Chapter 1

What Is
Accounting?
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.
Mr. Welham
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.
 A good accounting
system can answer
many questions about
the business.
 Who Needs the Accounting
Information to Make Decisions?
Groups of Interest (Stakeholders)
Insiders Outsiders
(internal users) (external users)
• managers • creditors (i.e. groups that the
• executives business owes money to, like a
• - these people run the bank)
…..business and make • investors (owners of the business)
…..decisions for the
…..business. • possible or potential investors
• labour unions (they represent the
workers)
• government (i.e. for tax purposes)
 For each question below, tell me which
group(s) of interest might ask that question.

1. Is the business making enough -owner, manager

profit?
2. Are the selling prices of the products -manager
too low (too cheap)?
3. Do the goods for sale need to be -manager
reordered from suppliers?
4. Should I buy this business? -possible investor
5. Did the business pay the proper -government
amount of tax?
6. Can the business afford to pay more -labour union
to its employees?
 Why Study Accounting?
- A knowledge of accounting can be very
useful in many ways:

1. Accounting on the Job

- Easier to find a job in business
- Higher pay (make more money)

2. Accounting in Daily Life

- Can better handle your personal finances
- Keep better financial records
- You will do your own taxes
3. Owning Your Own Business
- Do the banking for the business
- Keep record of customers that owe you money
- Calculating and keeping track of the employee
wages
- Keeping records of the tax that needs to be
paid to the government
4. Accounting as a Profession
- Study to become a CPA (Chartered
Professional Accountant)
- Public accountant provides accounting
services for a fee to the general public, such as
auditing.
- Auditing is the checking and testing of the
accounting system and the reporting
 Types of Business
All businesses fall into 4 categories…
This type of business sells effort (ie. work,
talent) that does not result in a material
1. service item. A haircut would be an example of a
service.

This type of business combines effort and

materials to produce a new product. To
2. manufacturing produce a car, many material items are put
together, such as metal, engine parts, etc.

This type of business purchases a

3. Merchandising manufacturer’s product and resells it to
another customer for a higher price.

4. Non-profit The focus is not to earn a profit but to

organization provide a social benefit. It does activities
to help society or the community (i.e.
Cancer Society, MADD (Mothers Against
Drunk Drivers).
Forms of Business
Organization
(Ownership)
There are three main forms
of business organization.
They are:
• Sole Proprietorship
• Partnership
• Corporation
 Sole Proprietorship
not formed into a legal corporation

• 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
 The Nature of Accounting
Accounting work can be divided into 3 parts:
1. Daily Activities
- Happens every day
- Includes writing cheques, paying bills, and banking
2. Periodic Activities
- Happens once a week, once a month, once a year
- Includes paying workers every two weeks
- Bank account is checked every month
- Reports are made every month and year
3. Miscellaneous Activities
- Can happen at any time
- For example, firing of a worker and need a new one
- Business meetings
 The Accounting Cycle
Accounting happens in a cycle, it repeats.
Usually the accounting cycle is a period of
one year, called a fiscal period.

The accounting cycle is the set of repeating

accounting work that happens in a fiscal
period.

When one accounting cycle ends, another

accounting cycle begins.
The Accounting Cycle (see p.7)
 Roles of Accounting
Accountant and accounting clerk are different,
but both are important in a good accounting
system.
The Accounting clerk
- does office work that is regular and
repetitive and in nature
- Examples: recording accounting
information, organizing accounting papers,
calculating and preparing the pay cheques
for the workers
 Roles of Accounting
The Accountant
- Responsible for maintaining the whole
accounting system
- Examples: developing a new system to
make sure correct information is entered,
supervising the work of all accounting
employees, making sure the rules of
accounting are being followed, going to
meetings with management, preparing
reports, understanding reports
 Becoming a
Professional Accountant
¨ The title or designation in Canada is CPA,
(Chartered Professional Accountant)
 Becoming a
Professional Accountant
¨ To become a CPA, it requires a 4-year
business degree, plus to 2 years of CPA
education (PEP), which also includes
completing a period of work-related
experience (30 months), and passing a final
exam.
https
://www.cpacanada.ca/en/become-a-cpa/cpa-pr
ep-becoming-a-cpa
Videos of CPA Canada
https://www.youtube.com/watch?v
=tbmMjeMlU8o

https://www.youtube.com/watch?v
=3czfnOHPt-Q
 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