Test #1 Flashcards
What is accounting?
Information system that analyzes, records, summarizes and communicates the results of a business’ activities
Financial Accounting
reports used outside the company by external users (financial statements
Management Accounting
reports used inside the company by internal users (detailed financial plans and reports about operating performance.
Internal users
- includes finance, marketing, human resources, production, company officers
- accounting information helps improve efficiency and effectiveness of planning, organizing and running companies
External Users
- creditors, investors/shareholders, customers, regulators
- accounting information used to determine credit, lending, ownership, compliance, performance
- accounting information is communicated to external users via financial statements.
Forms of Businesses
Sole proprietorship, partnership, corporation
Sole proprietorship
one owner, owner personally liable for business debts, owner taxed on profits, easy to set-up, common
Partnership
- more than one owner, partners personally liable for business debts, partners taxed on profits, easy to set up , common for professional practices
Corporation
one or more owners, owner(s) are NOT personally liable for business debts, separate legal entity, subject to many regulations, corporation taxed on profits, public or private.
Financial Statements
- a company’s primary means of communicating its finances
-transactions are recorded, classified, and summarized
-each statement provides different information but they are all linked together - Basic Accounting Equation : Assets= Liabilities +
Shareholders Equity
How to find net income
revenue-expenses= net income
Order of financial statements
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
Income Statemetn
presents revenue, expenses and profit/loss for a specific period of time
statement of retained earnings
summarizes the changes in shareholders’ equity for a specific period of time
-reports the way net income and the distribution or payment of dividends affected the financial position of the company during a period of time.
Balance Sheet
reports assets, liabilities and owner’s equity at a specific date.
Canadian Generally Accepted Accounting Principles (GAAP)
rules of accounting approved by the Canadian Institute of Chartered Accountants (CICA) for use in Canada
International Financial Reporting Standards
Rules of accounting created by Internal Accounting Standards Board (IASB) for international use
Accounting Standards for Private Enterprises (ASPE)
Rules of accounting for private enterprises
Unit of Measure
a business’s domestic currency is the appropriate unit of measure for it to use in its accounting
Separte entity
each business must be accounted for separately from its owner or any other economic entity.
Going Concern
a company will continue operating for a period of time sufficient to carry out its commitments, obligations, and objectives
time period
ongoing business activities will be divided up int periods of a year, quarter, month, week, etc.
Cost
transactions are recorded based on the actual cash amount received or paid (or cash equivalent in the absence of cash)
Revenue recognition
revenue must be recorded when it is earned, regardless or when cash or another asset is exchanged
Matching
When you recognized revenue, you should match related expenses with that revenue
full disclosure
should include all information in a business’ financial statements that would affect a reader’s understanding of those statements.
Ethics
- to assist with ensuring high standards of ethical behavior, common to have formal Standards of Conduct
- Ethical practices build trust, which promotes loyalty and long-term relationships with customers, suppliers, employees and investors
Chart of accounts
a list of all the accounts (names and corresponding account numbers) used to record the financial results in the accounting system
Journals
are used to record the effects of each financial transactin; organized by date
Ledgers
are used to summarize the effects of the journal entries on each account; organized by account
T-accounts
best representation of how each account is impacted (simplified version of a ledger account)
Current assests
are assets that twill be used up or converted to cash within 12 months
Current liabilities
are debts and obligations that will be paid, settled, or fulfilled within 12 months
Non-current (or long-term)
assets and liabilities are assets and liabilities that do not meet the definition of ‘current’
Current ration
shows whether current assets are sufficient to pay current liabilities
- a higher ratio means a better ability to pay
Current ratio= current assets / current liabilities
10,630/ 630= 16.9 (high ratio)
