Accounting Concepts and Procedures

ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

The functions of accounting are to analyze, record, classify, summarize, report, and interpret financial information. Sole proprietorship1 owner; unlimited liability; easy to form Partnership2 or more owners; unlimited liability; easy to form CorporationStockholders; limited liability; difficult to form Service, merchandise, or manufacturing Bookkeeping is the recording function of the accounting process. The three elements of the basic accounting equation are assets, liabilities, owners equity. Capital is the owners current investment or equity in the assets of a business. It is one subdivision of owners equity. True. The sum of the left side of the equation must equal the sum of the right side of the equation. False. That is the income statement. False. Revenue is a subdivision of owners equity. Owners equity is subdivided into Capital, Withdrawals, Revenue, and Expenses. False. It is non-business expense; a subdivision of owners equity. Reject. As expenses increase, owners equity decreases. Revenue less Expenses; an income statement shows performance. Reject. It calculates ending capital.

SOLUTIONS TO CHAPTER 1 MINI EXERCISES 1. a. b. c. d. e. f. A L OE A A A

2. A. Shift in Assets B. Liabilities C. Cash 3. A. S B. I 4. $12,000 + $1,000 = $13,000 5. B. D. F. H. M. Kaminsky, Capital M. Kaminsky, Withdrawals Rent Expense Hair Salon Fees Earned

6. B. Accounts Payable C. Legal Fees Earned 7. A D 8. A. B. C. D. E. F. G. H. 9. A. B. C. D. OE BS BS BS IS IS OE BS OE BS IS IS SOLUTIONS TO EXERCISES 1-1. A. B. C. $ 8,000 $14,000 $ 6,000
ASSETS A. B. C. +$90,000 $600 + $600 +$900

($10,000 $2,000) ($6,000 + $8,000) ($10,000 $4,000)

= LIABILITIES + OWNERS EQUITY +$90,000 +$900

1-2.

EXERCISES (CONTINUED) 1-3.

AVONS CLEANERS BALANCE SHEET NOVEMBER 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Cleaning Equipment

$40 0 0 0 00 8 0 0 0 00

Total Assets

$48 0 0 0 00

Liabilities Accounts Payable Owners Equity A. Avon, Capital Total Liabilities and Owners Equity

$19 0 0 0 00 29 0 0 0 00 $48 0 0 0 00

1-4.
ASSETS
Accounts Rec.

= LIABILITIES +
Computer + Equip. = + Accounts Payable

OWNERS EQUITY
B. Wong, Capital + $60,000 B. Wong, Withd.

Cash A. B. C. D. E. F. G. 4,000 1,500 $68,300 200 +14,000 +$60,000

Revenue

Expenses

$7,000

+ $7,000 +$200 +$14,000

+$30,000

+30,000 +$4,000 +1,500

$ 30,000

$7,000 =

$7,000

$60,000

$ 200

$ 44,000

$ 5,500

$105,300 = $105,300

Remember, as withdrawals or expenses increase, the end result is to reduce owners equity.

EXERCISES (CONTINUED) 1-5. (A)

FRENCH REALTY INCOME STATEMENT FOR MONTH ENDED JUNE 30, 200X

Revenue: Professional Fees Operating Expenses: Salaries Expense Utilities Expense Rent Expense Total Operating Expenses Net Income

$2 9 0 0 00 $ 5 0 0 00 3 6 0 00 5 0 0 00 1 3 6 0 00 $1 5 4 0 00

(B)
FRENCH REALTY STATEMENT OF OWNERS EQUITY FOR MONTH ENDED JUNE 30, 200X

S. French, Capital, June 1, 200x Net Income for June Less: Withdrawals for June Increase in Capital S. French, Capital, June 30, 200x

$8 0 0 0 00 $1 5 4 0 00 (4 0 00) 1 5 0 0 00 $9 5 0 0 00

EXERCISES (CONTINUED) (C)

FRENCH REALTY BALANCE SHEET JUNE 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Rec. Office Equip.

$3 3 1 0 00 1 4 9 0 00 6 7 0 0 00

Total Assets

$1 5 0 0 00 1

Liabilities Accounts Payable Owners Equity S. French, Capital Total Liabilities and Owners Equity

$2 0 0 0 00 9 5 0 0 00 $11 5 0 0 00

SOLUTIONS TO A PROBLEMS PROBLEM 1 A-1

LEES NAIL CARE CENTER ASSET + = = = +$4,000 + + + 4,000 +1,000 14,000 400 $13,600 $ 5,000 $18,600 = = 5,000 = = +1,000 1,000 400 $600 $18,600 + $18,000 + 18,000 18,000 LIABILITIES Accounts Payable + OWNERS EQUITY + Lee Stone, Capital +$18,000 18,000

Cash TRANSACTION A NEW BALANCE TRANSACTION B NEW BALANCE TRANSACTION C NEW BALANCE TRANSACTION D ENDING BALANCE +$18,000 18,000 4,000 14,000

Equipment

PROBLEM 1A-2
GREENS ADVERTISING SERVICE BALANCE SHEET SEPTEMBER 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Equipment Building

$10 0 0 0 00 14 0 0 0 00 35 0 0 0 00

Liabilities Accounts Payable Owners Equity R. Green, Capital Total Liabilities and Owners Equity

$30 0 0 0 00

29 0 0 0 00

Total Assets

$59 0 0 0 00

59 0 0 0 00

PROBLEM 1 A-3

RICK FOX TYPING SERVICE = LIABILITIES + OWNERS EQUITY

ASSETS

Cash +$10,000 = 10,000 +$4,000 = 4,000 4,000 4,000 4,000 4,000 +900 + 2,100 4,000 + = 4,900 + 10,000 +$400 + $2,100 + $4,000 $15,640 = $4,900 $15,640 + $10,000 $400 + + + + + 10,000 10,000 10,000 + 10,000 10,000 = = = = + +$4,000 + 4,000 4,000 4,000 4,000 4,000 + +$2,100 + 2,100 2,100 2,100 + + + + + + + +

Accounts Receivable + = + +

Office Equipment

Accounts Payable

R. Fox, Capital

R. Fox, Withd.

Typing Revenue

Expenses

A.

+$10,000

BALANCE

10,000

B.

BALANCE

10,000

C.

+500 +

+$500 500 +2,100 2,600 +$350 2,600 2,600 2,600 350 +210 560 +900 1,460

BALANCE

10,500

D.

BALANCE

10,500

E.

350

BALANCE

10,150

F.

210

BALANCE

9,940

G.

BALANCE

9,940

H.

400

ENDING BALANCE

$9,540

$2,600

$1,460

PROBLEM 1A-4 (A)

WEST STENCILING SERVICE INCOME STATEMENT FOR MONTH ENDED JUNE 30, 200X

Revenue: Stenciling Fees Operating Expenses: Advertising Expense Repair Expense Travel Expense Supplies Expense Rent Expense Total Operating Expenses Net Income

$3 0 0 0 00

1 1 2 2 5 1 9 2 5

0 5 0 0 0

00 00 00 00 00 8 2 5 00 $2 1 7 5 00

(B)
WEST STENCILING SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED JUNE 30, 200X

J. West, Capital, June 1, 200x Net Income for June Less: Withdrawals for June Increase in Capital J. West, Capital, June 30, 200x

$1 2 0 0 00 $2 1 7 5 00 (3 0 0 00) 1 8 7 5 00 $3 0 7 5 00

(C)
WEST STENCILING SERVICE BALANCE SHEET JUNE 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Equipment

$2 3 0 0 00 4 0 0 00 6 8 5 00

Liabilities Accounts Payable Owners Equity J. West, Capital Total Liabilities and Owners Equity

3 1 0 00

0 7 5 00

Total Assets

$3 3 8 5 00

$3 3 8 5 00

TOBEYS CATERING SERVICE = LIABILITIES + OWNERS EQUITY

ASSETS

PROBLEM 1 A-5

Cash = + 20,000 + 20,000 20,000 20,000 20,000 20,000 20,000 + 400 400 + = = 2,100 + $200 $2,100 $24,060 = = + 400 +400 800 +600 1,400 + $1,400 $24,060 + + + 20,000 20,000 20,000 20,000 20,000 $20,000 +$90 90 90 90 90 $90 + + + + + + + + + + +$2,400 2,400 2,400 +300 2,700 2,700 2,700 2,700 +1,800 4,500 4,500 4,500 $4,500 + + + + + + + 1,700 1,700 1,700 1,700 1,700 1,700 1,700 = = = 400 = 400 = 400 = 400 + + + + + 200 200 200 200 200 + + + + + + + + + + +$300 300 100 200 + = = +$1,000 1,000 600 400 +$700 700 +1,000 1,700 = +$20,000 20,000

+ Equipment

Accounts Receivable + = + + Expenses

Accounts Payable

J. Tobey, Capital

J. Tobey, Withd.

Catering Revenue

+$20,000 20,000 700 19,300

19,300 600 18,700 +2,400 21,100 690 20,410

+$690 690 690 690 +60 750 750 750 750 +600 1,350 +400 $1,750

9 1,700 +400 2,100

10/25 BALANCE 10/27 BALANCE 10/28 BALANCE 10/29 BALANCE 11/1 BALANCE 11/5 BALANCE 11/8 BALANCE 11/10 BALANCE 11/15 BALANCE 11/17 BALANCE 11/20 BALANCE 11/25 BALANCE

20,410 +100 20,510 60 20,450 90 20,360 +1,800 22,160

22,160

11/28 BALANCE 11/30 END BAL.

22,160 400 $21,760

PROBLEM 1A-5 (CONTINUED) (B)

TOBEYS CATERING SERVICE BALANCE SHEET OCTOBER 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Equipment

$18 7 0 0 00 1 7 0 0 00

Liabilities Accounts Payable Owners Equity J. Tobey, Capital Total Liabilities and Owners Equity

$ 4 0 0 00

20 0 0 0 00

Total Assets

$20 4 0 0 00

$20 4 0 0 00

(C)
TOBEYS CATERING SERVICE INCOME STATEMENT FOR MONTH ENDED NOVEMBER 30, 200X

Revenue: Catering Fees Operating Expenses: Salaries Expense Telephone Expense Rent Expense Supplies Expense Total Operating Expenses Net Income

$4 5 0 0 00

6 9 6 6 0 4 0

0 0 0 0

00 00 00 00 1 7 5 0 00 $2 7 5 0 00

(D)
TOBEYS CATERING SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED NOVEMBER 30, 200X

John Tobey, Capital, November 1, 200x Net Income for November Less: Withdrawals for November Increase in Capital John Tobey, Capital, November 30, 200x

$20 0 0 0 00 $2 7 5 0 00 (9 0 00) 2 6 6 0 00 $22 6 6 0 00

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PROBLEM 1A-5 (CONCLUDED) (E)

TOBEYS CATERING SERVICE BALANCE SHEET NOVEMBER 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Equipment

$21 7 6 0 00 2 0 0 00 2 1 0 0 00

Total Assets

$24 0 6 0 00

Liabilities Accounts Payable Owners Equity John Tobey, Capital Total Liabilities and Owners Equity

$1 4 0 0 00 22 6 6 0 00 $24 0 6 0 00

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SOLUTIONS TO B PROBLEMS PROBLEM 1 B-1

LEES NAIL CARE CENTER ASSET + = = = +$1,800 21,000 800 20,200 3,000 $17,200 + + 1,800 +3,000 $ 4,800 $22,000 = = $ 1,000 $22,000 + $21,000 = + 1,800 = +$1,800 1,800 800 1,000 + 21,000 + 21,000 LIABILITIES Accounts Payable + OWNERS EQUITY + Lee Stone, Capital +$21,000 21,000

Cash TRANSACTION A NEW BALANCE TRANSACTION B NEW BALANCE TRANSACTION C NEW BALANCE TRANSACTION D ENDING BALANCE +$21,000 21,000

Equipment

PROBLEM 1 B-2
GREENS ADVERTISING SERVICE BALANCE SHEET SEPTEMBER 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Equipment Building

$32 0 0 0 00 41 0 0 0 00 16 0 0 0 00

Liabilities Accounts Payable Owners Equity R. Green, Capital Total Liabilities and Owners Equity

$70 0 0 0 00

19 0 0 0 00

Total Assets

$89 0 0 0 00

$89 0 0 0 00

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PROBLEM 1 B-3

RICK FOX TYPING SERVICE ASSETS = LIABILITIES + OWNERS EQUITY

Cash = + + 3,000 3,000 3,000 3,000 3,000 = = = 3,000 3,000 3,000 +100 $3,000 $14,820 = $3,100 = $14,820 = 3,000 + + + + 3,000 + + + 2,690 2,690 + + + +2,690 2,690 + + = + +$3,000 3,000 + 9,000 9,000 9,000 9,000 9,000 9,000 +$3,000 = 3,000 +$9,000 9,000

Accounts Receivable + = +

Office Equipment

Accounts Payable

R. Fox, Capital

R. Fox, Withd.

Typing Revenue

Expenses

A. BALANCE B. BALANCE C.

+$9,000 9,000

9,000 +1,290

+$1,290 + + + + +$350 350 + 1,290 1,290 +2,690 3,980 3,980 3,980 +$310 310 310 +500 810 810 +100 + $9,000 $350 + $3,980 $910

13 9,980 500 9,480 350 9,130 + $2,690 +

BALANCE D. BALANCE E. BALANCE F. BALANCE G. BALANCE H. ENDING BALANCE

10,290 310 9,980

$9,130

PROBLEM 1 B-4 (A)

WEST STENCILING SERVICE INCOME STATEMENT FOR MONTH ENDED JUNE 30, 200X

Revenue: Stenciling Fees Operating Expenses: Advertising Expense Repair Expense Travel Expense Supplies Expense Rent Expense Total Operating Expenses Net Income

$1 0 9 8 00

1 3 4 9 2 7 2 4

5 5 0 0 0

00 00 00 00 00 $ 7 8 0 00 3 1 8 00

(B)
WEST STENCILING SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED JUNE 30, 200X

J. West, Capital, June 1, 200x Net Income for June Less: Withdrawals for June Decrease in Capital J. West, Capital, June 30, 200x

$3 7 2 0 00 $ 3 1 8 00 (3 6 0 00) 4 2 00 $3 6 7 8 00

(C)
WEST STENCILING SERVICE BALANCE SHEET JUNE 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Equipment

$2 0 4 3 00 1 1 4 0 00 5 4 0 00

Liabilities Accounts Payable Owners Equity J. West, Capital Total Liabilities and Owners Equity

4 5 00

6 7 8 00

Total Assets

$3 7 2 3 00

$3 7 2 3 00

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TOBEYS CATERING SERVICE = LIABILITIES + OWNERS EQUITY

ASSETS

PROBLEM 1 B-5

Cash = + 17,500 17,500 17,500 17,500 17,500 17,500 17,500 + 600 600 = = 2,700 + $2,700 $25,005 = = + + 600 +300 900 +750 1,650 + $1,650 $25,005 + + + 17,500 17,500 17,500 17,500 17,500 $17,500 +$650 650 = 650 650 650 $650 + + + + + + + + + + +$2,000 2,000 2,000 +4,500 6,500 6,500 6,500 6,500 +1,800 8,300 8,300 8,300 $8,300 + + 2,400 2,400 2,400 2,400 2,400 2,400 2,400 = = 600 + = 600 + = 600 + = 600 + + + + + + 3,500 3,500 3,500 3,500 3,500 $3,500 + + + + + + + + + + +$4,500 4,500 1,000 3,500 + = 900 300 600 + = + +$900 900 +1,500 2,400 = + +$900 900 +$17,500 17,500

+ Equipment

Accounts Receivable + = + + Expenses

Accounts Payable

J. Tobey, Capital

J. Tobey, Withd.

Catering Revenue

+$17,500 17,500

17,500 1,500 16,000 300 15,700 +2,000 17,700 350 17,350

+$350 350 350 350 +95 445 445 445 445 +750 1,195 +600 $1,795

15 2,400 +300 2,700

10/25 BALANCE 10/27 BALANCE 10/28 BALANCE 10/29 BALANCE 11/1 BALANCE 11/5 BALANCE 11/8 BALANCE 11/10 BALANCE 11/15 BALANCE 11/17 BALANCE 11/20 BALANCE 11/25 BALANCE

17,350 +1,000 18,350 95 18,255 650 17,605 +1,800 19,405

19,405

11/28 BALANCE 11/30 END BAL.

19,405 600 $18,805

PROBLEM 1 B-5 (CONTINUED) (B)

TOBEYS CATERING SERVICE BALANCE SHEET OCTOBER 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Equipment

$15 7 0 0 00 2 4 0 0 00

Liabilities Accounts Payable Owners Equity J. Tobey, Capital Total Liabilities and Owners Equity

6 0 0 00

17 5 0 0 00

Total Assets

$18 1 0 0 00

$18 1 0 0 00

(C)
TOBEYS CATERING SERVICE INCOME STATEMENT FOR MONTH ENDED NOVEMBER 30, 200X

Revenue: Catering Fees Operating Expenses: Salaries Expense Telephone Expense Rent Expense Supplies Expense Total Operating Expenses Net Income

$8 3 0 0 00

3 5 9 7 5 6 0

0 5 0 0

00 00 00 00 1 7 9 5 00 $6 5 0 5 00

(D)
TOBEYS CATERING SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED NOVEMBER 30, 200X

John Tobey, Capital, November 1, 200x Net Income for November Less: Withdrawals for November Increase in Capital John Tobey, Capital, November 30, 200x

$17 5 0 0 00 $6 5 0 5 00 (6 5 0 00) 5 8 5 5 00 $23 3 5 5 00

16

PROBLEM 1 B-5 (CONCLUDED) (E)

TOBEYS CATERING SERVICE BALANCE SHEET NOVEMBER 30, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Equipment

$18 8 0 5 00 3 5 0 0 00 2 7 0 0 00

Total Assets

$25 0 0 5 00

Liabilities Accounts Payable Owners Equity John Tobey, Capital Total Liabilities and Owners Equity

$1 6 5 0 00 23 3 5 5 00 $25 0 0 5 00

17

SOLUTION TO REAL WORLD APPLICATION #1

RONS WINDOW WASHING CO. INCOME STATEMENT FOR YEAR ENDED DECEMBER 31, 200X Revenue: Window Cleaning Operating Expenses: Salaries Expense Supplies Expense Interest Expense Advertising Expense Total Operating Expenses Net Income $6,880 1,400 300 95 8,675 $ 5,601 $14,276

Insights $11,376 + 2,900 $14,276 $ 5,080 +1,800 $ 6,880

SOLUTION TO REAL WORLD APPLICATION #2

LUNE CO. BALANCE SHEET DECEMBER 31, 200X ASSETS Cash Accounts Receivable Land Building Desks Auto Total Assets $10 0 1 6 00 104 3 3 7 00 72 9 3 5 00 44 6 0 0 00 6 8 2 5 00 14 2 6 8 00 $252 9 8 1 00 LIABILITIES AND OWNERS EQUITY Liabilities Notes Payable Accounts Payable Total Liabilities Owners Equity J. Lune, Capital Total Liabilities and Owners Equity

$75 127

3 2 8 00 6 0 4 00 $202 9 3 2 00 50 0 4 9 00 $252 9 8 1 00

(2) Slowe does not seem to understand the basic accounting equation, the classification of accounts, or the double-entry accounting system which would keep all of the accounts in balance (including the Capital account). If she stays in the position of bookkeeper it is likely that the accounting records will not be accurate.

18

(3)
LUNE CO. BALANCE SHEET DECEMBER 31, 200X ASSETS Cash Accounts Receivable Land Building Desks Auto Total Assets $28 104 72 44 14 20 0 3 9 6 8 2 1 3 3 0 2 6 6 7 5 0 5 8 00 00 00 00 00 00 LIABILITIES AND OWNERS EQUITY Liabilities Notes Payable Accounts Payable Total Liabilities Owners Equity J. Lune, Capital Total Liabilities and Owners Equity

$79 127

3 2 8 00 6 0 4 00 $206 9 3 2 00 78 0 4 9 00 $284 9 8 1 00

$284 9 8 1 00

Insight
Cash 10,016 2,000 20,000 Desks 6,825 8,000 Auto 14,268 6,000 J. Lune 50,049 28,000 Notes Payable 75,328 4,000

SOLUTION TO REAL WORLD APPLICATION #3 The questions in this case is whether Paul should be allowed to pad his expense account with an additional $100 of expenses. I feel that Paul should only be allowed to expense those items that are business related. Pauls argument that he is entitled to an additional $100 is not a valid assumption. However, he should be allocated money for any business expenses during the weekend.

19

ELDORADO COMPUTER CENTER = LIABILITIES + OWNERS EQUITY

ASSETS

Cash = + 4,500 4,500 4,500 4,500 4,500 4,500 4,500 = 600 $600 $5,900 = = 335 + $335 + $5,900 4,500 $4,500 +100 $100 + + + + + + 1,200 1,200 1,200 1,200 1,200 1,200 1,200 $1,200 + + + 600 = + 600 = + 600 = 250 + + 600 = 250 + + 600 = +$250 250 + +$250 250 + + + + + + + 250 250 250 250 250 $250 + +$600 600 = + +$1,200 1,200 = + +$4,500 4,500

SOLUTION TO CONTINUING PROBLEM

+ Supplies

Computer Office Accounts Freedman, Freedman, + Shop Equipment + Equipment = Payable + Capital Withdrawals + Revenue

Expenses

+$4,500 4,500 1,200 3,300 600 2,700

+$250 250 +200 450 450 +1,200 1,650 $1,650

+$400 (Rent) 400 400 400 +85 (Electric) 485 485 $485

2,700 400 2,300 +250 2,550 +200 2,750 250 + +85 335 +

A. BALANCE B. BALANCE C. BALANCE D. BALANCE E. BALANCE F. BALANCE G. BALANCE H. BALANCE I. BALANCE J. END BALANCE

2,750 +1,200 3,950 100 $3,850

ELDORADO COMPUTER CENTER INCOME STATEMENT FOR THE MONTH ENDED JULY 31, 200X

Revenue: Service Revenue Operating Expenses: Rent Expense Electric Expense Total Operating Expenses Net Income

$1 6 5 0 00

4 0 0 00 8 5 00 4 8 5 00 $1 1 6 5 00

ELDORADO COMPUTER CENTER STATEMENT OF OWNERS EQUITY FOR MONTH ENDED JULY 31, 200X

T. Freedman, Capital, July 1, 200X Net Income for July Less: Withdrawals for July Increase in Capital T. Freedman, Capital, July 31, 200X

$4 5 0 0 00 $1 1 6 5 00 (1 0 0 00) $1 0 6 5 00 $5 5 6 5 00

ELDORADO COMPUTER CENTER BALANCE SHEET JULY 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Supplies Computer Shop Equipment Office Equipment Total Assets

$3 8 2 1 2 6

5 5 0 0

0 0 0 0

00 00 00 00

Liabilities: Accounts Payable Owners Equity T. Freedman, Capital Total Liabilities and Owners Equity

3 3 5 00

$5 9 0 0 00

5 5 6 5 00 $5 9 0 0 00

21