1. BASIC ACCOUNTING CONCEPTS
CHAPTER 2
BASIC ACCOUNTING CONCEPTS
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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

3. Basic Accounting Concepts
Generally Accepted Rules and Conventions
GAAP-Generally Accepted Accounting Principles
Basic Concepts to which all GAAP are oriented

4. Basic Accounting Concepts: The Balance Sheet
Business Entity Concept
Money Measurement Concept
Objectivity Concept
Going-Concern Concept
Cost Concept
Conservatism Concept
Dual Aspect Concept

5. BUSINESS ENTITY CONCEPT
OWNER & BUSINESS-TWO SEPARATE BUSINESS ENTITIES
SEPARATE SETS OF FINANCIAL STATEMENTS

6. MONEY MEASUREMENT CONCEPT
Accounting system deals only with facts that can be expressed in monetary terms.
Enables the quantification of the effects of a wide variety of financial transactions.

7. OBJECTIVITY CONCEPT Accounting measurements must be: Verifiable
Free from bias
Subject to verification by an independent third party

8. GOING-CONCERN CONCEPT
(Assuming no evidence to the contrary )
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

9. COST=PRICE PAID TO ACQUIRE ASSET
COST CONCEPT
COST=PRICE PAID TO ACQUIRE ASSET
Closely related to the going– concern concept
Proper basis to account for resources owned by the hospitality firm
referred to as
ASSETS

10. “ANTICIPATE NO PROFIT BUT PROVIDE FOR ALL POSSIBLE LOSSES”
CONSERVATISM CONCEPT
Departure from cost when there is evidence that cost cannot be recovered
Record assets at their lowest possible value, but do not show INCREASES.
“ANTICIPATE NO PROFIT BUT PROVIDE FOR ALL POSSIBLE LOSSES”

11. Assets = Liabilities + Owners' Equity
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
Assets = Liabilities + Owners' Equity

12. BASIC ACCOUNTING EQUATION ASSETS = LIABILITIES + OWNERS’ EQUITY
ASSETS-Future values owned by the organization
LIABILITIES-Creditors’ claims against assets
OWNERS EQUITY- Owners’ claims against assets
CASH
ACCOUNTS RECEIVABLE
INVENTORIES
PREPAID EXPENSES
BUILDING, EQUIPMENT
ACCOUNTS PAYABLE
NOTES PAYABLE
TAXES PAYABLE
COMMON SHARES
RETAINED EARNINGS

13. 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% per annum
A = L + OE
+100,000
+100,000
A = L + OE
+20,000
+20,000

14. Assets = Liabilities + Owners' Equity
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
Assets = Liabilities + Owners' Equity

15. Illustrative Balance Sheet
A Famous Restaurant
Balance Sheet
As at Dec. 31, 2008.
LIABILITIES AND OWNERS’ EQUITY
LIABILITIES
Accounts Payable $ 5,000
Taxes Payable ,000
Total Liabilities ,000
SHAREHOLDERS’ EQUITY
Common Shares ,000
Retained Earnings ,600
TOTAL SHAREHOLDERS’ EQUITY 314,600
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY: $327,600
=====
ASSETS
Cash $ 1,000
Accounts Receivable ,000
Inventory
Equipment ,000
Land ,000
Building ,000
TOTAL ASSETS: $ 327,600
======

16. 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

17. The Measurement of Business Income
Time Period Concept
Consistency
Realization
Matching

18. SEGMENT OF TIME SELECTED TO
Time Period Concept
SEGMENT OF TIME SELECTED TO
MEASURE THE RESULTS OF
OPERATIONS
ONE YEAR
ONE QUARTER
ONE MONTH

19. CONSISTENCY
gives the same accounting treatment to similar events in each period
Makes it easier to perform comparisons between accounting periods

20. REALIZATION EARNED FOOD SALES ON CREDIT
Revenues are recorded when earned regardless of when cash is received
EARNED
FOOD SALES ON CREDIT

21. Revenues Room sales Food sales Beverage sales
An inflow of Assets in exchange for goods or services
Room sales
Food sales
Beverage sales

22. The accrual basis of accounting
MATCHING
Expenses are recognized when incurred, regardless of when cash is paid
Expenses are matched against the revenues they helped produce
The accrual basis of accounting

23. Expenses
Goods or services consumed in operating a hospitality business, such as
Salaries and Wages
Rent Expense
Interest expense
Supplies expense

24. Illustrative Income Statement

25. 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

26. Owners’ Equity in the Balance Sheet
OWNERS’ (SHAREHOLDERS’) INVESTMENT
REVENUES INCREASE OWNERS’ EQUITY
EXPENSES DECREASE OWNERS’ EQUTY
WITHDRAWALS (DIVIDENDS) DECREASE OWNERS’ EQUITY