Principles of Accounts Vocabulary

Vocabulary flashcards covering fundamental accounting concepts, terms, and statements from Principles of Accounts.

Business

A person or group of persons engaging in commercial activity, using resources to provide goods and services to consumers with a view to making a profit.

Profit

The financial gain achieved when total revenues exceed total costs ($\text{Revenues} > \text{Costs}$).

Loss

The financial result when total costs exceed total revenues ($\text{Revenues} < \text{Costs}$).

Transactions

Daily business activities necessary for producing goods or providing services, such as purchasing raw materials, selling finished goods, and borrowing funds.

Book-keeping

The process of recording business transactions manually or using software like Sage or QuickBooks according to accounting principles and conventions.

Accounting

The process that takes book-keeping further by classifying, summarizing, preparing financial statements, and communicating business accounts and reports to users.

Purposes of Accounting

The four main objectives of accounting: to determine profit, to determine asset and liability values, to provide business information, and to maintain financial control.

Internal Users

Users inside the business—including owners/shareholders, managers, and employees—who use financial information for decision making, evaluating investments, and trade union negotiations.

External Users

Users outside the business—including potential investors, banks/financial institutions, tax inspectors/government, and suppliers—who use accounting reports to evaluate investment profitability, credit, and taxes.

Accounting Cycle

The repeating annual process of recording and processing all financial transactions of a business from initial occurrence to representation on financial statements.

Source Documents

Documents containing original information on financial transactions, such as invoices and receipts, which form the first stage of the accounting cycle.

Trial Balance

A statement extracted to check the arithmetical accuracy of double-entry records.

Assets

Anything the firm possesses or owns, including buildings, motor vehicles, inventories, bank money, and debts owed by customers.

Liabilities

Amounts owing to external persons or organizations for assets supplied to a business or expenses incurred but not yet paid.

Capital (Owner's Equity / Net Worth)

Whatever resources the owner invests or brings into the business.

Fixed (Non-Current) Assets

Assets owned and used in business operations for an extended period of more than 12 months that are not bought for resale, such as land, premises, and machinery.

Current Assets

Assets with a short lifespan of less than 12 months that can be easily converted into cash, including inventory, accounts receivable, bank balance, and cash in hand.

Long-term (Non-Current) Liabilities

Liabilities that the business has more than 12 months to repay, such as long-term loans, mortgages, and debentures.

Current (Short-term) Liabilities

Liabilities that must be repaid within 12 months, such as accounts payable/creditors, bank overdrafts, and expenses owing.

Mortgage

A special type of long-term loan taken specifically to purchase property.

Debenture

A type of long-term loan that applies specifically to companies.

Bank Overdraft

A facility provided by a bank allowing a firm to write cheques for more than the balance in its account, which must be repaid with interest.

Accounting Equation

The core accounting formula stating that $\text{Assets} = \text{Capital} + \text{Liabilities}$ ($A = C + L$), which can be rewritten as $C = A - L$ or $L = A - C$.

Balance Sheet (Statement of Financial Position)

A financial document showing the financial position of a business at a specific date, expressing the formula $\text{Assets} - \text{Liabilities} = \text{Capital}$.

Liquidity

A measure of how rapidly an asset can be converted into cash.

Order of Liquidity

The method of listing assets on a statement starting with the most liquid asset (cash) down to the least liquid asset (land).

Order of Permanence

The method observed in presenting the Balance Sheet, listing assets starting with those the firm will own the longest (land) down to the least permanent asset (cash).