Financial Accounting Technician Level 1 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 changes at least two elements but the equation always balances, so total debits always equal total credits in the ledger.

Capital versus revenue expenditure

Capital expenditure buys or improves a non-current asset and is added to its cost. Revenue expenditure covers day-to-day running costs and is charged to profit or loss in the period incurred.

Drawings

Money or goods taken from the business by the owner for personal use. Drawings reduce capital and are not an expense, so they never appear in the statement of profit or loss.

DEAD CLIC rule

Debits increase Expenses, Assets and Drawings; credits increase Liabilities, Income and Capital. The reverse direction decreases each of those accounts.

Credit purchase journal entry

Debit Purchases (or Inventory) and credit Payables. The supplier's personal account is credited in the payables ledger, and the total is posted from the purchases day book.

Credit sale journal entry

Debit Receivables and credit Sales at the selling price. When using a perpetual inventory system, also debit Cost of Sales and credit Inventory at cost.

Contra entry

An offset between two ledger accounts of the same person, for example when a customer is also a supplier. Debit Payables and credit Receivables with the agreed amount.

Suspense account

A temporary account opened when a trial balance fails to agree, holding the difference. It is cleared once the underlying errors are found and corrected by journal entry.

Error of principle

A transaction recorded in the wrong class of account, such as vehicle repairs debited to Motor Vehicles. It does not affect trial balance agreement but misstates assets and expenses.

Error of commission

A correct type of account but the wrong personal account, such as a sale posted to J Smith instead of J Smyth. The trial balance still agrees; correction transfers the amount between the two accounts.

Compensating errors

Two or more separate errors whose effects cancel out, so the trial balance still balances. They cannot be detected by the trial balance and require other controls to find.

Unpresented cheques

Cheques issued and recorded in the cash book but not yet cleared through the bank. In the reconciliation they are deducted from the bank statement balance.

Uncredited lodgements

Cash and cheques paid into the bank and entered in the cash book but not yet shown on the bank statement. They are added to the statement balance in the reconciliation.

Receivables control account

A summary account of total customer balances. Opening balance plus credit sales, less receipts, discounts allowed, returns inwards and bad debts, gives the closing balance.

Imprest system

A petty cash method where the float is restored to a fixed amount at each reimbursement. Cash remaining equals the imprest minus total vouchers paid.

Sales day book

The book of prime entry for credit sales only. Its total is posted to the credit of the Sales account, and each invoice to the customer's personal account.

Credit note

A document issued by a supplier to reduce the amount owed, usually for returned or faulty goods. The buyer records it in the purchases returns day book.

Accrued expense

An expense incurred in the period but not yet invoiced or paid. Entry: debit the expense, credit accruals, creating a current liability in the statement of financial position.

Prepaid expense

An expense paid in the current period that relates to a future period. Entry: debit prepayments, credit the expense, creating a current asset.

Accruals concept

Revenue and expenses are recognised in the period they are earned or incurred, regardless of when cash is received or paid. It underpins all period-end adjustments.

Straight-line depreciation

Cost minus residual value, divided by useful life, charged equally each year. It suits assets whose benefits are consumed evenly, such as fixtures and fittings.

Reducing balance depreciation

A fixed percentage applied to the carrying amount at the start of each year. The charge falls over time and suits assets losing value fastest when new, such as vehicles.

Carrying amount

The cost of a non-current asset less accumulated depreciation to date. Also called net book value; it is the amount shown in the statement of financial position.

Profit on disposal

Sale proceeds exceed the carrying amount at disposal date. The difference is credited as income; a loss is the reverse and is charged to expenses.

Net realisable value

Estimated selling price less estimated costs of completion and costs to sell. Inventory is measured at the lower of cost and this figure under IAS 2.

Cost of sales formula

Opening inventory plus purchases plus carriage inwards, less returns outwards, less closing inventory. Revenue minus cost of sales equals gross profit.

FIFO method

First in, first out: the earliest units purchased are assumed sold first, so closing inventory is valued at the most recent purchase prices.

Bad debt write-off

Debit bad debts expense and credit receivables when a debt is confirmed irrecoverable. The amount is removed from the customer's account and from the control account.

Allowance for doubtful debts

An estimate of receivables unlikely to be collected, shown as a contra-asset. Only the movement in the allowance is charged or credited to profit or loss.

Discount allowed

A reduction given to a customer for prompt payment. It is a selling expense, recorded in the cash book and deducted in the receivables control account.

Closing capital formula

Opening capital plus capital introduced plus net profit, less drawings. It must equal assets minus liabilities in the statement of financial position.

Gross profit margin

Gross profit divided by revenue, expressed as a percentage. It measures profitability before operating expenses and is used to compare performance across periods.