ITC Entrance Exam key terms

Accounting approach that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It contrasts with cash basis and underpins most financial reporting frameworks.

Rule that expenses should be recognised in the same period as the revenues they helped generate. It supports accrual accounting by tying cost recognition to the timing of related income.

An amount paid in advance for goods or services not yet consumed, carried as an asset until used. Examples include prepaid rent and insurance premiums covering future periods.

Cash received before the related goods or services are delivered, recorded as a liability. It becomes revenue only once the performance obligation is satisfied.

The process of determining when and how much revenue to record. Under IFRS 15 it occurs when control of promised goods or services transfers to the customer.

A promise in a contract to transfer a distinct good or service to a customer. Revenue is recognised as each obligation is satisfied, forming the core unit of IFRS 15 analysis.

Systematic allocation of the depreciable amount of a tangible asset over its useful life. It spreads cost against the periods benefiting from the asset's use rather than charging it all at acquisition.

Depreciation technique that charges an equal amount each period, calculated as cost less residual value divided by useful life. It suits assets whose benefits are consumed evenly over time.

A reduction in an asset's carrying amount when its recoverable amount falls below book value. The loss is recognised immediately in profit or loss unless a revaluation surplus exists.

The value at which an asset or liability appears in the statement of financial position, after deducting accumulated depreciation and impairment. It is also called book value.

Sales revenue minus variable costs, representing the amount available to cover fixed costs and generate profit. It is central to cost-volume-profit analysis and short-term decision making.

The sales volume or revenue at which total revenue equals total cost, giving zero profit. It is calculated by dividing fixed costs by the contribution margin per unit or ratio.

A cost that remains unchanged in total over a relevant range of activity, such as factory rent. Per unit, it falls as output rises, which affects pricing and capacity decisions.

A cost that changes in total in direct proportion to activity volume, such as raw materials. Per unit it stays roughly constant within the relevant range.

The band of activity within which assumed cost behaviour patterns remain valid. Outside it, fixed costs may step up or variable costs per unit may change.

Inventory valuation method that includes direct materials, direct labour, and both variable and fixed production overhead in product cost. It is required for external financial reporting under most frameworks.

Product costing method that assigns only variable manufacturing costs to inventory, treating fixed production overhead as a period expense. It supports internal decisions but is not usually acceptable for external reporting.

Indirect production or operating costs that cannot be traced directly to a unit of output, such as supervision and utilities. These are allocated using a chosen basis like labour hours.

Costing system that assigns overhead to products based on the activities they consume, using multiple cost drivers. It improves accuracy where products make uneven demands on support resources.

Any factor that causes a change in the cost of an activity, such as machine hours or number of setups. Cost drivers provide the allocation basis in activity-based costing.

The amount on which income tax is computed after adjusting accounting profit for items that tax law treats differently. It may include non-deductible expenses and exclude exempt income.

An item that affects accounting profit or taxable income but never both, so it does not reverse over time. Examples include tax-exempt income and fines that are never deductible.

A tax asset or liability arising from temporary differences between accounting carrying amounts and tax bases. It reflects tax expected to be paid or recovered in future periods.

An indirect tax charged at each stage of the supply chain on the value added, with businesses collecting it from customers and offsetting input tax paid. The final burden falls on the consumer.

The right of a registered business to deduct tax paid on purchases from tax collected on sales. It prevents cascading of tax through the production and distribution chain.

Tax deducted at source by a payer from certain payments, such as dividends, interest, or royalties, and remitted to the tax authority. It secures collection before funds reach the recipient.

The two essential steps in forming a contract: a definite proposal by one party and an unqualified agreement to it by another. Together they create a binding agreement when other elements are present.

An invitation for others to make offers, rather than an offer itself, such as goods displayed in a shop. A response to it is an offer that the inviter may accept or reject.

Something of value exchanged between contracting parties, such as money for goods or a promise for a promise. It must be legally sufficient but need not be adequate.

A legal obligation to act in another party's best interests, placing loyalty and good faith above personal gain. It applies to directors, trustees, and agents in their dealings.

The system of rules, practices, and processes by which a company is directed and controlled. It addresses board accountability, shareholder rights, and transparency in reporting.

The threshold or magnitude of misstatement that would influence the economic decisions of users of financial statements. Auditors use it to plan procedures and evaluate whether errors are significant.

Information gathered by the auditor to support conclusions on which the audit opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability.

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It comprises inherent, control, and detection risk components.

The policies and procedures designed to provide reasonable assurance about reliable reporting, effective operations, and compliance with laws. Auditors assess it to plan the nature and extent of testing.

The principle that a sum of money available today is worth more than the same sum received later, because it can be invested and earn a return. It underlies discounting and compounding.

The sum of an investment's expected future cash flows discounted to today's value, less the initial outlay. A positive result suggests the project adds value at the chosen rate.

The rate used to convert future cash flows into present value, reflecting the time value of money and project risk. It is often based on the firm's cost of capital.

The weighted average return a company must earn to satisfy its debt and equity providers. It serves as the hurdle rate for evaluating investment projects.