Fundamentals of Accounting - Unit 4: The Accounting Cycle

Comprehensive vocabulary flashcards covering Unit 4: The Accounting Cycle, Promissory Notes, and Merchandising Transactions from the Fundamentals of Accounting course.

Accounting Cycle

A series of steps performed during each accounting period to classify, record, and summarize business data and produce financial information.

Step 1 of the Accounting Cycle

Analyzing business transactions from source documents.

Step 2 of the Accounting Cycle

Journalizing business transactions.

Step 3 of the Accounting Cycle

Posting to the general ledger.

Step 4 of the Accounting Cycle

Preparing a trial balance.

Step 5 of the Accounting Cycle

Preparing a worksheet (optional).

Step 6 of the Accounting Cycle

Journalizing and posting adjusting entries.

Step 7 of the Accounting Cycle

Preparing financial statements.

Step 8 of the Accounting Cycle

Journalizing and posting closing entries.

Step 9 of the Accounting Cycle

Preparing a post-closing trial balance.

Step 10 of the Accounting Cycle

Journalizing and posting reversing entries.

Business Transactions

Financial events that change the assets, liabilities, and equity of a business entity.

Business Documents

Source documents that serve as the basis for recording business transactions.

Purchase Requisition

A document listing goods to be ordered or items needed by a requesting department, issued to the purchasing department.

Purchase Order

A document issued by the buyer to the seller to order goods.

Receiving Report

A document prepared after inspection by the receiving department to show the quantity and condition of goods received.

Sales Invoice

An invoice issued by the seller to the buyer.

Purchase Invoice

An invoice associated with a purchase, identified as issued by the buyer to the seller.

Credit Note

A document issued by the seller to the buyer for returns or allowances.

Debit Note

A document issued by the buyer to the seller for returns or allowances.

Statement of Account

A reminder or request for payment issued by a seller or service provider.

Remittance Advice

A document issued by the buyer informing the seller that payment has been made, normally through bank transfer.

Receipt

A document acknowledging payment received through cash, cheque, or bank transfer.

Promissory Note

A written promise by the payor to pay a specified amount on a certain date.

Payor

The person or entity promising to pay on a note.

Payee

The person or entity receiving payment on a note.

Voucher

A document for payments made either by cash or cheque.

Petty Cash Voucher

A document for payments made from the petty cash fund.

Inventory Take Sheet

A document recording the inventory count and serving as the basis for recording ending inventory; also called a stock take sheet.

Return

An actual return of goods due to damage, delivery issues, or incorrect specifications.

Allowance

A price reduction granted without the actual return of goods.

Basic Rule of Debit and Credit

Increases are recorded on the normal balance side; decreases are recorded on the opposite side.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$

Account

A written record of the assets, liabilities, and owner's equity of a business.

Chart of Accounts

A list of accounts used by a business to record its financial transactions.

Normal Balance

The side of an account in the accounting equation on which the account normally has its balance.

Double-Entry System

An accounting system that records the effects of each transaction as debits and credits.

Account Balance

The difference between the two sides of an account.

Footing

Adding the amounts in an account.

Rule (Ruling)

A line representing a mathematical operation such as addition, subtraction, multiplication, or division.

Double Ruling

Underlining representing the account balance and final answers.

Permanent Account (Real Account)

An account carried forward to the next accounting period, comprising assets, liabilities, and owner's capital.

Temporary Account (Nominal Account)

An account closed at the end of the accounting period, comprising revenues, expenses, and owner's drawings.

Journalizing

Recording business transactions in a journal.

Journal

A chronological record of business transactions; also called the book of original entry or book of primary entry.

General Journal

A general-purpose journal used for recording all types of entries.

Special Journals

Journals used for recording similar and repetitive transactions.

Simple Journal Entry

A journal entry containing one debit and one credit.

Compound Journal Entry

A journal entry containing more than one debit or more than one credit.

Audit Trail

A chain of references that allows information to be traced, errors located, and fraud prevented.

Transposition Error

An error in which digits are switched, such as recording $357$ as $375$.

Transplacement Error (Sliding Error)

An error in which the decimal point is misplaced, such as recording $375$ as $37.50$.

Posting

Transferring information from a journal to a ledger.

Ledger

A permanent and classified record of all accounts of a business; also called the book of final entry.

General Ledger

The primary ledger containing the general accounts of a business.

Subsidiary Ledger

A group of similar individual accounts whose combined balances equal the balance of a specific general ledger account.

Trial Balance

A list of all ledger accounts with their balances, used to test the mathematical accuracy of total debits and credits.

Note Payable

A liability issued by the maker representing a written promise to pay the payee a specified amount on a specified future date, usually with explicit interest.

Note Receivable

An asset received by the payee representing a written promise by the maker to pay a specified amount on a specified future date, usually with explicit interest.

Maker

The person or business promising to repay a promissory note.

Principal (Face Value)

The amount being borrowed on a promissory note.

Term of a Note

The amount of time the borrower has to repay a note.

Maturity Date

The due date of a promissory note.

Interest

The fee charged for the use of money.

Interest Expense

A non-operating expense listed in the Finance Costs section of the Statement of Profit or Loss, with a normal debit balance.

Interest Income

A non-operating income listed in the Other Income section of the Statement of Profit or Loss, with a normal credit balance.

Interest Formula

$I = P \times R \times T$, where $I$ is interest, $P$ is principal, $R$ is annual interest rate, and $T$ is time (using $360$ days or $12$ months as divisor).

Maturity Value

The total amount due at the maturity date of a note, calculated as $\text{Maturity Value} = \text{Face Value} + \text{Interest}$.

Dishonored Note

A promissory note not settled at maturity; the maturity value is converted to Accounts Receivable for the payee or Accounts Payable for the maker.

Periodic Inventory System

An inventory system in which the merchandise inventory balance is updated when a physical inventory is taken, normally at the end of the period.

Perpetual Inventory System

An inventory system in which the merchandise inventory balance is updated perpetually with each purchase and sale.

Merchandise Inventory

Goods on hand at the end of the period, classified as a current asset with a normal debit balance.

Purchases

The purchase of goods for sale, classified under Cost of Sales with a normal debit balance.

Freight In

Delivery cost of goods purchased, assumed by the buyer and classified under Cost of Sales with a normal debit balance.

Purchase Returns

Returns of goods to suppliers due to damage, low quality, or wrong specifications; classified as Contra-Purchases with a credit balance.

Purchase Allowances

Reductions in original purchase price charged by the supplier without return of goods; classified as Contra-Purchases with a credit balance.

Purchase Discount

A cash discount offered by the supplier for payment within the discount period; classified as Contra-Purchases with a normal credit balance.

Sales

The sale of merchandise goods, classified as Revenue with a normal credit balance.

Freight Out

Delivery cost of goods sold, assumed by the seller and classified as an Expense with a normal debit balance.

Sales Returns

Returns of goods by customers due to damage, low quality, or wrong specifications; classified as Contra-Sales with a debit balance.

Sales Allowances

Reductions in original price charged to customers due to defects or wrong specifications; classified as Contra-Sales with a debit balance.

Sales Discount

A cash discount offered to customers for payment within the specified discount period; classified as Contra-Sales with a debit balance.

Trade Discount

A discount offered for bulk purchases that reduces the list price to invoice price; not recorded as a separate account in the books.

Cash Discount

A discount offered for early payment of an account, deducted from the invoice price and recorded using Sales Discount or Purchase Discount.

FOB (Free on Board)

A trade term determining ownership of goods in transit and the party responsible for freight and other expenses from shipment to destination.

FOB Destination Point

A freight term where title transfers at destination; the seller owns the goods in transit, bears the risk of loss, and pays for shipment.

FOB Shipping Point

A freight term where title transfers at shipment; the buyer owns the goods in transit, bears the risk of loss, and pays for shipment.

Freight Prepaid

A freight term specifying that the seller actually pays the carrier for freight charges.

Freight Collect

A freight term specifying that the buyer actually pays the carrier for freight charges.

Sales Journal

A special journal used exclusively for recording credit sales.

Sales Returns and Allowances Journal

A special journal used for goods returned by credit customers and allowances granted to credit customers.

Purchases Journal

A special journal used exclusively for recording credit purchases.

Purchases Returns and Allowances Journal

A special journal used for goods returned to credit suppliers and allowances granted by credit suppliers.

Cash Receipts Journal

A special journal used for recording all cash receipts.

Cash Payments Journal

A special journal used for recording all cash payments.

Petty Cash Book

A special record used for tracking small cash payments made from the petty cash fund.