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
Copyright 2006 Pearson Education Canada Inc. 2-3 Basic Accounting Concepts Generally Accepted Rules and Conventions GAAP-Generally Accepted Accounting Principles Basic Concepts to which all GAAP are oriented
Copyright 2006 Pearson Education Canada Inc. 2-4 Basic Accounting Concepts: The Balance Sheet 1. Business Entity Concept 2. Money Measurement Concept 3. Objectivity Concept 4. Going-Concern Concept 5. Cost Concept 6. Conservatism Concept 7. Dual Aspect Concept
Copyright 2006 Pearson Education Canada Inc. 2-5 BUSINESS ENTITY CONCEPT OWNER & BUSINESS-TWO SEPARATE BUSINESS ENTITIES SEPARATE SETS OF FINANCIAL STATEMENTS
Copyright 2006 Pearson Education Canada Inc. 2-6 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
Copyright 2006 Pearson Education Canada Inc. 2-7 OBJECTIVITY CONCEPT Accounting measurements must be: Verifiable Free from bias Subject to verification by an independent third party
Copyright 2006 Pearson Education Canada Inc. 2-8 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
Copyright 2006 Pearson Education Canada Inc. 2-9 COST CONCEPT Closely related to the going–concern concept Proper basis to account for resources owned by the hospitality firm referred to as
Copyright 2006 Pearson Education Canada Inc CONSERVATISM CONCEPT Departure from cost when there is evidence that cost cannot be recovered Record assets at their lowest possible value
Copyright 2006 Pearson Education Canada Inc 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
Copyright 2006 Pearson Education Canada Inc BASIC ACCOUNTING EQUATION ASSETS = LIABILITIES + OWNERS’ EQUITY ASSETS- Future values owned by the organization LIABILITES - Creditors’ claims against assets OWNERS EQUITY - Owners’ claims against assets CASH ACCOUNTS RECEIVABLE INVENTORIES PREPAID EXPENSES ACCOUNTS PAYABLE NOTES PAYABLE TAXES PAYABLE
Copyright 2006 Pearson Education Canada Inc 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)
Copyright 2006 Pearson Education Canada Inc 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
Copyright 2006 Pearson Education Canada Inc Illustrative Balance Sheet
Copyright 2006 Pearson Education Canada Inc 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
Copyright 2006 Pearson Education Canada Inc The Measurement of Business Income Time Period Concept Consistency Realization Matching
Copyright 2006 Pearson Education Canada Inc Time Period Concept SEGMENT OF TIME SELECTED TO MEASURE THE RESULTS OF OPERATIONS ONE YEAR ONE QUARTER ONE MONTH
Copyright 2006 Pearson Education Canada Inc CONSISTENCY gives the same accounting treatment to similar events in each period facilitates comparisons between accounting periods
Copyright 2006 Pearson Education Canada Inc REALIZATION Revenues are recorded when earned regardless of when cash is received
Copyright 2006 Pearson Education Canada Inc Revenues An inflow of Assets in exchange for goods or services
Copyright 2006 Pearson Education Canada Inc MATCHING Expenses are recognized when incurred, regardless of when cash is paid Expenses are matched against the revenues they helped produce
Copyright 2006 Pearson Education Canada Inc Expenses Goods or services consumed in operating a hospitality business
Copyright 2006 Pearson Education Canada Inc Illustrative Income Statement
Copyright 2006 Pearson Education Canada Inc Problem 2 Chapter 2-Transactional Analysis-First Six transactions
Copyright 2006 Pearson Education Canada Inc 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
Copyright 2006 Pearson Education Canada Inc Owners’ Equity in the Balance Sheet OWNERS’ INVESTMENT REVENUES INCREASE OWNERS’ EQUITY EXPENSES DECREASE OWNERS’ EQUTY WITHDRAWALS DECREASE OWNERS’ EQUITY