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Business (Economic) Entity

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Finance

19 Terms

1

Business (Economic) Entity

business accounting records kept separate from owner personal records.

ex) personal assets aren't on balance sheet

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2

Cost Principle (historical)

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

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3

Conservatism Principle

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

(not overstate income/assets)

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4

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)

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5

Full Disclosure

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

(ex: notes in financial statements)

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6

Going Concern Assumption

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

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7

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 $)

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8

Matching

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

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9

Objectivity

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

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

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10

Revenue Recognition

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

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11

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)

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12

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)

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13

Characteristics of Accounting Information

-understandability -relevance -reliability -comparability

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14

Understandability

  • info = understandable to be useful

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

  • statements prepared under assumptions

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15

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)

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16

Reliability

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

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17

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)

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18

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)

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19

Accounting in Industry

Provide accounting services for own company (internal reporting).

Annual reports (external reporting)

govt, private companies, non-profit.

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