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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
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.
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
Section 1.2
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
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.
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:
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.
1.4
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.
1.1
1 transactions occur
The accounting cycle. The terms used here will be explained later in the book.
Over the following eight chapters you will learn to do each of these essential accounting activities.
Section 1.5
1.5
Chapter 1
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 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
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.
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