PRINCIPLES OF ACCOUNTING

Accounting
in Action

1
What are the steps in the Accounting
process?

Identifying • relevant economic events (transactions)

• keeping a systematic, chronological diary of

Recording measured events

• preparation & distribution of accounting

Communicatin reports;
g • analyze & interpret the reported information
Sophie Company performs the following accounting tasks during the year.

______Summarizing economic events.

R
______Selecting economic activities relevant to the company.
I
______Reporting information in a standard format.
C
______Preparing accounting reports.
C
______Measuring events in dollars and cents.
R
______Keeping a systematic chronological diary of events.
R
______Explaining uses, meaning, and limitations of data.
C
______Classifying economic events.
R
______Analyzing and interpreting information.
C
Instructions
Categorize the accounting tasks performed by Sophie as relating to either
the identification (I), recording (R), or communication (C) aspects of
accounting
Measurement Principles In
Accounting?

Asset’s Asset’s
recorded at recorded at
Historic Costs Fair Fair value
al Cost Value
Principl Principl Price when
e Stay over e selling or
the time it
settle
is held
liability
 What are the Accounting
assumptions?

Monetary Unit Economic Entity

Assumption Assumption
• Only transaction data that can be • The activities of the entity be kept
expressed in terms of money be separate and distinct from the
included in the accounting records activities of its owners and all
 quantify (measure) economic other economic entities.
events.
The following situations involve accounting principles and assumptions.
1. Tisinai Company owns buildings that are worth substantially more than
they originally cost. In an effort to provide more relevant information,
Tisinai reports the buildings at fair value in its accounting reports.
 INCORRECT – Historical Cost Principle
2. Kingston Company includes in its accounting records only transaction
data that can be expressed in terms of money.
 CORRECT – Monetary Unit Assumption
3. Roger Holloway, owner of Roger’s Photography, records his personal
living costs as expenses of the business.
 INCORRECT – Economic Entity
Assumption
Instructions
For each of the three situations, say if the accounting method used is correct or
incorrect. If correct, identify which principle or assumption supports the method
used. If incorrect, identify which principle or assumption has been violated.
 3 types of business ownership?

Proprietorshi Partnership Corporation

p • Owned by 2 or • Ownership
• Owned by one more divided into
• Easy to start • Partnership transferable
agreement shares
• Owner bears all
• Shared financial • Limited Liability
profits & losses
burden • Unlimited life
 What is the basic accounting
equation?

Liabilitie Owner’s
Assets
s Equity

• Resources a • Creditor claims • Ownership claim on

business owns against assets total assets
• Used in carrying out • Existing debts and • Residual equity
activities such as obligations.
• = (Capital – Drawings)
production and sales
+ (Revenues –
• Provide future Expenses)
services or benefits
 Expanded accounting equation

Assets = Liabilities + Owner’s Equity

• Cash • Accounts • Capital • Drawings • Service • Rent
revenue expenses
• Accounts Liabilities
Payable + Owner’s Capital – Owner’s Drawings + Revenue –
Assets = • Sales • Salaries &
Receivable • Expenses
Notes
Wages
• Inventory Payable • Dividends
expenses
• Equipment • Interest
• Supplies • Rent
• Commission
s
 Assets
Liabilities + Owner’s Equity
=
Liabilities + Owner’s Capital – Owner’s Drawings + Revenue –
Assets =
Expenses

E1-6 Selected transactions for Green Valley Lawn Care Company are listed below.
1. Made cash investment to start business.
2. Paid monthly rent.  Decrease A & Decrease OE
3. Purchased equipment on account.  Increase A & Increase L
4. Billed customers for services performed.  Increase A & Increase OE
5. Withdrew cash for owner’s personal use.  Decrease A & Decrease OE
6. Received cash from customers billed in (4).  Increase A & Decrease A
7. Incurred advertising expense on account.  Increase L & Decrease OE
8. Purchased additional equipment for cash.  Decrease A & Increase A
 Increase A
9. Received cash from customers when service was performed. & Increase OE

Instructions
List the numbers of the above transactions and describe the effect of each transaction
on assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase
in assets and increase in owner’s equity.
 Assets
Liabilities + Owner’s Equity
=
Liabilities + Owner’s Capital – Owner’s Drawings + Revenue –
Assets =
Expenses

E1-7 Falske Computer Timeshare Company entered into the following transactions during
May 2017.
1. Purchased
 Increasecomputers for $20,000 from Digital Equipment on account.
A & Increase L
2. Paid $4,000 cash for May rent on storage space.
 Decrease A & Decrease OE
3. Received $17,000 cash from customers for contracts billed in April.
 Increase A & Decrease A
4. Performed
 Increasecomputer services for Viking Construction Company for $4,000 cash.
A & Increase OE
5. Paid Tri-State Power Co. $11,000 cash for energy usage in May.
 Decrease A & Decrease OE
6. Falske invested an additional $29,000 in the business.
 Increase A & Increase OE
7. Paid Digital Equipment for the computers purchased in (1) above.
 Decrease A & Decrease L
8. Incurred advertising expense for May of $1,200 on account.
 Increase L & Decrease in OE
PRACTICE
PROBLEMS
 Practice P1-4A
Trixie Maye started her own consulting firm, Matrix Consulting, on May 1, 2017.
The following transactions occurred during the month of May.
May 1 Trixie invested $7,000 cash in the business.
2 Paid $900 for office rent for the month.
3 Purchased $600 of supplies on account.
5 Paid $125 to advertise in the County News.
9 Received $4,000 cash for services performed.
12 Withdrew $1,000 cash for personal use.
15 Performed $5,400 of services on account.
17 Paid $2,500 for employee salaries.
20 Paid for the supplies purchased on account on May 3.
23 Received a cash payment of $4,000 for services performed on account on May 15.
26 Borrowed $5,000 from the bank on a note payable.
29 Purchased equipment for $4,200 on account.
30 Paid $275 for utilities.

Instructions
(a) Show the effects of the previous transactions on the accounting equation using the following format
 Matrix Consulting
Assets = Liabilities + Owner's Equity
Accounts Notes Accounts Owner's Owner's
Date Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital – Drawings + Revenues – Expenses
May 1 $ 7,000 $ 7,000

2 – 900 – $ 900

3 $ 600 $ 600

5 – 125 – 125

9 4,000 $ 4,000

12 – 1,000 – $ 1,000

15 $ 5,400 5,400

17 – 2,500 – 2,500

20 – 600 – 600

23 4,000 – 4,000

26 5,000 $ 5,000

29 $ 4,200 4,200

30 – 275 – 275

$14,600 + $1,400 + $600 + $4,200 = $5,000 + $4,200 + $7,000 – $1,000 + $9,400 – $3,800
$20,800 = $20,800
 MATRIX CONSULTING MATRIX CONSULTING
Income statement Balance Sheet
For the Month Ended May 31, 2017 May 31, 2017
Revenues Assets
Service Revenue $9,400 Cash $14,600
Expenses Accounts Receivable 1,400
Salaries & Wages Expense $2,500 Supplies 600
Rent Expense 900 Equipment 4,200
Utilities Expense 275 Total assets $20,800
Advertising Expense 125
Total Expense 3,800 Liabilities and Owner's Equity
Net Income $5,600 Liabilities
Notes payable $5,000
Accounts payable 4,200
Total liabilities $9,200
MATRIX CONSULTING Owner's Equity
Owner's Equity Statement Owner's Capital $11,600
For the Month Ended May 31, 2017 Total liabilities and owner's equity $20,800
Owner's capital, May 1 $0
Add: Investments 7,000
Net income 5,600

Less: Drawings 1,000

Owner's capital, May 31 $11,600
 Practice P1-3A

On June 1, Cindy Godfrey started Divine Designs Co., a company that provides craft opportunities, by
investing $12,000 cash in the business. Following are the assets and liabilities of the company at June 30
and the revenues and expenses for the month of June.

Cindy made no additional investment in June but withdrew $1,300 in cash for personal use during the
month.
Instructions
Prepare an income statement and owner’s equity statement for the month of June and a balance sheet
at June 30, 2017 assuming the following data are not included above: (1) $900 of services were
performed and billed but not collected at June 30, and (2) $150 of gasoline expense was incurred but not
paid
 Divine Designs Co. Divine Designs Co.
Income statement Balance Sheet
For the Month Ended June 30, 2017 June 30, 2017
Revenues Assets
Service Revenue $7,400 Cash $10,150
Expenses Accounts Receivable 3,700
Advertising Expense 500 Supplies 2,000
Rent Expense 1,600 Equipment 10,000
Gasoline Expense 350 Total assets $25,850
Utilities Expense 150
Total Expense 2,600 Liabilities and Owner's Equity
Net Income $4,800 Liabilities
Notes payable $9,000
Accounts payable 1,350
Total liabilities $10,350
Divine Designs Co. Owner's Equity
Owner's Equity Statement Owner's Capital $15,500
For the Month Ended June 30, 2017 Total liabilities and owner's equity $25,850
Owner's capital, June 1 $0
Add: Investments 12,000
Net income 4,800

Less: Drawings 1,300

Owner's capital, August 31 $15,500