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Chapter 1: Accounting and Business
Types of Business 1. 2. The Service Business 1. They sell a service to the public. 2. Examples are accounting firm, hair salon, dental clinic or Air Canada (airline company) The Merchandising Business 1. They buy goods and resells them at a higher price for a profit. 2. Examples are the Future Shop and the Gap stores.
Types of Business 1. The Manufacturing Business 1. They buy raw materials and converts them into a new product. Then they sell the new products to customers for a profit. 2. Examples are Ford, Toyota, Samsung (TV, computer, smartphone)
Types of Business 4. Producing Business • They obtain their product from the nature. • They sell these products to customers for a profit. • Examples are grain farming, fishing, gold mining and oil extraction
Types of Business 5. The Non-Profit Organization • They carry on activities to meet social needs. • They do not try to make profit. • Examples are churches, Me to We, Habitat for Humanity
Changes for Canada’s Professional Accoutants 1. 2. 3. CA, CGA and CMA are trying to merge. All three designation might be replaced by CPA (Chartered Professional Accountant) Canada in near future. In US, CPA stands for Certified Public Accountant. Many American companies like Wal. Mart and Enterprise Rent a car let CPA (US) hold the highest regards.
Changes for Canada’s Professional Accoutants 1. Accountants have started using IFRS (International Financial Reporting Standards) instead of Canadian GAAP (Generally Accepted Accounting Principle) = Accountants have started using international accounting rule instead of Canadian accounting rule since January 1, 2011.
TERMS: Assets are resources owned by a business. • Things, which will bring cash or benefits to the business in the future or now. • have monetary value owned by a business
TERMS: Assets are resources owned by a business. • They might be acquired through • Borrowing (bank, friends) • Owners paid cash for it. • Or combination of both borrowing and owner’s • Examples are: Cash, building, machine, computer, delievery truck, Accounts Receivable or AR (memo which indicates that customers owe
Terms Continued: Liabilities: • Debts of the business • Examples are: credit card debt, loan (short term such as 2 years), mortgage (long term loan such as 30 years) and Accounts Payable (memo which indicates that future shop owes money to Apple)
Terms Continued: Owners Equity: • My own definition: True Asset • Difference between assets and liabilities • OE = Assets - Liability • Claims against assets • Owners Equity is also called net worth or capital
Scenario #1 I’m a bank loans officer. Patrick has come to start a banana case business and needs to borrow $20, 000 from the bank. What does Patrick need to tell me to help me decide if the loan should be approved? Items he own Items he owe
Scenario #1 What do I do with this information? I should determine Pat’s owner’s equity. His owner’s equity is the difference between what he owns and what he owes. Financial Position of a business is the financial status of the business based on its assets, liabilities and owner’s equity. I can see his financial position, meaning I can make a decision whether my bank can go after Patrick’s asset in case he goes bankrupt.
Items Owned By Pat: Cash Clothing Furniture Equipment Auto Total Assets $12, 000 3, 000 10, 000 11, 000 15, 000 $51, 000
Items Patrick owe to others: Visa: Student Loan: Total Liability $1000 $10, 000 $11, 000 What is Pat’s Financial Position? Total amounts owned (Total Assets): $51, 000 LESS: Total amounts owed (Total Liability): $11, 000 EQUAL: Equity (Capital/Net Worth) $40, 000
Conclusion of the banker Therefore as a banker, I can lend him $20000 because the bank will go after Patrick’s equity (which is $40000) in case Patrick goes bankcrupt. If Patrick goes bankrupt, his assets will be sold to pay back his liabilities. Since the value of his total assets are higher than the value of his total liabilities, the bank can receive their money back. Banks and investors always want to know the total assets – total liability, which is owners equity.
Fundamental Accounting Equation: Owners Equity = Assets – Liability Owners Equity + Liability = Assets = Liabilities + Owners Equity Easiest way to remember is “ALO” Aloha is “hi” and “Goodbye” “Love” and “Peace” in Hawaian Language Let’s spend 3 minutes with your partner and explain to each other about this equation and definition of each term.
Example Problem: The Accounting Equation Assets = Liability + Owners Equity For example: If James’ total assets = $10, 000 and his total liabilities are $6, 000 then what is his owners equity? Answer: Assets = Liabilities + Owners Equity $10, 000 = $6, 000 + ? ? What’s the owner’s claims against the assets?
Classwork / Homework 1. 2. Review Questions Page 12 Q#8, 16, 17, Review Exercise Page 13 Q# 1 L, 1 M, 3. Page 20 Exercises #1 -6