Fundamentals of Accounting, Business, and Management 1

Foundational vocabulary for senior high school students studying accounting, covering the history, principles, cycles, and types of business organizations.

Accounting (Modern Definition)

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Luca de Pacioli

An Italian priest and philosopher who, in 1494, published a book explaining the basic principles of the Double Entry System of Bookkeeping.

Recording

The phase of accounting that involves writing down business transactions in various ways according to accounting standards and organization size.

Classifying

The grouping of transactions or entries of the same nature at one account.

Summarizing

The phase of accounting that involves preparing financial statements to show the results of business transactions.

Financial Accounting

A branch of accounting primarily focused on the preparation of financial statements to communicate results to internal and external users.

Management Accounting

A branch of accounting that generates in-house information and customized reports for specific purposes to serve as benchmarks for company performance.

Government Accounting

Accounting practiced by government agencies using specific sets of policies and processes reviewed by the Commission on Audit (COA).

Auditing

A systematic, independent, and documented process for obtaining and evaluating audit evidence to determine if criteria are fulfilled.

Tax Accounting

A branch of accounting focused on the preparation of tax returns as required by the Bureau of Internal Revenue (BIR).

Cost Accounting

A branch that deals with collating cost information useful for setting prices of goods and services and improving efficiency.

Internal Users

Persons working within the organization, such as management, employees, and owners, who make decisions pertaining to internal activities.

External Users

Business enterprises or individuals with interests in the business who are not directly involved in daily activities, such as creditors, tax authorities, and investors.

Sole Proprietorship

A business owned by a single person who assumes full responsibility and is personally liable for all obligations.

Partnership

A form of business organization where two or more persons share ownership, liabilities, and profits based on an agreement.

Corporation

A legal entity separate and distinct from its owners, owned by shareholders, and managed by a Board of Directors with a legal life of at least 50 years.

Service Business

A type of business that provides intangible products (no physical form) such as professional expertise or maintenance.

Merchandising Business

A type of business that buys products at wholesale prices and sells them at retail prices without changing their physical form.

Manufacturing Business

A business that purchases raw materials and uses labor and factory overhead to transform them into a finished product.

Generally Accepted Accounting Principles (GAAP)

Widely accepted sets of rules and standards that guide accountants in the application of accounting and preparation of financial statements.

Matching Principle

A principle requiring that revenues and expenses be recognized in the accounting period in which they are earned and incurred respectively.

Going Concern

The assumption that a business entity will continue to operate in the foreseeable future without management's intention to liquidate.

Accounting Equation

$$\text{ASSETS} = \text{LIABILITIES} + \text{CAPITAL}$$

Assets

Tangible or intangible items that a company owns which have economic value and bring in revenues.

Current Assets

Items completely consumed, sold, or converted into cash within one year or 12 months.

Liabilities

Debts or financial obligations of an individual or company to other individuals or companies.

Residual Value

Also known as Equity, it represents the value of assets after deducting total liabilities.

Chart of Accounts

A created list of accounts used by an organization to define and segregate each class of asset, liability, capital, revenue, and expenditure.

Journal

Referred to as the book of original entry; it records business transactions in chronological order using the double-entry system.

Ledger

Referred to as the book of final entry; it summarizes activities for each account after they are posted from the journals.

Double Entry Accounting

A method involving at least two accounts where one receives a debit (left side) and another receives a credit (right side).

Sales Invoice

An accountable document that serves as proof for the sale of goods to customers.

Official Receipt

An accountable document issued to customers upon acceptance of payment for sales or collection of receivables.

Normal Balance (Assets)

The normal balance is a Debit; a debit entry increases the account while a credit reduces it.

Normal Balance (Liabilities/Capital)

The normal balance is a Credit; a credit entry increases the account while a debit reduces it.

Depreciation Expense (Straight Line)

$$\text{Depreciation expense} = \frac{\text{Cost of the asset} - \text{Salvage value}}{\text{Estimated Useful Life}}$$

Statement of Financial Position

Also known as the Balance Sheet, it presents the financial position (Assets, Liabilities, Equity) of an entity as of a given date.

Statement of Income

Reports a company's financial performance in terms of net profit or loss over a specified period by deducting expenses from income.

Perpetual Inventory System

A system where the business maintains a continuous running record of inventory accounts and costs of sales.

Periodic Inventory System

A system where cost of sales and ending inventory are determined through a physical count at the end of the period.