accounting chapters 1-2

Five main activities of Accounting

- Gathering financial information
- Preparing and collecting permanent records
- Arranging, summarizing and classifying
- Preparing information reports and summaries
- Establishing controls to promote accuracy and honesty among employees

Service Business

Sells a service to the public. Does not make or sell a product as its main activity. (Ex; a nail salon)

The Merchandising Business

Buys goods and resells them at a higher price for a profit.
(Ex; Winners)

The Manufacturing or Producing Business

Buys raw materials, converts them into a new product, and sells these products. It is similar to a manufacturing business however its products for sale are produced.
(Ex; a bakery)

The Non-Profit Organization

May carry on activities to meet social needs and not for a financial profit. These organizations tend to be charities.
(Ex; The Red Cross)

Sole proprietorship

A business owned by one owner. There may or may not be employees working for this person.
(E.g. "J. Wouk, Carpenter.")

Partnership

A business with two or more owners. Typically, partnership businesses must fold if there is only one surviving owner.
(Ex: "Fogle, Silver, and Zimmerman, Accountants.")

Limited Company or Corporation

A special form of business that is owned by shareholders. Almost all large business operations are corporations, and some have several thousand shareholders.
(Ex: Apple, Microsoft, Amazon)

Routine Daily Accounting Activities

Accounting activities that occur nearly every day.
Eg. -> Processing bills
Preparing cheques
Daily banking transactions
Recording transactions
Preparing business papers/reports

Periodic Accounting Activities

Activities occurring at regular intervals.
Eg. -> - Pay cheques prepped every week or two
- Bank accounts checked every month
- Financial reports prepared every month and every year
- Income tax return is prepared every year (government
regulation)

Miscellaneous Activities

Unforeseen accounting activities.
- An accountant resigns (the hiring process)
- Bank managers may call for concern over the size of a bank loan, requiring accountants to visit the bank if necessary

the Accounting Cycle

the recurring set of accounting procedures carried out during each fiscal period**

The accounting cycle really consists of 2 separate cycles. Explain.

Outer Ring - ongoing activities and activities done once a month (Transactions recorded in a journal)

Inner Ring - Activities usually carried out once a year (Income Tax Returns)

Order of the Accounting Cycle

Public Accountant

A public accountant serves the general public for a fee in the same way as a doctor or lawyer. Main work -> Auditing

Auditing

The examination of testing of the books, records and procedures of a business in order to be able to express an opinion about financial statements. (basically testing factual statements to expression)

Certified General Accountants Association

The professional accounting organization that is well known for distance education.

Society of Management Accountants of Canada

The professional accounting organization that emphasizes management accounting.

Canadian institute of chartered accountants (CPA)

The professional accounting organization that publishes a handbook of Canadian accounting rules and standards.

Income Tax statement/ Financial Statement***

Formal accounting data, prepared at least once a year.

Source Document

the original document that contains the details of the business transaction
(Ex; a receipt)

GAAP

Generally accepted accounting principles

GAAPS Ensure

- Accounting practices are coherent and consistent
- Structure for accountants to respond to issues
- Increase the "relevance, reliability" understandability, and comparability of financial reports.

Which organizations merged to be the CPA?

CA, CMA, and CGA all merged to become CPA (Chartered Professional Accountants)

Understandability, Relevance, Reliability, Comparability

1) Readily understandable by users with reasonable knowledge and a willingness to study the information with reasonable diligence

2) Information is relevant when it influences the economic decisions of users.

3) Information is reliable when it is free from material error and bias and can be depended upon by users to represent faithfully that which it attempts to represent

4) Users must be able to compare financial statements of an entity through time; thus, transactions must be accounted for in a consistent way over time and throughout an entity.

IFRS

international financial reporting standards

What does the IFRS do?

set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

Who issues the IFRS?

Standards and Interpretations are issued by IASB : International accounting standards board

Conservatism

(Canadian GAAP)

Accounting for a business should be fair and reasonable Accountants are required to make evaluations and estimates and select procedures to that assets or profits are not over or understated.

Reliability – Prudence
(Framework para 37.)

(IFRS)
Prudence is a degree of caution in making judgments such that assets or income are not overstated and liabilities and expenses are not understated.

Consistency principle

(GAAP Principle)
Required that a business must use the same accounting methods and procedures from period to period. When they change a method from one period to another.. They must explain the change clearly on the financial statements.

Comparability (Framework para. 39)

(IFRS)
The measurement and presentation of transactions must be carried out in a consistent way throughout an entity and over time for that entity. If methods change, users must be informed as to the impact of the change.

Cost principle

(GAAP Principle)
The accounting for purchases must be at the cost price to the purchaser. This is the figure on the source document.

Measurement (Framework para 38)

(IFRS)
In most circumstances, assets are recorded at the amount of cash or cash equivalents paid at the time of their acquisition.

Full Disclosure

(GAAP Principle)
All information needed for a full understanding of a company’s financial statements must be included with the financial statements.

Completeness (Framework para. 38)

(IFRS)
To be reliable, financial information must be complete, as an omission can cause information to be false and misleading.

Going concern

(GAAP)
Assume that a business will continue to operate unless it is known that it will not. (Has to do with the value of assets if a company is going out of business.. And you can’t determine that value until the assets are sold)

Going Concern (Framework para. 23)

(IFRS)
The financial statements are normally prepared on the assumption that the entity will continue in operation for the foreseeable future. Hence, elements remain at their cost, not adjusted to their liquidation value.

Materiality

(GAAP)
Requires that accountants follow the GAAP principles except when to do so would be expensive or difficult or if it makes no difference if the rules are ignores. Net income would not be affected.

Relevance - Materiality (Framework para. 29)

(IFRS)
Information is material if its omission or misstatement could influence the decision of users. Thus, all material information must be reported.

Revenue recognition

(GAAP)
Revenue must be recorded in the accounts at the time the revenue is earning.

IAS 18 – Revenue

Revenue shall be measured at the value of the consideration received or receivable. Transactions are recognized when they occur, not when cash is paid

Business Entity

(GAAP)
The accounting for a business must be kept separate from the personal affairs of the owner. I.e. the owner should not place any personal assets on the Balance Sheet

Time Period

(GAAP)
Concept whereby accounting takes place over specific time periods known as fiscal periods. They are equal length and are used when measuring the progress of a business

Matching–

(GAAP)
Expenses must be recorded when “INCURRED” or recorded in the period in which they helped to earn revenue.