MATSEC AM Accounting flashcards

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

Accounting equation

Assets equal capital plus liabilities. Every transaction affects at least two elements while keeping the equation balanced, which underpins the double-entry system.

Accruals concept

Revenue and expenses are recognised in the period they are earned or incurred, regardless of cash timing. Unpaid expenses become accruals; paid-ahead items become prepayments.

Reducing balance depreciation

Annual charge equals the opening carrying amount multiplied by a fixed percentage. The charge falls each year and the asset is never depreciated below its residual value.

Error of principle

A transaction recorded in the wrong class of account, such as capital expenditure posted to repairs. It does not upset the trial balance but misstates profit and asset values.

Suspense account

A temporary account holding the difference when a trial balance does not agree. It is cleared once the underlying errors are found and corrected by journal.

Net realisable value

Estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale. Inventory is valued at the lower of cost and NRV.

Unpresented cheques

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

Prime cost

The total of direct materials, direct labour and direct expenses attributable to the cost unit. It excludes all production and non-production overheads.

Overhead absorption rate

Budgeted overhead divided by budgeted activity base, such as labour hours or machine hours. It converts indirect costs into a charge per cost unit.

High-low method

Technique splitting a mixed cost: variable cost per unit equals the change in total cost divided by the change in activity; fixed cost is the residual.

Contribution

Sales revenue less variable costs. It first covers fixed costs and any surplus becomes profit, which makes it central to marginal costing and break-even analysis.

Break-even point

The activity level where total contribution equals fixed costs and profit is zero. In units it equals fixed costs divided by contribution per unit.

Margin of safety

Budgeted or actual sales minus break-even sales, expressed in units, revenue or as a percentage of budgeted sales. It measures the fall in sales before a loss arises.

Sunk cost

A cost already incurred and unaffected by the decision under review. It is excluded from relevant costing because it is not a future incremental cash flow.

Material usage variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price. An adverse figure means more material was consumed than the standard allows.

Abnormal loss

Loss above the expected normal level in a process. It is valued at full cost and written off to profit or loss rather than borne by good output.

Relevant financial information

Information capable of making a difference to decisions, possessing predictive or confirmatory value. Materiality is entity-specific and is part of relevance.

Faithful representation

Information is complete, neutral and free from error. Neutrality means the depiction is not slanted to produce a predetermined favourable or unfavourable outcome.

Going concern

The assumption that the entity will continue operating for the foreseeable future without liquidation or material curtailment. It justifies preparing statements on a non-breakup basis.

Prudence

Exercising caution when making judgements under uncertainty so assets and income are not overstated and liabilities and expenses are not understated. It does not permit deliberate understatement.

Recognition criteria

An element is recognised when future economic benefits are probable and its cost or value can be measured reliably. Otherwise it may be disclosed only in the notes.

IAS 1 complete set

Requires a statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes.

Fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Professional scepticism

An attitude of questioning mind and alertness to conditions indicating possible misstatement, whether from error or fraud, when evaluating audit evidence.

Share premium

The excess of consideration received over the nominal value of shares issued. It is presented in equity and is generally not distributable as a dividend.

Bonus issue

A capitalisation of reserves by issuing free shares to existing holders at nominal value. Total equity is unchanged but share capital rises and reserves fall.

Rights issue bonus fraction

Theoretical ex-rights value divided by cum-rights value, used to adjust prior-year earnings per share and comparatives for the free element of the issue.

Return on capital employed

Operating profit divided by capital employed, usually total assets less current liabilities, expressed as a percentage. It measures profit generated per unit of long-term funds.

Gearing ratio

Debt divided by debt plus equity, or debt divided by equity. It indicates financial risk and the proportion of funds provided by lenders rather than shareholders.

Receivables collection days

Trade receivables divided by revenue, multiplied by 365. It estimates the average number of days credit customers take to settle amounts owed.

Operating cash flow

Cash generated from the entity's principal revenue-producing activities, presented in the statement of cash flows after adjusting profit for non-cash items and working capital changes.

Convertible loan note

A loan split into liability and equity components on issue. Finance cost equals opening carrying amount multiplied by the effective interest rate each period.