Copyright 2006 Pearson Education Canada Inc. 2-1

Copyright 2006 Pearson Education Canada Inc. 2-1

Copyright 2006 Pearson Education Canada Inc.2-2

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


Basic Accounting Concepts

Generally Accepted Rules and Conventions

GAAP-Generally Accepted Accounting Principles

Basic Concepts to which all GAAP are oriented


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


BUSINESS ENTITY CONCEPT

OWNER & BUSINESS-TWO SEPARATE BUSINESS ENTITIES

SEPARATE SETS OF FINANCIAL STATEMENTS


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


OBJECTIVITY CONCEPT

Accounting measurements must be:

Verifiable Free from bias Subject to verification by

an independent third party


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


COSTCONCEPT

Closely related to the going–concern concept

Proper basis to account for resources owned by the hospitality firm referred to as


CONSERVATISM CONCEPT

Departure from cost when there is evidence that cost cannot be recovered

Record assets at their lowest possible value


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


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


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)


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


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


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


The Measurement of Business Income

Time Period Concept

Consistency Realization Matching


Time Period Concept

SEGMENT OF TIME SELECTED TOMEASURE THE RESULTS OF

OPERATIONS

ONE YEAR

ONE QUARTER

ONE MONTH


CONSISTENCY

gives the same accounting treatment to similar events in each period

facilitates comparisons between accounting periods


REALIZATION

Revenues are recorded when earned regardless of when cash is received


Revenues

An inflow of Assets in exchange for goods or services


MATCHING

Expenses are recognized when incurred, regardless of when cash is paid

Expenses are matched against the revenues they helped produce


Expenses

Goods or services consumed in operating a hospitality business


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


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


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


Owners’ Equity in the Balance Sheet

OWNERS’ INVESTMENT REVENUES INCREASE

OWNERS’ EQUITY EXPENSES DECREASE

OWNERS’ EQUTY WITHDRAWALS

DECREASE OWNERS’ EQUITY

Documents

Copyright 2006 Pearson Education Canada Inc. 2-1