Question

A junior accountant is working to get everything in order for the new financing and has come to you with a question about what do next in the accounting cycle.

Read the email the junior accountant sent you and identify the best next step to take in the accounting cycle. Explain your reasoning.

I wanted to provide you some guidelines as you determine how we’ll finance our expansion. Please give this careful consideration, as we need to get this right.

I estimate we’ll need $150,000 to increase capacity in order to stock the five     additional pop-up stands

We’ll need to make sure we have additional funds available to increase our     marketing efforts to stimulate demand

I’d like to maintain or increase our profit margins

If we’re successful over the next two years, we’ll likely seek additional capital to          expand into more stores, so I’d like to do all we can now to enhance our                   credibility

JUNIOR ACCOUNTANT EMAIL

Hi,

I’m working on expenses from the last quarter for the revised income statement, but I’m unsure of what to do next. I grouped similar transactions to compile the following list:

inventory purchases marketing expenses payroll expenses interest expenses technology purchases

automotive maintenance cost travel expenses training and development costs office rent raw material purchases

• office supplies expenses

How would you like me to proceed given where we are in the process? Thanks in advance for your guidance.

Answer 1

Essentially, accounting cycles involves all the processes of identifying, recording, analyzing and summarizing business transactions over a given period of time. To ensure, accuracy in reportingfinancial results, the junior accountant needs to proceed as follows: First, identify and classify accounting items to be recorded in the respective books of accounts. Secondly and final, clarify the financial items in accordance to the rules set by GAAP. In other words, expenses should be recordedon the debit (DR) side while income on the credit (CR) side of the P&L. However, it is important to note that cost of materials, cost of goods sold (COGS) and purchase of inventory should not be treated as business expenses. Thus, based on the accountants list of expenses, he should record all expenses except the following; purchase of raw materials, purchase of technology and acquisition ofinventory.

For future reference there are 5 steps that we take in the accounting cycle, and knowing them will benefit you in the future. They are 1.Record: Capture each financial transaction, 2.Classify: Group similar transactions; 3.Summarize, Add up similar transactions to make them easy to understand, 4.Report: Create easy-to-read reports that provide an overall look at key parts of the business, and 5.Analyze: Use the information to make informed decisions about the business.