UPMSP Intermediate Accountancy flashcards

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

Accounting equation

Assets equal liabilities plus capital. Every transaction keeps this equality intact because each transaction affects at least two elements with equal amounts.

Dual aspect concept

Every transaction has two effects of equal amount, one debit and one credit, which is why total debits always equal total credits in the books.

Drawings

Cash or goods withdrawn by the owner for personal use. It reduces capital and is shown as a deduction from capital, not as an expense in the profit and loss account.

Accrual basis

Revenue is recorded when earned and expense when incurred, irrespective of cash received or paid. It gives a more accurate measure of periodic profit than the cash basis.

Going concern assumption

The assumption that the business will continue operating in the foreseeable future, so assets are shown at cost less depreciation rather than at forced-sale values.

Prudence convention

Anticipated losses are provided for but anticipated profits are not recorded. This supports creating a provision for doubtful debts and valuing stock at the lower of cost or realisable value.

Matching principle

Expenses incurred to earn revenue of a period are set against that period's revenue. Outstanding and prepaid items are adjusted so profit is measured correctly.

Compound journal entry

A single journal entry that debits more than one account or credits more than one account. Total debits still equal total credits.

Suspense account

A temporary account opened when the trial balance does not agree. It absorbs one-sided errors and is closed after all errors are rectified.

Error of principle

An error where a transaction is recorded in the wrong class of account, such as treating a capital expenditure as revenue. It does not disturb the trial balance.

Contra entry

An entry appearing on both the debit and credit sides of the cash book, such as cash deposited into bank or cash withdrawn for office use.

Unpresented cheques

Cheques issued and recorded in the cash book but not yet presented for payment at the bank. They are added when starting the reconciliation from the pass book balance.

Overdraft balance

A credit balance in the cash book bank column, meaning the bank owes the firm's withdrawals. It is a debit balance in the pass book.

Straight line method

Depreciation is charged equally each year on original cost less scrap value, divided by useful life. The book value falls to scrap value at the end of life.

Written down value method

Depreciation is charged at a fixed percentage on the book value at the start of each year. The annual charge decreases over the asset's life.

Provision versus reserve

A provision is a charge against profit for a known liability of uncertain amount. A reserve is an appropriation of profit made to strengthen the financial position.

Capital reserve

A reserve created out of capital profits such as securities premium or profit on sale of a fixed asset. It cannot be used for distributing dividend.

Bill of exchange

An unconditional written order by the drawer directing the drawee to pay a stated sum to the drawer or a specified person on demand or at a fixed future date.

Days of grace

Three days added to the period stated in a bill or note to arrive at the due date. If the due date is a holiday, payment is due on the preceding working day.

Retirement of bill

Payment of a bill by the acceptor before the due date. The acceptor receives a rebate calculated on the unexpired period at the agreed rate.

Closing stock adjustment

Closing stock is credited to the trading account and shown as a current asset in the balance sheet. It reduces cost of goods sold and increases gross profit.

Outstanding expense

An expense incurred but not yet paid. It is added to the expense in the profit and loss account and shown as a current liability in the balance sheet.

Prepaid expense

An expense paid in advance for a future period. It is deducted from the expense in the profit and loss account and shown as a current asset.

Sacrificing ratio

The proportion of profit given up by existing partners when a new partner is admitted, computed as old ratio minus new ratio. Goodwill is credited in this ratio.

Gaining ratio

The proportion by which remaining partners gain on a partner's retirement or death, computed as new ratio minus old ratio. It is used to compensate the retiring partner's goodwill.

Revaluation account

An account prepared on reconstitution to record increases and decreases in assets and liabilities. Its balance is shared by old partners in the old profit-sharing ratio.

Realisation account

An account opened on dissolution to record the sale of assets and settlement of liabilities. Its balance is transferred to partners' capital accounts in the profit-sharing ratio.

Garner v Murray rule

When a partner is insolvent and cannot pay the deficiency on capital, the deficiency is borne by the solvent partners in the ratio of their capitals, not the profit-sharing ratio.

Forfeiture of shares

Cancellation of shares for non-payment of calls. Share capital is debited with the called-up amount and the amount already received is credited to the Forfeited Shares Account.

Securities premium

Amount received above the face value of shares or debentures. It is a capital receipt credited to a separate account and cannot be distributed as dividend.

Current ratio

Current assets divided by current liabilities. It measures short-term liquidity, and a ratio of about 2:1 is generally considered satisfactory.

Operating cash flow

Cash generated from normal business operations, computed from net profit by adding non-cash expenses and adjusting for changes in working capital. It appears first in the cash flow statement.