Glossary of Accounting Terms: Essential Concepts for Canadian Accounting Exams

26.1 Glossary of Accounting Terms

Understanding key accounting terms is crucial for mastering the principles and applications of accounting in Canada. This glossary provides definitions and explanations of essential accounting concepts, focusing on terms relevant to Canadian accounting standards such as International Financial Reporting Standards (IFRS) and Canadian Accounting Standards for Private Enterprises (ASPE). This resource is designed to aid students and professionals preparing for Canadian accounting exams, offering clear and concise explanations, practical examples, and insights into real-world applications.

A

Accrual Accounting: A method of accounting that records revenues and expenses when they are incurred, regardless of when cash transactions occur. This approach aligns with the matching principle, ensuring that income and expenses are recorded in the same period.

Amortization: The process of gradually writing off the initial cost of an intangible asset over its useful life. Amortization is similar to depreciation but applies to non-physical assets like patents or copyrights.

Assets: Resources owned by a business that are expected to provide future economic benefits. Assets are classified as current (e.g., cash, inventory) or non-current (e.g., property, equipment).

B

Balance Sheet: A financial statement that presents a company’s financial position at a specific point in time, detailing assets, liabilities, and shareholders’ equity. It is also known as the statement of financial position.

Book Value: The value of an asset as recorded on the balance sheet, calculated as the original cost minus accumulated depreciation or amortization.

Budgeting: The process of creating a plan to allocate resources and manage expenses to achieve financial goals. Budgets are essential tools for financial planning and control.

C

Cash Flow Statement: A financial statement that provides an overview of cash inflows and outflows over a specific period. It is divided into three sections: operating, investing, and financing activities.

Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by a company. This includes the cost of materials and labor directly used in creating the product.

Current Assets: Assets that are expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.

D

Depreciation: The systematic allocation of the cost of a tangible asset over its useful life. Depreciation accounts for wear and tear, obsolescence, or age of the asset.

Dividends: Payments made by a corporation to its shareholders, usually in the form of cash or additional shares. Dividends are a way to distribute a portion of the company’s earnings.

Double-Entry Accounting: A system of bookkeeping where each transaction affects at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.

E

Equity: The residual interest in the assets of an entity after deducting liabilities. Equity represents the ownership value held by shareholders.

Expenses: The costs incurred in the process of generating revenue. Expenses are recorded on the income statement and are used to calculate net income.

Earnings Per Share (EPS): A financial metric that indicates the portion of a company’s profit allocated to each outstanding share of common stock. EPS is a key indicator of a company’s profitability.

F

Financial Statements: Reports that summarize the financial performance and position of a business, including the income statement, balance sheet, and cash flow statement.

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fixed Assets: Long-term tangible assets used in the operations of a business, such as land, buildings, and machinery. Fixed assets are subject to depreciation.

G

Generally Accepted Accounting Principles (GAAP): A set of accounting standards and procedures used to prepare financial statements. In Canada, GAAP includes IFRS and ASPE.

Goodwill: An intangible asset that arises when a company acquires another business for more than the fair value of its identifiable net assets. Goodwill reflects the value of a company’s brand, customer base, and other non-physical assets.

Gross Profit: The difference between sales revenue and the cost of goods sold. Gross profit indicates the efficiency of production and sales processes.

H

Historical Cost: The original monetary value of an asset or liability, as recorded at the time of acquisition. Historical cost is used as a basis for accounting, although it may not reflect current market value.

Harmonized Sales Tax (HST): A consumption tax in Canada that combines the federal Goods and Services Tax (GST) with provincial sales taxes. HST is applied to the sale of most goods and services.

Holding Gain: An increase in the value of an asset held by a company, typically due to market appreciation. Holding gains are not realized until the asset is sold.

I

Income Statement: A financial statement that reports a company’s financial performance over a specific period, detailing revenues, expenses, and net income. It is also known as the profit and loss statement.

Impairment: A decrease in the recoverable amount of an asset below its carrying amount on the balance sheet. Impairment losses are recognized in the income statement.

Inventory: Goods and materials held by a business for sale in the ordinary course of business. Inventory is classified as a current asset on the balance sheet.

J

Journal Entry: A record of a financial transaction in an accounting system. Journal entries include the date, accounts affected, amounts, and a brief description of the transaction.

Joint Venture: A business arrangement in which two or more parties agree to pool resources for a specific project or business activity. Joint ventures are often used to share risks and rewards.

Just-in-Time Inventory: An inventory management system that aims to minimize inventory levels by receiving goods only as they are needed in the production process.

K

Key Performance Indicators (KPIs): Quantifiable measures used to evaluate the success of an organization in achieving its objectives. KPIs are used in financial analysis and performance management.

Kiting: A form of check fraud that involves writing a check from one bank account and depositing it into another, without sufficient funds to cover the check. Kiting is illegal and unethical.

Knowledge Management: The process of capturing, distributing, and effectively using knowledge within an organization. Knowledge management is essential for improving efficiency and innovation.

L

Liabilities: Obligations of a business that are expected to result in an outflow of resources. Liabilities are classified as current (e.g., accounts payable) or non-current (e.g., long-term debt).

Liquidity: The ability of a company to meet its short-term financial obligations. Liquidity is often measured using ratios such as the current ratio and quick ratio.

LIFO (Last-In, First-Out): An inventory valuation method where the last items added to inventory are the first to be used or sold. LIFO is not permitted under IFRS but is used in some jurisdictions.

M

Management Accounting: The process of preparing financial reports and analyses for internal use by management. Management accounting focuses on budgeting, forecasting, and performance measurement.

Market Value: The estimated price at which an asset would trade in a competitive auction setting. Market value is often used in financial analysis and valuation.

Materiality: The significance of financial information to users’ decision-making. Information is considered material if its omission or misstatement could influence economic decisions.

N

Net Income: The total profit of a company after all expenses, taxes, and costs have been deducted from revenue. Net income is also known as the bottom line or net profit.

Non-Controlling Interest: The portion of equity in a subsidiary not attributable to the parent company. Non-controlling interest is reported in the consolidated financial statements.

Notes Payable: Written promises to pay a specific amount of money at a future date. Notes payable are classified as liabilities on the balance sheet.

O

Operating Expenses: The costs associated with running a business’s core operations, excluding the cost of goods sold. Operating expenses include salaries, rent, and utilities.

Overhead: Indirect costs incurred in the production of goods or services. Overhead includes expenses such as rent, utilities, and administrative salaries.

Owner’s Equity: The residual interest in the assets of a business after deducting liabilities. Owner’s equity represents the net worth of the business.

P

Profit Margin: A financial metric that measures the percentage of revenue that exceeds expenses. Profit margin is used to assess a company’s profitability.

Provisions: Liabilities of uncertain timing or amount, recognized when a company has a present obligation as a result of a past event. Provisions are recorded on the balance sheet.

Purchase Order: A document issued by a buyer to a seller, indicating the type, quantity, and agreed price for products or services. Purchase orders are used to control purchasing transactions.

Q

Quick Ratio: A liquidity ratio that measures a company’s ability to meet its short-term obligations with its most liquid assets. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities.

Qualified Opinion: An auditor’s opinion that financial statements are fairly presented, except for certain issues. A qualified opinion indicates that there are limitations or exceptions to the audit.

Quasi-Reorganization: An accounting procedure that allows a company to eliminate a deficit in retained earnings without undergoing a legal reorganization. Quasi-reorganizations are used to improve financial reporting.

R

Retained Earnings: The cumulative net income of a company that has not been distributed to shareholders as dividends. Retained earnings are used for reinvestment in the business.

Revenue Recognition: The accounting principle that determines when revenue should be recorded. Under IFRS 15, revenue is recognized when control of goods or services is transferred to the customer.

Risk Management: The process of identifying, assessing, and mitigating risks that could impact an organization’s objectives. Risk management is essential for ensuring business continuity and stability.

S

Share Capital: The total amount of money raised by a company through the issuance of shares. Share capital is classified as equity on the balance sheet.

Statement of Changes in Equity: A financial statement that shows changes in a company’s equity during a specific period. It includes transactions such as issuance of shares, dividends, and net income.

Subsidiary: A company that is controlled by another company, known as the parent company. Subsidiaries are included in the consolidated financial statements of the parent company.

T

Trial Balance: A report that lists the balances of all ledger accounts at a specific point in time. The trial balance is used to verify that total debits equal total credits.

Taxable Income: The portion of income subject to taxation, after deductions and exemptions. Taxable income is used to calculate income tax liability.

Treasury Shares: Shares that were issued and later reacquired by the issuing company. Treasury shares are not considered outstanding and do not have voting rights or receive dividends.

U

Unearned Revenue: A liability that represents revenue received before goods or services are delivered. Unearned revenue is recognized as income when the related goods or services are provided.

Unqualified Opinion: An auditor’s opinion that financial statements are fairly presented in all material respects. An unqualified opinion is also known as a clean opinion.

Utility Expense: Costs incurred for utilities such as electricity, water, and gas used in business operations. Utility expenses are classified as operating expenses.

V

Variable Costs: Costs that vary with the level of production or sales. Variable costs include direct materials, direct labor, and sales commissions.

Valuation: The process of determining the present value of an asset or a company. Valuation methods include discounted cash flow, market comparables, and asset-based approaches.

Vendor: A person or company that supplies goods or services to a business. Vendors are critical to supply chain management and procurement processes.

W

Working Capital: The difference between current assets and current liabilities. Working capital is a measure of a company’s short-term financial health and operational efficiency.

Write-Off: The removal of an uncollectible account receivable or worthless asset from the balance sheet. Write-offs are recorded as expenses in the income statement.

Weighted Average Cost of Capital (WACC): The average rate of return a company is expected to pay its security holders to finance its assets. WACC is used in investment appraisal and valuation.

X

XBRL (eXtensible Business Reporting Language): A standardized language for the electronic communication of business and financial data. XBRL is used to improve the accuracy and efficiency of financial reporting.

Ex-Dividend Date: The date on which a stock begins trading without the value of its next dividend payment. Investors who purchase the stock on or after the ex-dividend date are not entitled to the dividend.

Exchange Rate: The rate at which one currency can be exchanged for another. Exchange rates are influenced by factors such as interest rates, inflation, and economic stability.

Y

Yield: The income return on an investment, expressed as a percentage of the investment’s cost or current market value. Yield is used to assess the profitability of investments.

Year-End Closing: The process of finalizing a company’s financial records at the end of the fiscal year. Year-end closing involves adjusting entries, preparing financial statements, and closing temporary accounts.

YTD (Year-To-Date): A period starting from the beginning of the current year and continuing up to the present day. YTD is used to assess performance over a specific timeframe.

Z

Zero-Based Budgeting: A budgeting method where all expenses must be justified for each new period, starting from a zero base. Zero-based budgeting encourages cost control and efficiency.

Z-Score: A statistical measure that indicates the number of standard deviations a data point is from the mean. In finance, the Z-score is used to assess the likelihood of bankruptcy.

Zone of Possible Agreement (ZOPA): The range in which two parties can find common ground during negotiations. ZOPA is used in financial negotiations and contract discussions.

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