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