CA Foundation Accounting flashcards

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

Accounting Equation

Assets equal liabilities plus capital. Every transaction changes at least two elements while keeping the equation balanced, which is why total debits always equal total credits.

Dual Aspect Concept

Each transaction has two effects of equal value. This underpins double entry bookkeeping, where one account is debited and another credited for the same amount.

Accrual Concept

Revenue is recognised when earned and expenses when incurred, not when cash moves. It requires adjustment entries for outstanding and prepaid items at period end.

Going Concern Assumption

Financial statements assume the entity will continue operating in the foreseeable future, so assets are not valued at forced sale prices and costs are spread over useful lives.

Error of Principle

A transaction recorded against the wrong class of account, such as capital expenditure charged to revenue. It does not affect trial balance agreement but misstates profit and assets.

Suspense Account

A temporary account holding the difference in an unbalanced trial balance. It is closed once errors are located and corrected through a rectification journal entry.

Bank Reconciliation Statement

A statement reconciling the cash book bank balance with the bank statement balance, explaining cheques unpresented, deposits in transit, bank charges and standing instructions.

Contra Entry

An entry recording the same transaction in two accounts of the same nature, such as cash deposited into bank, debited to bank and credited to cash.

AS 2 Inventory Valuation

Inventories are measured at the lower of cost and net realisable value. Cost includes purchase price, conversion costs and other costs incurred in bringing inventory to its present location and condition.

Net Realisable Value

Estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale, used as the ceiling for inventory valuation.

AS 6 Depreciation

A measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence, allocated systematically over useful life.

Change in Accounting Estimate

A revision of an earlier estimate, such as useful life or provision for doubtful debts. It is applied prospectively, affecting current and future periods, with disclosure where material.

Change in Accounting Policy

A change in the specific principles or methods applied, such as a change in inventory valuation method. It is generally applied retrospectively with disclosure of the effect.

Substance Over Form

Transactions are accounted for according to their economic reality rather than merely their legal form, a principle applied in deciding recognition and classification.

AS 9 Revenue Recognition

Revenue from sale of goods is recognised when significant risks and rewards of ownership are transferred and no effective control is retained, with the amount reasonably measurable.

Materiality

Information is material if its omission or misstatement could influence economic decisions of users. Materiality governs separate disclosure and the choice of accounting treatment.

Gross Profit Formula

Gross profit equals net sales minus cost of goods sold, where cost of goods sold is opening inventory plus net purchases plus direct expenses minus closing inventory.

Closing Stock Treatment

Closing inventory is credited in the trading account and shown as a current asset in the balance sheet, valued at the lower of cost and net realisable value.

Outstanding Expense Adjustment

An expense incurred but unpaid at period end is debited to the expense account and shown as a current liability, so profit and liabilities are both correctly stated.

Prepaid Expense Adjustment

An expense paid in advance is removed from the expense account and shown as a current asset, reducing the charge for the period to the amount actually incurred.

Capital versus Revenue Expenditure

Capital expenditure acquires or enhances an asset and is capitalised; revenue expenditure maintains earning capacity and is charged to profit and loss in the current period.

Provision for Doubtful Debts

An estimate of receivables unlikely to be collected, charged to profit and loss and deducted from debtors in the balance sheet to state receivables at realisable value.

Balance Sheet Format

A statement of sources and application of funds listing capital, reserves and liabilities against fixed assets, investments and net current assets at a given date.

Drawings Treatment

Amounts or goods withdrawn by the owner are deducted from capital, not charged as an expense; goods taken are credited to purchases at cost.

Sacrifice Ratio

The proportion of profit surrendered by existing partners to an incoming partner, computed as old share minus new share, used to distribute admission goodwill.

Gaining Ratio

The proportion in which remaining partners benefit from a retiring partner's share, computed as new share minus old share, used to compensate the retiring partner's goodwill.

Revaluation Account

Prepared on admission, retirement or death to record changes in asset and liability values; the resulting profit or loss is shared by old partners in the old ratio.

Realisation Account

Opened on dissolution to record disposal of assets and settlement of liabilities; the balance represents profit or loss on realisation, shared in the profit-sharing ratio.

Partner's Loan Account

When a partner advances money beyond capital, the loan is credited to the partner's loan account and interest is payable at the agreed or statutory rate.

Income and Expenditure Account

An accrual basis summary of a not-for-profit entity's revenue and expenses for the period, producing a surplus or deficit transferred to the capital fund.

Receipts and Payments Account

A cash basis summary of actual receipts and payments during a period, including capital items, used to prepare the income and expenditure account.