Chapter 3
The Accounting Framework
63
The major differences between the three forms of organization are summarized in Figure 3.4.
Sole Proprietorship
Partnership
Corporation
Title of Owners
Proprietor (One)
Partners (Two or More)
Shareholders (One or More)
Public or Private
Private
Private
Public or Private
Equity Section
Owner’s Equity
Partners’ Equity
Shareholders’ Equity
Owner’s Liability
Unlimited
Limited or Unlimited
Limited
______________
FIGURE 3.4
Not-for-Profit Organizations
Unlike regular businesses, profits made by
not-for-profit organizations
are paid out (redistrib-
uted) to the community by providing services. While the primary objective of other forms of
organization is to maximize profits, not-for-profit organizations aim to improve society in some
way. They usually obtain funding from donations and government grants. Not-for-profit orga-
nizations include religious organizations, community care centres, charitable organizations and
hospitals. They do not have an identifiable owner but require financial statements because they
are accountable to donors, sponsors, lenders, tax authorities, etc.
Accounting records provide key information pertaining to the activities of not-for-profit orga-
nizations, enabling them to operate as permitted. This textbook will not focus on not-for-profit
organizations.
The Conceptual Framework of Accounting
Imagine a hockey or a football game with no rules or consistent method to keep score.The players
and spectators would quickly become frustrated because of the lack of consistency. By having rules
to follow and a consistent method to keep score, players know how to play the game and spectators
know what to expect as they watch.
Accounting in a business is similar. If there were no rules to follow, business owners and accoun-
tants could make up rules regarding what to report. External users would find the reports to be
unreliable and inconsistent. Thus, the accounting profession has created standards which provide
guidance on how financial information should be reported.These standards are commonly referred
to as
generally accepted accounting principles (GAAP)
.
In Canada, the Accounting Standards Board (AcSB) is responsible for setting accounting standards.
In the past, Canadian GAAP was used as the standard for all companies in Canada. However, in
recent years, there has been recognition of the different reporting needs of public companies and
private companies. Therefore, the AcSB decided that Canadian businesses must adhere to one of
two sets of standards, depending on the form of the organization.
Public enterprises must prepare financial information in accordance with the
International
Financial Reporting Standards (IFRS)
. IFRS was developed by the International Accounting
Standards Board (IASB) and is used globally.
