Accounting Chapter 1


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BAT4M chapter one notes

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Accounting Chapter 1

  1. 1. What is Accounting? <ul><li>Accounting is an information system that identifies, measures, records and communicates relevant, reliable, consistent and comparable information about an organization’s economic activities. </li></ul><ul><li>The objective is to help people make better decisions. </li></ul>
  2. 2. Users of Accounting Information <ul><li>External Information Users </li></ul><ul><li>Not directly involved in running the organization </li></ul><ul><li>Shareholders, lenders, directors, customers, suppliers, regulators, layers, brokers and the press </li></ul><ul><li>External Reporting </li></ul><ul><li>Financial accounting aimed at serving external users </li></ul><ul><li>Primary objective is to provide external reports canned financial statements to help users analyze an organization’s activities </li></ul><ul><li>Need to be reliable, relevant, consistent, and comparable </li></ul><ul><li>General-purpose financial statements </li></ul>
  3. 3. Users of Accounting Information <ul><li>Internal Information Users </li></ul><ul><li>Individuals directly involved in managing and operating an organization </li></ul><ul><li>Provide information to improve the efficiently and effectiveness of an organization in delivering products or services </li></ul><ul><li>Internal Reporting </li></ul><ul><li>Managerial accounting serves the decision making needs of internal uses </li></ul><ul><li>Provides special purpose reports customized to meet information needs of internal users </li></ul><ul><li>Internal Operating Functions </li></ul><ul><li>Accounting services each of the seven common functions of an organization (R&D, Purchasing, HR, Producing, Distribution, Marketing, and Servicing) </li></ul><ul><li>Internal controls are used to monitor operating functions, they are procedures set up to protect assets, ensure accounting reports are reliable, promote efficient and ensure company policies are followed. </li></ul>
  4. 4. Business Organizations <ul><li>Sole Proprietorship </li></ul><ul><li>A business owned by one person </li></ul><ul><li>Only required to file for a business license and register the business name. </li></ul><ul><li>Separate entity for accounting purposes; it is not a separate legal entity from its owner </li></ul><ul><li>Unlimited liability – the owner is responsible for debts that are greater than the resources of the proprietorship </li></ul><ul><li>Profits of the business are reported and taxed on the owner’s personal income tax return </li></ul><ul><li>Small retail stores and service businesses are often organized this way </li></ul>
  5. 5. Business Organizations <ul><li>Partnership </li></ul><ul><li>Owned by two or more persons called partners </li></ul><ul><li>Required to register the business name and obtain a business licence </li></ul><ul><li>Partners need an oral or written agreement that usually indicates how profits and losses are to be shared </li></ul><ul><li>Is not legally separate from its owners </li></ul><ul><li>Partners are usually subject to unlimited liability </li></ul><ul><li>Two types of partnerships that limit liability: </li></ul><ul><ul><li>Limited partnership includes a general partner(s) with unlimited liability and a limited partner(s) which liability restricted to the amount invested </li></ul></ul><ul><ul><li>Limited liability partnership restricts the partners’ liabilities to their own acts and the acts of individuals under their control. </li></ul></ul>
  6. 6. Business Organizations <ul><li>Corporation </li></ul><ul><li>A business that is a separate legal entity charted (or incorporated) under provincial or federal laws </li></ul><ul><li>Responsible for its own acts and its own debts </li></ul><ul><li>Enter into contracts, buy, own and sell properly </li></ul><ul><li>Can also sue or be sued </li></ul><ul><li>Unlimited life </li></ul><ul><li>Entitles the corporation to conduct business with the rights, duties and responsibilities of a person </li></ul>
  7. 7. Business Organizations <ul><li>Corporation </li></ul><ul><li>Files a tax return and pays tax on its profits </li></ul><ul><li>Shareholders are not personally liable for corporate acts and debts </li></ul><ul><li>Limited liability is key to why corporations can raise resources from shareholders </li></ul><ul><li>Ownership is divided into units called shares </li></ul><ul><li>Shareholder can sell or transfer shares to another person without affecting the operations of a corporation </li></ul>
  8. 8. Business Organizations <ul><li>Non-business Organizations </li></ul><ul><li>Not-for-profit and government organizations </li></ul><ul><li>Operate for other goals such as health, education, religious services, cultural and social activities </li></ul><ul><li>Do not have an identifiable owner </li></ul><ul><li>Organizations are accountable to taxpayers, donors, lenders, legislators, regulators, and other constituents </li></ul><ul><li>Roughly one third of Canadian economic activity is done by this type of organization </li></ul>