BGCSE Accounting 1442 key terms

The assumption that a business will continue operating for the foreseeable future, so assets are not valued at break-up prices and long-term costs are spread over the periods that benefit from them.

Revenue and expenses are recorded in the period they are earned or incurred, not when cash moves, so profit reflects activity rather than the timing of receipts and payments.

Recording losses and liabilities as soon as they are reasonably certain while recognising gains only when realised, so financial statements do not overstate profit or asset values.

The convention that the owner's private transactions are kept separate from the business's affairs, so personal spending is treated as drawings rather than a business expense.

Applying the same accounting methods and policies from one period to the next, so comparisons between years are meaningful; any change must be disclosed with its financial effect.

An item is material if omitting it or stating it wrongly could change a user's decision; immaterial amounts may be treated in the simplest practical way.

Recording assets at the amount originally paid for them rather than at current market value, which is objective and verifiable but may understate worth over time.

Every transaction has two effects of equal value, one debit and one credit, which keeps the accounting equation in balance at all times.

An entry on the left-hand side of a ledger account; it increases assets and expenses and reduces liabilities, capital and income.

An entry on the right-hand side of a ledger account; it increases liabilities, capital and income and reduces assets and expenses.

A book of original entry used to record transactions that do not fit the other day books, such as corrections, opening entries and purchases of non-current assets on credit.

A petty cash arrangement where a fixed float is restored at the end of each period by reimbursing exactly the amount spent, so the cash in hand returns to the float.

A transaction recorded on both sides of the cash book, for example cash paid into the bank or cash withdrawn for office use, so no separate ledger posting is needed.

The original paperwork, such as an invoice, credit note, receipt or cheque counterfoil, that proves a transaction happened and provides the details entered in the books.

A list of all ledger balances at a set date, with debits in one column and credits in another, used to check that total debits equal total credits.

A temporary account holding the difference between debit and credit totals in a trial balance until errors are found; it is closed once the errors are corrected.

Recording a transaction in the wrong class of account, such as treating the purchase of a machine as a repairs expense; it does not disturb the trial balance.

Two or more separate errors that cancel each other out, for example a debit overstated in one account and another debit overstated by the same amount, so the trial balance still agrees.

A transaction is left out of the books completely, so neither the debit nor the credit is recorded and the trial balance totals remain equal.

A summary ledger account for trade receivables or trade payables that totals many individual customer or supplier accounts, allowing the figure to be checked against the books of prime entry.

A statement that explains why the bank balance in the cash book differs from the balance on the bank statement by listing items such as unpresented cheques and outstanding lodgements.

A cheque written and entered in the cash book that the bank has not yet paid; it reduces the cash book balance before it reduces the bank statement balance.

A customer's cheque that the bank refuses to pay, usually for lack of funds; the amount must be removed from the bank balance and restored to the customer's account.

Sales revenue less the cost of the goods sold, showing what the trading activity earned before overheads such as rent, wages and depreciation are deducted.

Opening inventory plus purchases and carriage inwards, less closing inventory; it is the direct cost of goods actually sold during the period.

The systematic allocation of the cost of a non-current asset over the accounting periods expected to benefit from it, reflecting wear, use or obsolescence rather than a change in market price.

Cash, goods or other assets taken from the business by the owner for personal use; drawings reduce capital and are not treated as a business expense.

An estimate of the amount owed by credit customers that may never be collected, charged as an expense so receivables are not overstated in the statement of financial position.

A written or oral arrangement setting out how profits and losses are shared, interest on capital, partners' salaries and the rules for admitting or retiring partners.

The section of a partnership's income statement that shows how net profit is divided: interest on capital, partners' salaries, interest on drawings and the remaining shares.

A ledger account recording each partner's share of profit, drawings, interest on capital and salary; its balance shows what the partner is owed by the firm or owes to it.

The amount paid for the reputation and customer connections of an established business above the value of its net assets; it must be adjusted when partners join or leave.

A summary of cash actually received and paid during a period for a non-profit organisation, similar to a cash book and not showing profit or loss.

The equivalent of a profit and loss account for a non-profit organisation, matching income earned with expenses incurred for the period to show a surplus or deficit.

The total of an organisation's assets less its liabilities, the equivalent of capital in a business; it rises with a surplus and falls with a deficit.

The regular fee members pay to belong to a club; for correct accounting, the amount belonging to the period is credited as income whether or not cash has been received.

Gross profit expressed as a percentage of sales revenue; it shows the average mark-up achieved after the direct cost of goods sold and helps assess pricing and purchasing.

Current assets divided by current liabilities; it measures whether a business can pay its short-term debts as they fall due, with about 2:1 often considered comfortable.

Current assets excluding inventory, divided by current liabilities; a stricter liquidity test because inventory may take time to sell and turn into cash.

Operating profit divided by capital employed, shown as a percentage; it measures how efficiently the money invested in the business has been used to generate profit.