QUICKBOOKS PRO 2006: A COMPLETE COURSE With updates for 2007

QUICKBOOKS PRO 2006: A COMPLETE COURSE With updates for 2007 CHAPTER 4 LECTURE GENERAL ACCOUNTING AND END-OF- PERIOD PROCEDURES: SERVICE - BUSINESS CHAPTER OBJECTIVES The focus of Chapter 4 is on general accounting procedures for a service business. In this chapter students customize a company s chart of accounts by learning to change account names, delete accounts, and make accounts inactive. Adjustments for accrual basis accounting are discussed and entered directly in the Journal. Students record depreciation, adjust prepaid expenses, record owner withdrawals and investments, and transfer net income from retained earnings into the owner s capital account. A bank reconciliation is prepared. Rather than a formal closing, end-ofperiod/closing dates are assigned when all the adjustments and transactions for the period have been recorded. End-of-period reports are prepared including a Trial Balance, a Cash Flow Forecast, a Statement of Cash Flows, a Profit & Loss Statement, and a Balance Sheet. LECTURE I. Accrual basis accounting and cash basis accounting A. Discussion of accrual basis accounting 1. Stress that income is earned when the service is performed no matter when the payment is received 2. Expenses are incurred at the time the bill is received or the purchase is made regardless of the actual payment date a. Give examples of recording depreciation and using up equipment over a period of time

IM 4-2 QUICKBOOKS PRO 2006/2007: A COMPLETE COURSE b. Give examples of recording office supplies as a prepaid expense and adjusting for the expense as the supplies are used B. Discussion of cash basis accounting 1. Income is not recorded until payment is received 2. Expenses are not recorded until payment is made 3. Depreciation is not recorded. Purchasing something such as equipment is recorded as an expense at the time the equipment is purchased 4. Prepaid insurance is not used. Instead, insurance for a year is recorded as an expense when it is paid. C. Point out that QuickBooks Pro uses the accrual basis of accounting by default COMPUTER DEMONSTRATION AND LECTURE I. Customizing the Chart of Accounts A. Prior to beginning the demonstration, restore the Computer Ch 3.qbb (backup) file B. Demonstrate how to change an account name 1. Open the Chart of Accounts 2. Click Student s Name Capital to select 3. Use the keyboard shortcut, Ctrl+E to edit the account 4. Change Student s Name to your own name to illustrate 5. Click OK 6. Click Company Cars to select 7. Ctrl+E to Edit 8. Change the name to Business Vehicles, click OK 9. Click OK 10. Open one of the subaccounts and show how the parent account name has been changed 11. Do not close the Chart of Accounts C. Demonstrate how to make an account inactive 1. Click Property Taxes 2. Click Account button 3. Click Make Inactive 4. Do not close the Chart of Accounts D. Demonstrate how to delete an account 1. Click Contributions 2. Ctrl+D to delete the account 3. Click OK to delete the account 4. Do not close the Chart of Accounts

CHAPTER 4 GENERAL ACCOUNTING & END-OF-PERIOD PROCEDURES IM 4-3 II. Record Adjusting Entries in the Journal A. Prepaid Expenses discuss the concept of a prepaid expense being an asset account and the necessity of adjusting for the amount of insurance used within the period B. Record the adjustment for one month s insurance in the Journal 1. Click Company on the menu bar, click Make General Journal Entries 2. Enter 013106 for the date 3. Click Account drop-down list arrow, click Auto Insurance 4. Tab to or click Debit, 5. Illustrate how to use the calculator to determine 1/12 of the insurance a. Click Edit menu, click Use Calculator b. Discuss using the 10-key pad to enter numbers c. Make sure Num Lock is on d. Enter 2850 e. Press / for division f. Key 12 g. Press Enter key h. Point out that the total is not entered 6. Show how to use QuickMath a. Click in the Debit column b. Press the + key on the 10-key numerical keypad or at the top of the keyboard c. Enter 2850 d. Press / for division e. Key 12 f. Press Enter to close QuickMath and enter the amount of 237.50 in the Debit column g. Point out that QuickMath enters the amount automatically and that the Calculator requires that you enter the amount 7. Tab to or click Memo, enter Adjusting Entry, Insurance 8. Click Account drop-down list arrow, click Prepaid Insurance 9. Credit should be entered automatically, enter Memo, click OK C. Students seem to have a lot of difficulty determining whether or not office supplies are entered directly as an expense or as a prepaid expense. Discuss examples of each type of entry 1. Make a Journal entry to record $500 of office supplies to have on hand (be sure to include a vendor) Prepaid Expense (asset) 2. Make a second Journal entry to record the purchase of $5 of colored paper, which is to be used to print flyers announcing a sale (again, be sure to include a vendor) Expense 3. Record a Journal entry of an adjustment for the office supplies used of $250 D. Discuss Depreciation and record a compound entry for $142 depreciation for Office Furniture and Equipment and $583 for Business Vehicles 1. Credit the account for Office Furniture and Equipment Depreciation for $142 2. Credit the account for Business Vehicles Depreciation for $583 3. Point out that QuickBooks automatically debited Depreciation Expense $725.00

IM 4-4 QUICKBOOKS PRO 2006/2007: A COMPLETE COURSE 4. Show Chart of Accounts a. Students should note the amount of depreciation for Office Equipment b. Point out the balance of Office Equipment c. Do the same for Business Vehicles d. Remind students to make sure that the depreciation account was credited and that the expense account was debited E. View Journal 1. Click Reports, point to Accountant & Taxes, click Journal 2. Enter the dates 010106 and 013106, tab to generate the report 3. Scroll through the report 4. Point out the transactions entered in the demonstration 5. Show the Debit and Credit columns discuss how this is the same as traditional accounting III. Owner Withdrawals and Investments A. A check is prepared for the owner when a withdrawal is made B. The owner s name may need to be added to the Other Names list C. If an owner makes an additional investment in the business, it may be in the form of cash; or it may be a non-cash investment such as books, tools, etc. D. Additional investment can be entered in the Journal debit the asset and credit the owner s capital account IV. Bank Reconciliation A. The purpose of the bank reconciliation is to make sure the balance of the checking account matches the balance of the bank statement for the checking account B. Use your demonstration disk for Computer to reconcile the bank statement 1. Beginning balance is 12,870 (The ending balance depends on the transactions entered during the demonstration. If the previous chapter.qbb file has been restored for lecture, the checks and deposits shown on the bank reconciliation should appear.) 2. The date for the reconciliation should be 013106 3. Enter a service charge of $8 for Bank Service Charges (make sure the date is 01/31/2006 Caution students to check the dates carefully because they tend to miss this step.) 4. Enter interest of $66.43 for Interest Income (make sure the date is 01/31/2006) 5. Click Continue on the Begin Reconciliation window 6. Mark all checks and deposits as being received by the bank a. Mark the deposits of $25,000 and $13,840 b. Mark the Petty Cash for 110.00 c. Mark checks 1, 2, and 3 7. Demonstrate entering a payment on the loan for Office Equipment 8. Click Edit menu, click Use Register, click OK to use the checking account register a. Date is 013006 b. Number is Transfer

CHAPTER 4 GENERAL ACCOUNTING & END-OF-PERIOD PROCEDURES IM 4-5 c. Payee is Sunshine Bank d. Click Payment column e. Will get a message to add the name of the bank to the Other Name list, click Quick Add f. Enter the total payment in the Payment column $82.56 g. Click Account column, click Splits h. Click Interest on Loans, enter $53.39 i. Click Account drop-down list arrow, click Loan Payable: Office Furniture and Equipment, enter the principal of $29.17 j. Point out that the interest is greater than the principal k. Click Close to close the split window, click Record to record the transaction l. Enter the payment for the business vehicles loan Principal $467.19 and Interest $255.22 for a total payment of $722.41 m. Record the transaction and return to the bank reconciliation 9. Click the transfer of funds for the loan payment to mark the transaction 10. Click the transaction for Petty Cash to change your records to $110 a. Click the Go To button b. Change the Amount to 110 c. Return to the bank reconciliation and mark the transaction if the check mark is not longer shown 11. Ending balance and cleared balance should both be the same C. Discuss clicking Reconcile Now. 1. If there is an error and you have clicked Reconcile Now, you cannot access the bank reconciliation 2. Note: a student may cancel an incorrect bank reconciliation 3. The Checking account register must be accessed and all checkmarks must be removed (usually by triple clicking the checkmark). D. Discuss Reconciliation Report 1. Print when finished with the reconciliation choices are: a. Detail get all the transactions that were reconciled b. Summary report lists totals only 2. QuickBooks Pro will remember the last two reconciliation reports and can print them at a later time. 3. Remind students that sometimes the detailed bank reconciliation report may look a little different than the answer key. This is due to the computer date being different from the date in the text. E. Deleting Cleared Transactions Cannot be done without affecting the next bank reconciliation F. You may want to look at the Locate Discrepancies and discus the Undo Last Reconciliation feature and point out that this can be used if a student decided to redo the bank reconciliation. (This is included in Chapter 7.) V. End-of-Period Reports A. Trial Balance

IM 4-6 QUICKBOOKS PRO 2006/2007: A COMPLETE COURSE 1. Proves debits equal credits 2. Click Reports Center, click Accountant & Taxes, click Trial Balance 3. Enter the dates 010106 to 013106 4. Tab to generate the report, scroll through the report 5. Debits and Credits should be equal, close the report B. Cash Flow Forecast 1. Prepared for help in determining the expected income and disbursement of cash 2. Does not analyze investments, etc. 3. It simply projects a. The amount you will be receiving if all those who owe you money pay on time b. The amounts you will be spending to pay your accounts payable on time. C. Profit & Loss Statement 1. Also known as an Income Statement 2. Shows income and expenses for the period 3. Prepare the report for 010106 to 013106 4. If your demonstration does not have a Net Income, enter a large transaction on an Invoice, Save it, and make sure that a Net Income is shown D. Balance Sheet 1. Shows the balances of accounts as of 013106 2. Proves the fundamental accounting equation: Assets = Liabilities + Owner s Equity 3. Focus on the owner equity section of the report a. Point out the net income b. Change the year of the report to 2007 c. Notice that Net Income changes into Retained Earnings i. Tell students this is because QuickBooks Pro puts Net Income into Retained earnings at the end of a year no matter what type of ownership ii. In a sole proprietorship, correct accounting procedures would put Net Income into the owner s capital account not into Retained Earnings VI. Transfer Net Income/Retained Earnings into Your Name, Capital A. With the Balance Sheet on the screen, click Activities, click Make General Journal Entries B. Prepare a journal entry for this transaction 1. Debit Retained Earnings for the amount of Net Income shown on the Profit & Loss Statement (In the text the amount of Net Income is 4,135.53) 2. Credit Your Name, Capital for the same amount 3. Save the entry C. Point out the change in the Balance Sheet 1. Change the year to 2006, both Net Income and Retained Earnings are shown 2. Point out the negative amount shown for Retained Earnings a. This is because the adjusting entry has been made 3. Net Income will show the amount of Net Income until the year is changed, then the amount of Net Income will correctly show in Your Name, Capital

CHAPTER 4 GENERAL ACCOUNTING & END-OF-PERIOD PROCEDURES IM 4-7 4. When the year is 2007, nothing is shown for Retained Earnings or Net Income; the amount of the Net Income has been added to the owner s capital account D. Close the report VII. Remind Students to Back Up Work A. Students should prepare a backup of the data disk for Computer B. They should also prepare an archive disk for 01-31-06 (You may wish to make this an optional activity.) VIII. Closing Date A. Instead of closing entries, QuickBooks Pro uses a closing date to indicate the end of a period B. Assign a Closing Date 1. Click Edit on the menu bar, click Preferences 2. Scroll the preferences until you see Accounting 3. Click Company Preferences 4. Enter 013106 as the closing date QuickBooks 2007: click the Set Date/Password button, then enter the closing date 5. Caution students NOT to assign a password or they may not be able to access their data 6. Click OK C. Change a Transaction in a closed period 1. Change the amount of Prepaid Insurance 2. Open the Chart of Accounts, click Prepaid Insurance 3. Click Activities button, click Use Register 4. Change the amount in the increase column from 2,850 to 2,500 5. Click Record 6. Click OK when the dialog box appears regarding changing a transaction in a closed period 7. Prepare a Trial Balance and point out the amount in Prepaid Insurance 2,500 D. Discuss the importance of also changing the amount of Net Income because the insurance expense is $350 larger than it was before so there is less net income 1. Access the Journal entry where the Net Income was transferred from Retained Earnings to the Capital account 2. Change the debit and credit amounts by reducing them by $350