MATSEC AM Accounting key terms

Accounting approach in which income and expenses are recorded in the period they are earned or incurred, not when cash changes hands. It requires year-end adjustments for accrued and prepaid items.

An amount paid before the benefit has been consumed, so part of the cost belongs to a future period. It appears as a current asset until the expense is recognised.

A cost incurred in the current period but not yet invoiced or paid at the reporting date. It is recorded as a liability plus an expense in the same period.

Revenue earned in the current period but not yet invoiced or received. It is shown as a current asset and added to the reported income for the period.

An estimate of receivables that may not be collected, charged as an expense and deducted from trade receivables. It is a judgement-based allowance rather than a write-off of a specific debt.

A receivable removed from the books because it is considered irrecoverable. The amount is expensed and the trade receivables balance is reduced directly.

The systematic allocation of the depreciable amount of a non-current asset over its useful life. It spreads cost against the revenues the asset helps generate, not a valuation of the asset.

Depreciation calculated as cost less residual value, divided by useful life, giving an equal charge each year. Simple and suitable where benefits are consumed evenly.

Depreciation charged as a fixed percentage of the asset's carrying amount, so the expense falls each year. Often used for assets that lose value quickly early in life.

The amount at which an asset is recognised in the statement of financial position after deducting accumulated depreciation and any accumulated impairment losses.

A list of ledger balances at a date, split into debits and credits, used to check that total debits equal total credits before statements are prepared.

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

A recorded transaction showing the accounts to be debited and credited with equal amounts, together with a narration explaining the reason for the entry.

The bookkeeping rule that every transaction has two equal and opposite effects, a debit in one account and a credit in another, keeping the accounting equation in balance.

The relationship stating that assets equal capital plus liabilities. Every transaction changes at least two elements while keeping the equation balanced.

The owner's residual interest in the business, being assets less liabilities. It increases with profit and capital introduced and decreases with drawings.

Money or goods taken out of an unincorporated business by its owner for private use. Drawings reduce capital and are not an expense of the business.

A statement comparing the cash book balance with the bank statement balance, explaining timing differences such as unpresented cheques and uncredited deposits.

A book of prime entry and ledger account recording receipts and payments through the bank account, with a running balance reconciled to the bank statement.

The total of direct materials, direct labour and direct expenses incurred in making a product or delivering a service, before production overheads are added.

The process of charging indirect production costs to units produced, usually using a predetermined rate per labour hour, machine hour or unit.

The situation where overhead absorbed into production exceeds the overhead actually incurred, producing a credit balance that is written off or adjusted in the period.

The situation where overhead absorbed into production is less than the overhead actually incurred, producing an extra charge to the income statement for the period.

The increase in total cost caused by producing one additional unit, normally equal to variable cost per unit in the short term.

Sales revenue less variable costs. It measures the amount each unit or product line contributes towards covering fixed costs and then generating profit.

The level of sales at which total contribution equals total fixed costs, so the business makes neither profit nor loss. It can be expressed in units or revenue.

The amount by which budgeted or actual sales exceed the break-even level, showing how far sales can fall before a loss arises.

A costing method that assigns both variable and fixed production overheads to units, so inventory carries a share of fixed cost.

A system that sets predetermined costs and revenues for activities, then compares actual results with those standards to identify and investigate variances.

The calculation and interpretation of differences between standard and actual costs or revenues, splitting them into price and quantity elements for control.

The benefit forgone by choosing one course of action instead of the next best alternative. It is relevant to decision making even though no cash is paid.

Selecting only future, incremental cash flows that differ between alternatives when making a decision, ignoring sunk costs and apportioned fixed overheads.

A body of principles setting out the objective of financial reporting and the qualitative characteristics and definitions that underpin accounting standards.

A qualitative characteristic meaning information can influence users' economic decisions, having predictive value, confirmatory value, or both, and is material.

A qualitative characteristic requiring information to be complete, neutral and free from error, depicting the economic substance of what it claims to represent.

The principle that transactions are accounted for according to their economic reality rather than their legal or contractual form alone.

The exercise of caution when making judgements under uncertainty, so assets and income are not overstated and liabilities and expenses are not understated.

The threshold at which an omission or misstatement could influence users' decisions. Material items must be disclosed separately or corrected.

The assumption that an entity will continue in operation for the foreseeable future, without intention or need to liquidate or curtail operations significantly.

Statements presenting a parent and its subsidiaries as a single economic entity, combining assets, liabilities, income and expenses and eliminating intra-group balances.

The excess of the consideration transferred over the fair value of identifiable net assets acquired. It is recognised as an intangible asset and tested annually for impairment.

The share of a subsidiary's net assets and profits attributable to owners other than the parent, presented separately within equity in consolidated statements.

A reduction in an asset's recoverable amount below its carrying amount, recognised as an expense so the asset is not reported above the amount it can recover.

A primary statement reconciling opening and closing equity, showing profit, other comprehensive income, dividends, share issues and transfers between reserves.

A statement listing assets, liabilities and equity at a reporting date, showing the financial position of the entity at that point in time.

Current assets divided by current liabilities. It indicates whether short-term resources are sufficient to settle obligations falling due within a year.

Current assets excluding inventory, divided by current liabilities. A stricter liquidity test because inventory may take time to convert into cash.

The proportion of an entity's capital provided by debt rather than equity, often expressed as debt divided by debt plus equity or as debt to equity.

Operating profit divided by finance costs. It shows how many times profit can cover interest payments, indicating financial risk to lenders.

Operating profit expressed as a percentage of capital employed. It measures how efficiently long-term funds are used to generate operating profit.

Revenue divided by capital employed or total assets. It shows how much sales revenue is generated for each unit of assets invested.