SACE Stage 2 Accounting key terms

Recording income when it is earned and expenses when they are incurred, regardless of when cash changes hands. It gives a more accurate picture of profit than counting cash receipts and payments alone.

The rule that expenses are reported in the same period as the revenue they helped generate. It stops costs being shifted into a different reporting period from the income they relate to.

A cost that has been incurred but not yet paid or recorded, such as wages owed to staff for work already done. It is shown as a liability and as an expense in the current period.

Income that has been earned but not yet invoiced or received in cash, such as interest earned on a term deposit. It is recorded as an asset and as revenue for the period.

A payment made in advance for goods or services not yet consumed, such as insurance covering future months. The unused portion is an asset until the benefit is used up.

The systematic allocation of the cost of a non-current asset over the periods that benefit from its use. It spreads the expense rather than treating the whole purchase as a cost in one year.

A depreciation approach that charges an equal expense each period, calculated as cost minus residual value divided by useful life. It suits assets that provide fairly even benefits over time.

A depreciation approach that applies a fixed percentage to the asset's declining carrying amount, giving larger expenses early and smaller ones later. It suits assets that lose value fastest when new.

The estimated amount an asset could be sold for at the end of its useful life, after deducting disposal costs. It is subtracted from cost when calculating depreciation.

The value at which an asset appears in the accounting records, equal to its cost less accumulated depreciation. It is not the same as the asset's market value.

A list of all ledger account balances at a point in time, used to check that total debits equal total credits. It detects arithmetic errors but not every kind of mistake.

A record of a transaction showing the accounts debited and credited, with a brief explanation and date. It is the first step before amounts are posted to the ledger.

The main set of accounts in which all transactions are summarised by category, such as cash, sales and wages. Its balances feed into the trial balance and the financial statements.

A system in which every transaction is recorded twice, as an equal debit and credit, so the accounting equation stays balanced. It supports reliable reporting and error checking.

The relationship stating that assets equal liabilities plus equity. Every transaction affects at least two elements while keeping the equation in balance.

A statement showing an entity's assets, liabilities and equity at a specific date. It reveals what the business owns, owes and is worth at that moment.

A resource expected to be converted to cash, sold or used up within twelve months, such as inventory, receivables and cash. It indicates short-term liquidity available to meet obligations.

An obligation expected to be settled within twelve months, such as accounts payable, accrued wages and short-term loans. It is compared with current assets when assessing liquidity.

The owner's or shareholders' residual interest in the business after liabilities are deducted from assets. It rises with profits and capital contributions and falls with losses and drawings.

A report summarising revenue, expenses and the resulting profit or loss over a period. It explains how the entity performed between two balance sheet dates.

Sales revenue less the cost of goods sold, showing the margin earned before other operating costs. It measures how effectively stock is bought and resold.

The cost of inventory that has been sold during the period, calculated from opening stock plus purchases less closing stock. It is matched against sales to determine gross profit.

Money or goods taken from the business by the owner for personal use. Drawings reduce equity and are not treated as an expense in the income statement.

Resources the owner or shareholders put into the business, such as cash or equipment. It increases equity and provides funds for operations without creating a liability.

A process comparing the business's cash records with the bank statement to explain differences such as unpresented cheques, deposits in transit and bank fees. It confirms the true cash balance.

The policies and procedures a business uses to safeguard assets, ensure accurate records and prevent fraud. Examples include approvals, reconciliations, physical security and independent checks.

An internal control that divides tasks so no single person controls a transaction from start to finish. It reduces the risk of error and fraud going unnoticed.

The documented path of a transaction through the accounting system, from source document to financial statement. It allows errors or fraud to be traced and verified later.

The original record that provides evidence a transaction occurred, such as an invoice, receipt or cheque butt. It supports accurate data entry and later verification.

A coded list of all account names a business uses, organised by type such as assets, liabilities, revenue and expenses. Consistent coding makes recording and reporting efficient.

The people, software, procedures and data used to collect, process, store and report financial information. A good system delivers timely, accurate reports to decision makers.

Sales revenue less variable costs, representing the amount left to cover fixed costs and generate profit. It is used in break-even and cost-volume-profit analysis.

The level of sales at which total revenue equals total costs, so profit is zero. It can be expressed in units or dollars and shows the minimum activity needed to avoid a loss.

A cost that stays the same in total over a relevant range of activity, such as rent or insurance. Per unit, it falls as output rises because it is spread over more units.

A cost that changes in total in direct proportion to activity, such as raw materials or sales commissions. It stays constant per unit within the relevant range.

The amount by which actual or budgeted sales exceed the break-even level, shown in units, dollars or percentage. It indicates how far sales can fall before a loss occurs.

A detailed plan of expected income and expenditure for a future period, expressed in financial terms. It provides targets, coordinates activities and allows actual results to be compared with plans.

Comparing actual results with budgeted figures to identify differences and investigate their causes. Favourable and unfavourable variances guide corrective action and future planning.

A forecast of expected cash receipts and payments over a period, showing the projected closing cash balance. It helps a business plan borrowing and avoid cash shortages.

A future cost that differs between alternatives being considered, and so should influence the decision. Costs that are sunk or identical under every option are ignored.

The benefit given up when choosing one option over the next best alternative. It is relevant to decision-making even though it never appears in the accounting records.

Money already spent that cannot be recovered, such as the purchase price of existing equipment. It should not affect decisions about future actions because it is the same whatever is chosen.

Current assets divided by current liabilities, showing whether short-term resources cover short-term obligations. A result below one may signal liquidity pressure.

Current assets minus current liabilities, representing funds available for day-to-day operations. Positive working capital suggests the business can meet its short-term commitments.

The ability of a business to meet its short-term debts as they fall due, using cash or assets easily converted to cash. It is assessed using ratios and cash flow information.

Gross profit expressed as a percentage of sales revenue, showing the average mark-up achieved after cost of goods sold. Falling margins can signal pricing or purchasing problems.

A measure of how many times stock is sold and replaced in a period, calculated as cost of goods sold divided by average inventory. Low turnover may indicate slow-moving or obsolete stock.