Accounting Chapter 1 Notes PDF

BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy Chapter 1 (1.1-1.7) Notes: Accounting and Business (Textbook pgs. 2-11) 1.1​ What is Accounting? ​ Accounting is a system of organizing and dealing with f...

BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy Chapter 1 (1.1-1.7) Notes: Accounting and Business (Textbook pgs. 2-11) 1.1​ What is Accounting? ​ Accounting is a system of organizing and dealing with financial data that provides information for decision making ​ There are five main activities involved in accounting: 1.​ Gathering financial information: about the activities of a business/organization 2.​ Preparing and collecting permanent records: Records provide evidence/proof transactions (ex. payments, purchases, payroll) 3.​ Rearranging, summarizing, and classifying: financial information/records must be arranged in a useable form 4.​ Preparing information reports and summaries: so that a) management can make decisions; b) to serve the needs of groups outside the business like investors and bankers; c) to measure the profits of a business 5.​ Establish controls to promote accuracy and honesty among employees: controls need to be put in place so that business is conducted properly and ethically Accounting-An Information System ​ A good accounting system provides answers to many questions. For example if you own or manage a business you might be asking: o​ Is the business earning a profit? o​ Do we have enough money to meet our needs? o​ How much is it costing us to produce product X? o​ Are our customers paying their bills on time? o​ How much does ABC company owe us? o​ To whom was cheque No. 502 issued? ​ Other persons, companies, or organizations might seek answers to the following questions: o​ Should I lend money to this business (banker question) Page 1 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy o​ Should I sell this business (an owner question) o​ Can the business pay more to its employees? (a labour union question) o​ Is the business paying the proper amount of income tax (a government question) 1.2 Why Study Accounting? ​ Accounting on the job: if you decide to enter the business world, several jobs require a knowledge of clerical and accounting skills ​ Accounting in daily life: a personal working knowledge of accounting can help you handle personal business affairs (e.g. preparing a personal budget, income tax return) and you will be in a better position to understand the operation of the business where you work ​ Owning your own business: one might want to own their own business and in order for it to be successful, the owner must be able to make sound business decisions based on good financial records ​ Accounting as a profession: A professional accountant is a person who has met the requirements of at least one of the three accounting organizations in Canada. They may hold the designation of a Chartered Professional Accountant (CPA), a Certified General Accountant (CGA), or a Certified Management Accountant (CMA) o​ A public accountant serves the general public for a fee (e.g. prepares someone’s income tax return or audits a company) o​ An audit is the examination of the books, records and procedures of a business in order to be able to express an opinion about its financial statements (making sure the business is behaving) o​ Professional accountants can choose management accounting (e.g. working for a company like Bell Canada) or institutional accounting (e.g working for the government or a university) instead of public accounting (working for an individual) ​ Complexity of a Business: the government has created numerous rules and laws concerning fair business practices and they have become so complex that only accounting experts can fully understand them. Page 2 of 11  BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy 1.3​ Characteristics of Business Types of Business ​ Business fall within one of the following four main categories: 1.​ The Service Business: sells a service to the public, rather than making or selling an actual product (e.g. hair salon services; dental clinic; dog walking service, etc.) 2.​ The Merchandising Business: buys goods and resells them at a higher price for a profit (e.g. a clothing store, supermarket, etc.) 3.​ The Manufacturing or Producing Business: A manufacturing business buys raw materials, converts them into a new product and sells the product to earn a profit. (e.g. auto maker, paper mill, a steel plant) A producing business is almost like a manufacturing business (e.g. a farm produces milk, grain and other foods) 4.​ The Non-Profit Organization: carries on activities to meet social needs and not for a profit. (e.g. church, the Canadian Cancer Society, etc.) These organizations hope to provide a social benefit. Forms of Business Ownership a)​ Sole Proprietorship: one owner; usually a small business b)​ Partnership: a business involving more than own owner c)​ Limited Company or Corporation: is owned by many shareholders (owners) and it has its own separate existence with rights and obligations (own legal entity) 1.4​ The Nature of Accounting Accounting work can be divided into three categories: 1.​ Routine Daily Activities: occur the same way nearly every day (e.g. processing bills, preparing cheques, recording transactions, etc.) 2.​ Periodic Accounting Activities: these activities occur at regular intervals (e.g. payroll cheques might be prepared once a week, or every two weeks; financial reports may be prepared each month and every year; income tax returns are prepared once a year) 3.​ Miscellaneous Activities: Some accounting activities cannot be predicted. (e.g. an accounting employee resigns and the position must be filled) Page 3 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy The Accounting Cycle - What we will be learning this course ​ Accounting activities occur in cycles and these cycles occur in periods of time called fiscal periods (usually the length of a year) ​ You will become familiar with the terms in the diagram as you learn more about the accounting cycle throughout this course ​ The Accounting Cycle: 1.5​ Becoming a Professional Accountant Professional Accounting Organizations: ​ To be a fully qualified accountant, you must complete the course prescribed by one of the three Canadian professional accounting organizations: o​ Canadian Institute of Chartered Accountants o​ Certified General Accountants Association of Canada o​ Society of Management Accountants of Canada Page 4 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy Training To Be a Professional Accountant ​ Plan on approximately seven years of post-secondary study and work. This is because the CA, CGA, and CMA organizations require their applicants to acquire a university degree and to complete two or three years of specialized courses and work experience ​ Some of the programs allow students to remain employed while studying to earn credits towards their professional designations Changes for Canada’s Professional Accountants ​ Presently, members of all three professional accounting organizations are exploring a proposal to merge the three organizations and the suggested new designation is Chartered Professional Accountant or CPA ​ One proposal sets the transition period at 10 years because approximately 200 000 people would be affected, along with the thousands of students who are currently studying to be an accountant ​ In 2011, new rules, standards, and principles governing accounting practice took effect and the Canadian Accounting Standards Board implemented the first stages of moving Canadian accounting principles to global accounting standards 1.6​ Roles in Accounting ​ Accounting and bookkeeping are similar, but not the same ​ A bookkeeper or accounting clerk is clerical in nature and they are often concerned with routine matters (e.g. recording accounting entries and balancing the ledger), ​ An accountant requires more education and experience because their responsibilities are greater (e.g. responsible for interpreting the data produced by the accounting system and ensuring that accounting laws are obeyed) 1.7​ How Accountants Use Computer Technology ​ Accountants are usually proficient at using computer software to meet the demands of their careers ​ An accounting clerk might use Sage Simply Accounting software or Intuit Quickbooks Pro 2011 for Windows software for entering transaction data and printing reports ​ A senior accountant on the other hand might set up the entire accounting system or choose which software the business should buy Page 5 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy ​ A spreadsheet software such as Excel can also be useful because it can do just about any mathematical task an accountant needs done and be used to prepare meaningful reports for presentation purposes ​ Computers will never replace accountants because computers can’t make decisions Homework: Review Questions in textbook pgs. 12 and 13→ #1-13 Review Exercises in textbook pgs. 14 #1-3 Pg. 12 1. List the five main activities involved in accounting. -​ Gathering Financial information: about the activities of a business/organization -​ Preparing and collecting permanent records: records provide evidence/proof transactions (e.g. payments, purchases, payroll etc.) -​ Rearranging, summarising and classifying: financial information/records must be arranged in a useable form -​ Preparing information reports and summaries: so that a) management can make decisions; b) to serve the needs of groups outside the business like investors and bankers; c) to measure the profits of a business -​ Establish controls to promote accuracy and honesty among employees: controls need to be put in place so that business is conducted properly and ethically 2. Give three questions to which the accounting system can provide answers. If you own or manage a business you might be asking… -​ Is the business earning a profit? -​ Do we have enough money to meet our needs? -​ How much is it costing us to produce product X? -​ Are our customers paying their bills on time? -​ How much does ABC company owe us? -​ To whom was cheque No. 502 issued? 3. Identify the two groups that benefit from the information provided by the accounting system. Potential investors, accountants, business owners. 4. Describe how knowledge of accounting can help you with respect to employment. Page 6 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy A personal working knowledge of accounting can help you handle personal business affairs (e.g. preparing a personal budget, income tax return) and you will be in a better position to understand the operation of the business where you work. 5. Explain how knowledge of accounting can help people who own their own businesses. One might want to own their own business and in order for it to be successful, the owner must be able to make sound business decisions based on good financial records. 6. Describe the work of a public accountant. A public accountant serves the general public for a fee (e.g. prepares someone’s income tax return or audits a company) 7. Explain what auditing is. An audit is the examination of the books, records and procedures of a business in order to be able to express an opinion about its financial statements (making sure the business is behaving). 8. Identify three kinds of business besides the service business. The merchandising, manufacturing and non-profit businesses/organizations. 9. List the three forms of business ownership. Sole proprietorship, partnership, and corporation/limited company. 10. Give examples of a routine accounting activity and a periodic accounting activity. A routine accounting activity is recording transactions, and a periodic accounting activity is payroll cheques. 11. Define the accounting cycle. Accounting activities occur in cycles and these cycles occur in periods of time called fiscal periods (usually the length of a year). Page 7 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy 12. Name the three professional accounting organizations. -​ Canadian Institute of Chartered Accountants -​ Certified General Accountants Association of Canada -​ Society of Management Accountants of Canada 13. On average, how long does it take, after enrolment, to become a qualified professional accountant? Plan on approximately seven years of post-secondary study and work. This is because the CA, CGA, and CMA organizations require their applicants to acquire a university degree and to complete two or three years of specialized courses and work experience. Pg. 14 1.​ A.​ The professional accounting Certified General Accountants organization that is well-known for Association distance education B.​ The professional accounting Society of Management Accountants organization that emphasizes management accounting. C.​ The professional accounting Canadian Institute of Chartered organization that publishes a Accountants (CICA) Page 8 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy handbook of Canadian accounting rules and standards. D.​ Formal accounting data, prepared Financial Statements at least once a year. E.​ An organization whose main aim Non-profit business is to provide a social benefit, usually at little or no cost to the user. F.​ The recurring set of accounting Accounting cycle procedures carried out during each fiscal period. G.​ A business that buys goods and Merchandising business resells them at a higher price for profit. H.​ The owner of a business who is in Sole proprietor business alone. I.​ A special form of business that is Corporation owned by a number of persons called shareholders. J.​ Professional persons who offer Public accountants their services as accountants to the general public. K.​ The examining and testing of the Auditing books, records, and procedures of a business in order to be able to express an opinion about the financial statements. L.​ A business that sells a service to Service business the public and does not make or sell a product. M.​ A business that buys raw Merchandising business materials, converts them into a new product, and sells that product to earn a profit. Page 9 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy 2. A.​ The work of a bookkeeper or accounting clerk is clerical in nature. B.​ The work of a bookkeeper or accounting clerk is concerned with routine matters. C.​ A bookkeeper or accounting clerk ensures that the supporting documents are present and correct for every transaction. D.​ An accountant ensures that International Financial Reporting Standards are followed. E.​ A bookkeeper or accounting clerk records the accounting entries in the books of account. F.​ A bookkeeper or accounting clerk makes the payroll calculations. G.​ An accountant prepares reports based on the data produced by the accounting system. H.​ A bookkeeper or accounting clerk carries out all the necessary banking transactions. I.​ An accountant participates in management meetings. J.​ A professional accountant has a high-level position. 3. A. Which of the following statements does not fit the job title? a. An accounting clerk verifies source documents. b. An accounting clerk ensures that the ledger balances. c. An accounting clerk works neatly to guard against errors. d. An accounting clerk studies tax bulletins to keep up to date. B. Which of the following statements does not fit the job title? a. An accounting clerk works out accounting entries. b. An accounting clerk, together with the owner, compares this year’s and last year’s income statements. c. An accounting clerk records accounting entries in the books. d. An accounting clerk inquires about a suspected error made by the bank. C. Which of the following statements does not fit the job title? Page 10 of 11 BAF 3M1​ ​ CHAPTER 1 NOTES-Student Copy a. An accountant is a professional person. b. An accountant has a broad knowledge of accounting. c. An accountant ensures the accuracy of the payroll cheques. d. An accountant discusses the business’s cash flow with the owners. D. Which of the following statements does not fit the job title? a. An accountant talks about revising a spreadsheet model. b. An accountant investigates the credit rating of a new customer. c. An accountant is promoted to vice-president. d. An accountant is ill; a meeting with the bank manager has to be cancelled. E. Which of the following statements does not fit the facts about computers? a. The computer is an ideal machine for use in an accounting environment. b. The computer can handle large quantities of data. c. The computer produces better profit figures. d. The computer can provide information for management very quickly. Page 11 of 11