1. Accounting Principles
Chapter 2
Accounting Principles

2. 2-1 Conceptual Framework
CONSTRAINTS
Objectives of Financial Reporting
Qualitative
Characteristics of
Accounting Information
Elements of
Financial Statements
Operating Guidelines
Assumptions
Principles
CONSTRAINTS

3. 2-2 Qualitative Characteristics of Accounting Information
Useful
Financial
Information has:
Relevance
Reliability
1. Predictive value
2. Feedback value
3. Timely
1. Verifiable
2. Faithful representation
3. Neutral
Comparability
and
Consistency

4. 2-3 Operating Guidelines
Detailed Guidelines for Solving Practical Problems
ASSUMPTIONS
PRINCIPLES
1. Economic Entity
1. Revenue Recognition
2. Monetary Unit
2. Matching
3. Time Period
3. Full Disclosure
4. Going Concern
4. Cost
CONSTRAINTS
and
Materiality
Conservatism

5. 2-4 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.
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.

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

7. 2-4 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 +
$8,000
(Investment by Stockholders)
3,000
(Service Revenue) -
800
(Salary Expense)
200
(Rent Expense)
1,500
(Dividends)
$8,500

8. 2-4 Recording Business Transactions (continued)
Answer:
Sam Doty
Hospitality Consultant
Income Statement
For Month Ended September 30, 2008
Revenues
Service revenue
$3,000
Expenses
Salary expense
$800
Rent expense
200
Total expenses
1,000
Net income
$2,000
Sam Doty
Hospitality Consultant
Retained Earnings Statement
For Month Ended September 30, 2008
Retained Earnings, September 1
$ -0-
Add: Net income
2,000
Less: Dividends
$1,500
Retained Earnings, September 30
$ 500

9. 2-4 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, $ $4,000
Accounts Payable
$3,000
Common Stock
$8,000
R.E.
$500 = + + = + +

10. 2-4 Recording Business Transactions (continued)
Sam Doty, Hospitality Consultant
Balance Sheet
September 30, 2008
Assets
Cash
$ 7,000
Supplies
500
Equipment
4,000
Total assets
$11,500
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable
$ 3,000
Stockholders’ Equity
Common stock
8,000
Retained earnings
Total liabilities & stockholders’ equity
Answer:

11. 2-4 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
$3,000
Cash payments for expenses
1,000
Net cash provided by operating activities
$2,000
Cash flows from investing activities
Purchase of supplies
(500)
Payment for equipment
(1,000)
(1,500)
Cash flows from financing activities
Sale of common stock
$8,000
Dividends paid
6,500
Net increase in cash
7,000
Cash at the beginning of the period
Cash at the end of the period
$7,000

12. 2-5 Analyzing Transactions
Identify the various transactions indicated by the information provided:
CASH ACCOUNTS RECEIVABLE increased………………….. decreased_________________
RENT EXPENSE CASH increased………………….. decreased_________________
SUPPLIES ACCOUNTS PAYABLE increased………………….. decreased_________________
EQUIPMENT CASH increased………………….. decreased_________________
ACCOUNTS RECEIVABLE REVENUE increased………………….. decreased_________________
DIVIDENDS CASH increased………………….. decreased_________________

13. 2-5 Analyzing Transactions (continued)
Continue exercise by asking students for a transaction which
increases the following:
Cash, Accounts Receivable, Supplies, Equipment,
Accounts Payable, Common Stock
decreases the following:
Cash, Accounts Receivable, Supplies, and
Accounts Payable

14. 2-5 Analyzing Transactions (continued)
Answer:
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.