AAT Level 3 Business Awareness flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting equation

Assets = Capital + Liabilities. It shows that a business's resources (assets) are financed by the owner's capital and by liabilities (amounts owed to third parties).

Double-entry bookkeeping

Every transaction is recorded with equal debits and credits. Debits increase assets and expenses; credits increase liabilities, capital and income. This keeps the accounting equation in balance.

Trial balance

A list of all ledger account balances at a point in time. Total debits should equal total credits, helping to detect certain errors but not errors of omission, principle or compensating errors.

Accruals concept

Income and expenses are recognised in the period they are earned or incurred, not when cash is received or paid. This matches costs with the revenues they help generate.

Prepayment

An expense paid in advance of the period to which it relates. It is treated as a current asset until the benefit is consumed, then charged to the income statement.

Accrual (expense)

An expense incurred but not yet paid at the reporting date. It is recognised as a liability and charged to the income statement for the period.

Depreciation (straight-line)

A method allocating the depreciable amount of a non-current asset evenly over its useful life. Annual charge = (cost – residual value) / useful life in years.

Bank reconciliation

A process reconciling the cash book balance with the bank statement balance by adjusting for unpresented cheques, outstanding lodgements, bank charges and errors.

Going concern

The assumption that an entity will continue in operational existence for the foreseeable future, allowing assets to be valued on a non-liquidation basis.

Prudence concept

A principle requiring that assets and income are not overstated and liabilities and expenses are not understated. Provisions are made for foreseeable losses but not for anticipated profits.

Business structure: sole trader

An individual owning and running a business. They have unlimited liability for business debts, are taxed on profits as personal income, and keep all profits after tax.

Limited liability

A legal status where shareholders' financial liability is limited to the amount unpaid on their shares. Their personal assets are protected from the company's debts.

PESTLE analysis

A framework examining Political, Economic, Social, Technological, Legal and Environmental factors in the macro environment that can affect an organisation's strategy and performance.

Stakeholders

Individuals or groups with an interest in an organisation's activities, such as employees, customers, suppliers, owners, government and local community. Their objectives may conflict.

Corporate governance

The system of rules, practices and processes by which a company is directed and controlled, balancing the interests of shareholders, management and other stakeholders.

CSR

Corporate Social Responsibility: a business's commitment to behave ethically and contribute to economic development while improving the quality of life of its workforce and society.

Not-for-profit organisation

An entity whose primary objective is to fulfil a social or charitable purpose rather than generate profit for distribution. Any surplus is reinvested in the organisation's mission.

Public limited company (plc)

A company whose shares can be offered to the general public and traded on a stock exchange. It must have a minimum share capital and publish financial statements.

Contribution per unit

Selling price per unit minus variable cost per unit. It represents the amount each unit contributes towards covering fixed costs and then generating profit.

Break-even point

The level of sales (in units or revenue) at which total revenue equals total costs, resulting in neither profit nor loss. Break-even units = Fixed costs / Contribution per unit.

Margin of safety

The difference between budgeted (or actual) sales and break-even sales, expressed in units or as a percentage. It indicates how much sales can fall before a loss occurs.

High-low method

A technique to separate fixed and variable costs from historical data. Variable cost per unit = (cost at high activity – cost at low activity) / (high activity – low activity).

Absorption costing

A costing method that includes all manufacturing costs-direct materials, direct labour and both variable and fixed overheads-in the cost of a product.

Marginal costing

A costing method where only variable costs are assigned to products; fixed costs are treated as period costs and charged in full to the income statement.

Variance analysis

The process of comparing budgeted figures with actual results to identify differences. Adverse variances reduce profit; favourable variances increase profit.

Budget

A quantitative plan for a future period, expressed in monetary or unit terms, used for planning, coordination, motivation and control within an organisation.

Integrity

An ethical principle requiring professional accountants to be straightforward and honest in all professional and business relationships, including avoiding misleading information.

Objectivity

An ethical principle requiring accountants not to compromise professional judgement because of bias, conflict of interest or undue influence of others.

Confidentiality

An ethical principle requiring accountants not to disclose information acquired through professional relationships without proper authority, unless there is a legal or professional right or duty to disclose.

Professional competence

An ethical principle requiring accountants to maintain professional knowledge and skill at the level needed to ensure clients or employers receive competent service, acting diligently.

Professional behaviour

An ethical principle requiring compliance with relevant laws and regulations and avoidance of any conduct that discredits the accounting profession.

Time management

The process of organising and planning how to divide time between specific activities, often prioritising tasks by urgency and importance to meet deadlines effectively.