What is Accounting?

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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
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What is Accounting?
Accounting is the language of business.
Art Lightstone
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The Five functions of Accounting
1. Gathering financial information.
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The Five functions of Accounting
2. Preparing and collecting permanent records.
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The Five functions of Accounting
3. Rearranging, summarizing and classifying
financial information.
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The Five functions of Accounting
4. Preparing information reports and summaries.
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The Five functions of Accounting
5. Establishing controls to promote accuracy and
honesty among employees.
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Types of Business

• All businesses fall into three general
  categories
• service
• manufacturing
• merchandising

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 manufacturers product and resells it
to another customer for a higher price. Again,
such products may be viewed as assets or expenses
by the buyer.
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Forms of Business Organization
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There are three forms of business organization.
They are

• Sole Proprietorship

• Partnership

• Corporation

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Sole Proprietorship

• An unincorporated business owned by a single
  individual.

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

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Sole Proprietorship
Advantages

• low start-up cost

• great freedom from regulation

• all profits to owner

• owner has complete control

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Sole Proprietorship
Disadvantages

• unlimited liability

• difficult to raise capital

• limited to owners knowledge

• lack of continuity

• profits taxed at personal rate

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Partnership

• An unincorporated business owned by more than one
  individual.

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

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Partnership
Advantages

• ease of formation

• broader management skills

• limited regulations

• more capital resources

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Partnership
Disadvantages

• unlimited liability

• possible disagreements

• divided authority

• difficult to find partners

• partners liable for each other

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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).

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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 receives 1,000.00
Dividends 1.00 / share
Shareholder owns 1000 shares
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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

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Corporation
Disadvantages

• higher start-up costs and greater formalities

• requires annual maintenance from accountant and
  lawyer

• losses cannot offset personal income

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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)
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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.
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The Accounting Cycle
1. Originating Transaction Data
2. Journalizing
8. Post-closing Trial Balance
3. Posting
A L OE
7. Closing Entries
4. Trial Balance
6. Financial Statements
5. Worksheet