Glossary
Accounting cycle = a collective process of identifying, analyzing, and recording the
accounting events of a company. It is a standard 8-step process that begins when a
transaction occurs and ends with its inclusion in the financial statements
1. Identify Transactions: An organization begins its accounting cycle with the
identification of those transactions that comprise a bookkeeping event. This could be
a sale, refund, payment to a vendor, and so on
2. Record Transactions in a Journal: Next comes recording of transactions using
journal entries. The entries are based on the receipt of an invoice, recognition of a
sale, or completion of other economic events
3. Posting: Once a transaction is recorded as a journal entry, it should post to an
account in the general ledger. The general ledger provides a breakdown of all
accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual
general ledger accounts, an unadjusted trial balance is prepared. The trial balance
ensures that total debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth
step in the cycle. A worksheet is created and used to ensure that debits and credits
are equal. If there are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made.
These are the result of corrections made on the worksheet and the results from the
passage of time. For example, an adjusting entry may accrue interest revenue that
has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares
an adjusted trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and
expenses, at the end of the period using closing entries. These closing entries
include transferring net income into retained earnings. Finally, a company prepares
the post-closing trial balance to ensure debits and credits match and the cycle can
begin anew.
Accounts = “buckets” containing similar transactions. 4 types: assets, liabilities, income,
expenses
Accounts payable, concepts = amounts owed for inventory goods/services acquired in the
the normal course of business
● usually don’t require payment of interest (terms)
● 2/10, n/30: 2% discount if paid within 10 days, must be paid within 30 days
Accounts receivable = a receivable arising from the sale of goods/services with a verbal
promise to pay (traded on a subsidiary ledger by the company) debtor’s account: money
owed to a business by the debtor for goods/services supplied
3 scenarios:
● Business gets money
● Business might be able to collect
● Money cannot be collected
, Accounts receivables turnover ratio = how many times a company is transferring
accounts receivable into cash
Accrual basis of accounting = /matching principle. Effects of transactions & other events
are recognised when they occur rather than when cash is received/paid. Reported into
financial statements of the periods which they relate to. e.g. recorded when the house is
painted (not when cash is received) (on all F.S but not cash flow)
● Regardless when cash is exchanged, performance is measured
● Match efforts with benefits
● Capitalise expenditures that will benefit future periods, expense as benefit are
realised (prepayment = current asset)
● Recognise liabilities when efforts benefiting the current period require cash payment
in the future (accruals = current liability)
Related
● Deferral (=prepayments) = cash has been paid out but expense/revenue not
recognized
● Deferred expense = asset resulting from payment of cash before incurrence of
expense
● Accrued asset = record before payments
Principles
● Recognition = process of recording an item as an asset, liability, expense
● Measurement = requires 1 choices to be made:
Accrued liability = Liability that has been incurred but not yet paid
Additional paid-in capital = amount received for issuance of stock in excess of par value
Amortisation = the part of the original cost of a non-current intangible asset that is
consumed during its period of use by the business.
Annual report = a comprehensive of other reports
Important sections for accounting
● Management letter (yearly development + state)
● The financial statements (successful/not)
● Auditors report (external approve)
Assets = resources owned by a business/ a resource controlled by the entity as a result of past
events from which future economic benefits are expected to flow to the entity
3 characteristics
● must be an expected future economic benefit
● The reporting entity must control the future economic benefit
● A transaction or other past event giving rise to the reporting entity’s control must have occurred
2 types
● Non-current (fixed): >1 year. ex. land, buildings, machinery, computers, motor-vehicles
● Current: <1 year. ex. inventory, trades receivable, prepayments, bank balances, cash balances
Non-current (fixed) types
● Tangible (physical) ex. PPE, long term investments: equity shares/land held for investment
● Intangible (non-physical) ex. goodwill, trademarks, patents, copyrights
Accounting cycle = a collective process of identifying, analyzing, and recording the
accounting events of a company. It is a standard 8-step process that begins when a
transaction occurs and ends with its inclusion in the financial statements
1. Identify Transactions: An organization begins its accounting cycle with the
identification of those transactions that comprise a bookkeeping event. This could be
a sale, refund, payment to a vendor, and so on
2. Record Transactions in a Journal: Next comes recording of transactions using
journal entries. The entries are based on the receipt of an invoice, recognition of a
sale, or completion of other economic events
3. Posting: Once a transaction is recorded as a journal entry, it should post to an
account in the general ledger. The general ledger provides a breakdown of all
accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual
general ledger accounts, an unadjusted trial balance is prepared. The trial balance
ensures that total debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth
step in the cycle. A worksheet is created and used to ensure that debits and credits
are equal. If there are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made.
These are the result of corrections made on the worksheet and the results from the
passage of time. For example, an adjusting entry may accrue interest revenue that
has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares
an adjusted trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and
expenses, at the end of the period using closing entries. These closing entries
include transferring net income into retained earnings. Finally, a company prepares
the post-closing trial balance to ensure debits and credits match and the cycle can
begin anew.
Accounts = “buckets” containing similar transactions. 4 types: assets, liabilities, income,
expenses
Accounts payable, concepts = amounts owed for inventory goods/services acquired in the
the normal course of business
● usually don’t require payment of interest (terms)
● 2/10, n/30: 2% discount if paid within 10 days, must be paid within 30 days
Accounts receivable = a receivable arising from the sale of goods/services with a verbal
promise to pay (traded on a subsidiary ledger by the company) debtor’s account: money
owed to a business by the debtor for goods/services supplied
3 scenarios:
● Business gets money
● Business might be able to collect
● Money cannot be collected
, Accounts receivables turnover ratio = how many times a company is transferring
accounts receivable into cash
Accrual basis of accounting = /matching principle. Effects of transactions & other events
are recognised when they occur rather than when cash is received/paid. Reported into
financial statements of the periods which they relate to. e.g. recorded when the house is
painted (not when cash is received) (on all F.S but not cash flow)
● Regardless when cash is exchanged, performance is measured
● Match efforts with benefits
● Capitalise expenditures that will benefit future periods, expense as benefit are
realised (prepayment = current asset)
● Recognise liabilities when efforts benefiting the current period require cash payment
in the future (accruals = current liability)
Related
● Deferral (=prepayments) = cash has been paid out but expense/revenue not
recognized
● Deferred expense = asset resulting from payment of cash before incurrence of
expense
● Accrued asset = record before payments
Principles
● Recognition = process of recording an item as an asset, liability, expense
● Measurement = requires 1 choices to be made:
Accrued liability = Liability that has been incurred but not yet paid
Additional paid-in capital = amount received for issuance of stock in excess of par value
Amortisation = the part of the original cost of a non-current intangible asset that is
consumed during its period of use by the business.
Annual report = a comprehensive of other reports
Important sections for accounting
● Management letter (yearly development + state)
● The financial statements (successful/not)
● Auditors report (external approve)
Assets = resources owned by a business/ a resource controlled by the entity as a result of past
events from which future economic benefits are expected to flow to the entity
3 characteristics
● must be an expected future economic benefit
● The reporting entity must control the future economic benefit
● A transaction or other past event giving rise to the reporting entity’s control must have occurred
2 types
● Non-current (fixed): >1 year. ex. land, buildings, machinery, computers, motor-vehicles
● Current: <1 year. ex. inventory, trades receivable, prepayments, bank balances, cash balances
Non-current (fixed) types
● Tangible (physical) ex. PPE, long term investments: equity shares/land held for investment
● Intangible (non-physical) ex. goodwill, trademarks, patents, copyrights
