Key Terms

Key Terms: Introduction to Accounting

Key terms for Form 4 Chapter 1: each term comes with its meaning, a memory hook and how it is tested in the exam.

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Accounting vs Bookkeeping

Accounting is the process of identifying, recording, classifying, summarising, interpreting and reporting financial information to aid decision-making; bookkeeping is only the stage of recording transactions systematically.
Memory hook: bookkeeping is the 'hands' (daily recording), accounting is the 'brain' (interpreting and reporting). Bookkeeping is PART of accounting.
Tested as a compare-the-functions question: scope, skill level and end product. Weak answers treat the two as identical; show that accounting is broader and involves interpretation.

The Accounting Cycle is the repeating sequence of stages that processes transactions: source documents, journals, ledgers, trial balance, adjustments, and finally the Financial Statements for one accounting period.
Flow to memorise: 'Documents -> Journal -> Ledger -> Trial Balance -> Statements'. It restarts each accounting period, hence a 'cycle'.
Tested by drawing the cycle chart and explaining each stage. Common error: reversing the journal and ledger order, or omitting source documents as the first stage.

Four sub-fields: financial accounting (statements for external parties), management accounting (information for internal management), auditing (verifying the statements), and taxation (computing and complying with tax).
Memory hook: 'Financial creates, Audit checks, Tax computes'. Auditing and taxation both depend on the output of financial accounting; that is the link between them.
Tested by linking financial accounting with auditing and taxation. Distinguish internal users (management) from external users (investors, tax authority) for full marks.

Assumptions: Separate Entity (business separate from owner), Going Concern (business continues), Accounting Period (activity split into periods), and Money Measurement (only money-valued items recorded).
Principles: Consistency (same method each period), Cost Principle (assets recorded at purchase cost), and Recognition of Revenue and Expenses (recognised when earned/incurred, not when cash is received).
Constraint: Cost-Benefit (information is provided only if its benefit exceeds the cost of producing it). Tested by matching the exact concept to a case; name the concept AND explain how it applies.

Fundamental characteristics: relevance (information influences decisions) and faithful representation (complete, neutral, free from error). These two must be present before the others are useful.
Enhancing characteristics: comparability, understandability, verifiability and timeliness. They ENHANCE the usefulness of information that is already relevant and faithfully represented.
Memory hook for the enhancing characteristics: 'CUVT' (Compare, Understand, Verify, Timely). Tested by identifying which characteristic is breached in a scenario (e.g. a late report = timeliness breached).

Four entities: Sole Proprietorship (one owner, unlimited liability), Partnership (2-20 partners), Limited Company (separate legal entity, limited liability), and Cooperative (jointly owned by members, at least 50 members).
Memory hook for liability: 'Sole & Partnership = unlimited; Company = limited'. This difference matters when comparing owner risk and capital sources of each entity.
Tested by comparing ownership, capital sources and liability (see table). Brainstorming questions on business growth usually point to converting a Sole Proprietorship into a Limited Company.

Comparison of Business Entity Characteristics

Aspect	Sole Proprietorship	Partnership	Limited Company	Cooperative
Ownership	One owner	2 to 20 partners	Shareholders	Members (min. 50)
Capital Source	Owner's own capital	Partners' contributions	Issue of shares	Members' fees and shares
Liability	Unlimited	Unlimited	Limited	Limited

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