Chapter#1 The accounting environment: what is accounting and why is it done?
I. What is accounting and why does it matter?
A. Accounting is a system for gathering data about an entity’s economic activity, processing and
organizing that data to produce useful information about the entity, and communicating that
information to people who want to use it to make decisions.
B. Entity is an economic unit of some kind, such as business, university, government, or even a
C. Data are raw, unprocessed facts about an entity’s economic activity that are entered into an
D. Information results from organizing and presenting the data in ways that make it useful for
decision making by stakeholders.
E. Difference between bookkeeping and accounting:
Bookkeeping is part of accounting. Accounting involves the design and management of
information systems, how to account for and report an entity’s economic activity, and the analysis
and interpretation of financial information.
F. Economic consequences: it affects people’s wealth and it can have an impact on the decisions they
G. The costbenefit tradeoff: comparing the benefits of an action with its costs, and of taking the
action only if the benefits are larger.
It is usually not possible to collect all the information available on a subject because 1)
gathering and analyzing information is costly and takes time. 2) There are limits to the
amount of information people can effectively manage and process.
II. The accounting environment
Identify some of the factors that establish the structure of a society: political, cultural,
economic, competitive, regulatory, and legal parameters.
1. Corporation is a separate legal entity created under the corporation laws of either
Canada, one of the provinces, or some other jurisdiction in the world.
2. Ownership in a corporation is represented by shares, the owners of shares are
3. Features :
a. it provides limited liability to its shareholders, which means if the
corporation goes bankrupt, a shareholder will not lose more than his
or her investment (unless the shareholder has provided personal
guarantees for the corporation's debts).
b. Share ownership is easily transferred without affecting the corporation
4. Public corporation
a. Shares of public corporations can be purchased by anyone interested in
owning part of the company.
b. The shares are usually traded on a stock exchangea place where the
shares of publicly traded entities can be bought and sold.
5. Private corporation
a. The shares of private corporations cannot be purchased unless the
entity or its shareholders agree.
1. A proprietorship is an incorporated business with one owner
2. It is not a separate legal entity. It doesn’t pay taxes, instead, the proprietor
includes the money made by the proprietorship in his or her personal tax return. 3. If a proprietorship doesn’t meet its obligations any entities that are owed money
can attempt to recover it by seizing the proprietor’s personal assets.
4. Feature: easy and inexpensive to set up.
1. A partnership is an unincorporated business owned by two or more entities
2. Difference and similarity from proprietorship: there is more than one owner;
partnerships don’t pay taxes, their earnings are included in the partners’
incomes. Relatively easy and inexpensive to set up. The partnership agreement
adds cost and complexity.
1. Provide social, educational, professional, religious, health, charities, and other
services around the world.
2. Examples: hospitals, charities, religious organization, unions, clubs, daycare
centers, and university.
3. Are exempt from paying income taxes.
1. Individual people often have to produce information in quantitative form to meet
the demands of everyday life.
a. Filing an income tax return. Most Canadian have to file a tax return
every year with the Canada Revenue Agency (CRA), it is responsible
for administration and enforcement of federal tax laws. The Canada
Revenue Agency is a federal agency that administers tax laws for the
Government of Canada and for most provinces and territories.
b. Keeping track of finances. (Design to help people organize their
c. Borrowing money from banks. (Banks may request financial
information as part of a loan application)
d. Insuring homes and belongings. (Estimate the value and determine the
amount of insurance needed)
e. Preparing budgets. (Estimate how much it will cost to attend university,
plan monthly or weekly spending to ensure that she has enough money
to meet all financial needs for the year)
Characteristics of entities
1. No two entities are identical; each has characteristics that make it unique. Each may do business in
The choices available are constrained by contracts; laws, accounting standards, and the
information needs and demands of powerful stakeholders.
a. The Income Tax Act defines how certain transactions and economic events must be accounted
for in calculating the amount of income tax an entity must pay.
b. Corporations must meet the requirements of the law they are incorporated under e.g. the
Canada Business Corporations Act.
c. Some entities must agree to follow formal sets of accounting rules e.g. IFRS, ASPE.
d. Companies that trade on Canadian stock exchanges must meet the requirements of the
securities laws of their province and the rules of the stock exchange. e. Entities often enter voluntarily into contracts with other parties to do their accounting in a
There are many groups and individuals that might be interested in an entity, such as owners,
lenders, taxation authorities, employees, governments, consumers, and regulators.
Difference between stakeholders of private companies and public companies:
1. Private companies usually have a relatively small number of stakeholders
2. Private companies usually know who the stakeholders are
3. Private company stakeholders are typically more knowledgeable about the entity
4. Private company stakeholders can usually obtain information directly from the company
a. When the owners don’t manage the busi