroll Taxes Payable. And, as a retailer, the company likely accumulates and pays sales taxes (depending on the state, of course), hence Sales Tax Payable.

300 — Owner's Capital
310 — Owner's Draws
320 — Income Summary

Basis and rationale: Since the company has a lone owner, the only accounts necessary are shown above. The Income Summary account is used to close out the temporary accounts listed below at the end of the accounting period.

500 — Sales Revenue
510 — Rental Revenue

Basis and rationale: The company has only two sources of revenue – the sales of merchandise and the boat rentals. Therefore, only those two revenue accounts are necessary. If the company expands into different sources of revenue, it can add additional revenue accounts.

600 — Advertising Expense
605 — Bank Fees Expense
610 — Boat Permit Expense
615 — Cash Short and Over
620 — Depreciation Expense
625 — Insurance Expense
630 — Interest Expense
635 — Miscellaneous Expense
640 — Postage Expense
645 — Rent Expense
650 — Repair Expense
655 — Supplies Expense
660 — Telephone Expense
665 — Utilities Expense
670 — Wages Expense

Basis and rationale: Many of these expense accounts have already been dealt with by their "counterparts" above. These include Depreciation Expense, Insurance Expense, Interest Expense, Rent Expense, Supplies Expense, and Wages Expense. Further, it is difficult for any company to escape needing the Bank Fees Expense, Postage Expense, Telephone Expense, and Utilities Expense accounts in the normal course of business. The company likely needs to advertise in the local area to attract business, hence the Advertising Expense account. Due to the boat rentals, there are Boat Permit Expense and Repair Expense accounts. As a retailer, it is understandable that the cash till will be short or over on occasion, hence the Cash Short and Over expense account. Finally, the company can use the Miscellaneous Expense account for those expenses too insignificant or irregular for which to create accounts.

Please let me know if you have any questions!
Steven, M.Acc., Instructor
Satisfied Customers: 755
Experience: Instructor and accountant. Master's degree in Accounting.
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