Fundamentals of Accounting: Double Entry and Accounting Equation

This set of vocabulary flashcards covers the fundamental principles of accounting, including the five elements of financial statements, the accounting equation, source documentation, prime entry books, and the rules of the double-entry system.

Asset

A resource controlled by the business as a result of a past transaction and from which future economic benefits are expected to flow to the business.

Current Assets

Assets expected to be used, sold, or converted into cash within a short time period, specifically within 12 months, in the ordinary activities of a business.

Non-Current Assets

All assets that cannot be considered as current assets.

Liabilities

Payables of a business arising from past transactions that result in an outflow of economic resources upon settlement and represent a current obligation.

Current Liabilities

Liabilities that should be settled within a short period of time, such as within 12 months; also termed as short-term liabilities (e.g., Trade creditors, accrued electricity expense).

Non-Current Liabilities

All liabilities that cannot be considered as current liabilities, such as the portion of a bank loan settled after one year.

Equity

The value of assets that belongs to the owners of the business after the settlement of liabilities.

Income

An increase in equity except for those due to capital introductions by owners.

Expenses

A reduction in equity except for those due to drawings.

Basic Accounting Equation

$$\text{Assets} = \text{Equity}$$

Expanded Accounting Equation

$$\text{Assets} = \text{Equity} + \text{Liabilities}$$

Source Documents

Documents prepared at the time a transaction or event takes place, containing detailed information about the transaction to be used as evidence and for verification.

Receipt

The source document used for receipts of cash and cheques.

Payment Voucher

The source document used for payments made by cheques.

Petty Cash Payment Voucher

The source document used for payments made by petty cash.

Purchase Invoice

The source document used when inventory is purchased on a credit basis.

Sales Invoice

The source document used when inventory is sold on a credit basis.

Debit Note

The source document used for return outwards (purchase returns).

Credit Note

The source document used for return inwards (sales returns).

Journal Voucher

The source document for transactions that are not covered by other specific source documents.

Prime Entry Books

The books in which transactions are first recorded according to their order of occurrence using a generally accepted method before ledger posting.

Cash Receipts Journal

The prime entry book for recording receipts of cash and cheques.

Cash Payments Journal

The prime entry book for recording payments made by cheques.

Purchase Journal

The prime entry book for recording the purchase of inventory on a credit basis.

Sales Journal

The prime entry book for recording the sale of inventory on a credit basis.

Double Entry System

The recording of the dual effect of a transaction as debit and credit in the ledger accounts accurately.

Asset Double Entry Rule

Increase is recorded as a debit; decrease is recorded as a credit.

Expense Double Entry Rule

Increase is recorded as a debit; decrease is recorded as a credit.

Capital/Liability/Revenue Double Entry Rule

Increase is recorded as a credit; decrease is recorded as a debit.

Trial Balance

A report prepared including all balances of ledger accounts on a particular date to ensure the numerical accuracy of the double entry system and to assist in preparing financial statements.