Grade 11 Accounting Unit 1

Accounting Unit 1 - Terms & Significance

Accounting

Definition: Process of recording financial transactions relevant to a business. Includes summarizing, analyzing and reporting transactions to oversight agencies, regulators, and tax collection entities.

Significance: Helps track income and expenditures, provide investors, management, and government with financial information which can also be used in making business decisions.

Bookkeeping

Definition: Process of recording and organizing a business’s financial transactions, such as purchases, sales and payments

Significance: It’s significance includes providing accurate and organized financial records, budget creation, tax preparation, and financial management which are essential for a business to succeed and grow

Stakeholder

Definition: A person with an interest or concern in something

Significance: Their significance lies in their influence, as engaging stakeholders help build relationships, foster support, make informed decisions, and increase the chances of success

Accounting cycle

Definition: The recurring set of accounting procedures carried out during each fiscal period

Significance: ensures the accuracy, consistency, and reliability of financial statements by providing structured, standardized process for tracking all financial activities within a business

Generally Accepted Accounting Principles (GAAPs)

Definition: The ground rules and guidelines that everyone understands and follows. These rules are used by businesses in presenting financial information

Significance: It helps to ensure that financial statements are consistent and accurate

Economic Entity

Definition: Each business is distinct from its owner(s), and each business will also be considered separate from any other business

Significance: Its ensures transparency, making sure the business’s financial records are accurate, clear, and reliable, showing that the money is used for the company and not personal activities.

Time period assumption

Definition: The ongoing life of the business is divided into time periods. Time periods include fiscal years, semi-annual periods, quarters and months

Significance: It enables companies to prepare periodic financial statements. It makes measuring progress easier due to providing information for decision-making.

Cost principle

Definition: Dictates that assets and liabilities should be recorded at their original purchase price (historical cost) rather than their current market value.

Significance: Provides a stable, verifiable, and objective basis for recording assets.

Consistency principle

Definition: Businesses should apply the same accounting methods from one period to the next. If the business were to change methods, it must be properly disclosed

Significance: This is important for ensuring financial statements can be compared over time, helping people like investors and managers make precise decisions.

Objectivity principle

Definition: Accounting information must be based on facts with verifiable evidence, not personal opinions or bias.

Significance: Ensures financial information is unbiased and reliable for everyone (owners, investors, creditors, etc.)

Sole proprietorship

Definition: A sole proprietorship is a type of business owned and operated by a single individual. The owner is responsible for all aspects of the business.

Significance: Sole proprietorships are important because they are easy to set up and allow the owner to keep all profits

Partnership

Definition: Two or more individuals agree to share responsibilities, profits, and risks of running a company.

Significance: Partnerships allow people with different expertise to work together, which increases efficiency. Risks are also shared, so if the company does not do well, the losses are not pushed to one individual.

Corporation

Definition: A corporation is a business that is legally separate from its owners. It can own property, enter contracts, sue, and be sued independently of its shareholders.

Significance: Corporations are important because they provide limited liability to owners, meaning shareholders are not personally responsible for business debts.

Assets

Definition: Assets are resources owned by a company or individual that have a monetary value

Significance: They help generate income since they are used to operate the business. For companies, they are also indicators of a company’s financial health. For individuals, they provide shelter, grow in value, or pay for liabilities

Liabilities

Definition: Debts owned by a company to others, representing legal obligations that must be settled in the future.

Significance: It reveals a company’s financial obligations. They are crucial for assessing a company’s financial health and ability to repay debts. Provide creditors and investors with information useful for decision-making.

What are the four main areas of acounting?

Bookkeeping, Financial Accounting, Managerial Accounting, Tax Accounting

Full Disclosure Principle

A company is required to fully disclose whatever information they have available. If a company fails to do so, it can be very misleading & stakeholders may make decision based on half of the information needed.

Going Concern

Assumes that a business will continue to operate unless it is known that it will not. This assumption frees the reader of a balance sheet from worrying about the market values of assets & whether debts will have to be paid before they are due.

Monetary Unit

Only data that can be expressed in terms of a stable monetary unit is included in the accounting records. The monetary unit in Canada is the Canadian dollar. However, many companies around the world, including some Canadian companies, use the US dollar. For example, hockey players in Canada are paid in US dollars.