Principles of Accounting: Introduction to Accounting Systems, Assumptions, and Equations

Vocabulary practice flashcards covering the introductory principles of accounting, including definitions of the accounting system, user groups, accounting standards, fundamental assumptions, forms of business ownership, and elements of the accounting equation.

Accounting

The system that identifies, records, and communicates the economic events of a business to users of the information.

Bookkeeping

The recording part of accounting; it does not include identifying which events to record or communicating and explaining what the figures mean.

Inputs (Accounting System)

The economic events and transactions of a business, documented by source documents such as invoices, receipts, bank notices, and contracts.

Processing (Accounting System)

The accounting procedures that identify events, measure them in money, record them in date order, and classify and summarise them.

Outputs (Accounting System)

Financial statements prepared for external users and internal reports prepared for managers to facilitate decision-making.

Internal Users

Individuals inside a business who plan, organise, and run operations, including the owner, managers who decide on prices and stock, and supervisors.

External Users

Individuals and groups outside the business who cannot ask it directly for more information, including investors, prospective partners, banks, suppliers selling on credit, and the Egyptian Tax Authority.

Managerial Accounting

The branch of accounting that serves internal users; it has no fixed format and uses whatever format best supports management decisions.

Financial Accounting

The branch of accounting that serves external users, following fixed reporting formats governed by formal rule books.

IFRS

International Financial Reporting Standards; accounting standards issued by the International Accounting Standards Board and used in most countries worldwide.

US GAAP

Generally Accepted Accounting Principles; the financial reporting rules used by companies in the United States.

EAS

Egyptian Accounting Standards; the accounting rules that Egyptian companies report under, which are close to IFRS but not identical.

Relevance

A qualitative characteristic of accounting information signifying that the information is capable of changing or influencing a user's decision.

Faithful Representation

A qualitative characteristic requiring financial information to reflect what really happened by being complete, neutral, and free from error.

Comparability

A qualitative characteristic achieved when accounting numbers are measured consistently over time and across different businesses, preventing differences caused solely by changes in accounting methods.

Economic Entity Assumption

The rule that the activities of a business must be kept separate from the personal affairs of its owner, meaning personal items such as the owner's car, flat, and private savings are not recorded in business records.

Monetary Unit Assumption

The rule stating that only events measurable in monetary units are recorded in the accounting records, presented in a single currency, thereby excluding unquantifiable items like customer loyalty.

Time Period Assumption

The convention of dividing the ongoing life of a business into artificial time periods, such as months and years, so financial performance can be communicated periodically.

Going Concern Assumption

The presumption that a business will continue operating into the foreseeable future and will not be liquidated or forced to sell off its assets at closing-down prices.

Sole Proprietorship

A business owned by a single individual who is personally responsible for all of its debts; its equity is reported as owner's capital.

Partnership

A business owned by two or more people who share profits under an agreement and are usually personally responsible for the entity's debts; its equity is reported as partners' capital.

Corporation

A business organized as a separate legal entity owned by shareholders, whose liability is limited strictly to the amount they invested; its equity is reported as share capital.

Basic Accounting Equation

$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$; an equation where both sides remain equal after every single economic event.

Assets

Resources controlled by the business as a result of past events (what the business has), such as cash, supplies, and equipment.

Liabilities

Existing debts and obligations that the business must settle (claims of creditors that are paid first before owners).

Owner's Equity

The residual claim of the owner on total assets after deducting all liabilities; representing what remains for the owner.

Accounts Receivable

An asset account representing amounts owed to the business by its customers for services rendered or goods sold on credit.

Accounts Payable

A liability account representing amounts the business owes to its suppliers for goods or spare parts purchased on credit.

Notes Payable

A liability account representing amounts borrowed under a formal written promise to repay the creditor by a specific date.

Capital (Owner's Capital)

The funds or personal assets contributed by the owner to start or support the business, which increases owner's equity.

Revenues

Amounts earned by a business from performing services or providing goods, which increase owner's equity.

Expenses

The cost of resources consumed or services used in order to generate revenue, which decreases owner's equity.

Drawings

Amounts taken out of the business by the owner for personal use; they decrease owner's equity but are not classified as an expense.

Expanded Accounting Equation

$\text{Assets} = \text{Liabilities} + \text{Capital} + \text{Revenues} - \text{Expenses} - \text{Drawings}$; showing the specific components that increase and decrease owner's equity.