VCE Accounting key terms

The rule that the assets of a business always equal its liabilities plus owner's equity. It underlies the double-entry system and shows that every transaction keeps the balance sheet in balance.

Resources controlled by a business as a result of past events, from which future economic benefits are expected to flow. They are recorded at cost and classified as current or non-current depending on how quickly they convert to cash.

Present obligations of a business arising from past events, expected to result in an outflow of economic benefits when settled. They are classified as current or non-current according to when payment is due.

The residual interest in the assets of a business after deducting all liabilities. It rises with capital contributions and profit, and falls with drawings, losses and dividends paid to owners.

The owner's investment of resources into the business, recorded as an increase in owner's equity. It may be contributed as cash, equipment or other assets, and is not the same as a loan.

Cash or other assets withdrawn from the business by the owner for personal use. Drawings reduce owner's equity and are not treated as a business expense in the income statement.

Assets expected to be converted to cash, sold or consumed within twelve months of the reporting date, such as cash, accounts receivable, inventory and prepaid expenses. They support the business's short-term liquidity.

Assets held for use in the business rather than for resale, expected to provide benefit for more than twelve months. Examples include equipment, vehicles, land and buildings, and they are usually depreciated.

Obligations expected to be settled within twelve months of the reporting date, such as accounts payable, accrued expenses, GST payable and short-term loans. They are compared with current assets when assessing liquidity.

Obligations not expected to be settled within twelve months, such as long-term bank loans, mortgages and lease liabilities. They form part of the business's long-term financing structure.

Inflows or other enhancements of economic benefits arising in the ordinary course of business, such as sales, fees and interest earned. Revenue increases owner's equity and is reported in the income statement.

Outflows or consumption of economic benefits incurred in earning revenue, such as cost of goods sold, wages, rent and depreciation. Expenses reduce owner's equity and are matched against revenue in the period incurred.

The amount by which total revenue exceeds total expenses over a reporting period. Profit increases owner's equity and appears in the income statement and the statement of changes in equity.

A system in which every transaction is recorded with equal debits and credits, so the accounting equation stays balanced. It provides a built-in check on the accuracy of ledger postings.

An entry on the left-hand side of a ledger account. Debits increase assets and expenses and decrease liabilities, owner's equity and revenue, and they must equal total credits in every journal entry.

An entry on the right-hand side of a ledger account. Credits increase liabilities, owner's equity and revenue and decrease assets and expenses, and they must equal total debits in every journal entry.

The collection of accounts in which transactions are recorded and accumulated under double-entry accounting. Balances from the ledger are summarised in the trial balance and used to prepare financial reports.

A list of all ledger account balances at a given date, with debits and credits shown in separate columns. It checks that total debits equal total credits but does not detect all errors.

The book of original entry in which each transaction is first recorded in date order, with a narration and matching debits and credits. Amounts are then posted to the relevant ledger accounts.

Recording revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. It relies on adjusting entries for accruals and prepayments at the end of each period.

The idea that expenses should be recognised in the same reporting period as the revenue they helped to generate. It justifies adjusting entries such as depreciation and cost of goods sold.

A financial report showing revenue, expenses and profit or loss for a reporting period. It measures financial performance and links profit to the change in owner's equity.

A financial report listing assets, liabilities and owner's equity at a point in time. It demonstrates the accounting equation and shows the financial position of the business.

A report reconciling opening and closing owner's equity by showing capital contributions, profit or loss, drawings and dividends during the period. It explains why equity changed.

A report classifying cash movements into operating, investing and financing activities over a period. It explains how the cash balance changed and complements the accrual-based income statement.

Recording revenue when cash is received and expenses when cash is paid, rather than when earned or incurred. It is simpler than accrual accounting but can distort reported profit.

The systematic allocation of the cost of a non-current asset, less any residual value, over its useful life. It reflects consumption of the asset's benefits and is not a cash payment.

A method that allocates an equal amount of depreciation each period, calculated as cost minus residual value divided by useful life. It suits assets whose benefits are used evenly over time.

A method applying a fixed percentage to the asset's carrying amount each period, giving higher depreciation early in the asset's life. It suits assets that lose value fastest when new.

The estimated amount a non-current asset could be sold for at the end of its useful life, after deducting expected disposal costs. It is subtracted before depreciation is allocated.

The value at which an asset is recorded in the balance sheet, equal to its cost less accumulated depreciation. It is also called book value or written-down value.

Goods held for resale or for use in producing goods and services, forming part of current assets. Its valuation affects both the balance sheet and the cost of goods sold.

The cost of inventory sold during a period, calculated as opening inventory plus purchases less closing inventory. It is an expense matched against sales revenue in the income statement.

Assigning a cost to inventory on hand at the reporting date, commonly using first-in-first-out or weighted average. The chosen method affects reported profit, asset values and comparability between periods.

An inventory cost flow assumption under which the earliest units purchased are treated as the first sold. Closing inventory is therefore valued at the most recent purchase costs.

The policies and procedures a business uses to safeguard assets, ensure accurate records and prevent fraud and error. Examples include segregation of duties, physical security and bank reconciliations.

A process comparing the business's cash records with the bank statement, explaining differences such as unpresented cheques, deposits in transit and bank charges. It verifies and corrects the cash balance.

A small cash float kept for minor day-to-day payments, controlled through an imprest system and vouchers. Regular counting and reimbursement help protect against loss and misuse.