ICAEW ACA Accounting (ICAEW) 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 preserves this equality, which is why each entry has at least one debit and one matching credit of equal value.

Dual aspect concept

Every transaction has two effects: a debit and a credit of equal amount. This underpins double-entry bookkeeping and keeps the trial balance in agreement.

Error of principle

A transaction is recorded in the wrong class of account, such as capital expenditure posted to repairs expense. The trial balance still balances, so the error is not automatically detected.

Error of commission

The correct class of account is used but the wrong individual account within that class, for example a sale posted to the wrong customer's account. Totals remain unaffected.

Suspense account

A temporary account opened for the difference on a trial balance. It is cleared when the underlying errors are found and corrected, and the correction may change reported profit.

Accrued expense

An expense incurred in the period but not yet invoiced or paid. The double entry is debit expense and credit accruals, a current liability, increasing the expense charged.

Prepaid expense

A payment made in advance for benefits not yet consumed. The double entry is debit prepayments, a current asset, and credit the expense, reducing the charge for the period.

Accrued income

Income earned but not yet received or invoiced. The double entry is debit accrued income, a current asset, and credit the income account, increasing reported income for the period.

Deferred income

Cash received before goods or services are delivered. It is a current liability: debit income and credit deferred income, releasing it to profit or loss as performance obligations are met.

Straight-line depreciation

Annual charge equals cost less residual value, divided by useful life. It gives a constant charge and suits assets whose benefits are consumed evenly over time.

Reducing balance depreciation

Annual charge equals the opening carrying amount multiplied by a fixed percentage. It gives higher charges early in the asset's life and suits assets losing value fastest initially.

Lower of cost and NRV

Inventory is measured at the lower of cost and net realisable value. NRV equals estimated selling price less costs to complete and costs to sell, preventing overstated assets.

Cost of sales formula

Opening inventory plus purchases, less purchase returns and closing inventory, plus carriage inwards. Carriage outwards is a distribution cost and is excluded from this calculation.

Gross profit margin

Gross profit divided by revenue, expressed as a percentage. It measures profitability before operating costs and is compared with mark-up, which is gross profit over cost of sales.

Return on capital employed

Operating profit divided by capital employed, where capital employed equals total equity plus non-current liabilities. It measures how efficiently long-term funds generate operating profit.

Quick ratio

Current assets excluding inventory, divided by current liabilities. It tests short-term liquidity without relying on selling inventory and is also called the acid test ratio.

Inventory turnover days

Inventory divided by cost of sales, multiplied by 365. It shows the average number of days stock is held before sale; a rising figure may indicate slow-moving inventory.

Working capital cycle

Inventory days plus receivables days less payables days. It measures the period cash is tied up in operations; shortening it improves liquidity.

Receivables ledger control

A summary account for all customer balances. Debits include opening balances, credit sales and interest; credits include receipts, discounts allowed, returns and irrecoverable debts written off.

Contra entry

An offset between the receivables and payables ledgers when a business both buys from and sells to the same party. Debit payables control and credit receivables control.

Bank reconciliation

A statement reconciling the adjusted cash book bank balance with the bank statement, allowing for unpresented cheques, uncredited lodgements and items recorded only by the bank.

Imprest petty cash

A fixed float restored by reimbursing exactly the vouchers spent. The top-up amount equals the total of petty cash vouchers since the last reimbursement, keeping the float constant.

Trade discount

A reduction from list price granted by a supplier, deducted on the invoice before the net amount is recorded. It is not recorded as a separate ledger entry.

Settlement discount

A cash discount for prompt payment. Discount allowed is an expense to the seller; discount received is income to the buyer, both recorded through the cash book.

Capital expenditure

Spending that acquires or enhances a non-current asset and its future economic benefits. It is capitalised and depreciated rather than charged to profit or loss immediately.

Share premium

The excess of issue proceeds over the nominal value of shares issued. It is credited to a share premium account, part of equity, and is not distributable as a dividend.

Retained earnings roll-forward

Opening retained earnings plus profit for the year, less dividends declared, equals closing retained earnings. Dividends are distributions of equity, not expenses in profit or loss.

Mark-up versus margin

Mark-up is gross profit as a percentage of cost of sales; margin is gross profit as a percentage of revenue. Cost of sales equals sales divided by one plus mark-up.

Statement of affairs

A list of assets and liabilities used in incomplete records to derive capital as assets less liabilities. Profit equals closing capital plus drawings less opening capital.

Going concern assumption

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

Faithful representation

Information is complete, neutral and free from error, depicting the economic substance of transactions. It is a fundamental qualitative characteristic alongside relevance.

Substance over form

Transactions are accounted for according to their economic substance rather than their legal form, for example recognising leased assets or consignment inventory correctly.