GCE A/L Accounting key terms

Accounting approach where income is recorded when earned and expenses when incurred, regardless of when cash moves. It matches costs with the revenues they helped generate in the same period.

Assumption that the entity will continue trading for the foreseeable future, so assets are valued on a continuing-use basis rather than at break-up values. Financial statements are normally prepared on this basis.

Quality requiring caution when making judgements under uncertainty, so assets and income are not overstated and liabilities and expenses are not understated. It supports neutrality rather than permitting deliberate understatement.

Set of underlying concepts guiding how financial statements are prepared: objective, qualitative characteristics, elements, recognition and measurement. It helps standard setters and preparers resolve issues not covered by a specific standard.

Quality of information that depicts economic reality completely, neutrally and free from material error. It is one of the fundamental qualitative characteristics, alongside relevance.

Threshold above which omissions or misstatements could influence decisions of users. It is entity-specific and depends on size and nature of the item, not on a fixed monetary limit.

Body of company law, accounting standards and stock exchange rules governing what financial statements must contain and how they are presented and filed. It gives statements comparability and legal enforceability.

Statement listing assets, liabilities and equity at a single reporting date, showing the accounting equation in structured form. It is a snapshot, not a measure of value or performance over time.

List of ledger account balances at a date, used to test whether total debits equal total credits before statements are prepared. It does not detect errors of principle, omission or compensating errors.

Temporary account opened to hold the difference when a trial balance fails to agree. Once errors are found and corrected, the balance should be cleared to zero.

Mistake where a transaction is entered in the wrong class of account, for example capital expenditure recorded as revenue expense. It does not disturb trial balance agreement.

Schedule explaining the difference between the bank balance in the cash book and the balance on the bank statement, by adjusting for unpresented cheques, unrecorded lodgements, bank charges and errors.

Summary ledger account, such as the receivables or payables control, containing totals posted from books of prime entry. Its balance is checked against the sum of the individual ledger balances to detect errors.

Offsetting entry recording the same transaction on both sides of a control account, typically when a customer who is also a supplier has balances cancelled. It reduces both receivables and payables.

Spending that acquires, improves or extends a non-current asset and benefits more than one accounting period. It is capitalised and depreciated rather than charged to the income statement immediately.

Systematic allocation of the depreciable amount of a non-current asset over its useful life. It reflects consumption of economic benefits, not a fall in market value or a fund set aside.

Amount at which an asset is recognised in the statement of financial position: cost or revalued amount less accumulated depreciation and any accumulated impairment. It is the figure used to compute disposal gains or losses.

Depreciation calculated as a fixed percentage of the asset's carrying amount each year, giving higher charges early in life. It suits assets that lose value fastest when new.

Increase in the carrying amount of a non-current asset on revaluation, credited to other comprehensive income and held in equity. It is not a realised profit and is not available for dividend distribution.

Summary of assets and liabilities prepared from incomplete records, often using opening and closing capital figures to derive profit. It substitutes for a statement of financial position when records are missing.

Gross profit expressed as a percentage of cost of goods sold, used in incomplete-record questions to derive sales or purchases. It differs from margin, which is based on selling price.

Gross profit expressed as a percentage of sales revenue. It is always lower than the equivalent mark-up and is used to convert a known sales figure into gross profit.

Intangible asset representing the excess of consideration paid over the fair value of identifiable net assets acquired. Internally generated goodwill is not recognised; purchased goodwill is amortised or tested for impairment.

Amount a new partner pays above the value of the share of net assets received, compensating existing partners for accumulated goodwill. It is shared among old partners in their old profit-sharing ratio.

Proportion of profit given up by existing partners when a new partner is admitted, calculated as old share minus new share. It determines how the admission premium is divided.

Process of winding up a partnership: realising assets, paying external liabilities, settling partners' capital and current accounts, and distributing any surplus or deficiency according to the profit-sharing ratio.

Account prepared on dissolution recording disposal proceeds of assets, settlement of liabilities and the resulting profit or loss, which is then shared among partners. It closes the partnership's asset and liability balances.

Offer of new shares to existing shareholders in proportion to their holding, usually below market price. It raises finance while preserving relative ownership and is recorded in share capital and share premium.

Free issue of shares to existing shareholders made by capitalising reserves such as share premium or retained earnings. No cash is raised and total equity is unchanged.

Amount received on issuing shares above nominal value, held in a capital reserve. It is not distributable as dividend but may be used for bonus issues or issue costs.

Equity balances other than share capital, split into capital reserves (not distributable) and revenue reserves (distributable). They arise from profits, revaluations or share issues.

Long-term loan finance raised by a company, usually secured on assets and carrying fixed interest. Interest is a finance cost charged against profit, not a dividend appropriation.

Rate used to charge indirect production costs to units, typically budgeted overhead divided by budgeted activity such as labour hours or machine hours. It converts total overhead into a per-unit cost.

Situation where overhead charged to production exceeds overhead actually incurred, because activity was higher than budgeted. The difference is written off as an adjustment to cost of sales.

Costing method that charges only variable costs to units, treating fixed overhead as a period cost. It supports contribution analysis and short-term decisions such as accept or reject an order.

Sales revenue less variable costs, being the amount available to cover fixed costs and then generate profit. It is the key figure in break-even and limiting-factor decisions.

Level of activity at which total contribution equals fixed costs, giving neither profit nor loss. It can be expressed in units or revenue and is found by dividing fixed costs by contribution per unit.

Excess of budgeted or actual sales over break-even sales, expressed in units, revenue or percentage. It measures how far sales can fall before a loss arises.

System that sets predetermined costs for materials, labour and overhead, then compares actual results against them. Differences are analysed as variances to identify where performance departed from plan.

Difference between a standard or budgeted figure and the actual figure. Favourable variances increase profit relative to plan; adverse variances reduce it, and each should be analysed by cause.

Budget restated to the actual level of activity achieved, so that variable costs and revenue are compared on a like-for-like basis. It isolates spending variances from volume effects.

Statement classifying cash movements into operating, investing and financing activities to explain the change in cash over a period. It complements the income statement by showing liquidity and solvency.

Profit before interest and tax divided by capital employed, expressed as a percentage. It measures how efficiently long-term funds generate operating profit and is a primary profitability ratio.

Current assets divided by current liabilities, indicating short-term liquidity and ability to meet obligations falling due within a year. A very high ratio may signal idle or slow-moving assets.