ACCT 217

• Accounting


  The process of identifying, recording, summarizing, and reporting economic information for decision makers. This information is presented through financial statements.
• Types of accounting


  • Management accounting
  • Financial accounting
• Management accounting


  For internal users. Provides information to assist in the planning, implementations, control, decision making processes. Ex: budgeting, performance measurement.
• Financial accounting


  For external users. Provides information to managers and people outside the firm. *Main focus*
• Evaluating a company


  • Look at the company's ability to sell products (sales revenue), income measures (gross profit, operating and net income), the percentage of sales revenue for profit, the company's ability to collect receivables, pay liabilities, and where/how the company receives cash.
• Business entity


  A distinct entity (separate from its owners)
• Business structures


  • Proprietorship
  • Partnership
  • Corporation
• Proprietorship


  Owner(s): Proprietor – one owner. Personal liability of owner(s) for business debts: Proprietor is personally liable.
• Partnership


  Owner(s): Partners – two owners. Personal liability of owner(s) for business debts: General partners are personally liable; limited partners are not.
• Corporation


  Owner(s): Shareholders – many owners. Personal liability of owner(s) for business debts: Shareholders are NOT personally liable.
• Generally Accepted Accounting Principles (GAAP)


  Accounting needs to follow certain conventions to be understandable by users.
• Accounting standards


  • US Financial Accounting Standards Board (FASB)
  • International Accounting Standards Board (IASB). The IASB has developed International financial reporting standards (IFRS).
• Who uses accounting information?

  • Investors
  • Employees
  • Creditors (banks)
  • Suppliers and trade creditors
  • Customers
  • Government
  • The public
• Internal users


  • Managers of companies, directors of finance, marketing, human resource, production, and many more.
• External users


  • Investors, creditors/lenders (bankers), non-management employees, potential employees, taxing authorities, regulatory authorities, customers, etc.
• Types of accounts


  • Assets
  • Liabilities
  • Owner's equity
• Current assets


  • Cash
  • Accounts receivable (AR)
  • Inventory
  • Supplies
  • Prepaid expenses
• Non-current assets


  • Long-term investments
  • Land
  • Property, Plant, equipment
  • Intangible assets
  • Goodwill
• Current liabilities


  • Bank indebtedness
  • Accounts payable (AP)
  • Unearned revenue
  • Notes payable
  • Accrued liabilities
  • Income tax payable
  • Current maturities of long-term debt
• Non-current liabilities


  • Notes payable
  • Lease obligations
  • Bank loan payable
  • Bonds payable
  • Deferred income tax liabilities
• Owner's equity


  • Share capital
  • Retained earnings
  • Common shares
• Revenue (income)


  Increases in economic benefits during an accounting period.
• Expenses


  Decrease in economic benefits during an accounting period.
• Financial statements


  • Balance sheet
  • Income statement
  • Statement of changes in Equity
  • Statement of Cash flows
• Accounting equation


  Assets = Liabilities + Equity. This equation must always balance.
• Objective of general-purpose financial reporting

  • Provides financial information to existing and potential investors, lenders, and other creditors who are making decisions about providing resources to a company. Should have Comparability, verifiability, timeliness, and understandable.
• Relevance


  Has relevance if it makes a difference in users' decisions. May have predictive and/or confirmatory value.
• Faithful representation


  Information should reflect economic reality. It should be complete, neutral, and free from error.
• Transactions


  Economic events that must be recorded in the financial statements. Recorded if it changes assets, liabilities, or shareholders' equity.
• Recording transactions


  Identify the affected account, 2. determine the direction of effect on each account (increase/decrease), 3. Verify that the accounting equation remains in balance.
• Debit


  When you add a transaction to the left.
• Credit


  When you add a transaction to the right.
• Accounts with normal debit balances

  Assets (cash, land, AR) expenses.
• Accounts with normal liability balances

  Liabilities (AP, Notes payable, Bank loan), shareholders equity (common shares, retained earnings), revenue.
• Trial balance


  Lists all of the accounts with their balances. Assets are listed first, than liabilities, then shareholders equity. Usually used at the end of the period to prepare the balance sheet and the income statement.
• Accrual accounting


  An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. Focuses on the underlying activities not cash flows. Records revenues when earned and expenses when incurred. Records both cash and noncash (transactions on account, depreciation, use of prepaid assets, etc.) transactions.
• Accruals


  Adjustments for revenues that have been earned but are not yet recorded and expenses that have been incurred but are not yet recorded.
• Fiscal year


  A 12-month period ending on a date other than December 31.
• Cash basis


  Records transactions only if cash is involved. Revenues are recorded when cash is received ad expenses are recorded when cash is paid.
• Matching principle


  The expense should be recorded in the same period that the revenue created from the expense is earned.