First-year courses · Business

Financial accounting: Canadian first-year essentials

Financial accounting flashcards for Canadian students: the accounting equation, debits and credits, statements, adjusting entries, inventory, IFRS and ASPE.

45 cards7 topicsAbout 20 minutes a roundTypical first-year Introductory Financial Accounting in a Canadian business program

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About this deck

This deck covers the core of an introductory financial accounting course taught in Canada: the accounting equation, double-entry bookkeeping, the accounting cycle, the main financial statements, accrual accounting and adjusting entries, inventory costing, depreciation of long-lived assets, and basic ratio analysis. It also explains the two standards you will meet in Canada: IFRS for publicly accountable enterprises and ASPE for private enterprises.

This is general study material to help you learn course concepts, not accounting, tax or financial advice for any real business.

Before you begin, be comfortable with basic arithmetic and percentages. Then memorize the accounting equation and the normal balance of each account type, because every other topic depends on them. A handy check: assets and expenses normally carry debit balances, while liabilities, equity and revenues normally carry credit balances.

The best way to study is to pair these cards with practice journal entries. For each transaction, ask which accounts change, whether each goes up or down, and which side (debit or credit) records that change. Then confirm that total debits equal total credits.

Common mistakes: thinking a debit always means an increase (it increases assets but decreases liabilities); recording revenue when cash arrives rather than when it is earned; and treating accumulated depreciation as cash set aside for replacing assets. It is simply a running total of cost already allocated to expense.

Before you start: High school math; no prior accounting needed.

All 45 cards

Cover the definitions with a sheet of paper and test yourself, or use the study modes above.

Foundations

Accounting equation: Assets = Liabilities + Equity; the relationship that must stay in balance after every transaction.Example: A café with $80,000 of assets and $30,000 owed to lenders has $50,000 of owner's claims.
Asset: A resource controlled by the business as a result of past events that is expected to bring future economic benefits.Example: Cash, accounts receivable, inventory and equipment.
Liability: A present obligation of the business, arising from past events, expected to be settled by giving up resources.Example: A bank loan or amounts owed to suppliers.
Equity: The owners' residual interest in the assets after deducting all liabilities.Example: Share capital plus retained earnings for a corporation.
Revenue: Increases in economic benefits from a company's ordinary activities, such as selling goods or providing services, that raise equity.Example: A landscaping company billing a client $1,200 for a completed job.
Expense: Decreases in economic benefits from using up resources in operations, which reduce equity.Example: Wages, rent and utilities.
IFRS: International Financial Reporting Standards, required in Canada for publicly accountable enterprises such as listed companies.Example: A company whose shares trade on the TSX reports under these standards.
ASPE: Accounting Standards for Private Enterprises, a simpler Canadian framework that private companies may choose instead of IFRS.Example: A family-owned construction company in Saskatoon may use it.
Going concern assumption: Presumption that a business will keep operating for the foreseeable future, so assets are not reported at forced-sale values.Example: If a company is about to be wound up, this basis no longer applies.
Historical cost: Measurement basis that records assets at the amount paid to acquire them.Example: Land bought for $300,000 stays at that amount even if its market value rises.

Recording transactions

Double-entry accounting: System in which every transaction affects at least two accounts and total debits always equal total credits.Example: Buying supplies for cash increases supplies and decreases cash.
Debit: An entry on the left side of an account; it increases assets and expenses and decreases liabilities, equity and revenues.Example: Receiving cash is recorded on this side of the Cash account.
Credit: An entry on the right side of an account; it increases liabilities, equity and revenues and decreases assets and expenses.Example: Taking out a bank loan is recorded on this side of Loans Payable.
Normal balance: The side, debit or credit, on which an account's increases are recorded and where its balance usually sits.Example: Accounts Payable usually has a credit balance.
Journal: Chronological record where transactions are first entered, showing the accounts and amounts debited and credited.Example: Each entry includes a date, accounts, amounts and a brief explanation.
General ledger: The collection of all of a company's accounts, showing each account's transactions and running balance.Example: Journal entries are posted here.
Trial balance: A list of all account balances at a point in time used to confirm that total debits equal total credits.Example: It balances even if an entry was posted to the wrong account, so it cannot catch every error.
Chart of accounts: Numbered list of every account a business uses, organized by type.Example: 1000s for assets, 2000s for liabilities, 3000s for equity.

Financial statements

Income statement: Report of revenues and expenses over a period, ending in net income or net loss.Example: Shows performance for the year ended December 31.
Statement of financial position: Report listing assets, liabilities and equity at a single date; also called the balance sheet.Example: A snapshot as at March 31.
Statement of changes in equity: Report showing how each component of owners' interest changed during the period, including income and dividends.Example: Under ASPE, a simpler statement of retained earnings is used.
Statement of cash flows: Report of cash receipts and payments over a period, grouped into operating, investing and financing activities.Example: Buying a delivery van is an investing outflow.
Retained earnings: Cumulative net income kept in a corporation after dividends have been declared.Example: Opening balance + net income - dividends = ending balance.

Adjusting entries

Accrual basis accounting: Recording revenues when earned and expenses when incurred, regardless of when cash changes hands.Example: December work billed in January is still December revenue.
Adjusting entries: Entries made at the end of a period so revenues and expenses fall in the correct period and balances are accurate.Example: Recording a month of insurance used from a prepaid policy.
Prepaid expense: An asset created when a business pays in advance for goods or services it will use in future periods.Example: Paying 12 months of rent up front on January 1.
Unearned revenue: A liability for cash received before goods or services are delivered.Example: An airline selling a ticket for a flight next month.
Accrued expense: An expense incurred but not yet paid or recorded at period end, creating a liability.Example: Wages employees earned in the last week of December, paid in January.
Accrued revenue: Revenue earned but not yet billed or received at period end, creating a receivable.Example: Interest earned on a term deposit but not yet received.
Closing entries: Year-end entries that reset revenue, expense and dividend accounts to zero and transfer their balances to retained earnings.Example: They prepare temporary accounts for the next year.

Inventory

Perpetual inventory system: Method that updates inventory and cost of goods sold continuously with each purchase and sale.Example: A grocery chain's scanners update stock with every checkout.
Periodic inventory system: Method that determines inventory and cost of goods sold only at period end through a physical count.Example: A small craft shop counting stock once a year.
Cost of goods sold: The cost of inventory sold to customers during the period, matched against sales revenue.Example: Beginning inventory + purchases - ending inventory, in a periodic system.
FIFO: First-in, first-out cost flow assumption: the oldest units' costs are assigned to goods sold first, leaving recent costs in ending inventory.Example: When prices are rising, this method reports lower cost of goods sold.
Weighted average cost: Cost formula that assigns each unit sold the average cost of all similar units available.Example: If 10 units cost $5 and 10 cost $7, each is assigned $6.
LIFO in Canada: The last-in, first-out cost method, which is not permitted under IFRS or ASPE, so Canadian students use FIFO, weighted average or specific identification.Example: US companies may still see it under US GAAP.
Lower of cost and net realizable value: Rule that inventory is reported at whichever is smaller: its cost or its estimated selling price less costs to complete and sell.Example: Outdated phones bought for $400 that can only sell for $250 are written down.

Long-lived assets

Depreciation: Systematic allocation of a long-lived asset's cost, less residual value, over its useful life; ASPE calls it amortization.Example: A $50,000 truck used for 5 years with no residual value: $10,000 a year by straight-line.
Straight-line method: Allocating an equal amount of an asset's depreciable cost to each year of its useful life.Example: (Cost - residual value) / useful life.
Declining-balance method: Accelerated approach that applies a fixed rate to the asset's carrying amount, giving larger charges in early years.Example: Double-declining uses twice the straight-line rate.
Accumulated depreciation: Contra-asset account holding the total cost allocated to expense so far for an asset.Example: Equipment $40,000 less this account $15,000 gives a carrying amount of $25,000.
Carrying amount: Cost of an asset minus accumulated depreciation and any impairment; also called book value.Example: It usually differs from the asset's market value.

Analysis

Current ratio: Current assets divided by current liabilities; a measure of short-term liquidity.Example: A value of 2.0 means $2 of current assets for each $1 due within a year.
Gross margin ratio: Gross profit (sales minus cost of goods sold) divided by net sales.Example: Sales $500,000 and cost of goods sold $300,000 give 40%.
Debt to total assets ratio: Total liabilities divided by total assets; shows how much of the business is financed by creditors.Example: A value of 0.6 means 60% of assets are financed by obligations.