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Chapter 2

Chapter 2. Accounting Principles. 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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Chapter 2

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  1. Chapter 2 Accounting Principles

  2. 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 Generally Accepted Accounting Principles (GAAP)

  3. Principles of Operation Unit of Measurement Objectivity Historical Cost Generally Accepted Accounting Principles (GAAP) – continued • Periodicity • Consistency • Matching Define how the accounting systems works, i.e. how financial events are measured, recorded and repeated

  4. 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 Generally Accepted Accounting Principles (GAAP) – continued

  5. 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. 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. Instructions: Prepare the tabular summary for the transactions above.

  6. Recording Business Transactions(continued) Summary of Transactions Month of September 2008 Answer:

  7. Recording Business Transactions(continued) B. Financial Statement Relationship to Transactions and Balances • 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. Recording Business Transactions(continued) Answer:

  9. Recording Business Transactions(continued) • 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 = + + = + +

  10. Recording Business Transactions(continued) Answer:

  11. Prepare the Statement of Cash Flows from the Cash Column of the Summary of Transactions for the month of September. Recording Business Transactions(continued)

  12. Identify the various transactions indicated by the information provided: CASH ACCOUNTS RECEIVABLEincreased………………….. decreased_________________ RENT EXPENSE CASHincreased………………….. decreased_________________ SUPPLIES ACCOUNTS PAYABLEincreased………………….. increased_________________ EQUIPMENT CASHincreased………………….. decreased_________________ ACCOUNTS RECEIVABLE REVENUEincreased………………….. increased_________________ DIVIDENDS CASHincreased………………….. decreased_________________ Analyzing Transactions

  13. 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. Analyzing Transactions(continued) Answer:

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