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

Vocabulary practice flashcards covering fundamental accounting concepts, transaction analysis, merchandising accounts, shipping terms, special journals, and promissory notes.

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.

Purchase Requisition

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

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 evidencing the delivery and sale of goods.

Credit Note

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

Debit Note

A business document issued by the buyer to the seller documenting the return of goods or requesting allowances.

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 issued by the buyer to the seller informing them that payment has been made (normally through bank transfer).

Receipt

A business document issued by the seller to the buyer confirming that payment has been received via cash, cheque, or bank transfer.

Petty Cash Voucher

A document used to record payments disbursed specifically from the petty cash fund.

Inventory Take Sheet

A document used to record a physical inventory count, serving as the basis for recording ending inventory.

Normal Balance

The side of an account (debit or credit) in the accounting equation where increases to that account are recorded.

Double Entry System

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

Chart of Accounts

A list of all accounts used by a business entity to record its financial transactions.

Permanent Account (Real Account)

An account whose ending balance is brought 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 primary entry.

Audit Trail

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

Transposition Error

An error that occurs when digits of an amount are switched, such as recording $357$ as $375$ or $537$.

Transplacement Error (Sliding Error)

An error that occurs when a decimal point is misplaced, such as recording $375$ as $37.50$ or $3{,}750$.

Posting

The process of transferring journalized transaction information from a journal to the ledger accounts.

Ledger

A 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.

Trial Balance

A statement listing all ledger accounts with their debit or credit balances to test the mathematical accuracy of total debits and credits after recording and posting.

Periodic Inventory System

An inventory system in which the merchandise inventory balance is updated only when a physical count is taken (normally at the end of the period), suited for low-cost items with a high volume of transactions.

Perpetual Inventory System

An inventory system in which the merchandise inventory balance is updated continuously after each purchase and sale, suited for expensive items with a low volume of transactions.

Merchandise Inventory

Goods on hand at the end of the accounting period; classified as a Current Asset with a normal balance of Debit (Dr).

Purchases

An account used under the periodic system for the acquisition of goods intended for resale; classified under Cost of Sales with a normal balance of Debit (Dr).

Freight In

Transportation cost incurred on the delivery of goods purchased assumed by the buyer; classified under Cost of Sales with a normal balance of Debit (Dr).

Purchase Returns

The physical return of purchased merchandise to the supplier due to damage, low quality, or wrong specifications; classified as Contra-Purchases with a normal balance of Credit (Cr).

Purchase Allowances

A price reduction granted by a supplier without returning goods due to damage, low quality, or wrong specifications; classified as Contra-Purchases with a normal balance of Credit (Cr).

Purchase Discount

A cash discount offered by a supplier for prompt payment within a specified discount period; classified as Contra-Purchases with a normal balance of Credit (Cr).

Freight Out

Transportation costs incurred on the delivery of goods sold assumed by the seller; classified as an operating Expense with a normal balance of Debit (Dr).

Sales Returns

Merchandise returned by customers due to damage, low quality, or wrong specifications; classified as a Contra-Sales account with a normal balance of Debit (Dr).

Sales Allowances

A reduction in the original price charged to customers due to damage, low quality, or wrong specifications; classified as a Contra-Sales account with a normal balance of Debit (Dr).

Sales Discount

A cash discount offered to customers to encourage early payment of accounts within a specified period; classified as a Contra-Sales account with a normal balance of Debit (Dr).

Trade Discounts

Price reductions offered for bulk purchases that are deducted from list price to determine invoice price and are not recorded in the accounting books.

Cash Discounts

Discounts offered for prompt payment of credit accounts deducted from invoice price, recorded in the books using Sales Discount or Purchase Discount.

Free on Board (FOB)

A shipping term determining when title and ownership transfer to the buyer and identifying which party bears the risk of loss and is responsible for shipping costs.

FOB Destination Point

A shipping arrangement where title transfers upon arrival at the destination point; the seller owns the goods in transit, bears risk of loss, and pays shipment costs.

FOB Shipping Point

A shipping arrangement where title transfers as soon as goods are shipped; the buyer owns the goods in transit, bears risk of loss, and pays shipment costs.

Freight Prepaid

A freight payment term indicating that the seller physically paid the carrier at the point of shipment.

Freight Collect

A freight payment term indicating that the buyer physically pays the carrier upon delivery.

Special Journals

Accounting records designed to record specific types of repetitive, high-volume transactions (e.g., sales journal, cash payments journal).

Promissory Note

A written promise made by a maker (payor) to pay a payee a specified amount of money at a fixed or determinable future date.

Notes Payable

A liability issued by a maker representing a written promise to pay the payee a principal amount plus interest at a specified future date; normal balance is Credit (Cr).

Notes Receivable

An asset held by the payee representing a maker's written promise to pay a principal amount plus interest at a specified future date; normal balance is Debit (Dr).

Interest

The fee charged for the use of borrowed money, computed by the formula $I = prt$, where $p$ is principal, $r$ is annual rate, and $t$ is time ($\frac{\text{days}}{360}$ or $\frac{\text{Months}}{12}$).

Interest Expense

A non-operating expense account with a Debit (Dr) normal balance, presented in the Finance Costs section of the Statement of Profit or Loss.

Interest Income

A non-operating income account with a Credit (Cr) normal balance, presented in the Other Income section of the Statement of Profit or Loss.

Maker

The party or business entity that signs a promissory note, promising to repay the principal and explicit interest to the payee.

Payee

The person, business, or entity to whom a promissory note is made payable and who receives the payment.