Seasonality of Business
Short distribution chain and time span
Major investment in fixed assets
What accounting does in our industry?
Generally Accepted Accounting Principles (GAAP)------------------------------------------------------------ (1)Cost 말고
(2) Business entity - a restaurant owner, decided to take some sushi home for her dinner. He had to record the cost of the sushi as a withdrawal.
(3) Continuity of the business unit - Robert purchased a new limo. The cost is $50,000, however, the resale value will be $30,000. The limo recorded at cost and will be written off over the next five years rather than written down immediately.
(4) Unit of measurement: - If we had huge inflation (1 in 2005 $5 in 2008), you need to show current replacement cost in footnotes of your financial statements.
(5) Objective evidence- Kim strongly believes her car is worth of $20,000, but the business records it with its Blue-Book (appraiser’s) value of $18,000.
(6) Full disclosure- Mr. Park’s hotel describes its depreciation method and inventory valuation method in the footnotes.
(7) Consistency - If Starbucks used a straight line depreciation method in 2007, the company had to use the same depreciation method in 2008 unless a change was warranted and disclosed.
(8) Matching (Expenses should be matched with revenues they generated) Related to Accrual basis accounting - Credit card fees of $10 should be recorded as expenses during the accounting period in which the generated sale of $200 is recorded.
(9) Conservatism (to expenses) - a restaurant owne, reduces its tomato inventory value of $1000 (original cost) to $800 in order to reflect the market value.
(10) Materiality - Spencer, a hotel manager, replaced ten frames ($10/frame) in his office and recorded his spending of $100 as expense, not as equipment.
Cash basis accounting: recognizes accounting transactions at the point of cash inflow or outflow. Accrual basis accounting: recognizes “revenues” when earned and “expenses” when incurred, regardless of when cash actually changes hands (e.g., unpaid wages, unpaid expenses). Cost accounting (concerning with recording, allocating, and reporting current and future costs). Managerial accounting (preparing performance reports, including comparisons to budget; providing in-depth information as a basis for management decisions).
Financial accounting (Preparing and distributing report)
Tax accounting (performed by specialists)
Auditing (providing opinions on reports/ by certified public firms)
Accounting systems (Review information systems)
Fundamental Accounting Equation-----------------------------Assets = Liabilities + Owners’ Equity
(1) A: Cash, Account receivables, Inventory, Investment, Building, Equipment, and Land.
(2) L: Payables, Accrued payroll
(3) OE : Permanent = Capital stock and Retained earning : Temporary = Revenue and Expenses
Asset — debit (+) (What your company own)
Liability — credit (+) (What your company owes to third parties)
Owners’ Equity Permanent — credit (+) (What your company owe to you)
Owners’ Equity Revenue — credit (+) (It increases OE)
Owners’ Equity Expense — debit (+) (It decrease OE)
Contra asset accounts: Accumulated Depreciation; Allowance for Doubtful Accounts generally show a credit balance.
The Accounting Cycle
2. Record transactions in journals
3. Post amounts from journals to ledger accounts
5. Prepare a trial balance
6. Prepare and post adjusting entries
(2) Accruing uncollected revenue: increase in account receivable (debit) & increase revenue (credit)
(3) Accruing unpaid expense: increase in wage payable (credit)& increase in wage expense (debit)
(4) Converting liability to revenue: decrease in unearned revenue (debit) &…