See it, understand it, use it Accounting definitions

See it, understand it, use itAccouNtiNg defiNitioNs

Accounting is much more than numbers.

It’s important to understand the meaning

and implications behind the figures –

including the definitions found in this

glossary of accounting terms.

Mission statementThe mission of the Certified General Accountants of Ontario is to ensure its members merit the confidence and trust of all who rely upon their profes-sional knowledge, skills, judgment and integrity by regulating qualification, performance and discipline standards for certified general accountants, while advocating the use of their professional expertise in the public interest.

The Association offers its thanks to booklet contributors. They include Sandra Cartland, CGA; Michelle Causton, FCGA; Sarosh Contractor, CGA; Hélène Labelle, CGA; Grant Rowson, CGA; Paul Turner, FCGA; Thomas McCallum, FCGA; and Jerry Flexer, CGA.

While great care has been taken to ensure the accuracy of the information as at September 2009, the Certified General Accountants of Ontario does not assume any liability.

See it, understand it, use it: Accounting Definitions Copyright © Certified General Accountants of Ontario, 1994, 1999, 2000, 2002, 2004, 2006, 2007, 2009. ISBN 0-9690132-2-1

As with many professions, accountants have their own set of commonly used terms. This booklet will give you a solid starting point for discussing finance, business, and even your own personal financial situation.

The meanings within this booklet aren’t cast in stone – after all, accounting is an evolving profession, and many financial terms don’t have narrow, precise definitions – but by familiarizing yourself with them you’ll be well on the way to getting the most from your business, finance and accounting courses.

The more you know, the wider your horizons, so keep this booklet at your fingertips whenever numbers, and the real-world realities behind the numbers, are the topics at hand.

Expand your understanding

ACCOuNTING DeFINITIONS | 5

Accountant• anindividualtrainedandknowledgeableintheprofessionofaccountancy;and• preferablyamemberofaprofessionalaccountingorganization(e.g.,aCGA,

CMA or CA).

Accountant’s Communication• theaccountant’swrittencommunicationthatprefacesthefinancialstatements;

and• additionally,seeAuditors’Report,ReviewEngagementReportandNoticetoReader.

Accounting (Accountancy)• functionsincludeanalyzing,interpretingandexaminingtheresultsofthe

bookkeeping process; and• informationsystemdesignanddevelopmentofcontrolsandprocedures.

Accounting Equation • adescriptionoftherelationshipbetweenacompany’sassets,liabilitiesandequity;

expressed as Assets = Liabilities + Owner’s equity; and• alsoknownasthebalancesheetequation.

Accrued Expense• liability,createdbyconsumptionofeconomicbenefitthathasnotbeeninvoicedanddoesnotrequirepaymentuntilalaterdate(e.g.,accruedpropertytaxes).

Accrued Revenue• anasset,createdbyrealizationofeconomicbenefit,whichnormallyisnotdue orinvoiceduntilalaterdate(e.g.,accruedinterestincome).

Amortization• systematicallocationofcostoverarelatedtimeperiod;• theexpensingofbothtangibleandintangibleassets;and• oftenreferredtoas“depreciation.”

Annuity• asequenceofequalpayments,usuallymadeatregularintervalsoftime.

A

6 |

Article of Incorporation• legaldocumentthatrecognizesacorporationasalegalentity;• additionally,grantedbythefederalorprovincialjurisdictioninwhichthe

company is incorporated; and• thedocumentwouldincludethenameofthecompany,thenatureofbusiness

activities, and the number and types of capital stock it can sell.

Asset• anythingofvalueownedorcontrolledbyacorporationorindividualwhichmay

be tangible or intangible; and• anythingownedbythecompanythatprovidesafuturebenefit.

Audit• anexaminationofrecordsorfinancialaccountstoverifytheiraccuracy;and• additionally,seeAudit(External);ComplianceAudit;EnvironmentalAudit;

Forensic Audit; Internal Audit; and Operational Audit.

Auditor• seeExternalAuditor;and• seeInternalAuditor.

Auditors’ Report• thereportthatprefacesfinancialstatementsandexpressestheopinionofthe

external auditor as to the fairness of the financial statements attached.

Balance• amountarrivedatbyaddingalldebitsandsubtractingallcredits;and• toensuretotaldebitsequaltotalcredits.

Balance Sheet• statement,ataparticularpointintime,ofthefinancialpositionofabusinessororganizationdividedintothreeparts:assets,liabilitiesandownership(equity);and

• alsoknownasstatementoffinancialposition.

Bank Indebtedness• balanceofabankaccountwhenfundswithdrawnexceedfundsdeposited.

Bank Reconciliation• analysisthataccountsforthedifferencebetweenthebalanceshownonthebank

statement and the balance shown in the accounting records on a given date.

A/B


Bankrupt• legalstatusofapersonorcorporationwho/thatisunabletopayhis/her/itsdebtsastheybecomedueandwho/thathasmadeatransferofpropertyorofarightorinterest in property to a trustee for the benefit of creditors.

Bankruptcy• thestateofbeingbankrupt.

Benchmarks• highstandardsestablishedbyothersimilarcompaniesinanindustry;and• areusedasacomparisonbasebyindividualcompaniestoidentifyactivities

with the greatest room for improvement.

Bill of Lading•writtendocumentissuedbythecarrierofgoods;• bothareceiptforgoodsandacontracttodelivergoods;and• titletothegoodsmaybepassedbytransferofthebilloflading.

Bond• certificateofindebtednessissuedbyagovernmentorcorporation;• writtenobligation,sometimessupportedbycollateral,givenbyonetoanothertopaydamagesorindemnifyagainstlossescausedbyathirdparty(e.g.,aninsurance company agrees to indemnify a company for actions of the company’s employees); and

• thestatusofgoodsstoredinawarehouseonwhichdutiesareunpaid.

Book of Original Entry• ajournalinwhichtransactionsarerecordedforthefirsttimebeforesummarizingand/orpostingtoledgeraccounts(e.g.,purchasejournal,cashreceiptsjournal,accounts payable journal, disbursements journal, general journal and payroll journal); and

• additionally,seeGeneralJournalandJournal.

Bookkeeping• therecordingoffinancialtransactions,electronicallyormanually;and• allworkinsupportoftheaccountingprocess,includingverificationofaccuracy.

Branch Accounting• completesetofrecordskeptseparatelybyabranchoperationforwhicha

controlling account is maintained in the records of the main operation.

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Budget• monetaryplanthatmaybesimpleorverydetailedwithaforecastofcashflows,

revenue, expenses and profit or loss over a future period, usually one year or one operating cycle; and

• aplanofactionexpressedinfinancialterms.

By-laws• theinternalrulesformallyapprovedbytheownersormembersofanorganization

to regulate the method of operation.

Canada Revenue Agency (CRA)• thefederalbodyresponsibleforinterpretingandapplyingtaxlawsandregulations

and collecting the tax from individuals, corporations and trusts in Canada; and• previouslyknownasCanadaCustomsandRevenueAgencyand(beforethat)

Revenue Canada.

Capital (or Equity)• theinterestofbusinessowner(s)intheassetsofabusiness,generallyrepresented

by the excess of total assets over total liabilities due to outside interests.

Capital Asset• assetsofeitheratangibleorintangiblenature,ownedorheldbyabusiness,

which are expected to be used or held over several fiscal periods; and• additionally,seeFixedAsset.

Capital Cost Allowance (CCA)• systematicwriteoffofcapitalassetsasprovidedbyrulesunderincometax

legislation; and•CCAreplacesamortizationanddepreciationintaxcalculations.

Capital Gain• profitorgainrealizedfromthesaleordisposalofacapitalasset;and• underincometaxlegislation,thetermhasaspecialmeaning.

Capital Loss• lossrealizedfromthesaleordisposalofacapitalasset;and• underincometaxlegislation,thetermhasaspecialmeaning.

Capital Stock• seeStock.

B/C


Certified General Accountant• aprofessionalaccountantwhoisamemberoftheCertifiedGeneralAccountants

Association of Canada;• thisnationallyrecognizeddesignationisgiventothosewhosuccessfully

complete its program of professional studies and other academic and experience requirements; and

• thedesignationacquiredisCGA.

Certified Management Accountant• aprofessionalaccountantwhoisamemberoftheSocietyofManagement

Accountants of Canada; and• thedesignationacquiredisCMA.

Chartered Accountant• aprofessionalaccountantwhoisamemberoftheCanadianInstituteofChartered

Accountants; and• thedesignationacquiredisCA.

Chartered Certified Accountant• aprofessionalaccountantwhoisamemberoftheAssociationofChartered

Certified Accountants, the world’s largest and fastest-growing global professional accounting body; and

• thedesignationacquiredisACCA.

Commitment/Encumbrance Accounting• oftenusedbynot-for-profitorganizations,anaccountingconceptwhereexpenses

are recorded when goods or services are ordered, rather than when the organization receivesthegood/service;and

• theendresultgenerallyreducesthepossibilityofoverspendingthebudget.

Compliance Audit• anauditperformedwiththepurposeofdeterminingwhetherthepartybeingaudited

is following specific procedures or rules set down by a higher authority; and• anexamplewouldbereviewingwageratepaidbyanemployertoseeifitisin

accordance with minimum wage laws.

Compilation Engagement• thecompilingofunauditedfinancialinformationintofinancialstatements,schedules

or reports, based on information provided by the accountant’s client; and• basically,clientinformationisarrangedintheformofafinancialstatement,

without performing an audit or a review.

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Compilation Report• the‘NoticetoReader’thatappearsoneachpageorprefacesthefinancial

statements, schedules or reports, warning readers of the very limited involvement of the accountant in a compilation engagement.

Compound Interest• theinterestcalculatedonboththeprincipalamountinvestedandthepreviously

accumulated unpaid interest.

Comprehensive Income• thechangeinnetassetsthatresultsfromalltransactionsotherthanthoseof

the shareholders.

Consignee• apersonwhoreceivesgoodsthatbelongtosomeoneelse,forfuturesaleor

another purpose; and • althoughconsigneesarenottheownersofthegoods,theyareaccountableforthem.

Consignment• goodsthatareinthehandsofsomeoneotherthantheownerforfuturesaleor

another purpose.

Consignor• theownerofgoodsthatareinsomeoneelse’shandsforfuturesaleoranother

purpose.

Consolidated Financial Statements• financialstatementsthatshowtheresultsofalloperationsundertheparent

company’s control, including those of any subsidiaries.

Control• isassumedtoexistwheretheacquiringcorporationhasacquiredmorethan 50percentofthevotingsharesofanother(acquired)corporation.

Controlling Interest• directorindirectownershipofvotingsharessufficienttoelectthemajorityof

the board of directors of a corporation.

C


Corporation• legalentityformedundertheauthorityofeitherprovincialorfederalstatutes;• usuallyformedtomakeaprofit;• liabilitiesofshareholders(owners)aregenerallylimitedtotheamountoftheir

investment; and• thenameofacorporationendswithLimited,Ltd.,Incorporated,Inc.,Corporation

or Corp.

CRA Auditor• anindividualhiredbytheCanadaRevenueAgencywhoisresponsiblefor

performing compliance audits on individuals, corporations and trusts; and• thisindividualauditstaxpayersonbehalfofthefederalgovernment.

Credit• entryrecordinganincreasetoaliabilityorowner’sequityorrevenueora

reduction to an asset or expense;• creditsarerecordedintherighthandcolumnofanaccountoratwo-columnbook;and• theoppositeofdebit.

Credit Note• issuedbyasellertoapurchasertorecordthereductionofabillbecauseof

an allowance, return or cancellation; and• theoppositeofaninvoice.

Current Asset• unrestrictedcash,orotherasset,whichisexpectedtobeconvertedintocash

or consumed in the production of income within the greater of one year and the normal operating cycle.

Current Liability• liabilityexpectedtobeliquidatedinthegreaterofoneyearandthenormal

operating cycle, excluding any liability otherwise classified as current, which will be settled from other than current assets.

Customer Relationship Management (CRM)• coversmethodsandtechnologiesthatanalyzetheaccountingsalesdata,which allowsthebusinesstobettertrackandmanage(oranticipate)theneedsof customers or clients;

• CRMworkstoensureongoingloyaltybygeneratingoranticipatingmarketingpreferences based on customer information; and

• improvingthecompany’sabilitytomeetorexceedcustomerexpectations.

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Debenture• anunsecuredbond.

Debit• entryrecordinganincreasetoanassetorexpenseorareductiontoaliability,

revenue or owner’s equity;• debitsarerecordedinthelefthandcolumnofanaccountoratwo-columnbook;and• theoppositeofcredit.

Deficit• anegativeamount(debitbalance)ofretainedearningscausedbycumulative

losses and dividend distributions exceeding cumulative net income.

Demand Loan• loanrepayableupondemandofcreditor.

Depletion• gradualusinguporconsumptionofanaturalresource;and• chargetoanaccountingperiodthatreflectsthecostoftheportionofwasting assetsconsumedorused(e.g.,timberresources).

Depreciation• seeAmortization.

Direct Cost• anycostthatcanbeeasilyandefficientlytraceddirectlytotheproduct(e.g.,wheels

in the production of wagons or labour in the production of custom cabinetry).

Discount• anamountpaidbelowthefacevalue(e.g.,purchaseof$100bondatacost of$96).

Dividend• portionoftheearningsofthecompanydistributedtoshareholdersbydeclaration

of the board of directors.

D


E-commerce• theabilityforconsumers,businessesandotherstoorderproductsandserviceselectronically(e.g.,viatheInternet).

Economic Value • thevalueofanassetderivingfromitsabilitytogenerateincome.

Economic Value Added (EVA)• themonetaryvalueofanentityattheendofanytimeperiod,minusthemonetary

value of that same entity at the beginning of that time period.

Electronic Approval/Signature• inelectronicpurchase-orderorpaymentsystems,theprocesswhereanorderis

approved by a code or password, rather than a conventional signature.

Electronic Data Interchange (EDI)• theabilityforbusinessestoplace,process,receiveandpayforordersof

merchandise through computers, thus reducing the cost and need for paper invoices and data entry time; and

• thissystemisoftenfoundwithJust-In-Time(JIT)inventorysystems.

Electronic Funds Transfer (EFT)• inbanking,atermthatrepresentsthetransferoffundsfromoneentity’sbank

account to another’s, without a traditional paper-based cheque.

Engagement• theworkperformedforaspecificclientisreferredtoasanengagement;normally

this refers to an audit engagement or, in the case of a non-audit engagement, to one of either a review engagement or a compilation engagement.

Engagement Letter• writtencommunicationbetweenanaccountantandaclientwithrespecttoapro-

fessional engagement, which outlines the scope of the accountant’s responsibilities and arrangement agreed upon.

Enterprise Resource Planning systems (ERP)• softwarestemmingfromanorganization’scomputerizedaccountingsystem

that allows for increased automation and processing of orders, their fulfilment and payment.

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14 |

Environmental Audit• examinationtoevaluateenvironmentalprotectionpoliciesandprocedures

including, in pertinent circumstances, an assessment of the viability of past and presentmethodsfordisposalofsoil,waterandaircontaminantsand/orsearch for their presence.

Equity• seeCapital.

Ethics• evaluationofconflictingalternatives,inordertoachievethegreatestgoodor

cause the least harm.

Expenditure• consumptionofanassetorpaymentforanexpense;and• incurringaliability.

External Auditor• anindependentaccountantengagedtodetermineifthefinancialstatementsofanentitypresentfairly(withoutanymaterialmisstatements)theeconomiceventsthatoccurredduringtheperiodaudited(referredtoastheattestfunction);and

• theexternalauditisfortheshareholders/owners(ratherthanformanagement).

Fair Market Value• thehighestpriceavailableinanopenandunrestrictedmarketbetweeninformed,

prudent parties, acting at arm’s length and under no compulsion to transact, expressed in terms of money or money’s worth.

Financial Instruments• anythingofmonetaryvalue,includingcurrency,stock,bondsandpromissorynotes.

Financial Statements• formalfinancialreportspreparedfromaccountingrecords(e.g.,balancesheet,statementofretainedearnings,statementofincome,cashflowstatement).

Fiscal Year• aperiodofoneyearforwhichfinancialstatementsarepreparedthatmayor

may not coincide with the calendar year.

E/F


Fixed Assets• seeCapitalAssets.

Fixed Cost• coststhatdonotchangeintotalinrelationtotheactivity• anexampleisrentthatisfixedinrelationtotheproductionofgoods;and• additionally,seeVariableCost.

Free on Board (FOB)• shippingtermmeaning“freeonboard”(FOB);and• toinformthepurchasersofthelocationatwhichtheybecomeresponsible fortheshippingcharges(e.g.,FOBTorontomeansthevendorpaysthecharges to Toronto’s freight yard and the purchaser is responsible from then on).

Forecast• anestimateofthemostlikelybusinessoperatingresultsbasedonexisting

information for one or more future periods;• toestimatebusinessresultsinadvance;• toplanthebusinesscourseforthefutureand;• thedocumentthatlaysouttheplans.

Forensic Accounting• usesaccounting,auditingandinvestigativeskillstoconductanexaminationinto

a company’s financial statements, thus providing an accounting analysis that is suitable for court.

Forensic Audit• theactivitythatconsistsofgathering,verifying,processing,analyzingandreporting ondatainordertoobtainfactsand/orevidence;and

• intheareaoffinancialorlegaldisputesand/orirregularities(includingfraud), this includes providing preventative advice.

Forensic Auditing• theapplicationofauditingskillstosituationsthathavelegalconsequences.

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GAAP• abbreviationforgenerallyacceptedaccountingprinciples(GAAP);and• accountingprinciplesthathavebeengivenformalrecognitionorauthoritative

support.

GAAS• abbreviationforgenerallyacceptedauditingstandards(GAAS);and• auditingstandardsthathavebeengivenformalrecognitionorauthoritativesupport.

General Journal• thejournalinwhichtransactionsarerecordedforwhichspecificjournalsarenotprovided(e.g.,adjustmentsandcorrections);and

• inasmalloperationthegeneraljournalmaybetheonlybookoforiginalentry.

General Ledger• ledgerinwhichalltheassets,liabilities,equity,revenueandexpensesareposted

and from which financial statements are prepared.

Goodwill• thedifferencebetweengoing-concernvalueandtangibleassetvalue(tangible

assets include identifiable intangible assets having values that can be determined separately).

Government Auditor• anindividualhiredtoauditthefederalorprovincialgovernmentsonbehalf

of the taxpayers;• anexampleisanAuditorGeneral;and• additionally,seeCRAAuditor.

Human Resources• employeesofanorganization,themanagementofwhichincludeshiring,

retention, training, employment responsibility and dismissal.

G/H


Imprest Fund• abankaccountsolelydedicatedtoonespecifictypeofdisbursement,the

purpose of which is to provide a higher level of control over the disbursement of the fund; and

• someexamplesincludepayrolldisbursements,dividenddisbursements,etc.

Income• moneyoritsequivalent,earnedperiodicallybyanindividual,acorporation,etc.,

in return for goods or services provided; and• theoppositeofloss.

Income Statement• afinancialstatementsummarizingrevenues,expenses,gainsandlossesfora

stated period of time; and• alsoknownasstatementofearnings,statementofincomeorstatementofoperations.

Income Tax• taxleviedontheincomeofapersonorabusiness.

Incorporated (Inc.)• seeCorporation.

Information Systems Audit• adetailedreviewofanorganization’sinternalcontrolsandcomputerizedsystems,

with the intent to ensure that accounting and other data are accurate, complete, protected and accessible to the proper personnel only.

Insolvency•whenliabilitiesexceedassets;• theinabilitytopaydebtswhendue;and• additionally,seeBankruptcy.

Instalment• partofasumofmoneyoradebttobepaidatregularintervals,usuallymadeup

of principal and interest combined.

Institute of Internal Auditors• aninternationalprofessionalassociationrecognizedastheinternalauditfunction’s

premier body in certification, education, research and technological guidance; • itsdesignationistheonlygloballyacceptedcertificationforinternalauditors;and• thedesignationacquiredisCIA.

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Intangible Asset• anassetwithoutphysicalsubstancethathasvalueduetorightsresultingfromitsownershipandpossession(e.g.,goodwill,patents,trademarks).

Internal Audit• anindependentandobjectiveassuranceandconsultingactivity,designedto

add value and improve an organization’s operations;• ithelpsanorganizationaccomplishitsobjectivesbybringingasystematic,

disciplined approach to evaluation; and • itimprovestheeffectivenessofriskmanagement,controlsandgovernanceprocesses.

Internal Auditor• anemployeeofanentity(forexample,acorporation)whoauditsformanagement,

providing valuable information for decision making concerning the effective operation of his or her business.

Internal Checks• asystemofproceduresandtechniquesdesignedtominimizeerrors,fraudor

waste, whereby the work of an employee or group is verified by having to be in agreement with the work of others.

Internal Control• aco-ordinatedsystemofproceduresandtechniquesdesignedtosafeguarda

company’s assets, to ensure the accuracy of its accounting records and to promote efficiency and adherence to prescribed policies.

International Financial Reporting Standards (IFRS)• accountingstandardssetbytheInternationalAccountingStandardsBoard(IASB).

Inventory• itemsoftangiblepropertyheldforsale;• detailedlistofitemsandtheirvaluesownedataspecificpointintime;• stockinventorycouldincluderawmaterialsformanufacture,materialspartlyprocessed,

as well as finished products, including items in transit for which title is held;• stockinventorywouldnotincludeitemsphysicallyheldforwhichtitlebelongstoothers;• inventoriesmayalsobemadeofcapitalassets,stationeryandsupplies,etc;and• additionally,seeWorkinProgress.

Investment• fundscommittedtoacquiresomethingtangibleorintangible,inordertoreceive

a return, either in revenue or use.

I


Invoice• documentforgoodspurchasedorservicesrendered,showingdetailssuchas

quantities, prices, dates, shipping details, order numbers, terms of sale, etc.

Joint Products•twoormoreproductsthataremanufacturedsimultaneouslyfromthesameraw

materials; and• anexampleisgasolineandheatingoil,whicharejointproductsofcrudeoil.

Journal• abookoforiginalentryinwhichfinancialtransactionsarerecorded(e.g.,a

purchase journal is a record of purchase transactions).

Journal Entry• anentryinanyjournal.

Just-in-Time (JIT)• schedulingproductiontomeetimmediatesalesordemand,withtheintention ofreducinginventories(andrelatedcosts)toaminimumlevel;and

• sometimesreferredtoas“pullproduction.”

Lease• alegalcontractconveyingtheuseofpropertyfromtheowner(lessor)toanother(lessee)atarent,forastatedlengthoftime.

Leasehold Improvements• additions,improvementsoralterationsmadetoleasedpropertybythelessee.

Ledger• abookoffinalentrycontainingalltheaccountsofabusinessoralltheaccounts ofaparticulartype(e.g.,generalledger,accountsreceivableledger).

Liability• anamountowed,notnecessarilyduetobepaidimmediately;and• anobligationtoremitassetsorservicesatafuturedate.

Limited (Ltd.)• seeCorporation.

I/J/L

20 |

Limited Partnership• apartnershipwithtwoclassesofpartners:limitedpartnersandoneormore

general partners; and• limitedpartnershavenopersonalliabilityfordebtsofthelimitedpartnership

beyond the amounts invested by them.

Liquid Asset• anasset,suchascash,thatcanbereadilyconvertedintoothertypesofassets

or used to buy goods and services or to satisfy obligations.

Liquidation• paymentofadebt;and• thewinding-upofanorganizationbysettlingwithdebtors,creditorsandshareholders.

Liquidation Value• thenetamountrealizedonassetsintheeventofaliquidation.

Loss• theexcessofexpendituresoverrevenues;and• theoppositeofincome/profit.

Management Accounting• accountingconcernedwithprovidinginformationtomanagers;thatis,tothose

who are inside an organization and who direct and control operations; and• managementaccountingincludescostaccumulationforproductandjobcosting,

budgeting and financial statement analysis.

Market Value• thehighestpricethatanownercouldrealizeinanopenmarkettransaction.

Materiality• atermusedtodescribethesignificanceoffinancialstatementinformationtodeci-

sion makers; and• anitemofinformationismaterialifitisprobablethatitsomissionormisstatementwouldinfluenceorchangeadecision.

Minority Interest• theequityofallshareholderswhodonotholdacontrollinginterestinacompany.

L/M


Net Book Value• thecostofanasset,lessaccumulatedamortization.

Net Income• theexcessoftotalrevenueovertotalexpensesforaperiodoftime;and• additionally,seeProfit.

Net Worth• totalassetslesstotalliabilities;and• additionally,seeCapital(orEquity).

Note Payable (Promissory Note)• writtenpromisemadebyoneindividualtoanother,topayaspecificamounton

demand by a definite date.

Note Receivable•writtenpromisebyanotherpartytomakepaymenttoyouataspecifieddate.

Notice to Reader• seeCompilationReport.

Operational Audit• anauditwhosepurposeistoassesstheeffectivenessandefficiencyofaprocess

or performance, the purpose of which is to serve as a basis for improvements in effectiveness and efficiency;

• anexamplewouldbeassessingthelayoutofafactorytodetermineifitfacilitatesthe movement of new materials to production; and

• alsoreferredtoasaninternalaudit.

Operating Cycle• normalbusinesscycle;and• assumesoneyearinlength,althoughsomeindustries(e.g.,shipbuildingand

various areas of construction) have a longer cycle.

Overhead• allcostsassociatedwithproductionofgoodsorservicesotherthandirectcosts,

for example, the cost of heating a factory or the cost of support staff in an accounting firm.

N/O

22 |

Parent Company• acorporationthat,directlyorindirectly,ownsacontrollinginterestinanother

corporation; and• additionally,seeSubsidiary.

Partnership• twoormorepersonscarryingonabusinessforprofit,wherebyeachpartnerhas

unlimited liability for the debts of the partnership, except in a limited partnership in which some of the partners may have limited liability.

Payable• anobligationtopayasumatafuturedate.

Payroll• arecordofwagesorsalariespaidorpayable;and• theactualwagesandsalariespaidduringagivenperiod.

Pension• seriesofregularpaymentsoralumpsumofmoneypaidtoretiredemployees

or their beneficiaries.

Point-of-Sales (POS) Systems• inacomputerizedaccountingsystem,thisrepresentstheabilitytoprocesssalestransactionsbyscanningabarcodeorradiofrequencyidentification(RFID)tag on the product, rather than key-punching information into a cash register.

Posting• aprocesswherebytransactionsaretransferredfromajournaltoageneralledger

or subsidiary ledger.

Premium• anamountpaidoverandabovethefacevalueornormalprice(e.g.,purchase of$100bondatacostof$110);and

• anamountpaidforinsurance.

Prepaid• anassetcreatedbypaymentforeconomicbenefitsthatdonotexpireuntilalatertime;asthebenefitexpirestheassetbecomesanexpense(e.g.,prepaidrent,prepaid insurance); and

• shippingcostspaidbytheshipperratherthanthereceiver.

P


Principal• thecapitalportionofaloanasopposedtointerest.

Profit• theexcessoftotalrevenueovertotalexpensesforaperiodoftime;and• additionally,seeNetIncome.

Projection• aforecastofexpectedbusinessresultsthatconsidersoneormorepossiblechanges

to the environment, policies or processes, which will affect future outcomes; and• projectionsoftenconsistofaseriesof“what-if”or“bestcase/worstcase”scenarios.

Property, Plant and Equipment• capitalassetsthataretangibleinnature,includingland,buildings,equipment,

furniture, automobiles, etc.

Radio Frequency Identification (RFID)• usedprimarilyininventorysystems,anelectronictagthatallowstheidentification

of a goods item to a point-of-sale system; and• RFIDisgraduallyreplacingthetraditionalbarcodesystem.

Ratio• relativesize,expressedasthenumberoftimesonequantityiscontainedinanother(e.g.,theratioofassetstoliabilitiesofacompanyhavingtotalassetsof$200,000andtotalliabilitiesof$150,000wouldbe$200,000÷$150,000=1.33).

Receivable• anamounttobereceivedatafuturedate.

Retained Earnings• cumulativenetincomesofacorporation,lesslossesanddividenddistributions toshareholders(profitsnotdistributed).

Return on Investment• aperformancemeasureusedtoevaluatetheefficiencyofaninvestmentorto

compare the efficiency of a number of different investments.

P/R

24 |

Revenue• grossproceedsfromthesaleofgoodsorservices;• interestanddividendsearnedoninvestments;and• asourceofincome.

Review Engagement• theunauditedreviewoffinancialstatementsofabusinessororganizationbyan

independent accountant for the purpose of determining the plausibility of the information reported on; and

• areviewinvolvesmakingenquiriesconcerningfinancial,operatingandcontractualinformation, applying analytical procedures and having discussions with appropriate officials of the enterprise.

Review Engagement Report• theaccountant’sreportthatprefacesunauditedfinancialstatementsthathave

been reviewed. It provides negative assurance that the financial information conforms in all material respects to generally accepted accounting principles.

Security• collateralforadebt(e.g.,accountsreceivablemaybepledgedassecurityfora

loan); and• agenerictermusedtorefertoabond,sharecertificateorothermedium-or

long-term investments evidencing debt or ownership.

Semi-variable or Mixed Costs• coststhatcontainbothfixedandvariableelements(orcoststhatbehaveas

though they do).

Share• oneofequalpartsofaclassofcapitalstockinacompany;• legalownershipcertificateforabove;and• additionally,seeStock.

Shareholder• personwhoistheownerofastockcertificateorshareinacorporation.

Significant Influence• wheretheacquiringcorporationdoesnothavecontrolbutisabletoinfluence

business decisions of the acquired corporation;• assumedtoexistwheretheacquiringcorporationhas20percentofthevoting shares; and• additionally, see Control

R/S


Sole Proprietorship• anunincorporatedbusinesswhollyownedbyoneindividual.

Source Documents• documentsthatarethesourceofinformationrecordedwithaccountingentries;• canbeeitheronpaperorinanelectronicform;and• anexamplewouldbeaninvoice,cheque,bankstatement,contractorother

documentation, either paper or electronic.

Standard Cost• predeterminationofcostsofproduction(i.e.,directcostsandoverhead)under

normal, efficient operating conditions;• costsassignedtowork-in-progressandfinishedgoodsinastandardcosting

system; and• usedtocomparetoactualresultsinordertomonitorcostsandperformance (seeVariance).

Statement• summaryofanaccountforaperiodoftime(usuallyonemonth)showinginvoices,

credits and balance due, provided to a customer by a supplier.

Statement of Cash Flows• afinancialstatementshowingtheeffectofoperating,financingandinvesting

activities, for a stated period of time, on the cash position of an entity; and• alsoknownasthecashflowstatement,statementofoperating,financingand

investing activities or statement of changes in cash resources.

Statement of Earnings• seeIncomeStatement.

Statement of Financial Position• seeBalanceSheet.

Statement of Retained Earnings• afinancialstatementsummarizingthechangesinretainedearningsforastated

period; and• alsoknownasthestatementofchangesincapitalaccountsorstatementof

changes in retained earnings and reserves.

S

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Stock• capitalofacorporationthatisdividedintoportionsorshares.Theremaybe

several classes of shares in a corporation, each class divided into equal portions or shares;

• additionally,seeShare;and•materialsandfinishedproductsonhand(stockinventory).

Stock Dividend• adividendpaidbytheissuanceofsharesofcapitalstock.

Stock Option• therighttobuysharesofcapitalstockatastatedpriceonorbyagivendate;and• aprivilegeoftenextendedtoexecutivesoremployeesofacompany.

Subsidiary• acorporationcontrolledbyanothercorporationthatownsdirectly,orindirectly,

an interest sufficient to elect a majority of the board of directors of the subsidiary corporation; and

• additionally,seeParentCompany.

Supply Chain• anetworkoffacilitiesanddistributionfromprocurementofrawmaterialsand

supplies to shipment of goods to customers; and• alsoreferredtoaslogistics.

Tax Avoidance• legalminimizationoftheimpactoftaxation.

Tax Evasion• illegalattempttoescapetheimpactoftaxes.

Title• legalrighttoownershipofproperty.

Total Quality Management (TQM)•managementstrategyaimedatensuringthatanawarenessofqualityisfound in all of the processes of an organization.

Trial Balance• listingandtotallingallbalancesinaledgertoverifythattotaldebitsequal

total credits; and

S/T


• listingandtotallingallbalancesinasubsidiaryledgertoverifythatthetotalis in agreement with the controlling general ledger account.

Trust Fund• money,propertyorvaluableslegallyheldbyapersonorcompanyforthe

benefit of another.

Trustee• apersonorcompanylegallyresponsibleforthepropertyofanother.

Valuation Day• dateestablishedbylawasthebasisofonemethodofvaluationforthe

calculation of capital gains or losses for income tax purposes; and• valuationdayisDecember23,1971,forpubliclytradedsecuritiesand

December 31, 1971, for all other capital property.

Variable Costs• coststhatchangeintotalinrelationtotheactivity;• anexampleisthetotalcostofwheelsincreasesastheproductionofwagons

increases; and• seeFixedCosts.

Variance• thedifferencebetweenstandardcostandactualcost;and• thedifferencebetweenanactualrevenueorexpenseitemandthebudgetfor thatitem(budgetvariance).

Work in Progress (or Process)• aninventoryaccountinaproductionorserviceindustrythatincludeseither

actual or standard costs associated with work not yet completed.

Working Papers• analyses,confirmations,schedules,transcripts,notesandothermemorandaprepared andaccumulatedbyaccountantsand/orauditorsintheperformanceofaprofessional engagement that supports the conclusions reached and any report issued.

Write-off• totransferanitemthatwasanassettoanexpenseaccount(e.g.,totransfer

an uncollectible account receivable to bad debts expense); and• theitemoramountreducedorcancelled.

T/V/W

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Additional resources

If you have any questions about accounting or becoming a CGA,

or if you’re interested in additional resources from the Certified

General Accountants of Ontario, please visit our website at

cga-ontario.org or contact us at 1-800-668-1454.

Certified General Accountants of Ontario

240 eglinton Avenue eastToronto, ON M4P 1K8416.322.6520 or 1.800.668.1454email: [email protected] | seeyourway.org

Pub. No. 09-126Cert no. XXX-XXX-000

See it, understand it, use it Accounting definitions

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