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Student Centre Fundamental Accounting Principles
10th Canadian Edition
Larson / Jensen / Carroll

Student Centre

Chapter 2: Financial Statements and Accounting Transactions

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    Key Terms and Glossary

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    Accounting equation: A description of the relationship between a company's assets, liabilities, and equity; expressed as Assets = Liabilities + Owner's Equity; also called the balance sheet equation.

    Accounts payable: A liability created by buying goods or services on credit.

    Accounts receivable: An asset created by selling products or services on credit. Amounts due from customers for credit sales.

    AcSB (Accounting Standards Board): The authoritative committee that identifies generally accepted accounting standards.

    ASB (Auditing Standards Board): The authoritative committee that identifies generally accepted auditing standards.

    Assets: Properties or economic resources owned by the business; more precisely, resources with an ability to provide future benefits to the business.

    Balance sheet: A financial statement that reports the financial position of a business at a point in time; lists the types and dollar amounts of assets, liabilities, and equity as of a specific date; also called the statement of financial position.

    Balance sheet equation: Another name for the accounting equation.

    Business entity principle: The principle that requires every business to be accounted for separately from its owner or owners; based on the goal of providing relevant information about each business to users.

    Business transaction: An economic event that changes the financial position of an organization; often takes the form of an exchange of economic consideration (such as goods, services, money, or rights to collect money) between two parties.

    Calendar year: An accounting year that begins January 1 and ends December 31

    CICA Handbook: The publications of the CICA that establishes generally accepted accounting principles in Canada.

    Continuing-concern principle: Another name for the going-concern principle.

    Cost principle: The accounting principle that requires financial statement information to be based on actual costs incurred in business transactions; it requires assets and services to be recorded initially at the cash or cash equivalent amount given in exchange.

    Creditors: Individuals or organizations entitled to receive payments from a company.

    Debtors: Individuals or organizations that owe amounts to a business.

    Dividends: Distributions of assets by a corporation to its owners.

    Economic entity principle: See Business entity principle.

    Equity: The owner's claim on the assets of a business; more precisely, the residual interest in the assets of an entity that remains after deducting its liabilities; also called net assets.

    Expenses: The costs incurred to earn revenues (or sales). Outflows or the using up of assets as a result of the major or central operations of a business; also, liabilities may be increased.

    Financial statements: The most important products of accounting; include the balance sheet, income statement, statement of changes in owner's equity, and the statement of cash flows.

    Fiscal year: A one-year reporting period.

    GAAP (Generally accepted accounting principles): The rules adopted by the accounting profession that make up acceptable accounting practices for the preparation of financial statements.

    GAAS (Generally accepted auditing standards): Rules adopted by the accounting profession as guides for conducting audits of financial statements.

    Going-concern principle: The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue; also called continuing-concern principle.

    IASC: International Accounting Standards Committee; a committee that attempts to create more harmony among the accounting practices of different countries by identifying preferred practices and encouraging their worldwide acceptance.

    Income statement: The financial statement that shows whether the business earned a profit by subtracting expenses from revenues; it lists the types and amounts of revenues earned and expenses incurred by a business over a period of time.

    Liabilities: The obligations of a business; claims by others that will reduce the future assets of a business or require future services or products.

    Monetary unit principle: The expression of transactions and events in money units; examples include units such as the dollar, peso, and pound sterling.

    Natural business year: A 12-month period that ends when a company's sales activities are at their lowest point.

    Net assets: Another name for equity.

    Net income: The amount a business earns after subtracting all expenses incurred to generate revenues; also called profit or earnings.

    Net loss: Arises when total expenses are more than revenues (sales). The excess of expenses over revenues for a period.

    Notes payable: A liability expressed by a written promise to make a future payment at a specific time.

    Objectivity principle: The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence rather than someone's opinion; objectivity adds to the reliability, verifiability, and usefulness of accounting information.

    Owner Investments: The transfer of an owner's personal assets to their business.

    Owner withdrawals: See withdrawals.

    Realization principle: See Revenue recognition principle.

    Revenue recognition principle: Provides guidance on when revenue should be reflected on the income statement; the rule includes three guidelines (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash, and (3) measures the amount of revenue as the cash plus the cash equivalent value of any noncash assets received from customers in exchange for goods or services.

    Revenues: The amounts earned from selling products or services; also called sales. Inflows of assets received in exchange for goods or services provided to customers as part of the major or primary operations of the business; may occur as inflows of assets or decreases in liabilities.

    Statement of cash flows: A financial statement that describes the sources and uses of cash for a reporting period, i.e., where a company's cash came from (receipts) and where it went during the period (payments); the cash flows are arranged by an organization's major activities: operating, investing, and financing activities.

    Statement of financial position: Another name for the balance sheet.

    Statement of owner's equity: Reports the changes in equity over the reporting period; beginning equity is adjusted for increases such as owner investment or net income and for decreases such as owner withdrawals or a net loss.

    Withdrawal: The distribution of cash or other assets from a proprietorship or partnership to its owner or owners.


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