Tamil Nadu HSE First Year Accountancy flashcards

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

Accounting definition

The process of identifying, measuring, recording, classifying, summarising, analysing and communicating economic information so that users can make informed judgements and decisions.

Book-keeping vs accounting

Book-keeping covers recording and classifying transactions only. Accounting continues with summarising, analysing, interpreting and communicating results to users of the financial statements.

Accrual basis

Revenue is recorded when it is earned and expenses when they are incurred, regardless of when cash is received or paid. It requires outstanding and prepaid adjustments.

Business entity concept

The owner and the business are treated as separate entities. Capital introduced is a liability of the business, and drawings are deducted from capital, not treated as an expense.

Going concern concept

The assumption that the business will continue operating for the foreseeable future. It justifies recording assets at cost and charging depreciation over their useful lives.

Matching concept

Expenses incurred in a period are matched against the revenue they helped to earn in the same period, so profit is measured correctly for that period.

Conservatism convention

Anticipate no profits but provide for all possible losses. Stock is valued at lower of cost or realisable value, and provisions are created for doubtful debts.

Accounting equation

Assets = Liabilities + Capital. Every transaction changes at least two elements, and the two sides of the equation always remain equal after the change.

Expanded accounting equation

Assets = Liabilities + Capital + Revenue − Expenses − Drawings. Profit increases capital, while losses and drawings reduce the owner's capital balance.

Effect of credit purchase

Stock, an asset, increases and creditors, a liability, increase by the same amount. Total assets rise and the equation stays balanced.

Drawings effect on equation

Cash withdrawn by the owner reduces the asset cash and reduces capital by the same amount. Total assets and total capital both fall equally.

Golden rules of debit and credit

Personal accounts: debit the receiver, credit the giver. Real accounts: debit what comes in, credit what goes out. Nominal accounts: debit expenses and losses, credit incomes and gains.

Compound journal entry

An entry that debits one account and credits several accounts, or the reverse. The total of debits must still equal the total of credits.

Trial balance purpose

A statement listing debit and credit balances on a date to test arithmetical accuracy of posting. It does not prove the absence of errors of principle or omission.

Errors not disclosed by trial balance

Errors of omission, commission, principle, compensating errors and wrong narration keep the trial balance tallying, so they must be found by other checks.

Purchases book

A subsidiary book recording only credit purchases of goods dealt in. Cash purchases and purchases of fixed assets are excluded and recorded elsewhere.

Contra entry

An entry appearing in both the cash and bank columns of a two-column cash book, such as cash deposited into bank or cash withdrawn for office use. Marked C.

Imprest system

A petty cash method where a fixed sum is given to the petty cashier, who is reimbursed exactly the amount spent, restoring the original float.

Bank reconciliation statement

A statement prepared on a date reconciling the bank balance shown by the cash book with the balance shown by the pass book, explaining each difference.

Cheques issued not presented

The cash book balance is already reduced but the bank has not yet paid, so the pass book balance is higher than the cash book balance.

Bank charges in BRS

Charges debited by the bank but not yet entered in the cash book reduce the pass book balance, so they are deducted when starting from the cash book balance.

Capital expenditure

Spending that creates or improves a fixed asset and gives benefit beyond one accounting period, such as purchase price, installation charges and carriage on machinery.

Revenue expenditure

Spending whose benefit is consumed within the current period, such as rent, salaries, wages, insurance, repairs and carriage on goods sold.

Deferred revenue expenditure

Revenue expenditure of a heavy amount whose benefit extends over several years, written off gradually, for example preliminary expenses or a heavy advertising campaign.

Straight line method formula

Depreciation = (Cost − Scrap value) ÷ Useful life in years. An equal amount is charged every year, and the asset can be reduced to scrap value.

Written down value method

Depreciation = Book value at the beginning of the year × fixed rate. The charge falls each year because the book value keeps reducing.

Provision vs reserve

A provision is a charge against profit for a known liability of uncertain amount. A reserve is an appropriation of profit, so it does not reduce profit.

Cost of goods sold

Opening stock + Net purchases + Direct expenses − Closing stock. It is deducted from net sales in the trading account to arrive at gross profit.

Gross profit formula

Gross profit = Net sales − Cost of goods sold. Net sales are sales less sales returns; cost of goods sold includes opening stock and direct expenses.

Closing capital formula

Closing capital = Opening capital + Profit for the year − Drawings. It links the profit and loss account with the capital shown in the balance sheet.

Bill of exchange parties

The drawer makes and signs the bill, the drawee accepts it and becomes liable to pay, and the payee is the person entitled to receive the amount.

Days of grace

Three days added to the period of a bill to calculate the due date. If the due date falls on a public holiday, payment is due on the preceding working day.

Discounting a bill

The holder transfers the bill to a bank before the due date and receives the amount less discount, calculated on the bill amount for the unexpired period.

Computerised accounting

Recording transactions in accounting software so that ledgers, trial balance and final reports are generated automatically from a single entry, with faster and more accurate results.

Ready-made accounting software

Standard packaged software such as Tally or Busy, suitable for many businesses, cheaper than tailor-made software but less flexible for unusual requirements.

Audit trail in software

A record kept by accounting software of every entry, edit and deletion with user identity and date, supporting verification and preventing undetected manipulation of books.