Introduction to Accounting and Finance - Chapter 1 Flashcards

Vocabulary flashcards covering the definitions, history, forms of business organization, types of business activity, and underlying accounting principles and assumptions in Chapter 1.

Accounting (American Accounting Association definition)

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

Accounting (AICPA definition)

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

Accounting (Accounting Standards Council definition)

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.

Luca Pacioli

The father of modern accounting who first described the double-entry bookkeeping system in his $1494$ work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita.

Accountancy Act of $1923$

Also known as Act No. $3105$, passed by the Sixth Philippine Legislature on March $17$, $1923$, which established the Board of Accountancy and the certification of CPAs.

Sole Proprietorship

A form of business organization owned by one individual, characterized by unlimited liability, minimal source of capital, and limited life.

Partnership

A form of business organization owned by two or more individuals where at least one partner has unlimited liability and capital is pooled from the partners.

Corporation

A form of business organization with at least one incorporator that enjoys limited liability, substantial capital-raising ability, and unlimited life due to the right of succession.

Service Business

A type of business that provides intangible products such as professional skills, proposals, and expertise; examples include law firms and accounting firms.

Merchandising Business

A ‘buy and sell’ business where products are bought from manufacturers and sold to end customers at a mark-up.

Manufacturing Business

A business that converts raw materials into finished goods to create a new product; it is typically labor and capital intensive.

Stakeholders

The collective term for all decision makers who use financial information communicate by accounting.

Internal Users

Users of financial information who are within the business organization, such as owners, managers, and employees.

External Users

Users of financial information who are outside the business organization, such as investors, lenders, creditors, and tax authorities.

Time Period Assumption

The assumption that the life of an economic entity can be divided into artificial time periods for periodic reporting.

Accrual Basis Assumption

The principle that transactions are recorded as they occur, regardless of when the cash inflow or outflow happens.

Going Concern Assumption

The assumption that a business will continue operating and remain in existence for an indeterminate period unless there is evidence to the contrary.

Monetary Unit Assumption

The assumption that only transactions expressible in terms of money are recorded and that the currency (e.g., Philippine peso) is stable.

Economic Entity Assumption

The assumption that business transactions are kept separate and distinct from the personal transactions of the owner.

Cost Principle

The principle that all assets acquired should be recorded at their original cost of acquisition, without adjustment for inflation.

Full Disclosure Principle

The principle requiring accountants to include sufficient information to allow stakeholders to make informed judgments about a business's financial condition.

Matching Principle

The requirement that expenses be matched with their corresponding revenues in a given period to show the true profit of the business.

Revenue Recognition Principle

The principle that revenue is recorded when services are rendered or goods are delivered, regardless of when cash is received.

Materiality Principle

The principle that business transactions affecting user decisions are important and must be recorded properly based on professional judgment.

Prudence Principle

Also known as conservatism, it states that when given two options for valuation, the one resulting in the less negative impact on net income should be chosen.