CIMA BA3 key terms

Resources controlled by a business as a result of past transactions and expected to bring future economic benefit, such as cash, inventory, equipment and receivables. They appear on the statement of financial position.

Present obligations arising from past transactions that the business expects to settle by transferring economic resources, for example trade payables, bank loans and tax owed. They are reported alongside assets on the statement of financial position.

The owner's residual interest in the business, calculated as total assets minus total liabilities. It increases with owner investment and profit, and decreases with drawings and losses.

A system in which every transaction is recorded with equal debits and credits in at least two accounts, keeping the accounting equation in balance and allowing errors to be detected through a trial balance.

An entry on the left-hand side of a ledger account. Debits increase assets and expenses, and decrease liabilities, capital and income. The word is an instruction about position, not about good or bad.

An entry on the right-hand side of a ledger account. Credits increase liabilities, capital and income, and decrease assets and expenses. Every credit has a matching debit elsewhere in the ledger.

A record of all increases and decreases in one specific item, such as a customer, an expense or a bank balance. Its balance is the net of its debit and credit entries.

A list of all ledger balances at a date, split into debit and credit columns, used to check that total debits equal total credits. It does not prove that transactions were analysed correctly.

A temporary account used to hold the difference when a trial balance does not balance, or to park one side of an unclear transaction. It must be cleared once the error is found.

A bookkeeping mistake where a transaction is entered in the wrong class of account, for example treating a non-current asset purchase as a repair expense. It keeps the trial balance balanced, so it is hard to detect.

An expense that has been incurred in the period but not yet invoiced or paid, such as unpaid wages at year end. It is added to the expense and recorded as a liability.

A payment made in advance for goods or services not yet consumed, such as rent paid for next year. The unused portion is removed from the expense and shown as an asset.

The principle that expenses should be recognised in the same period as the income they helped to generate, so profit reflects the activity of the period rather than the timing of cash flows.

The assumption that a business will continue operating for the foreseeable future, without intending or needing to liquidate. It justifies treating assets at cost rather than break-up value.

Recording income when it is earned and expenses when they are incurred, regardless of when cash changes hands. It differs from the cash basis used by some very small entities.

The systematic allocation of the cost of a non-current asset over its useful life, reflecting consumption of benefit. It is an expense in profit or loss, not a cash payment or a fall in market value.

A method charging an equal annual amount, calculated as cost minus residual value divided by useful life. It suits assets whose benefit is used evenly, such as furniture or leasehold improvements.

A method applying a fixed percentage to the asset's carrying amount each year, giving larger charges early and smaller charges later. It suits assets that lose value quickly, such as vehicles or computers.

The value at which an asset is shown in the statement of financial position, being cost less accumulated depreciation and any impairment. It is also called net book value.

The estimated amount a non-current asset could be sold for at the end of its useful life, after deducting disposal costs. It is subtracted before spreading cost over the asset's life.

Spending that acquires or improves a non-current asset and brings benefit over several periods, such as buying machinery. It is recorded as an asset rather than charged to profit or loss immediately.

Spending on day-to-day running costs or on maintaining an asset in its current condition, such as repairs, rent and wages. It is charged as an expense in the period incurred.

A report at a single date showing assets, liabilities and capital, with assets equal to liabilities plus capital. It is a snapshot of financial position, not a measure of performance over a period.

A report covering a period that shows income less expenses to arrive at profit or loss. It explains the change in capital that is not caused by owner investment or drawings.

The direct cost of the goods or services sold in a period, usually opening inventory plus purchases less closing inventory. It is deducted from revenue to calculate gross profit.

Revenue minus cost of sales. It measures the margin earned from trading before overheads, wages and other operating expenses are deducted to reach operating profit.

Goods held for sale, work in progress or raw materials awaiting use, valued at the lower of cost and net realisable value. Closing inventory reduces cost of sales and appears as a current asset.

The convention of exercising caution when making estimates, so that assets and income are not overstated and liabilities and expenses are not understated. It does not justify deliberate understatement.

A comparison of the business's cash book balance with the bank statement balance, explaining items such as unpresented cheques, deposits in transit, bank charges and standing orders, to prove the corrected cash book figure.

A ledger account combining the bank and cash columns that records receipts and payments, including discounts allowed and received. Its balance is reconciled to the bank statement each period.

A transfer between two of the business's own accounts, most commonly cash withdrawn from the bank for the petty cash float. It is recorded on both sides and does not involve an outside party.

A summary ledger account, such as the receivables or payables control account, that totals many individual customer or supplier balances. It allows the ledger to be checked against a list of balances.

The subsidiary ledger holding an individual account for each credit customer, showing invoices, credit notes and receipts. Its total should agree with the receivables control account balance.

An amount owed to the business by a customer for goods or services supplied on credit. It is a current asset, expected to be collected within normal credit terms.

An amount a business owes to a supplier for goods or services bought on credit. It is a current liability and is recorded in the payables ledger and control account.

A receivable that is confirmed as uncollectable, for example because the customer is insolvent. It is written off as an expense, reducing receivables in the statement of financial position.

An estimate of the portion of receivables unlikely to be collected, deducted from trade receivables to show a prudent net figure. Movements in the allowance are charged or credited to profit or loss.

Money or goods taken from the business by its owner for personal use. Drawings reduce capital and are not an expense, so they never appear in the statement of profit or loss.

The reasoning that a debit balance is an asset or expense and a credit balance is a liability, capital or income, used to classify ledger balances correctly when drafting financial statements from a trial balance.