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What is Accounting?

Accounting is a system of
dealing with financial
information that provides
information for decision-
making.
G.E. Syme & T.W. Ireland
What is Accounting?

Accounting is the
language of business.
Art Lightstone
The Five functions of
Accounting

1. Gathering financial
information.
The Five functions of
Accounting

2. Preparing and
collecting permanent
records.
The Five functions of
Accounting

3. Rearranging,
summarizing and
classifying financial
information.
The Five functions of
Accounting

4. Preparing
information reports
and summaries.
The Five functions of
Accounting

5. Establishing
controls to promote
accuracy and honesty
among employees.
Types of Business
All businesses fall into three general
categories…
Sells effort (ie. work, talent) that does not
1. service result in a material item. A haircut would be
an example of a service. A service is often
viewed as an expense by the buyer.

Combines effort and materials to produce a


2. manufacturing new product. These products may be
viewed by the buyer as an expense (ie.
fuel) or an asset (ie. car).

3. merchandising Purchases a manufacturer’s product and


resells it to another customer for a higher
price. Again, such products may be viewed
as assets or expenses by the buyer.
Forms of Business
Organization
There are three forms of
business organization. They
are:
• Sole Proprietorship
• Partnership
• Corporation
Sole Proprietorship

•An unincorporated business


owned by a single individual.

•The law does not distinguish


between the business and the
owner.
Sole Proprietorship
Advantages
• low start-up cost
• great freedom from regulation
• all profits to owner
• owner has complete control
Sole Proprietorship
Disadvantages
• unlimited liability
• difficult to raise capital
• limited to owner’s knowledge
• lack of continuity
• profits taxed at personal rate
Partnership

•An unincorporated business


owned by more than one
individual.

•The law does not distinguish


between the business and the
owners.
Partnership

Advantages
• ease of formation
• broader management skills
• limited regulations
• more capital resources
Partnership

Disadvantages
• unlimited liability
• possible disagreements
• divided authority
• difficult to find partners
• partners liable for each other
Corporation

•A business which is an individual


in the eyes of the law.

•The law views the business as a


separate entity from the owner(s).
Corporation

•Profits of the corporation are


distributed to the shareholders by way
of "dividends".
•The more shares one owns, the
more dividends they will receive.
example
Shareholder
Dividends: Shareholder owns:
receives:
$1.00 / share 1000 shares
$1,000.00
Corporation

Advantages
•limited liability of shareholders (However,
directors and officers can be liable in
certain circumstances.)
•possible lower taxation rate
•can sue / be sued in the corporate name
•more prestige
•continuity of business
Corporation

Disadvantages
•higher start-up costs and greater
formalities

•requires annual maintenance from


accountant and lawyer

•losses cannot offset personal income


Corporation
Structure
Executive: (ie. President, Treasurer, Secretary.
Run the day to day operations of the business.)

Directors: (Hire executive, guide mission,


distribute profits between business & shareholders)

Shareholders: (provide capital,


elect directors, receive dividends)
1. In groups of four to five students, answer the following
Chapter Review questions: #1, 8, 9, 10, and 11.

1. List the five main activities involved in accounting.


8. Identify three kinds of businesses besides a service
business.
9. List the three forms of business ownership.
10. Give examples of a routine accounting activity and a
periodic accounting activity.
11. Define the accounting cycle.
Bonus Question: Explain the paradox involved in the
answer to question #8.
The Accounting Cycle
e Entire
Th e
Cycl 1. Originating
Transaction Data

2. Journalizing
8. Post-closing
Trial Balance

3. Posting
7. Closing A = L + OE
Entries

4. Trial Balance
6. Financial
Statements

5. Worksheet