Accounting Notes September 12th 2013

Accounting And Business th

September 4 2013 What Is Accounting? 

Accounting is a system for dealing with financial information information that provides information used in decision making.

Why Is Accounting Useful? Accounting can answer questions about a company’s financial stability and position 

Accounting can help determine the path company should take to best generate profit o Ex. Is the business earning enough profit?, How much did John Smith earn last year? Useful in many jobs, personal life and is a necessity if you own your own business o

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Main activities 

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There are five main activities associated with accounting Gathering financial information of the activities of a business or other organizati o rganization on Preparing and collecting permanent records. Records provide evidence of purchase, proof of  payment, details of payroll, and so on. They also serve as the basis for dealings with other companies Rearranging, summarizing and classifying financial information into a more useable form Preparing information reports and summaries for the following fo llowing purposes: a. To help management reach decisions b. To serve the needs of groups outside the business, such as bankers and investors c. To measure the profitability of the business Establishing controls to promote accuracy and honesty among employees. As business grow, owners can no longer look after everything alone, they have to hire others to help them As soon as employees are hired, accounting controls become essential

The Accounting Cycle 

The recurring set of accounting procedures carried out during each fiscal period

Types Of Business 

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Service Business o Provides a service in exchange for currency o Ex. Tim Hortons Merchandising Business o Provides and object in exchange for currency o Buys products and resells them at a higher price o Ex. Canadian Tire Manufacturing Business o Buys raw materials and converts them into useable products which are then sold in exchange for currency o Ex. Ford Motor Company Not For Profit Business o Provides something (usually a service) free of charge o Usually gains profits through a third party o Ex. Lorne Park Secondary School

Types of ownership 

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Sole Proprietorship o A single person or family owns the business o Ex. Convenience Stores Partnership o Multiple people, families or parties each own a portion of the business o Ex. Pearson Darby Spectre Law Firm Corporation o A large company in which anyone can own part of through the stock exchange o Ex. Facebook

Accounting As A Profession 

There are three main professions and accountant can work in

Accounting Clerk 

Mostly involved in routine activities o Ensures transactions are recorded properly and necessary documents are prepared o Recording the accounting entries and balancing ledger o Making payroll calculations and preparing payroll cheques o Carrying out all necessary banking transactions

Accountant   

Broader than the work of an accounting clerk Requires more education and experience Responsible for maintaining the entire accounting system o Developing a system to ensure that data is correctly entered into the system o Ensuring that GAAS are met o Interpreting data produced by accounting system o Preparing reports based on data output from system o Participating in management meetings and assisting with business decisions o Supervising accounting employees

Auditor 

Examines and tests the books, records and procedures of a business to express and opinion about it financial statements

Balance Sheets th

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September 6 2013 Can be used to determine the financial position of a company Always written on columnar paper to ensure neatness

Definitions  Assets - The total value of all of the things that the company owns including land, supplies and cash Liabilities - The total value of all the things that the company owes including mortgages and loans   Equity - The total value of money left after liabilities are subtracted from assets  Liquidity - The readiness of an asset to be converted into useable cash  Order Of Importance - The urgency for a liability to be paid back Accounting Equation  

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This is the fundamental equation that a balance sheet is centered around This equation is used to calculate the owner’s Equity o A - L = OE (Assets - Liabilities = Owner ’s Equity) This equation can be re-written to calculate the owner’s assets o A = L + OE (Assets = Liabilities + Owner’s Equity)

Steps For Making A Balance Sheet 1) Start by writing the “who”, “what” and “when” on the top

three lines of the columnar paper. 2)

Write and underline “Assets”

on the first line of the left column and “Liabilities” the

first line of the right column 3) List the Assets on the left side in order of liquidity. Write the prices in the five columns next to it. From the right, the order is as follows: cents, ones, tens, hundreds, thousands and more. Finally, total all assets and write the sum underneath (write on the same line as “total liabilities and

Equity if possible) 4) List the Liabilities on the left side in order of importance Write the prices in the five columns next to it. From the right, the order is as follows: cents, ones, tens, hundreds, thousands and more. Finally, total all liabilities and write the sum underneath. 5) Skip a line on the right side, write and underline “Owner’s Equity” 6) Under it, write “(the owner’s name), Capital” and the owner’s equity in the five columns beside it 7) Under that, write “Total Liabilities And Equity” and write the sum of the liabilities and the equity 8) Add dollar signs in the “thousands” column in the foll owing places: the first asset, the total of all assets, the first liability, the total of all liabilities and the total liabilities and equity 9) Underline the money value in the following places: the final asset (before the total), the final liability (before the total) and “(the owner’s name), Capital” 10) Lastly, double underline the money value in the following places: the total Assets and the total liabilities and equity

Claims Against The Assets th

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September 12 2013 Someone is entitled to the assets through one of two ways: 1. They provide the actual asset (eg. Person A gives Person B a desk valued at $500) 2. They provide the money to buy the asset (eg. Person A gives Person B $500 to buy a desk)

Creditors 

A person to whom the company owes money to

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Creditors are always listed on the liabilities column under “ Accounts Payable”

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They are usually one of the first to be paid back

Closing A Business 

The owner must follow these steps: 1. Sell all of or as much of the business’s assets as possible (hiring a liquidator is an option) 2. Pay back all due liabilities 3. Keep the remaining

Selling A Business 

The owner is the only person who benefits or suffers when a business is closed

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After all the assets are sold and the liabilities are paid back, the remaining money is the owner ’s to

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spend That amount may be more or less than what they started with depending on how successful the business was and how much they sold the assets for The creditors never get more or less than what they put in

Generally Accepted Accounting Principles (GAAPs) th

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September 12 2013 A set of rules that practicing accountants must follow The rules are found within the CICA Handbook (Canadian Institute of Chartered Accountants)

The Business Entity Concept This GAAP states that the assets and liabilities of the owner’s person life should not be placed in the  business’s balance sheet  This is in order to keep the business’s balance sheet accurate for the business only The Continuing Concern Concept (The Going Concern Concept) 

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This GAAP states while the balance sheet is being made, the accountant must assume that the business will remain in operation This is order to keep the dollar value of the assets at the time of purchase The assets are rarely sold at the same price

The Principle Of Conservatism 

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This GAAP States that the accountant is creating the balance sheet, he or she should be fair and reasonable This is to ensure that assets are not over stated or understated when uncertainty exists