Zenkei Bookkeeping Grade 1 flashcards

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

Fundamental qualitative characteristics

Relevance and faithful representation are the two fundamental characteristics. Relevance includes predictive value, confirmatory value, and materiality; faithful representation requires completeness, neutrality, and freedom from error.

Asset definition

A present economic resource controlled by the entity as a result of past events. The resource has the potential to produce economic benefits, and control distinguishes an asset from a mere right of access.

Fair value definition

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future. If management intends to liquidate, the going-concern basis is not appropriate.

Accrual basis

Transactions and events are recognised when they occur, not when cash is received or paid. They are recorded in the periods to which they relate and reported in the financial statements of those periods.

Compound journal entry

A single journal entry with more than one debit or more than one credit. Total debits must equal total credits, and each account line records the amount attributable to that account.

Normal account balances

Assets and expenses have normal debit balances; liabilities, equity, and revenue have normal credit balances. Contra accounts carry the opposite balance and reduce the related account, such as accumulated depreciation.

Trial balance limitations

A trial balance proves only that total debits equal total credits. It does not detect errors of principle, complete omission of a transaction, or compensating errors, because these keep debits and credits equal.

Petty cash reimbursement

Reimburse by debiting the expense accounts and Cash Over and Short for any shortage, then crediting Cash. The Petty Cash account is not adjusted on reimbursement, only when the fund size changes.

Sales discount gross method

Record the receivable at the gross invoice amount and recognise a sales discount (debit) only if the customer pays within the discount period. The net method records the receivable net of the discount instead.

Accrued expense adjusting entry

Debit the expense account and credit an accrued liability account for expenses incurred but unpaid at period end. The entry reverses in the next period when the cash payment is recorded.

Prepaid expense adjustment

When the initial payment is debited to an asset, the period-end entry debits expense and credits the asset for the expired portion. The unexpired portion remains an asset on the balance sheet.

Unearned revenue adjustment

When cash received is credited to a liability, the period-end entry debits the liability and credits revenue for the earned portion. The remaining balance represents revenue not yet earned.

Straight-line depreciation formula

Annual depreciation equals (cost minus residual value) divided by useful life in years. The same amount is charged each full year, and the carrying amount declines to residual value at the end of the life.

Allowance write-off effect

Writing off an uncollectible account debits Allowance for Doubtful Accounts and credits Accounts Receivable. It does not change net income or net receivables because both the gross receivable and the allowance decrease equally.

Closing entries

Close revenues and expenses to Income Summary, close Income Summary to Retained Earnings, and close dividends or drawings to Retained Earnings. Temporary accounts end at zero; permanent accounts carry forward.

Statement of cash flows sections

Operating activities are principal revenue-producing activities; investing activities involve non-current assets and investments; financing activities change share capital, borrowings, and dividends. IAS 7 governs the presentation.

Indirect method operating cash flow

Start with profit before tax, add back non-cash expenses such as depreciation and impairment, remove gains on disposals, and adjust for changes in working capital items such as receivables and payables.

Basic earnings per share

Profit attributable to ordinary shareholders divided by the weighted-average number of ordinary shares outstanding during the period. Weighting reflects the time each share was outstanding.

Current ratio

Current assets divided by current liabilities. It measures short-term liquidity, indicating whether current resources cover obligations due within twelve months or the operating cycle, whichever is longer.

Predetermined overhead rate

Estimated total manufacturing overhead divided by the estimated activity base for the period. Applied overhead equals the rate multiplied by the actual activity base incurred during the period.

Break-even point in units

Fixed costs divided by unit contribution margin, where contribution margin equals unit selling price minus unit variable cost. At break-even, total contribution margin exactly equals total fixed costs.

Absorption vs variable costing

Absorption costing includes fixed manufacturing overhead in product cost; variable costing expenses it as a period cost. Absorption profit exceeds variable profit when inventory increases during the period.

Relevant costs

Future costs that differ among the alternatives being considered. Sunk costs and allocated fixed costs are irrelevant, while opportunity cost is relevant and must be included in the decision analysis.

Prime and conversion cost

Prime cost equals direct materials plus direct labour. Conversion cost equals direct labour plus manufacturing overhead. Both are used to analyse the cost of converting raw materials into finished goods.

Treasury shares

Shares reacquired by the issuing corporation and recorded at cost as a contra-equity account. They reduce total equity, receive no dividends, and carry no voting rights while held.

Deferred tax liability

Arises from taxable temporary differences, where the accounting carrying amount exceeds the tax base. It is measured at the tax rates expected to apply when the difference reverses.

Contract elements

A valid contract requires offer, acceptance, consideration, capacity, and legality. A contract lacking legality or capacity is void; one induced by fraud, duress, or undue influence is voidable.

Stock dividend effect

A stock dividend transfers retained earnings to share capital and additional paid-in capital. Total equity and total assets are unchanged, but the number of shares outstanding increases.

Control under IFRS 10

An investor controls an investee with power over it, exposure to variable returns from involvement, and the ability to use that power to affect the returns. Control requires consolidation.

Goodwill formula

Goodwill equals consideration transferred plus non-controlling interest plus previously held interest minus the net fair value of identifiable assets acquired and liabilities assumed. It is tested for impairment, not amortised.

Equity method

The investment is initially recorded at cost, then adjusted for the investor's share of the investee's profit or loss and other comprehensive income, and reduced by dividends received. It applies to associates and joint ventures.

Closing rate translation

Under IAS 21, foreign operation assets and liabilities are translated at the closing rate, income and expenses at the transaction-date or average rate, and exchange differences go to other comprehensive income.