Accounting Principles and Methods Flashcards

Practice flashcards covering essential accounting principles, standards like ASPE and IFRS, and the differences between accrual and cash basis accounting.

Business Entity Principle

The principle that each business is a separate unit or entity, meaning financial data must be kept separate from the owner's personal data and other businesses owned by the same person.

Drawings

Recorded when a business owner uses company funds for personal expenses, which reduces the owner's equity under the Business Entity Principle.

Cost Principle

A principle under ASPE requiring that an asset be recorded at the actual paid price at the time of purchase, rather than its current market worth.

ASPE

Commonly used by private Canadian businesses, these Accounting Standards for Private Enterprises require assets like land bought for $50,000$ to remain on the balance sheet at that historical cost even if the value increases to $1,000,000$.

Fair Value Principle

The principle under IFRS that allows the balance sheet to show the current market value of an asset, providing investors with an accurate picture of what assets are worth right now.

IFRS

International Financial Reporting Standards, used by public companies on the stock market, which allows for the adjustment of certain assets and investments to their current market value.

Time Period Principle

The requirement that the time blocks (monthly, quarterly, or annually) used to prepare financial statements be defined and consistent to allow for useful comparisons over time.

Matching Principle

The bedrock of accrual accounting that requires costs recorded in expense accounts to be matched with the revenue generated during that same accounting period.

Revenue Recognition Principle

The principle stating that revenue is recognized and recorded at the time it is earned, regardless of when the cash is physically received or transferred.

Principle of Objectivity

The requirement that accounting evidence be based on verifiable, bias-free evidence such as receipts, invoices, bank statements, or cash register tapes.

Principle of Materiality

The concept that information significant enough to influence the decisions of users of financial statements (such as a large lawsuit settlement) must be included, while insignificant items (like a minor cost for a calculator) can be grouped as general expenses.

Principle of Conservatism

An accounting guideline to choose the option least likely to overstate assets or revenue and least likely to understate expenses or liabilities; summarized as "anticipate no profits, but provide for all possible losses."

Accrual Basis of Accounting Method

A method required by law for most corporations where revenue is recorded when earned and expenses are recorded when incurred, providing an accurate picture of profitability regardless of cash movement.

Cash Basis of Accounting Method

A simplified accounting method where revenue is recorded only when cash is received and expenses are recorded only when they are actually paid, often used for personal bank accounts but generally not for formal business statements.