Financial Accounting Ch 1-4

Notes Payable

Account includes promissory notes given to creditors. Promissory notes given to banks may be shown separately from notes to other creditors. (Liability Account)

Accounts Payable

Account payable is an amount the business owes to a creditor, resulting from an oral or implied promise to pay at some future date. (Liability Account)

Prepaid Expenses

Items that are assets when purchased but become expenses as they are used; such as prepaid rent, unexpired insurance, and prepaid taxes. (Asset Account)

Operating Equipment

Items that have useful lives of one year or less; such as linen, glassware, silver, and uniforms. (Asset Account)

Trial Balance

Listing of accounts and their debit and credit balances, it is prepared to test the equality of debit and credit balances.

Mortgage Payable

Long-term debt for which creditor has a secured prior claim against one or more of the hospitality firm's assets. (Liability Account)

Other Assets

Long-term nature that are not recorded under other asset categories; such as intangible assets, deferred charges, and operating equipment that has a useful life beyond one year. (Asset Account)

Recording accrued payroll at the end of the month is based on the __________ principle.

Matching

Expensing the purchase of a filing cabinet (useful life of ten years) rather than recording it as equipment is most likely based on the __________ principle.

Materiality

Retained Earnings

Net income or loss from (the results of operations less dividends declared) is recorded. (Owner's Equity Account)

Journal

accounting and bookkeeping, is a record of financial transactions in order by date, often defined as book of original entry

Continuity of Business Unit Principle

"Going Concern Principle", accounting principle that requires the preparation of accounting records and reports under the assumption that the business will continue indefinitely and that liquidation is not a prospect

Temporary Accounts

(Nominal) Accounts that are closed after each accounting cycle (Revenues, Expenses, Dividends)

Permanent Accounts

(Real) Accounts that are never closed (Assets, Liabilities, Stockholder's Equity: Balance Sheet accounts)

Property and Equipment

A separate account is maintained for each type, includes land, buildings, furniture, and carpets. (Asset Account)

Profitability

Ability to generate net income, shown on firm's income statement.

Solvency

Ability to pay debts on time, shown in enterprise's balance sheet.

Accrued Interest Receivable

Account consists of interest earned on interest-bearing assets that the business has not yet received at the date of the balance sheet. (Asset Account)

Cash versus Accrual Accounting

Accounting that recognizes an accounting transaction at point of cash inflow/outflow, this method does not require the adjustments while another accounting recognizes expenses when they are incurred regardless of when payment is made, and recognizes revenue when it is earned regardless of when cash received.

A hotel pays off a note payable. What effect does this have on the accounting equation using a T-account?

Asset- Cash account is credited, Liability - Account Payable is debited.

A hotel purchases a computer for cash. What effect does this have on the accounting equation using a T-account?

Asset- Cash account is credited. Asset- Equipment account is debited.

Scott opens his restaurant by investing $150,000. What effect does this have on the accounting equation using a T-account?

Asset- Cash account is debited $150,000 due to ownership of business. Owner's Equity- Capital account is credited $150,000.

A restaurant purchases merchandize supplies for cash. What effect does this have on the accounting equation using a T-account?

Asset-Cash account is credited. Asset-Inventory account is debited.

What effects do payment of expenses have on the accounting equation, using a T-account?

Asset-Cash account is credited. Owner's Equity-Retained Earnings account is debited.

Mary borrowed money for her Spa business from a local bank. What effect does this have on the accounting equation using a T-account?

Asset-Cash account is debited. Liability-Account Payable account credited.

What effect an increase in revenues have on the accounting equation using a T-account?

Asset-Cash account is debited. Owner's Equity-Retained Earnings account is credited.

The Boca Raton Resort purchased rooms supplies on account for $60,000. What effect does this have on the accounting equation using a T-account?

Asset-Inventory account is debited $60,000. Liability-Account Payable account is credited $60,000.

Example of Chart of Accounts

Assets 100-199, Liabilities 200-280, Equity 281-299, Revenue 300-399, Cost of Sales 400-499, Payroll/Related Expenses 500-599, Other Expense 600-699, Fixed Charges 700-799

Fundamental Accounting Equation

Assets = Liabilites + Stockholder's Equity, balance sheet

Extended Accounting Equation

Assets = Liabilities + Owner's Equity + Revenues - Expenses

Debit Balance

Assets and Expense accounts, all others credit balance

Types of Accrual Adjustments

Assets and revenues not previously provided (recording service provided but not previously recoded, as a receivable "asset" and a revenue), Liabilities and expenses not previously recorded (recording the amount due "liability" and the corresponding expense)

Office Supplies

Assets when purchased, when used in business they become expenses; some examples include postage stamps, stationary, and paper. (Asset Account)

Common Expense Accounts include

Beverage expense, food expense, wages expense, payroll taxes, office supplies, rent, cleaning supplies, electricity, fuel, insurance, interest expense, advertising expense, travel expenses, property taxes, depreciation expense income taxes. (Owner's Equity Account)

Keeping records for a business separate from the owner's personal affairs is in keeping with the __________ principle.

Business Entity

Eleven Principles of Accounting

Business entity, conservatism, consistency, continuity of the business unit, cost, full disclosure, matching, materiality, objective evidence, revenue recognition, and unit of measurement

Types of Owner's Equity Accounts

Capital Accounts, Revenue & Expense Accounts

Types of Asset Accounts

Cash, Notes Receivable, Accounts Receivable, Accrued Interest Receivable, Marketable Securities, Inventories of Merchandise, Office Supplies, Operating Equipment, Prepaid Expenses, Investments, Property and Equipment, other such as intangible, deferred charges and operating equipment that has a useful life beyond one year.

Changing inventory valuation methods year after year violates the __________ principle.

Consistency

The upward valuation of land subsequent to its purchase violates the __________ principle.

Cost

General Journal Elements

Date of transaction, Titles of accounts used, Explanation of transactions, Account numbers of ledger accounts to which the debit & credit amounts of the transactions are transferred, Debit & credit effects on transactions on the accounts listed

Procedure for Trial Balance Preparation

Determine balance of each account in ledger, list accounts and show debit/credit balances in corresponding columns, add the debit balances, add the credit balances, then compare the totals of each balance to evaluate equality.

Capital Stock

Different accounts are maintained for different types of stock when a firm is incorporated and the Capital account is replaced. (Owner's Equity Account)

Accrued Expenses

Expenses for a period not yet paid at the end of the accounting period (such as wages, salaries, interest, and utilities) are recorded. (Liability Account)

Notes Recievable

Formal written promise to pay a sum of money at a fixed future date is called a promissory note. Businesses refer to these notes when they receive them from debtors. (Asset Account)

Providing necessary details regarding depreciation methods in footnotes to financial statements is based on the __________ principle.

Full Disclosure

Assuming a business will continue until the assets are fully utilized is in accordance with the __________ principle.

Going Concern/Continuity of Business Unit

Accounts Recievable

Goods or services often sold to guests on the basis of the guests' oral or implied promises to pay in the future, known as sales on account and the promises to pay are known as this. (Asset Account)

Capital Account

Individual invests in a business organized as a sole proprietorship, the investment is recorded in an account bearing the investor's name. (Owner's Equity Account)

Investments

Investments in securities of affiliated or associated companies and other securities purchased as non-temporary investments are included in this account. (Asset Account)

Types of Liability Accounts

Notes Payable, Accounts Payable, Taxes Charged to Guests and Withheld from Employees, Income Taxes Payable, Accrued Expenses, Advance Deposit, and Mortgage Payable

Using an invoice, rather than the seller's opinion of the value, to document the value of equipment, is based on the __________ principle.

Objective Evidence

Cash

On hand in the custody of cashiers/other employees, plus on deposit with banks, usually a separate account for each fund and for each account with the bank. (Asset Account)

Types of Deferral Adjustments

Previously recorded assets (prepaid) then become expense, Previously recorded liabilities (deferred service revenue) then become revenue

Revenue and Expense Accounts

Revenue increases owners' equity while expenses decrease it. The prime objective of a business enterprise is to earn a profit. (Owner's Equity Account)

Common Revenue Accounts include

Room sales, food sales, beverage sales, gift shop sales, greens fees, pro shop sales, banquet sales, interest income, and dividend income. (Owner's Equity Account)

Marketable Securities

Securities (stocks/bonds) that are purchased as short-term investments and are thus readily convertible to cash. (Asset Account)

Inventories of Merchandise

Several accounts will be maintained for the inventory of goods for sale. (Asset Account)

Income Taxes Payable

The firm will record the amount of federal, state, and city income taxes due for prior fiscal years in separate accounts. The estimated liability for income taxes on the current year's net income to date is also recorded. (Liability Account)

Taxes Charged to Guests and Withheld from Employees

These are generally recorded in separate accounts such as Sales Taxes Payable, FICA Payable, Federal Income Taxes Withheld, State Income Taxes Withheld, and City Income Taxes Withheld. (Liability Account)

Advance Deposits

Unearned portion of revenue resulting from cash received from a guest for a period following the end of the accounting period; such as, deposits on banquets and room reservations. (Liability Account)

Full Disclosure Principle

accounting principle stating that a business's financial statements should provide information on all the significant facts that have a bearing on their interpretation. Types of disclosures include the accounting methods used, changes in the accounting methods, contingent liabilities, events occurring subsequent to the financial statement date, and unusual and nonrecurring items

Conservatism Principle

accounting principle that requires accounting procedures that recognize expenses as soon as possible, but delay the recognition of revenues until they are ensured (for example, nonrefundable deposits for future services should be recognized as liabilities until service is actually performed)

Unit of Measurement Principle

accounting principle that requires financial data to be recorder with a common unit of measure, such as the dollar is the common unit in the United States

Cost Principle

accounting principle that requires recording the value of transactions for accounting purposes at the actual transaction price

Business Entity Principle

accounting principle that requires that a business maintain its own set of records and accounts that are separate from other financial interests of its owners

Matching Principle

accounting principle that requires that expenses and revenues be matched to the period in which they were incurred or earned regardless of when they are actually realized

Consistency Principle

accounting principle that requires that once an accounting method has been adopted, it should be followed from period to period in the future unless a change in accounting methods is warranted and disclosed

Objective Evidence Principle

accounting principle that states that all accounting transactions and the resulting accounting records should be based on objectively determined evidence to the greatest extent possible

Materiality Principle

accounting principle that states that only items that are "material" or that "make a difference" should be presented in financial statements, (for example, may be established by a rule of thumb that states that an item is recognized if it exceeds a certain percentage of total assets or income)

Revenue Recognition Principle

accounting principle used to determine the period in which revenue is recorded and the amount (gross versus net) to be recorded

Deferrals

adjusting entries made for business data that have "already been recorded in other accounts," revenue later becomes an expense while asset later becomes a liability.

Accruals

adjusting entries made for business data that have "not yet been entered into accounts"

Credit Balance

balance in which the sum of the credits is greater than the sum of the debits

Liabilities

debts or obligations that arise during the course of business operations, recorded on right side

Account

detailed record of the changes/transactions between the five accounts

Account Balance

difference between the sum of the debits and the sum of the credits in an account

Adjusting entries

entries required at end of an accounting period to record internal adjustments of various accounts due to the matching principle

Expenses

expired costs incurred from providing goods and services offered and recorded on left side, recorded when incurred

6 Branches of Accounting, Generally Accepted Accounting Principles (GAAP)

financial accounting, managerial accounting, cost accounting, tax accounting, auditing, accounting systems

Normal Balance

increase side of the account

Revenues

inflows of assets resulting from sales of goods or services to customers, recorded on right side, recorded when earned

Debit

left hand side of any account that will increase asset and expense accounts while decreasing liability, owner's equity, and revenue accounts

Chart of accounts

listing of the titles/names of all accounts used by particular accounting system, allows owners to add/delete accounts to meet specific needs of properties, defines amount of detail that may be shown in financial statement

Statement of Cash Flows (SCF)

movement in cash inflows and outflows over period of time classified under operating, investing, and financing activities

Creditor

party to whom money is owed, creditor record money owed as a "receivable" (an asset account), giver of benefits

Debtor

party who has debt, debtor record debt as "payable" (liability account), receiver of benefits

General Ledger

principal ledger, contains all balance sheet and income statement accounts (including assets, liabilities, owner's equity, revenues, expenses, and owner's drawing), book of final entry

Posting

process of transferring amounts recorded in the journal to the appropriate ledger accounts

Bookkeeping

recording and classifying information

Journalizing

recording of transactions in a journal before they enter a ledger

Accounting

recording, classifying, summarizing, and interpreting information; process of identifying, measuring, and communicating economic information to permit users to make informed decisions/judgements

Income Statement

report on profitability of operations including revenues earned and expenses incurred in generating revenues for the period of time covered by statement; results of operations for a period of time and is generally prepared monthly for management's purposes (internal) and less frequently for outside users (external).

Assets

resources acquired to produce revenues, recorded on left side

Credit

right side of any account that will increase liability, owner's equity, and revenue accounts while decreasing asset and expense accounts

Balance Sheet

statement of the financial position of the hospitality establishment on a given date, giving the account balances for assets, liabilities and owner's equity (fundamental accounting equation)

Cash basis accounting

system of reporting revenues and expenses at the time they are collected/paid respectively, no accruals or deferrals

Accrual basis accounting

system of reporting revenues and expenses in period in which considered to have been earned/incurred, regardless of actual time of collection/payment

Owner's Equity

total assets - total liabilities, recorded on right side, retained earnings

T-account

visual aid used by accountants to illustrate a journal entry's effect on general ledger accounts, debit on left while credit is on right.