Accounting Key Terms: A to D for Canadian Exams

18.1 Key Accounting Terms A - D

Understanding key accounting terms is essential for anyone preparing for Canadian accounting exams. This section provides comprehensive definitions and explanations of accounting terms starting with the letters A through D. These terms form the foundation of accounting knowledge and are crucial for both exams and professional practice.

A

Accrual Accounting

Accrual accounting is a method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid. This method provides a more accurate picture of a company’s financial position and performance over a specific period.

• Example: A company delivers goods in December but receives payment in January. Under accrual accounting, the revenue is recorded in December.

Assets

Assets are resources owned by a company that have economic value and can provide future benefits. They are classified into current and non-current assets.

• Current Assets: Expected to be converted into cash or used within one year (e.g., cash, inventory).
• Non-Current Assets: Long-term investments not expected to be converted into cash within a year (e.g., property, equipment).

Amortization

Amortization refers to the gradual reduction of an intangible asset’s value over time. It is similar to depreciation but applies to intangible assets like patents or copyrights.

• Example: A company amortizes a patent over its useful life of 10 years.

Accounts Payable

Accounts payable are short-term liabilities representing amounts a company owes to suppliers for goods and services purchased on credit.

• Example: A company receives office supplies and agrees to pay the supplier within 30 days.

Accounts Receivable

Accounts receivable are amounts owed to a company by customers for goods or services provided on credit. They are considered current assets on the balance sheet.

• Example: A customer purchases goods on credit, and the amount owed is recorded as accounts receivable.

Accrued Liabilities

Accrued liabilities are expenses that have been incurred but not yet paid. They are recorded in the financial statements to reflect the company’s obligations.

• Example: Salaries payable at the end of the month for work already performed.

Audit

An audit is an independent examination of financial information to provide assurance that financial statements are accurate and comply with accounting standards.

• Example: A public company undergoes an annual audit by an external auditor to verify its financial statements.

B

Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It includes assets, liabilities, and equity.

• Equation: Assets = Liabilities + Equity

Bookkeeping

Bookkeeping involves recording financial transactions systematically. It is the foundation of the accounting process and includes tasks such as recording sales, purchases, receipts, and payments.

• Example: A bookkeeper records daily sales transactions in the accounting system.

Budget

A budget is a financial plan that estimates income and expenses over a specific period. It helps organizations allocate resources and monitor financial performance.

• Example: A company prepares an annual budget to plan for expected revenue and expenses.

Bond

A bond is a fixed-income instrument representing a loan made by an investor to a borrower. Bonds are used by companies, municipalities, and governments to finance projects and operations.

• Example: A corporation issues bonds to raise capital for expansion.

Break-Even Point

The break-even point is the level of sales at which total revenues equal total costs, resulting in neither profit nor loss.

• Calculation: Break-Even Point = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

Bad Debt

Bad debt refers to accounts receivable that are unlikely to be collected. Companies estimate bad debts and record them as an expense.

• Example: A company writes off a customer’s account as bad debt after repeated collection attempts fail.

C

Cash Flow Statement

A cash flow statement is a financial report that shows the inflows and outflows of cash within a company over a specific period. It is divided into operating, investing, and financing activities.

• Purpose: To provide insights into a company’s liquidity and financial health.

Capital

Capital refers to financial assets or resources that a company uses to fund its operations and growth. It includes both equity and debt.

• Example: A business raises capital through equity financing by issuing shares.

Cost of Goods Sold (COGS)

COGS represents the direct costs of producing goods sold by a company. It includes materials, labor, and manufacturing overhead.

• Calculation: COGS = Beginning Inventory + Purchases - Ending Inventory

Credit

In accounting, credit refers to an entry on the right side of an account that increases liabilities, equity, or revenue, or decreases assets and expenses.

• Example: Recording a sale on credit increases accounts receivable and revenue.

Current Ratio

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations with its current assets.

• Calculation: Current Ratio = Current Assets / Current Liabilities

Contingent Liability

A contingent liability is a potential liability that may occur depending on the outcome of a future event.

• Example: A company faces a lawsuit, and the potential financial impact is disclosed as a contingent liability.

D

Depreciation

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It reflects the wear and tear of the asset.

• Methods: Straight-line, declining balance, and units of production.

Dividend

A dividend is a distribution of a portion of a company’s earnings to its shareholders. Dividends can be in the form of cash, stock, or property.

• Example: A company declares a cash dividend of $1 per share to its shareholders.

Double-Entry Bookkeeping

Double-entry bookkeeping is an accounting system where every transaction affects at least two accounts, with debits equaling credits.

• Principle: For every debit entry, there must be a corresponding credit entry.

Deferred Revenue

Deferred revenue is money received by a company for goods or services yet to be delivered. It is recorded as a liability until the service is provided.

• Example: A software company receives payment for a one-year subscription in advance.

Debt-to-Equity Ratio

The debt-to-equity ratio is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets.

• Calculation: Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity

Direct Costs

Direct costs are expenses that can be directly attributed to the production of specific goods or services.

• Example: The cost of raw materials used in manufacturing a product.

Visual Aids

To enhance understanding, let’s visualize the double-entry bookkeeping concept using a simple diagram:

    graph TD;
	    A[Transaction] --> B[Debit Account];
	    A --> C[Credit Account];
	    B --> D[Assets];
	    C --> E[Liabilities/Equity];

Best Practices and Exam Tips

• Understand the Accounting Equation: Mastering the accounting equation (Assets = Liabilities + Equity) is fundamental for solving many exam problems.
• Practice Double-Entry Bookkeeping: Regular practice with journal entries will help you understand the flow of transactions.
• Memorize Key Ratios: Ratios like the current ratio and debt-to-equity ratio are frequently tested. Use mnemonic devices to remember them.
• Stay Updated on Standards: Familiarize yourself with Canadian accounting standards, including IFRS and ASPE, as they are crucial for exams.

Further Reading and Resources

• CPA Canada Handbook: Provides detailed guidance on accounting standards.
• International Financial Reporting Standards (IFRS): Essential for understanding global accounting practices.
• Accounting Standards for Private Enterprises (ASPE): Relevant for private companies in Canada.

Ready to Test Your Knowledge?

By mastering these key terms, you will be well-prepared for the Canadian accounting exams and equipped with the foundational knowledge necessary for a successful career in accounting.