Chapter 2

Accounting Principles

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Generally Accepted Accounting Principles (GAAP)

• Principles of Identity

– Business Entity – Going Concern Define the identity of an organization by setting it up as a unique entity that is separate from its owners as well as other entities, and that is presumed to operate indefinitely

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Generally Accepted Accounting Principles (GAAP) – continued

• Principles of Operation

– Unit of Measurement – Objectivity – Historical Cost – Periodicity – Consistency – Matching Define how the accounting systems works, i.e. how financial events are measured, recorded and repeated

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Generally Accepted Accounting Principles (GAAP) – continued

• Principles of Reporting

– Conservatism – Materiality – Full Disclosure Decide how financial events are reported by defining the margin that can affect business decisions, and cautioning against understating or overstating figures

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Recording Business Transactions

A. Review of Selected Transactions Mr. Sam Doty opened and incorporated a hospitality consulting firm during the month of September and provided you with the following data.

1.

2.

3.

4.

5.

6.

7.

8.

Invested $8,000 in his business in exchange for common stock.

Purchased $500 of supplies for cash.

Purchased $4,000 of equipment on account.

Received $3,000 cash for consulting services.

Paid salaries of $800 Paid the first month’s rent of $200.

Paid $1,000 owned to a creditor.

The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder.

Instructions: Prepare the tabular summary for the transactions above.

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Recording Business Transactions (continued)

Answer: Assets Summary of Transactions Month of September 2008 = Liabilities + Stockholders’ Equity Trans action Cash + Sup plies + Equip ment = Accounts Payable + Common Stock Retained Earnings (1) (2) (3) (4) +$8,000 -500 +3,000 +500 +$4,000 +$4,000 +$8,000 (5) (6) (7) (8) -800 -200 -1,000 -1,500 $7,000 + $500 + $4,000 = -1,000 $3,000 + $8,000 Investment +3,000 -800 Service Revenue Salary Expense -200 Rent Expense -1,500 Dividends $500

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Recording Business Transactions (continued)

B. Financial Statement Relationship to Transactions and Balances 1.

Prepare the Income Statement and Retained Earnings Statement from the Stockholders’ Equity Column of the Summary of Transactions for the month of September.

+ + Stockholders’ Equity $8,000 (Investment by Stockholders) 3,000 (Service Revenue) 800 (Salary Expense) 200 (Rent Expense) 1,500 (Dividends) $8,500

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Recording Business Transactions (continued)

Answer: Sam Doty Hospitality Consultant Income Statement For Month Ended September 30, 2008 Revenues $3,000 Service revenue Expenses Salary expense Rent expense Total expenses Net income $800 200 1,000 $2,000 Sam Doty Hospitality Consultant Retained Earnings Statement For Month Ended September 30, 2008 Retained Earnings, September 1 Add: Net income Less: Dividends Retained Earnings, September 30 $ -0 2,000 2,000 $1,500 $ 500

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Recording Business Transactions (continued)

2. Prepare the Balance Sheet from the Month-end Balances of the Summary of Transactions.

Assets = Liabilities + Stockholders’ Equity Cash + Supplies + Equip.

$7,000 + $500 + $4,000 = = Accounts Payable $3,000 + + Common Stock $8,000 + + R.E.

$500

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Recording Business Transactions (continued)

Answer: Sam Doty, Hospitality Consultant Balance Sheet September 30, 2008

Assets

Cash Supplies $ 7,000 500 Equipment 4,000 Total assets

Liabilities and Stockholders’ Equity

$11,500 Liabilities Accounts payable Stockholders’ Equity Common stock Retained earnings Total liabilities & stockholders’ equity $ 3,000 8,000 500 $11,500

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Recording Business Transactions (continued)

Prepare the Statement of Cash Flows from the Cash Column of the

Summary of Transactions

for the month of September.

Sam Doty, Hospitality Consultant Statement of Cash Flows for Month Ended September 30, 2008 Cash flows from operating activities Cash receipts from customers Cash payments for expenses Net cash provided by operating activities Cash flows from investing activities Purchase of supplies Payment for equipment (500) (1,000) Cash flows from financing activities Sale of common stock Dividends paid Net increase in cash Cash at the beginning of the period Cash at the end of the period $8,000 (1,500) $3,000 1,000 $2,000 (1,500) 6,500 7,000 0 $7,000 www.lrjj.cn

Analyzing Transactions

Identify the various transactions indicated by the information provided: 1.

2.

3.

4.

5.

6.

CASH ACCOUNTS RECEIVABLE increased………………….. decreased_________________ RENT EXPENSE CASH increased………………….. decreased_________________ SUPPLIES ACCOUNTS PAYABLE increased………………….. increased_________________ EQUIPMENT CASH increased………………….. decreased_________________ ACCOUNTS RECEIVABLE REVENUE increased………………….. increased_________________ DIVIDENDS CASH increased………………….. decreased_________________

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Analyzing Transactions (continued) Answer :

1.

2.

3.

4.

5.

6.

Collection of an accounts receivable.

Payment of the current month’s rent.

Purchase of supplies on account.

Purchase of equipment for cash.

Rendering of services for a customer on account.

The declaration of a cash dividend.

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