LC Accounting flashcards

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

Accounting equation

Assets equal capital plus liabilities; every transaction preserves this equality, and profit increases capital while drawings reduce it.

Capital expenditure

Spending that acquires or improves a non-current asset, recorded in the statement of financial position rather than as an expense in profit or loss.

Books of prime entry

Day books and the cash book where transactions are first recorded before posting to the ledgers; the sales and purchases day books record credit transactions only.

Contra entry

An offset between the receivables and payables ledgers when the same party is both customer and supplier: debit payables, credit receivables.

Trial balance

A list of ledger balances at a date proving total debits equal total credits; it does not detect errors of omission, principle or compensating errors.

Suspense account

A temporary account opened for a trial balance difference and cleared once the underlying one-sided errors are found and corrected by journal.

Error of principle

Recording a transaction in the wrong class of account, such as debiting a vehicle purchase to motor expenses; the trial balance still balances.

Bank reconciliation

A statement adjusting the cash book for items on the bank statement and adjusting the statement for unpresented cheques and uncredited lodgements.

Receivables control account

A summary ledger account of total customer balances: opening balance plus credit sales less returns, receipts, discounts and bad debts.

Accrual

An expense incurred in the period but not yet invoiced or paid; recorded as a debit to expense and a credit to a current liability.

Prepayment

An expense paid in advance of the period it relates to; recorded as a debit to a current asset and a credit to the expense account.

Straight-line depreciation

An equal annual charge calculated as cost less residual value, divided by the asset's useful life in years.

Lower of cost and NRV

IAS 2 rule requiring inventory to be measured at cost or net realisable value, whichever is lower, applied item by item.

Cost of sales

Opening inventory plus purchases and carriage inwards, less purchases returns and closing inventory; deducted from revenue to give gross profit.

Closing capital formula

Opening capital plus capital introduced plus net profit less drawings; it reconciles the opening and closing statement of financial position.

Drawings

Goods or cash taken by the owner for personal use; deducted from capital and never treated as a business expense.

Partnership appropriation account

The account that distributes net profit through salaries, interest on capital and interest on drawings before sharing the residual in the profit-sharing ratio.

Statement of affairs

A list of estimated asset and liability values used in incomplete records to derive opening capital as assets minus liabilities.

Share premium

The amount received on issuing shares above their nominal value; it is part of equity and is not a profit of the period.

Statement of cash flows

A statement classifying cash movements into operating, investing and financing activities, reconciling opening and closing cash balances.

Return on capital employed

Operating profit divided by capital employed, expressed as a percentage; it measures how efficiently long-term funds generate profit.

Quick ratio

Current assets excluding inventory, divided by current liabilities; a stricter liquidity test because inventory may be slow to convert to cash.

Gearing

Non-current liabilities divided by non-current liabilities plus equity, expressed as a percentage; higher gearing indicates greater financial risk.

Window dressing

Deliberate year-end transactions, such as delaying purchases or accelerating sales, that flatter ratios like the current ratio without changing real performance.

Going concern

The assumption that the entity will continue operating for the foreseeable future, so assets are not valued at break-up amounts.

Prudence concept

Accounting policy of recognising liabilities and losses as soon as they are known while not anticipating income before it is reasonably certain.

Carrying amount

The cost of a non-current asset less accumulated depreciation to date; the figure shown in the statement of financial position.

Allowance for receivables

An estimate of debts unlikely to be collected, deducted from trade receivables; increases are charged to profit or loss.

Unpresented cheques

Cheques issued and recorded in the cash book but not yet cleared through the bank, so they reduce the bank statement balance.

FIFO

A costing method pricing issues at the oldest remaining cost, so closing inventory reflects the most recent purchase prices.

Extended trial balance

A working paper with adjustment, profit or loss and statement of financial position columns used to prepare final accounts from the trial balance.

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.