Financial Accounting Technician Level 1 key terms

The rule that assets always equal liabilities plus owner's equity, written as A = L + E. Every transaction changes at least two figures but keeps this balance intact.

Resources controlled by the business that are expected to bring future economic benefit, such as cash, inventory, equipment and amounts owed by customers.

Present obligations of the business to transfer resources to others, such as bank loans, trade payables and unpaid expenses. They are settled in cash, goods or services.

The owner's residual interest in the business after liabilities are deducted from assets. It rises with capital introduced and profit, and falls with drawings and losses.

The resources the owner invests in the business, recorded as a credit to the capital account. It forms part of equity and is not the same as a loan from the owner.

Money or goods taken out of the business by the owner for personal use. Drawings reduce equity and are debited to the drawings account, not treated as an expense.

An asset expected to be realised, sold or consumed within twelve months or the normal operating cycle, such as cash, receivables and inventory held for resale.

The system in which every transaction is recorded with equal debits and credits, so total debits always equal total credits and the accounting equation stays in balance.

The left-hand side of a ledger account. Debits increase assets and expenses, and decrease liabilities, income and equity.

The right-hand side of a ledger account. Credits increase liabilities, income and equity, and decrease assets and expenses.

A dated record showing the accounts to be debited and credited for one transaction, with a narration explaining it. It is the starting point before posting to the ledger.

The book of prime entry used for transactions that do not fit the other day books, such as corrections of errors, opening entries and adjustments.

Transferring amounts from a book of prime entry or journal into the relevant ledger accounts, using the date and a cross-reference to keep an audit trail.

The collection of accounts in which transactions are summarised by category, so each account shows a running balance for assets, liabilities, income or expenses.

The ledger holding income, expense and capital accounts used to prepare the statement of profit or loss, often called the general ledger.

A list of all ledger balances at a date, with debits in one column and credits in another. Equal totals prove arithmetic accuracy but do not prove the absence of errors.

A temporary account opened to hold the difference when a trial balance does not agree. It is cleared once the underlying errors are found and corrected.

A mistake where a transaction is recorded in the wrong class of account, such as treating the purchase of a machine as a repairs expense. The trial balance still balances.

A transaction left out of the accounting records completely. Because neither the debit nor the credit is posted, the trial balance totals still agree.

Two or more separate errors whose effects cancel out, so the trial balance still agrees even though individual account balances are wrong.

The first records of transactions before posting to the ledger: sales day book, purchases day book, returns day books, cash book and general journal.

The original evidence for a transaction, such as a sales invoice, purchase invoice, credit note, receipt or bank statement, used to make the first entry.

The book of prime entry listing credit sales invoices in date order. Totals are posted to the sales account and to individual receivable accounts.

A document issued by a supplier to cancel part or all of an invoice, for example after goods are returned. It reduces the amount the customer owes.

The book of prime entry and ledger account recording receipts and payments, including the bank columns. Its balance feeds the bank reconciliation.

A statement explaining the difference between the bank statement balance and the cash book balance, by listing unpresented cheques, uncredited lodgements and bank charges.

A cheque written and recorded in the cash book but not yet cleared through the bank, so the bank statement balance is higher than the cash book.

A summary ledger account, such as the receivables or payables control account, whose balance should equal the total of the individual customer or supplier accounts.

A transfer between two ledger accounts that cancels a balance, commonly used when a customer who is also a supplier agrees to offset amounts owed each way.

An expense incurred in the period but not yet invoiced or paid, so it is charged to the current period and shown as a liability in the statement of financial position.

An amount paid in one period that relates to a later period. The unused part is removed from the expense and shown as a current asset.

The rule that expenses are recognised in the same period as the income they helped to generate, which is why accruals and prepayments are made at period end.

The systematic allocation of the cost of a non-current asset, less any residual value, over its useful life to reflect the benefit consumed each period.

A method charging an equal depreciation amount each year, calculated as cost less residual value divided by useful life, or as a fixed percentage of cost.

A method charging a fixed percentage of the asset's carrying amount each year, giving higher charges early in the asset's life and lower charges later.

The value at which a non-current asset appears in the statement of financial position: original cost less accumulated depreciation to date.

Spending to acquire, improve or extend a non-current asset, added to its cost rather than charged as an expense in the period.

Spending on day-to-day running costs, such as repairs, rent and wages, charged to the statement of profit or loss in the period incurred.

Measuring inventory at the lower of cost and net realisable value, with cost determined by a method such as FIFO or weighted average.

The cost of goods actually sold in the period, calculated as opening inventory plus purchases less closing inventory.

First in, first out: an inventory cost method assuming the earliest goods bought are sold first, so closing inventory is valued at the most recent prices.

The estimated selling price of inventory less the costs still needed to complete and sell it. Inventory is written down when this falls below cost.

A customer who owes the business money for goods or services supplied on credit, shown as a current asset until settled.

A supplier to whom the business owes money for goods or services bought on credit, shown as a current liability until paid.

An amount owed by a customer that is judged irrecoverable and written off as an expense, removing the balance from receivables.

A provision reducing receivables to the amount expected to be collected, estimated from past experience and reviewed at each period end.

Revenue less cost of sales for the period. It measures trading performance before overheads such as rent, wages and depreciation are deducted.

Gross profit plus other income less all operating expenses for the period. It is added to capital in the statement of financial position.

A statement at a single date listing assets, liabilities and owner's equity, proving that assets equal liabilities plus equity.