Unit 1-1 Accounting Concepts and Procedures
By Bill Venables

• Sole proprietorship (one owner)
• Partnership (more than one owner)
• Corporation (many owners)
• See table 1-1 at the top of page 3
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• 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
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• >= 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
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• 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
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• Service
• Merchandising
• Manufacturing
Question: How would you classify an
OFFICE ADMIN firm as far as activity?
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• 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?
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• Revenue = money earned for services rendered and/or goods sold
• Expense = costs incurred by your firm to generate revenue
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• 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
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• Keep the company’s affairs separate from your personal affairs
• I use 2 bank accounts for deposits and withdrawals
– The company has its own cheque book
– I have my own personal cheque book
ACCT_100 Bill Venables

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
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GAAP – Realization/Recognition Principle
• Record revenue and expenses when the transaction takes place
• Eg. The company completes a project today (January 6 th ) and invoices you but payment will not have to be made until
February 15 th
– Record the sale using the date = January 6 th not February 15 th )
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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)
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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
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• 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
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• 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 31 st .
– Our year end = December 31 st
• Companies can have a year end that is not
December 31 st
– Eg. July 1, 2004 - June 30, 2005
• We will try to keep it simple and use the calendar year.
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• 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!
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• Make assumptions
• Stick with your assumptions so that from one year to the next, they are consistent
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• 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
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• 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
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• 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
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• 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?
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• 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)
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• 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?
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• 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.
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• 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
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• 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)
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• Transaction C
• Buy $400 of office equipment on account (Accounts Payable=you will pay for it later)
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• Self review quiz 1-1
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