ICAEW ACA Accounting (ICAEW) flashcards

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

Double-entry principle

Every transaction is recorded with equal total debits and equal total credits, so the accounting equation stays in balance and a trial balance can be extracted.

DEAD CLIC

A mnemonic: Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital. Used to decide which side of a ledger account to post to.

Books of prime entry

First records of transactions before ledger posting: sales, purchases, sales returns and purchases returns day books, the cash book, and the general journal for non-routine entries.

Suspense account

A temporary ledger account opened when the trial balance does not agree. It holds the difference until the underlying error is located and corrected by journal.

Error of principle

A transaction recorded in the wrong class of account, such as capital expenditure treated as revenue expense. It does not unbalance the trial balance, so a journal is needed to correct it.

Accounting equation

Assets = Capital + Liabilities. Profit increases capital, drawings and losses reduce it, and every transaction preserves the equality of both sides.

Partnership appropriation account

An account that distributes profit: interest on capital, partner salaries and interest on drawings are allocated first, then residual profit is shared in the profit-sharing ratio.

Partners' current accounts

Where fixed capital accounts are used, current accounts record appropriations of profit, interest on capital, drawings and interest charged on drawings for each partner.

Statement of changes in equity

A company statement showing movements in share capital, share premium and retained earnings: opening balances plus profit, share issues and less dividends paid.

Share premium

The excess of issue proceeds over the nominal value of shares issued. It is capital of the company, not profit, and is usually reduced by share issue costs.

Lower of cost and NRV

Inventory valuation rule: inventory is measured at the lower of cost and net realisable value, applied item by item, so losses are recognised immediately.

Cost of sales formula

Opening inventory plus purchases (less returns) plus carriage inwards, minus closing inventory. It is deducted from revenue to give gross profit.

Accruals concept

Income and expenses are recognised in the period they are earned or incurred, regardless of when cash is received or paid, matching costs with related revenue.

Prepayment adjustment

An expense paid in advance is removed from the expense account and shown as a current asset. Entry: debit prepayments, credit the expense account.

Accrued expense adjustment

An expense incurred but not yet invoiced is charged to profit or loss and shown as a current liability. Entry: debit expense, credit accruals.

Straight-line depreciation

Annual charge equals cost less residual value, divided by useful life. It produces an equal expense each year based on time, not usage.

Reducing balance depreciation

Annual charge equals the carrying amount at the start of the year multiplied by a fixed percentage, giving higher charges early and lower charges later.

Irrecoverable debt write-off

Removing a receivable unlikely to be paid: debit irrecoverable debts expense, credit receivables. It reduces profit and the receivables balance.

Allowance for receivables

An estimate of doubtful receivables, usually a percentage of remaining receivables. Increases are expensed; decreases are credited to profit or loss.

Bank reconciliation purpose

Explains the difference between the cash book and bank statement by adjusting the cash book for unrecorded items and listing unpresented cheques and lodgements not credited.

IAS 7 cash flow categories

Cash flows are classified as operating, investing or financing activities, with cash and cash equivalents reconciled to the statement of financial position.

Cash and cash equivalents

Short-term, highly liquid investments readily convertible to known cash amounts with insignificant risk of change in value, typically maturing within three months, less overdrafts.

Operating cash flow indirect method

Profit before tax adjusted for non-cash items such as depreciation and gains on disposal, plus or minus working capital movements, less interest and tax paid.

Investing activities examples

Cash flows from acquiring or disposing of non-current assets and investments, plus interest and dividends received where the entity chooses that classification policy.

Financing activities examples

Cash flows from share issues, loans raised or repaid, dividends paid and finance lease payments. These change the capital and borrowing structure of the entity.

Non-cash transactions

Transactions such as bonus share issues or assets acquired under finance leases that involve no cash flow; they are excluded from the cash flow statement but disclosed separately.

ROCE

Return on capital employed = operating profit divided by capital employed (equity plus non-current liabilities), expressed as a percentage. It measures profit generated per unit of long-term capital.

Current ratio

Current assets divided by current liabilities. It indicates short-term liquidity, though a high ratio may reflect slow-moving inventory or poor receivable collection.

Quick ratio

Current assets excluding inventory, divided by current liabilities. A stricter liquidity test because inventory may take time to convert into cash.

Gearing ratio

Debt divided by debt plus equity, or debt divided by equity. It shows the proportion of finance from borrowings and the associated financial risk.

Interest cover

Operating profit divided by finance cost. It measures how many times profit covers interest payments, indicating the margin of safety for lenders.

Fundamental ethical principles

ICAEW Code: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Members must comply and be seen to comply.

Ethical threats

Self-interest, self-review, advocacy, familiarity and intimidation. Where a threat is significant, safeguards are applied or the engagement is declined or withdrawn.