What is Accounting? Accounting is a system of dealing with financial information that provides information for decision- making. G.E. Syme & T.W. Ireland

Accounting is the language of business. Art Lightstone What is Accounting?

The Five functions of Accounting 1. Gathering financial information.

2. Preparing and collecting permanent records. The Five functions of Accounting

3. Rearranging, summarizing and classifying financial information. The Five functions of Accounting

4. Preparing information reports and summaries. The Five functions of Accounting

5. Establishing controls to promote accuracy and honesty among employees. The Five functions of Accounting

All businesses fall into three general categories… 1.service 2.manufacturing 3.merchandising Types of Business Sells effort (ie. work, talent) that does not result in a material item. A haircut would be an example of a service. A service is often viewed as an expense by the buyer. Combines effort and materials to produce a new product. These products may be viewed by the buyer as an expense (ie. fuel) or an asset (ie. car). Purchases a manufacturer’s product and resells it to another customer for a higher price. Again, such products may be viewed as assets or expenses by the buyer.

Forms of Business Organization

There are three forms of business organization. They are: Sole Proprietorship Sole Proprietorship Partnership Partnership Corporation Corporation

Sole Proprietorship An unincorporated business owned by a single individual.An unincorporated business owned by a single individual. The law does not distinguish between the business and the owner.The law does not distinguish between the business and the owner.

great freedom from regulation great freedom from regulation Advantages low start-up cost low start-up cost all profits to owner all profits to owner owner has complete control owner has complete control Sole Proprietorship

Disadvantages difficult to raise capital difficult to raise capital unlimited liability unlimited liability limited to owner’s knowledge limited to owner’s knowledge lack of continuity lack of continuity profits taxed at personal rate profits taxed at personal rate

Partnership An unincorporated business owned by more than one individual.An unincorporated business owned by more than one individual. The law does not distinguish between the business and the owners.The law does not distinguish between the business and the owners.

Partnership broader management skills broader management skills Advantages ease of formation ease of formation limited regulations limited regulations more capital resources more capital resources

Partnership Disadvantages possible disagreements possible disagreements unlimited liability unlimited liability divided authority divided authority difficult to find partners difficult to find partners partners liable for each other partners liable for each other

Corporation A business which is an individual in the eyes of the law.A business which is an individual in the eyes of the law. The law views the business as a separate entity from the owner(s).The law views the business as a separate entity from the owner(s).

Corporation Profits of the corporation are distributed to the shareholders by way of "dividends".Profits of the corporation are distributed to the shareholders by way of "dividends". The more shares one owns, the more dividends they will receive.The more shares one owns, the more dividends they will receive. example Dividends: $1.00 / share Shareholder owns: 1000 shares Shareholder receives: $1,000.00

Corporation Advantages possible lower taxation ratepossible lower taxation rate limited liability of shareholders (However, directors and officers can be liable in certain circumstances.)limited liability of shareholders (However, directors and officers can be liable in certain circumstances.) continuity of businesscontinuity of business can sue / be sued in the corporate namecan sue / be sued in the corporate name more prestigemore prestige

Corporation Disadvantages losses cannot offset personal incomelosses cannot offset personal income higher start-up costs and greater formalitieshigher start-up costs and greater formalities requires annual maintenance from accountant and lawyerrequires annual maintenance from accountant and lawyer

Corporation Structure Executive: (ie. President, Treasurer, Secretary. Run the day to day operations of the business.) Directors: (Hire executive, guide mission, distribute profits between business & shareholders) Shareholders: (provide capital, elect directors, receive dividends)

1. In groups of four to five students, answer the following Chapter Review questions: #1, 8, 9, 10, and List the five main activities involved in accounting. 8. Identify three kinds of businesses besides a service business. 9. List the three forms of business ownership. 10. Give examples of a routine accounting activity and a periodic accounting activity. 11. Define the accounting cycle. Bonus Question: Explain the paradox involved in the answer to question #8.

The Accounting Cycle 1. Originating Transaction Data 2. Journalizing 3. Posting 4. Trial Balance 5. Worksheet 6. Financial Statements 7. Closing Entries 8. Post-closing Trial Balance A = L + OE The Entire Cycle