Principles of Accounts: Comprehensive Lecture Review

Vocabulary practice flashcards covering introductory accounting concepts, accounting theories, financial elements, double-entry rules, internal controls, and ratio analyses based on Mr Tang's lecture notes.

Accounting

The provision of accounting information for stakeholders to make decisions.

Accountants (Role as Stewards)

Stewards of businesses who are responsible for providing accounting information for stakeholders to make decisions, supplying relevant information in a timely manner based on accounting theories, and adhering to professional ethics.

Integrity

A professional ethic defined as being straightforward and honest in all professional relationships.

Objectivity

A professional ethic defined as not letting bias, conflict of interest, or undue influence of others override professional judgment.

Trading Business

A business that buys and sells goods to earn income.

Service Business

A business that provides services to customers to earn income.

Sole Proprietorship

A business structure owned by one person who has full control over the business, has access to funds limited to personal funds, and has unlimited liability as the owner is personally liable for all business debts and losses.

Limited Liabilities Partnership

A business structure that can get more funds from new or existing partners, whose partners are not personally liable for business debts and losses, and has few regulatory requirements to comply with.

Private Limited Company

A business structure owned by 50 or fewer shareholders that can raise more funds by issuing shares, whose shareholders are not personally liable for business debts and losses, and allows transfer of ownership by selling shares.

Cash Transaction

A transaction that happens when payment is made immediately during a sale or purchase.

Credit Transaction

A transaction that happens when payment is postponed to a later date during a sale or purchase.

Accounting Information System (5 Stages)

The five progressive stages: Source document (Stage 1), Journal (Stage 2), Ledger (Stage 3), Trial balance (Stage 4), and Financial statements (Stage 5).

Accounting Cycle (4 Stages)

The recurring four-stage process: Stage 1: Identify and record, Stage 2: Adjust, Stage 3: Report, and Stage 4: Close.

Source Document

A document that provides evidence that a transaction has taken place and provides details of the transaction to be recorded in the journal.

Objectivity Theory

An accounting theory stating that accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases.

Invoice

A source document used when buying or selling goods and services on credit to customers.

Debit Note

A source document used to correct an undercharge to credit customers.

Credit Note

A source document used for goods returned by credit customers or to correct an overcharge to credit customers.

Receipt

A source document issued or received when cash or cheques are received.

Payment Voucher

A source document used when paying cash or cheques.

Bank Statement

A source document showing bank-related transactions made on behalf of the business.

Basic Accounting Equation

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

Expanded Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Capital} + \text{Income} - \text{Expenses} - \text{Drawings}$$

Assets

Resources owned or controlled by the business that are expected to provide future benefits.

Liabilities

Obligations owed by the business to others that are expected to be settled in the future.

Equity

The claim by the owner on the net assets of a business.

Income

The amount earned through business activities.

Expenses

Costs incurred to generate income.

Double-entry Rule

A rule stating that for every transaction, at least two accounts will be affected, and the total amount debited must be equal to the total amount credited in the affected accounts.

Debit and Credit Rules

Assets, Expenses, and Drawings increase with a Debit and decrease with a Credit; Liabilities, Income, and Capital increase with a Credit and decrease with a Debit.

Trial Balance

A list of all ledger accounts and their ending balances at a point in time, used to check arithmetic accuracy in recording and facilitate the preparation of financial statements.

Accounting Period Theory

An accounting theory stating that the life of a business is divided into regular time intervals for reporting purposes so that financial statements provide timely accounting information for decision-making.

Non-current Assets

Resources owned or controlled by the business that are expected to provide benefits beyond one financial year.

Current Assets

Resources owned or controlled by the business that are expected to provide benefits that will be used up within the next financial year or assets that can be converted to cash easily.

Non-current Liabilities

Obligations owed by the business which are due for settlement beyond one financial year.

Current Liabilities

Obligations owed by the business which are due for settlement within the next financial year.

Gross Profit

The profit earned specifically from trading activities by buying and selling goods.

Profit for the Year

The overall profit earned from the whole business operations.

Income Received in Advance

The amount of income received but not yet earned; recognised as income in the statement of financial performance in the next financial year when it is earned.

Income Receivable

The amount of income earned but not yet received.

Revenue Recognition Theory

An accounting theory stating that sales revenue is earned when goods are sold and service fee revenue is earned when services are provided.

Accrual Basis of Accounting

An accounting concept stating that income is recognised when earned regardless of whether money is received or not, and expense is recognised when incurred regardless of whether money is paid or not.

Matching Theory

An accounting theory stating that expenses incurred must be matched against income earned in the same period to determine the profit for that period.

Prepaid Expense

The amount of expense paid but not yet incurred; recognised as an expense in the statement of financial performance in the next financial year when it is incurred.

Expense Payable

The amount of expense incurred but not yet paid.

Trade Discount

A reduction to the list price given to encourage bulk purchases, reward customer loyalty, or clear slow-moving inventory.

Cash Discount

A reduction to the net invoiced price given to encourage early payment and cut down the risk of uncollectible debt.

Segregation of Duties

An internal control method requiring that cash handling and cash recording duties are performed by different employees.

Custody of Cash

An internal control procedure where the business secures cash and cheques in locked storage.

Bank Reconciliation

An internal control process to identify items that caused differences between the ending balance of the cash at bank account and the bank statement balance.

Inventories

Goods bought by the business for resale purpose.

FIFO Method

First-In-First-Out inventory valuation method which assumes that goods bought first are sold first, meaning cost of sales consists of earlier batches bought and ending inventory consists of the latest batches bought.

Net Realisable Value

The estimated selling price less any cost to sell the inventory.

Prudence Theory

An accounting theory stating that a business should not overstate assets and profits nor understate liabilities and losses.

Trade Receivables

Amounts owed to the business by credit customers.

Allowance for Impairment of Trade Receivables

The amount owed by credit customers that are estimated to be uncollectible.

Impairment Loss on Trade Receivables

The amount of possible losses due to the change in allowance for impairment of trade receivables.

Depreciation

The allocation of the cost of a non-current asset as an expense over its estimated useful life.

Consistency Theory

An accounting theory stating that once an accounting method is chosen, this same method should be applied to all future accounting periods to enable meaningful comparison.

Straight-line Method of Depreciation

A depreciation method applied when it is assumed that an asset provides equal benefits over its useful life, matching it with equal depreciation each period.

Reducing-balance Method of Depreciation

A depreciation method applied when it is assumed that an asset provides more benefits in the earlier years of its useful life, matching it with more depreciation in earlier years and less in later years.

Capital Expenditure

The cost to buy, extend, or improve non-current assets that provides benefits which last for more than one year, recorded as non-current assets in the statement of financial position.

Revenue Expenditure

The daily running cost to operate or maintain non-current assets that provides benefits which last only for the current year, recorded as an expense in the statement of financial performance.

Materiality Theory

An accounting theory stating that financial information is only material to the financial statements if it is likely to make a difference to decision-making.

Trade Payables

Amounts owed by the business to credit suppliers.

Bank Loan

A fixed amount borrowed by a business where money is transferred to its bank account, having a fixed repayment period and classified as a non-current liability.

Bank Overdraft

A credit arrangement that is not a fixed amount, occurring when withdrawals exceed deposits up to an agreed limit, reduced by subsequent deposits and classified as a current liability.

Capital

The owner's contributions of own resources for business use.

Drawings

The owner's withdrawals of business resources for own use.

Accounting Entity Theory

An accounting theory stating that activities of the business are separate from the activities of the owner, meaning all transactions are recorded from the viewpoint of the business.

Share Capital

The total value of shares issued to shareholders.

Retained Earnings

The accumulated profits that have not been distributed to the shareholders.

Dividends

The part of profits or retained earnings that have been distributed to shareholders.

Profitability

A financial measure of the ability of a business to generate income and manage expenses.

Mark-up on Cost

$$\text{Mark-up on Cost} = \frac{\text{Gross Profit}}{\text{Cost of Sales}} \times 100$$

Gross Profit Margin

$$\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Net Sales Revenue}} \times 100$$

Profit Margin

$$\text{Profit Margin} = \frac{\text{Profit for the Period}}{\text{Net Sales Revenue}} \times 100$$

Return on Equity

$$\text{Return on Equity} = \frac{\text{Profit for the Period}}{\text{Average Equity}} \times 100$$

Liquidity

The ability of a business to have sufficient cash or other current assets to pay current liabilities.

Working Capital

$$\text{Working Capital} = \text{Total Current Assets} - \text{Total Current Liabilities}$$

Current Ratio

$$\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}}$$

Quick Ratio

$$\text{Quick Ratio} = \frac{\text{Total Current Assets} - \text{Inventory} - \text{Prepayments}}{\text{Total Current Liabilities}}$$

Trade Receivables Management

The ability of a business to grant appropriate credit terms to promote sales and to collect its debts from credit customers on a timely basis.

Rate of Trade Receivables Turnover

A ratio measuring the number of times a business collects payments from credit customers: $\frac{\text{Net Credit Sales Revenue}}{\text{Average Net Trade Receivables}}$ for trading businesses or $\frac{\text{Net Credit Service Fee Revenue}}{\text{Average Net Trade Receivables}}$ for service businesses.

Trade Receivables Collection Period

A ratio measuring the number of days a business takes to collect payments from credit customers: $\frac{\text{Average Net Trade Receivables}}{\text{Net Credit Sales Revenue}} \times 365\,\text{days}$.

Inventory Management

The ability of a business to manage its inventory at an optimal level to meet customer demand.

Rate of Inventory Turnover

An efficiency ratio measuring the number of times a business sold and replaced goods: $\frac{\text{Cost of Sales}}{\text{Average Inventory}}$.

Days Sales in Inventory

An efficiency ratio measuring the number of days a business takes to sell goods: $\frac{\text{Average Inventory}}{\text{Cost of Sales}} \times 365\,\text{days}$.