What is Accounting?
It is a system for gathering data about an entity's economic activity, processing and organizing that data
to produce useful info About the entity and communicating that info to ppl who want to use it to make
Entity: is am economic unit of some kind such as a business, uni, gov't, or a person.
NOTE * DATA are RAW and UNPROCESSED facts about an entity's economic activity that is entered to an
accounting system****** INFORMATION is produced from ORGANIZING and PRESENTING the data in
ways that make it useful for decision making by stakeholders.
THE ACCOUNTING SYSTEM
GATHER DATA -----------> PROCESS AND ORGANIZE DATA -------------> Communicate Info.
Through this process, an accountant or a manager must make any decisions regarding what data to
collect and how it should be organized.
Financial Accounting: provides info to ppl who are external to an entity------ like lenders, taxation
authorities, competitors, CRA, etc. These ppl usually rely on the entity to provide them with the info.
Managerial Accounting: addresses the info needs and decisions of the managers of an entity. Assist in
operating decisions like price setting, evolution of products, etc.
Accounting is important because it has economic consequences where it affects ppl's wealth.
We need accounting because it helps one gather info and make a decision based on good and valuable
info received. If the info is limited then the decision ends up more of a guess rather than a decision.It
is part of life to make a decision either for you or for an entity and especially when money is involved.
This helps one manage money in a best way possible.
THE COST BENEFIT TRADE OFF (PAGE #5)
Accounting was created to provide a record of economic activity and info useful in decision making, so it
makes sense that accounting should be responsive to the environment and the ppl using the info. There
are four key components of the accounting environment----- overall environment, entities, stakeholders,
PAGE 7 figure 1.2
Since many countries have different rules and regulations ------> accounting, rules vary
Because there are different factors that establish a society ---> political, cultural, economic, competitive,
regulatory and legal parameters
Since stakeholders are always seeking for info. entities are at the center of the acc. env. Because they are
the ones that provide info to the stakeholders.
There are three categories of business entities-----> corporations, proprietorships, and partnerships...
minor (non-for profit organizations, gov't, and individuals)
Corporation is a separate legal entity created under corp. laws... they have the same rights and
responsibilities as individuals. ----> Shares are represented in a form of ownership and the owners are
stakeholders. Shares are issued to investors when a company is formed and are available for purchase
during a corp's life. Corps most important feature is that it provides limited liability to its
shareholders-----> hence if a corp faces a loss, then the shareholders face the loss since the corp is unable
to repay the money back to its shareholders. In addition, the ownership of the corp is easily transferredwithout affecting the corp. Public corps can be purchased by anyone interested in owning part of the
entity. The shares are usually traded on a stock exchange, which is a place where the shares of publicly
traded entities can be bought or sold. Private Corps are NOT available for trade unless the entity or the
shareholders agree to it. In case of a small business, corp. where there is only one owner-----> no one
can obtain shares unless the owner is ready to sell it.
Proprietorship is a business with one owner and is unincorporated. They are easy and cheap to set up.
Unlike corps, the owner includes all its revenues in their personal income tax hence a proprietorship is
not a SEPERATE LEGAL ENTITY. If the company owes any money, the sole owner's assets can be
Partnerships are also an unincorporated business and have two or more owners. The partners could
be ppl or corps. They do not pay taxes; their earnings are included in the partner's personal incomes.
There should be an agreement stating partner's rights and responsibilities.
Nonprofit orgs. ... They are providing social, educational, religious, and other services to communities
and individuals. They are incorporated and provide members with limited liability but they do not pay
Gov't...they play a major role as they spend and decide how spend the money ---> they also raise a lot of
money. Financial reporting by gov't is an important source of accountability.
Individuals...are acc. entities as they produce info. in quantitative form to meet the demands of everyday
life. EG. #9
CHARACTERTISTICS OF ENTITIES
There are many characteristics... no enti