Chapter 1

Accounting is an information system that identifies, records and communicates the economic
events of an organization for the purpose of decision making
Economic events activites related to distribution of goods or services in an organization
Identifying economic activities; sales, providing services, or paying employees
Events are recorded systematically in a chronological order, measured in dollars and cents.
These are then classified and then summarized
The information is communicated to those interested through financial statements
Report in aggregate similar transations are accumulated and totalled in a financial statement
This simplifies the accounting process and makes it more understandable, but can lead to a
loss of detail
Many companies take advantage of this and avoid reveling significant details to their
competitors
To communicate, an accountant must analyse using ratios, percentages, graphs and charts to
highlight specifics and interpret explaining the usues, meanings and limitations of information
for other users
Accounting is known as the language of business
Internal users of accounting information are people who run the business, such as marketing
managers, production supervisors, finance directors, and company officers and require detailed
internal reports
External users are people who have interest in another company:
Investors, who will decide whether to buy, sell or hold shares of a company
Creditors who will evaluate the risk of granting credit to this company
Taxing authorities who want to know if the company respects the tax laws
Regulatory agencies who will check if the company is following prescribed rules
Customers who want to ensure the company will maintain their product warranties
Labour unions who want to know if the owners can pay increased wages and benefits
Economic planners who use the information to forecast economic activity
Luca Pacoli was an Italian Renaissance mathetmatician, tutor to Leonardo Da Vinci, described a
system to ensure financial information was recorded effieciently and accurately
As the Industrial age began in the 19th century, the need to report financial status arose
Today's Information age, businesses are constantly changing to keep up with others
Bookkeeping is the recording of economic events, and only one part of the accounting process
Bookkeeping is now primarily done by computer softwares
Accounting requires a higher level of expertise and judgement than bookkeeping
Accounting can be divided into financial accounting and managerial accounting
Financial accountants provide economic and financial information to external users
Managerial accountants provide to internal users
Accounting can help you with:
General management when making business decisions
Getting a good job in finance
Marketers should be sensitive to costs and benefits
Information technology and e-commerce require communication of accounting information

CPA chartered proffesional accountant has absolved the previous:

CA chartered accountant
CGA certified general accountant
CMA certified management accountant
Public accounting offers services to the general public, auditing, taxation and business advisory
services
Auditing is the conduction of an official financial examination of an organization's accounts
and analyses if it fairly reflects the economic events that occured during the same time.
Tax specialists advise and plan, prepare tax returns, preform accounting for GST, PST or
HST
Business advisory services include installing basic accounting systems, helping small
businesses plan or managing human ressources
Private accounting is also known as managerial accounting, which includes
General accounting, recoring daily transactions and preparing financial statements
Cost accounting, determining the cost of specific goods
Budgeting, helping management quantify goals concering revenues, cogs, and Op. Expenses
Accounting information systems, designing both manual and computerized accounting
software
Income tax accounting, preparing tax returns and doing tax planning for the company
Internal auditing, reviewing the company's operations to evalute their compliance with
management policies and efficiency
Not-for-Profit accounting is done, some examples are United Way, the Red Cross, CIBC Run
for the Cure
Ethics are the astandards of conduct of which actions are judged as right or wrong
Certain leaders can make unethical/illegal decisions, ie. Falsifying expense accounts, insider
trading, violating environmental legislation
Most organisations have a code of conduct, outlining their belief system
To Solve an Ethical Dilemma
1. Recognize an ethical situation and the ethical issues involved, using personal ethics or
an organization's code of ethics
2. Identify and analyze the princple elements, the people who will he harmed vs. Benefit,
what are their responsibilities
3. Select the most ethical alternative, consider all consequences, there can be more than
one right answer
GAAP Generally Accepted Accounting Principles are a set of standards that developed over
time in response to traditions, experience and feedback
The Canadian Institute of Chartered Accountants (CICA) is responsible for the GAAP
The GAAP has legal status for companies that follow the regulations of the Canadian
Business Corporations Act
Standards are not static and change
The IFRS International Financial Reporting Standards replaced the GAAP
The Cost Principle states that cost is the value exchanged at the time something is acquired and
is reliable
Fair market value is the value determined
The Going Concern Assumption is the assumption that a company will continue to operate int
he forseeable future in spite of failures

The Monetary Unit Assumption requires that transaction data be only expressed in terms of
money ie. Expense of free food is balanced with loss of cash, not balanced with employee
morale increased
the assumption also prohibits adjusting for inflation
The Economic Entity Assumption requires that the organisation's financial activity be seperate
from the owner's personal activities
Entities' finances must be kept seperate from each other if they have the same owner
Proprietorship a business owned by one person, usually small service businesses, ie.
Hairstylists
easy to start a proprietorship, little capital needed
the owner recieves all profits and incurs all debts
the owner's personal records are seperate although there is no legal distinction between them
Partnership a business owned by two or more persons as partners
similar to a proprietorship
a partnership agreement, written or oral outlines the rules ie. Duties, division of net income,
settlement upon death, etc.
all owners are liable for debt, regardless of who created it
a partner's personal assets can be sold to repay debt
Corporation a business that is organised as a seperate legal entity under federal/provincial
corporation law
ownership is divided into transferrable shares (shareholders)
shareholders have limited liability, as they are not personally liable for debts but will lose
money as the share price falls
ownership can be changed through the buying and selling of shares, which attracts many
ownership can be transferred without dissolving the corp, giving the corp unlimited life
proprietorships + partnerships > corporations, but corps generate much more revenue,
ranging from $7 billion to $22 billion
Public corporations' shares are publicly listed on the Canadian stock exchange, they distribute
financial statements to investors, creditors, other interested parties, and even the general public
Private corporations do not issue publicly traded shares
Assets are the resources owned by a business, each has the capacity to provide future services
or benefits
Cash, A/R, inventory, supplies, prepaid expenses (ie. insurance)
Liablities and owner's equity are the rights or claims to these resources
claims of those the company owes (creditors) are liabilities, creditors claims are paid before
ownership when a business is liquidated and an unpaid creditor can legally force a business
to liquidate
claims of the owners are owner's equity
Owner's Equity is the remaining equity after the creditors claim,
OE is also known as residual equity
If OE is negative, i is called owner's deficiency or deficit
The basic accounting equation is [Asset = Liabilities + Owner's Equity] and can be rearranged
as A L = OE when finding OE
This equation applies to all business organizations