BAT4M Flashcards

Business (Economic) Entity

Business (Economic) Entity

business accounting records kept separate from owner personal records.

ex) personal assets aren't on balance sheet

Cost Principle (historical)

purchases/assets recorded at historical cost (purchase price paid) vs market value

Conservatism Principle

The method of representing financial info must result in showing lower valuation of assets & net income.

(not overstate income/assets)

Consistency

use of the same accounting principles and methods from year to year within a company

(ex: showing declining balance every year, not dwitch to straight line)

Full Disclosure

include all info affecting full understanding of financial statements in the statements

(ex: notes in financial statements)

Going Concern Assumption

Assumes that the entity will remain in operation indefinitely - financial reports prepped with this in mind

Materiality

any info that can materially affect (significant impact) decisions of financial statement users must be incl. in statements.

Some may be left out if considered immaterial by decision-makers. (ex: including $50 expense for statements reported in millions $)

Matching

expenses shown in period which they help earn revenue. Expenses are shown as they incur, not when paid.(accrual-based accounting)

Objectivity

accounting based on objective evidence (source document - receipt, invoice, cheque)

Where no objective evidence, business should get a third-party professional appraiser.

Revenue Recognition

revenue is recorded on the date earned, even if payment is received later.

Time Period

businesses must use the same fiscal year (accounting period) yearly to allow for yearly comparability.

(ex: fiscal year always Sept 1- Aug 31)

Monetary Unit Assumption

Only transaction data that can be expressed in an amount of money are included in financial statements.

use money as a method of valuations

Assumes stability of the dollar (not incl. inflation)

Characteristics of Accounting Information

-understandability -relevance -reliability -comparability

Understandability

• info = understandable to be useful

• assumed user understands accounting concepts/procedures & general economic conditions

• statements prepared under assumptions

Relevance

-relevant info used as basis for forcasts -confirms or corrects prior expectations -timely (available when decisions must be made - e.g. providing monthly, quarterly reports)

Reliability

-info is verifiable -true representation of business activities -neutral -conservative

Comparability

-accounting principles used consistently year to year -diff bus. using similar accounting principles more easily compared (i.e. why Cdn businesses switched to IFRS -Intl Financial Reporting Standards)

Public Accounting

work for accounting firm, provide acct. services for another company

Do auditing, tax, acquisitions & mergers, receivership, bankruptcy etc.

can be sm./med/lg. (Big 4: Deloitte, Ernst & Young, KPMG, PWC)

Accounting in Industry

Provide accounting services for own company (internal reporting).

Annual reports (external reporting)

govt, private companies, non-profit.