2. BASIC ACCOUNTING PRINCIPLES
ACCRUAL BASIS
This method means revenue or income is recognized when earned
regardless of when received and expenses are recognized when
incurred regardless of when paid.
Hence:
Income does not mean cash collections and
expenses do not mean cash payments
Under accrual basis income and expenses are independent of cash
collections or payments
3. ACCOUNTING ENTITY CONCEPT
Accounting entity concept means a business is an entity, separate from its
owners, managers, and employees.
Personal transactions therefore, should not be mixed in with transactions
of the company.
Ex : 1. If ABC company, buys a vehicle for transportation
of its customers that is a business transaction.
2. If Mr A, the owner of ABC company, buys a car
for personal use with his own money, then that
transaction should not be mixed in with ABC
company transactions.
4. I M E
P E R I O DT
The time period concepts means that a business has indefinite life
unless otherwise noted and this life is subdivided into periods of
equal length for reporting financial statements.
Accounting period is usually 1 year – More frequent reports are
done monthly or quarterly.
5. MATCHING PRINCIPLE
Income is matched with expenses and vice versa. Expenses are recognized
in the period the income is earned and income is recognized in the period
the expenses are incurred. Through accrual accounting the matching
principle is achieved.
Revenue recognition principle – accrual accounting
Expense recognition principle – accrual accounting
Historical cost principle – items in the balance sheet are generally presented
at historical cost. Some accounts however are revalued at fair market value
or discounted cost (Mark to Market). (usually Land, Properties)
8. The balance sheet
The balance sheet shows the balance between the assets of an
organization with its liabilities and owners’ equity. This balance is
symbolized in the fundamental accounting equation as follows:
Assets = liabilities + owners’ equity
Asset is everything of value that is owned by a person or a company
• Current assets are those assets that are expected to be converted into
cash in a relatively short time or in the normal operating cycle of the
business.
• Non-current receivables : Different from the receivables described under
current assets, noncurrent receivables are those accounts that are not
expected to be collected within the year
• Investments in other companies or in property or plant not connected
with the daily operations of the property are equally considered as a
separate asset category
• Fixed assets also known as property, plant and equipment (PP & E)
refer to those assets and property within a company which cannot easily
be converted into cash.
• Operating equipment As explained above, operating equipment with
periods of consumption of less than one year are classified as current
assets.
9. The balance sheet
A liability is an amount that an individual or a company is under obligation
to pay to other persons or organizations.
• Current liabilities These are obligations at the balance sheet date which
are reasonably expected to be paid back within the next 12 months.
• Accounts payable Accounts payable represents amounts due to
suppliers. Amounts due to other parties for guest charges collected by
the property may be included with Accounts payable or shown
separately.
• Advance deposits Advance deposits represent amounts received that
are to be applied as part of the payment for future sales of rooms, food
and beverage, or other goods and services
• Income taxes payable Income taxes payable represents the estimated
obligations for income taxes to be honoured within the next 12 months.
• Long term liabilities These are obligations, which on the date of the
balance sheet are expected to be paid back beyond the next 12 months.
• Owners’ equity At the start of a business, the owners bring in some
funding into the business to finance the acquisition of their assets.