FA Unit 2 & 3: The Accounting Cycle and Financial Statements

Comprehensive vocabulary flashcards covering the accounting cycle, journalizing, ledger posting, trial balance errors, and the preparation of financial statements.

Accounting Cycle

The illustration of steps businesses take each accounting period to record transactions leading to the preparation of financial statements.

Source Documents

Original records such as invoices, receipts, orders, and cash slips that serve as the input for the accounting system.

Books of Prime Entry

The records where business transactions are first entered into the accounting system.

External Transactions

Economic events between the organization and outsiders, such as purchasing a computer from a supplier or paying rent to a landlord.

Internal Transactions

Economic events that occur entirely within the organization, such as the use of cleaning materials by a department.

Recording Criterion

The rule that an event should only be recorded if it changes the financial position (assets, liabilities, or equity) of the company.

Double Entry System

A system of recording transactions based on the dual nature of events, where every transaction influences two or more items and ensures the accounting equation remains in balance.

Expanded Accounting Equation

$$\text{Asset} = \text{Liabilities} + (\text{Share Capital} + \text{Retained Earnings} + \text{Revenue} - \text{Expenses} - \text{Dividend})$$

Journalizing

The process of entering transaction information into a journal in chronological order, disclosing the complete effects of a transaction in one place.

Debit (Dr)

The left-hand side of an account.

Credit (Cr)

The right-hand side of an account.

Chart of Accounts

A list of all accounts and their identifying numbers that indicate their location in the ledger.

Asset Account Rules

These accounts increase on the debit side and decrease on the credit side.

Liability/Equity Account Rules

These accounts increase on the credit side and decrease on the debit side.

Expense/Dividend Account Rules

These accounts increase on the debit side and decrease on the credit side because they reduce equity.

Ledger Account (T-Account)

A record that tracks increases and decreases in specific asset, liability, and equity items, named for its specific shape.

Posting

The process of transferring transaction data from the journal to the specific accounts in the ledger to determine account balances.

Debit Balance

The result when the total debit amounts in an account exceed the total credit amounts.

Balance Carried Down (c/d)

The difference between debit and credit totals entered on the side with the smaller total to balance the account at the end of a period.

Balance Brought Down (b/d)

The opening balance for the next period, carried over to the opposite side after the account has been balanced.

Three-Column Form of Account

A format used in practice that includes columns for Debit, Credit, and a running Balance.

Trial Balance

A list of all debit and credit balances in the ledger at a given time used to check mathematical equality and verify double entries.

Transposition Error

An error where the order of numbers is reversed (e.g., writing 12 as 21) which results in a difference divisible by 9.

Error of Omission

An error not revealed by the trial balance where a transaction is completely left out of the records.

Error of Principle

An error not revealed by the trial balance where a transaction is recorded in the wrong type of account, such as treating an expense as an asset.

Compensating Error

An error where a mistake on the debit side is offset by an identical mistake on the credit side.

Statement of Profit or Loss

A financial statement reporting the net income or loss of a company by subtracting expenses from revenue for a specific period.

Statement of Retained Earnings

A statement showing how net profit and dividend payments affect the company's accumulated earnings.

Statement of Financial Position

A financial report that lists assets, liabilities, and equity at a specific point in time to show the company's financial status.

Statement of Cash Flow

A financial statement summarizing the cash inflows and outflows from Operating, Investing, and Financing activities.