Sri Lanka Accountants' Service Exam key terms

A method of recording transactions when the underlying economic event occurs, not when cash moves. Revenue is recognised when earned and expenses when incurred, so receivables and payables appear in the financial statements.

The presumption that an entity will continue operating for the foreseeable future without intending or being forced to liquidate. It justifies carrying assets at amounts recoverable through normal use rather than forced-sale values.

The rule that expenses are recognised in the same reporting period as the revenues they helped generate. It drives adjustments for depreciation, accruals, prepayments and inventory cost of sales.

The systematic allocation of a non-current asset's depreciable amount over its useful life. Methods include straight-line, reducing balance and units of production; the choice must reflect the pattern of benefits consumed.

The amount by which an asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use, tested whenever indicators of impairment exist.

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

Statements presenting a parent and its subsidiaries as a single economic entity. Intra-group balances, transactions and unrealised profits are eliminated, and non-controlling interests are shown separately within equity.

An intangible asset arising on acquisition, measured as consideration transferred plus non-controlling interest and previously held interests, less the fair value of identifiable net assets acquired. It is not amortised but tested annually for impairment.

The portion of a subsidiary's net assets and profit or loss attributable to owners other than the parent. It is presented within consolidated equity, separately from the parent's owners' equity.

A primary statement classifying cash movements into operating, investing and financing activities. It reconciles opening and closing cash and explains why profit differs from net cash generated.

Sales revenue less all variable costs. It measures how much each unit or each rupee of sales contributes towards covering fixed costs and then generating profit, and underpins break-even and target-profit calculations.

The activity level at which total contribution equals total fixed costs, giving neither profit nor loss. It can be expressed in units (fixed costs divided by unit contribution) or in sales value using the contribution-to-sales ratio.

The excess of budgeted or actual sales over break-even sales, expressed in units, rupees or as a percentage. It indicates how far sales may fall before the business makes a loss.

A costing approach in which inventory and cost of sales include only variable production costs, with fixed production overheads treated as period costs. It contrasts with absorption costing and affects reported profit where inventory levels change.

A costing method that assigns both variable and fixed production overheads to units produced, usually through predetermined overhead absorption rates. It is required for external financial reporting but can distort short-term decisions.

A predetermined rate used to charge indirect production costs to output, calculated by dividing budgeted overhead by a budgeted basis such as labour hours, machine hours or direct wages. Differences from actual overhead give over- or under-absorption.

A system that sets predetermined costs for materials, labour and overhead, then compares actual results against them. Variances are analysed by cause to support control and performance evaluation.

The process of decomposing the difference between budgeted or standard results and actual results into price and quantity components, such as material price and usage variances, to identify responsibility and corrective action.

A budget adjusted to the actual level of activity achieved, so that variable costs reflect actual volumes while fixed costs remain unchanged. It provides a fairer comparison with actual results than a fixed budget.

A budgeting approach where every activity and cost must be justified from a nil base each period, rather than rolling forward prior expenditure. It suits discretionary and support costs but is time-consuming.

The excess of current assets over current liabilities, representing funds tied up in day-to-day operations. Managing it involves balancing inventory, receivables and payables to maintain liquidity.

Current assets divided by current liabilities. It indicates short-term liquidity and the ability to meet obligations falling due within a year; a very high ratio may signal idle or poorly managed assets.

Current assets excluding inventory, divided by current liabilities. Also called the acid-test ratio, it tests liquidity using only the most readily realisable assets.

The threshold or thresholds below which misstatements, individually or in aggregate, would not reasonably influence users' economic decisions. It guides the nature, timing and extent of audit procedures and evaluation of uncorrected misstatements.

The risk that the auditor expresses an inappropriate opinion on materially misstated financial statements. It comprises inherent risk, control risk and detection risk, with detection risk controlled by the auditor's procedures.

Information used by the auditor to reach conclusions on which the opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability, and may be obtained through inspection, observation, enquiry, confirmation, recalculation and analytical procedures.

Audit evidence obtained as a direct written response from a third party to the auditor, for example a bank or customer. It is generally more reliable than evidence generated internally by the entity.

The policies and procedures designed to provide reasonable assurance about achieving objectives relating to reliable reporting, effective operations and compliance. It comprises the control environment, risk assessment, control activities, information and communication, and monitoring.

A control that separates authorisation, custody of assets and record-keeping among different people, so that no single person can both perpetrate and conceal an error or fraud. It is central to preventing misappropriation.

An opinion that is qualified, adverse or a disclaimer, issued when the auditor concludes the financial statements are materially misstated or evidence is insufficient. A separate emphasis of matter paragraph does not itself modify the opinion.

The twelve-month period for which income tax is charged on the income of the immediately preceding year of assessment. The year of assessment generally runs from 1 April to 31 March.

The period in which income is earned and which forms the basis for assessment in the following assessment year. In Sri Lanka it normally runs from 1 April to 31 March.

Assessable income after deducting qualifying payments and losses, on which income tax is computed at the applicable rates. It is distinct from total statutory income and from accounting profit.

A deduction spread over time in respect of capital expenditure on qualifying assets such as plant, machinery and buildings, instead of a single deduction for the full cost. It reflects wear and tear and is claimed against business income.

Tax deducted at source by a payer from specified payments such as interest, dividends, rent or service fees, and remitted to the tax authority. It is a collection mechanism, and the recipient may claim credit for it.

An indirect tax charged on the supply of goods and services at each stage of the production and distribution chain, with registered traders recovering input tax against output tax. The net amount is remitted periodically.

The annual law passed by Parliament authorising expenditure from the Consolidated Fund for specified heads and programmes. It gives legal authority for spending and is a cornerstone of legislative control over public money.

The principal government account into which all revenue and other receipts are paid and from which authorised expenditure is met. Withdrawals generally require parliamentary appropriation or specific statutory authority.

The detailed expenditure proposals prepared by ministries and departments for the coming financial year, debated and voted by Parliament. They form the basis of the Appropriation Act and of subsequent budget execution.

A budget structured around programmes, activities and expected outputs or outcomes rather than merely line-item inputs. It links resource allocation to results and supports accountability for value for money.

A parliamentary committee that examines the Auditor General's reports and the accounts of government institutions, holding accounting officers to account for the regularity and value for money of public spending.

Something of value given in return for a promise, which is essential to form a binding contract. It may be money, goods, services or a promise to do or refrain from doing something, but must not be past.

The two essential steps in contract formation: a definite promise made with intention to be bound, and an unqualified agreement to all its terms. A counter-offer destroys the original offer.

The legal ability of a party to enter a binding contract, which may be limited by age, mental incapacity or status such as an undischarged bankrupt. Contracts with parties lacking capacity may be void or voidable.

The state of being free from relationships or interests that could compromise objectivity. It has an appearance dimension and a mental dimension, and is fundamental to the credibility of audit and assurance work.

The ethical principle requiring a member not to compromise professional judgement because of bias, conflict of interest, or undue influence of others. It supports impartial decisions and honest reporting.

The ethical duty not to disclose information acquired through professional relationships without proper authority, unless there is a legal or professional right or duty to disclose. It continues even after the relationship ends.

A circumstance that may compromise adherence to the fundamental ethical principles, classified as self-interest, self-review, advocacy, familiarity or intimidation. Safeguards must be applied or the engagement declined.

In information systems, the separation of incompatible access rights such as developing, testing, deploying and operating systems or authorising and processing transactions, to reduce the risk of error and fraud.

The recorded sequence of system activity that allows transactions and changes to be traced from source to report and back. It supports verification, investigation and accountability in computerised environments.