Accounting-A system for gathering data about an entity’s economic activity,
processing and organizing that data to produce useful information abut that entity,
and communicating that information to people who want to use it to make decisions.
Entity-An economic unit of some kind, such as a business university, government or
even a person.
Data-Raw and unprocessed facts about an entity’s economic activity that is entered
into an accounting system.
Information-Organizing and presenting data of that entity in a useful way that
enables stakeholders to make decision.
-Hence the cycle is gathering data, processing and organizing the data, then
Bookkeeping-The process of recording financial transaction and maintaining
financial records. Bookkeeping is just one aspect of accounting, there are several
other aspects associated with accounting (e.g., organizing and presenting
information with regards to an entity, and interpreting financial information).
Financial Accounting-Provides information to the individuals external (investors,
lenders, taxation authorities, and competitors) to the entity. These individuals
generally do not have direct access to an entity’s financial information and must rely
on the entity to provide this information.
Managerial Accounting-Addresses the information and needs for the managers of
an entity. For example, operating decisions, price setting, expansion, evaluating
which products are successful, and determining how much of a product should be
Economic Consequences-Accounting effects peoples wealth and that would impact
the financial and general decisions they make.
Cost benefit tradeoff-Information is only worth collecting when its benefit exceeds
Components of accounting
i). Environment: Different economic systems and the character of a county’s
institutions influence the ways in cwhich people live their lives and how accounting
varies between these countries for these reasons. E.g., political, cultural, economic,
competitive, regulatory, legal.
ii). Entities include corporation (a separate legal entity under corporation laws. As
individuals, it also must file tax returns, can be used and can enter contracts such as
borrowing money, providing G & S to consumers) Shares: Ownership of a corporation is represented by shares owned. These can be
issued anytime through a corporation’s life.
Shareholders: Owners of these shares.
Limited liability-The only money at risk is the money that as been invested by
shareholders. Hence these shareholders are not obligated or liable for the
Public Corporations-Can be purchased by anyone interested in owning part of the
Stock exchange-Physical or virtual space where shares are usually traded.
General purpose financial statements-Not intended by one stakeholder or
individual, but for everyone in general.
Consolidated-Aggregate the financial information of more than one corporation
into a single set of statements. When a corporation controls more than 50% of other
corporations (intended to give information to stakeholders of all companies in the
group). All consolidated financial statements include balance sheets and income
statements (profit loss statements).
-Current assets are assets that can be converted into cash within 12 months.
-Marketable securities (investing money in financial securities, e.g., bonds, short
term GIC, that can be converted into cash within the business cycle which is 12
-Restricted Marketable securities (money invested by Leons perhaps in a subsidiary
that can not be taken back for a certain period of time).
- Accounts receivable is money that is owed to a corporation.
-Income tax recoverable is money paid in taxes by a corporation in advance but if
sales were less than expected (hence lower income taxes), the money would be
reimbursed to the company (vice versa). Prepaid taxes (paid in advance more than
required amount of tax) is an asset but tax owing is a liability (sales in year 2 is
higher than year 1).
-The cost of inventory is measured by the cost of current goods in the corporation’s
warehouses and stores (measured at cost price).
Other assets: -Prepaid expense are utilities, rent etc, paid before they are due.
-Goodwill (intangible, money paid out of generosity in the hope of high future
expected gains, e,g,, paid 1.5 million for a entity worth 1 million)
-Other receivables: The money that needs to be paid (not immediately) but with
hope in the future.
-Property plant (non-movable and fixed where a machine is removable) and
Liability and Shareholder equity
-Current liability is something that must be owed within a year (buy furniture from
China, you owe them money for the furniture within a certain duration of time
(short within 1 year).
-Income tax payable (depends on how much revenue and growth there has been,
but prepaying the income tax may make this value 0 because you have already
anticipated how much expect growth there would be. If the corporation does do
better than anticipated, it would maybe need to pay additional income tax over the
prepaid amount which is known as the income tax payable).
-Customer deposits is the amount of money the customer has deposited to
preorder/order a certain G&S. The corporation is now liable to deliver this G&S
(Apple Iphone 4S preorder, or even Ebay where seller is liable to send the product
purchased by the buyer).
-Dividends (company has made money and out of these profits, a portion of the
money is given to shareholders from a dividend payable account). Dividends are not
paid out immediately, they are first announced and then paid out to owners of the
corporation after a certain period of time.
-Deferred warranty plan is revenue (extended warranty, purchase warranty for
product but the product breaks but its under warranty, this is the amount of money
set aside to meet obligations under extended warranties sold).