Term
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Definition
| It is an information system that identifies, records, and communicates relevant, reliable and comparable information about an organization's business activities |
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| What is the objective of accounting |
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Definition
| It’s objective is to help people make better decisions |
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Term
| External Users of Accounting |
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Definition
| lenders, shareholders, external auditors, unions, cra |
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Term
| typical questions asked by external users |
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Definition
• Will the company be able to pay debts?
• Is the company earning enough money to give me a return?
• Can the company afford a pay raise?
• Will the company stay in business to service the product I buy? |
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Definition
| Generally Accepted Accounting Principles |
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Definition
| Internal users are involved in managing and operating an organization |
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Term
| accounting helps internal users.. |
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Definition
| Accounting provides information to these users to help them improve the efficiency and effectiveness of the organization |
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| Typical questions asked by internal users |
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Definition
• What are the manufacturing expenses per unit of product? • What is the most profitable mix of services?
• How much do we have to sell to break-even?
• How much profit did we earn last month?
• Are we keeping our expenses under control? |
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Definition
| beliefs that differentiate right from wrong |
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| Ethics obligations of accountants |
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Definition
• Maintain a high level of professional competence
• Treat sensitive information as confidential
• Exercise due care and professional judgment
• Must not be associated with deception information |
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| Business Entity Principle |
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Definition
| Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner (separate financial records) |
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| Historical Cost Principle |
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Definition
| All transactions are recorded based on the actual cash amount received or paid; or in the absence of cash, the cash equivalent amount of the exchange is recorded |
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Term
| Revenue Recognition Principle |
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Definition
| Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged (measured by the cash plus the cash equivalent of any other assets received) |
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Definition
| Financial statements reflect the assumption that that business will continue operating instead of being closed or sold (assume that business will operate indefinitely) |
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Definition
| Expenses incurred to generate revenue are matched against revenue |
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Definition
| Financial statements prepared at least annually (likely not calendar end) |
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Definition
| No changes in chosen set of accounting alternatives from year to year |
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Term
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Definition
Transactions are expressed using units of money as the common denominator (and one currency)
Adjustments are not made for changes in exchange rates or inflation |
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Term
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Definition
Usually operated by the owner
• Easy to set up & gives you control over the business (no special legal requirements to start up this form of business, other than to file for a business license and register the business name)
• Relatively low start-up capital
• Owner receives any profits & suffers any losses |
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Term
| main disadvantage of a sole proprieotorship |
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Definition
Not a separate legal entity – meaning owner is personally liable for all debts of the business (a court can order an owner to sell personal belongings to pay a proprietorship’s debt)
• Unlimited liability is a main disadvantage of this form of business |
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Term
| sole proprietorship-income tax |
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Definition
| Since this is not a separate entity - proprietors pay personal income tax on any business profits (reported as part of the owners’ personal earnings) |
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Term
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Definition
• Operated by 2 or more owners who may bring unique skills or resources to the business
• As with a SP, easy to set up and gives you control over the business (no special legal requirements to start up a partnership, other than to register business name and obtain a business license)
• Relatively low start-up capital but more economic resources to initiate or expand business
• Wise to obtain a written / oral agreement indicating how profits and losses are to be shared
• Owners receive any profits & suffer any losses (owners are personally liable for all debts of the business – “unlimited liability”) |
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Definition
| No legal distinction b/w business as economic unit & owners, therefore, partners pay personal income tax on their respective share of business profits |
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Term
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Definition
Separate legal entity incorporated under prov. or fed. laws (entitles the corporation to conduct business with the rights, duties and responsibilities of a person)
• Responsible for its own acts and its own debts (can enter into its own contracts, can buy/own/sell property, can sue and be sued)
• Owned by investors who receive shares to indicate their ownership claim (can be an owner by investing small amounts of money) |
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Definition
| Shareholders are not personally liable for business debt (limited liability - risk of losing amount invested in shares only) *key reason by corporations can raise funds from shareholders who are not active in managing the business (much easier) |
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Term
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Definition
| Corporations pay income tax on any profits as a separate legal entity (file its own tax return and pay tax on profits separately from its owners) |
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Definition
Owned by numerous, often thousands, of shareholders
• Shares are publicly traded on an organized stock exchange (i.e. TSE)
• Distribute financial statements to shareholders, creditors, other interested parties & general public upon request (i.e. Loblaw) |
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Definition
• Do not issue publicly traded shares
• Almost never distribute financial statements publicly (i.e. Sobeys, McCain Foods) |
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Term
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Definition
| (Assets = Liabilities + Equity) |
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Definition
| • Properties or economic resources owned by a business |
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Definition
| • Debts or obligations of the business |
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Definition
| • Owner(s) claim on the assets of the business |
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Definition
| • Resources whose benefits will be realized within 1 year |
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Term
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Definition
Resources whose benefits will be realized over more than 1 year
Divided into 3 main groupings:
1. Long-term investments
2. Property, plant, and equipment
3. Intangible assets |
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Term
| non current assets are divided into 3 main groups |
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Definition
Divided into 3 main groupings:
1. Long-term investments
2. Property, plant, and equipment
3. Intangible assets |
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Term
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Definition
• Assets expected to be converted into cash or that will be sold or that will be used within 1 year of the balance sheet date
• Listed in order of liquidity on balance sheet |
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Term
| common types of current assets |
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Definition
• Cash
• Receivables (i.e.. accounts receivable, notes receivable, interest receivable – all converted into cash within the year)
• Supplies • Short-terminvestments(e.g.debtorequitysecurities) • Inventory • Prepaid expenses |
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Term
| Common types of non-current assets |
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Definition
Long-Term Investments
• corporate & government notes, corporate bonds, asset-backed securities, equity (shares) in other businesses, real estate
Property, Plant, and Equipment
• land, buildings, equipment, furniture
Intangible Assets
• Patents. copyrights, trademarks & trade names, licenses |
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Term
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Definition
Current Liabilities:
• Obligations that are to be paid within the coming year • Often listed in order of liquidity (i.e. those expected to be paid first are
listed first) or they’re arranged according to internal company custom
• Users of statements look carefully at the relationship between assets & current liabilities to evaluate business’ ability to pay its current debt |
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Term
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Definition
Current Liabilities:
• Obligations that are to be paid within the coming year • Often listed in order of liquidity (i.e. those expected to be paid first are
listed first) or they’re arranged according to internal company custom
• Users of statements look carefully at the relationship between assets & current liabilities to evaluate business’ ability to pay its current debt |
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Term
| Examples Of current liabilities |
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Definition
Accounts payable
Income & sales tax payable
Interest payable
Unearned or deferred revenue
Current maturities of long-term debt
Salaries / wages payable
Bank loans or notes payable |
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Term
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Definition
| Financial obligations expected to be paid after 1 year |
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Term
| examples of non current liabilities |
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Definition
Mortgages payable
Long-term notes payable
Lease or pension liabilities
Future income taxes payable |
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Term
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Definition
Called Owner’s Equity for a Sole Proprietorship or Partnership
Called Shareholders’ Equity for a Corporation
Represents the ‘claim’ on total assets |
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Term
| Equity will increase for 2 reasons: |
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Definition
1.If the owner puts their own money into the business
2. If the business earns money (revenue) |
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| Equity will decrease for 2 reasons: |
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Definition
1.If money is distributed to the owner(s)
2.If the business spends money (expense) |
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Term
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Definition
Any income source earned by the business
Common revenue accounts can be identified by having a key word in their account name (i.e. income earned, sales, revenue, etc.) |
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Term
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Definition
| Any outlay of cash for something required to run the business |
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Term
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Definition
The income statement reports:
Revenues of the organization Expenses (costs incurred in earning the revenues)
Net income or loss
The income statement covers a period of time |
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Definition
The balance sheet reports:
• Assets
• Liabilities
• Equity
•Reported at a point in time (snapshot) |
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Term
| Financial statements must be completed in the following order: |
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Definition
1. Income Statement is done first because the earnings figure is required for the second statement
2. Statement of Retained Earnings (SRE) uses the earnings from I/S to determine the ending retained earnings (equity)
3. Balance Sheet uses the ending retained earnings to calculate the owner’s equity section of that report |
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Term
| Not all events are recorded and reported as accounting transactions |
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Definition
| Only those that change assets, liabilities or shareholders’ equity |
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Term
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Definition
| – entering an amount on the left side |
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Term
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Definition
| entering an amount on the right side |
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Term
| If debits exceed credits |
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Definition
| -> account has a DEBIT BALANCE |
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Term
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Definition
| -> account has a CREDIT BALANCE |
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Term
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Definition
| only one that adheres to accounting standards |
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Term
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Definition
| ...per CRA, only allowed for Farming and Fishing |
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Term
| accrual basis of accounting |
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Definition
Transactions affecting a company’s financial statements are recorded in the period the event occurs, rather than when the cash is received or paid
Revenue is recorded when earned (not just when received)
Expenses are recorded when goods or services are consumed (not just when paid) |
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Term
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Definition
Transactions are recorded when the cash is received or
paid
Revenue is recorded when received Expenses are recorded only when cash is paid |
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Term
| Reasons not to use cash basis accounting |
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Definition
Can lead to misleading financial statements
* Revenue and expenses can be manipulated by timing the receipt and/or payment of cash (increase/decrease profit)
• Can cause peaks & valleys in your earnings (forcing you into higher tax brackets in some years)
• Can cause confusion over what your real earnings are (since you’re not reporting outstanding debt or receivables or true value of depreciable assets) |
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Term
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Definition
A receivable is recorded when service is provided on account
A receivable is reduced when cash is collected |
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Term
What happens when a customer doesn’t pay by the due
date? |
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Definition
OInterest charge may be added to the balance due
Some accounts become uncollectible |
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Term
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Definition
This is how we recognize the costs associated with using the asset over time
Systematic allocation of the cost of the asset over it’s useful life |
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Term
| Straight line depreciation |
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Definition
A delivery van was bought on Jan 1, 2012:
Cost = $33,000
Estimated residual value = $3,000
Estimated useful life = 5 years
Estimated useful life = 100,000 km
Depreciable amount = cost – residual value = $33,000 – 3,000
= $30,000
Depreciation expense = depreciable amount ÷ useful life (years)
= $30,000 ÷ 5 years
= $6,000 per year |
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Term
| diminishing -Balance depreciation |
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Definition
Depreciation is calculated based on the asset’s carrying amount, which gets smaller each year as accumulated depreciation increases
Ignores any residual value for depreciation expense (but we still need to make sure the asset isn’t depreciated below this amount) |
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Term
| Units-of-Production Depreciation |
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Definition
Useful life is expressed in terms of total units of production or activity expected from the asset
i.e. units produced or machine-hours worked
Depreciable amount
= cost – residual value = $33,000 – 3,000
= $30,000
Depreciation expense = depreciable amount ÷ useful life (km)
= $30,000 ÷ 100,000 km
= $0.30 per km
If total km for the year = 15,000 km Depreciation expense = $0.30 x 15,000 = $4,500 |
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Term
| A perpetual inventory system |
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Definition
keeps a running tally of inventory levels by recording sales and purchase transactions as they occur
• In other words - inventory is updated after each sale or purchase |
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Term
| A periodic inventory system |
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Definition
does not keep a running tally of inventory levels but instead only records purchases made (additions to inventory, not deductions or sales)
• Inventory is updated at the end of the period based on a physical count
• Physical count must occur to determine both the ending inventory and likewise, the cost of goods sold
• Shrinkage cannot be determined |
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Term
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Definition
| Items in inventory include all goods owned by a company and held for sale...even if those goods are not necessarily physically held by the company |
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Term
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Definition
| At the end of the period, there may be some goods in transit (either being shipped by you to a customer or being shipped to you by a supplier) |
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Term
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Definition
ownership of the goods passes to the buyer as
soon as the goods are shipped from the seller |
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Term
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Definition
| ownership of the goods remains with the seller until the goods reach the buyer |
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Term
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Definition
| The ownership of consigned goods remains with the owner not the holder of the goods |
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Term
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Definition
| • Goods taken home “on approval” by the customer are still owned by the company |
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Term
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Definition
This method can be used when items can be directly identified with a specific purchase and its invoice
Common examples: automobiles, horses, art, custom furniture |
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Term
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Definition
Assumes that the first item purchased is the first item sold
When a sale occurs:
•The earliest units purchased are removed from the balance sheet and charged to Cost of Goods Sold (COGS) on the Income statement
• The cost of the most recent purchases remain in inventory |
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Term
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Definition
Under this method, the costs of all inventory are averaged together
Average cost per unit: Cost of goods available for sale
Number of units available for sale
Unlike FIFO or Specific Identification, this is the only method that will produce different results depending on whether you are using a perpetual or periodic inventory system |
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Term
| Under a perpetual inventory system |
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Definition
| a new weighted average is calculated after each purchase |
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Term
| Under a periodic inventory system |
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Definition
| only one average is calculated at the end of the period |
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Term
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Definition
| Shows where a company obtained cash during a period of time & how that cash was used |
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Term
| Balance Sheet (Statement of Financial Position): |
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Definition
Presents a picture of what a company owns (assets), what it owes (liabilities), &
its net worth (owner’s equity) at a specific point in time |
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Term
| Balance Sheet (Statement of Financial Position): |
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Definition
Presents a picture of what a company owns (assets), what it owes (liabilities), &
its net worth (owner’s equity) at a specific point in time |
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Term
| Statement of Retained Earnings (Statement of Owner’s Equity): |
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Definition
| • Indicates the portion of a company’s earnings that was distributed to the owners of a company & how much was retained in the business to allow for future growth |
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| Income Statement (Statement of Earnings): • |
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Definition
Reports revenue & expenses to show how successfully a company performed
during a period of time |
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Term
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Definition
| the order in which they are expected to be converted into cash) |
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Term
| voluntary changes in accounting policy |
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Definition
| allowed when a new policy would result in more reliable and relevant information |
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Term
| Mandatory change in accounting policy |
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Definition
| required by standard setters |
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Term
| Changes in accounting policy |
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Definition
• occurs when the accounting policy used in the current year
changes from the one used previously • could be either a voluntary change or mandatory |
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Term
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Definition
| Used to evaluate the efficiency or condition of a particular aspect of a company’s operations |
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Term
| 3 main categories / types of ratios: |
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Definition
| 1. Liquidity 2. Solvency 3. Profitability |
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Term
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Definition
| measures the short-term ability of a company to pay its maturing debt and meet any unexpected cash needs |
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Definition
| measures the ability of a company to survive over a long period of time |
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Definition
| measures the earnings or operating success of a company for a given period of time |
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Term
| limitations of financial analysis |
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Definition
• Alternative / changes to accounting policies • Professional judgement (estimates)
• Diversification of company (comparable?)
• Inflation
• Economic factors |
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Term
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Definition
| means having the necessary policies and procedures in place in order to do all of these things |
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Term
| Control activities might include: |
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Definition
Establishing roles & responsibilities for each person
Maintaining good records / proper documentation Ensuring authorization of certain transactions and activities
Controlling physical access to goods / technological controls
Segregation of duties Insuring assets / bonding key employees
Performing regular independent reviews |
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Term
| limitations of internal control |
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Definition
Human Error
Negligence, fatigue, confusion
2) Fraud
Intent to defeat internal controls for personal gain (independent or collusion)
3) Cost vs. Benefits
Costs cannot exceed the benefits Size matters |
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Term
| controlling your cash- general guidelines |
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Definition
General Guidelines:
Separate handling of cash from the recordkeeping of cash
Consider more than 1 signature on authorization
Deposit cash receipts daily – or even better, accept payment via cheque or EFT
Make cash disbursements by cheque or EFT |
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Term
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Definition
Report prepared periodically to explain the difference between the cash balance reported on the bank statement and the cash balance reported in the company’s books
It reconciles these two balances These 2 totals MUST agree! |
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Term
| why dont the bank records and yours match ? |
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Definition
There is a difference between these two sets of records because...
1) Time lag between when a cheque is written and when it is cashed
2) Time lag between when receipts are recorded the company and when they are logged and recorded by the bank
3) Fees charged or interest paid by the bank may not be known to the company until posted by the bank
4) Potential for errors by either party in recording |
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