9 Describe accounting and finance for Canadian business.
Understanding the Difference Between Accounting and Finance
SmartAsset: The Difference Between Accounting and Finance
Accounting and finance serve distinct but complementary roles in business:
Accounting focuses on tracking, recording, and reporting financial transactions—looking at the past to ensure accuracy and compliance.
Finance takes a broader approach, managing assets and liabilities while planning for future growth.
Key Differences:
Accounting is retrospective, ensuring accurate reporting of financial activities and adherence to laws and standards.
Finance is forward-looking, strategizing asset acquisition, investment growth, and risk mitigation.
Career Considerations:
If you enjoy detailed financial records and compliance, accounting may be the right path.
If you’re interested in high-level strategy and long-term financial planning, finance may be a better fit.
Course Focus:
Accounting students study subjects like accounting principles, tax law, business law, and ethics.
Finance students explore topics like macroeconomics, international finance, financial engineering, and corporate finance.
9.1 Define accounting and its uses.
Accounting: The International Language of Business
Accounting translates the financial activities of a business—its dollars and cents—into a structured format that stakeholders can easily understand and use.
Why is Accounting Important?
This video explains how accounting plays a crucial role in business, combining the output of all functional areas to support informed decision-making:
📺 [Watch up to 1:43] – The Importance of Accounting in Business.
The Role of Accounting: Internal vs. External
Internal Accounting
Within a business, financial transactions must be accurately recorded and managed. This process involves:
Bookkeepers handling day-to-day financial tasks such as recording transactions, categorizing expenses, processing invoices, and managing payroll and bank deposits.
Accountants setting up and overseeing the bookkeeping system, then compiling data into financial statements (more on this shortly).
Managerial Accountants (Finance Managers) analyzing financial information to help business owners and managers make data-driven decisions.
External Accounting
While internal accounting focuses on operational needs, certain financial data must also be shared externally:
Financial Accountants prepare and analyze financial statements for external stakeholders such as banks, investors, and regulatory bodies.
Tax Accountants develop strategies to optimize after-tax cash flow and ensure compliance with the Canada Revenue Agency (CRA).
Auditors (Certified Public Accountants) independently verify the accuracy of financial statements before they are presented to external entities, such as government agencies, banks (for loan applications), and shareholders.
We’ll explore business loans and shareholder investments in more detail in the next learning step: The Role of Finance in Business.
9.2 Review the accounting process.
Accounting is often referred to as the international language of business. It is built on well-established principles and practices with very few “grey areas,” making it a structured discipline. Unlike business functions such as human resources or marketing, accounting follows strict rules that require consistent learning and application. Some individuals find this structured approach appealing as a career, while others do not—and that’s what makes the world diverse!
The world of accounting is based on two fundamental concepts:
The Accounting Equation
Double-Entry Bookkeeping
Understanding the Accounting Equation and Double-Entry Bookkeeping
The following video provides an excellent summary of these concepts: 📽 Video: Double Entry Accounting System Explained 101 – Accounting Equation
Watch here (Running time: 4:50)
Key Takeaways from the Video
Up to 1:45
What is the Accounting Equation?
Assets = Liabilities + Owner’s Equity. The left side of this equation must always equal the right side.
Examples of Assets
Cash, machinery, supplies, equipment, buildings
Assets are anything that has not been consumed yet. As they are consumed, they become expenses.
Up to 2:10 3. What is the Purpose of Assets?
Assets help generate future revenue.
Up to 2:24 4. Examples of Liabilities
Bank loans, accounts payable (amounts owed to suppliers on account)—anything owed to an external party.
What is Owner’s Equity?
The portion of the business owed to the owner(s), which can be an individual in a sole proprietorship, partners in a partnership, or shareholders in a corporation. (Refer to our discussion on business ownership for a refresher.)
Double-Entry Accounting System
In the double-entry system, an increase in an asset (left side of the balance sheet) must be matched by:
A decrease in another asset, and/or
An increase in a liability or owner’s equity.
Accounting transactions are divided into debits and credits.
For every debit posted, there must be an equal and opposite credit.
Debits and Credits Rules
(Not mentioned in the video, but essential to understand!)
An increase to an asset account = Debit
A decrease to an asset account = Credit
An increase to a liability or equity account = Credit
A decrease to a liability or equity account = Debit
The Accounting Cycle
A search for “accounting cycle” online will yield various models ranging from 4 to 10+ stages. However, the fundamental steps remain the same. We will focus on the four basic steps:
Four Basic Steps in the Accounting Cycle
Gathering Financial Information
Monthly supplies purchased, bills paid, sales made, and receipts collected are compiled.
Recording Transactions in a Journal
All financial transactions are recorded chronologically, including amounts, dates, and descriptions.
This record is called a journal, and the entries are known as journal entries.
Most businesses use computerized accounting software for this process.
Posting to the Ledger
Financial transactions are categorized into specific accounts.
This structured record is called the ledger.
Creating Financial Statements
The organized financial data is used to generate financial reports for analysis and decision-making.
Automation in Accounting
Most of the accounting process is automated through accounting software.
These tools help reduce human error and improve efficiency in financial management.
By mastering these principles and processes, businesses can maintain accurate financial records and make informed decisions.
9.3 Review financial statements.
Final Step of the Accounting Cycle: Preparing Financial Statements
Financial statements provide a structured and consistent way to present and analyze a business’s financial data. These statements are valuable both internally for management decision-making and externally for stakeholders such as investors, lenders, and regulatory bodies.
External Financial Reporting
As we discussed earlier, financial accountants prepare audited statements for external use. These statements are often included in a company’s annual report, which is presented to the public.
📌 Example: Review Sask Polytech’s latest Annual Report (2022-23 Annual Report) and refer to the financial information starting on page 37.
Understanding a Business’s Financial Statements
To deepen your understanding, we will review the three fundamental financial statements of a business.
💡 Group Activity: Break into groups to discuss each financial statement and present key takeaways to the class.
1. Income Statement
Purpose:
The income statement summarizes a business’s financial performance over a specific period (e.g., a month or year).
Key Components:
Revenue: Total income from sales.
Expenses: Costs incurred during the period.
Profit (Net Income): Revenue minus expenses.
Taxes & Interest: Deducted to determine final net income.
Retained Earnings: After closing the accounting period, net income is transferred to the owner’s equity section of the balance sheet.
📌 Additional Resource: Explore BDC’s Income Statement Guide for more insights.
2. Balance Sheet
Purpose:
Unlike the income statement, which tracks financial performance over time, the balance sheet provides a snapshot of a business’s financial position at a specific point in time.
Key Components:
Assets: What the business owns.
Liabilities: What the business owes.
Owner’s Equity: The owner’s investment in the business.
🔹 The balance sheet follows the fundamental accounting equation:
Assets = Liabilities + Owner’s Equity
📌 Additional Resource: Learn more from BDC’s Balance Sheet Guide.
3. Cash Flow Statement
Purpose:
The cash flow statement (or statement of changes in financial position) tracks cash inflows and outflows over a given period.
Key Components:
Sources of Cash: Activities that increase cash flow.
Uses of Cash: Activities that decrease cash flow.
📌 Additional Resource: Check out BDC’s Cash Flow Statement Guide.
Financial Statement Tools & Software
Most businesses use accounting software to generate financial statements automatically.
✅ Resources for Financial Planning & Statement Templates:
Intuit QuickBooks Small Business Budget Template
✅ Top Accounting Software for Small Businesses:
PCMag’s Best Small Business Accounting Software (2021)
9.4 Explain a business’s performance using ratio analysis.
Understanding Financial Statements
Now that you have learned how raw financial data is created and organized into financial statements, it is crucial to know how to interpret these statements. Without proper analysis, financial statements do not provide much useful information.
To assess business performance effectively, financial statements must be analyzed to determine whether a business is performing well or if improvements are needed.
Just as students compare their grades to class averages, businesses compare their performance to industry peers using financial ratios. These ratios help eliminate differences in business size and volume, allowing for a meaningful comparison.
Next, we will explore how financial statements are analyzed using ratio calculations. Check out BDC’s Financial Tools page for useful calculators: BDC Financial Tools.
Importance of Cash Flow Budgeting
While financial ratios provide valuable insights, cash flow budgeting is equally important, especially for new businesses. Financial managers (managerial accountants) must prepare an accurate budget to guide financial decisions. As part of their Business Plan Project, students are required to create a budget.
Why Budgeting is Crucial:
Without a financial goal, it is impossible to determine whether the business has achieved success. A well-prepared budget helps control cash flow and ensures the business has the necessary capital to seize emerging opportunities.
Key Budget Components:
Income Sources: Identify and add all revenue sources, including income from operations, investments, and interest on savings.
Fixed Costs: Identify consistent monthly expenses, such as rent and utilities.
Variable Expenses: Include fluctuating costs like electricity and raw materials.
One-Time Expenses: Account for large purchases, such as real estate or equipment.
Emergency Funds: Always allocate a contingency fund for unexpected expenses.
For additional budgeting resources, refer to Intuit QuickBooks: Small Business Budget Template.
Benefits of Budgeting:
Properly manage cash flow
Improve income and profits
Decrease expenses and fixed costs
Monitor performance
Track slow and peak seasons
Gain industry insights
Determine best-selling products/services
Enhance decision-making
Prepare for emergencies
Hundreds of free business budgeting templates are available. One of the simplest and most effective ones is provided by QuickBooks. You can access the Excel version in Brightspace or directly from the QuickBooks site.
Ethics in Business Finance and Accounting
Ethical conduct is essential across all business functions. However, ethical behavior is particularly critical in accounting and finance due to the direct involvement with money. Trust and long-term growth depend on financial transparency and integrity.
Ethics in Accounting:
Financial misrepresentation can lead to major corporate scandals.
Adherence to Generally Accepted Accounting Principles (GAAP) is crucial to maintaining ethical standards.
Case Study: Trump Organization In 2021, a federal investigation in the U.S. alleged that Donald Trump’s businesses manipulated asset values. Inflated values helped secure loans, while understated values reduced tax liabilities. Accountants, both internal and external, played a key role in these decisions.
2008 Financial Crisis: Unethical financial practices by Wall Street banks contributed significantly to the 2008 financial crisis. Misleading accounting and risk-taking behaviors led to widespread economic downturns.
CPA guidelines require firms to maintain strict independence to prevent conflicts of interest. Auditing one’s own work compromises ethical integrity.
Why High-Integrity Accounting Firms Matter:
Ensures financial statement accuracy.
Builds trust with investors and stakeholders.
Prevents financial scandals and maintains economic stability.
The Big Four Accounting Firms & Scrutiny
Why is the dominance of the Big Four accounting firms being scrutinized?
The Big Four (PwC, Deloitte, KPMG, EY) control over 75% of the global accounting market. Their dominance raises concerns over potential conflicts of interest.
Conflict of Interest:
Critics argue that large accounting firms fail to critically evaluate client accounts due to their reliance on consultancy work.
Nonaudit services generate most of their revenue, which may compromise independent financial assessments.
Discussion Questions:
Why is the Big Four’s dominance a concern?
Do you think accounting firms face conflicts of interest? Why or why not?
Are current accounting regulations sufficient to ensure ethical financial practices? Support your answer with reasoning.
9.5 Identify the financial institutions that are crucial to businesses.
The Role of Financial Institutions in Business
Banks and insurance companies played a pivotal role in the 2008 Financial Crisis, alongside accountants. This highlights the crucial role these institutions hold in the business world and the necessity of regulatory bodies that keep them in check.
The Office of the Superintendent of Financial Institutions (OSFI), the regulatory body overseeing Canada’s financial system, states:
“A properly functioning financial system that inspires a high degree of confidence makes a significant contribution to Canada’s economic performance.”
Every business must engage with financial institutions to operate effectively. Making informed choices about which institutions to work with is essential.
Types of Financial Institutions Businesses Rely On
In Canada, there are various financial institutions, but for this course, we will focus on banking and insurance. Below are key financial service providers businesses typically need:
Chartered Banks & Credit Unions – Provide short- and long-term financing, operating and savings accounts, investment options, and small business financial consultation (e.g., Business Development Bank of Canada – BDC).
Credit Card Companies – Facilitate debit and credit processing solutions.
Insurance Companies – Offer property, liability, and life insurance coverage.
Investment Advisors/Brokers – Assist in financial planning and investment management.
Choosing a Financial Institution for Your Business
One of the first steps in starting a business is securing financial services for daily operations. This includes:
Business chequing (operating) accounts
Savings accounts
Operating loans to manage cash flow
Your choice of banking institution depends on factors such as:
The types of products/services you sell
Daily transaction volume
The need for financing beyond deposit banking
Business complexity and advisory needs
International banking requirements
Convenience, location, hours, and relationship management
For guidance, refer to:
The Balance for Small Business: Best Small-Business Bank Accounts in Canada
HowToSaveMoney.ca: Best Business Bank Accounts in Canada
QuickBooks: How to Choose the Best Bank for Your Canadian Small Business
The Role of Insurance in Business Success
Running a business involves risks, and while no insurance can provide absolute guarantees, having the right coverage can significantly reduce exposure to financial loss.
Key considerations when choosing business insurance:
Identifying risks specific to your business
Understanding available insurance options
Selecting a reputable insurance provider
For a comprehensive overview, see:
Wagepoint: A Mini Guide to Small Business Commercial Insurance in Canada
9.6 Discuss the role of finance in business.
Debt and Equity Financing: A Comparison
When businesses seek to raise funds for large-scale, long-term capital expenses and projects, they generally have two primary options: debt financing and equity financing. We first introduced these concepts in Learning Outcome 6. The key question is: How does a business decide between debt and equity financing for its long-term capital requirements?
The Balance for Small Business (link) provides an excellent recap of each type of financing. Consider the following pros and cons of both options:
Debt Financing
Pros (✔)
You remain the sole owner of the business and retain total control.
You keep all profits (and bear all losses).
Interest on debt is tax-deductible as a business expense.
Cons (✖)
Failure to make scheduled principal and interest payments can put the business at risk.
Equity Financing
Pros (✔)
No burden of debt—there is no requirement to repay the funds.
Cons (✖)
You relinquish partial control of your business to shareholders and must act in their best interests.
Debt Financing: Borrowing with Long-Term Liabilities
Businesses that opt for debt financing borrow money that must be repaid over a long period. This can be done in two ways:
Bank Loans: Traditional lending institutions, such as banks, offer loans with various restrictions and interest rates.
Bonds: Larger companies may issue bonds instead of taking out bank loans. A bond is essentially an I.O.U. issued by the company to investors in exchange for capital. The company makes semi-annual interest payments to bondholders and repays the principal at maturity.
Regardless of the method, borrowed funds are recorded as liabilities on the business’s balance sheet, and repayment is required.
Equity Financing: Raising Capital through Ownership Shares
For businesses that prefer to avoid debt, equity financing is an alternative. This involves issuing shares of the company to investors in exchange for capital.
These funds are recorded in the owners’ equity section of the balance sheet.
Investors expect a return, either through dividends or capital gains (an increase in share price over time).
When a company issues shares for the first time, it does so in the primary market. Afterward, shares are bought and sold in the secondary market (e.g., stock exchanges).
Shareholders effectively become part-owners of the business.
Case Study: Debt vs. Equity Financing in Action
Consider Meta (Facebook) as an example of a business using both financing options:
May 2023: Meta raised $8.5 billion through a bond issue (source).
Dec 2023: Meta issued new shares for the first time in two years (source).
Alternative Financing for Small Businesses
Start-ups and small businesses may not have the scale for issuing bonds or stocks. Here are some alternative financing methods:
1. Personal Savings, Friends, and Family
One of the most common sources of start-up capital.
2. Government Grants and Loans
The Canadian federal and provincial governments offer various grants and financing programs (source).
3. Business Development Bank of Canada (BDC)
A federal Crown corporation offering financing and advisory services to support Canadian businesses (source).
4. Crowdfunding
A method where entrepreneurs raise small amounts of capital from a large number of individuals, often via online platforms.
Pros (✔):
Provides early access to capital and potential customers.
Helps gauge market interest in a product or service.
Builds brand awareness.
Cons (✖):
Many campaigns fail to reach their funding targets.
Running a successful campaign requires significant marketing effort.
Ideas may be exposed before intellectual property protections are in place.
5. Angel Investors and Venture Capitalists
Angel Investors: Individuals investing their own funds (typically under $1M) to help a business grow.
Venture Capitalists: Companies investing with the expectation of high returns, often seeking some control over business decisions.
For more alternative financing options, visit Business News Daily (source).
The Future of Digital Banking and Transactions
1. Will Digital Wallets Revolutionize Electronic Banking and In-Store Transactions?
Many argue that digital wallets (Apple Pay, Google Wallet, etc.) will significantly impact electronic transactions by increasing convenience and security.
2. How Will Digital Wallets Affect Traditional Banks?
Digital wallets offer added convenience, storing not only payment information but also loyalty cards, boarding passes, and event tickets. This could push banks to develop competitive digital solutions.
3. Risks and Mitigation Strategies for Digital Wallets
Risk: Identity theft and data breaches.
Solution: Consumers can enhance security by using multi-factor authentication (MFA) and encryption.
Conclusion
There are numerous financing options available for businesses, from traditional loans and bonds to equity investments, crowdfunding, and venture capital. The key to success lies in understanding the risks and rewards of each method and choosing the best fit for the business’s specific needs.
9.7 LO9 – Business Plan