LC Accounting key terms

The relationship stating that assets equal liabilities plus capital, and that capital equals assets minus liabilities. Every transaction preserves this balance, which underpins the whole double-entry system.

The owner's residual interest in the business, being assets less liabilities. It rises with owner contributions and profits, and falls with drawings and losses.

Resources controlled by the business as a result of past events and expected to bring future economic benefit, such as cash, receivables, inventory and equipment.

Present obligations arising from past events that the business expects to settle by transferring resources, such as payables, bank loans and unpaid expenses.

Cash or goods taken from the business by the owner for personal use. Drawings reduce capital and are not an expense in the income statement.

The system in which every transaction is recorded with equal debits and credits, so total debits always equal total credits and the accounting equation stays in balance.

An entry on the left-hand side of a ledger account. Debits increase assets and expenses, and decrease liabilities, capital and income.

An entry on the right-hand side of a ledger account. Credits increase liabilities, capital and income, and decrease assets and expenses.

The first records where transactions are listed before posting to the ledger: sales day book, purchases day book, returns day books, cash book and the general journal.

A list of credit sales to customers, recorded from copy sales invoices. It is totalled periodically and posted to the sales ledger and the sales account.

The book of prime entry used for transactions that do not fit the other day books, including corrections of errors, opening entries and adjustments such as depreciation.

A record with debit and credit sides that accumulates all entries for one item, such as a customer, a supplier, an expense or an asset.

A list of all ledger balances at a date, with debit balances in one column and credit balances in another, used to check that total debits equal total credits.

A temporary account opened for the difference when a trial balance does not balance. Its balance is cleared once the underlying errors are found and corrected.

A mistake where a transaction is entered in the wrong class of account, for example treating a non-current asset purchase as a repairs expense. It does not disturb trial balance agreement.

A mistake where a correct amount is posted to the correct class of account but the wrong individual account within that class, such as the wrong customer's ledger.

A transaction left out of the accounting records entirely. Because no debit or credit is made, the trial balance still balances and the error is hard to detect.

Recording the wrong amount in the book of prime entry and posting that same wrong amount to both accounts, so the trial balance still agrees.

A schedule explaining why the bank statement balance differs from the cash book bank balance, adjusting for unpresented cheques, lodgements not yet credited, bank charges and errors.

A cheque issued and recorded in the cash book but not yet cleared through the bank, so the bank statement shows a higher balance until it is presented.

A summary ledger account, such as the receivables or payables control account, whose balance should equal the total of the individual ledger balances it summarises.

A customer who owes money for goods or services supplied on credit. Balances are held in the sales ledger and summarised in the receivables control account.

A supplier owed money for goods or services bought on credit. Balances sit in the purchases ledger and are summarised in the payables control account.

An expense incurred in the period but not yet invoiced or paid, such as unpaid wages. It is added to the expense and shown as a current liability.

An amount paid in one period that relates to a later period, such as insurance paid in advance. It is removed from the expense and shown as a current asset.

The systematic allocation of the cost of a non-current asset, less any residual value, over its useful life to reflect consumption of economic benefit.

A method charging an equal annual amount, calculated as cost less residual value divided by useful life, or as a fixed percentage of original cost.

A method charging a fixed percentage on the asset's carrying amount each year, giving higher charges early in the asset's life and lower charges later.

The value at which a non-current asset appears in the statement of financial position, being cost less accumulated depreciation to date.

A receivable balance that has proved irrecoverable and is written off as an expense, removing the debt from receivables and from the sales ledger.

A provision reducing receivables to the amount expected to be collected, created as an expense and adjusted each period to the required level.

An inventory costing method assuming the earliest units bought are sold first, so closing inventory is valued at the most recent purchase costs.

An inventory method recalculating a weighted average unit cost after each purchase, then valuing issues and closing inventory at that average.

The direct cost of goods sold, calculated as opening inventory plus purchases less closing inventory, and deducted from revenue to give gross profit.

Revenue less cost of sales. It measures the profit earned from trading before deducting operating expenses, interest and tax.

Gross profit plus other income less all operating expenses and finance costs. It is added to capital after drawings in the sole trader's accounts.

A statement at a reporting date listing non-current and current assets, capital, non-current and current liabilities, demonstrating that assets equal capital plus liabilities.

An account showing how profit is divided among partners, deducting interest on capital and partners' salaries before sharing the remainder in the agreed profit-sharing ratio.

A partner's account recording drawings, share of profits, interest on capital and salary. Its balance is separate from the fixed capital account.

A published statement classifying cash movements into operating, investing and financing activities to explain the change in cash and cash equivalents over the period.

Current assets divided by current liabilities. It indicates short-term liquidity, showing how many times current liabilities are covered by assets expected to convert to cash.

Current assets excluding inventory divided by current liabilities. A stricter liquidity measure because inventory may take time to convert into cash.

Operating profit divided by capital employed, expressed as a percentage. It measures how efficiently the business generates profit from the funds invested in it.