1.7: Summary of Chapter 1 Learning Objectives

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Henry Dauderis and David Annand
Athabasca University via Lyryx Learning

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LO1 – Define accounting.

Accounting is the process of identifying, measuring, recording, and communicating an organization's economic activities to users for decision making. Internal users work for the organization while external users do not. Managerial accounting serves the decision-making needs of internal users. Financial accounting focuses on external reporting to meet the needs of external users.

LO2 – Identify and describe the forms of business organization.

The three forms of business organizations are a proprietorship, partnership, and corporation.

The following chart summarizes the key characteristics of each form of business organization.

Characteristic	Proprietorship	Partnership	Corporation
Separate legal entity	No	No	Yes
Business income is taxed as part of the business	No (Business income is added to the owner's personal income and the owner pays tax on the sum of the two.)	No (Business income is added to the owner's personal income and the owner pays tax on the sum of the two.)	Yes
Unlimited liability	Yes	Yes	No
One owner permitted	Yes	No	Yes (A corporation can have one or more owners.)
Board of Directors	No	No	Yes

LO3 – Identify and explain the Generally Accepted Accounting Principles (GAAP).

GAAP followed in Canada by PAEs (Publicly Accountable Enterprises) are based on IFRS (International Financial Reporting Standards). PEs (Private Enterprises) follow GAAP based on ASPE (Accounting Standards for Private Enterprises), a less onerous set of GAAP maintained by the AcSB (Accounting Standards Board). GAAP have qualitative characteristics (relevance, faithful representation, comparability, verifiability, timeliness, and understandability) and principles (business entity, consistency, cost, full disclosure, going concern, matching, materiality, monetary unit, and recognition).

LO4 – Identify, explain, and prepare the financial statements.

The four financial statements are: income statement, statement of changes in equity, balance sheet, and statement of cash flows. The income statement reports financial performance by detailing revenues less expenses to arrive at net income/loss for the period. The statement of changes in equity shows the changes during the period to each of the components of equity: share capital and retained earnings. The balance sheet identifies financial position at a point in time by listing assets, liabilities, and equity. Finally, the statement of cash flows details the sources and uses of cash during the period based on the three business activities: operating, investing, and financing.

LO5 – Analyze transactions by using the accounting equation.

The accounting equation, \(A = L + E\), describes the asset investments (the left side of the equation) and the liabilities and equity that financed the assets (the right side of the equation). The accounting equation provides a system for processing and summarizing financial transactions resulting from a business's activities. A financial transaction is an economic exchange between two parties that impacts the accounting equation. The equation must always balance.