UPMSP Vocational Accountancy & Auditing 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. It expresses the dual aspect of every transaction and keeps the balance sheet in balance after any entry is recorded.

Accrual Concept

Income is recognised when earned and expenses when incurred, not when cash is received or paid. It underlies matching of revenue with related costs.

Golden Rule: Nominal Account

Debit all expenses and losses, credit all incomes and gains. Nominal accounts are closed at year end and transferred to the Trading and Profit and Loss Account.

Contra Entry

An entry affecting both cash and bank columns of the cash book, such as cash withdrawn for office use. Both sides are marked with a C.

Suspense Account

A temporary account opened for the difference in a trial balance. It is closed once the errors causing the difference are located and rectified.

Error of Principle

A mistake where a capital expenditure is treated as revenue expenditure or the reverse, for example machinery purchase debited to Purchases. Trial balance still agrees.

Trial Balance Limitation

A trial balance cannot reveal errors of principle, compensating errors, complete omission of a transaction, or a wrong entry posted to both sides correctly.

Purchases Book

A subsidiary book recording only credit purchases of goods meant for resale. Cash purchases and purchases of fixed assets are not entered here.

Cheque Issued Not Presented

When a cheque is issued but not yet presented, the cash book shows a lower bank balance than the pass book. Add it to cash book balance in reconciliation.

Straight Line Depreciation

Depreciation equals cost less scrap value divided by useful life. The same amount is charged every year on the original cost of the asset.

Written Down Value Method

Depreciation is charged at a fixed percentage on the opening book value of the asset, so the annual charge falls every year over the asset's life.

Profit on Sale of Asset

Sale proceeds minus the book value on the date of sale. Book value is original cost less depreciation provided up to the date of sale.

Cost of Goods Sold

Opening stock plus purchases plus direct expenses minus closing stock. It is deducted from net sales in the Trading Account to obtain gross profit.

Outstanding Expense Adjustment

Debit the expense in Profit and Loss Account and show the unpaid amount as a current liability. The adjustment has a double effect in final accounts.

Closing Stock Valuation

Closing stock is valued at cost or net realisable value, whichever is lower. It is credited to the Trading Account and shown as a current asset.

Sacrifice Ratio

Old profit-sharing ratio minus new ratio. On admission of a partner, the incoming partner's goodwill is credited to old partners in this ratio.

Gaining Ratio

New ratio minus old ratio. On retirement of a partner, the retiring partner's share of goodwill is compensated by the gaining partners in this ratio.

Realisation Account

An account opened on dissolution to record the sale of assets, payment of liabilities and realisation expenses. Its balance is shared by all partners.

Interest on Drawings

A charge against partners for amounts withdrawn. It is debited to the partner's capital or current account and credited to the Profit and Loss Appropriation Account.

Securities Premium

Amount received on shares above face value. It is credited to Securities Premium and shown under equity until used for permitted purposes such as premium on redemption.

Forfeiture of Shares

Cancellation of shares for non-payment of calls. Share Capital is debited with the called-up amount and Share Forfeiture credited with the amount actually received.

Debenture Interest

A charge against profits payable to debenture holders regardless of profit earned. Unlike dividend on shares, it is an expense in the Statement of Profit and Loss.

Prime Cost

The sum of direct material, direct labour and direct expenses. It forms the first stage of the cost sheet before factory overheads are added.

Break-Even Point

The sales level at which total contribution equals fixed cost and profit is zero. In units it equals fixed cost divided by contribution per unit.

P/V Ratio

Contribution divided by sales, expressed as a percentage. It measures the rate at which contribution is earned and is used to compute break-even sales.

Margin of Safety

Actual sales minus break-even sales. It indicates how much sales can fall before the business incurs a loss, and is expressed as a percentage of actual sales.

Vouching

Examination of supporting documents to verify the authenticity and accuracy of entries recorded in the books of account, including proper authorisation and correct classification.

Internal Check

Division of duties so that no single person handles a transaction completely from start to finish. Work of one employee is automatically checked by another.

Internal Audit

An independent appraisal function performed by employees of the organisation to evaluate the adequacy and effectiveness of internal control and report to management.

Qualified Audit Opinion

An opinion issued when misstatements are material but not pervasive, or when sufficient appropriate evidence cannot be obtained but the effect is not pervasive.

Disclaimer of Opinion

An opinion issued when the auditor is unable to obtain sufficient appropriate audit evidence and the possible effects are both material and pervasive.

Adverse Audit Opinion

An opinion issued when the auditor concludes that misstatements are both material and pervasive, so the financial statements as a whole do not give a true and fair view.