Page 48 - Accounting Principles (A Business Perspective)

1. Accounting and its use in business decisions

account balance consists of that partner’s investments in the business, plus that partner’s cumulative share of net
income since that partner became a partner, less any amounts withdrawn by that partner.
The Dividends account in a corporation is similar to an owner’s drawing account in a single proprietorship.

These accounts both show amounts taken out of the business by the owners. In a partnership, each partner has a
drawing account. Accountants treat asset, liability, revenue, and expense accounts similarly in all three forms of
organization.
Demonstration problem

On 2010 June 1, Green Hills Riding Stable, Incorporated, was organized. The following transactions occurred
during June:
June 1 Shares of capital stock were issued for USD 10,000 cash.
4 A horse stable and riding equipment were rented (and paid for) for the month at a cost of USD 1,200.
8 Horse feed for the month was purchased on credit, USD 800.
15 Boarding fees of USD 3,000 for June were charged to those owning horses boarded at the stable. (Fee is due
on July 10.)
20 Miscellaneous expenses of USD 600 were paid.
29 Land was purchased from a savings and loan association by borrowing USD 40,000 on a note from that

association. The loan is due to be repaid in five years. Interest payments are due at the end of each month beginning
July 31.
30 Salaries of USD 700 for the month were paid.
30 Riding and lesson fees were billed to customers in the amount of USD 2,800. (Fees are due on July 10.)
Prepare a summary of the preceding transactions. Use columns headed Cash, Accounts Receivable, Land,
Accounts Payable, Notes Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction
to show that the basic accounting equation is in balance.

Prepare an income statement for June 2010.
Prepare a statement of retained earnings for June 2010.
Prepare a balance sheet as of 2010 June 30.
Solution to demonstration problem
GREEN HILLS RIDING STABLE, INCORPORATED
a. Summary of Transactions
Month of June 2010
Assets = Liabilities + Stockholders Equity
Accounts Notes Capital + Retained
Date Explanation Cash Land Accounts Payable
Receivable Payable Stock Earnings
June 1 Capital stock issued $ 10,000 = $ 10,000
4 Rent expense (1,200) $ (1,200)
$ 8,800 = + $ 10,000 $ (1,200)
8 Feed expense $ 800 (800)
$ 8,800 = $ 800 + $ 10,000 $ (2,000)
15 Boarding fees $ 3,000 3,000
$ 8,800 $ 3,000 = $ 800 + $ 10,000 $ 1,000
Miscellaneous
20 (600) (600)
expenses
$ 8,200 $ 3,000 = 800 + $ 10,000 $ 400
Purchased land by
29 $ 40,000 $ 40,000
borrowing
$ 8,200 $ 3,000 $ 40,000 = $ 800 $ 40,000 + $ 10,000 $ 400

49