1 Accounting Concepts and Procedures
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1 1 Accounting Concepts and Procedures ANSWERS TO DISCUSSION QUESTIONS AND CRITICAL THINKING/ETHICAL CASE 1. The functions of accounting are to analyze, record, classify, summarize, report, and interpret financial information. 2. Sole proprietorship 1 owner; unlimited liability; easy to form; limited life Partnership 2 or more owners; unlimited liability; easy to form; limited life Corporation Stockholders; limited liability; difficult to form; unlimited life 3. Businesses are classified as service, merchandise, or manufacturing. 4. Computer technology has greatly reduced the time required for performing the bookkeeping function. 5. The three elements of the basic accounting equation are assets, liabilities, and owner's equity. 6. Capital is the owner's current investment or equity in the assets of a business. It is one subdivision of owner's equity. 7. True. The sum of the left side of the equation (assets) must equal the sum of the right side of the equation (liabilities and owner's equity). 8. False. That is the income statement. 9. False. Revenue is a subdivision of owner's equity. 1. Owner's equity is subdivided into Capital, Withdrawals, Revenue, and Expenses. 11. False. It is nonbusiness expense of the owner; a subdivision of owner's equity. It is not a business expense. 12. False. As expenses increase, owner's equity decreases. 13. Revenue less Expenses; an income statement shows performance over time. 14. False. It calculates ending capital. 15. The question in this case is whether Paul should be allowed to "pad" his expense account with an additional $1 of expenses. I feel that Paul should only be allowed to expense those items that are business related. Paul's argument that he is entitled to an additional $1 is not a valid assumption. However, he should be reimbursed for any business expenses during the weekend. Copyright 216 Pearson Education, Inc. 11
2 SOLUTIONS TO CONCEPT CHECKS 1. a. A b. A c. L d. A e. OE f. A 2. a. Liabilities b. Total Assets c. Accounts Payable 3. a. I b. S 4. Total assets Cash $31, Warehouse equipment $3, $34, 5. b. J. Penny, Capital d. J. Penny, Withdrawals f. Advertising Expense g. Taxi Fees Earned 6. c. Accounts Payable d. Grooming Fees Earned 7. a,b,d 8. a. IS b. BS c. BS d. BS e. IS f. IS g. OE h. BS 9. a. OE b. BS c. BS d. IS Copyright 216 Pearson Education, Inc. 12
3 SOLUTIONS TO SET A EXERCISES 1A1. a. $3, $8, $22, b. $15, $7, $98, c. $25, $11, OE OE should be $14, 1A2. Assets Liabilities Owner s Equity Cash Equipment Accounts Matty, Capital Payable a. 13, 13, b. (1,1) 1,1 c A3. RIDEOUT COMPANY CLEANERS SHEET NOVEMBER 3, 21X Assets Liabilities and Owner s Equity Cash $71 Liabilities Equipment 12 Accounts Payable $15 1 Total Liabilities 15 1 Owner's Equity B. Rideout, Capital 67 9 Total Assets $83 Owner's Equity $83 Copyright 216 Pearson Education, Inc. 13
4 EXERCISES(CONTINUED) 1A4. LIABILITIES OWNER'S EQUITY B. B. Accounts Computer Accounts Black, Black, Cash Rec. Equip. Payable Capital Withd. Revenues Expenses a. 6, 6, b. 7, 7, c. (1) 1 d. 14,3 14,3 e. 3,6 3,6 f. (3,6) 3,6 g. (1,47) 1,47 Remember, as withdrawals or expenses increase, the end result is to reduce owner's equity. Copyright 216 Pearson Education, Inc. 14
5 EXERCISES (CONTINUED) 1A5. (a) FREDERICK REALTY INCOME STATEMENT MONTH ENDED NOVEMBER 3, 21X Revenue: Professional Fees $3 Operating Expenses: Salaries Expense $ 5 5 Utilities Expense 2 Rent Expense 8 Total Operating Expenses Net Income $1 4 5 (b) FREDERICK REALTY STATEMENT OF OWNER S EQUITY MONTH ENDED NOVEMBER 3, 21X S. Frederick, Capital, November 1, 21X $9 Net Income for November $1 4 5 Less: Withdrawals for November (1 2 ) Increase in Capital S. Frederick, Capital, November 3, 21X $1 3 3 (c) FREDERICK REALTY SHEET NOVEMBER 3, 21X Assets Liabilities and Owner s Equity Cash $4 8 Liabilities Accounts Receivable Accounts Payable $4 Office Equipment 8 3 Owner's Equity S. Frederick, Capital Total Assets $ Owner's Equity $ Copyright 216 Pearson Education, Inc. 15
6 SOLUTIONS TO SET B EXERCISES 1B1. a. $27, $7, $2, b. $85, $12, $73, c. $3, $5, $25, 1B2. Assets Liabilities Owner s Equity Cash Equipment Accounts Mandy, Capital Payable a. 114, 114, b. (1,6) 1,6 c. 1,15 1,15 1B3. ROLLAND COMPANY CLEANERS SHEET JUNE 3, 21X LIABILITIES AND OWNER S EQUITY Cash $52 Liabilities Equipment 36 Accounts Payable $11 Total Liabilities $11 Owner's Equity B. Rolland, Capital $77 Total Assets $88 Owner's Equity $88 Copyright 216 Pearson Education, Inc. 16
7 EXERCISES(CONTINUED) 1B4. LIABILITIES OWNER'S EQUITY B. B. Accounts Computer Accounts Bell, Bell, Cash Rec. Equip. Payable Capital Withdr. Revenues Expenses a. 45, 45, b. 9,5 9,5 c. (75) 75 d. 14,1 14,1 e. 29,6 29,6 f. (3,4) 3,4 g. (1,5) 1,5 Remember, as withdrawals or expenses increase, the end result is to reduce owner's equity. Copyright 216 Pearson Education, Inc. 17
8 EXERCISES (CONTINUED) 1B5. (a) FRENCH REALTY INCOME STATEMENT MONTH ENDED SEPTEMBER 3, 21X Revenue: Professional Fees $3 4 Operating Expenses: Salaries Expense $ Utilities Expense 3 Rent Expense Total Operating Expenses 1 2 Net Income $2 2 (b) FRENCH REALTY STATEMENT OF OWNER'S EQUITY MONTH ENDED SEPTEMBER 3, 21X S. French, Capital, September 1, 21X $6 5 Net Income for September $2 2 Less: Withdrawals for September (2 ) Increase in Capital 2 S. French, Capital, September 3, 21X $8 5 (c) FRENCH REALTY SHEET SEPTEMBER 3, 21X LIABILITIES AND OWNER'S EQUITY Cash $2 9 Liabilities Accounts Receivable Accounts Payable $7 Office Equipment 1 4 Owner's Equity S. French, Capital 8 5 Total Assets $15 5 Owner's Equity $15 5 Copyright 216 Pearson Education, Inc. 18
9 SOLUTIONS TO SET A PROBLEMS PROBLEM 1A1 MORGAN'S NAIL SPA Transaction Assets Liabilities Owner s Equity Cash Store Equipment Accounts Payable M. Amberson, Capital a. 16, 16, b. (3,7) 3,7 c. 6,5 6,5 d. (6) (6) Total 11,7 9,75 5,45 16, PROBLEM 1A2 SHEA S INTERNET SERVICE SHEET JUNE 3, 21X Cash $38 Liabilities LIABILITIES AND OWNER'S EQUITY Equipment 39 Accounts Payable $14 Building 55 Owner's Equity Shea, Capital 118 Total Assets $132 Owner's Equity $132 Copyright 216 Pearson Education, Inc. 19
10 Copyright 216 Pearson Education, Inc. 11 PROBLEM 1A3 Expenses ,2 1,645 1,645 OWNER'S EQUITY Computer Service Revenue 8 8 2,1 2,9 2,9 2,9 2,9 2,9 FONTAN COMPUTER SERVICE R. Fontan, Withd. 7 7 R. Fontan, Capital 25, 25, 25, 25, 25, 25, 25, 25, 25, LIABILITIES Accounts Payable 2,5 2,5 2,5 2,5 2,5 2,5 1,2 3,7 3,7 29,255 Office Equipment 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 29,255 Accounts Receivable 2,1 2,1 2,1 2,1 2,1 2,1 Cash 25, 25, 25, 8 25,8 25,8 (275) 25,525 (17) 25,355 25,355 (7) 24,655 a. b. c. d. e. f. g. h. ENDING
11 PROBLEM 1A4 (a) WILLIAMS HOME DECORATING SERVICE INCOME STATEMENT MONTH ENDED SEPTEMBER 3, 21X Revenue: Home Decorating Fees $2 7 Operating Expenses: Advertising Expense $ Repair Expense 4 5 Travel Expense 6 5 Supplies Expense Rent Expense 1 5 Total Operating Expenses Net Income $ (b) WILLIAMS HOME DECORATING SERVICE STATEMENT OF OWNER'S EQUITY MONTH ENDED SEPTEMBER 3, 21X J. Williams, Capital, September 1, 21X $2 5 Net Income for September $ Less: Withdrawals for September (3 ) Increase in Capital J. Williams, Capital, September 3, 21X $ (c) WILLIAMS HOME DECORATING SERVICE SHEET SEPTEMBER 3, 21X Cash $2 1 Liabilities LIABILITIES AND OWNER'S EQUITY Accounts Receivable 1 5 Accounts Payable $ 4 5 Decorating Equipment Owner's Equity J. Williams, Capital Total Assets $ Owner's Equity $ Copyright 216 Pearson Education, Inc. 111
12 Copyright 216 Pearson Education, Inc. 112 PROBLEM 1A5 OWNER S EQIUTY Expenses ,2 1,2 1,2 1,2 65 1,85 3 2,15 Catering Revenue 1,3 1,3 1,3 5 1,8 1,8 1,8 1,8 1,8 3,6 3,6 3,6 3,6 TANSON S CATERING SERVICE J. Tanson, Withd J. Tanson, Capital 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, LIABILITIES Accounts Payable 2, 2, (9) 11 1,1 1,1 11 1,1 1,1 1,1 1,1 1,2 2,3 65 2,95 2,95 $24,24 Equipment 2,3 2,3 2, 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 1,2 5,5 5,5 5,5 $24,24 Accounts Receivable 5 5 (25) Cash 2, 2, (2,3) 17,7 17,7 (9) 16,8 1,3 18,1 (8) 17,3 17, ,55 (4) 17,15 (16) 16,99 1,8 18,79 18,79 18,79 (3) 18,49 1/25 1/27 1/28 1/29 11/1 11/5 11/8 11/1 11/15 11/17 11/2 11/25 11/28 11/3 END BAL.
13 PROBLEM 1A5 (CONTINUED) (b) TANSON'S CATERING SERVICE SHEET OCTOBER 31, 21X Cash $16 8 Liabilities LIABILITIES AND OWNER'S EQUITY Equipment 4 3 Accounts Payable $1 1 Owner's Equity J. Tanson, Capital 2 Total Assets $21 1 Owner's Equity $21 1 (c) Revenue: TANSON'S CATERING SERVICE INCOME STATEMENT MONTH ENDED NOVEMBER 3, 21X Catering Revenue $3 6 Operating Expenses: Salaries Expense $ 8 Telephone Expense 4 Rent Expense 6 5 Supplies Expense 3 Total Operating Expenses Net Income $1 4 5 Copyright 216 Pearson Education, Inc. 113
14 PROBLEM 15A(CONCLUDED) (d) TANSON'S CATERING SERVICE STATEMENT OF OWNER'S EQUITY MONTH ENDED NOVEMBER 3, 21X J. Tanson, Capital November 1, 21X $2 Net Income for November $1 4 5 Less: Withdrawals for November (1 6 ) Increase in Capital J. Tanson, Capital, November 3, 21X $ (e) TANSON'S CATERING SERVICE SHEET November 3, 21X LIABILITIES AND OWNER'S EQUITY Cash $ Liabilities Accounts Receivable 2 5 Accounts Payable $2 9 5 Equipment 5 5 Owner's Equity J. Tanson, Capital Total Assets $ Owner's Equity $ Copyright 216 Pearson Education, Inc. 114
15 PROBLEM 1B1 SOLUTIONS TO SET B PROBLEMS MANDY S NAIL SPA Transaction Assets Liabilities Owner s Equity Cash Store Equipment Accounts Payable M. Anabelle, Capital a. 21, 21, b. (3,5) 3,5 c. 5,75 5,75 d. (1,) (1,) Total 16,5 9,25 4,75 21, PROBLEM 1B2 SEALY'S INTERNET SERVICE SHEET NOVEMBER 3, 21X Cash $55 Liabilities LIABILITIES AND OWNER'S EQUITY Equipment 14 Accounts Payable $15 5 Building 5 Owner's Equity Sealy, Capital 13 5 Total Assets $119 Owner's Equity $119 Copyright 216 Pearson Education, Inc. 115
16 Copyright 216 Pearson Education, Inc. 116 PROBLEM 1B3 RED FUMAN COMPUTER SERVICE Expenses ,22 1,22 OWNER'S EQUITY Computer Service Revenue 2 2 2,2 2,4 2,4 2,4 2,4 2,4 R. Fuman Withd. 9 9 R. Fuman, Capital 1, 1, 1, 1, 1, 1, 1, 1, 1, LIABILITIES Accounts Payable 2, 2, 2, 2, 2, 2, 6 2,6 2,6 $12,88 Office Equipment 2, 2, 2, 2, 2, 2, 2, 2, $12,88 Accounts Receivable 2,2 2,2 2,2 2,2 2,2 2,2 Cash 1, 1, 1, 2 1,2 1,2 (5) 9,7 (12) 9,58 9,58 (9) 8,68 a. b. c. d. e. f. g. h. ENDING
17 PROBLEM 1B4 (a) Revenue: WU HOME DECORATING SERVICE INCOME STATEMENT MONTH ENDED JUNE 3, 21X Home Decorating Fees $2 4 Operating Expenses: Advertising Expense $ Repair Expense 4 Travel Expense 1 1 Supplies Expense Rent Expense 3 Total Operating Expenses 7 7 Net Income $1 6 3 (b) WU HOME DECORATING SERVICE STATEMENT OF OWNER'S EQUITY MONTH ENDED JUNE 3, 21X J. Wu, Capital, June 1, 21X $ Net income for June $1 6 3 Less: Withdrawals for June (4 ) Increase in Capital J. Wu, Capital, June 3, 21X $ (c) WU HOME DECORATING SERVICE SHEET JUNE 3, 21X Cash $1 7 Liabilities LIABILITIES AND OWNER'S EQUITY Accounts Receivable 6 Accounts Payable $1 1 4 Decorating Equipment Owner's Equity J. Wu, Capital Total Assets $ Owner's Equity $ Copyright 216 Pearson Education, Inc. 117
18 Copyright 216 Pearson Education, Inc. 118 PROBLEM 1B5 OWNER S EQUITY Expenses , ,8 Catering Revenue 2,2 2,2 2,2 25 2,45 2,45 2,45 2,45 2,5 4,95 4,95 4,95 4,95 THILDORE S CATERING SERVICE J. Thildore, Withd J. Thildore, Capital 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, 25, LIABILITIES Accounts Payable 8 8 (4) ,3 1,7 65 2,35 2,35 $3,38 Equipment 1,2 1,2 8 2, 2, 2, 2, 2, 2, 2, 2, 2, 1,3 3,3 3,3 3,3 $3,38 Accounts Receivable (8) Cash 25, 25, (1,2) 23,8 23,8 (4) 23,4 2,2 25,6 (55) 25,5 25,5 8 25,13 (5) 25,8 (12) 24,96 2,5 27,46 27,46 27,46 (55) 26,91 1/25 1/27 1/28 1/29 11/1 11/5 11/8 11/1 11/15 11/17 11/2 11/25 11/28 11/3 END BAL.
19 PROBLEM 1B5 (CONTINUED) (b) THILDORE'S CATERING SERVICE SHEET OCTOBER 31, 21X Cash $23 4 Liabilities LIABILITIES AND OWNER'S EQUITY Equipment 2 Accounts Payable $ 4 Owner's Equity J. Thildore, Capital 25 Total Assets $25 4 Owner's Equity $25 4 (c) THILDORE'S CATERING SERVICE INCOME STATEMENT MONTH ENDED NOVEMBER 3, 21X Revenue: Catering Revenue $4 9 5 Operating Expenses: Salaries Expense $ 5 5 Telephone Expense 5 Rent Expense 6 5 Supplies Expense 5 5 Total Operating Expenses 1 8 Net Income $3 1 5 Copyright 216 Pearson Education, Inc. 119
20 PROBLEM 1B5(CONCLUDED) (d) THILDORE'S CATERING SERVICE STATEMENT OF OWNER'S EQUITY MONTH ENDED NOVEMBER 3, 21X J. Thildore, Capital, November 1, 21X $25 Net Income for November $3 1 5 Less: Withdrawals for November (1 2 ) Increase in Capital 3 3 J. Thildore, Capital, November 3, 21X $28 3 (e) THILDORE'S CATERING SERVICE SHEET NOVEMBER 3, 21X Cash $ Liabilities LIABILITIES AND OWNER'S EQUITY Accounts Receivable 1 7 Accounts Payable $2 3 5 Equipment 3 3 Owner's Equity J. Thildore, Capital 28 3 Total Assets $3 3 8 Owner's Equity $3 3 8 Copyright 216 Pearson Education, Inc. 12
21 FINANCIAL REPORT PROBLEM SOLUTION 213 Kellogg s Annual Report YEAR Cash and Cash Equivalents 213 $273 million 212 $281 million Decrease ($8 million) Cash and cash equivalents decreased $8 million from 212 to 213. Copyright 216 Pearson Education, Inc. 121
22 Copyright 216 Pearson Education, Inc. 122 ON THE JOBSmith Computer Center Solution Expenses $5 (Rent) (Utilities) $575 OWNER'S EQUITY Service Revenue $ ,4 1,4 1,8 3,2 $3,2 Feldman, Withdrawals 175 $175 LIABILITIES Feldman, Capital $6, 6, 6, 6, 6, 6, 6, 6, 6, 6, $6, $8,725 SMITH COMPUTER CENTER Accounts Payable $ $275 Office Equipment $3,3 3,3 3,3 3,3 3,3 3,3 3,3 3,3 $3,3 $8,725 Computer Shop Equipment $1,8 1,8 1,8 1,8 1,8 1,8 1,8 1,8 1,8 $1,8 Supplies $ $2 Cash $6, 6, 1,8 4,2 3, ,2 6 1,8 1,8 1,8 3,6 175 $3,425 a. b. c. d. e. f. g. h. i. j. END
23 Revenue: SMITH COMPUTER CENTER INCOME STATEMENT FOR THE MONTH ENDED JULY 31, 21X Service Revenue $3 2 Operating Expenses: Rent Expense $ 5 Utilities Expense 7 5 Total Operating Expenses Net Income $ SMITH COMPUTER CENTER STATEMENT OF OWNER'S EQUITY FOR MONTH ENDED JULY 31, 21X T. Feldman, Capital, July 1, 21X $ Investment for July 6 Total investment for July 6 Net Income for July $ Less: Withdrawals for July (1 7 5 ) Increase in Capital $2 4 5 T. Feldman, Capital, July 31, 21X $8 4 5 SMITH COMPUTER CENTER SHEET JULY 31, 21X Cash $ Liabilities: LIABILITIES AND OWNER'S EQUITY Supplies 2 Accounts Payable $ Computer Shop Equipment 1 8 Office Equipment 3 3 Owner s Equity T. Feldman, Capital Total Assets $ Owner's Equity $ Copyright 216 Pearson Education, Inc. 123
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