(01) Analyzing Business Transactions & Qualitative Characteristics Part 1

30 vocabulary-style flashcards covering fundamental accounting elements, the accounting equation, qualitative characteristics of financial information, and key accounting principles discussed in the lecture.

Asset

An economic resource obtained and controlled by an entity from a past event, expected to produce probable future economic benefits.

Key Features of an Asset

(1) Result of a past event, (2) Controlled by the enterprise, (3) Future economic benefits are expected to flow to the entity.

Liability

A present obligation of an entity arising from a past event whose settlement is expected to result in an outflow of resources.

Key Features of a Liability

(1) Present obligation, (2) Originated from a past event, (3) Settlement will cause an outflow of resources.

Owner’s Equity

The residual interest of the owner(s) in the entity’s net assets after deducting liabilities from assets.

Net Assets / Net Worth

Total assets minus total liabilities; represents the owner’s claim on the business.

Accounting Equation

Assets = Liabilities + Equity; expresses the fundamental relationship among the accounting elements.

Business Transaction

An exchange of values between two parties expressed in monetary terms, having dual effects on the accounting elements.

Double-Entry Bookkeeping

System in which every transaction affects at least two accounts so that the accounting equation remains in balance.

Statement of Financial Position

Financial statement that lists assets, liabilities, and owner’s equity at a specific date to show liquidity and solvency.

Qualitative Characteristics

Attributes—understandability, relevance, reliability, comparability—that make financial information useful to users.

Understandability

Quality that requires clear terminology and orderly presentation so knowledgeable users can comprehend information.

Relevance

Quality of information that is capable of influencing users’ decisions through predictive and feedback value.

Materiality

Aspect of relevance; an item is material if its omission or misstatement could influence users’ economic decisions.

Timeliness

Constraint on relevance; information must be available to users in time to influence their decisions.

Reliability

Quality of information that is objective and free from material error or bias; can be depended upon by users.

Faithful Representation

Information reflects the economic phenomena it purports to represent without misstatement or bias.

Substance over Form

When economic substance and legal form differ, accounting reflects the economic reality, not merely the legal form.

Neutrality

Information should be unbiased and not prepared to benefit one group of users over another.

Prudence

Exercise of caution when making judgments under uncertainty, avoiding overstatement of assets or income.

Completeness

Financial information should include all necessary descriptions and explanations for users to understand it properly.

Comparability

Enables users to identify similarities and differences over time or between entities to assess performance and position.

Generally Accepted Accounting Principles (GAAP)

Broad set of conventions, practices, and standards that guide the measurement and reporting of financial information.

Monetary Measurement Principle

All business transactions are recorded and reported in the single monetary unit used as medium of exchange (e.g., pesos, dollars).

Business Entity Concept

Treats the business as separate and distinct from its owners; only the entity’s assets, liabilities, revenues, and expenses are recorded.

Exchange Price / Cost Principle

Assets, liabilities, revenues, and expenses are recorded at the amount agreed upon in an arm’s-length transaction (historical cost).

Going Concern Assumption

Financial statements are prepared on the premise that the entity will continue operating indefinitely unless evidence suggests otherwise.

Accrual Assumption

Transactions are recognized when they occur (not when cash is received or paid), so revenues and expenses match the appropriate period.

Objectivity Principle

Recorded amounts must be supported by verifiable evidence such as invoices, contracts, or receipts.

Reporting Period (Time-Period) Principle

Life of a business is divided into artificial time periods (e.g., year, quarter) for which periodic financial statements are prepared.