Day 1

Introduction

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

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Roadmap

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

2
1. Forms of Business Organizations
1. Sole proprietorship

2. Partnership

3. Corporations

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Forms of Business Organizations

1. Sole proprietorship
 One person owns and operates the business.

 Usually small, local businesses such as restaurants,

photography studios, retail stores.

The owner is fully liable for all debts of the business.

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Forms of Business Organizations

2. Partnership
 A partnership is a business owned jointly by two or more
owners.
Many professional practices of physicians, lawyers and
accountants are often organized as partnerships.
 A partnership contract determines how the partnership is
governed and how profits are shared.
All partners are fully liable for debts of the partnership.

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Forms of Business Organizations

3. Corporations
 A corporation is a business incorporated under federal or
provincial corporations legislation and is a legal entity
separate from its owners.
 The owners of the corporation are shareholders.
Ownership is represented by shares of capital that can be
bought and sold freely.

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Forms of Business Organizations

3. Corporations
 Public corporations
• Offer their shares to the general public through the intermediary of
a stock exchange.

Private corporations

• The shares of private corporations are not available to the general

public.

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Roadmap

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

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2. Accounting and Financial Statements

Accounting is an information system that measures

and records business activities, process data into
reports, and disclose results to decision makers.

Financial
statements Information users
Accounting and Financial Statements
Financial Statements are the business documents that
companies use to report the results of their activities to
various user groups. The system of accounting produces
the following financial statements:

Balance Income
Sheet/ Statement of
Statement/ Statement of
Statement of Changes in
Statement of Cash Flows Equity
Financial Income
Position

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 Who Uses Accounting Data
Internal Tax
Users Managers Authority
Investors
Human There are two
Resources broad groups of
users of financial Not For
information: Profit Org.
Finance internal users and
external users.
Creditors
External
Marketing Customers
Users

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Two Types of Accounting

Management accounting (ACC 1110):

 provides information for internal users, e. g., managers,
employees;
 information is customized to particular organization and its needs.

Financial accounting (ACC 1100):

 provides information for users external to the entity, e. g.,
investors, creditors, government;
 information is standardized so that it is understandable to
outsiders.
Generally Accepted
Accounting Principles
(GAAP)
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Roadmap

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

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3. Generally Accepted Accounting Principles

 GAAP refer to accounting practices in widespread

use because of tradition or are specifically
mandated by recognized rule-making authorities.

 Different countries may follow different GAAP

mandated by their authorities.

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International Financial Reporting Standards
(IFRS)

As commerce becomes more global and accounting

becomes more complex, the existence of different GAAP in
countries made comparisons between companies almost
impossible.
As a result, the International Accounting Standards Board
(IASB) was set up in 2001 to issue International Financial
Reporting Standards (IFRS).
 IFRS are being adopted in Canada (and many other
countries around the world)

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Accounting for Different Organizations

Public corporations
• Must follow International Financial Reporting Standards
(IFRS), as outlined in Part I of the Chartered Professional
Accountants Canada (CPA Canada) Handbook –
Accounting.

Private corporations
• Can follow IFRS or Accounting Standards for Private
Enterprises (ASPE), as outlined in Part II of the CPA
Canada Handbook – Accounting.

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Accounting for Different Organizations

Not-for-profit organizations
• Part III of the CPA Canada Handbook – Accounting.

Pension plans
• Part IV of the CPA Canada Handbook – Accounting.

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 Ethically Evaluate Business Decisions
• Although guided by accounting standars such as IFRS,
accountants have options on how they record for one specific
business transaction. For example:
• Estimate depreciation method, or useful life for long-lived assets
• Determine whether subsequent expenditure for long-lived assets
should be expensed or capitalized.
• Estimate the amount of bad debt expense for receivables.
• The ethical factor recognizes that while certain actions might
be both economically profitable and legal, they may still not
be right.
• An ethical analysis is often needed to guide judgment when
making business decisions. You may ask the following
question when making decisions.
• Which options create the greatest good for the greatest number of
stakeholders (not just for shareholders)?
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Roadmap

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

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4. The Accounting Equation

A company A company
owns owes

If assets are If assets are

borrowed invested

Assets =Liabilities + Shareholders’ Equity

E.g. Cash
A/R A/P Owner’s equity
Inventory Bank loan Retained earnings
Equipment

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 4. The Accounting Equation
Example: In January, Ross and Rachel invest $5,000 to start up an
accounting consultation firm. For the start-up fund, $2,000 is from
their own pockets, and $3,000 is borrowed from the bank. Elaborate
the accounting equation for their business.

Shareholder’s
Assets = Liabilities + equity

Bank loan Owner’s equity

Cash 5000 = 3000
+ 2000

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4. The Accounting Equation
In February, Ross and Rachel used $1,500 to buy a laptop for
their business. Elaborate the accounting equation for their
business.

Shareholder’s
Assets = Liabilities + equity

Bank loan Owner’s equity

Cash 5000 = 3000
+ 2000

Bank loan Owner’s equity

Cash 3500 = 3000
+ 2000
Laptop 1500

The accounting equation

always, always, always holds
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Roadmap

1. Forms of business organizations

2. Accounting and financial statements
3. Accounting principles, standards and rule-
making authorities
4. The accounting equation
5. Assets and liabilities

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5. Assets and Liabilities
An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the entity. An asset is recognized (for accounting
purposes) when its value can be measured with reasonable
precision.

Example: Explain why BestBuy’s inventory is an asset for the firm.

Control: owned by the firm;

Past event: Purchase from supplier;
Future benefits: Will help firm generate future sales;
Value can be measured: Purchase price on the invoice;
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Assets Exercise:
For each example, determine whether the
underlined item would be considered an asset of
the italicized entity. (control, past event, future
benefits, measure of value)

1. A very nice public park is located across the street from my

house (me).
2. The clothing boutique has a very friendly and
knowledgeable staff.
3. A vehicle owned by the firm is totaled in a head-on
collision.

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 Assets Exercise:

For each example, determine whether the

underlined item would be considered an asset of
the italicized entity. (control, past event, future
benefits, measure of value)

1. A very nice public park is located across the street from my

house (me).
Control? No. Public park is accessible to anyone.
Remember that unless ALL elements of the definition are met,
the item in question is not an asset.
The public park is not an asset.
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Assets Exercise:

For each example, determine whether the

underlined item would be considered an asset of
the italicized entity. (control, past event, future
benefits, measure of value)
2. The clothing boutique has a very friendly and
knowledgeable staff.

Control? Probably not. I cannot stop employees from leaving

to work somewhere else.

Employees are not an asset.

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Assets Exercise:

For each example, determine whether the

underlined item would be considered an asset of
the italicized entity. (control, past event, future
benefits, measure of value)
3. A vehicle owned by the firm is totaled in a head-on
collision.
Future benefits? Probably none (unless there is some salvage
value)
This would not be considered an asset of the firm.
Note that if there are any insurance proceeds receivable
associated with the collision, that would be a separate asset.

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Liabilities
A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits. A liability is recognized (for accounting purposes)
when the value of the obligation can be measured with
reasonable precision.
Example: Explain why BestBuy’s Accounts payable to its supplier
is a liability for the firm.
Obligation: To pay for inventory purchased on account;
Past event: Delivery of inventory by suppliers;
Outflow of resources: Will use cash to settle this obligation;
Valuation can be measured: Amount specified on the invoice;

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Liabilities Exercise:
For each example, determine whether the underlined
item would be considered a liability of the italicized
entity on December 31, 2015. (obligation, past event,
provision of asset/service, measure)

1. The firm estimates that it will have to pay $25,000 in 2015

income tax. Taxes will be due April 30, 2016.
2. The firm expects to pay $2 million in salaries to employees
in 2016.
3. The firm enclosed $10 cash rebate certificates in some of
the shoes that were sold in 2015. 40,000 certificates are now
in circulation. The firm expects that roughly 5% of the
coupons will be sent in by customers in 2016.

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Liabilities Exercise:
For each example, determine whether the underlined
item would be considered a liability of the italicized
entity on December 31, 2015. (obligation, past event,
provision of asset/service, measure)

1. The firm estimates that it will have to pay $25,000 in 2015

income tax. Taxes will be due April 30, 2016.
Obligation? Yes.
Past event? Yes. The economic activities of the firm in 2015 have
caused the income taxes payable, even though it is not due until
later in 2016.
Outflow of resources? Yes – cash
Measure? Yes - $25,000 estimate is likely accurate.
This is a liability of the firm.

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Liabilities Exercise:
For each example, determine whether the underlined
item would be considered a liability of the italicized
entity on December 31, 2015. (obligation, past event,
provision of asset/service, measure)

2. The firm expects to pay $2 million in salaries to employees

in 2016.
Past event? No. The $2 million will be paid for work done by
employees in 2016 but that work has not happened yet.
While it is very likely that the company will pay this amount
to employees, it is not considered a liability on Dec. 31, 2015.

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Liabilities Exercise:
For each example, determine whether the underlined
item would be considered a liability of the italicized
entity on December 31, 2015. (obligation, past event,
provision of asset/service, measure)

3. The firm enclosed $10 cash rebate certificates in some of the shoes that
were sold in 2015. 40,000 certificates are now in circulation. The firm
expects that roughly 5% of the coupons will be sent in by customers in
2016.
Obligation? Yes, the firm has the obligation give customers discount when
they come to claim their cash rebate certificates.
Past event? 2015 sales of shoes with certificates.
Provision of asset? Yes – cash
Measure? Probably accurate, based on company and industry experience.
This is a liability.

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