Management and Organizational Studies 1023A/B Chapter Notes - Chapter 1: Accounts Payable, Promissory Note, Financial Statement
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15 Nov 2011
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Chapter 1- Purpose and Use of Financial Statements
•accounting is the information system that identifies and records the economic events of an
organization and communicates them
•economic systems depend on highly transparent, reliable and accurate financial reporting
•“the language of business”
Users and Uses of Accounting
INTERNAL USERS
•internal users of accounting information plan, organize and run companies
EXTERNAL USERS
•external users are investors that use accounting information to make decisions to buy, hold or
sell their ownership
•creditors evaluate the risks of granting credit to a company
ETHICAL BEHAVIOUR
•in order for financial information to have value to its users, it must be prepared by individuals
with high standards of ethical behaviour
•ethics in accounting is of the utmost importance
Forms of Business Organization
PROPRIETORSHIP
•owned by one person
•simple to set up and gives you control, usually operated by the owner
•personally liable for all debts of the business
•no legal distinction between business and owner
PARTNERSHIP
•a partnership is similar to a proprietorship except there is more than one owner
•often formed because one person does not have enough economic resources to initiate the
business, or because partners bring unique skills to the partnership
•unlimited liability for all debts of the partnership
•exception: limited liability
CORPORATIONS
•as an investor in a corporation, you receive shares to indicate your ownership claim
•can become owners by investing relatively small amounts of money
•makes it easier for corporations to raise funds
•shares are easy to sell
•thousands of shareholders, shares are traded on organized stock exchanges
•many business starts as proprietorships or partnerships and eventually incorporate
•limited liability
•corporations pay income taxes as separate legal entities
•revenue produced by corporations is far greater