2. Seasonality of Business
Short distribution chain and time span
Labor intensive
Major investment in fixed assets
What accounting does in our industry?
- Provide financial
information, statements, and reports to
various users (Who are users?) 1
3. 2.Generally Accepted Accounting Principles (GAAP)
(1) Cost
- Ashley recorded a hotel building at the purchase price of
$1,500,000 when the market value is $1,750,000.
(2) Business entity
- Kevin, a restaurant owner, decided to take some sushi home for her
dinner. He had to record the cost of the sushi as a withdrawal.
(3) Continuity of the business unit
- Robert purchased a new limo. The cost is $50,000, however, the
resale value will be $30,000. The limo recorded at cost and will be
written off over the next five years rather than written down
immediately.
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4. 2.Generally Accepted Accounting Principles (GAAP)
(4) Unit of measurement:
- If we had huge inflation (e.g.,$1 in 2005 $5 in 2008), you need to
show current replacement cost in footnotes of your financial
statements.
(5) Objective evidence
- Kim contributed her Accord to her restaurant. She strongly believes
her car is worth of $20,000, but the business records it with its
Blue-Book (appraiser’s) value of $18,000.
(6) Full disclosure
- Mr. Park’s hotel describes its depreciation method and inventory
valuation method in the footnotes.
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5. 2.Generally Accepted Accounting Principles (GAAP)
(7) Consistency
- If Starbucks used a straight line depreciation method in 2007, the
company had to use the same depreciation method in 2008 unless a
change was warranted and disclosed.
(8) Matching (Expenses should be matched with revenues they
generated) Related to Accrual basis accounting
- Credit card fees of $10 should be recorded as expenses during the
accounting period in which the generated sale of $200 is recorded.
(9) Conservatism (to expenses)
- Kristine, a restaurant owner, reduces its tomato inventory value of
$1000 (original cost) to $800 in order to reflect the market value.
(10) Materiality
- Spencer, a hotel manager, replaced ten frames ($10/frame) in his
office and recorded his spending of $100 as expense, not as
equipment.
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6. 3.Cash VS. Accrual
• Cash basis accounting: recognizes
accounting transactions at the point of
cash inflow or outflow
• Accrual basis accounting: recognizes
“revenues” when earned and
“expenses” when incurred, regardless
of when cash actually changes hands
(e.g., unpaid wages, unpaid expenses)
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7. 4. The Six Branches of Accounting
• Financial accounting (Preparing and distributing report)
• Cost accounting (concerning with recording, allocating, and
reporting current and future costs)
• Managerial accounting (preparing performance reports, including
comparisons to budget; providing in-depth information as a basis
for management decisions)
• Tax accounting (performed by specialists)
• Auditing (providing opinions on reports/ by certified public firms)
• Accounting systems (Review information systems)
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8. 5. Fundamental Accounting Equation
Assets = Liabilities + Owners’ Equity
(1) A: Cash, Account
receivables, Inventory, Investment, Building, Equipme
nt, and Land.
(2) L: Payables, Accrued payroll
(3) OE : Permanent = Capital stock and Retained earning
: Temporary = Revenue and Expenses
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9. 6. Normal Account Balances (Debit/Credit)
Asset — debit (+) (What your company own)
Liability — credit (+) (What your company owes to third
parties)
Owners’ Equity Permanent — credit (+) (What your company
owe to you)
Owners’ Equity Revenue — credit (+) (It increases OE)
Owners’ Equity Expense — debit (+) (It decrease OE)
• Contra asset accounts: Accumulated Depreciation; Allowance for
Doubtful Accounts generally show a credit balance.
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