Intro To AccountingIntro To Accounting

Case StudyCase Study

It was late August and Amanda Del Toro was about to attend her first MSS High School student council meeting as treasurer. She was elected back in June with the encouragement of last year’s treasurer and Michelle’s good friend, Michelle Balbard. Michelle was now attending far off Queen’s University. Amanda’s first duty was to recommend to the student council executive the amount to charge students for the student activity fee.

It was late August and Amanda Del Toro was about to attend her first MSS High School student council meeting as treasurer. She was elected back in June with the encouragement of last year’s treasurer and Michelle’s good friend, Michelle Balbard. Michelle was now attending far off Queen’s University. Amanda’s first duty was to recommend to the student council executive the amount to charge students for the student activity fee.

On the floor of the Student Council room was a box that Michelle left behind containing the entire financial information from the previous year.  Amanda opened the box. She gasped in disbelief. The box was stuffed with dishevelled papers; bills, receipts, cheques, bank statements, cash and a few rolls of coin.  How was she supposed to make sense of this mess? How could she make an informed decision without knowing any information about last year’s student council? How could Michelle have been so disorganized? For Michelle to leave behind such a jumble was unforgivable. Amanda became very angry. “Where to start?” she thought. “I only have an hour before the meeting!”

On the floor of the Student Council room was a box that Michelle left behind containing the entire financial information from the previous year.  Amanda opened the box. She gasped in disbelief. The box was stuffed with dishevelled papers; bills, receipts, cheques, bank statements, cash and a few rolls of coin.  How was she supposed to make sense of this mess? How could she make an informed decision without knowing any information about last year’s student council? How could Michelle have been so disorganized? For Michelle to leave behind such a jumble was unforgivable. Amanda became very angry. “Where to start?” she thought. “I only have an hour before the meeting!”

Amanda started to pull out papers; a receipt for food for the semi-formal, a five dollar bill, a $50.00 cheque that had not been deposited, the July bank statement. Amanda paused and looked at the balance on the bank statement; negative $758.00!

What action should Amanda take to ensure that she makes an informed decision regarding the student activity fee?

Amanda started to pull out papers; a receipt for food for the semi-formal, a five dollar bill, a $50.00 cheque that had not been deposited, the July bank statement. Amanda paused and looked at the balance on the bank statement; negative $758.00!

What action should Amanda take to ensure that she makes an informed decision regarding the student activity fee?

AnswerAnswer

Amanda does indeed have a big job in front of her. First, she needs to CLASSIFY all the information into categories (dances, spirit days, special events etc.). She then needs to RECORD the money spent and the money received (activity fees, fundraising, dances etc.). She then needs to SUMMARIZE this information to find out how much money the student council requires to operate for the upcoming year. Finally, she must ANALYSE the information in order to make an informed DECISION as to what the students’ activity fee will be. The tasks Amanda needs to complete are exactly the same as the tasks for an accountant.

Amanda does indeed have a big job in front of her. First, she needs to CLASSIFY all the information into categories (dances, spirit days, special events etc.). She then needs to RECORD the money spent and the money received (activity fees, fundraising, dances etc.). She then needs to SUMMARIZE this information to find out how much money the student council requires to operate for the upcoming year. Finally, she must ANALYSE the information in order to make an informed DECISION as to what the students’ activity fee will be. The tasks Amanda needs to complete are exactly the same as the tasks for an accountant.

What is Accounting?What is Accounting?

Accounting is the classifying, recording, summarizing, and analysing of financial information.

Accounting is the classifying, recording, summarizing, and analysing of financial information.

Bookkeeping vs. Accounting

Bookkeeping vs. Accounting

So what is bookkeeping? Bookkeeping involves the recording part of accounting. Usually accountants do not do the recording of information. Accountants are primarily responsible for summarizing and analysing the information.

So what is bookkeeping? Bookkeeping involves the recording part of accounting. Usually accountants do not do the recording of information. Accountants are primarily responsible for summarizing and analysing the information.

Purpose of AccountingPurpose of Accounting

The purpose of accounting is to provide information for decision-making; should a business hire more people? Should a new machine be purchased? Should a factory be moved?

The purpose of accounting is to provide information for decision-making; should a business hire more people? Should a new machine be purchased? Should a factory be moved?

Who Uses Accounting Information? And For What?

Who Uses Accounting Information? And For What?

Managers and Business Owners

Planning and controlling daily operations as well as long-term goals

Investors (current and potential) Should I continue, discontinue, increase, and/or decrease my investment

Creditors (i.e. Banks) Should I give the loan? Will I get my money back?

Managers and Business Owners

Planning and controlling daily operations as well as long-term goals

Investors (current and potential) Should I continue, discontinue, increase, and/or decrease my investment

Creditors (i.e. Banks) Should I give the loan? Will I get my money back?

Government Regulatory Bodies ie. Canadian Revenue Agency (Is this person or business paying all their taxes)

Employees - Job security, career advancement, flexibility, potential investors

Unions - For contract negotiations as well as other interests of the employees (raise, better benefits?)

Government Regulatory Bodies ie. Canadian Revenue Agency (Is this person or business paying all their taxes)

Employees - Job security, career advancement, flexibility, potential investors

Unions - For contract negotiations as well as other interests of the employees (raise, better benefits?)

Types of BusinessTypes of Business

Business - An organization that involves the manufacture and/or sale of goods and/or services in order to earn a profit.

Most business fall into one of the four categories: 1. The Merchandising Business 2. The Service Business 3. The Manufacturing or Producing Business 4. The Non-Profit Organization

Business - An organization that involves the manufacture and/or sale of goods and/or services in order to earn a profit.

Most business fall into one of the four categories: 1. The Merchandising Business 2. The Service Business 3. The Manufacturing or Producing Business 4. The Non-Profit Organization

The Manufacturing Business

The Manufacturing Business

Buys raw materials, converts them into a product and sells these products to earn a profit.

Consider a construction company, a paper mill, or steel plant.

Buys raw materials, converts them into a product and sells these products to earn a profit.

Consider a construction company, a paper mill, or steel plant.

The Producing BusinessThe Producing Business

Closely related to manufacturing

Examples include farms who may produce milk, grain, etc. Other examples include oil extraction, mining, forestry, hunting, and fishing

Closely related to manufacturing

Examples include farms who may produce milk, grain, etc. Other examples include oil extraction, mining, forestry, hunting, and fishing

Non-Profit or Not-for-Profit Organization

Non-Profit or Not-for-Profit Organization

An organization that does not seekto make a profit, but insteadraises money/funds for a specific goal. (churches, charities, recreational sports clubs)

Examples include: Canadian Cancer Foundation, Amnesty International, Junior Achievement etc

An organization that does not seekto make a profit, but insteadraises money/funds for a specific goal. (churches, charities, recreational sports clubs)

Examples include: Canadian Cancer Foundation, Amnesty International, Junior Achievement etc

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Forms of Business OwnershipForms of Business Ownership

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Forms of Business OwnershipForms of Business Ownership1.1. Sole Proprietorship Sole Proprietorship

owned by one personowned by one person

2. 2. Partnership PartnershipUsually owned by two or more partnersUsually owned by two or more partners

3.3. Franchise FranchiseOne business licenses (allows) another to use its name, operating One business licenses (allows) another to use its name, operating procedure, etc.procedure, etc.Can have any form of ownershipCan have any form of ownership

4.4. CooperativeCooperative

Owned by its workers or by members who buy from the businessOwned by its workers or by members who buy from the business

5. Corporation5. Corporation• Business is an artificial “person” created by law and owned by Business is an artificial “person” created by law and owned by

shareholdersshareholders

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Sole ProprietorshipSole Proprietorship(over 1 million in Canada)(over 1 million in Canada)

Advantages – So what?Advantages – So what? Keep all the profitsKeep all the profits Make all the decisionsMake all the decisions You are your own bossYou are your own boss (i.e Financial (i.e Financial

information can be information can be kept secret. from kept secret. from competitors), but not competitors), but not the governmentthe government

DisadvantagesDisadvantages Unlimited LiabilityUnlimited Liability Facing personal and Facing personal and

financial risks and financial risks and challenges on your ownchallenges on your own

Borrowing money may Borrowing money may be more difficultbe more difficult

Huge time commitmentHuge time commitment

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Sole ProprietorsSole ProprietorsExamples may include individuals who are:Examples may include individuals who are:

ArtistsArtistsAuthorsAuthorsCarpentersCarpentersComputer specialistsComputer specialistsDigital designersDigital designersEcotourism guidesEcotourism guides

• FarmersFarmers• Industrial designersIndustrial designers

PhotographersPhotographersWeb designersWeb designersChefs or BakersChefs or BakersHair stylistsHair stylists

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PartnershipPartnership

More complex and needs a written agreementMore complex and needs a written agreement

Partners must discuss and agree on issues such Partners must discuss and agree on issues such as:as: how much time and money each partner will puthow much time and money each partner will put

into the business into the business How the profits will be sharedHow the profits will be shared Who will make decisions about different aspects ofWho will make decisions about different aspects of

the business the business Who will manage the employeesWho will manage the employees

How the partnership might be endedHow the partnership might be ended

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Partnership AgreementPartnership Agreement

All partners must sign the partnership agreement which All partners must sign the partnership agreement which includes:includes:

the name and location of the businessthe name and location of the business Its purposeIts purpose The amount of partner’s investmentThe amount of partner’s investment The way that the profits and losses are to beThe way that the profits and losses are to be

divided divided The duties and responsibilities of each partnerThe duties and responsibilities of each partner The procedures for ending the partnershipThe procedures for ending the partnership

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PartnershipsPartnerships

AdvantagesAdvantages Inexpensive to set up Inexpensive to set up

and organize ($1000)and organize ($1000) Two people to invest and Two people to invest and

it is easier to borrow from it is easier to borrow from a banka bank

More brains filled with More brains filled with different knowledge, different knowledge, experience, skillsexperience, skills

Shared responsibility Shared responsibility eases stress and eases stress and workloadworkload

Share debt and can more Share debt and can more easily take a vacationeasily take a vacation

DisadvantagesDisadvantages Unlimited liabilityUnlimited liability Your personal assets Your personal assets

(home, care etc may need (home, care etc may need to be used to pay off to be used to pay off business debts)business debts)

Conflicts between partners Conflicts between partners that can not be worked outthat can not be worked out

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Typical PartnershipsTypical Partnerships

Small independent service or retail businesses. Small independent service or retail businesses.

bakeries, hair salons, flower shop, convenience bakeries, hair salons, flower shop, convenience store, landscaping or décor store, consignment store, landscaping or décor store, consignment shop, restaurants, retail stores,plumbers, shop, restaurants, retail stores,plumbers, electricians, mechanics, carpenterselectricians, mechanics, carpenters

Professional Designations or ApprenticeshipsProfessional Designations or Apprenticeships

accountants, lawyers, doctors, veterinarians, accountants, lawyers, doctors, veterinarians, mechanics, plumbers, electricians, carpentersmechanics, plumbers, electricians, carpenters

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FranchiseFranchiseOne of the fastest growing forms of business One of the fastest growing forms of business ownershipownershipThe franchisor sells to another person (the The franchisor sells to another person (the franchisee) the rights to use the business name franchisee) the rights to use the business name and to sell a product or service in a given territory.and to sell a product or service in a given territory.Available in many different sectors (fast food, wine, Available in many different sectors (fast food, wine, funeral homes)funeral homes)Franchise can be any form of business ownershipFranchise can be any form of business ownership

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Franchise AgreementFranchise Agreement

Written contract between the franchise seller and Written contract between the franchise seller and buyerbuyerPermit the franchisee to use the franchisor’s name, Permit the franchisee to use the franchisor’s name, products, packagingproducts, packagingFranchisor will specify how the franchise is to be Franchisor will specify how the franchise is to be operated, what products can be sold, the operated, what products can be sold, the advertising, etc.advertising, etc.Provide more than 1 million jobs directly, many Provide more than 1 million jobs directly, many more indirectlymore indirectlyAnnual sales of $100 billionAnnual sales of $100 billion

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FranchisesFranchises

AdvantagesAdvantages Proven track record and Proven track record and

nationally or nationally or internationally recognized internationally recognized namename

Personal ownership like a Personal ownership like a sole proprietorshipsole proprietorship

Less stress in initial set Less stress in initial set up as most issues like up as most issues like process, products and process, products and location, equipment, location, equipment, décor are spelled out by décor are spelled out by the franchisorthe franchisor

DisadvantagesDisadvantages Expensive to buyExpensive to buy Must pay royalties for your Must pay royalties for your

sales sales Little say in many of the Little say in many of the

business decisionsbusiness decisions If the franchisor fails, so If the franchisor fails, so

does the franchiseedoes the franchisee

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Co-operativesCo-operatives

Also called Co-opsAlso called Co-ops

Business owned and operated by a group of Business owned and operated by a group of people with a strong common interestpeople with a strong common interest

Start-up costs are shared among membersStart-up costs are shared among members

Members own and control and make all the Members own and control and make all the business decisionsbusiness decisions

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Examples of CoopsExamples of Coops

FarmersFarmersBelong to producer co-opsBelong to producer co-opsMembers bring crops to a central location to sell themMembers bring crops to a central location to sell themCoop monitors the supply of the crop and controls its Coop monitors the supply of the crop and controls its sale and pricesale and priceFarmers do not compete against each other or undercut Farmers do not compete against each other or undercut other’s pricesother’s pricesFarmers can combine to buy equipment and reduce Farmers can combine to buy equipment and reduce costs and share expertisecosts and share expertiseExample: Saskatchewan Wheat Pool sells products all Example: Saskatchewan Wheat Pool sells products all over the world.over the world.

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Consumer Co-opsConsumer Co-ops

Join together to operate a business that Join together to operate a business that provides them with goods and servicesprovides them with goods and services

Profits are divided among the members in Profits are divided among the members in proportion to the amount of business that proportion to the amount of business that each member doeseach member does

Examples: Omish Community Furniture Examples: Omish Community Furniture Co-ops Co-ops

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Credit Unions/ Caisses Populaires Credit Unions/ Caisses Populaires

Financial co-opsFinancial co-ops

Like banks but profits are distributed annually to Like banks but profits are distributed annually to their memberstheir members

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Co-operativesCo-operativesAdvantagesAdvantages Shared skills and experiencesShared skills and experiences Less risk than for sole Less risk than for sole

proprietor and partnershipproprietor and partnership Liability is limited to the amount Liability is limited to the amount

of your share in the capital of of your share in the capital of the coopthe coop

Each member gets one vote – Each member gets one vote – equal decision making and equal decision making and influenceinfluence

If you have more shares, you If you have more shares, you still get one vote, but more still get one vote, but more share of the profitsshare of the profits

Coops get discounts due to Coops get discounts due to volume purchasing by many volume purchasing by many peoplepeople

Control sale and price of goodsControl sale and price of goods

DisadvantagesDisadvantages Individual members hesitant to Individual members hesitant to

invest more – only one voteinvest more – only one vote Decision-making can be difficult Decision-making can be difficult

because of multiple members because of multiple members Commitment of members may Commitment of members may

vary because some have more vary because some have more money at stake and some may money at stake and some may take things more seriously than take things more seriously than othersothers

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CorporationCorporation

Legal entity that exists independently of its owners who are Legal entity that exists independently of its owners who are the shareholders.the shareholders.

Has the same rights and obligations under Canadian Has the same rights and obligations under Canadian law as a natural personlaw as a natural person

It can be found guilty of committing a crimeIt can be found guilty of committing a crime

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CorporationCorporation

Brought into existence by drawing up and filing with the Brought into existence by drawing up and filing with the proper government agency a document called the proper government agency a document called the articles articles of incorporationof incorporation

A lawyer and accountant are often needed to prepare this A lawyer and accountant are often needed to prepare this documentdocument

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CorporationCorporation

Articles of Incorporation include information Articles of Incorporation include information such as:such as:

Name of corporationName of corporation

Headquarters of corporationHeadquarters of corporation

Type of corporationType of corporation

Number of shares allowed to be issued to Number of shares allowed to be issued to the public for purchasethe public for purchase

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Classification of CorporationsClassification of Corporations

1. Non-Profit Corporation1. Non-Profit Corporation

2. Crown Corporation2. Crown Corporation

3. Private Corporation3. Private Corporation

4. Public Corporation4. Public Corporation

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Non-Profit CorporationsNon-Profit Corporations

Purpose is to undertake fundraising, to do Purpose is to undertake fundraising, to do research and to lobby for a particular cause research and to lobby for a particular cause in order to help peoplein order to help people

Example: United Way, Museums, Religious Example: United Way, Museums, Religious organizations, athletic and artistic organizations, athletic and artistic organizations.organizations.

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Crown CorporationCrown Corporation

Owned by the federal, provincial, or municipal Owned by the federal, provincial, or municipal governmentsgovernments

Function is to provide a special service to the publicFunction is to provide a special service to the public

Examples: Bank of Canada, Royal Canadian Mint, Examples: Bank of Canada, Royal Canadian Mint, Canada Post, Canadian Broadcasting Corp. (CBC)Canada Post, Canadian Broadcasting Corp. (CBC)

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Private CorporationPrivate Corporation

Can have up to 50 shareholdersCan have up to 50 shareholders

A single person who incorporates may have only A single person who incorporates may have only one shareholder – him or herself.one shareholder – him or herself.

Usually small but not alwaysUsually small but not always

Eatons now owned by Sears was a private Eatons now owned by Sears was a private corporationcorporation

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Public CorporationPublic Corporation

Does not have a restriction on the number of Does not have a restriction on the number of shareholders. (unlimited number)shareholders. (unlimited number)

Shares are bought and sold (traded) on the Shares are bought and sold (traded) on the stock exchanges, such as the Toronto Stock stock exchanges, such as the Toronto Stock Exchange, the Vancouver Stock Exchange.Exchange, the Vancouver Stock Exchange.

Examples include: Tim Hortons, Google, Examples include: Tim Hortons, Google,

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Employees

Managers

(Supervise Employees)

Officersi.e. CEO

(Chief Executive Officer)

(set corporate

objectives and hire managers)

Board of Directors

(hire officers)

Owners/Shareholders

(Elect Board of Directors)

STRUCTURE OF A

CORPORATION

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Structure of a CorporationStructure of a Corporation

The shareholders elect a board of directors, who The shareholders elect a board of directors, who direct the overall affairs of the corporationdirect the overall affairs of the corporation

The BOD hire the officers (i.e. the President of the The BOD hire the officers (i.e. the President of the corporation) who decide on the objectives for the corporation) who decide on the objectives for the company and hire the managers and essentially run company and hire the managers and essentially run the day to day operations of the business.the day to day operations of the business.

The managers supervise the employees.The managers supervise the employees.

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CorporationCorporationAdvantagesAdvantages Owners are only liable for the Owners are only liable for the

amount they invest – Limited amount they invest – Limited liabilityliability

Has more financial resources Has more financial resources to expand and grow (money to expand and grow (money collected from the selling of collected from the selling of shares)shares)

Easier to get a loan from a Easier to get a loan from a bank because it has more bank because it has more assets to use as security assets to use as security (collateral”)(collateral”)

The tax rate is lower than for a The tax rate is lower than for a sole proprietorship.sole proprietorship.

(40-50% versus 23%)(40-50% versus 23%) Ownership is easily Ownership is easily

transferabletransferable

DisadvantagesDisadvantages More complicated to set up due More complicated to set up due

to government regulationsto government regulations Must be registered in every Must be registered in every

province it operatesprovince it operates Time consuming process and Time consuming process and

expensiveexpensive Closing a corporation can be Closing a corporation can be

time consuming and expensivetime consuming and expensive Business is managed by Business is managed by

employees who may or may not employees who may or may not be shareholders.be shareholders.

Must publish an annual report Must publish an annual report outlining the companies financial outlining the companies financial position which can benefit position which can benefit competitorscompetitors

Changes in stock market could Changes in stock market could impact future financial resources impact future financial resources raised through issuing new raised through issuing new stock to sell to the publicstock to sell to the public