ICAB CL 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 items while keeping the equation in balance, which underpins the double-entry system.

Accrual Concept

Revenue and expenses are recognised when earned or incurred, regardless of cash timing. Profit therefore measures performance, not the movement in the bank balance.

Net Realisable Value

Estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale, used to test inventory for write-down.

Provision Recognition Criteria

A provision is recognised only when a present obligation from a past event exists, an outflow of resources is probable, and a reliable estimate can be made.

Depreciation Straight Line

Annual charge equals cost less residual value, divided by useful life. The same amount is charged each year, giving a constant expense over the asset's life.

Contribution Per Unit

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 at which total contribution equals total fixed costs, giving neither profit nor loss. In units it is fixed costs divided by contribution per unit.

Margin of Safety

The excess of budgeted or actual sales over break-even sales. It shows how far sales can fall before the business makes a loss.

High-Low Method

A technique separating fixed and variable elements of a mixed cost by comparing total costs at the highest and lowest activity levels within the relevant range.

Overhead Absorption Rate

Budgeted production overhead divided by budgeted activity, such as labour hours or machine hours. It allocates indirect costs to units produced during the period.

Relevant Cost

A future, incremental, cash-based cost that differs between alternatives. Sunk costs and committed fixed costs are irrelevant because they cannot be changed by the decision.

Audit Risk Model

Audit risk equals inherent risk multiplied by control risk multiplied by detection risk. The auditor reduces detection risk by designing more effective substantive procedures.

Performance Materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements exceed materiality for the financial statements.

Sufficient Appropriate Evidence

Evidence that is sufficient in quantity and appropriate in relevance and reliability. External, documentary and original evidence is generally more reliable than internal or oral evidence.

Modified Audit Opinion

A qualified opinion, adverse opinion or disclaimer of opinion, issued when the financial statements are materially misstated or sufficient appropriate evidence cannot be obtained.

Going Concern Assumption

The entity is assumed to continue operating for the foreseeable future without liquidation. If a material uncertainty exists, the auditor reports it in a separate section.

Auditor Independence

Freedom from interests and relationships that a reasonable informed third party would consider to compromise the auditor's objectivity in forming audit conclusions.

Net VAT Payable

Output tax charged on taxable supplies minus input tax recoverable on business purchases for the period. A negative result represents a repayment due from the authority.

Deferred Tax

Tax arising on temporary differences between the carrying amount of an asset or liability and its tax base, recognised when those differences are expected to reverse.

Separate Legal Personality

A company is a legal person distinct from its members. It owns assets, contracts in its own name and is liable for its own debts.

Fiduciary Duty

A director's obligation to act in good faith in the company's interests, avoid conflicts of interest, and apply care, skill and diligence to decisions.

Distributable Profits

Accumulated realised profits not required for capital maintenance and legally available for dividend distribution to shareholders of the company.

Span of Control

The number of subordinates directly reporting to a single manager. A wide span creates a flat structure; a narrow span creates tall hierarchies.

Herzberg Two-Factor Theory

Hygiene factors such as pay and working conditions prevent dissatisfaction, while motivators such as achievement and recognition create genuine satisfaction and motivation.

Porter Five Forces

A framework assessing industry attractiveness through rivalry among existing firms, threat of new entrants, threat of substitutes, buyer power and supplier power.

SWOT Analysis

A structured review of internal strengths and weaknesses against external opportunities and threats, used to align organisational capability with environmental conditions.

Maslow Hierarchy

A motivational model ranking needs from physiological and safety through social and esteem to self-actualisation, with lower needs generally satisfied before higher ones.

Integrity Principle

The ethical requirement to be straightforward and honest in all professional and business relationships, including not being associated with misleading information.

Self-Review Threat

A threat to objectivity arising when a professional evaluates previous work performed by themselves or their firm, such as auditing a system they designed.

Segregation of Duties

Dividing authorisation, recording and custody of assets among different people so that no individual can both perpetrate and conceal an error or fraud.

General IT Controls

Controls over the IT environment as a whole, including access security, program change management, backup and disaster recovery, supporting reliable application processing.

Audit Trail

A chronological, tamper-evident record of system activity and transactions that allows an auditor to trace items from source documents through processing to financial statements.