Principles of Financial Accounting 1

A collection of vocabulary terms and definitions covering basic financial accounting principles, concepts, and practices as discussed in the lecture notes.

Accrual basis of accounting

A basis of accounting where revenue and expenses are recognised when they are earned or incurred.

Cash basis of accounting

A basis of accounting where revenue and expenses are recognised when they are received or paid for.

Company

A form of business ownership characterized by limited liability for owners, a separate legal entity, and a perpetual life span.

Integrity and Objectivity

The ethical requirement for an accountant to be honest and unbiased in the discharge of official duties.

Double-entry bookkeeping

A system where every transaction must have a dual effect in the books of accounts.

Books of prime entry

Original entry books for recording financial information, including the Cash Book, Sale Day Book, and Purchases Day Book.

Separate entity concept

The principle that the business and its owner are treated as separate entities and the personal affairs of the owner are not considered.

Going concern

The assumption that a business will operate for a long period of time and will not be dissolved in the near future.

Money measurement

The accounting principle that only financial information is recorded in the books.

Matching concept

The principle that revenues should be matched against related expenses in a realistic way to determine net results for a period.

Accounting equation

The fundamental formula represented as: $Assets = Liabilities + Stockholder's\ equity$

Non-current assets

Assets such as motor vans, buildings, or manufacturing plants that are used by the business over a long period of time spanning beyond one accounting year.

Current assets

Assets that will be used or recovered within one accounting period, including cash, receivables, and prepayments.

Liabilities

Obligations of the business, including items such as account payables, short-term loans, and long-term loans.

Creditors

All those whom the business owes money to in the course of daily business transactions.

Journal

A book of primary entry where each business transaction is first entered before being posted to the ledger.

Sales invoice

A request for payment sent to a customer for goods delivered, showing details of payment terms.

Depreciable amount

The cost of an asset or its revalued amount less its residual value.

Residual value

The estimated amount expected from the disposal of an asset after deducting disposal costs.

Useful life

The period over which an asset is expected to be available for use by the business.

Straight line method of depreciation

A method that charges the depreciable amount in equal proportions to each reporting year over the expected useful life of the asset.

Prepayments

Monies paid for services in advance that are yet to be received; these are regarded as business assets.

Accruals

Business liabilities representing expenses that have been incurred but not yet paid.

Accounts receivable

Monies the business is expected to collect from its customers within a period of one year.

Inventory

An asset measured in financial statements at the lower of Cost and Net Realizable Value (NRV).