ACTG 2010 Chapter Notes - Chapter 1: Legal Personality, Bookkeeping, Canadian Business
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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
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
•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
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