Lecture Notes: Accounting Principles, History, and Financial Statements (Vocabulary)

Vocabulary flashcards covering key terms and concepts from the accounting notes.

Double-entry accounting system

A bookkeeping method in which every transaction is recorded with both a debit and a credit, ensuring the accounting equation remains balanced.

Debit

An entry on the left side of an account; generally increases assets and expenses, and decreases liabilities, equity, and revenue.

Credit

An entry on the right side of an account; generally increases liabilities, equity, and revenue, and decreases assets and expenses.

Dual effect

The concept that every transaction has two sides recorded as a debit and a credit.

Luca Pacioli

Italian mathematician and Franciscan monk, often called the father of accounting, co-credited with developing and documenting the double-entry system.

Summa de Arithmetica Geometria Proportioni et Proportionalita

Pacioli’s 1494 book that included a detailed treatise on bookkeeping and the first published work on double-entry accounting.

Particularis de Computis et Scripturis

Chapter in Pacioli’s Summa describing record keeping, journals, ledgers, assets, and double-entry methods.

Journal

The book of original entry where transactions are first recorded.

Ledger

A collection of accounts where journal entries are posted to determine balances.

Memorandum

An early record-keeping document used before formal journals and ledgers.

T-account

A simplified account representation with a left (debit) and right (credit) side used to analyze transactions.

Asset

Economic resource owned or controlled by a business expected to provide future benefits.

Liability

A present obligation arising from past events that will result in an outflow of resources.

Equity

The residual interest in the assets of an entity after deducting liabilities; owner’s claim to the business.

Real (Permanent) Accounts

Assets, Liabilities, and Equity accounts; balances carry forward to future periods.

Nominal (Temporary) Accounts

Revenue and Expense accounts; balances are closed at the end of the period.

Revenue

Inflow of economic benefits from the core operations of a business, increasing equity.

Expense

Outflow or consumption of assets to generate revenue, reducing equity.

Drawings

Owner withdrawals from the business that reduce owner’s equity.

Contra accounts

Accounts that offset related accounts (e.g., allowances, accumulated depreciation).

Allowance for doubtful accounts

A contra-asset account reducing accounts receivable to reflect potential nonpayment.

Accumulated depreciation

Contra-asset account representing total depreciation charged against fixed assets.

Trial Balance

A listing of ledger balances to verify that total debits equal total credits.

Journal Entry

A record in the General Journal showing date, accounts, and amounts for debits and credits.

General Ledger

The complete set of all accounts showing their balances after postings.

Posting

Transferring journal entries to the general ledger accounts.

Chart of Accounts

An organized listing of all accounts used by a business, typically ordered by asset, liability, equity, revenue, and expense.

Accounting Cycle

The sequence of steps from recording transactions to producing financial statements, usually over a 12-month period.

Accounting Information System (AIS)

System that collects, processes, and reports financial information; can be manual or computerized.

GAAP

Generally Accepted Accounting Principles; a framework of accounting standards and common practices.

Balance Sheet (Statement of Financial Position)

Financial statement showing assets, liabilities, and owner’s equity at a point in time.

Income Statement (Statement of Comprehensive Income)

Financial statement showing revenues and expenses to determine net income or loss.

Cash Flow Statement

Financial statement detailing cash inflows and outflows from operating, investing, and financing activities.

Notes to the Financial Statements

Supplementary explanations that clarify and provide context for the main financial statements.

Internal Users

Owners, Management, and Employees who use financial information for decision making.

External Users

Creditors, Investors, Government, Customers, Vendors, and the Public who rely on financial statements.

Materiality

The significance of information; material items must be disclosed if they could influence decisions.

Going Concern

Assumes the business will continue operating for the foreseeable future.

Monetary Unit Principle

Accounting measurements are expressed in a stable monetary unit.

Business Entity Concept

The business is considered separate from its owners for accounting purposes.

Matching Principle

Revenues and related expenses are recognized in the same period to reflect performance.

Accrual

Recognition of revenues when earned and expenses when incurred, regardless of cash flows.

Consistency

Using the same accounting methods across periods to ensure comparability.

Conservatism (Prudence)

Recognize potential losses and provide cautious estimates to avoid overstating assets or income.

Substance over Form

Economic reality takes precedence over legal form in financial reporting.

Periodicity (Reporting Period)

Dividing the life of a business into standard reporting periods (monthly, quarterly, yearly).

Service Business

A business that provides intangible services rather than physical goods.

Merchandising Business

Buys goods and resells them, typically maintaining inventory.

Manufacturing/Processing Business

Transforms raw materials into finished goods through production processes.

Hybrid Business

A business that combines service, merchandising, and manufacturing operations.

PPE (Property, Plant, and Equipment)

Long-term tangible assets used in operations (land, buildings, equipment).

Receivables

Amounts owed to the business by customers.

Inventory

Goods held for sale in the ordinary course of business.

Accounts Payable

Amounts the business owes to suppliers.

Notes Payable, Mortgage Payable, Bonds Payable

Non-current liabilities representing long-term obligations.

Post Closing Trial Balance

Trial balance prepared after closing entries to verify ending balances for the next period.

Normal Balance

The side on which an account normally shows a net increase (debit for assets, debit for drawings/expenses; credit for liabilities, equity, revenues).

DC ADE-LER

Mnemonic for debit/credit rules: Debits for Assets, Drawings, Expenses; Credits for Liabilities, Equity, Revenues.

Transposition/Transplacement errors

Common trial balance errors where digits are swapped or decimal points misplaced.