What is Accounting? 1. Information Gathering Based on financial events that occur 2. Information Measuring Expressed in monetary terms 3.Recording Information Keeping track of events
What is Accounting 4.Information Classification Classify data into appropriate categories 5. Summarizing and Reporting Information Based on written reports 6. Interpret and Controlling Review statements to ensure accuracy and efficiency of operations and to assist in decision making.
What is the Purpose of Accounting? • To provide information to decision makers. More specifically… • The basic purpose of financial statements is to assist decision makers in evaluating the financial strength, profitability, and future prospects of business.
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?
Who Uses Accounting Information? And For What? Government Regulatory Bodies • 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 Business Business Defined • 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 Merchandising Business • Buys goods and resells them at a higher price for a profit. Examples:
The Service Business • sells a service to the public • it does not sell a product as its main activity • usually provides skills or expertise and the customer is involved in the delivery of the service
Note: • Sometimes a service company will sell products (i.e. hairdresser selling shampoo), but it is a sideline and not the main business. • Sometimes a merchandising business will offer services (i.e. computer repair or hemming clothes), but it is also just a sideline and not the main 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.
The 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
Non-Profit or Not-for-Profit Organization An organization that does not seek to make a profit, but instead raises money/funds for a specific goal. (churches, charities, recreational sports clubs) Examples include: Canadian Cancer Foundation, Amnesty International, Junior Achievement etc.
Forms of Business Ownership 1. Sole Proprietorship • owned by one person 2. Partnership • Usually owned by two or more partners 3. Franchise • One business licenses (allows) another to use its name, operating procedure, etc. • Can have any form of ownership 4.Cooperative • Owned by its workers or by members who buy from the business 5. Corporation • Business is an artificial “person” created by law and owned by shareholders
Advantages – So what? Keep all the profits Make all the decisions You are your own boss (i.e Financial information can be kept secret. from competitors), but not the government Disadvantages Unlimited Liability Facing personal and financial risks and challenges on your own Borrowing money may be more difficult Huge time commitment Sole Proprietorship(over 1 million in Canada)
Sole Proprietors Examples may include individuals who are: • Artists • Authors • Carpenters • Computer specialists • Digital designers • Ecotourism guides • Farmers • Industrial designers • Photographers • Web designers • Chefs or Bakers • Hair stylists
Partnership • More complex and needs a written agreement • Partners must discuss and agree on issues such as: • how much time and money each partner will put into the business • How the profits will be shared • Who will make decisions about different aspects of the business • Who will manage the employees • How the partnership might be ended
Partnership Agreement All partners must sign the partnership agreement which includes: • the name and location of the business • Its purpose • The amount of partner’s investment • The way that the profits and losses are to be divided • The duties and responsibilities of each partner • The procedures for ending the partnership
Advantages Inexpensive to set up and organize ($1000) Two people to invest and it is easier to borrow from a bank More brains filled with different knowledge, experience, skills Shared responsibility eases stress and workload Share debt and can more easily take a vacation Disadvantages Unlimited liability Your personal assets (home, care etc may need to be used to pay off business debts) Conflicts between partners that can not be worked out Partnerships
Typical Partnerships Small independent service or retail businesses. • bakeries, hair salons, flower shop, convenience store, landscaping or décor store, consignment shop, restaurants, retail stores,plumbers, electricians, mechanics, carpenters Professional Designations or Apprenticeships • accountants, lawyers, doctors, veterinarians, mechanics, plumbers, electricians, carpenters
Franchise • One of the fastest growing forms of business ownership • The franchisor sells to another person (the franchisee) the rights to use the business name and to sell a product or service in a given territory. • Available in many different sectors (fast food, wine, funeral homes) • Franchise can be any form of business ownership
Franchise Agreement • Written contract between the franchise seller and buyer • Permit the franchisee to use the franchisor’s name, products, packaging • Franchisor will specify how the franchise is to be operated, what products can be sold, the advertising, etc. • Provide more than 1 million jobs directly, many more indirectly • Annual sales of $100 billion
Advantages Proven track record and nationally or internationally recognized name Personal ownership like a sole proprietorship Less stress in initial set up as most issues like process, products and location, equipment, décor are spelled out by the franchisor Disadvantages Expensive to buy Must pay royalties for your sales Little say in many of the business decisions If the franchisor fails, so does the franchisee Franchises
Co-operatives • Also called Co-ops • Business owned and operated by a group of people with a strong common interest • Start-up costs are shared among members • Members own and control and make all the business decisions
Examples of Coops Farmers • Belong to producer co-ops • Members bring crops to a central location to sell them • Coop monitors the supply of the crop and controls its sale and price • Farmers do not compete against each other or undercut other’s prices • Farmers can combine to buy equipment and reduce costs and share expertise • Example: Saskatchewan Wheat Pool sells products all over the world.
Consumer Co-ops • Join together to operate a business that provides them with goods and services • Profits are divided among the members in proportion to the amount of business that each member does • Examples: Omish Community Furniture Co-ops
Credit Unions/ Caisses Populaires • Financial co-ops • Like banks but profits are distributed annually to their members
Advantages Shared skills and experiences Less risk than for sole proprietor and partnership Liability is limited to the amount of your share in the capital of the coop Each member gets one vote – equal decision making and influence If you have more shares, you still get one vote, but more share of the profits Coops get discounts due to volume purchasing by many people Control sale and price of goods Disadvantages Individual members hesitant to invest more – only one vote Decision-making can be difficult because of multiple members Commitment of members may vary because some have more money at stake and some may take things more seriously than others Co-operatives
Corporation • Legal entity that exists independently of its owners who are the shareholders. Has the same rights and obligations under Canadian law as a natural person It can be found guilty of committing a crime
Corporation • Brought into existence by drawing up and filing with the proper government agency a document called the articles of incorporation • A lawyer and accountant are often needed to prepare this document
Corporation Articles of Incorporation include information such as: • Name of corporation • Headquarters of corporation • Type of corporation • Number of shares allowed to be issued to the public for purchase
Classification of Corporations 1. Non-Profit Corporation 2. Crown Corporation 3. Private Corporation 4. Public Corporation
Non-Profit Corporations • Purpose is to undertake fundraising, to do research and to lobby for a particular cause in order to help people • Example: United Way, Museums, Religious organizations, athletic and artistic organizations.
Crown Corporation • Owned by the federal, provincial, or municipal governments • Function is to provide a special service to the public • Examples: Bank of Canada, Royal Canadian Mint, Canada Post, Canadian Broadcasting Corp. (CBC)
Private Corporation • Can have up to 50 shareholders • A single person who incorporates may have only one shareholder – him or herself. • Usually small but not always • Eatons now owned by Sears was a private corporation
Public Corporation • Does not have a restriction on the number of shareholders. (unlimited number) • Shares are bought and sold (traded) on the stock exchanges, such as the Toronto Stock Exchange, the Vancouver Stock Exchange. • Examples include: Tim Hortons, Google,
Owners/Shareholders (Elect Board of Directors) Board of Directors (hire officers) STRUCTURE OF A CORPORATION Officers i.e. CEO (Chief Executive Officer) (set corporate objectives and hire managers) Managers (Supervise Employees) Employees
Structure of a Corporation • The shareholders elect a board of directors, who direct the overall affairs of the corporation • The BOD hire the officers (i.e. the President of the corporation) who decide on the objectives for the company and hire the managers and essentially run the day to day operations of the business. • The managers supervise the employees.
Advantages Owners are only liable for the amount they invest – Limited liability Has more financial resources to expand and grow (money collected from the selling of shares) Easier to get a loan from a bank because it has more assets to use as security (collateral”) The tax rate is lower than for a sole proprietorship. (40-50% versus 23%) Ownership is easily transferable Disadvantages More complicated to set up due to government regulations Must be registered in every province it operates Time consuming process and expensive Closing a corporation can be time consuming and expensive Business is managed by employees who may or may not be shareholders. Must publish an annual report outlining the companies financial position which can benefit competitors Changes in stock market could impact future financial resources raised through issuing new stock to sell to the public Corporation