Q1: Accounting Principles and Assumptions with Examples

1. Accrual Principle:

• Concept: This principle states that revenues are recognized when earned, regardless of when cash is received, and expenses are recognized when incurred, regardless of when cash is paid.
• Example: A company provides consulting services in July but receives payment in August. The revenue is recognized in July (when earned), even though the cash is received in August.

2. Matching Principle:

• Concept: This principle requires matching expenses incurred to generate revenue in the same accounting period as the revenue is recognized.
• Example: A company purchases office supplies in January and uses them throughout the year. The cost of the supplies is expensed throughout the year (as they are used) to match the expense to the revenue generated during that period.

3. Going Concern Assumption:

• Concept: This principle assumes that a business will continue operating in the foreseeable future and will not have to liquidate its assets in the near term.
• Example: When recording the value of a building on the balance sheet, the assumption is that the building will be used by the business for several years and not sold in the immediate future.

Q2: Journal Entries

(1) June 1st:

• Debit: Cash (10,000)
• Credit: Owner’s Capital (10,000)

(2) June 6th:

• Debit: Inventory (6,000)
• Credit: Accounts Payable (6,000)

(3) June 12th:

• Debit: Inventory (2,000)
• Credit: Cash (2,000)

(4) June 15th:

• Debit: Cash (15,000)
• Credit: Loan Payable (15,000)

(5) June 31st:

• Debit: Accounts Payable (4,000)
• Credit: Cash (4,000)

Q3: Financial Statements

Income Statement:

Revenue:

• Revenue Earned – 72,000

Expenses:

• Supplies Expense – 3,400
• Rent Expense – 6,000
• Wages Expense – 22,000
• Total Expenses – 31,400

Net Income: 40,600

Statement of Retained Earnings:

• Beginning Retained Earnings – 11,155
• Add: Net Income – 40,600
• Less: Dividends – 36,000
• Ending Retained Earnings – 15,755

Balance Sheet:

Assets:

• Cash – 7,000
• Accounts Receivable – 475
• Supplies – (2,500 – 3,400) = -825
• Equipment – 17,000
• Total Assets – 23,150

Liabilities & Equity:

• Accounts Payable – 1,220
• Loan Payable – 15,000
• Common Stock – 10,000
• Retained Earnings – 15,755
• Total Liabilities & Equity – 41,975

Note: The ending balance of Supplies is calculated by subtracting the expense (3,400) from the beginning balance (2,500).