ACC 315 Week 2 Setting Up a Company File and Chart of Accounts Example

Building the Books Before the First Invoice: Company Settings, a Numbered Chart of Accounts and Opening Balances for a Composite Dog Daycare and Boarding LLC

[Student Name]

University of Phoenix

ACC/315: Accounting Software Systems

Week 2 Assignment

[Instructor Name]

[Date]

The business, its balances and its state tax settings are composites written for a model paper; accounting rules come from the sources listed.

A composite dog daycare and boarding business has operated one location for four years as a single-member limited liability company. It is opening a second location in a nearby town, and the owner has decided to start a fresh company file rather than keep adding to records that were set up in a hurry. The old file has 112 accounts, including three different accounts for dog food and a revenue account called Misc Income that holds nearly a fifth of annual sales. A chart of accounts is a promise about what the reports will be able to show, and the old one promised very little. This paper documents the settings chosen for the new file, the chart of accounts that replaces the old one and the opening balances entered on the conversion date.

Company Settings

The legal name, address and employer identification number are entered exactly as they appear on tax filings, because the software prints them on payroll forms. The fiscal year begins January 1, matching the tax year. The tax form is set to the one used by a single-member LLC reporting on the owner's individual return; if the owner later elects to be taxed as an S corporation, the setting and the equity accounts will change. Federal guidance says records must support every item on a return (Internal Revenue Service, 2024), which is easier when the software's tax setting links accounts to the correct form lines.

The accounting basis is accrual. The business sells multi-visit daycare packages in advance and bills boarding at checkout, so cash basis would record package revenue months before the dog ever arrives. Accrual matches revenue with the period it is earned, consistent with the standard setter's view that useful financial information is relevant and faithfully represents what happened (Financial Accounting Standards Board, 2010). The owner's bank, which is financing the second location, also asked for accrual statements.

Numbering Plan

The chart uses four-digit numbers in ranges: 1000 to 1999 for assets, 2000 to 2999 for liabilities, 3000 to 3999 for equity, 4000 to 4999 for income, 5000 to 5999 for direct costs and 6000 to 7999 for operating expenses. Numbers are assigned in steps of ten, so an account can be inserted later without renumbering. Weygandt et al. (2021) note that a well-designed chart lists accounts in financial statement order, which makes the trial balance read like a draft of the statements.

Assets and Liabilities

Assets begin with two bank accounts, operating and payroll, followed by undeposited funds, accounts receivable, inventory of retail treats and supplies and prepaid insurance. Fixed assets are grouped by type: kennels and fencing, grooming equipment, a van and leasehold improvements at the new site, each with its own accumulated depreciation account so the balance sheet shows cost and depreciation separately.

Liabilities include accounts payable, a business credit card, sales tax payable, payroll liabilities split into federal withholding, state withholding and employer taxes and the equipment loan. One liability matters more than the rest: unearned revenue for prepaid daycare packages. When a customer buys a 20-visit package, the cash is recorded here and moved to income as visits are used.

Equity

Because the business is a single-member LLC, equity is simple: owner's capital, owner's draws and the retained earnings account the software requires. The owner is not an employee of the LLC for payroll purposes, so money taken out goes to draws, not to wages. Opening balance equity appears only during setup and is closed to owner's capital once the balances are confirmed.

Income and Direct Costs

The old file's Misc Income account is replaced by four income accounts: daycare, boarding, grooming and retail sales. Each sits in the 4000 range, and a fifth account, discounts and refunds, is kept separate so the owner can see how much revenue is given back. Direct costs in the 5000 range include grooming supplies, retail treats sold and credit card processing fees, since those rise and fall with sales.

Operating Expenses

Operating expenses are grouped by type rather than by vendor: rent, utilities, insurance, repairs, marketing, software subscriptions, professional fees, vehicle expenses and wages and payroll taxes for staff. The old file had separate accounts for each pet food supplier; in the new file, one account for food and supplies is enough, and the vendor record shows who was paid. Locations are tracked with a location tag rather than duplicate accounts, so a single chart serves both sites and reports can still show profit by location.

Service Items

Each service the business sells is set up as an item linked to its income account: a single daycare day, a 10-visit package, a 20-visit package, an overnight stay, a bath and a full groom. Package items post to unearned revenue, and a monthly entry moves used visits to daycare income. In the composite's state, grooming is taxable and boarding is not, so only grooming and retail items carry the sales tax code. Tax rules differ from state to state, and the setting should be confirmed with the state revenue department rather than assumed.

Opening Balances

Opening balances are entered as of December 31, the last reconciled month end in the old records. Bank balances match the December statements. Open customer invoices and unpaid supplier bills are entered individually so aging reports work from day one. The unearned revenue balance equals the unused visits on packages sold, counted from the booking system. Fixed assets and loans are entered at their year-end book values. After entry, the trial balance in the new file is compared with the old December trial balance, and opening balance equity is moved to owner's capital.

Keeping the Chart Clean

Only the owner and the outside accountant may add accounts. New accounts must fit an existing range and use a name that describes the account, not a vendor. Each quarter the bookkeeper runs a report of accounts with no activity and marks unused ones inactive. Romney et al. (2021) describe the chart of accounts as a coding scheme that determines what reports a system can produce; a quarterly review keeps that scheme useful as the business grows.

Conclusion

The new company file starts with settings that match the business's legal and tax position, an accrual basis that suits prepaid packages and a lender's needs and a chart of accounts organized so every report reads cleanly. Revenue by stream replaces a single miscellaneous account, locations are tracked by tag instead of duplicate accounts and opening balances come from a reconciled date. The work takes longer than accepting a template, but it prevents years of confusing reports.

References

Financial Accounting Standards Board. (2010). Conceptual framework for financial reporting (Statement of Financial Accounting Concepts No. 8).

Internal Revenue Service. (2024). Starting a business and keeping records (Publication 583). https://www.irs.gov/publications/p583

Romney, M. B., Steinbart, P. J., Summers, S. L., & Wood, D. A. (2021). Accounting information systems (15th ed.). Pearson.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.