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Chapter 1

Chapter One Textbook Notes (Financial Accounting: A Critical Approach, 3rd Edition)

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ACTG 2010
Jonathan Farrar

Chapter ONE The Accounting Environment: What is Accounting and Why is it Done? What is Accounting? Accounting – a system for gathering data about an entity’s economic activity, processing and organizing the data to produce useful information about the entity, and communicating the information to people who use it to make decisions (economic information that enables users to make investment & credit decisions) • Communication is important but challenging • Effective decision making requires information, accntg provides this 2 Subfields: 1) Financial Accounting – provides information to people external to entity 2) Managerial Accounting – addresses the information needs & decisions of the managers of the entity Entity – an economic unit, such as an individual, proprietorship, government, not-for- profit organization etc. In an accounting environment, an entity is an economic unit that a stakeholder wants accounting information about. • Provide accounting information stakeholder need • Reports must be tailored to suit entity’s accounting environment Data v Information • Data – raw, unprocessed facts about an entity’s economic activity, entered in accounting system • Information – results from organizing & presenting data Bookkeeping v Accounting Why Does Accounting Matter? Has Economic consequences (for stakeholders) – the effect of actions and decisions on people’s wealth Why Do People Need & Want Accounting Information? Information to make business decisions Cost-benefit trade off – the concept of comparing the benefits of an action with the costs of the action, and taking action only if the benefits exceed the costs • Relates to information collection The Accounting Environment 4 Key Components • Affects how entity will and should account for economic activity A) Environment 1 www.notesolution.com Chapter ONE o Social, political, legal, cultural & economic environment of society B) Entities 3 Categories 1. Corporation – separate legal entity created under the corporation laws of Canada or of a province – has many of the rights & responsibilities of an individual • Share – a unit of ownership in a corporation • Shareholder – an entity that owns shares of a corporation and that is therefore an owner of the corporation • Limited Liability – shareholders of a corporation are not liable for the obligations of and losses suffered by the corporation • Public Corporations – a corporation whose shares or other securities are available for purchase by any entity that has an interest in owning the securities and money to buy them – securities usually traded on … • Stock Exchange – a place (physical or virtual) where entities can trade securities of publicly traded entities • Private Corporations – a corporation whose shares and other securities are not available for purchase without agreement with the private corporation or its shareholders 2. Proprietorship – an incorporated business owned by one person – not legally separate from the person who owns it • Proprietor – a person who owns a proprietorship 3. Partnership – an incorporated business owned by two or more entities (can be corporations or individuals) – not legally separate from the partners who own it • Partner – an entity that is one of two or more owners of a partnership 4. Not-for-profit organizations – an entity whose objective is to provide services and not to make a profit
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