Accounting Chapter 1-4

Accounting

An information system that records and communicates financial information to users.

Internal Users

Individuals who manage companies, not-for-profit, and government organizations, including company officers and managers.

External Users

Individuals who do not work for the company, such as investors, lenders, customers, and regulators.

Proprietorship

A business owned by one person with limited life and unlimited liability, where income tax is paid by the owner.

Partnership

A business owned by two or more individuals with limited life and unlimited liability, where income tax is paid by each partner.

Corporations

A separate legal entity owned by shareholders with unlimited life and limited liability, which pays income tax.

IFRS

International Financial Reporting Standards used by publicly traded corporations for financial statements.

ASPE

Accounting Standards for Private Enterprises.

Net Income (Loss)

The result of revenue minus expenses.

Statement of Changes in Equity

Used to monitor dividend declaration practices and payments.

Statement of Financial Position

Used by creditors, managers, lenders, and investors to assess financial health.

Statement of Cash Flows

Shows cash sources, uses, and changes during a period.

Financing Activity

Involves raising money through debt or equity financing.

Investing Activity

Involves buying or selling property to run a business.

Operating Activity

Day-to-day expenses related to selling products/services and paying operating expenses.

Order of Financial Statements

Statement of income, changes in equity, financial position, and cash flow.

Debit

A normal balance for expenses, assets, and dividends.

Deferred Revenue

Prepaid income classified as a current liability.

Prepaid Rent

An asset representing rent paid in advance.

Salaries Payable

A liability representing salaries owed to employees.

Depreciation Concept

Cost of capital assets recorded over their useful life.

Capital Asset

Long-lasting assets like equipment and buildings, excluding land.

Current Assets

Assets that can be converted to cash within a year.

Non-Current Assets

Assets that last longer than a year and are not intended for sale.

Intangible Assets

Non-physical assets with significant future value.

Non-Current Liabilities

Obligations due after one year.

Current Liabilities

Obligations due within one year.

Dividends Declared

Classified as retained earnings.

Accumulated Depreciation

Classified as property, plant, and equipment (PPE).

Mortgage Payable

A non-current liability due in 20 years.

Patents

Classified as an intangible asset.

Relevance

Information with predictive and confirmatory value.

Faithful Representation

Information that is complete, neutral, and free of material error.

Verifiability

The ability to confirm information through audits.

Neutrality

The quality of not favoring one position over another.

Understandability

Information that is comprehensible to informed users.

Predictive Value

Information that helps forecast future income.

Comparability

Similar companies applying the same accounting principles.

Completeness

Information that includes all important details.

Cost Constraint

The value of information must exceed the cost of providing it.

Confirmatory Value

Information that confirms or corrects prior expectations.

Timeliness

Information available before it loses its influence on decisions.

Free from Material Error

A component of faithful representation.

Materiality

Allows insignificant items not to be disclosed.

Assets and Liabilities

Found on the Statement of Financial Position.

Shareholders Equity

Found on the Statement of Financial Position and changes in equity.

Revenue and Expenses

Found on the Statement of Income.

Revenue Recognition Rule #1

Revenue is recognized when services are performed or goods delivered.

Expense Recognition Rule #2

Expenses are recognized when incurred, regardless of cash payment.

Depreciation in Adjusting Entries

Debit depreciation expense, credit accumulated depreciation.

Correcting Errors in Adjusting Entries

Identify the correct account and record it correctly.

Income Tax Expense

Classified as income tax payable.

Interest Expense

Classified as interest payable.

Salaries Expense

Classified as salaries payable.

Utilities Expense

Classified as accounts payable.

Adjusting Entries

Always note the date and frequency.

Post-Closing Trial Balance Order

Revenue to income summary, expenses to income summary, income summary to retained earnings, dividends to retained earnings.

Temporary Accounts

Include all expenses, dividends declared, and revenue.

Going Concern Assumption

Assumes a business will continue operating in the foreseeable future.

Cost Constraint

Ensures financial reporting value exceeds the cost of providing it.

Accrual Basis Accounting

Revenue is recorded when event occurs, not when cash is received or paid. Revenue is recorded when earned, even if cash is not received. Expense are recorded when goods or service is provides, not when cash is paid.

Cash Basis Accounting

Revenue is recorded when cash is received, expense are recorded when cash is paid. This can lead to misinformation

Revenue Recognition under IFRS

Revenue is recognized when a company satisfies a performance obligation. 1. Identify the contract with the client or customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contracts. 5. Recognize revenue when (or as) the company satisfies the performance obligation

Under ASPE, revenue can be recognized when

Services have been provided or the risks and rewards of ownership of the goods have been transferred to the buyer, Revenue can be reliably measured, Collection is reasonably certain

Carrying Amount

Cost - accumulated depreciation = Carrying amount. The carrying amount is what goes on the Statement of Financial Position.

IFRS used the term depreciation

yes

ASPE uses the term amortization

yes

IFRS requires a statement in changes in equity

yes

ASPE requires a statement of changes in equity

no, it requires a statement of retained earnings instead

Accounting Equation

Assets = Liabilities + Equity. Must always balance.

Step one of closing entry’s

Revenue into income summary (debit revenue, credit income summary)

Step two of closing entry’s

Expenses into income summary (debit income summary, credit expense)

Step three of closing entry’s

Income summary into retained earnings (debit income summary, credit retained earnings)

Step four of closing entry’s

Dividends into retained earnings (debit retained earnings, credit dividends declared)

What are temporary accounts?

Dividends declared, expense and revenue (fees earned)

What financial statement(s) is Retained Earnings on?

SFP, SCE

What financial statement(s) is Common Shares on?

SFP, SCE

Long-term debt is classified as:

Non-current liability