Introduction to Accounting - Ch.

1
1. What is Accounting?

Accounting is the system of sorting, recording and analyzing, economic data

relating to business transactions. It involves preparing statements of the results
for individuals or businesses to use in making business decisions. Accounting
is a system of dealing with financial information that is used for decision
making. It looks at what is owned, what is owed and the difference which is
called personal net-worth or owner’s equity if it’s a business entity.

2. Reasons for studying Accounting?

• To get a job – with an accounting background it’s easier to get a job at
the lower level.
• Personal use – you can prepare your own personal budget, financial
reports, income tax return. It will allow you to better understand
financial matters and be able to make better business decisions.
• Owning your own business – you will need to:
- keep track of amount owed by customers
- keep accounting records for government purposes
- produce an income statement for income tax purposes
- preparing payrolls and making payroll deductions
- banking

• As a profession – having a designate

- CA – Chartered Accountant
- CGA – Certified General Accountant
- CMA – Certified Management Accountant
- Public Accountant – they do general accounting for a fee
- Management Consultants
- Auditing – is the examination and testing of the books, records
and procedures of a business so as to be able to express an
informed opinion about its financial statements or affairs.
- Tax Advisors
- Industrial or Institutional Accounting – working with banks,
government, large insurance companies etc.

• Business Complexity – business require the knowledge and

understanding of the various complex government laws : fair business
practices and regulations, income tax etc.
 3. What Accounting involves?

There are five things involved in accounting:

 Gathering financial data about the business or other organizations
 Preparing and collecting permanent records of purchases made,
payments received, payroll details, and so on. These are the basis for
dealing with other companies.
 Putting financial information into a more useful form by rearranging,
summarizing, and classifying this information
 Preparing information reports, and summaries for:
a) measuring the probabilities of the company
b) helping to manage and reach decisions
c) external use to groups such as bankers, investors
 Establishing controls to promote accuracy and honesty amongst
employees.

- Accounting looks at what is OWNED –OWED = PERSONAL NETWORTH

What are the terms used in business for these?

Assets = Liabilities – Owner’s Equity

e.g.

John Brown
Personal Balance Sheet
February 5, 2010

Owned Owed
Cash $ 100 Loans $ 30
Clothin 50 Cell Phone bill 25
Cell Phone 60 Total Owed 55
Jewellery 25
I-Pod 50
Camera 30
Laptop 150
Personal Equity
Money in Bank 410
Total Owed &
Personal Net worth $465 Total Equity $465

Both sides should be the same sum and this is why it’s called a Balance Sheet.
Note: This is the same procedure used to find one’s net worth if they should seek a loan
in the bank.

The Accounting Equation:

A = L + O/E

The Purpose of Accounting

1. To record the day to day financial activities of the business.
2. To summarize and report information in financial statements for analysis and
decision making.

Who would be interested in seeing the financial statements of a company?

 The Owner – to make valid business decisions, check for profit or to make
necessary plans
 Creditors – people who have their money wrapped up in the business
 Investors - Individuals or businesses that would like to invest in the
business or who have made investment in the company.
 Government – for tax purposes, statistical reports, policy decision making
etc.
 Competitors – for comparative reasons

Types of Business Ownership

1. Sole Trader or Sole Proprietorship
The individual and the owner are the same so the owner bears all the risks
and liabilities. He can be sued and this can be taken form his personal
assets to repay the amount owed.

2. Partnership
Business owned by more than 1 person. Again they have total liability and
share the liability or the gain.

3. Limited Company or Corporation

The business is separate from the owner the shareholders own the business
and have limited liabilities they stand to lose only their investments.

GAAP – Generally Accepted Accounting Principles

GAAPs are the standard Accounting rules and guidelines used in accounting e.g.
1. Business Entity Principle
It states that the personal affairs of the Owner should be kept separate and
apart from that of the Business.
 2. Cost Principle
States that the original price paid for an item should be the same price
used in the accounting records even if the value has drastically changed.

Preparing the B/S statement

Steps on Page 7
Note: when preparing
 No abbreviations should be used in the statement
 It should have no corrections
 $ signs should be aligned with one another on both sides of the statement.

Order of Items on the B/S

Assets are listed based on their degree of liquidity for short teem items. Liquidity is how
easily the item can be converted to cash.
1. Current Assets – Cash, A/R, Office Supplies
2. Fixed Assets – land, building, equipment – these are long lived assets and are
listed based on the length of their useful life to the business. The longest lasting is
listed 1st i.e. land.
3. Liabilities are listed according to when they must be paid in full i.e. the maturity
date. They are listed from the shortest to the longest term.
A/P, Bank Loan, Mortgage Payable

Do: Assignment 1 then

Pages 13-14
Ques. 5-12
Exer. 4-8

Business Transactions
A transaction is an event that occurs during the operation of a business and results in a
financial change. A business transaction is always an exchange of things of value.

Soemthing of Value given up Transaction SomethingOfValueIsReceived

1. The B/S – gives a detailed picture of the financial position of the business up to a
certain date.
2. Transaction Analysis Sheet – is used to assist in the examination of a transaction.
It looks at the effect of the transaction on the B/S.

3. Accounting period – It is the time used to complete the accounting cycle. It’s the
length of time between the preparation of the financial reports e.g. monthly,
annually (Calendar year, Fiscal year).

- Calendar year – January to December of same year

 - Fiscal year - 12 months (any 12 months)

HW
Research:
1. Characteristics of business: service, merchandising, manufacturing or producing,
and non-profit organizations
2. The difference between: accounting clerk, bookkeeper, and accountant
3. 3 basic forms of business ownership: sole proprietorship, partnership, and limited
company & corporation