BACC CH 1

FORMS OF ORGANIZATION

• External users

• Internal users

• Private Accounting

• Public accounting

External users:

Do not directly run the organization and have limited access to

its accounting information. Examples are lenders, shareholders, external

auditors, non-executive employees, labour unions, regulators, voters, donors,

suppliers, and customers.

Internal users:

Directly manage organization operations. Examples are the CEO

and other executives, research and development managers, purchasing managers,

production managers, and other managerial-level employees.

Private accounting:

Accounting employees working for businesses.

Public accounting

Offering audit, tax, and advisory services to others.

Summary Characteristics of Business Organizations

(GAAP) Elements of Financial Statements Summary

Accounting equation:

Applies to all transactions and events, to all companies and organizations

and to all points in time.

Expanded accounting equation:

Summary of transactions:

The financial effects of the following transactions are shown in the table using the expanded accounting equation.

Transaction 1: Investment by owner

Transaction 2: Purchase supplies for cash

Transaction 3: Purchase equipment and supplies on credit

Transaction 4: Services rendered for cash

Transactions 5, 6: Payment of expenses in cash

Transaction 7: Service contract signed for April

Transaction 8: Services and Rental Revenues Rendered for Credit

Transaction 9: Receipt of cash from accounts receivable

Transaction 10: Payment of accounts payable

Transaction 11: Withdrawal of cash by owner

Summary Analysis of Organico's Transactions Using the

Accounting Equation

FINANCIAL STATEMENTS

Describe the purpose and importance of accounting

Accounting is an information and measurement system that aims to identify, measure, record, and communicate relevant information that faithfully represents an organization's economic activities. It helps us better assess opportunities, products, investments, and social and community responsibilities. The greatest benefits of understanding accounting often come to those outside accounting, because an improved understanding of accounting helps us to compete better in today's globally focused and technologically challenging world.

Describe forms of business organization.

Organizations can be classified either as businesses or as non-businesses. Businesses are organized for profit, while non-businesses or not-for-profit organizations serve us in ways not always measured by profit. Businesses take one of four forms: sole proprietorship, partnership, limited liability partnership, or corporation. These forms of organization have characteristics that hold important implications for legal liability, taxation, continuity, number of owners, and legal status.

Identify users and uses of accounting and opportunities in accounting.

There are both internal and external users of accounting. Some users and uses of accounting include (a) management for control, monitoring, and planning; (b) lenders for making decisions regarding loan applications; (c) shareholders for making investment decisions; (d) directors for overseeing management; and (e) employees for judging employment opportunities. Opportunities in accounting encompass traditional financial and managerial accounting and taxation, but also include accounting-related fields such as lending, investing, consulting, managing, and planning.

Identify and explain why ethics and social responsibility are crucial to accounting.

The goal of accounting is to provide useful information for decision-making. For

information to be useful, it must be trusted. This demands ethics and socially

responsible behaviour in accounting. Without these, accounting information loses

its reliability.

Identify, explain, and apply accounting principles.

Accounting principles help in providing accurate information about a business's money-related activities. Some basic principles include treating the business and its owners separately, basing financial statements on actual costs, assuming the business will continue in the foreseeable future, and using stable money values. Additionally, revenue is recognized when earned, not necessarily when cash is received.

Financial Statements Types:

1. Financial Statements Types:

   • Income Statement (Profit = Revenues - Expenses)

   • Statement of Changes in Equity (Tracks equity changes)

   • Balance Sheet (Shows assets, liabilities, and equity)

   • Statement of Cash Flows (Details cash in/outflows)

Equity Ownership:

1. Equity Ownership:

   • Sole proprietorship: Owned by the sole owner

   • Partnership: Belongs to partners

   • Corporation: Owned by shareholders

Distributions of Assets:

1. • Sole proprietorship & Partnership: Withdrawals

   • Corporation: Dividends

Owner as Manager:

1. • Sole proprietorship & Partnership: No salary expense for owner-manager

   • Corporation: Manager's salary is an expense if they're also a shareholder.

Analyze business transactions by applying the accounting equation

An organization's financing activities fund investing activities. An organization's assets (investments) must equal its financing (from liabilities and from equity). This basic relation gives us the accounting equation: Assets = Liabilities + Equity. A transaction is an exchange of economic consideration between two parties and affects the accounting equation. The equation is always in balance when business transactions are properly recorded. An economic consideration is something of value; examples include products, services, money, and rights to collect money. Source documents are the source of accounting information. An event does not involve an economic exchange; it has no effect on the accounting equation.

Prepare financial statements reflecting business transactions.

Using the accounting equation, business transactions can be summarized and organized so that we can readily prepare the financial statements. The balance sheet uses the ending balances in the accounting equation at a point in time. The statement of changes in equity and the income statement use data from the equity account for the period.

Describe the tools used by today's businesses to analyze data collected from all

aspects of their business.

Accountants can use data analytics to help

businesses uncover valuable insights within their financial information to

increase profitability, identify process improvements that can increase

efficiency, and manage risk better.

Accounting

An information system that identifies, measures, records, and

communicates relevant information that faithfully represents an organization's

economic activities.

Accounting equation

A description of the relationship between a company's assets,

liabilities, and equity; expressed as Assets =Liabilities + Equity; also called the balance

sheet equation.

Accounting Standards Board (AcSB)

Prior to Canada's adoption of IFS, the AcSB was the authoritative body that set accounting standards for Canada. With IFS being set by the lASB, the AcSB's new role is evolving.

Accounting Standards for Private Enterprises (ASPE)

The Accounting Standards Board created rules to govern accounting for Canadian private enterprises.

Account payable

A liability created by buying goods or services on credit.

Accounts receivable

Assets created by selling products or services on credit.

AcSB

See Accounting Standards Board.

APE

See Accounting Standards for Private Enterprises.

Assets

Properties or economic resources owned by the business; more precisely,

resources with an ability to provide future benefits to the business, or results from a past transaction.

Audit

An independent, external check of an organization's accounting systems and

records.

Balance sheet

A financial statement that reports the financial position of a business at a point in time; lists the types and dollar amounts of assets, liabilities, and equity as of a specific date; also called the statement of financial position.

Bookkeeping

The part of accounting that involves recording economic transactions

electronically or manually; also called recordkeeping.

Budgeting

The process of developing formal plans for future activities, which often

serve as a basis for evaluating actual performance.

Business

One or more individuals selling products or services for profit.

Business activities

All of the transactions and events experienced by a business.

Business events

Activities that do not involve an exchange of economic consideration

between two parties and therefore do not affect the accounting equation.

Business transaction

An exchange of economic consideration between two

parties that causes a change in assets, liabilities, or equity. Examples of

economic considerations include products, services, money, and rights to collect

money.

Calendar year

An accounting year that begins on January 1 and ends on December 31.

Canada Revenue Agency (CRA)

The federal government agency responsible for the collection of tax and enforcement of tax laws.

Common shares

The name for a corporation's shares when only one class of share

capital is issued.

Comparability

Similarity; ability to be compared with other information.

Controller

The chief accounting officer of an organization.

Corporation

A business that is a separate legal entity under provincial or federal laws

with owners who are called shareholders.

Cost accounting A managerial accounting activity designed to help managers identify,

measure, and control operating costs.

Cost constraint The accounting standard that requires the benefits obtained from

financial statement information to be justifiable based on costs incurred in financial

reporting. ASPE refers to it as the benefit versus cost constraint. IFS refers to it as the

cost constraint. Both have the same interpretation: that the cost/benefit trade-off is

considered for both standard setters and businesses applying accounting information.

Costs The expenses incurred to earn revenues (or sales).

Cost accounting

A managerial accounting activity designed to help managers identify,

measure, and control operating costs.

Cost constraint

The accounting standard requires the benefits obtained from financial statement information to be justifiable based on costs incurred in financial reporting. ASPE refers to it as the benefit versus cost constraint. IFS refers to it as the cost constraint. Both have the same interpretation: that the cost/benefit trade-off is considered for both standard setters and businesses applying accounting information.

Costs

The expenses incurred to earn revenues (or sales).

CPA Canada

Chartered Professional Accountants of Canada, the accounting body with

a mandate to merge the three legacy accounting designations (CA, CMA, CGA).

Creditors

Individuals or organizations are entitled to receive payments from a company.

Currency

Transactions are to be expressed in money units based on the main currency

used in operations; examples include units such as the Canadian dollar, American

dollar, peso, and pound sterling.

Data Analytics

A process of analyzing data to identify meaningful relations and trends;

in accounting, data analytics helps individuals make informed business decisions.

Data visualization

A graphical presentation of data to help people understand its

significance and draw reliable inferences.

Debtors

Individuals or organizations that owe amounts to a business.

Economic consideration

Something of value (e.g., products, services, money, and

rights to collect money).

Equipment

Tangible asset intended to be used in the business with an expected life of

more than one year.

Equity

The owner's claim on the assets of a business; more precisely, the assets of an

entity that remain after deducting its liabilities. Equity increases with owner investments

and profit and decreases with owner withdrawals and losses, also called net assets.

Ethics

Beliefs that differentiate right from wrong.

Events

See business events.

Expenses

Costs of providing products and services. Expenses decrease equity.

External auditors

Accountants outside the company who examine and provide

assurance that financial statements are prepared according to generally accepted

accounting principles (GAAP).

External users

Persons using accounting information who are not directly involved in

the running of the organization. These users often hold a financial interest in the

company but are not involved in day to day operations. Examples include

shareholders, customers, regulators, and suppliers.

Faithful representation

A quality of information that is complete, neutral, and free from

error.

Financial Accounting

The area of accounting that reports on the financial performance

and condition of an organization. It is aimed at serving external users.

Financial statements

The products of accounting that report on the financial

performance and condition of an organization. They include the income statement,statement of changes in equity, balance sheet, and statement of cash flows.

Fiscal year

A one-year (12-month) reporting period.

GAAP

See generally accepted accounting principles.

General accounting

The task of recording transactions, processing data, and preparing

reports for managers; includes preparing financial statements for disclosure to external

users.

Generally Accepted Accounting Principles (GAAP)

The underlying concepts adopted by the accounting profession make up acceptable accounting practices for preparing financial statements.

Going concern assumption

The rule that requires financial statements to reflect the

assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue.

IASB

See International Accounting Standards Board.

IFRS

See International Financial Reporting Standards.

Income

Another name for profit.

Income statement

The financial statement shows, by subtracting expenses from

revenues, whether the business earned a profit; it lists the types and amounts of

revenues earned and expenses incurred by a business over a period of time. Also

known as the statement of profit or loss.

Internal auditing

Function performed by employees within organizations who assess

whether managers are following established operating procedures and evaluate the

efficiency of operating procedures.

Internal controls

Procedures set up to protect assets, ensure reliable

accounting reports, promote efficiency, and encourage adherence to

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company policies.

Internal users

Persons using accounting information who are directly involved in day to

day operations and are required to make decisions in order to effectively manage and

operate an organization; examples include internal managers, executives, and

directors.

International Accounting Standards Board (IASB)

The body responsible for

developing and setting IFS standards.

International Financial Reporting Standards (IFRS)

The standards for financial reporting that came into effect January 2011 in Canada for publicly accountable entities.

Inventory turnover

A financial statement analysis tool used to determine the number

of times a company's average inventory was sold during an accounting period,

calculated by dividing cost of goods sold by the average merchandise inventory

balance.

Liabilities

The debts or obligations of a business; claims by others that will reduce the

future assets of a business or require future services or products resulting from a past

transaction.

Limited liability

The owner's liability is limited to the amount of investment in the

business.

Limited liability partnership (LLP)

A partnership structure where liability is limited to

the individual partner that is sued; the remaining partner's assets are not at risk.

Loss

The excess of expenses over revenues for a period.

Management consulting

Activity in which suggestions are offered for improving a

company's procedures; the suggestions may concern new accounting and internal

control systems, new computer systems, budgeting, and employee benefit plans.

Managerial accounting

The area of accounting aimed at serving the decision-making

needs of internal users.

Matching principle

The GAAP principle that requires expenses to be recorded in the

same period as the associated revenues are recognized.

Materiality principle

States that an amount may be ignored if its effect on the financial

statements is not important to their users. Financial statement preparers need to

assess whether the item would impact the decision of a user.

Natural business year

A 12-month period that ends when a company's sales activities

are at their lowest point.

Net assets

Assets minus liabilities; another name for equity.

Note payable

A liability expressed by a written promise to make a future payment at a

specific time.

Owner investments

The transfer of an owner's personal assets to the business.

Partnership

A business owned by two or more people that is not organized as a

corporation.

Personal budget

An individualized spending plan that allocates future income toward

expenses, savings, and personal debt.

Private accountants

Accountants who work for a single employer other than the

government or a public accounting firm.

Private enterprise (PE)

A corporation that does not offer its shares for public sale.

Profit

The excess of revenues over expenses for a period; also called income.