Business Decisions, Financial Accounting, and the Accounting Cycle

Vocabulary flashcards covering core introductory financial accounting concepts, GAAP/IFRS guidelines, accounting cycle steps, transaction recording, and period-end adjustment procedures.

Sole Proprietorship

A form of business owned by 1 individual where all profits or losses become part of the taxable income of the owner, who is personally liable for all debts of the business.

Partnership

A form of business where the profits, taxes, and legal liability are the responsibility of 2 or more owners instead of just one, as determined by a partnership agreement.

Corporation

A form of business that is a separate entity from both a legal and accounting perspective, meaning the corporation, not its owners, is legally responsible for its own taxes and debts.

Limited Liability Partnership (LLP)

A partnership where the partners have limited personal responsibility for the mistakes or debts caused by other partners.

Accounting

A system of analyzing, recording, and summarizing the results of a business's activities and then reporting the results to decision makers.

Managerial Accounting Reports

Financial reports used inside the company that include detailed financial plans and reports about operating performance.

Financial Accounting Reports

Reports known as financial statements that are used outside the company by creditors, investors, directors, and government.

Accounting System Flow

The system mechanism that processes operating, investing, and financing activities into financial reports for external decision makers and managerial reports for internal decision makers.

Basic Accounting Equation

The relationship between company resources and claims: $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$.

Assets

Economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future.

Liabilities

Measurable amounts that a company owes to creditors.

Shareholders' Equity

The owners' claims on the business, which arise from contributed capital and retained earnings.

Contributed Capital

Money and resources that owners put directly into the company in exchange for its shares.

Retained Earnings

Cumulative profits that the business has earned and kept over time.

Income Statement

A financial statement measuring operating performance by reporting revenues, expenses, and net income ($\text{Net Income} = \text{Revenues} - \text{Expenses}$).

Revenues

Amounts earned by selling goods or services to customers.

Expenses

All the costs of doing business that are necessary to generate revenue.

Net Income

The profit earned during a period, calculated as $\text{Revenues} - \text{Expenses}$.

Dividends

Payments a company gives to its shareholders, usually distributed from its profits.

Statement of Retained Earnings

A report detailing the period's beginning retained earnings balance, added net income (or subtracted net loss), and subtracted dividends to find ending retained earnings.

Balance Sheet

A financial report stating the amount of a business's assets, liabilities, and shareholders' equity at a specific point in time.

Statement of Cash Flows

A financial statement divided into operating, investing, and financing activities that details cash inflows and outflows for the accounting period.

Operating Activities

Cash flows and business activities that arise directly from running the core operations of the business to earn profit.

Investing Activities

Cash flows that arise from buying and selling long-lived productive resources, purchasing investments, or lending to others.

Financing Activities

Cash flows including borrowing from banks, repaying bank loans, receiving cash from shareholders for shares, and paying dividends to shareholders.

Canadian Generally Accepted Accounting Principles (GAAP)

The underlying rules and principles of financial accounting in Canada.

Accounting Standards Board (AcSB)

An independent body supported by CPA Canada that develops and establishes guidelines and standards for financial accounting and reporting in Canada.

International Financial Reporting Standards (IFRS)

Accounting principles required in Canada for publicly accountable profit-oriented enterprises.

Accounting Standards for Private Enterprises (ASPE)

Accounting rules that Canadian private enterprises whose shares are not publicly traded can choose to follow.

Financial Reporting Standards in Canada Diagram

Visual structure of Canadian GAAP showing that publicly accountable enterprises must follow IFRS, whereas private enterprises follow ASPE or may elect to use IFRS.

Equity Financing

Money provided by shareholders when a business issues shares, which the business is not obligated to repay.

Debt Financing

Money borrowed by the business (such as a bank loan) that must be repaid.

Transaction

An event or activity that has a direct economic effect on the company's assets, liabilities, or shareholders' equity.

Accounting Cycle Steps Diagram

The 5-step systematic sequence used to record and report activities: 1. Analyze, 2. Record, 3. Summarize, 4. Prepare Trial Balance, and 5. Report Financial Statements.

Chart of Accounts

A list of a company's account names and reference numbers.

Journal

An accounting record that documents the financial effects of each day's transactions.

Ledger

An accounting record that summarizes and organizes the effects of journal entries for each account.

Debit and Credit Rules Matrix

The double-entry framework where Debits increase Assets and decrease Liabilities/Equity, while Credits decrease Assets and increase Liabilities/Equity.

Trial Balance

An internal report listing all accounts and their T-account balances to check that debits equal credits before preparing financial statements.

Current Ratio

A ratio measuring whether a company has enough current assets to pay its current liabilities, calculated as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$.

Cost Principle

The rule stating that assets and liabilities are initially recorded at their cash equivalent value on the transaction date.

Cash Basis Accounting

An accounting method where revenues and expenses are reported based on when cash is received or paid.

Accrual Basis Accounting

An accounting method that reports revenues and expenses when the business activity actually occurs, regardless of cash movement.

Revenue Recognition Principle

The rule requiring revenue to be recognized and recorded when it is earned.

Expense Recognition Principle (Matching)

The accounting principle requiring expenses to be recognized in the same period as the revenues they helped generate.

Deferred Revenue

A liability account recorded when a business receives cash from a customer before providing the underlying goods or services.

Net Profit Margin

A profitability metric showing how much profit a company earns from each dollar of revenue: $\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}}$.

Adjusting Entries

Entries made at the end of an accounting period to make sure accounts have correct balances before financial statements are prepared.

Deferral Adjustments

Adjustments made when cash was paid or received prior to the recognition of the related expense or revenue.

Accrual Adjustments

Adjustments needed when revenue has been earned or an expense incurred, but cash has not yet been received or paid.

Depreciation

The process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used.

Accumulated Depreciation

A contra-asset account that offsets or reduces the recorded value of equipment shown on the balance sheet.

Permanent Accounts

Balance sheet accounts whose ending balances carry forward to the next accounting year.

Temporary Accounts

Revenue, expense, and dividend accounts whose balances are reset to $0$ at the end of each accounting year.