chapter 1

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26 Oct 2010
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Chapter 1
Accounting Matters
Accounting t is the information system that identifies and records the economic events of an
organization, and then communicates them to a wide variety of interested users.
Users and Uses of Accounting
Internal users t they work for the company
- These include finance directors, marketing managers, human resource personnel,
production supervisors, and company officers
- Accounting provides internal reports: financial comparisons of operating alternatives,
projections of earnings from new sales campaigns, forecasts of cash needs for next
year, analyses of sales costs, and budgets financial statements.
External users t investors and creditors are the main external users of accounting information
- Investors: is the company earning enough to give me a return on my investment
- Creditors: will the company be able to pay its debts as they come due
- Labour unions: can the company afford the pay raise we are asking for
- Customers: will the company stay in business long enough to service the products I
buy from it
Ethical behaviour t financial statements must be prepared by individuals with high standards of ethical
Forms of Business Organizations
Proprietorships t owned by one person, only a relatively small amount of capital is needed to start, the
owner receives profits/losses, and incurs many liabilities. There is no legal distinction between the
business and the owner
Partnerships t two or more people together, each partner has unlimited liability, they are legally
responsible for Z}Z[ actions. You can, however, form limited liabilities in the form of limited
partners vs. general partners.
Corporations t as an investor of a corporation, you receive shares to indicate your ownership claim. By
allowing investors to become owners through shares, it allows them to raise capital easily. When
deciding the type of business entity, many factors must be considered. Proprietors and partners pay
personal income tax on their respective shares of profits, while corporations pay income taxes as
separate legal entities on corporate profits. Public corporations commonly distribute their financial
statements to their shareholders, creditors, and other interested parties. Private corporations do not
issue publicly traded shares.
Business Activities
All businesses are involved in three types of activities: financing, investing, and operating.
Financing Activities
The two primary ways of raising outside funds for a corporation is borrowing money and issuing shares.
Forms of liabilities incurred thorough borrowing money include: bank indebtedness (principal
outstanding), notes payable, long-term debt, mortgages, accounts payable, lease, etcY