GCE A/L Accounting flashcards

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

Going concern assumption

Financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, with no intention or necessity to liquidate or curtail materially the scale of operations.

Fundamental qualitative characteristics

Relevance and faithful representation. Relevance means capable of making a difference to user decisions; faithful representation means complete, neutral and free from error depiction of economic phenomena.

Asset definition (2018 Framework)

A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

Materiality

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of primary users. Materiality is entity-specific and not a fixed threshold.

Accrual basis

Effects of transactions and other events are recognised when they occur, not when cash is received or paid, and are recorded in the periods to which they relate.

IAS 1 complete set

Statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, and notes comprising material accounting policies and explanatory information.

IAS 10 adjusting events

Events after the reporting period that provide evidence of conditions existing at the end date require adjustment of recognised amounts, for example settlement of a court case confirming a year-end obligation.

IAS 37 provision criteria

A provision is recognised when a present obligation from a past event exists, an outflow of economic benefits is probable, and the amount can be reliably estimated.

IAS 2 inventory measurement

Inventory is measured at the lower of cost and net realisable value. Cost includes purchase costs, conversion costs and other costs of bringing inventory to its present location and condition.

IAS 8 policy change

A change in accounting policy is applied retrospectively, restating comparatives and adjusting opening retained earnings, unless a transitional provision in the standard requires otherwise.

Partnership appropriation account

An account that distributes profit among partners: interest on capital, partners' salaries, interest on drawings, and the residual balance shared in the agreed profit-sharing ratio.

Statement of changes in equity

A primary statement showing movements in each component of equity: opening balance, profit for the year, other comprehensive income, share issues, dividends and closing balance.

Cost of sales formula

Opening inventory plus purchases plus carriage inwards less returns outwards less closing inventory. It is deducted from revenue to arrive at gross profit.

Straight-line depreciation

An equal annual charge calculated as (cost less residual value) divided by useful life. It is appropriate where benefits are consumed evenly over the asset's life.

Revaluation surplus treatment

An upward revaluation increase is recognised in other comprehensive income and accumulated in equity as a revaluation surplus; it is not reported in profit or loss.

Profit on asset disposal

Proceeds of disposal less the carrying amount at the disposal date, after charging depreciation up to that date. A negative result is a loss on disposal.

Sales ledger control account

A summary account of debtors: opening debit balances plus credit sales less cash received, discounts allowed, returns inwards and irrecoverable debts equals closing debit balances.

Suspense account

A temporary account opened for the difference when a trial balance does not agree. It is cleared when one-sided errors and other balancing errors are corrected.

Error of principle

A transaction recorded in the wrong class of account, such as revenue expenditure debited to a non-current asset account. It does not affect trial balance agreement.

Unpresented cheques

Cheques issued and recorded in the cash book but not yet presented for payment at the bank. They are deducted when reconciling the bank statement balance to the cash book.

Profit from incomplete records

Closing capital plus drawings less capital introduced less opening capital. Capital at each date is found from a statement of affairs of assets less liabilities.

Mark-up versus margin

Mark-up is gross profit as a percentage of cost of sales; margin is gross profit as a percentage of sales. Margin equals mark-up divided by 100% plus mark-up.

Sacrificing ratio

The old profit-sharing ratio minus the new profit-sharing ratio. It shows the proportion of profit given up by each existing partner to the incoming partner.

Gaining ratio

The new profit-sharing ratio minus the old profit-sharing ratio. On retirement, the retiring partner's goodwill is shared among continuing partners in this ratio.

Realisation account

An account opened on dissolution recording the carrying amounts of assets and liabilities, sale proceeds and dissolution expenses; the resulting profit or loss is shared among partners.

Share premium

The excess of the issue price of shares over their nominal value. It is a capital reserve and is not distributable as a dividend.

Bonus issue

An issue of shares to existing shareholders paid from reserves rather than cash. Total equity is unchanged; only the split between share capital and reserves changes.

Debenture interest

The finance cost calculated as nominal value multiplied by the coupon rate. It is charged to profit or loss and paid to debenture holders regardless of profit.

Prime cost

The sum of direct materials, direct labour and direct expenses. Production cost equals prime cost plus production overheads absorbed into the product.

Overhead absorption rate

Budgeted production overheads divided by budgeted activity level, expressed per labour hour, machine hour or unit. It is used to charge overheads to products.

Economic order quantity

The order size that minimises total ordering and holding costs, calculated as the square root of twice annual demand times order cost divided by annual holding cost per unit.

Production budget

Budgeted sales units plus required closing inventory units less opening inventory units. It determines the quantities to be manufactured in the budget period.

Flexible budget

A budget prepared for the actual activity level achieved. It is used in variance analysis so that cost differences are not distorted by volume changes.

Material usage variance

Standard quantity for actual output less actual quantity used, multiplied by standard price. It measures efficiency in using materials and is valued at standard price.

Relevant cost

A future, incremental cash flow that differs between alternatives. Sunk costs, committed costs and apportioned fixed overheads are excluded from decision making.

Current ratio

Current assets divided by current liabilities. It indicates short-term liquidity and the extent to which current obligations are covered by current assets.

Return on capital employed

Operating profit divided by capital employed, where capital employed is total assets less current liabilities or equity plus non-current liabilities, expressed as a percentage.

Cash and cash equivalents

Cash on hand and demand deposits, plus short-term highly liquid investments with original maturity of three months or less that are subject to insignificant risk of changes in value.

Indirect method operating cash flow

Profit before tax adjusted for non-cash items such as depreciation and for working capital movements, then less interest and tax paid, to derive net cash from operating activities.