Introduction to/Principles of Accounting Flashcards

This document contains flashcards related to Introduction/Principles of Accounting (ECO 103/ACCT 101) course material for BSc. Public Administration from Ahmadu Bello University Zaria, Nigeria. Contains definitions, classifications, formulas.

Accounting

A discipline which records, classifies, summarizes and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern.

Financial Accounting (AICPA definition)

The art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which in part, at least is of a financial character, and interpreting the results thereof.

Accounting (American Accounting Association definition)

The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

Recording

The recording of financial transactions in an orderly manner, soon after their occurrence in the proper books of accounts.

Classifying

The systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place.

Summarizing

The preparation and presentation of the classified data in a manner useful to the users, involving the preparation of financial statements.

Interpreting

Explaining the statements in a manner useful to action, including why something happened and what is likely to happen under specified conditions.

Accounting as a service activity

Provides quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Accounting as a profession

A career that involves the acquiring of a specialized formal education before rendering any service. Accounting is a systematized body of knowledge.

Accounting as a social force

The discipline of accounting and the accountant both have to watch and protect the interests of other people who are directly or indirectly linked with the operation of modern business.

Accounting as a language

One means of reporting and communicating information about a business, based on fundamental rules and symbols.

Accounting as science or art

Accounting has its own principles. Accounting is an art as it also requires knowledge, interest and experience to maintain the books of accounts in a systematic manner.

Accounting as an information system

An information system designed to provide relevant financial information on the resources of a business and the effect of their use.

Objectives of Accounting

To keep systematic records, protect business properties, ascertain profit or loss, ascertain the financial position, facilitate rational decision making, and serve as an information system.

Money measurement concept

Economic activity is initially recorded and reported in a common monetary unit of measure.

Cost concept or exchange price

Assets are ordinarily entered on the accounting records at the price paid to acquire it.

Going-concern (continuity) concept

Accountants assume that the business entity will continue operations into the indefinite future.

Periodicity (time periods) concept

An entity’s life can be meaningfully subdivided into time periods (such as months or years) to report the results of its economic activities.

Separate business entity concept

A distinction between business and the owner is made. All the books of accounts records day to day financial transactions from the view point of the business rather than from that of the owner.

Dual aspect concept

Each transaction requires two aspects to be recorded. The recognition of these two aspects of every transaction is known as a dual aspect analysis.

The Matching concept

Revenue earned during a period is compared with the expenditure incurred for earning that revenue.

Accrual Concept

A distinction between the receipt of cash and the right to receive it, and the payment of cash and the legal obligation to pay it.

Realisation Concept

Revenue is recognised when sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

Materiality concept

Affects every transaction as well as financial statements and assumes that only material items should be disclosed in financial statements.

Historical cost concept/fair value

Allows a user to assume that all the transactions in an entity’s financial statements reflect the actual cost price billed, or revenue charged, for items.

Prudence concept

Assumes that the financial statements have been prepared on a prudent basis, ensuring no profits are included that are not earned and expenses are complete.

Substance over form concept

When accounting for transactions, the preparer should look at the economic substance of a transaction, not its legal form.

Separate determination concept

Allows the user to know that the reported figure is the total value for each of these elements and does not allow a company to net one element against another.

External users of accounting information

Investors, creditors, members of non-profit organizations, government, consumers, research scholars

Internal users of accounting information

Owners, management, and employees

Financial transaction

An event which can be expressed in terms of money and which brings change in the financial position of a business enterprise.

Accounting equation

Assets = Liabilities + Owner's equity.

Account

A summary of the relevant transactions at one place relating to a particular head recording the amount of transactions, their effect and direction

Accounting period concept

A means of dividing up the life of an accounting entity into discrete periods for the purpose of reporting performance for a period of time and showing its financial position at a point in time.

Revenue Expenditure

Expenditure that is to be matched against the period's revenue and used up in the period; will have no value at the end of the period to which it relates.

Capital Expenditure

Represents amounts which it is appropriate to carry forward as part of the next year's opening statement of financial position because it will be used over a number of periods and contributes to several periods' revenues.

Source Documents

Original documents from which accounting records are kept.

Invoice

A business document prepared when goods are sold and is normally sent by the seller to the buyer. It gives details of the goods and the value of the transaction.

Debit Note

A document prepared whenever it becomes necessary to increase the amount due from a debtor.

Credit Note

Informs the buyer that the account in the books of the seller is being credited.

Cheque

A bill of exchange drawn on a banker, payable on demand.

Receipt

A written document issued to acknowledge that money or valuable property has been received.

Voucher

Original document used for obtaining authorization for all payments irrespective of magnitude or mode.

Subsidiary books

Books into which transactions are recorded on a daily basis from the source documents and from which postings are made periodically to the relevant accounts in the ledger.

Sales day book

Records the sale on credit of goods bought specifically for resale. Another name for the sales day book is the sales journal.

Purchases day book

A book in which we record the purchase on credit of goods for resale. The purchase day book is also called purchase journal.

Sales returns day book

In which is recorded the goods sold on credit that are returned by customers.

Purchases return day book

In which is recorded the goods purchased on credit that are returned to suppliers.

Petty cash book

Is a book in used is recorded cash received and cash paid.

Cash book

This is the book in which are recorded cheques received (and cash paid into the bank) and payments made by cheque (and cash withdrawn from the bank).

Journal

A historical record of business transactions or events and book of original or prime entry.

Journalising

The process of recording a transaction in the journal.

Goods

Articles which are purchased by a businessman with an intention to sell it.

Trade discount

Usually allowed on the list price of the goods and is not recorded in the books of account. Entry is made only with the net amount paid or received.

Cash discount

A concession allowed by seller to buyer to encourage him to make early cash payment.

Drawings

When the businessman withdraws cash or goods from the business for his personal/domestic use.

Ledger

A principal book of accounts of the enterprise which is a summary statement of all the transactions relating to a person, asset, expense or income which have taken place during a given period of time and shows their net effect.

Double-entry bookkeeping

A systematic method of recording an enterprise's transactions in a book called the general ledger, or simply the 'ledger'. It is an application of the dual aspect concept.

Ledger

Each page of the ledger is split into two halves: the left half is called the debit side and the right half is called the credit side. The ledger is divided into sections called accounts.

T-accounts

Simplified version of a ledger account.

Accounting period concept

Means of dividing up the life of an accounting entity into discrete periods for the purpose of reporting performance for a period of time and showing its financial position at a point in time.

Contra entry

An accounting entry, which is recorded on the both the sides of the cash book.

Two column cash book

For both debit and credit entries, it has two columns, one for recording cash transactions and the other for bank transactions.

Three column cash book

Is similar to the two-column cash book except that the discount column is added to both the debit and the credit side.

Petty cash book

Book for recording cash transactions which are considered too small in value to be paid for by cheque.

The Imprest System

At the beginning of each period (week or month) the petty cashier has a fixed amount of cash referred to as a float. At the end of each period (or the start of the next) the petty cashier is reimbursed the exact amount spent during the period, thus making the float up to its original amount.

Bank cash book

Used in businesses where all receipts are paid into the bank and all payments are made by cheque.

Trial Balance

A two-column schedule listing the titles and balances of all the accounts in the order in which they appear in the ledger.

Clerical Errors

Those errors, which are committed by the clerical staff during the course of recording business transactions in the books of accounts

Errors of omission

When business transaction is either completely or partly omitted to be recorded in the books of prime entry

Error of commission

Errors generally committed by the clerical staff due to their negligence during the course of recording business transactions in the books of accounts.

Compensating errors

Errors which cancel or compensate themselves.

Errors of duplication

When a business transaction is recorded twice in the prime books and posted in the Ledger in the respective accounts twice

Errors of principle

When a business transaction is recorded in the books of original entries by violating the basic/fundamental principles of accountancy

An asset

A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise

Non Current Assets

Items not specifically bought for resale but to be used in the production or distribution of those goods normally sold by the business. They are durable goods that usually last for several years, and are normally kept by a business for more than one accounting year.

Tangible assets

Assets that have physical substance

Intangible assets

Identifiable non-monetary assets without physical substance

Valuation

The amount at which assets are shown in the statement of financial position.

Depreciation

The allocation of the cost of a non-current asset over the accounting periods that comprise its useful economic life to the business according to some criterion regarding.

Depreciation accounting

A system of accounting which aims to distribute cost or the basic value of tangible capital assets less salvage (if any), over the estimated useful life of the unit (which may be group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation.

Depletion

The process of removing an available but irreplaceable resource such as extracting coal from a coal miner or oil out of an oil well.

Amortisation

The process of writing off intangible assets

Obsolescence

Decline in the useful life of an asset because of factors like technological advancements, changes in the market demand of the product, legal or other restrictions, and improvement in production process.

Straight Line Method

The depreciation is charged on the uniform basis year after year.

Machine hour rate method

The running time of the asset is taken into account for the purpose of calculating the amount of depreciation

Written down value method

Depreciation is charged at fixed rate on the reducing balance (i.e., cost less depreciation) every year. Another name for this method is Diminishing Balance Method.

Sum of years digits (SYD) method

The annual amount of depreciation that will be expensed in the statement of profit and loss is computed by multiplying the depreciable amount by a fraction.

Annuity method

Depreciation is charged on the basis that besides losing the acquisition cost of the asset the business also loses interest on the amount used for purchasing the asset.

Depreciation fund method

The amount of depreciation charged from the profit and loss account is invested in certain securities carrying a particular rate of interest.

Insurance Policy Method

Instead of investing the money in securities an insurance policy for the required amount is taken.

Depletion method

It is essential to make an estimate of the units of output the asset will produce in its life time. Another name for this method is productive output method.

Bad or irrecoverable debt

When goods are sold on credit, it sometimes transpires that the customer is unwilling or unable to pay the amount owed.

Provision

The setting-aside of income to meet a known or highly probable future liability or loss, the amount and/or timing of which cannot be ascertained exactly, and is thus an estimate.

Financial ratio

A proportion or fraction or percentage which expresses the relationship between items contained in different financial statements.

Liquidity

Refers to the ability of a firm to meet its current obligations as and when they become due.

Net Working Capital (NWC)

The excess of current assets over current liabilities.

Current Ratio

The ratio of total current assets to total current liabilities.

Acid-Test/Quick Ratio

A measure of a firm's ability to convert its current assets quickly into cash in order to meet its current liabilities.

Cash-Position Ratio or Super-Quick Ratio

Calculated by dividing the super-quick current assets by the current liabilities of a firm. The super-quick current assets are cash and marketable securities.