RSM219H1 Lecture Notes - Financial Statement, Income Statement, Ipod

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20 Apr 2012
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Introduction to Accounting - Ch. 1
1. What is Accounting?
Accounting is the system of analyzing, sorting, and recording economic data
relating to business transactions. It involves preparing statements of the results
for individuals or businesses to use in making business decisions. Accounting is
a system of dealing with financial information that is used for decision making.
It looks at what is owned, what is owed and the difference which is called
personal net-worth or owner’s equity if it’s a business entity.
2. Reasons for studying Accounting?
To get a job – with an accounting background it’s easier to get a job at
the lower level.
Personal use – you can prepare your own personal budget, financial
reports, income tax return. It will allow you to better understand
financial matters and be able to make better business decisions.
Owning your own business – you will need to:
- keep track of amount owed by customers
- keep accounting records for government purposes
- produce an income statement for income tax purposes
- preparing payrolls and making payroll deductions
- banking
As a profession – having a designate
- CA – Chartered Accountant
- CGA – Certified General Accountant
- CMA – Certified Management Accountant
- Public Accountant – they do general accounting for a fee
- Management Consultants
- Auditing – is the examination and testing of the books, records
and procedures of a business so as to be able to express an
informed opinion about its financial statements or affairs.
- Tax Advisors
- Industrial or Institutional Accounting – working with banks,
government, large insurance companies etc.
Business Complexity – business require the knowledge and
understanding of the various complex government laws : fair business
practices and regulations, income tax etc.
3. What Accounting involves?
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There are five things involved in accounting:
Gathering financial data about the business or other organizations
Preparing and collecting permanent records of purchases made,
payments received, payroll details, and so on. These are the basis for
dealing with other companies.
Putting financial information into a more useful form by rearranging,
summarizing, and classifying this information
Preparing information reports, and summaries for:
a) measuring the probabilities of the company
b) helping to manage and reach decisions
c) external use to groups such as bankers, investors
Establishing controls to promote accuracy and honesty amongst
employees.
- Accounting looks at what is OWNED –OWED = PERSONAL NETWORTH
What are the terms used in business for these?
Assets = Liabilities – Owner’s Equity
e.g.
John Brown
Personal Balance Sheet
February 5, 2010
Owned Owed
Cash $ 100 Loans $ 30
Clothin 50 Cell Phone bill 25
Cell Phone 60 Total Owed 55
Jewellery 25
I-Pod 50
Camera 30
Laptop 150
Personal Equity
Money in Bank 410
Total Owed &
Personal Net worth $465 Total Equity $465
Both sides should be the same sum and this is why it’s called a Balance Sheet.
Note: This is the same procedure used to find one’s net worth if they should seek a loan in
the bank.
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