Fundamentals of Accounting: The Accounting Cycle, Promissory Notes, and Merchandising Transactions

Comprehensive vocabulary flashcards covering the accounting cycle, business source documents, rules of debit and credit, promissory notes, merchandising accounts, freight terms, and inventory systems.

Accounting Cycle

A series of 10 steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.

Business Transactions

Financial events that change the assets, liabilities, and equity of a business entity.

Business Documents

Source documents that serve as the basis for recording business transactions.

Purchase Requisition

A business document issued by the sales department or any other department to the purchasing department listing goods to be ordered or items needed.

Purchase Order

A business document issued by the buyer to the seller to place an order for goods.

Receiving Report

A document issued by the receiving department to the purchasing department after inspection to show the quantity and condition of the goods received.

Sales Invoice

A document issued by the seller to the buyer for the delivery of goods.

Credit Note

A document issued by the seller to the buyer acknowledging the return of goods or granting price allowances.

Debit Note

A document issued by the buyer to the seller requesting or notifying of a return of goods or an allowance.

Statement of Account

A document issued by a seller or service provider to a buyer or customer serving as a reminder or request to pay.

Remittance Advice

A document sent by the buyer to the seller to inform them that payment has been made (normally through bank transfer).

Receipt

A document issued by the seller to the buyer acknowledging receipt of payment via cash, cheque, or bank transfer.

Voucher

A business document that substantiates payments made either by cash or by cheque.

Petty Cash Voucher

A document used to record and substantiate payments made from the petty cash fund.

Inventory Take Sheet / Stock Take Sheet

A source document used for recording the physical inventory count, serving as the basis for recording ending inventory.

Rules of Debit and Credit

The accounting rule stating that increases are recorded on the normal balance side of an account, while decreases are recorded on the opposite side.

Normal Balance (NB)

The side (debit or credit) of an account in the accounting equation where increases are placed. Assets, Owner's Drawings, and Expenses have a debit normal balance; Liabilities, Owner's Capital, and Revenues have a credit normal balance.

Double Entry System

An accounting system that involves recording the financial effects of each transaction as debits and credits.

Permanent Account / Real Account

An account whose ending balance is carried forward to the next accounting period, comprising Assets, Liabilities, and Owner's Capital.

Temporary Account / Nominal Account

An account that is closed at the end of the accounting period, comprising Revenues, Expenses, and Owner's Drawing.

Journal

A chronological record of business transactions, commonly referred to as the book of original entry or book of primary entry.

Audit Trail

A chain of references that makes it possible to trace information, locate errors, and prevent fraud.

Transposition Error

An accounting error that occurs when digits are switched (e.g., recording $357$ as $375$ or $537$).

Transplacement Error / Sliding Error

An accounting error that occurs when a decimal point is misplaced (e.g., recording $375$ as $37.50$ or $3,750$).

Ledger

The permanent and classified record of all accounts of a business, known as the book of final entry.

Subsidiary Ledgers

Groups of similar individual accounts whose combined total balance equals the balance of a specific general ledger controlling account (e.g., Accounts Receivable or Accounts Payable).

Trial Balance

A list of all ledger accounts with their balances, prepared as a statement to test the mathematical accuracy of total debits and credits after journalizing and posting.

Notes Payable

A liability issued by the maker representing a written promise to pay the payee a specified amount at a specified future date, classified as current if due within one year or non-current if due in more than one year (Normal Balance: Credit).

Notes Receivable

An asset received by the payee representing a written promise by the maker to pay a specified amount at a specified future date, classified as current if due within one year or non-current if due in more than one year (Normal Balance: Debit).

Interest Expense

A non-operating expense account listed in the Finance Costs section of the Statement of Profit or Loss (Normal Balance: Debit).

Interest Income

A non-operating income account listed in the Other Income section of the Statement of Profit or Loss (Normal Balance: Credit).

Principal (Face Value)

The amount being borrowed or the stated monetary face value ($p$) of a promissory note.

Interest Rate

The fee charged for the use of money, stated by default as an annual percentage ($r$) of the principal.

Interest Formula

The mathematical formula to calculate simple interest: $I = prt$, where $p$ is the face value, $r$ is the annual rate, and $t$ is time ($\frac{\text{days}}{360}$ or $\frac{\text{Months}}{12}$).

Maker

The person or business that signs a promissory note, promising to repay the principal and interest.

Payee

The person or business to whom a promissory note is payable.

Periodic Inventory System

An inventory system in which the merchandise inventory balance is updated only when a physical count is taken at the end of the period, commonly used for low-cost items with high transaction volume.

Perpetual Inventory System

An inventory system in which the merchandise inventory balance is updated continuously (perpetually) with each purchase and sale, typically used for expensive items with low transaction volume.

Merchandise Inventory

Goods on hand at the end of the period, classified as a Current Asset with a normal balance of Debit.

Purchases Account

An account used in a periodic inventory system to record the purchase of goods intended for sale, classified under Cost of Sales (Normal Balance: Debit).

Freight In

Delivery cost of goods purchased that is assumed by the buyer, classified under Cost of Sales (Normal Balance: Debit).

Freight Out

Delivery cost of goods sold that is assumed by the seller, classified as an operating Expense (Normal Balance: Debit).

Purchase Returns

An account used to record the physical return of goods to suppliers due to damage, low quality, or wrong specifications, classified as Contra-Purchases (Normal Balance: Credit).

Purchase Allowances

A reduction in the original price charged by a supplier granted due to damage, low quality, or wrong specifications without the return of goods, classified as Contra-Purchases (Normal Balance: Credit).

Purchase Discount

A cash discount offered by a supplier for prompt payment within a specified discount period, classified as Contra-Purchases (Normal Balance: Credit).

Sales Returns

An account used to record goods returned by customers due to damage, low quality, or wrong specifications, classified as Contra-Sales (Normal Balance: Debit).

Sales Allowances

A reduction in the original price charged to customers due to damage, low quality, or wrong specifications without the return of goods, classified as Contra-Sales (Normal Balance: Debit).

Sales Discount

A cash discount offered to customers for making payment within a specified discount period, classified as Contra-Sales (Normal Balance: Debit).

Trade Discounts

Discounts given for bulk purchases that are deducted from the list price to determine invoice price; they are not recorded in the accounting books.

Cash Discounts

Discounts offered for early payment of an account, deducted from the invoice price (after accounting for returns and allowances) and recorded in the books as Sales Discount or Purchase Discount.

FOB Shipping Point

A shipping term under which title and risk of loss pass to the buyer as soon as the goods are shipped, meaning the buyer owns goods in transit and is responsible for shipping costs.

FOB Destination Point

A shipping term under which title and risk of loss transfer to the buyer only when the goods reach their destination, meaning the seller owns goods in transit and pays shipping costs.

Freight Prepaid

A freight payment term indicating that the seller actually pays the carrier for freight costs at shipment.

Freight Collect

A freight payment term indicating that the buyer actually pays the carrier for freight costs upon receipt of the shipment.

Special Journals

Specialized journals designed for recording repetitive, high-frequency transactions of a similar type (e.g., Sales Journal, Purchases Journal, Cash Receipts Journal, Cash Payments Journal).