Power of Accounting
Accounting World
Accounting
is a
system that
Identifies
Records
BUSI5004 - Accounting I
Relevant
François Brouard, DBA, CA
Sprott School of Business
Carleton University
Reliable
information
that is
Communicates
to help users make
better decisions.
Comparable
© 2007, François Brouard
THE
THEACCOUNTING
ACCOUNTING
PROCESS
PROCESS
Types of Accounting Information
Accounting links
ECONOMIC
ECONOMIC
ACTIVITIES
ACTIVITIES
TTAAX
X
AL
NCCIIAL
NAAN
FFIIN
decision makers
with economic activities – ACCOUNTING
ACCOUNTING
INFORMATION
INFORMATION
and
with the results of their
decisions
DECISION
DECISION
MAKERS
MAKERS
© 2007, François Brouard
Financial Accounting
Q Constraint – GAAP
Q Users – external
Q Historical
Q Macro reporting
Q General purpose
Q Decisions –
investing and
lending
© 2007, François Brouard
RIAALL
NAGGEERI
M
MAANA
© 2007, François Brouard
Provide
Information
Useful for
Decision
Making
Managerial Accounting
Q No constraints
Q Users – internal
Q Future oriented
Q Micro reporting
Q Special purpose
Q Decisions –
operating, investing,
financing, and
evaluation.
Amount
and
Timing of
Cash Flows
Economic
Resources,
Claims,
Changes
© 2007, François Brouard
1
Canadian Accounting Profession
Judgment,
Chartered
Accountant (CA)
Q
Certified
Management
Accountant (CMA)
and
Ethical
Behaviour
Selected Opportunities in Accounting
Q
Professional
Competence,
Q
Opportunities in Practice
Financial
Managerial
•General accounting
•Cost accounting
•Budgeting
•Internal auditing
•Consulting
•Controller
•Treasurer
•Preparation
•Analysis
•Auditing
•Regulatory
•Consulting
•Planning
•Criminal
investigation
Certified General
Accountant (CGA)
© 2007, François Brouard
Taxation
•Preparation
•Planning
•Regulatory
•Investigations
•Consulting
Accountingrelated
•Educators
•Lenders
•Consultants
•Traders
•Directors
•Underwriters
•Planners
•Appraisers
•Forensic
investigation
© 2007, François Brouard
Guidelines for Ethical Decision
Making
n Identify
Ethical Issues
p Make Ethical
Decision
o Analyze
Options
Business Context
BUSI5004 - Accounting I
Use personal
ethics to
recognize ethical
issues.
Consider both
good and bad
consequences
for all affected.
François Brouard, DBA, CA
Sprott School of Business
Carleton University
Choose the best
option after
weighing all
consequences.
© 2007, François Brouard
Aims of Organizations
Q
Social role of organizations
Profit oriented organizations
Q
Non-profit oriented organizations (NPO)
Q
Public sector
For-profit
organizations
(FPO)
Profitability
Social objectives
© 2007, François Brouard
Not-for-profit
organizations
(NPO)
Social objectives
Profitability
© 2007, François Brouard
2
Types of Business
Q
Q
Service
Merchandizing
Forms of Business Organizations
No inventory
Inventory
– Retailers
– Wholesalers
Q
Manufacturing
– Finished goods
Q
Q
Q
Q
Inventory
– Raw materials
– Work-in-process
– Finished Goods
© 2007, François Brouard
Q
Q
Sole Proprietorship
Corporation
Partnership and Limited Partnership
Joint Ventures
Co-ownership
Trust
© 2007, François Brouard
Sole Proprietorship
Corporation
Definition
Definition and Types
Q
Definition
Q
Definition
«an unincorporated business owned by one
individual»
«a business organized as a separate legal
entity, with ownership divided into
transferable shares of capital stock»
Q
Types
– private corporation
– public corporation
© 2007, François Brouard
© 2007, François Brouard
Corporation
Partnership
Illustration
Definition and Types
Q
Individuals /
Shareholders
Corporation
(HOLDCO)
Corporation
(OPCO)
© 2007, François Brouard
Definition (IT-90, par. 2)
«a partnership is the relation that subsists
between persons carrying on business in
common with a view to profit»
Individuals /
Shareholders
Q
Types
– Partnership
– Limited partnership
Corporation
(OPCO)
© 2007, François Brouard
3
Partnership
Limited Partnership
Illustration
Definition
Q
Individual
Individual
Individual
Individual
Individual
Corporation
Corporation
Corporation
«the limited partnership is a formal entity
created, as corporations, by legal statute ...
the entity must have two separate classes of
partners : general partners and limited
partners»
Q
Partnership
Partnership
Partnership
© 2007, François Brouard
Definition (Buckwold, 2004, p.540)
Special type of partnership used to flow
out deductions and losses to passive
investors
Source : Buckwold (2004, p.540)
© 2007, François Brouard
Limited Partnership
Joint Venture and Co-ownership
Illustration
Overview
Q
Individual
Corporation
(General partner)
Individual
Individual
Corporation
Corporation
Definition (Woodlin Developments Ltd 86 DTC 116)
Individual
«a business undertaking by two or more
parties in which profits, losses and control
are shared … a more limited scope and
duration»
Q
(Limited partners)
Limited
Partnership
© 2007, François Brouard
Indicators of a Joint Venture
– joint property interest in the venture
– right of mutual control and management
– limitation to a single undertaking or limited
Source : Woodlin Developments Ltd (TCC) 86 DTC 116
© 2007, François Brouard
Trust
Trust
Definition
Illustration
Q
Definition
«a relationship whereby a person (who is
called a trustee) is bound to deal with
property over which he of she has control
(which is called the trust property) for the
benefit of persons (who are called the
beneficiaries) any of whom may enforce the
obligation»
Beneficiaries
Settlor
Assets
Trust
Trustee
Assets
© 2007, François Brouard
Source : Beam et al. (2003-2004, p.1051)
© 2007, François Brouard
4
Business Model for a commercial SME
Forms of Business Organizations
Enterprise
Comparison of characteristics
Governments
Sole
Proprietorship
Characteristics
Legal status
Liability
Accounting
status
Tax status
Corporation
$
Taxes
Assistance
Services
$
A/R
Services
Partnership
Employees
$
Trust
CLIENTS
Sales
Investment
Not separate
legal entity
No personal
liability
Separate
entity
Income
taxable to
corporation
Not separate
legal entity
Personal
liability
Separate
entity
Income
taxable to
owner
Separate
legal entity
No personal
liability
Separate
entity
Income
taxable to
trust or
beneficiaries
Separate
legal entity
Personal
liability
Separate
entity
Income
taxable to
partners
© 2007, François Brouard
Goods
$
Shareholders
$
Services
$
$
Salaries
Dividends
Inventories
Goods
Purchases
$
Loans $
Interests
Bankers
Loans
A/P
Suppliers
$
Services
$
Interests
© 2007, François Brouard
Basic Accounting: From Events to Decisions
Annual Report
Highlights
Management’s Discussion
and Analysis of Operations
Accounting Process
Accounting
Economic
Activities
BUSI5004 - Accounting I
GAAS
GAAP
Audit
Report
Management’s
Responsibility
Report
Financial
Statements
Cycle
Managerial
Information
François Brouard, DBA, CA
Sprott School of Business
Carleton University
Users &
Decisions
Tax
Information
Events
Accounting Cycle and Standards
Accounting Information
© 2007, François Brouard
Accounting Cycle
Recording transactions
1. Analyze transactions
2. Journalize transactions
3. Post to GL accounts
Adjusting entries
4. Prepare unadjusted TB
5. Adjust some accounts
6. Post to GL accounts
7. Prepare adjusted TB
Accounting Principles
and GAAP
Economic
Activities
GAAP
Reversing entries
12. Reverse some accounts
13. Post to GL accounts
Events
Preparing statements
8. Prepare Financial
Statements
Closing entries
9. Close some accounts
10. Post to GL account
11. Prepare post-closing TB
Accounting Process
Financial
Statements
Users &
Decisions
BUSI5004 - Accounting I
François Brouard, DBA, CA
Sprott School of Business
Carleton University
© 2007, François Brouard
5
Accounting
Conceptual Framework
GAAP
Accounting Postulates
Q
Users
Objectives
Quality of
accounting
information
Recognition
A
Measurement
Presentation
Interpretations
(judgment)
Principles
A
Q
Q
Constraints
Postulates
G
Q
Information
needs
Elements of
financial
statements
Accounting
conventions
Standards
P
Financial
Statements
Inspired by Ménard et al. (1991, p.44) and Lauzon (1990, p.137)
© 2007, François Brouard
GAAP
Q
Q
Q
Q
Q
Q
Q
Objectivity (reliability, no bias) Principle
Cost Principle
Realization (revenue recognition) Principle
Matching Principle
Consistency and Uniformity (comparability) Principle
Disclosure Principle
Materiality Principle
Conservatism Principle
Source: Meigs, Lam, Mallouk (2002) and Belkaoui (2000, p.161-)
© 2007, François Brouard
Source: Meigs, Lam, Mallouk (2002) and Belkaoui (2000, p.161-)
© 2007, François Brouard
Basic Elements
Accounting Principles
Q
Accounting (Business) Entity Postulate
Going-concern Postulate
Unit of measure (stable-dollar) Postulate
Accounting-period Postulate
Assets
Liabilities
Current & Long term
Current & Long term
Shareholders’ Equity
Net Assets
Revenues
Expenses
Gains
Losses
© 2007, François Brouard
Users Issue
Shareholders / Investors
Members / Contributors
Creditors
Objectives
Users
Preferred users
in the CICA
Handbook
Analysts ands advisors
Financial Statements
Overview
Employees
Directors
Customers and suppliers
Industry groups
Labor unions
Governmental departments
Public
Regulatory agencies
Other companies
Standard setters and researchers
© 2007, François Brouard
S
O
C
I
E
T
Y
BUSI5004 - Accounting I
François Brouard, DBA, CA
Sprott School of Business
Carleton University
Adapted from Stamp (1981, p.50) and CICA Handbook (1000.09/.11)
6
Financial Statements Components
Financial Statements Components
For profit organization
For non-profit organization
Q
Balance Sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows
Notes to the Financial Statements
Q
Additional information
Q
Q
Q
Q
Q
Statement of Financial Position
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Notes to the Financial Statements
Q
Additional information
Q
Q
Q
Q
© 2007, François Brouard
© 2007, François Brouard
Financial Statements (sole proprietorship)
Balance Sheet
As at December 31, 200X
x
x
Long-term investments
x
Long-term debt
x
Capital assets
x
OWNER’S EQUITY
J. Barber, Capital
x
Intangible assets
x
Total assets
Total liab. & equity
XX
Balance Sheet
For the year ended December 31, 200X
LIABILITIES
Current liabilities
ASSETS
Current assets
Financial Statements (corporation - for profit)
Statement of Cash Flows
XX
OPERATING ACTIVITIES
Net income/(loss)
Items not affecting cash
x
x
INVESTING ACTIVITIES
x
FINANCING ACTIVITIES
x
Net increase/decrease in cash XX
Cash position, beginning of year x
Cash position, end of year
x
Income Statement
Statement of Owner’s Equity
For the year ended December 31, 200X
For the year ended December 31, 200X
REVENUES
x
EXPENSES
(x)
NET INCOME/(LOSS)
XX
J. Barber, Capital, beginning of year x
+ Investments by owner
x
+ Net income
x
- Withdrawals by owner
(x)
- Net loss
(x)
J. Barber, Capital, end of year
x
Statement of Cash Flows
As at December 31, 200X
Notes to
Financial
Statements
© 2007, François Brouard
For the year ended December 31, 200X
x
LIABILITIES
Current liabilities
x
Long-term investments
x
Long-term debt
x
Capital assets
x
SHAREHOLDERS’ EQUITY
Share capital
x
Retained earnings
x
ASSETS
Current assets
Intangible assets
Total assets
x
Total liab. & equity
XX
XX
OPERATING ACTIVITIES
Net income/(loss)
Items not affecting cash
x
x
INVESTING ACTIVITIES
x
FINANCING ACTIVITIES
x
Net increase/decrease in cash XX
Cash position, beginning of year x
Cash position, end of year
x
Income Statement
Statement of Retained Earnings
For the year ended December 31, 200X
For the year ended December 31, 200X
REVENUES
x
EXPENSES
(x)
Retained earnings, beginning of year
+ Net income/loss
- Dividends
Retained earnings, end of year
NET INCOME/(LOSS)
XX
x
x
(x)
x
Notes to
Financial
Statements
© 2007, François Brouard
Financial Statements (corporation - non-profit)
Statement of Financial Position
Statement of Cash Flows
As at December 31, 200X
For the year ended December 31, 200X
x
LIABILITIES
Current liabilities
x
Long-term investments
x
Long-term debt
x
Capital assets
x
Intangible assets
x
NET ASSETS
Share capital
Retained earnings
x
x
ASSETS
Current assets
Total assets
XX
Total liab. & net assets
Statement of Operations
XX
OPERATING ACTIVITIES
Net income/(loss)
Items not affecting cash
x
x
INVESTING ACTIVITIES
x
FINANCING ACTIVITIES
x
Net increase/decrease in cash XX
Cash position, beginning of year x
Cash position, end of year
x
Statement of Changes in Net Assets
For the year ended December 31, 200X
For the year ended December 31, 200X
REVENUES
EXPENSES
EXCESS (DEFICIENCY)
OF REVENUES
OVER EXPENSES
Balance, beginning of year
x
+ Excess of revenues over expenses x
+ Endowment contributions
x
+/- Restrictions
(x)
Balance, end of year
x
© 2007, François Brouard
x
(x)
XX
Q
Q
Q
Q
Notes to
Financial
Statements
Q
Internal Control Structure
Generally accepted
accounting principles (GAAP)
Audits of financial statements
Accounting Standards Board
of the Canadian Institute of
Chartered Accountants
Securities commissions
© 2007, François Brouard
7
Financial Statement Format for Non-profit
Accountants’ Reports
Financial
Statement
Format
Credibility
Q
Q
Q
Auditor Report
Review Engagement
Report
Notice to Reader
© 2007, François Brouard
Non-profit - Fund Balances
Q
Q
Q
Q
Invested in Capital Assets
Externally Restricted
Internally Restricted
Unrestricted
Separate Funds
Not Reported
Deferral Method
of Recognizing
Contributions
Restricted Fund
Method of
Recognizing
Contributions
© 2007, François Brouard
Deferral Method
of Recognizing
Contributions
Source : CICA Handbook (4400.AI)
Non-profit - Type of Funds
Q
Q
Q
Q
Q
© 2007, François Brouard
Separate Funds
Reported
Operating Fund
Endowment Fund
Acquisitions Fund
Research Fund
Capital Asset Fund
© 2007, François Brouard
8