Fundamentals of Accounting 1: Concepts, Principles, and the Accounting Cycle

Comprehensive vocabulary flashcards covering basic accounting concepts, principles, assumptions, constraints, financial statements, elements of financial reporting, and the accounting cycle.

Conceptual Framework of Accounting

A statement of generally accepted theoretical principles that forms the frame of reference for financial reporting, providing the basis for developing new accounting standards and evaluating existing ones.

Relevance

A fundamental qualitative characteristic requiring financial information to be capable of making a difference in an economic decision, consisting of predictive value, confirmatory value, and materiality.

Predictive Value

An ingredient of relevance where financial information helps users forecast or predict future outcomes.

Confirmatory Value

An ingredient of relevance that enables users to check and confirm earlier predictions or evaluations.

Materiality

An entity-specific aspect of relevance and constraint stating that information is material if its omission or misstatement is significant enough to influence the economic decisions of users.

Faithful Representation

A fundamental qualitative characteristic requiring financial reports to represent what they purport to represent to achieve public trust and confidence, accomplished by being complete, neutral, and free from error.

Neutrality

A quality of faithful representation where accounting data is presented with fairness and freedom from bias toward a desired result or favored party.

Comparability

An enhancing qualitative characteristic that enables users to identify similarities and differences between two or more sets of economic circumstances.

Intra-comparability

The horizontal or inter-period comparability of financial statements of the same reporting entity from one period to another.

Inter-comparability

The dimensional comparability of financial statements between different reporting entities.

Verifiability

An enhancing qualitative characteristic occurring when independent observers using the same accounting methods can reach the same results to corroborate faithful representation.

Timeliness

An enhancing qualitative characteristic requiring accounting information to be available on time when needed to influence decision-makers before it loses its relevance.

Understandability

An enhancing qualitative characteristic requiring financial information to be presented in a clear, comprehensible, and structured manner.

Assets

Resources owned or controlled by an entity arising from past events, from which future economic benefits are expected to flow to the entity, normally carrying a debit balance.

Liabilities

Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits, normally carrying a credit balance.

Equity

The residual interest in the assets of the entity after deducting all of its liabilities, representing owner contributions, retained earnings, and reserves.

Recognition

The process of recording an item in the books of accounts and reporting it in the financial statements when future economic benefits are probable and the item can be measured with reliability.

Economic Entity Concept

A basic accounting assumption that regards a business enterprise as separate and distinct from its owners and any other business entities, requiring separate accounting records.

Going Concern Concept

An accounting assumption that a business entity will continue operating indefinitely to carry out its objectives and commitments, assuming liquidation is not imminent and justifying historical cost valuation.

Monetary Unit Concept

An accounting assumption that money is the common denominator of economic activity and that its purchasing power remains stable over time, ignoring the effects of inflation and deflation.

Periodicity Assumption

An accounting assumption that the indefinite life of an enterprise can be divided into equal time periods (calendar year, fiscal year, or interim periods) for financial reporting.

Historical Cost Principle

A measurement principle requiring business entities to record and report assets and liabilities based on their original acquisition transaction price.

Fair Value Principle

A measurement principle defining value as the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted between knowledgeable, willing parties in an arm's length transaction.

Revenue Recognition Principle

An accounting principle requiring entities to recognize revenue in the accounting period in which the performance obligation is satisfied, generally at the point of sale.

Expense Recognition Principle

A principle synonymous with the matching principle requiring expenses to be recognized when the related revenue is earned via cause-and-effect association, systematic allocation, or immediate recognition.

Full Disclosure Principle

An accounting principle requiring financial statements to report all relevant information bearing on the economic affairs of an enterprise, including subsequent events, to ensure a true and fair view.

Conservatism

An accounting constraint, also known as the Prudence Principle, requiring financial statements to be prepared with a downward measurement bias by anticipating no profits and providing for all possible losses.

Cost-Benefit Constraint

A practical limitation stating that the costs of providing financial reporting information should not exceed the benefits that users will gain from having that information.

Accounting Conventions

Accounting practices accepted by practitioners due to their long existence and use, such as the use of debit and credit and the dual aspect concept.

Basic Accounting Equation

The fundamental mathematical expression showing that total business resources equal total claims: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

Expanded Accounting Equation

The extended mathematical identity detailing components of equity: $\text{Assets} = \text{Liabilities} + \text{Investments} + \text{Income} - \text{Expenses} - \text{Drawings}$.

Shift in Assets

A transaction that alters the composition of an entity's assets without altering the total amount of assets, such as using cash to purchase inventory.

Statement of Management's Responsibility

A document attached to financial statements signed by the Chairman, CEO, and CFO confirming management's responsibility for preparing fair financial statements, internal controls, and going concern assessment.

Statement of Financial Position

A primary financial report, also known as the Balance Sheet, presenting an entity's assets, liabilities, and equity to convey liquidity, solvency, capital structure, and financial flexibility at a specific date.

Statement of Comprehensive Income

A primary financial statement that measures an entity's operating performance and profitability over a period of time by detailing revenues, expenses, and net profit or loss.

Statement of Cash Flows

A financial statement prepared on a cash basis summarizing cash inflows and cash outflows across operating, investing, and financing activities during an accounting period.

Statement of Changes in Equity

A financial statement detailing movements in owner's capital during a period, including owner contributions, distributions, net income or loss, and prior period adjustments.

Notes to the Financial Statements

An integral component of financial statements providing narrative descriptions, accounting policy summaries, line item disaggregations, and required PFRS disclosures.

Clay Tablet

The oldest physical evidence of record-keeping dating back to around 3600 B.C. in Mesopotamia, used to document commercial transactions such as accounts receivable and accounts payable.

Luca Pacioli

An Italian mathematician considered the Father of Accounting, who documented and disseminated the double-entry bookkeeping system during the 14th century.

Window Dressing

A limitation of financial reporting involving deliberate manipulation of accounts to conceal vital facts and artificially present a better financial picture.

Accounting Cycle

The sequential ten-step process completed within an accounting period to record business transactions and prepare complete financial statements under double-entry bookkeeping.

Real Accounts

Permanent accounts reported on the Statement of Financial Position—including assets, liabilities, and equity—that maintain cumulative balances across accounting periods.

Nominal Accounts

Temporary accounts presented on the Statement of Comprehensive Income—comprising revenues and expenses—that reset to a zero balance at the end of each period.

Contra-Assets

Specialized asset-offsetting accounts carrying a normal credit balance, paired with specific asset accounts to present a net carrying value.

Allowance for Doubtful Accounts

A contra-asset account credited to record estimated uncollectible trade receivables in accordance with the principle of conservatism.

Accumulated Depreciation

A contra-asset account credited for the cumulative expired cost of a depreciable plant asset over its useful life under systematic cost allocation.

General Journal

The primary book of original entry where financial transactions are recorded chronologically in a multi-line format showing debit and credit effects.

Special Journals

Customized books of original entry designed to record high-volume, repetitive transactions, including the Sales, Purchases, Cash Receipts, and Cash Disbursements journals.

General Ledger

The book of final entry containing a classified grouping of all real and nominal accounts used in preparing an entity's financial statements.

Posting

The process of transferring journalized debit and credit figures from books of original entry to the respective accounts in the general ledger.

Chart of Accounts

A listing of all account titles and corresponding identification numbers used by an entity, typically structured in financial statement order.

Unadjusted Trial Balance

A list of all ledger accounts and their open debit or credit balances at a given time, prepared primarily to verify the mathematical equality of total debits and total credits.

Compound Entry

A journal entry that involves three or more accounts, composed of either multiple debits and one credit, one debit and multiple credits, or multiple debits and credits.