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					CHAPTER 3
Accounting Principles.

         a.   Historical cost principal—definite and objective, not subject to
              interpretation.


         b.   Revenue recognition principle—revenue is recognized when the earning
              process is virtually complete and an exchange transaction has occurred.
               Revenue principle
               3 conditions for revenue to be recorded
                         1. earnings process complete
                         2. exchange taken place
                         3. collection reasonably assured


         c.   Matching principle—efforts (expenses) should be matched with
              accomplishments (revenues) .


Difference between cash and accrual accounting.
    cash basis: revenue when cash received and expenses when cash paid
    Accrual basis: revenue recorded when earned and expenses when incurred,
    REGARDLESS OF WHEN CASH RECEIVED OR PAID



Income statement explains changes in company’s net assets (i.e., total assets less
total liabilities) during accounting period.
             Net income = Revenues – expenses

          o    Revenues are increases in assets or decreases in liabilities over a period
               of time
          o    Expenses are decreases of assets or increases of liabilities over a period
               of time
          o    Since revenues and expenses are defined by the changes in assets and
               liabilities, every transaction affecting the income statement also affects at
               least one asset or liability account on the balance sheet.

SEE PAGE 115

The Accounting Cycle

   1.   Transaction Analysis
   2.   Record journal entries
   3.   post to T-accounts
   4.   trial balance (DR = CR)
   5.   Adjusting and closing entries
   6.   Financial Statements
                                             3-
T- accounts

Objective:      Illustrate the accounting cycle

Given:
Assume the following Balance Sheet for Hathaway, Inc. as of 12-31-01

Assets
 Cash                                               5,000
 A/R                                                  550
   Total Current Assets                                      5,550
 PPE                                               20,000
 Other Long-term Assets                             2,000
   Total Long-term Assets                                   22,000
      Total Assets                                                   27,550


Liabilities
 Notes Payable                                      5,000
       Total Liabilities                                     5,000

Stockholders Equity
 Contributed Capital                               15,000
 Retained Earnings                                  7,550
      Total Stockholders Equity                             22,550

         Total Liabilities and Stockholders                          27,550
Equity


The following transactions occurred during 2001

1. Purchased equipment at a cost of $6,000.
2. Purchased marketable securities for $3,500.
3. Provided services for $900, receiving $200 in cash.
4. Issued 2,000 shares of common stock for $18 per share.
5. Collected $100 owed by its customers.
6. Incurred and paid wages of $600.
7. Paid $1,200 on an outstanding note payable: $800 on interest and $400 on
   principal.
8. Declared, but did not pay, an $800 dividend. The dividend becomes a liability at the
   date of declaration.
9. Sold the marketable securities purchased in (2) for $3,200.




                                              3-
Required:

(1)    Record journal entries and post to T-accounts. For each transaction, identify the
       financial statement elements that are affected and by which direction.

(2)  Prepare the 12-31-02 Balance Sheet, 2002Income Statement. Assume no
     adjustments are necessary at year end.
_____________________________________________________________________
___

Solution:

journal entries:                                                           effect:

1.


2.


3.


4.


5.


6.


7.


8.


9.


closing entries --




                                           3-
T-accounts:

        Cash             Accounts Receivable   Property, Plant, & Equip.




  Other L-T Assets         Notes Payable         Contributed Capital




  Retained Earnings




Financial Statements:

Balance Sheet 12-31-02


                                      3-
Income Statement




Statement of Retained Earnings




                                 3-

				
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