CIMA BA3 flashcards

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

Accounting equation

Assets = Capital + Liabilities. It underlies the double-entry system: each transaction changes at least two elements while keeping total assets equal to total capital plus liabilities.

Dual aspect concept

Every transaction has two effects of equal value, one debit and one credit. This is the basis of double-entry bookkeeping and of the trial balance's equality.

Trial balance purpose

A list of ledger account balances at a date, used to check that total debits equal total credits. It detects arithmetic errors but not errors of principle or omission.

Error of principle

A transaction recorded in the wrong class of account, such as capital expenditure posted to repairs. Debits still equal credits, so the trial balance agrees.

Suspense account

A temporary account holding the difference when a trial balance does not agree. It is cleared once the underlying errors are found and corrected.

Accruals concept

Income and expenses are recognised in the period in which they are earned or incurred, regardless of when cash is received or paid. Also called the matching concept.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue trading for the foreseeable future, so assets are not valued at forced-sale amounts.

Prudence concept

Under uncertainty, exercise caution: do not overstate assets or income, and recognise liabilities and losses as soon as they are reasonably foreseeable.

Capital expenditure

Spend that acquires, constructs or improves a non-current asset, or extends its useful life. It is capitalised and charged to profit or loss through depreciation.

Revenue expenditure

Spend on day-to-day running costs or on maintaining (not improving) an asset, such as repairs and fuel. It is charged to profit or loss immediately.

Books of prime entry

The first records of transactions: sales, purchases, sales returns and purchases returns day books, cash book, petty cash book and general journal. Totals are posted to the ledgers.

Journal entry purpose

Records non-routine and adjustment transactions not captured by day books, such as opening entries, corrections of error, accruals and depreciation charges, with narration.

Lower of cost and NRV

IAS 2 rule for inventory: value at the lower of cost and net realisable value, where NRV is estimated selling price less costs to complete and sell.

FIFO inventory valuation

First in, first out: goods issued are priced at the earliest purchase cost, so closing inventory reflects the most recent prices and profit rises with inflation.

Weighted average cost (AVCO)

A new average unit cost is calculated after each receipt: total cost of goods available divided by total units. Issues are charged at the latest average.

Straight-line depreciation

Annual charge = (cost − residual value) / useful life in years. It spreads the depreciable amount evenly over the asset's life.

Reducing balance depreciation

A fixed percentage is applied to the opening carrying amount each year, giving larger charges early in the asset's life and smaller charges later.

Carrying amount

The amount at which an asset is recognised: cost (or revalued amount) less accumulated depreciation and accumulated impairment losses at the reporting date.

Revaluation surplus

The increase on revaluing a non-current asset, credited to other comprehensive income and held in a revaluation reserve rather than recognised in profit or loss.

Profit on disposal formula

Profit or loss on disposal = disposal proceeds − carrying amount at the date of sale. A negative result is a loss on disposal.

Development cost capitalisation

IAS 38 permits capitalising development expenditure only when technical feasibility, intention and ability to complete, probable future benefits and reliable measurement are all demonstrated.

Doubtful debts allowance

A provision against receivables expected not to be collected. Each year the allowance is adjusted to the required balance; only the movement is charged or credited.

Irrecoverable debt write-off

Removing a receivable confirmed as uncollectable, debiting irrecoverable debts expense and crediting receivables. If later recovered, the cash is credited to the expense.

Bank reconciliation purpose

Explains the difference between the bank statement balance and the cash book balance by adjusting for unpresented cheques, uncredited lodgements and items not yet in the cash book.

Cost of sales formula

Opening inventory + purchases − purchases returns + carriage inwards − closing inventory. It is deducted from revenue to give gross profit.

Gross profit margin

Gross profit divided by revenue, expressed as a percentage. It shows the proportion of each sales unit retained after direct cost of sales.

Mark-up

Gross profit divided by cost of sales, expressed as a percentage. Margin and mark-up differ: a 25% mark-up equals a 20% gross margin.

Current ratio

Current assets divided by current liabilities. A ratio below 1 suggests short-term liquidity strain; a very high ratio may indicate idle assets.

Quick ratio

(Current assets − inventory) divided by current liabilities. It tests liquidity using only the most liquid assets, excluding inventory.

Return on capital employed

Operating profit divided by capital employed, expressed as a percentage, where capital employed is total assets less current liabilities. It measures profitability of funds invested.

Gearing ratio

Debt, including preference shares, divided by debt plus equity, as a percentage. High gearing means greater fixed finance costs and financial risk.

Statement of cash flows

IAS 7 statement classifying cash flows as operating, investing and financing activities, reconciling opening and closing cash and cash equivalents for the period.