CA Foundation Accounting key terms

The rule that every transaction has two equal effects, one debit and one credit, so total debits always match total credits. It is the foundation of double-entry bookkeeping and keeps the accounting equation balanced.

The statement that assets equal liabilities plus owner's equity. Each transaction changes at least two elements while preserving the equality, which is why the balance sheet always balances.

The assumption that the business will continue operating for the foreseeable future without being forced to liquidate. It justifies recording assets at cost rather than at breakup value and supports deferring certain costs.

Revenue and expense are recognised when they are earned or incurred, not when cash moves. This matching of effort with reward produces a truer profit figure than cash receipts and payments alone.

Expenses incurred to earn a given period's revenue must be recorded in that same period. It works together with accrual to compare like with like and prevent profit from being distorted across years.

Recording assets and transactions at the amount actually paid or agreed at the time of acquisition, rather than at current market value. It provides verifiable evidence but can understate value over time.

A policy of caution under uncertainty, recognising likely losses and liabilities but not anticipating unrealised gains. It prevents profits from being overstated while still requiring estimates to be reasonable, not deliberately biased.

The first written record of a transaction, showing the accounts debited and credited with equal amounts and a short narration. It is the book of original entry from which postings to ledgers are made.

A single journal entry that debits or credits more than two accounts to record one transaction, such as goods purchased partly for cash and partly on credit. Total debits must still equal total credits.

A book containing all accounts in classified form, each with debit and credit sides. Transactions from the journal are posted here so that the balance of every account can be found easily.

A statement listing all ledger account balances at a date, with debits in one column and credits in another. Equal totals give arithmetic assurance but do not prove that no errors were made.

A temporary account used to hold the difference when a trial balance does not agree. It is cleared once the underlying errors are located and corrected, so it should not appear in final accounts.

Recording a transaction in the wrong class of account, for example treating a capital purchase as a revenue expense. Because both sides are still equal, the trial balance agrees and the error stays hidden.

Failing to record a transaction at all, either wholly or by omitting one side of the entry. A complete omission leaves the trial balance in agreement, whereas a one-sided omission makes it differ.

The process of correcting mistakes found after books are written, using a journal entry that restores the affected accounts. Errors affecting nominal accounts are corrected through profit, while those affecting personal or real accounts are adjusted directly.

A statement explaining why the cash book bank balance differs from the bank statement balance, by listing cheques not yet presented, deposits not yet credited, and bank charges or interest not yet recorded.

A cheque returned unpaid by the bank, for example due to insufficient funds. The original receipt entry is reversed, restoring the customer's debt, and any noting charges may be recovered from the customer.

The systematic allocation of the depreciable cost of a fixed asset over its useful life. It is a charge against profit, not a cash payment, and reflects consumption of the asset's service potential.

Charging an equal amount of depreciation every year, calculated as cost less residual value divided by useful life. It suits assets whose benefit is spread evenly, such as furniture or leases.

Charging depreciation at a fixed percentage on the reducing book value each year, so the charge falls over time. It suits assets like machinery whose repair costs rise as they age.

Spending that creates or improves a long-term asset and benefits more than one accounting period, such as buying plant. It is shown on the balance sheet rather than charged to profit in the year of payment.

Spending on day-to-day running of the business whose benefit is consumed within the current period, such as rent or wages. It is charged to the profit and loss account.

The owner's claim on the business, representing money and assets brought in plus profits retained less drawings. It appears on the liabilities side of the balance sheet within owner's equity.

Money or goods withdrawn by the owner for personal use. Drawings reduce capital and are not an expense, so they are deducted from capital rather than charged to profit.

The going concern, consistency and accrual assumptions that underlie financial statements. If any is not followed, the fact must be disclosed, because statements are otherwise prepared on these bases.

Applying the same accounting policies and methods from period to period unless a change is justified and disclosed. It makes figures comparable across years and prevents profit from being smoothed by switching methods.

The specific principles, bases, conventions, rules and practices a business adopts in preparing financial statements, such as the method of depreciation or stock valuation. They must be disclosed where material.

A liability of uncertain timing or amount recognised when a present obligation exists, an outflow is probable, and a reliable estimate can be made. It differs from a contingent liability, which is only disclosed.

A possible obligation whose existence depends on a future uncertain event, or a present obligation that is not recognised because outflow is not probable or cannot be measured reliably. It is disclosed, not provided for.

A possible asset arising from past events whose existence will be confirmed only by uncertain future events. It is not recognised in the financial statements and is disclosed only where an inflow is probable.

Income or expenses that arise in the current period from omissions or errors in earlier financial statements. They are disclosed separately in the profit and loss statement so that current results are not distorted.

Gains or losses that are clearly distinct from ordinary activities, are not expected to recur frequently, and are not regarded as ordinary revenue or expense. They are disclosed separately after profit from ordinary activities.

Total assets minus total outside liabilities, representing shareholders' funds. In company accounts it includes paid-up capital, reserves and surplus, less accumulated losses and fictitious assets.

The first part of the final accounts, showing gross profit or loss by comparing net sales with cost of goods sold. Cost of goods sold equals opening stock plus purchases plus direct expenses less closing stock.

The statement that starts with gross profit and deducts indirect expenses and adds indirect incomes to arrive at net profit. It covers a period and explains the change in owner's equity from operations.

Net sales revenue minus the cost of goods sold, before any indirect expenses. It measures trading efficiency and is carried down from the trading account to the profit and loss account.

A statement of assets, liabilities and equity at a particular date, not for a period. It shows financial position and is prepared after the trading and profit and loss accounts are complete.

The value of unsold goods held at the end of the accounting period. It is credited in the trading account to reduce cost of sales and shown as a current asset in the balance sheet.

An amount paid in the current period for a benefit that will be consumed in a later period, such as advance rent. It is removed from the expense and shown as a current asset.

An expense incurred during the period but not yet paid at the year end, such as unpaid wages. It is added to the expense in the profit and loss account and shown as a current liability.

Income earned during the period but not yet received, such as interest due on a deposit. It is added to income in the profit and loss account and shown as a current asset.

A written agreement among partners setting out capital contributions, profit-sharing ratio, interest on capital, salary, and how the firm is managed. Where it is silent, the default rules of the Partnership Act apply.

The agreed proportion in which partners divide profits and losses. In the absence of an agreement, profits and losses are shared equally, regardless of the capital each partner has contributed.

The account recording each partner's investment and share of profits, reduced by drawings. Under the fixed method it stays unchanged except for permanent items, with current items taken to a separate current account.

The proportion in which existing partners give up their share of profit to admit a new partner. It equals old ratio minus new ratio and determines how the incoming partner's goodwill premium is divided.

The proportion in which continuing partners acquire a retiring or deceased partner's share. It equals new ratio minus old ratio and is used to distribute the retiring partner's share of goodwill.

The value of a firm's reputation, customer base and earning capacity beyond the value of its net assets. It is paid by an incoming partner and compensated to sacrificing partners, or adjusted on retirement.

The process of bringing a new person into the firm, requiring adjustment of capital, revaluation of assets and liabilities, distribution of goodwill, and a new profit-sharing arrangement among all partners.

A partner leaving the firm, which requires settling the amount due to them, revaluing assets, adjusting goodwill through the gaining ratio, and recalculating the remaining partners' shares.

A temporary account prepared on admission, retirement or death to record changes in the value of assets and liabilities. The resulting profit or loss is shared among partners in their old ratio.

The closing down of the business itself, not merely a change in partners. Assets are realised, liabilities paid, and any surplus or deficiency is settled among partners in their profit-sharing ratio.

An account opened on dissolution to record the sale of assets and payment of liabilities. The balance is the gain or loss on realisation, shared by partners in their profit-sharing ratio.

An entity formed for charitable, educational or social purposes rather than profit, where any surplus is retained in the organisation. Its main statements are the receipts and payments account, income and expenditure account, and balance sheet.

An account prepared by a not-for-profit organisation on an accrual basis, recording revenue and expenses of the period to show surplus or deficit. It resembles a profit and loss account and excludes capital items.

A summary of cash and bank receipts and payments during a period, prepared on a cash basis. It opens with the opening balance and closes with the closing balance, but does not reveal the period's surplus.

The regular amount members of a not-for-profit organisation pay for membership. Amounts relating to the current year are treated as income, while amounts received in advance or in arrears are adjusted accordingly.

A bill of exchange accepted by a debtor, treated as an asset in the drawer's books. It may be held to maturity, discounted with a bank, or endorsed to a creditor.