Daily Operating Cycle
sales revenue cycle in which restaurant operations depend on meal periods for sales revenue.
a sales revenue cycle for a 7-day period.
sales revenue cycle in which hospitality operations depend on vacationers to provide sales revenue during vacation months.
a sales revenue cycle that exists during recessionary inflationary cycles, in which hospitality operations experience a major decline in sales revenue.
a recurring series of steps that occurs during each accounting period.
an expense that can be distributed directly to an operating department and generally controllable by that department.
a cost not allocated directly to an operating department.
Contributory Income (or Departmental Contributory Income)
the income of an individual operating department after direct expenses have been deducted from sales revenue.
a record in which the current status (or balance) of each type of asset, liability, owner’s equity, sales revenue, and expense is kept.
the amount of an account at a point in time.
the time period covered by the financial statements.
a method of accounting whereby transactions are only recorded at the time cash is received or disbursed.
a method of accounting whereby transactions are recorded as they occur and not when cash is exchanged; the matching of sales revenue and expenses on periodic income statements regardless of when cash is received or disbursed.
The Cash Basis can be computed as
Beginning cash + Cash sales revenue – Cash payments = Ending cash
The two major financial reports are
the balance sheet and the income statement.
a statement showing that assets = liabilities + owner’s equity. A balance sheet shows the financial position of a company at a point in time.
a financial statement showing money earned from sales of goods and services, less expenses incurred to earn that income, for a period of time; sometimes referred to as the profit and loss statement.
Balance Sheet Equation
A = L + OE
Resources of value used by a business entity to create sales revenue, which in turn, increases assets.
Debt obligations owed to creditors as a result of operations to generate sales revenue; to be paid in the near future with assets. Liabilities represent creditor equity or claims against the assets of the business entity.
Ownership equity represents claims to assets of a business entity.
Three types of ownership equity
1. Proprietorship – entity financing provided by a sole owner.
2. Partnership – entity financing provided by two or more owners (partners).
3. Corporation – a legal entity incorporated under the laws of a state, separate from its owners.
* Capital stock: Financing provided by stockholders (or shareholders) with ownership represented by shares of corporate stock. Each share of stock represents one ownership claim.
* Retained earnings: Earnings of the corporation that have been kept in the business after dividends are paid.
Double Entry Accrual Accounting
an accounting procedure that requires equal debit and credit entries in the accounts for every business transaction. This ensures the accounting equation is kept in balance.
generally accepted accounting principles.
Business Entity Principle
the concept that a business, and business transactions, should be kept separate from personal transactions of the business’s owners.
Monetary Unit Principle
the primary national monetary unit is used fro recording numerical values of business exchanges and operating transactions.
Going Concern Principle
the accounting assumption that a business entity is to remain in business indefinitely.
Accounting for assets at their original cost to the current owner.
Time Period Principle
The time period principle requires a business entity to complete an analysis to report financial condition and profitability of its business operation over a specific operating time period. An ongoing business operates continuously. For example, electrical power in reality flows continuously to the user, yet in the theory the flow stops when the service meter reading is recorded. The billing statement says that the service for the period technically ended at a certain date, although service continued without interruption.
a principle of accounting to help ensure sales revenue and assets are not overstated or expenses and liabilities understated.
a principle of accounting to help ensure that financial statements are comparable from one period to the next.
the significance of an item in relation to the total business. If an item is not significant, other accounting principles may be ignored for reasons of practicality. For instance, the purchase of a supply of letterhead stationary for the use over the next 5 yrs at a cost of $200. The business could show the total amount of $200 as an expense in the year purchased, opting not to expense the stationery at $40 per year over 5 years. Operating income would not be materially affected by completely expensing the purchase in one year.
Full Disclosure Principle
a principle of accounting whereby financial statements provide all the relevant information that a reader of them should have.
a principle of accounting requiring all business transactions be documented in writing.
a principle of accrual accounting relating expenses to the sales revenue earned during a period regardless of when the cash was received or the expenses paid.
initial cost of an asset or assets less related accumulated depreciation.
a book of accounts holding those accounts from which the financial statements are prepared.
a recording of a business transaction in a journal. The journal entry is the source of instructions that identifies a specific account by name, the dollar value, and the debit or credit column to be entered. The journal entry must identify at least two accounts. The entry must show at least one debit and one credit entry. The sum of the debits and credits must equal.
a simplified form of account in the shape of a T, with account title on top, debit on the left, and credit on the right.
Assets are debit balanced accounts
and are increased by debits and decreased by credits
Liabilities are credit balanced accounts
and are increased by credits and decreased by debits.
OE’s are credit balanced accounts
and are increased by credits and decreased by debits
Sales Revenue accounts are credit based accounts
credits increase a credit balanced account and debits decrease a credit balanced account.
Expense accounts are debit-balanced accounts
debits increase a debit-balanced account and credits decrease a debit-balanced account.
a liability documented by a written promise from the borrower to pay it.
amounts due to suppliers (creditors): a debt or or a liability.
Cost of Sales
Cost of sales reflects the cost of inventories purchased for resale that were sold.
when total sales revenue equals the total cost of producing the revenue (no loss or profit exists).
sales revenue – cost of sales
The cost of assets consumed to produce sales revenue. This not include the cost of inventory consumed.
Income before taxes or Gross Margin – expenses = operating income or operating loss
An economic result of operations when total sales revenue is greater that total costs after income taxes.
An economic result of operations when total sales revenue is less than total cost.
amounts due from customers or guests (debtors); an asset
Credit Card Receivalbles
amounts due from credit card companies based on credit card sales.
Unadjusted Trial Balance
this trial balance shows each general larger account and its balance before any adjusting entries are made to the accounts to correct sales revenue and expenses.
Adjusted Trial Balance
a trial balance of accounts after period-end adjustments have been made. aka Trial Balance
Two types of adjusments:
1. The use or consumption of an asset and recognition of it as an expense. This type of adjustment typically adjusts supplies, prepaid expenses, and depreciable assets.
2. The reduction of a liability and recognition of sales revenue. This adjustment concerns the recognition of unearned revenue as being recognized as earned.
Operating supplies are an asset
until consumed. At the end of a period, the difference between the balance in the supplies ledger account and the value of the supplies remaining in inventory represents the amount consumed that needs to be expensed.
Assume that a supplies account had a balance of $1200 at the end of an operating period and that supplies on hand were $400. Thus, $1,200-$400 = $800 of supplies were used. The adjusting entry is:
Journal Entry –
Supplies Expense $800
All prepaid items such as prepaid rent and prepaid insurance are paid for in advance and are considered to be assets from which benefits will be received over the life of the prepaid. The amount of a prepaid asset to be expensed over its expected life can be expressed in months or years:
For example: assume rent was prepaid for the next two years for $24,000. The rent expense for one year would be $12,000 ($24,000/2 years), or $1,000 per month for 12 months ($24,000/24):
Journal Entry –
Rent Expense $12,000
Prepaid Rent $12,000
end of period adjustments recognizing sales revenue earned and expenses incurred, with the receipt of payment or the making of payment expected to occur in the next accounting period.
an expense that has been incurred that is going to be written off over a period of time greater than one year.
Cost of Sales and Food Inventory Adjustment
Cost of Sales $12,200
Food inventory $12,200
Food Inventory $3,200
Cost of sales $3,200
Two inventory control methods
1. periodic method
2. perpetual method
Periodic Method of inventory control
a method of inventory control where the quantity of each item in stock is not known until an actual physical count of storeroom quantities is taken, usually at each month-end.
Perpetual Method of inventory control
a method of inventory control where a continuous record is maintained for each item in stock on a perpetual inventory card of items received and items issued and a running balance of the quantity of each item in stock is constantly updated.
a method of allocating the cost of a fixed asset over the anticipated life of the asset, showing a portion of the cost, for each accounting period of the life, as an expense on the income statement.
the estimated value of a physical long-lived asset at the end of its estimated useful life for depreciation purposes. The term also applies to the estimated value of a leased asset at the end of its leased life.
Contra Asset Account
accounts with a balance shown on the “wrong” side of the balance sheet as a reduction of a related account, for example, allowance for bad debts show as a reduction of accounts receivable.
the total depreciation that has been show as an expense on the income statement since the related assets were purchased.
Straight Line Depreciation
a method of depreciation whereby equal portions of the amount paid for an asset are shown as an expense during each accounting period of the life of the asset.
Equipment Depreciation Calculation
Cost minus Residual / Life
Purchased equipment for 12,000 that has an 8 year estimated life with no residual value.
$12,000/96 = 125 depreciation expense per month
Building Depreciation Calculation
Purchased a building for $150,000 that has a 25 yr life and a residual value of $30,000
Cost – Residual / Life =
$150,000-$30,000/300 months = $400 per month
$150,000 – $30,000/25 yrs = $4,800 per year
(Cost – Residual) / Life in units = Depreciation expense
Life in units could be mileage, gallons produced, or hours used.
For instance – a van was purchased for $29,800 with an estimated residual value of $1,800 based on a life of 140,000 miles. During the month of May, the van recorded 580 miles of use. The depreciation expense is calculated as:
($29,800 – $1,800)/ 140,000 = $28,000/140,000 = .20 per mile
.20 per mile X 580 = $116 Depreciation Expense
an accelerated depreciation method that allows greater amounts of depreciation to be expensed in the earlier years of the depreciable asset’s life. The accelerated method assumes that an asset becomes less and less efficient over its life.
SYD determines the amount to be depreciated using a fraction multiplied by the cost minus the residual value. The maximum years of a depreciable asset’s life becomes the numerator in the first year and then reduces the numerator by one in each subsequent year of the asset’s life. The denominator of the fraction is found by summing the years of asset’s life, or by using an equation.
SYD fraction x Cost- Residual = Depreciated Expense
Example of SYD Calculation
YEAR SYD Fraction x Cost – Residual = Depreciation
1 5/15 x 33,600 = 11,200
2 4/15 x 33,600 = 8,960
3 3/15 x 33,600 = 6,720
4 2/15 x 33,600 = 4,480
5 1/15 x 33,600 =2,240
The SYD depreciation schedule indicates that the depreciation expense is accelerated by expensing larger amounts in the earlier years.
Double- Declining- Balance Depreciaton (aka DDB depreciation)
a method of accelerated depreciation that allocates a larger amount of depreciation expense in the earlier years of the life of an asset. This method, unlike the straight line, units of production, ans SYD, ignores any type of residual value in the calculation of the depreciation expense. The DDB% is multiplied by the book value to determine the amount of the depreciation expense.
DDB% x Book Value = Depreciation Expense
DDB% is calculated as 100%, or 1 divided by years of life.
100%/5 = 20% x 2 = 40% or 1/5 = 20% x 2 = 40%
In other words, the straight-line rate is doubled.
Since DDB% doubles the straight-line rate, the numerator can be expressed as follows:
100% x 2 = 200%, or 2 divided by years of life = 2/5 = 40%
Book Value Calculation
Book Value = cost – accumulated depreciation
The general ledger
is the source used to prepare an adjusted trial balance that confirms the ledger accounts are in balance.
the last step in moving through the accounting cycle which brings the temporary accounts balances to zero.
an account that receives the sums of all sales revenue and expense accounts when they are close to a zero balance. The final balance of the income summary account will represent net income or net loss which is transferred to the capital account(s) or the retained earnings account.
Post Closing Trial Balance
a balance done after preparing and posting closing entries.
a document prepared at the end of an accounting period to ensure that all the accounts are balanced and show all information needed to journalize adjusting and closing entries, and to prepare major financial statements.
10 Step Accounting Cycle
1. Perform transactional analysis.
3. Post a journal entry
4. Prepare an unadjusted trial balance
5. Prepare a worksheet (optional)
6. Adjust the ledger accounts
7. Close the temporary accounts
8. Prepare a post-closing trial balance
9. Prepare the income statement
10. Prepare the balance sheet