Chapter 1

1. Chapter 1 Unit 1-1 Accounting Concepts and Procedures By Bill Venables

2. Types of business organizations • Sole proprietorship (one owner) • Partnership (more than one owner) • Corporation (many owners) • See table 1-1 at the top of page 3 ACCT_100 Bill Venables

3. Sole proprietorship • One owner • Runs business • Plus • You make the decisions • When business does well you receive all of the benefits • Minus • You do everything • If business can’t pay its expenses, you must pay for them • Ends upon death ACCT_100 Bill Venables

4. Partnership • >= 2 owners • Plus • Decision making is shared • Risk is shared • Minus • Partners are responsible for debts of partnership • Partners might not get along • Ends upon death or leaving ACCT_100 Bill Venables

5. Corporation • Owned by shareholders • Plus • Limited liability of shareholders • Minus • Other shareholders can take the company in a way you don’t want it to go • Never ends – just keeps on going ACCT_100 Bill Venables

6. Classifying businesses by activity • Service • Merchandising • Manufacturing Question: How would you classify an OFFICE ADMIN firm as far as activity? ACCT_100 Bill Venables

7. What do accountants do? • Analyze-what happened? • Record-the transactions • Classify-group stuff together • Summarize-total things by date (usually) • Report-create reports based on the previous information • Interpret-make money/ lost money? ACCT_100 Bill Venables

8. Definitions • Revenue = money earned for services rendered and/or goods sold • Expense = costs incurred by your firm to generate revenue ACCT_100 Bill Venables

9. GAAP • Generally Accepted Accounting Principles • Just because they are generally accepted doesn’t mean that they are correct (maybe the principle should be changed!) • Guidelines when running a business ACCT_100 Bill Venables

10. GAAP - Business Entity Principle • Keep the company’s affairs separate from your personal affairs • I use 2 bank accounts for deposits and withdrawals • The company has its own chequebook • I have my own personal chequebook ACCT_100 Bill Venables

11. GAAP – Historical Cost Principle • Record transactions at their cost • Value of an asset never changes on your books • Eg, Company bought land for $40,000 • It is now worth $60,000 • When the land was purchased it was recorded at $40,000 • It never changes on your books ACCT_100 Bill Venables

12. GAAP – Realization/Recognition Principle • Record revenue and expenses when the transaction takes place • Eg. The company completes a project today (January 6th) and invoices you but payment will not have to be made until February 15th • Record the sale using the date = January 6th not February 15th) ACCT_100 Bill Venables

13. GAAP – Going-Concern Assumption • Businesses (companies) will continue even if the shareholders pass away (others will take their place) • The company is in business to make money (going concern) ACCT_100 Bill Venables

14. GAAP – Matching Principle • Match revenue and expenses • Eg. The company sells me a car for $40,000. • Revenue = $40,000 • Expenses • The company paid $30,000 for the car • The company paid the salesman $2,000 as a commission to sell the car • Total expenses = $32,000 • Net Income = revenue-expenses = $8,000.00 ACCT_100 Bill Venables

15. GAAP – Conservatism • Be conservative when recording transactions • Underestimate revenue • Overestimate expenses • This will minimize the taxes that you have to pay because you pay tax on net income = revenue-expenses ACCT_100 Bill Venables

16. GAAP – Fiscal Year End • Every company has a year end = a date when one period ends and another starts • Eg. For individuals, our year starts January 1 and goes to December 31st. • Our year end = December 31st • Companies can have a year end that is not December 31st • Eg. July 1, 2004 - June 30, 2005 • We will try to keep it simple and use the calendar year. ACCT_100 Bill Venables

17. GAAP – Materiality • Painstaking detail when creating reports is not necessary • Transactions are recorded in dollars and cents • Reports are usually rounded to dollars • Eg. Your company’s net income last year = $567,000.02 Do we really need to care about the $.02 No! ACCT_100 Bill Venables

18. GAAP – Consistency • Make assumptions • Stick with your assumptions so that from one year to the next, they are consistent ACCT_100 Bill Venables

19. The accounting equation – p 7 • Assets = Equities • Assets are what you own (even if they are not paid off) • Equities are financial claims to the assets • Equation must always be in balance ACCT_100 Bill Venables

20. Equities – p 7 • Can be further broken down as Liabilities + Owner’s Equity • Assets = equities (liabilities + owners equity) • Owners equity (capital) = rights (claims) by the owner • Liabilities = rights of creditors (companies or individuals who lend the business money/sell the business things on credit, etc) • They get paid before the owners ACCT_100 Bill Venables

21. Catherine Hall Law Practice • P 8 • Catherine opens her own practice • She must keep her personal affairs separate from the business • She will have her own personal • Bank account • cheque book • She will have a business • Bank account • cheque book ACCT_100 Bill Venables

22. Your turn again – p 8 • Assume you are Catherine • You supply the following items to the business when you start it up: • $7,000 cash • $800 in office equipment (printer, computer, monitor, speakers….) • What is your equity in the business? ACCT_100 Bill Venables

23. Your turn-p 8 • Use template Unit 1-1.xls workbook • Unit 1-1 worksheet • Transaction A • Catherine invests $7,000 cash and $800 worth of office equipment into the business • Use these accounts: cash, office equipment, liabilities, owners equity • Show the equation (it must always be in balance) ACCT_100 Bill Venables

24. Shift in Assets • It is the weekend so it is time to Parrrrttttaaaay • You have $100 cash so the total value of your assets is $100 • You buy a case of beer for $20 • What is the total value of your assets now? ACCT_100 Bill Venables

25. Your turn again-p 9 • Transaction B • Buy $900 worth of office equipment for cash • This is a shift in assets • using up one asset to buy another • Cash goes down and office equipment goes up but the total assets does not change. ACCT_100 Bill Venables

26. Definitions – Accounts Payable (a liability) • Sometimes the business will purchase things with cash (cash or cheque) • Sometimes the business will purchase now but promise to pay for it later on (Mastercard, Visa, American Express…). You buy using credit. • Accounts payable – an account that tracks what you purchase on credit • Eg. You go to Future Shop and purchase some music CDs using your Mastercard • When you buy with Mastercard, you owe Mastercard the money, not Futureshop • This is a liability, a promise to pay a creditor ACCT_100 Bill Venables

27. Definition – Accounts Receivable • When the business does work for someone (supplies a service or goods to a customer) either the customer: • pays cash (cash or cheque) right away • promises to pay you later on • Account receivable – an account that tracks what your customers owe you • Eg. I (customer) hire you to do some work for me and I promise to pay you later, then this is an Accounts Receivable from your point of view (you will receive payment in the future or a customer (me) is promising to pay you later) ACCT_100 Bill Venables

28. Your turn again - p 9 • Transaction C • Buy $400 of office equipment on account (Accounts Payable=you will pay for it later) ACCT_100 Bill Venables

29. End of Unit 1-1 – p 10 • Self review quiz 1-1 ACCT_100 Bill Venables