1McGraw-Hill Ryerson

College

AccountingFirst Canadian Edition

Price • Haddock • Brock • Hahn • Reed

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The Accounting Cycle

ACCOUNTING:

The Language of Business

CHAPTER 1

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ACCOUNTING

•is “the Language of Business”

•is used to gather and communicate financial information about an organization.

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ACCOUNTING

•this information is used by owners and managers to make decisions that will build and improve the business

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OBJECTIVE 1 Define Accounting

OBJECTIVE 1 Define Accounting

ACCOUNTING DEFINED

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

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OBJECTIVE 2 Explain why it isimportant to study

accounting

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THREE PROFESSIONAL ACCOUNTING BODIES

IN CANADA

. Certified General Accountants of Canada (CGA)•Society of Management Accountants of Canada (CMA)•Canadian Institute of Chartered Accountants (CA)

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FINANCIAL INFORMATION NEEDED

• How much cash does the business have?

• How much money do customers owe the business?

• What is the cost of the merchandise sold?

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•How much did the volume of sales increase?

•What is the amount owed to suppliers?

•How much profit has the firm made?

FINANCIAL INFORMATION NEEDED (Continued)

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OBJECTIVE 3Identify who needs

to receivefinancial information

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• Owners and Managers• Suppliers• Banks• Tax Authorities• Regulatory Agencies

and Investors • Customers• Employees and Unions

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USERS OFFINANCIAL INFORMATION

OBJECTIVE 4Describe generally accepted accounting

principles

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Generally Accepted Accounting Principles

GAAP

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Include specific rules, practices and procedures as

well as broad underlying concepts and conventions.

GAAP

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Transactions and events are recognized in financial statements at the amount of cash or cash equivalents paid or received when they took place.

Historical CostBasis of

Measurement

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USE OF GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES

To ensure that generally accepted accounting principles are followed by publicly owned corporations, the stock exchange requires that financial information, in the form of financial statements, be submitted annually.

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OBJECTIVE 5Compare the three types

of business entities

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ENTITYAnything having its own separate identity, such as an individual, a town, a university, or a business.

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The concept of keeping a firm’s financial records separate from the owner’s personal financial records.

ENTITYASSUMPTION

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• A business entity owned by one person.

• Ends when the owner quits or dies.

• Owner is legally responsible for the debts and taxes of the business.

SOLE PROPRIETORSHIP

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Mike’s Bike Shop

• A business entity owned by two or more people who are legally responsible for the debts and taxes of the business.

• Ends when one of the partners leave the partnership.

PARTNERSHIP

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• A publicly or privately owned business.• Owned by stockholders.• Does not end when ownership changes.• Shareholders are not responsible for the

debts or taxes of the corporation.• Financial affairs of the shareholders must be

kept separately from the corporation.

CORPORATION

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OBJECTIVE 6State the

steps in the accounting cycle

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ACCOUNTINGCYCLE

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1. RECORD

2. CLASSIFY

3. SUMMARIZE4. INTERPRET

5. COMMUNICATE

1. RECORD• in journal

2. CLASSIFY• in a ledger

3. SUMMARIZE• in financial statements

4. INTERPRET5. COMMUNICATE

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ACCOUNTINGCYCLE

Alltransactions