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chapter one

Accounting and Business


1.1 1.2 1.3 1.4 1.5 1.6 1.7
What Is Accounting? Why Study Accounting? Characteristics of Business The Nature of Accounting Becoming a Professional Accountant Roles in Accounting How Accountants Use Computers

A
1.1

s a student just beginning the study of accounting, you would naturally like to know exactly what accounting is.There is no simple definition. Accounting is a system of dealing with

financial information that provides information for decision-making.

What Is Accounting?
There are five main activities involved in accounting. These are: 1. gathering financial information about the activities of a business or other organization; 2. preparing and collecting permanent records. Records provide evidence of purchase, proof of payment, details of payroll, and so on. They also serve as the basis for dealings with other companies; 3. rearranging, summarizing, and classifying financial information into a more useable form; 4. preparing information reports and summaries for the following purposes: a. to help management reach decisions; 1

Chapter 1

b. to serve the needs of groups outside the business, such as bankers and investors; c. to measure the profitability of the business; 5. establishing controls to promote accuracy and honesty among employees. As businesses grow, owners can no longer look after everything alone. They have to hire others to help them. As soon as employees are hired, accounting controls become essential.

AccountingAn Information System


By enabling financial information to be gathered and prepared, a good accounting system provides the answers to many questions. For example, owners and managers might seek answers to questions such as the following: Is the business earning enough profit? Are the selling prices of the products high enough? How much does ABC Company owe the business? How much does the business owe to XYZ Company? What is the value of all of the goods for sale? Do any of the goods for sale need to be restocked? To whom was cheque No. 502 issued? How much does it cost to produce product X? How much did John Smith earn last year? Are our customers paying their bills on time? Do we have enough money to meet our needs? Can we finance a business expansion?

Accounting provides financial information so that decisions can be made.

Other persons, companies, or organizations might seek answers to the following questions: Should I lend money to this business? (a banker) Should I buy into this business? (a potential investor) Should I sell this business? (an owner) Is the business well run? (an absentee owner) Is the company growing satisfactorily? (an absentee owner) Can the business afford to pay more to its employees? (a labour union) Is the business paying the proper amount of income tax? (the government)

1.2

Why Study Accounting?


A knowledge of accounting can be very useful to the student in several ways.

Accounting on the Job


Those of you who decide to enter the business world will find employment more easily if you have a background in accounting. A large number of jobs require accounting and clerical skills. The higher levels require more training and experience but they also offer higher salaries.

Section 1.2

Accounting in Daily Life


A working knowledge of accounting is an advantage in daily life. An accounting background will help you with the language of business as well as accounting concepts. You will be better able to handle your personal business affairs, such as preparing a personal budget, keeping personal financial records, and preparing your income tax return. With an improved grasp of financial matters, you will be in a better position to take advantage of business opportunities or to understand the operation of the organization where you work.

An income tax return is a detailed report to the government to determine the amount of tax a person or company should have paid in the previous year

Owning Your Own Business


Many people want to own their own business. In fact, small business is the fastestgrowing segment of our economy. If you achieve this goal, you will soon find yourself faced with accounting tasks such as: banking; keeping track of the amounts owed by customers; keeping accounting records for the government; producing an income statement for income tax purposes; possibly, preparing payrolls and making payroll deductions.

Clearly, a knowledge of accounting is helpful in small business. If a business is to be successful, the owner must be able to make sound management decisions based on good financial records.

Accounting as a Profession
Some of you may choose accounting as a profession. This requires several years of serious study and practice. By completing the requirements of one of the three professional organizations of accountants in Canada, you can become a Chartered Accountant (CA), a Certified General Accountant (CGA), or a Certified Management Accountant (CMA). Qualified professional accountants have the right to practise as public accountants. A public accountant serves the general public for a fee in the same way as a doctor or a lawyer does. The main type of work done by public accountants is auditing. Auditing is the examination and testing of the books, records, and procedures of a business in order to be able to express an opinion about its financial statements. Public accountants also work as management consultants and tax advisors. Professional accountants may choose industrial or institutional accounting rather than public accounting. Industrial accountants work for large companies such as IBM or Stelco. Institutional accountants work for the government, banks, large insurance companies, and similar organizations. Many of the senior management positions require one of the accounting designations (CA, CMA, CGA) as a qualification.

Complexity of Business
There are many laws laid down by the government concerning fair business practices, income taxes, and so on. However, the laws have become so numerous and complex

Chapter 1

that only experts can thoroughly understand them. Fully qualified accountants know these laws, so business owners, managers, and professionals (such as dentists, lawyers, etc.) often seek their advice. The increasing complexity of government regulations is a major reason why accounting is such an important profession.

Career Profiles and Activities


At the end of most chapters, you will find a profile of a person who has used accounting knowledge to build a career, as well as questions, information, or suggestions to help you think about your own future.

1.3

Characteristics of Business
Types of Business
Businesses are the economic framework upon which our society is built. But, what is a business? Generally, a business involves the manufacture and/or sale of goods or services in order to earn a profit. Most businesses fall within one of the following four main categories:

1. The Service Business


A service business sells a service to the public; it does not make or sell a product as its main activity. To picture a service business, think of a hairdressing salon, a tutoring service, or a dental clinic.

2. The Merchandising Business


A merchandising business buys goods and resells them at a higher price for a profit. To picture a merchandising business, think of a clothing store, a music store, or a supermarket. (Note: Sometimes a service business sells some products; for example, a hairdressing salon will carry a line of shampoos. But the sale of shampoos is only a sideline, not the main business, which is the service of hairdressing. Similarly, a merchandising business, such as a clothing store, may provide some services, such as repairs and alterations. But these are only add-ons to the main business, which is selling goods.)

3. The Manufacturing or Producing Business


A manufacturing business buys raw materials, converts them into a new product, and sells these products to earn a profit. To picture a manufacturing business, think of a construction company, a paper mill, or a steel plant. Another type of business, closely related to manufacturing, is the producing business. A farm, for example, produces milk, grain, and other foods. Other activities of producing businesses include oil extraction, mining, forestry, hunting, and fishing.

4. The Non-Profit Organization


A non-profit organization may carry on activities to meet social needs and not for a financial profit. To picture these organizations, think of a church, a service club (such as the Rotary Club), an organization (such as the Cancer Society), or a recreational club (such as a community hockey league). Such organizations hope that their

Section 1.4

work will provide a social benefit. They are required to keep accounting records, especially if they receive funds or a tax-deductible status from the government.

Forms of Business Ownership


There are three main forms of business ownership. If you take a walk down any commercial street, you can see examples of each one. 1. You might notice a sign that reads J. Wouk, Carpenter. This sign indicates that J. Wouk is in business for himself. He may work alone or others may work for him. This type of business is known as a sole proprietorship. The owner is a sole proprietor. 2. You might come across a sign that reads Fogle, Silver, and Zimmerman, Accountants. This sign suggests that three persons share in the ownership and operation of an accounting business. A business of this type, involving more than one owner, is known as a partnership. 3. You might find a sign that reads Red River Homes Limited. This sign tells you that the business is a limited company or a corporation. A limited company or corporation is a special form of business that is owned by shareholders. Almost all large business operations are corporations, and some have several thousand shareholders. Most of the businesses we study in this text are sole proprietorships. Partnerships and corporations are introduced in Chapter 13.

1.4

The Nature of Accounting


The accounting department of a business includes a wide variety of functions. In a small business, one or two people may do all of the necessary accounting work. In a large business, the accounting work may be divided into several departments, each of which may have many people working in it.

Categories of Accounting Work


Accounting work can be divided into three categories:

1. Routine Daily Activities


These activities occur in the same way nearly every day of the year. They include processing bills, preparing cheques, daily banking, recording transactions, preparing business papers, and so on.

2. Periodic Accounting Activities


These activities occur at regular intervals. Pay cheques are prepared every week or two. The bank accounts are checked every month. The financial reports are prepared each month and every year. Also, the income tax return is prepared every year, as required by government regulation.

3. Miscellaneous Activities
Some accounting activities cannot be predicted. For example, if an accounting employee resigns, the position must be filled quickly. An advertisement is prepared,

Chapter 1

interviews are conducted, and a selection is made. Or a bank manager may call expressing concern over the size of the bank loan, and a visit to the bank to discuss the matter may become necessary. A salesperson may call about a new machine that she claims will reduce office costs. Time may be taken to see a demonstration of the equipment. In addition, professional accountants take part in meetings and activities put on by their associations.

The Accounting Cycle


Accounting is thought of as occurring in cycles. Accounting activities are performed in relation to equal periods of time known as fiscal periods. The usual length for a fiscal period is one year. The accounting cycle can be thought of as the recurring set of accounting procedures carried out during each fiscal period. These accounting activities are carried out repeatedly, period after period. Figure 1.1 below shows the recurring nature of accounting activity. The accounting cycle really consists of two separate cycles. Figure 1.1 shows these with an inner and an outer ring. Some of the activities shown on the outer ring occur every day. Others occur only once a month. If a computer accounting package is used, steps 2, 3, and 4 are automated and will occur at virtually the same time. The activities on the inner ring normally occur once a year and are based on data provided by the activities of the outer ring. It must be understood, however, that each cycle is built upon the cumulative results of previous cycles. The business does not have a fresh start each fiscal period.
FIGURE

1.1
1 transactions occur

The accounting cycle. The terms used here will be explained later in the book.

OUTER RING Ongoing activities and activities done once a month

7 ledger accounts adjusted and closed 2 transactions recorded in journal

8 post-closing trial balance prepared


4 trial balance and interim financial statements prepared

Over the following eight chapters you will learn to do each of these essential accounting activities.

INNER RING Activities usually done once a year

6 formal financial statements prepared

5 work sheet prepared

3 journal entries posted to ledger accounts

Section 1.5

1.5

Becoming a Professional Accountant


A great many accounting jobs exist in our society. Some are entry-level positions with small firms and require only basic accounting skills. Others are high-level positions requiring exceptional competence and training. Between these two extremes, there lies a vast range of accounting occupations in business. Filling these positions are many persons with different backgrounds and abilities. Some may have little or no formal training. Others may have studied at an advanced level for a number of years. Accountants get their formal training in high school, at college or university, or from a professional organization. In addition to formal studies in accounting, on-thejob experience is important. You are not really prepared to do professional accountancy until you have practical experience along with your formal training. Most colleges and universities offer diplomas or degree courses in business. The study of accounting is included as part of the curricula of these courses.

Professional Accounting Organizations


To be a fully qualified accountant, you must complete the course prescribed by one of the three national professional accounting organizations: Certified General Accountants Association Members professional designation: CGA (Certified General Accountant) www.cga-canada.org Society of Management Accountants of Canada Members professional designation: CMA (Certified Management Accountant) www.cma-canada.org Canadian Institute of Chartered Accountants (CICA) Members professional designation: CA (Chartered Accountant) www.cica.ca Each of these national associations has provincial associations working within provincial requirements. The members of all three of these organizations are highly respected professional accountants.

Training To Be a Professional Accountant


To qualify as a professional accountant, you will need further education after secondary school. You should carefully examine the course requirements of each of the three accounting organizations before you enroll. Each organization has its own requirements, which are outlined at their websites. Regardless of which organization you choose, plan on at least six years of post-secondary study and work. This is because the CGA, CMA, and CA organizations generally require their applicants to acquire a university degree and to complete 2 to 2 1/2 years of specialized courses and work experience. (A few non-degree routes to professional accounting designations exist, so interested applicants should use the Internet as a starting point in order to stay informed.) The CGA program includes a wide range of finance and accounting courses. Students can tailor their careers by following one of four options: corporations/small-medium enterprise; information technology; government/not-for-profit, or public practice. The CGA association is well known for its distance education, which allows students to remain employed while they study to earn course credits towards a CGA designation.

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The Society of Management Accountants place their emphasis on management accounting, and most of their graduates take management positions in business and industry, rather than in public practice. CMAs are regarded as experts in cost accounting and industrial accounting. The CAs represent the longest-standing body in the profession. The Canadian Institute of Chartered Accountants is highly regarded, due in part to its publication of the CICA Handbook. The CICA Handbook sets accounting rules and standards and is accepted by the other accounting organizations. To enrol as a CA, you must be admitted to a university in a specific program prescribed by the Institute. The practical experience for CA students is 30 months long and must be completed at an office that has received a training designation from CICA. At the end of the program, students must pass CICAs Uniform Final Exam (UFE), which is a demanding four-day national exam. Once qualified, CAs are especially well prepared to become auditors; however, they may choose careers in any area of accounting.

1.6

Roles of Accounting
Many people confuse accounting and bookkeeping. Accounting and bookkeeping are different, although each is essential to the successful operation of a business. The terms bookkeeper and accounting clerk describe the same job, but accounting clerk is becoming the more popular designation.

The Accounting Clerk


The work of an accounting clerk is clerical in nature and for the most part it is concerned with routine matters. Some of the jobs of an accounting clerk are: 1. ensuring that transactions are properly recorded and that the necessary supporting documents are present and correct; 2. recording the accounting entries in the books of account and balancing the ledger as necessary; 3. making the payroll calculations and preparing the payroll cheques and other payroll records; 4. carrying out all necessary banking transactions.

The Accountant
The work of an accountant, on the other hand, is broader in scope and requires more education and experience. A professional accountant is usually responsible for maintaining the entire accounting system. Some of the things an accountant is concerned with are: 1. developing a system to ensure that correct data are entered into the accounting system; 2. ensuring that generally accepted accounting standards are met; 3. interpreting the data produced by the accounting system; 4. preparing reports based on the data output from the system; 5. participating in management meetings and assisting in making business decisions; 6. supervising the work of all accounting employees.

Section 1.7

A professional accountant has a high-level position. Key people in many large corporations are professional accountants.

1.7

How Accountants Use Computers


Computers are ideal for use in an accounting environment. Some of the numbercrunching activities that computers do very well are recording, sorting, calculating, summarizing, storing, displaying, and printing. Accountants who work effectively with computers are better able to meet the demands of their careers. All three national accounting organizations recognize the impact technology has on the profession. For example, students in the CGA program acquire hands-on computer experience beginning in the first year. Course content is delivered on a CD-ROM with a direct link to CGA websites. To help students gain the required computer knowledge, the association offers three computer tutorials covering spreadsheets, accounting software, and Windows applications. Since different businesses use different programs, accounting students must have exposure to a wide variety of computer software. Not only will such exposure make them more employable for clerical positions, but it will also better enable them to perform auditing and consulting functions in the future. Fortunately, once a student learns a few accounting and spreadsheet programs, new ones are mastered quite easily. While computers are important, it should be stressed that they are merely tools for accountants. They do not make accounting skills unnecessary. For example, read the following job advertisement for a senior cost accountant in a manufacturing firm:

Career Opportunity
The senior cost accountant prepares forecasts, assists in the preparation of annual and long-term plans, and undertakes special studies on request. Specific duties include the maintenance of our product-costing system and the analysis of our monthly results. Applicants must have superior analytical and problem-solving skills. Communication skills are also essential. Accounting experience in a manufacturing environment and familiarity with the use of computers are key for candidates for this position.

Notice that the important qualifications in this advertisement are listed first: Applicants must have superior analytical and problem-solving skills. The ability to effectively communicate the results of analyses and problem-solving is also an essential requirement. As you study accounting, keep in mind that developing computer skills along with financial analysis, problem-solving, and communication skills will qualify you for a wide variety of career options.

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Chapter 1

CHAPTER

Summary

CHAPTER HIGHLIGHTS
Now that you have completed Chapter 1, you should: have a broad understanding of the objectives of accounting; know the four main kinds of businesses and the three forms of business ownership; know the benefits to be gained by having a background in accounting; know what is meant by professional accountant and public accountant; know the type of work performed by an accounting department; understand what is meant by the accounting cycle; know the different ways that you can become an accountant; know the names of the three national professional accounting organizations; understand the value of computer skills to an accountant.

ACCOUNTING TERMS
accountant accounting accounting clerk accounting cycle auditing bookkeeper corporation limited company manufacturing business merchandising business non-profit organization partnership producing business public accountant service business sole proprietorship

CHAPTER

Review Questions
1. List the five main activities involved in accounting. 2. Give three questions for which the accounting system can provide answers. 3. Identify the two groups that benefit from the information provided by the accounting system. 4. Describe how a knowledge of accounting can help you with respect to employment. 5. Explain how a knowledge of accounting can help people who own their own business. 6. Describe the work of a public accountant. 7. Explain what auditing is. 8. Identify three kinds of business besides the 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. 12. Name the three professional accounting organizations. 13. On average, how long does it take, after enrollment, to become a qualified professional accountant? 14. Why is the Canadian Institute of Chartered Accountants highly regarded?

Chapter Review

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15. What length of work experience does the Canadian Institute of Chartered Accountants require? 16. Describe briefly the nature of an accounting clerks work. 17. Describe the scope of an accountants work. 18. Explain why computer studies are part of the curricula of accounting courses. 19. What computer tutorials do CGA students learn? 20. The computer is merely a tool of accountants. Comment on this statement.

CHAPTER

Review Exercises
Using Your Knowledge
1 A list of accounting terms is given below. In your Workbook, write down the

term that matches the statement. a. The professional accounting organization that is well-known for distance education. b. The professional accounting organization that emphasizes management accounting. c. The professional accounting organization that publishes a handbook of Canadian accounting rules and standards. d. Formal accounting data, prepared at least once a year. e. An organization whose main aim is to provide a social benefit, usually at little or no cost to the user. f. The recurring set of accounting procedures carried out during each fiscal period. g. A business that buys goods and resells them at a higher price for profit. h. The owner of a business who is in business alone. i. A special form of business that is owned by a number of persons called shareholders. j. Professional persons who offer their services as accountants to the general public. k. The examining and testing of the books, records, and procedures of a business in order to be able to express an opinion about the financial statements. l. A business that sells a service to the public and does not make or sell a product. m. A business that buys raw materials, converts them into a new product, and sells that product to earn a profit. List of Words or Phrases accounting cycle auditing Certified General Accountants Association corporation financial statements Canadian Institute of Chartered Accountants (CICA) manufacturing business merchandising business non-profit business public accountants service business Society of Management Accountants sole proprietor

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Chapter 1

2 Each of the statements below can be completed by filling in the blank(s) with one

or more of the following: accountant, accounting, accounting clerk. In your Workbook, supply the correct term in each of these statements. a. The work of an ___________________ is clerical in nature. b. The work of an ___________________ is concerned with routine matters. c. An ___________________ ensures that the supporting documents are present and correct for every transaction. d. An _______ ensures that generally accepted accounting principles are followed. e. An _______________ records the accounting entries in the books of account. f. An ___________________ makes the payroll calculations. g. An ___________________ prepares reports based on the data produced by the accounting system. h. An ___________________ carries out all the necessary banking transactions. i. An ___________________ participates in management meetings. j. A professional ___________________ has a high-level position. k. For centuries, all ___________________ was handwritten. l. Some small businesses still do their ___________________ by hand.
3 This exercise also appears in your Workbook.

1. Which of the following statements does not fit the job title? a. An accounting clerk verifies source documents. b. An accounting clerk ensures that the ledger balances. c. An accounting clerk works neatly to guard against errors. d. An accounting clerk studies tax bulletins to keep up to date. 2. Which of the following statements does not fit the job title? a. An accounting clerk works out accounting entries. b. An accounting clerk, together with the owner, compares this years and last years income statements. c. An accounting clerk records accounting entries in the books. d. An accounting clerk inquires about a suspected error made by the bank. 3. Which of the following statements does not fit the job title? a. An accountant is a professional person. b. An accountant has a broad knowledge of accounting. c. An accountant ensures the accuracy of the payroll deductions. d. An accountant discusses the businesss cash flow with the owners. 4. Which of the following statements does not fit the job title? a. An accountant talks about revising a spreadsheet model. b. An accountant investigates the credit rating of a new customer. c. An accountant is promoted to vice-president. d. An accountant is ill; a meeting with the bank manager has to be cancelled. 5. Which of the following statements does not fit the facts about computers? a. The computer is an ideal machine for use in an accounting environment. b. The computer can handle large quantities of data. c. The computer produces better profit figures. d. The computer can provide information for management very quickly.

Chapter Review

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A. Arrange a brief interview with a professional accountant. Your best sources are relatives and family friends. You may prefer to use the Yellow Pages under accountants or to contact the person in charge of the accounting department of a local business. On a sheet of paper, fill in the data for headings below. Be prepared to read your findings to the class. Professional Designation General Job Description List of Yesterdays On-The-Job Activities This category will give you a glimpse of an accountants typical day.

Name Relation to You Employer Job Title

B. Did the person you interviewed seem satisfied with the rewards of his or her employment? Would the on-the-job activities be appealing to you in a future career?

Optional
C. Repeat the above for an accounting clerk.
5 To get an idea of what computer software is being used in accounting, find ten

job advertisements for accounting positions that mention a particular brand of software. You may use the career pages in a newspaper or online classified ads on the Internet. (To find online classified ads, go to any search engine and use words like Accounting, Ads, Canada as your key search words.) Summarize your findings in a table similar to the following:
Simply Accounting Lotus 1-2-3 MS Office

ACCPAC QuickBooks

Excel

Other

1 Company Position Salary Offered 2 Company Position Salary Offered 3 Company Position Salary Offered etc.

Homby Real Estate General Accountant n/a Cottage Construction Office Manager $42 000 Aaron Ong Graphics Payroll Administrator $37 000


WordPerfect

(Note: The software names listed above are registered trademarks. MS Office includes Excel, Word, and Access. In advertisements, Simply Accounting usually refers software made by ACCPAC International, Inc. for small businesses; ACCPAC Pro usually refers to software made by ACCPAC International, Inc. for larger businesses.) After your table is complete, tally the results and summarize your findings in a one-page report; attach the original job advertisements.

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Chapter 1

Career
Tom Andrews / Student
Tom Andrews is now in his final year at Swift Current Comprehensive High School in Swift Current, Saskatchewan. His future plans are to obtain a Bachelor of Commerce degree at the University of Regina and then to enroll in the Canadian Institute of Chartered Accountants program. During his last two years in high school, Tom has been studying accounting and computer concepts to prepare for a responsible position in the business world. He has enjoyed his accounting courses, and his grades have been very good in this area. Because he had taken accounting courses, Tom was able to get a summer job in the accounting department of Agri-Farm Freight Company, which specializes in the shipping of wheat and other locally produced grains. Agri-Farm Freight uses a computer system for accounts receivable. Accounts receivable is the money that customers owe to the business. Tom studied computer systems in high school, and was excited to gain practical experience. He handled all customer accounts, coded all sales for computer entry, prepared forms to enter these payments in the computer, and printed all weekly and monthly accounts receivable balances. Each month, he also printed and issued monthly computer-produced customer statements. Because he controlled the paper flow of a wide variety of tasks within an accounting office, Tom realizes that organization, neatness, and accuracy are extremely important. The accounting courses and work experience provide Tom with a good base for further study. He finds it easier to concentrate on the concepts of accounting because he has already mastered the practical aspects. Tom is very pleased with the work he has done for Agri-Farm Freight during the summer months. His employers are so impressed with his work that they would like him to return during the summer while he studies at university. They want him to accept a highly responsible position with the company once he has completed his education.

Discussion
1. The company that Tom works for, Agri-Farm Freight Company, ships grain for its customers. Would you describe this as a service business, a merchandising business, a manufacturing business, or a producing business, on the basis of what you have read in Chapter 1 about types of businesses? 2. Make a list of three different types of summer job for which accounting and business courses would make a student more eligible. 3. Tom realizes that organization, neatness, and accuracy are extremely important. Why should these skills be important today, when computers are used extensively in most businesses?

Careers

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Career

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Chapter 1

Career

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