CMA Foundation Paper 2 (FFCA) key terms

Every transaction affects at least two ledger accounts, keeping total debits equal to total credits. This underpins the double-entry system and guarantees the trial balance balances after all postings are recorded.

Income and expenses are recorded in the period they are earned or incurred, regardless of when cash moves. This basis drives adjusting entries and is required for fair presentation under standard accounting frameworks.

A chronological record showing the accounts debited and credited for a transaction, with a narration explaining it. It is the first step of the accounting cycle before amounts are posted to ledger accounts.

A summary record of all increases and decreases in one specific asset, liability, equity, income or expense item. Its closing balance feeds into the trial balance and ultimately the financial statements.

A list of all ledger account balances at a given date, split into debit and credit columns that should agree. It detects arithmetic and posting errors but not errors of principle or complete omission.

A temporary account used to hold the difference when a trial balance does not agree, pending investigation. Once the underlying errors are located and corrected, the balance should reduce to nil.

A bookkeeping mistake where a transaction is entered in the wrong class of account, such as treating capital expenditure as revenue expenditure. It does not disturb trial balance agreement.

A schedule explaining differences between the cash book bank balance and the bank statement balance at a date. Causes include unpresented cheques, deposits in transit, bank charges and standing orders.

A petty cash method where a fixed float is issued and periodically reimbursed by the exact amount spent. It keeps cash on hand controlled and makes the custodian accountable for a constant balance.

The systematic allocation of a non-current asset's depreciable amount over its useful life. It is an expense reflecting consumption of economic benefits, not a fund set aside for replacement.

Depreciation calculated as cost less residual value, divided by useful life, giving an equal charge each year. It suits assets whose benefits are consumed evenly, such as furniture or buildings.

Depreciation charged as a fixed percentage of the asset's carrying amount each year, so the expense falls over time. It suits assets that lose value fastest in early years, such as machinery.

Spending that acquires, extends or improves a non-current asset and benefits several accounting periods. It is capitalised on the balance sheet rather than charged to the statement of profit or loss.

Spending on day-to-day running costs or on maintaining an asset in its existing condition, charged to profit or loss. Examples include repairs, rent, wages and consumables used in operations.

A period-end journal entry that updates account balances before statements are prepared, covering accruals, prepayments, depreciation and closing inventory. It enforces accrual accounting and the matching of income with expense.

An amount paid in advance for goods or services not yet consumed, so it is an asset at the reporting date. It reduces the expense recognised in the current period and reverses next period.

An expense incurred but not yet invoiced or paid at the reporting date, recognised as a liability. It ensures the period's costs are complete before profit is measured.

An estimated allowance reducing trade receivables to the amount expected to be collected. It recognises expected credit losses without removing the debt from the ledger until it is written off.

A written order requiring the acceptor to pay a stated sum on a specified date to the drawer or bearer. It is a negotiable instrument commonly discounted with a bank before maturity.

An arrangement where the consignor sends goods to a consignee who sells them for a commission, retaining no ownership risk until sale. Unsold stock remains the consignor's asset and is valued with proportionate expenses.

A temporary business arrangement where two or more parties share costs, risks and profits of a specific venture without forming a partnership. Each venturer records its own share of transactions and results.

Recording the transactions and results of a business's separate locations, either through debtors accounts or at invoice price. It lets management assess each branch's profitability and control stock.

Stock transferred to a branch or department recorded at cost plus a mark-up, requiring an unrealised profit adjustment. Loading is removed when preparing final statements so inventory is stated at cost.

Separate trading and profit figures prepared for each department of one entity, apportioning shared costs on a reasonable basis. They reveal which activities contribute most to overall profit.

A statement showing how partnership profit is divided among partners through interest on capital, salaries and residual shares. It follows the profit and loss account and precedes partners' current accounts.

A report listing assets, liabilities and equity at a reporting date, showing financial position rather than performance. Assets and liabilities are usually split into current and non-current classifications.

A report summarising income earned and expenses incurred over a period to arrive at profit or loss. It explains the change in equity from trading activity, excluding owner contributions and drawings.

Revenue from sales less the cost of goods sold, measuring the margin earned before operating overheads. It is a key indicator of pricing and purchasing efficiency in a trading business.

Opening inventory plus purchases and direct costs, less closing inventory, for goods actually sold in the period. It is deducted from revenue to compute gross profit.

The value of unsold goods held at the period end, measured at the lower of cost and net realisable value. It is an asset in the balance sheet and reduces the cost of goods sold.

Estimated selling price in the ordinary course of business less estimated costs to complete and sell. Inventory is written down to this figure when it falls below cost.

The amount at which an asset or liability is recognised in the statement of financial position after deducting accumulated depreciation or impairment. It is the book value used in ratio analysis.

A statement reconciling opening and closing equity, showing profit, owner contributions, drawings, dividends and other movements. It links the statement of profit or loss to the statement of financial position.

The total of direct material, direct labour and direct expenses incurred in making a product or service. It excludes production overheads and is the first stage of building up product cost.

A predetermined rate used to charge indirect production costs to output, usually per labour hour, machine hour or as a percentage of direct cost. It allows overheads to be attached to units as they are produced.

The difference between overhead actually incurred and overhead absorbed into production using a predetermined rate. Over-absorption is credited to cost of sales; under-absorption is charged as an extra expense.

The cost of converting raw materials into finished output, comprising direct labour plus production overheads. It is useful for valuing work in progress and setting prices in process industries.

Sales revenue less variable costs, showing the amount available to cover fixed costs and then generate profit. It is central to break-even analysis and short-term decisions such as special orders.

The activity level at which total revenue equals total cost, giving neither profit nor loss. In units it equals fixed costs divided by contribution per unit.

The excess of budgeted or actual sales over break-even sales, expressed in units, revenue or percentage. It measures how far sales can fall before losses begin.

A future cash cost that differs between the alternatives under consideration, used in decision making. Sunk costs, committed costs and allocated fixed overheads are excluded because they cannot change.

The benefit forgone by choosing one course of action instead of the next best alternative. It is a relevant cost even when no cash is paid, such as contribution lost when scarce capacity is redirected.

A choice between producing a component internally and purchasing it externally, based on relevant costs. Only avoidable costs and any lost contribution from freed capacity should drive the comparison.

A system that sets predetermined costs for materials, labour and overheads, then compares them with actual results. Differences are analysed as variances to identify inefficiencies and improve control.

The process of breaking down the gap between standard and actual cost into its causes, such as price and usage. Favourable and adverse variances are investigated to guide corrective action.

A budget restated for the actual level of activity achieved, so fixed and variable costs behave as expected. It provides a fair benchmark for comparing actual costs and isolating variances.

A method where costs are collected separately for each identifiable job or customer order, such as in construction or printing. Each job's costs are tracked on a job card until completion.

A method for continuous mass production where costs are averaged over units passing through a sequence of processes. Normal loss, abnormal loss and equivalent units must be handled when valuing output.

A measure converting partly completed work in progress into the number of fully completed units it represents. It allows process costs to be shared fairly between finished output and closing work in progress.

A costing method for large, long-term projects where costs accumulate against a specific contract over several periods. Revenue and profit are recognised by reference to the stage of completion.

An approach that assigns overheads to products through activities and cost drivers rather than a single volume-based rate. It gives more accurate product costs where products differ in complexity and batch size.

A costing technique where only variable production costs are assigned to units, with fixed costs treated as period costs. It highlights contribution and supports short-term decisions and break-even analysis.

A costing technique where both variable and fixed production costs are assigned to units of output. Profit differs from marginal costing only through changes in inventory levels.

A responsibility unit to which costs are collected and attributed, such as a department or machine group. It may be a production centre or a service centre whose costs are reapportioned.

A book recording small cash payments, often operated under an imprest float with analysis columns for expense types. It reduces the volume of trivial entries in the main cash book.

A book combining the cash account and bank account, acting as both journal and ledger for cash transactions. Its bank column balance is reconciled to the bank statement each period.

A receivable removed from the books because recovery is judged impossible, charged as an expense. It differs from an allowance, which only estimates future losses while the debt remains recorded.

The rule that expenses are recognised in the same period as the income they helped to generate. It justifies accruals, prepayments, depreciation and inventory adjustments at each period end.