Accounting Fundamentals and Principles

Comprehensive vocabulary flashcards covering basic accounting definitions, business structures, financial statements, principles, merchandising operations, manufacturing costs, and payroll.

Accounting

The process of recording, classifying, and summarizing economic events/transactions of an individual, business, organization, or government that might affect its accounts.

Manager (Internal User)

A user who uses accounting information for assessing business performance and making decisions for the business.

Lender or Creditor (External User)

A user who assesses the paying ability of the borrower.

Sole Proprietorship

A business set up and managed by one person; characterized by unlimited liabilities, one-man control, and one-man profit/loss.

Partnership

Owned by two or more persons who agreed to contribute assets for the purpose of generating profit through a contractual relationship.

Corporation

A business organization separated from the owner; characterized by limited liabilities, shareholder ownership, continuous life, and dividends.

Service Business

A type of business providing service in exchange for money; outcomes are intangible or have no physical form.

Merchandising Business

A business type that buys processed goods (tangible) and sells them at a mark-up price to gain profit.

Manufacturing Business

A business that involves the conversion of raw materials into finished goods through the application of labor and factory costs.

Financing Activities

The methods an organization uses to obtain financial resources.

Investing Activities

The selection and management of resources that will be used to develop, produce, and sell products.

Operating Activities

The use of resources to design, produce, distribute, and sell goods and services.

Balance Sheet (Statement of Financial Position)

Shows the progress report of the entity including Assets, Liabilities, and Equity.

Income Statement (Statement of Comprehensive Income)

Shows the earning performance for the current accounting period including Revenues and Expenses.

Financial Accounting

Branch of accounting focused on the preparation and interpretation of financial statements primarily for external users.

Cost Accounting

Branch of accounting focused on recording, classifying, and summarizing material, labor, and overhead costs for production.

Auditing

The independent verification and examination of the credibility of accounting records.

Forensic Accounting

Integrates accounting, auditing, and investigative skills for financially related crimes.

Business Entity Principle

The concept that business accounts are separated from the owner’s personal accounts.

Historical Cost

The principle that the price to be recorded is the actual price by which entry will be made in the records.

Going Concern

The assumption that the business will continue to operate and meet its obligations for the foreseeable future.

Understandability

A qualitative characteristic requiring clear terminology and presentation of reports for users to interpret information.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

Accrual Concept

Recording the effects of transactions and other events when they occur, not as cash is received or paid; revenue is recognized when earned, and expenses when incurred.

Debit Rules

Increases Assets, Withdrawals, and Expenses; decreases Liabilities, Capital, and Revenues.

Credit Rules

Increases Liabilities, Capital, and Revenues; decreases Assets, Withdrawals, and Expenses.

Fixed Assets

Assets that are owned by the business and used for a long-term period.

Current Assets

Assets owned by the business that are expected to be consumed or converted into cash within one accounting period.

Contingent Liabilities

Liabilities that arise depending on the happening of certain events.

Calendar Year

An accounting period that follows the standard annual calendar starting January 1 and ending December 31.

Operating Cycle

Refers to the days required for the business to receive inventory, sell it, and collect cash from the inventory.

General Journal

Also known as the book of original entry; where transactions are recorded in chronological order using a double-entry system.

General Ledger

Also known as the book of final entry; the principal book where journalized transactions are posted in specific account classifications.

Closing Entries

Entries made at the end of the accounting period to transfer nominal account balances to the capital account.

Reversing Entries

Journal entries made at the start of a new period to reverse certain end-of-period adjustments to simplify recordkeeping.

Perpetual Inventory System

A digital system where the inventory account is continuously updated as merchandise is being sold.

Periodic Inventory System

A manual system where no entries are made to the inventory account during purchases or sales, and Cost of Goods Sold is determined at the end of the period.

Freight In

The cost incurred by the buyer for transporting goods from the seller’s place to the buyer’s place.

FOB Shipping Point

Terms where the Buyer shoulders the transportation and ownership transfers at the shipping point.

FOB Destination

Terms where the Seller shoulders the transportation and ownership transfers only when goods reach the destination.

Input VAT

Value-added tax used in purchase transactions, typically recorded as a Debit at a rate of $$12\%$.

Output VAT

Value-added tax used in selling transactions, typically recorded as a Credit at a rate of $$12\%$.

Prime Cost

The sum of Direct Materials and Direct Labor used to make a product.

Conversion Costs

The sum of Direct Labor and all Manufacturing Overhead (indirect costs).

Cost of Goods Manufactured (COGM)

$$\text{COGM} = \text{Total Manufacturing Costs} + \text{Beginning WIP} - \text{Ending WIP}$$

Gross Pay

Total earnings of an employee before any deductions, including regular pay, overtime, and bonuses.

Net Pay

$$\text{Net Pay} = \text{Gross Pay} - \text{Total Deductions}$$