The Accounting Cycle and Trial Balance

A set of vocabulary flashcards covering the accounting cycle, recording transactions, ledger management, trial balances, and financial statements based on the lecture material.

Accounting Cycle

The series of steps businesses take each accounting period to record transactions, ranging from analysis to the preparation of financial statements and closing entries.

Source Documents

The original records of business transactions, such as invoices, receipts, orders, credit notes, and cheque counterfoils, which serve as the first entry point for accounting information.

Books of Prime Entry

The records where business transactions are first entered into the accounting system before being processed further.

External Transactions

Economic events occurring between an organization and outside parties, such as paying rent to a landlord or purchasing equipment from a supplier.

Internal Transactions

Economic events that take place entirely within an organization, for example, the use of supplies by a specific department.

Double Entry System

A recording method based on the dual nature of transactions, ensuring that for every entry there is an equal and opposite entry so that the accounting equation remains in balance.

Expanded Accounting Equation

The mathematical relationship where $Assets = Liabilities + Share\,Capital + Retained\,Earnings + Revenue - Expenses - Dividend$.

Journalizing

The process of recording transaction information chronologically in a journal, disclosing the complete effects of a transaction in one place.

Debiting

The act of recording an entry on the left-hand side of an account.

Crediting

The act of recording an entry on the right-hand side of an account.

Chart of Accounts

A listing of all accounts and their respective identification numbers used to indicate their location within the ledger.

Ledger

A record, often called a T-account, that tracks the specific increases, decreases, and cumulative balances of individual asset, liability, and equity items.

Posting

The step in the accounting cycle where information is transferred from the journal to the ledger accounts to determine account balances.

Folio Column

A column in a ledger account used to record the reference number or code that links the entry back to its source in the books of original entry.

Trial Balance

A list of all debit and credit balances in the ledger at a point in time, used to verify the mathematical equality of the double-entry system.

Arithmetic Errors

Mistakes made in addition or subtraction during the preparation of the trial balance that cause discrepancies between debit and credit totals.

Transposition Error

An error where the order of numbers is reversed (e.g., writing $21$ instead of $12$), resulting in a difference between debits and credits that is divisible by $9$.

Errors of Omission

A type of error not revealed by the trial balance which occurs when a transaction is completely left out of the accounting records.

Compensating Errors

Errors that do not affect the trial balance because a posting mistake on the debit side is cancelled out by an identical error on the credit side.

Errors of Principle

Errors where a transaction is recorded in the wrong type of account, such as treating a capital expenditure as a revenue expenditure.

Statement of Profit or Loss

A financial statement that summarizes revenue and expenses to determine the net profit or loss for a period.

Statement of Financial Position

Also known as a balance sheet, this statement lists the assets, liabilities, and equity of a business as of a specific date.

Statement of Cash Flow

A financial statement summarizing the cash inflows and outflows of a business categorized into operating, investing, and financing activities.