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Outline
Basic Accounting Concepts Basic Accounting Concepts: The Balance Sheet Basic Accounting Equation Balance Sheet Illustrative Balance Sheet The Measurement of Business Income Illustrative Income Statement Transactional Analysis Other Concepts of Income Measurement Owners’ Equity in the Balance Sheet
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Basic Accounting Concepts
Generally Accepted Rules and Conventions
GAAP-Generally Accepted Accounting Principles
Basic Concepts to which all GAAP are oriented
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Basic Accounting Concepts:The Balance Sheet
1. Business Entity Concept2. Money Measurement Concept3. Objectivity Concept4. Going-Concern Concept5. Cost Concept6. Conservatism Concept 7. Dual Aspect Concept
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BUSINESS ENTITY CONCEPT
OWNER & BUSINESS-TWO SEPARATE BUSINESS ENTITIES
SEPARATE SETS OF FINANCIAL STATEMENTS
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MONEY MEASUREMENT CONCEPT
Recording of facts that can be expressed in monetary terms
Enables the quantification of the effects of a wide variety of financial transactions
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OBJECTIVITY CONCEPT
Accounting measurements must be:
Verifiable Free from bias Subject to verification by
an independent third party
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GOING-CONCERN CONCEPT
Also called continuity Assumption is made that the
organization will continue to operate forever
Organization will not be sold or liquidated
No need to record replacement values
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COSTCONCEPT
Closely related to the going–concern concept
Proper basis to account for resources owned by the hospitality firm referred to as
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CONSERVATISM CONCEPT
Departure from cost when there is evidence that cost cannot be recovered
Record assets at their lowest possible value
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DUAL ASPECT CONCEPT
Based on the premise that there are ownership claims to all things of value
It can be expressed in the form of the fundamental Accounting Equation
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BASIC ACCOUNTING EQUATIONASSETS = LIABILITIES + OWNERS’ EQUITY
ASSETS-Future values owned by the organization
LIABILITES-Creditors’ claims against assets
OWNERS EQUITY-Owners’ claims against assets
CASH ACCOUNTS RECEIVABLE
INVENTORIESPREPAID EXPENSES
ACCOUNTS PAYABLENOTES PAYABLETAXES PAYABLE
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Basic Accounting Equation 1. Ms. R invests $100,000 in a new restaurant
(R Delight)
2. The restaurant borrows $20,000 from a
bank at 12% APR(Annual Percentage Rate)
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Balance Sheet
Reflects the financial position of a company as of a point in time
Basic accounting equation is the basis for the preparation of the balance sheet
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Illustrative Balance Sheet
ASSETSCash $32,385Accounts Receivable $1,500Food Inventory 600Prepaid insurance 3,600Land 20,000Equipment 2,000
Total Assets $60,085
LIABILITIES AND OWNER'S EQUITYLIABILITIESAccounts payable $2,000Notes payable 30,000
Mortgages Payable 18,000Total Liabilities $50,000
OWNER'S EQUITYDavid Ricardo, Capital $5,042Lisa Montcalm, Capital 5,043Total Owners' Equity 10,085
Total Liabilities and Owner's Equity $60,085
David and Lisa RestaurantBalance Sheet
13-Feb-07
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The Income Statement the measurement of business income over a
period of time
reflects the results of operations over a period of time
summarizes revenues and expenses over a period of time
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The Measurement of Business Income
Time Period Concept
Consistency Realization Matching
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Time Period Concept
SEGMENT OF TIME SELECTED TOMEASURE THE RESULTS OF
OPERATIONS
ONE YEAR
ONE QUARTER
ONE MONTH
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CONSISTENCY
gives the same accounting treatment to similar events in each period
facilitates comparisons between accounting periods
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REALIZATION
Revenues are recorded when earned regardless of when cash is received
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Revenues
An inflow of Assets in exchange for goods or services
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MATCHING
Expenses are recognized when incurred, regardless of when cash is paid
Expenses are matched against the revenues they helped produce
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Expenses
Goods or services consumed in operating a hospitality business
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Illustrative Income Statement
RevenuesFood Sales $3,500
ExpensesCost of Food Sold $1,400Rent expenses 2,000Credit Card Fees 15
Total Expenses 3,415LIABILITIES AND OWNER'S EQUITY
Net income $85
David and Lisa RestaurantIncome Statement
For the period ended February 13, 2007
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Problem 2 Chapter 2-Transactional Analysis-First Six transactions
ASSETS OWNER'S EQUITY
Office Accounts Prepaid supplies Accounts Notes M . Bober
Cash receivable insurance inventory Equipment payable payable Capital Revenue Expenses
+50,000 0 0 0 +30,000 0 0 +80,000 0 0+15,000 0 0 0 0 0 0 0 +15,000 0
-3,000 0 0 0 0 0 0 0 0 -3,000-1,000 0 0 0 0 0 0 0 0 -1,000
-15,000 0 0 0 +25,000 0 +10,000 0 0 00 0 0 0 0 +6,000 0 0 0 -6,000
LIABILITIES
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Other Concepts of Income Measurement
Cash basis- Revenues are recorded only when cash is received and expenses are recognized when cash is paid
Tax basis- Governed by regulations established by federal and provincial governments
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Owners’ Equity in the Balance Sheet
OWNERS’ INVESTMENT REVENUES INCREASE
OWNERS’ EQUITY EXPENSES DECREASE
OWNERS’ EQUTY WITHDRAWALS
DECREASE OWNERS’ EQUITY