AAT Level 3 FAPS key terms

A system where every transaction is recorded in at least two ledger accounts, with equal debits and credits, so that the accounting equation stays in balance after each entry.

An entry on the left-hand side of a ledger account. Debits increase assets and expenses and reduce liabilities, income and capital.

An entry on the right-hand side of a ledger account. Credits increase liabilities, income and capital and reduce assets and expenses.

A record of all movements on one item, such as a customer, supplier or expense, showing increases on one side and decreases on the other with a running balance.

The main set of accounts used to prepare the financial statements, containing every income, expense, asset, liability and capital account of the business.

The day books in which transactions are first recorded before being posted to the ledger, including sales, purchases, returns, the cash book and the journal.

A book of prime entry used for entries that do not fit the other day books, such as corrections of errors, period-end adjustments and opening entries.

A list of all ledger account balances at a given date, split into debit and credit columns, used to check that total debits equal total credits.

Assets equal capital plus liabilities. It shows that everything a business owns is funded either by the owner or by amounts owed to third parties.

The owner's financial interest in the business, increased by profits and capital introduced and reduced by drawings and losses made.

Money or goods taken from the business by the owner for personal use. Drawings reduce capital and are never treated as a business expense.

A summary ledger account whose balance should agree with the total of the individual balances in its supporting subsidiary ledger, helping to detect and locate errors.

An account summarising all transactions with credit customers, such as sales, receipts and write-offs, which is checked against the total of the individual customer accounts.

A statement explaining the difference between the bank balance shown in the cash book and the balance on the bank statement at the same date.

Cheques sent to suppliers and recorded in the cash book that have not yet cleared the bank, so they appear on a later bank statement.

Amounts paid into the bank and entered in the cash book that have not yet been recorded as received on the bank statement.

A petty cash arrangement where the cashier holds a fixed float and is reimbursed periodically for exactly the amount spent, restoring the float to its original level.

Comparing the balance shown on a supplier's statement with the balance on that supplier's account in the payables ledger and explaining any difference found.

Amounts owed by credit customers that the business has decided will never be collected, written off as an expense in the income statement.

A reduction in the carrying amount of trade receivables to reflect the likelihood that some balances will not be collected, estimated from past experience and current conditions.

An expense incurred in the period that has not yet been invoiced or paid, so it is charged in the current period and shown as a liability.

A payment made in one period for goods or services relating to a later period, so it is carried forward as an asset instead of being charged as an expense now.

Income earned in the period that has not yet been received or invoiced, so it is recognised as income and shown as a receivable in the statement of financial position.

The systematic allocation of the cost of a non-current asset over its useful life, matching the expense to the periods that benefit from using the asset.

A method charging an equal amount of depreciation each year, calculated as cost less residual value, divided by the number of years of expected useful life.

A method charging depreciation as a fixed percentage of the asset's carrying amount each year, giving higher charges in early years and lower charges later.

The cost of a non-current asset less the total depreciation charged on it so far, being the amount presented in the statement of financial position.

A temporary account holding the difference when a trial balance does not agree, cleared once the underlying error has been found and corrected.

A double entry where the correct amounts are posted but to the wrong type of account, such as recording a capital purchase as a repairs expense.

A double entry posted to the correct class of account but the wrong individual account, such as the wrong customer, so the trial balance still balances.

An error where a wrong figure is entered in a book of prime entry and the same wrong figure is posted to both ledger accounts, so the trial balance still balances.

Two or more separate errors that cancel each other out, so the trial balance still agrees even though the ledger contains mistakes.

A working paper listing all account balances with adjustments, extending each figure into income statement or statement of financial position columns to produce draft financial statements.

A statement showing what a business owns and owes at a single point in time, listing its assets and liabilities and the capital of the owner.

A statement showing the income and expenses of a business for a period, arriving at the profit or loss made during that period.

Opening inventory plus purchases and other direct costs, less closing inventory. It is the direct cost of the goods actually sold in the period.

Sales revenue less cost of sales, showing the profit earned before overheads such as rent, wages, advertising and depreciation are deducted.

The rule that inventory is valued at the lower of cost and net realisable value, applied consistently at each period end so that profits are not overstated.