what is accounting? accounting is a system of dealing with financial information that provides...

What is Accounting?What is Accounting?Accounting is a system of Accounting is a system of

dealing with financial dealing with financial information that provides information that provides information for decision-information for decision-

making.making.

G.E. Syme & T.W. IrelandG.E. Syme & T.W. Ireland

Accounting is the Accounting is the language of business.language of business.

Art LightstoneArt Lightstone

What is Accounting?What is Accounting?

The Five functions of The Five functions of AccountingAccounting

1. Gathering financial 1. Gathering financial information.information.

2. Preparing and 2. Preparing and collecting permanent collecting permanent

records.records.


3. Rearranging, 3. Rearranging, summarizing and summarizing and

classifying financial classifying financial information.information.


4. Preparing information 4. Preparing information reports and summaries.reports and summaries.


5. Establishing controls 5. Establishing controls to promote accuracy and to promote accuracy and

honesty among honesty among employees.employees.


All businesses fall into three general All businesses fall into three general categories…categories…

1.1. serviceservice

2.2. manufacturingmanufacturing

3.3. merchandisingmerchandising

Types of BusinessTypes of Business

Sells effort (ie. work, talent) that does not 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 new product. These products may be

viewed by the buyer as an expense (ie. fuel) or an asset (ie. car).

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 Forms of Business OrganizationOrganization

There are three forms of There are three forms of business organization. They business organization. They are:are:

• Sole ProprietorshipSole Proprietorship• PartnershipPartnership• CorporationCorporation

Sole ProprietorshipSole Proprietorship

•An unincorporated business An unincorporated business owned by a single individual. owned by a single individual.

•The law does not distinguish The law does not distinguish between the business and the between the business and the owner.owner.

• great freedom from regulationgreat freedom from regulation

AdvantagesAdvantages

• low start-up costlow start-up cost

• all profits to ownerall profits to owner

• owner has complete controlowner has complete control


DisadvantagesDisadvantages


• difficult to raise capitaldifficult to raise capital

• unlimited liabilityunlimited liability

• limited to owner’s knowledgelimited to owner’s knowledge

• lack of continuitylack of continuity

• profits taxed at personal rateprofits taxed at personal rate

PartnershipPartnership

•An unincorporated business An unincorporated business owned by more than one owned by more than one individual. individual.

•The law does not distinguish The law does not distinguish between the business and the between the business and the owners.owners.


• broader management skillsbroader management skills


• ease of formationease of formation

• limited regulationslimited regulations

• more capital resourcesmore capital resources



• possible disagreementspossible disagreements

• unlimited liabilityunlimited liability

• divided authoritydivided authority

• difficult to find partnersdifficult to find partners

• partners liable for each otherpartners liable for each other

CorporationCorporation

•A business which is an individual A business which is an individual in the eyes of the law. in the eyes of the law.

•The law views the business as a The law views the business as a separate entity from the owner(s).separate entity from the owner(s).


•Profits of the corporation are Profits of the corporation are distributed to the shareholders by way distributed to the shareholders by way of "dividends". of "dividends".

•The more shares one owns, the The more shares one owns, the more dividends they will receive.more dividends they will receive.

exampleexample

Dividends: Dividends: $1.00 / share$1.00 / share

Shareholder owns: Shareholder owns: 1000 shares1000 shares

Shareholder Shareholder receives: receives: $1,000.00$1,000.00



•possible lower taxation ratepossible lower taxation rate

•limited liability of shareholders limited liability of shareholders (However, (However, directors and officers can be liable in directors and officers can be liable in certain circumstances.)certain circumstances.)

•continuity of businesscontinuity of business

•can sue / be sued in the corporate name can sue / be sued in the corporate name

•more prestigemore prestige



•losses cannot offset personal incomelosses cannot offset personal income

•higher start-up costs and greater higher start-up costs and greater formalitiesformalities

•requires annual maintenance from requires annual maintenance from accountant and lawyeraccountant and lawyer


StructureStructure

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

1. List the five main activities involved in accounting.1. List the five main activities involved in accounting.8. Identify three kinds of businesses besides a service 8. Identify three kinds of businesses besides a service business.business.9. List the three forms of business ownership.9. List the three forms of business ownership.10. Give examples of a routine accounting activity and a 10. Give examples of a routine accounting activity and a periodic accounting activity.periodic accounting activity.11. Define the accounting cycle. 11. Define the accounting cycle.

Bonus QuestionBonus Question: Explain the paradox involved in the : Explain the paradox involved in the answer to question #8. answer to question #8.

The Accounting CycleThe Accounting Cycle

1. Originating 1. Originating Transaction DataTransaction Data

2. Journalizing2. Journalizing

3. Posting3. Posting

4. Trial Balance4. Trial Balance

5. Worksheet5. Worksheet

6. Financial 6. Financial StatementsStatements

7. Closing 7. Closing EntriesEntries

8. Post-closing 8. Post-closing Trial BalanceTrial Balance

A = L + OEA = L + OE

The Entire The Entire

CycleCycle

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