Accounting is the language of business
Constituents of accounting: People who are interested in financial statements
Creditors: People who will lend you money (Ex: Banks)
Investors: People who own a part of your business
*For sole proprietors, you must separate your personal accounting from the business’s
*Shareholders don’t have to pay for liabilities that the company may incur; limited
*Only Corporations can trade stocks on the market
*For public corporations, anyone can buy shares of a company whereas private restricts who can
*Merchandising Business: Businesses who sell the products but don’t make them
*Manufacturing Business: purchase raw materials and huge investments on equipments, make
them (can be told by the balance sheet; a lot of equipments and inventory)
*Service Business: Most non-profit organizations are service organizations
*Every single transaction is either a financing, investing, or operating activities
*Investment activities: What should I invest in for the long-term. It’s only an investment activity
if it lasts in the long-term. Short-term investments such as supplies for an office is not an
*Operating Activity: Includes the day-to-day expenses incurred from running the business. If you
are a car dealership and buy ten vehicles then it is an operating activity
*Income statements are temporary accounts because after each year the account starts back at 0
revenue and expenses
*Income statements have to report in a specific period of time for the purpose of comparison.
Fiscal means company can choose whenever to be the year end. Bank usually ends at October
31 . (Yearly, monthly or quarterly)
*Corporations have to report quarterly, sole proprietorship should do yearly.
*FundamentalAccounting Principle (ON EXAM:Assets = Liabilities + Owner’s Equity
*Expenses decrease retained earnings * Only service companies don’t have COGS expenses
*sole proprietorship has drawings instead of dividends.
*Notes receivable is usually longer term with interest where accounts receivable is more short-
term and without interest
*Prepaid expenses are something that you paid for in advance and you are going to get the
benefit of that purchase later on. Ex: You pay two years worth of rent in advance
*Accrued Liabilities are for expenses that we have incurred but not yet paid
*Deferred revenue is if somebody else prepaid you for something. Ex: Someone buys an airline
ticket from your company far in advance. Means it is going to be revenue but not until it is
*Debit = Left
*Credit = Right
Debit (Increase) Arrow up
(Dividends, Expenses,Assets, Losses)
Credit (Increase)Arrow up
(Gains, Revenue, Liabilities, Shares)
*Management Stewardship: Is management doing its best to maximize shareholder value
*representational faithfulness: Complete
Free from material error: ignore error under $1000 in some company. Differ from different
Substance over form: signed a lease for a laptop for two years- financing for two years to buy it.
So this one is not the same thing as renting a house, we recorded computer as the asset.And it
belongs to you after two years. Not like a house you recorded it as renting expenses. Not like
* There is always a trade-off between relevance and representational faithfulness. More relevant
one thing is, less reliable it is.
* Verifiability: refer to how management works. Often the third party comes along and says yeah
it is reasonable. This also refers to consensus.
* Understandability: not apply to average person. Only for investors or people have some
*Materiality:Aprofessional judgment call. When would the omission or including certain
information change the decision? One can even able to override one GAAP only if it doesn’t
affect the outcomes. Small number compares to the total one. Not a big deal.
* Assets: associated with economic benefits, total control; resulted from past transactions
* Ordinary activities & Incidental transactions (one time thing): (flower store)
Revenues: flowers sales Expenses: delivery utility
Gains: truck sale gain a lot Loss: sale the truck with lower price that I purchased it.
Not transparent if we mixed Ordinary or incidental.
* Decognition: one example is the software. It used to record in long term asset and appreciate
for 7 years. With the rapid development it is no longer in it since it may only last for probably
* Economic entity: the total of both family legal entity and subsidiary legal entity. Obviously it
can be used to cheat the system and hide the debts from investors.
* Matching principle: COGS and sales. For instance, there are depreciation; Bad debt expense;
Warranty Expense; Salary expense. Vacation pay. Make things more relevant.
* When making an entry, it is always based on an accrual accounting decision unless stated
otherwise * Fair market value: more relevant but less reliable, price more reliable but not relevant.
* Going concern and the choices of appreciation are in disclosure notes.
MD&A includes a company’s vision: vague expectations, usually warm and macro. core value;
goals; human resources plan; risks; histories.
* Trade-offs exists everywhere: estimates and reliability.
*Accumulated depreciation; credit assets
*For external decision makers, the financial statements that are produced are general and are not
specifically produced for certain individuals or corporations. For internal decisions, there is
specific data made.
*Strategy’s consist of long-term goals that haven’t been reached. It isn’t strategy if we already
*Plans range from 3 to 5 years and are used to achieve your strategy. Ex:Astrategy could be “I
want my business to be international in ten years”
*Directing and Motivating: Executives are responsible for this but they usually delegate their
roles to lower positions in the company
*Control. Usually focused on the budget but could be qualitative features (Ex: having more
positive customer satisfaction). Control ensures that the plan is going well and why it is going
well or poorly.Acontinuous process
*Managerial accounting does not focus on precise numbers like financial accounting cares about.
Managerial accounting cares more about how well planned and timely a plan is
*Specify Problem and Goals: Not everyone has goals of money. No one’s goal is better than
another person’s. Goals change constantly. Some people may prefer leisure over money goals
*The definition of cost is determined by the type of decisions you are making
*Manufacturer’s balance sheet will always have three levels of inventories!
*To determine what direct labour is:Ask yourself, “Did they touch the product”?Also known as
*Way to determine whether its overhead or an expense is “why are your incurring this?”Any
costs associated with the factory. If you closed down the plant, the costs that also disappeared because the manufacturing plant was closed is overhead.Any costs that are still there is an
*Prime cost is direct material and direct labour is combined
*Ex: The cost object is the produce apartment. Fruits, baggies to hold fruit in, supplies are direct
costs of a produce apartment. Indirect costs are cashiers and snow removal trucks for the shop. If
the supermarket was the cost object, the roles of direct and indirect mentioned abo