Generally Accepted Accounting Principles and Key Ideas CHECK YOUR READING. a=nrapply YOUR KNOWLEDGE

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1 90 CHAPTER 3 The Income Statement Generally Accepted Accounting Principles and Key Ideas In this chapter, you learned the following Generally Accepted Accounting Principles: The Time-Period Principle: Each company sets and defines an accounting period. The period may be a month, three months, a year, etc. The company consistently uses the same time period when it prepares its financial statements. The Matching Principle: The costs recorded in the expense accounts should be matched with the revenue of the same accounting period to determine net income. You also learned the following key ideas: The accrul basis of accounting records revenue when it is earned, whether that revenue is in the form of cash or credit granted. Expenses are recorded when incurred, whether those expenses are paid for in cash or credit granted by the supplier. CHECK YOUR READING Questions 13. (a) Does revenue increase or decrease owner's equity? (b) Do expenses increase or decrease owner's equity? 14. (a) What is the increase side for revenue accounts? Why? (b) What is the increase side for expense accounts? Why? 15. (a) Give an example of a transaction that is recorded in the owner's Drawings account. (b) On which financial statement does the owner's Drawings account appear? 16. In which account is the payment of a salary to the owner recorded? 17. What is a report form balance sheet? 18. Which financial statement is prepared first? Why? a=nrapply YOUR KNOWLEDGE Exercises Part A 8. The following accounts are found in the general ledger of Almond Nursery School: Cash; Accounts Receivable; Playground Equipment; Accounts Payable; L. Almond, Drawings; Fees Earned; Advertising Expense; Automobile Expense; Salaries Expense. Referring to these accounts, analyze the transactions shown on the next page for this business. Use the format demonstrated in the example to assist you. List the debit portion of the entry before the credit portion. Transaction (a) has been done for you.

2 Revenue and Expense Accounts UNIT 5 91 (a) Received $155 cash from a client for the weekly nursery school fees. (b) Paid $35 cash for gas for the station wagon used to transport the children to school. (c) Received a bill for $100 from the Standard for advertising. (d) Purchased a new swing set for the playground from School Supply for $350 on credit. (e) Paid the weekly salary of $3000 to the staff. (f) The owner, L. Almond, withdrew $500 for personal use. (g) Paid the $100 bill received previously from the Standard. Example: Type of Increase/ Debit/ Transaction Account Affected Account Decrease Credit Amount (a) Cash Asset Increase Debit $155 Fees Earned Revenue Increase Credit Gibson's Service Centre repairs automobiles on a cash or credit basis. Accounts in the general ledger include: Cash $10 000; Accounts Receivable $3500; Tools $5500; Equipment $25 500; Accounts Payable $2200; P. Gibson, Drawings; P. Gibson, Capital $42 300; Repair Service Revenue; Advertising Expense; Rent Expense; Telephone Expense. Transactions that occurred during October are given below. (a) Set up a T-account ledger, then record the balances and the following transactions. (b) Prepare a trial balance. Oct. 2 Paid the monthly rent of $4000 to Deneer Co. 3 Repaired Jim Jones' car and billed him $ Purchased a new set of tools for $1275 on credit from Tool Supply. 6 Received a bill for $475 from the Gazette for advertising. 6 Paid Auto Supply $750 for amounts owing to them. 7 Paid the telephone bill received today, $ The owner, P. Gibson, withdrew $500 for his own use. 11 Received $215 cash from a customer for a tune-up and oil change done today. 11 Received $175 cash on account from a customer who was sent a bill last month. 10. Record the following transactions for Stokes Driving School in these accounts: Cash; Accounts Receivable/L. Starr; Equipment; Automobiles; Accounts Payable/Grant's Esso; R. Stokes, Capital; Revenue from Lessons; Salaries Expense; Advertising Expense; Automobile Expense; Utilities Expense.

3 92 CHAPTER 3 The Income Statement Aug. 1 R. Stokes invested $ cash. 2 Purchased equipment for $2000 cash. 4 Purchased two cars from Dardick Motors for $ cash. 5 Received $700 cash from customers' driving lessons. 7 Paid $700 cash for instructor's salary for the first week. 9 Paid $45 cash to the telephone company. 10 Received $800 cash from customers taking driving lessons. 11 Issued a bill of $100 to L. Starr, who is taking lessons but will pay at a later date. 11 Received a bill for $75 from Grant's Esso for gas and oil used by the cars. 12 Paid $95 cash for hydro and electricity. 13 Sent a $290 cheque to the Daily Star for advertising space. 14 Received $100 cash from L. Starr in payment of a bill sent previously. (a) Balance the accounts and prepare a trial balance. (b) Prepare an income statement for the two weeks ended August The T-accounts shown on the next page contain a series of transactions for Tancredi Realty. For each of the labelled entries, indicate how the accounts have changed and the transaction that must have occurred to generate the entry. The chart below, with transaction (a) done as an example, will assist you in completing the question. Example: Type of Increase/ Debit/ Transaction Account Affected Account Decrease Credit Amount (a) Cash Asset Increase Debit $500 Accounts Receivable Asset Decrease Credit 500 Cash increased and Accounts Receivable decreased. Therefore, an account ceivable was collected. ve 12. Complete the following chart by indicating the amount of the increase or decrease in Capital and the ending amount in Capital. i Beginning Net Net Inc. or Dec. Ending --' Capital Income Loss Drawings in Capital Capital (a) $ $1 000 $ 500?? (b) ? (c) $ ??,..., (d) ? _-//

4 Revenue and Expense Accounts UNIT 5 93 Cash General Ledger Balance (b) 100 (b) 100 (a) 500 (d) 650 ( (g) (h) 90 (i) 175 Accounts Receivable J. Tancredi, Drawings Commissions Earned Balance (a) 500 (c) (c) ( Office Furniture Balance (d) 650 Office Salaries Expense Office Equipment Balance (e) 400 Advertising Expense Accounts Payable Bank Loan Balance (g) (e) 400 Balance (h) 90 Rent Expense Telephone Expense J. Tancredi, Capital Utilities Expense Balance (j) Prepare the owner's equity section of the balance sheet for each of the following three months for Dr. W. Lucey, who has just begun a medical practice. (a) Capital Balance January 1 $ Net Loss for January Drawings for January (b) Capital Balance February 1 Net Income for February Drawings for February (c) Capital Balance March 1 Net Income for March Drawings for March 4 500

5 94 CHAPTER 3 The Income Statement Exercises Part B 14. On April 1, Ted's Golfing School had the following accounts, some with balances and some without: Cash $3000; Accounts Receivable/P. Moores $150; Accounts Receivable/L. Troop; Equipment $4700; Accounts Payable/Jack's Repair Shop $750; T. Craig, Capital $7100; Fees Income; Advertising Expense; Rent Expense; Equipment Repairs Expense; Utilities Expense. (a) Set up the general ledger for Ted's Golfing School on April 1 and record the transactions listed below. (b) On April 12, balance the accounts and prepare a trial balance, an income statement for the two weeks, and a balance sheet. Apr. 2 Received $300 cash from customers for golf lessons. 2 Issued a bill for $95 to L. Troop for lessons that will be paid for later. 3 Paid $1400 cash to United Realty for the monthly rent. 4 Received $50 cash from P. Moores to be applied to amount outstanding. 5 Received a $175 bill from Jack's Repair Shop for repairing equipment. 8 Received $2000 cash from customers for lessons. 8 Issued another $45 bill to L. Troop for lessons. 9 Received $100 cash from P. Moores to pay balance owed. 10 Received a $500 bill for equipment bought from Jack's Repair Shop. 12 Paid $90 cash for electricity and water. 12 Paid $300 to Jack's Repair Shop to reduce the balance owing. 12 Paid $355 cash to the Gazette for advertising. 15. On October 1, the Courtland Cougars Hockey Team, owned by J. Lambert, had the following accounts, some with balances and some without: Cash $12 000; Accounts Receivable/Stokes Dept. Stores; Equipment $4000; Bus $15 000; Accounts Payable/Klaman Motors $5300; J. Lambert, Capital $25 700; Ticket Sales; Players' Salaries Expense; Bus Maintenance Expense; Arena Rental Expense; Advertising Expense. (a) Set up the general ledger for the hockey team on October 1, and record the transactions given below for the month of October. (b) On October 31, balance the accounts and prepare a trial balance, an income statement for the month, and a balance sheet. Oct. 2 Received $ cash from sales of season tickets. 4 Purchased equipment for $3000 cash. 8 Received a $250 bill from Klaman Motors for repairs to the team bus. 9 Issued a bill for $2100 to Stokes Department Stores, which bought 500 tickets for the team's opening home game. (The tickets will be used for promotional purposes.) 10 Paid a $350 rental fee for use of the arena for the last two weeks' practice.

6 Revenue and Expense Accounts UNIT Issued cheques for $ to pay the players' salaries for the past two weeks. 16 Paid $350 cash to KCV TV for advertising the first home game on October Paid $470 to the Daily Reporter for advertising. 20 The week's sale of tickets for the opening game brought in $3500 in cash. 24 Paid $50 cash for gas and oil for the bus on the first awayfrom-home game. 26 Received a further $8700 cash for ticket sales on the opening game. 28 Paid $2100 cash to the arena for the last two week's rent. 29 Issued cheques for $9800 to pay the players' salaries for the rest of the month. 16. The Foothills Flyers are a minor league professional baseball team owned by Dawn French. A partial list of the accounts used by the team are as follows: Cash $10 000; Equipment; Accounts Payable; Bank Loan $10 000; D. French, Capital; D. French, Drawings; Gate Receipts; Parking Revenue; Concession Revenue; Advertising Expense; Players' Salaries Expense; Interest Expense; Rent Expense; Transportation Expense. (a) Set up the general ledger for Foothills Flyers Baseball Club Inc. Record the following transactions and calculate the account balances. Jun. 1 D. French, the owner, invested an additional $ in the team. 1 Received a bill for $750 from the Gazette for advertising. The amount is due in 30 days. 2 Purchased a new speaker system for the field from Electronics Inc. Paid $500 cash and the remaining $1500 is to be paid in 30 days. 2 Paid the players' salaries for the week, $ The game today produced gate receipts $4500, parking revenue $490, and concession revenue $ Signed a new player to a standard player's contract calling for a payment of $750 per week for the remainder of the season. The player will join the club for tomorrow's game. 4 Made the regular monthly payment of $1000 on the bank loan. The payment consisted of $100 in interest and $900 that reduced the amount of the loan. 4 Today's game generated gate receipts of $3900, parking revenue of $425, and concession revenue of $ Paid the stadium rent to the city for the last two games. The rent was 10 percent of gate receipts. 5 The owner, D. French, withdrew $700 to make the monthly payment to GMAC on her personal car loan. 5 Received a bill from Buckley's Transit for the bus used on the last road trips, $2200. Sent a cheque in full payment.

7 96 CHAPTER 3 The Income Statement 17. A random-order list of accounts and balances for a one-month accounting period is shown below for TAC Plumbing. Prepare the financial statements for the company on February 28. r- General Expense $ 500 Cash --- $6 500 Accounts Receivable Salaries Expense Rent Expense Plumbing Supplies Equipment Advertising Expense 900 Truck Sales Accounts Payable C. Bell, Drawings C. Bell, Capital Bank Loan 4 Computer Accounting Canadian Tire Stores Canadian Tire stores are found in most communities in Canada. There are about 444 Canadian Tire retail outlets located across all ten provinces. In the following case profile, we will examine how this Canadian Tire store uses computers to complete some of its accounting tasks. The store is located on Heron Road in Ottawa and is owned by Ken MacEachern. There are approximately 160 employees involved in running the store and an automotive repair centre. Accounting System Outside of management, there are five people involved in accounting in this business. As well, several major accounting functions are contracted from outside companies. A breakdown of the accounting system follows. The office manager coordinates the payroll, financial statements, and general ledger functions. Payroll Services The payroll is prepared in-house using a computerized payroll system and distributed by the Canadian Imperial Bank of Commerce. Employee work information is sent to the bank and the bank calculates gross pay, deductions, and net earnings and provides a pay statement for each employee. The bank provides a payroll summary to the company for its records.