Introduction to Accounting

Study Notes

Accounting is an information system for businesses that measures business activities, processes the data into reports, and communicates results to decision makers.
Financial statements are the reports created that communicate accounting information.

Managers: Utilize accounting data to set goals, evaluate progress towards those goals, and take corrective actions.
Investors: Use accounting reports to make decisions about investing in a company or evaluate existing investments.
Creditors: Analyze accounting information to assess a borrower’s ability to repay loans.
Government and Regulatory Agencies: Rely on accounting to ensure organizations pay the correct amount of taxes (e.g., Canada Revenue Agency - CRA).
Individuals: Make investment decisions and manage personal finances using accounting information.
Not-for-profit Organizations: Employ accounting principles in a similar manner to for-profit businesses.

Financial Accounting: Provides information for both internal management and external decision-makers like investors and creditors.
Managerial Accounting: Generates internal information specifically for management use.

Proprietorship: A single-owner unincorporated business where the owner has unlimited liability, meaning they are personally responsible for the business's debts.
Partnership: Unincorporated business with two or more owners, each with unlimited liability.
Corporation: An incorporated business with ownership held by shareholders, who are represented by shares. Shareholders elect the board of directors who set company policies and appoint officers. Shareholders have limited liability, meaning they are only responsible for the amount invested in the company. Corporations are separate legal entities from their owners and have many of the same rights as individuals.

Generally Accepted Accounting Principles (GAAP): Professional guidelines that govern the recording, measurement, and reporting of financial information.
Canadian Institute of Chartered Accountants (CICA): Sets the GAAP for Canada.
Multiple Sets of GAAP: Different sets of GAAP apply based on the organization's type.
- Publicly Accountable Enterprises (PAEs): Must use International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB) to enhance comparability of financial information globally. IFRS became effective in Canada for public companies in 2011.
- Private Enterprises: Can choose to use IFRS or Accounting Standards for Private Enterprises (ASPE).
- Other GAAP: Apply to non-profit organizations, pension plans, and government entities.

The primary objective of financial reporting is to provide useful information to users to make informed investment and lending decisions.
Characteristics of Useful Information:
- Relevance: Information presented must be useful, providing predictive value, confirmatory value, and being material in nature (meaning omission or misrepresentation could impact a user's decision).
- Faithful Representation (Reliability): Accounting records must be based on accurate information. Generally, actual costs are prioritized over estimations or market values.