SACE Stage 2 Accounting flashcards

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

Accounting equation

Assets equal liabilities plus equity. Every transaction changes at least two elements while keeping this equality intact, which is why total debits always equal total credits.

Accrual accounting

Revenue is recorded when earned and expenses when incurred, not when cash moves. Period-end adjustments are needed for accruals, prepayments, depreciation and unearned revenue.

Closing entries

Entries that transfer revenue, expense and drawings balances to the capital account so temporary accounts start the new period at zero, leaving only permanent accounts open.

Straight-line depreciation

An equal depreciation charge each period, calculated as cost minus residual value, divided by the asset's useful life in years.

Reducing balance depreciation

Depreciation calculated as a fixed percentage of the asset's carrying amount, giving larger charges early in the asset's life and smaller charges later.

FIFO inventory method

First-in, first-out assumes the oldest inventory is sold first, so cost of sales uses the earliest costs and closing inventory reflects the most recent purchase costs.

Bank reconciliation

A statement adjusting the bank statement balance for unpresented cheques and uncredited deposits, and adjusting the cash book for bank charges, interest and errors, until both agree.

Error of principle

A posting made to the wrong class of account, such as treating a capital purchase as an expense. It does not disturb the trial balance.

Product versus period costs

Product costs, being direct materials, direct labour and manufacturing overhead, attach to inventory until sold. Period costs are expensed in the period incurred.

Contribution margin

Selling price per unit minus variable cost per unit. It measures how much each sale contributes towards covering fixed costs and then generating profit.

Break-even point

The activity level where total revenue equals total cost and profit is zero. In units it equals fixed costs divided by contribution per unit.

Margin of safety

The excess of actual or expected sales over break-even sales. It can be expressed in units, dollars, or as a percentage of actual sales.

High-low method

Splits a mixed cost by dividing the change in total cost by the change in activity to find the variable rate, then deducting total variable cost to find fixed cost.

Relevant cost

A future cost that differs between alternatives. Sunk costs and allocated common fixed costs are irrelevant because they cannot change with the decision.

Absorption costing

A costing method that includes fixed manufacturing overhead in product cost, so some fixed overhead sits in closing inventory and profit differs from variable costing.

Flexible budget variance

The difference between actual results and the flexible budget, caused by price or spending differences rather than by changes in the level of activity.

Limiting factor ranking

When a scarce resource restricts output, products are ranked by contribution per unit of that resource, with the highest-ranked product produced first.

Segregation of duties

Separating custody of assets, authorisation of transactions and record keeping so that no single employee can both commit and conceal an error or fraud.

Internal control components

The five elements are control environment, risk assessment, control activities, information and communication, and monitoring of the control system.

Batch total

A control total calculated over a group of source documents before processing, then recalculated afterwards to confirm all records were processed and none added.

Audit trail

A record allowing each transaction to be traced from source document to ledger and back. Deleting or overwriting entries destroys the trail and weakens control.

Access controls

Controls such as unique logins, password rules, role-based permissions and activity logs that limit who may enter or change data and record what they did.

Detective control

A control that identifies errors or fraud after they occur, such as bank reconciliations, exception reports and physical stocktakes compared with records.

Preventive control

A control applied before or during a transaction to stop errors or fraud occurring, such as authorisation limits, segregation of duties and physical locks.

Collusion

Two or more employees acting together to bypass controls that would be effective against either person working alone, a key limitation of internal control.

Net present value

The sum of a project's future cash flows discounted at the required rate, minus the initial outlay. A positive result indicates the project adds value.

Payback period

The time taken for cumulative cash inflows to equal the initial outlay. It ignores cash flows after payback and does not consider the time value of money.

Accounting rate of return

Average annual profit divided by average investment, where average investment is initial cost plus residual value divided by two. It ignores the timing of cash flows.

Sunk cost

A cost already incurred that cannot be recovered or changed by any future decision, so it is excluded from relevant costing analysis.

Special order decision

Accepting a one-off order when its incremental revenue exceeds incremental costs and spare capacity exists, provided it does not harm normal-priced sales.

Confidentiality threat

The risk of disclosing client information obtained through professional work. It is managed by limiting access, securing records and not using information for personal advantage.

Self-interest threat

An ethical threat arising when a financial interest, bonus or personal relationship could improperly influence an accountant's professional judgement or objectivity.