MATSEC IM Accounting flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Accounting equation
- Assets = Liabilities + Capital. Every transaction must keep this equality true, which is why double entry records equal debits and credits.
- Accrual concept
- Revenue is recorded when earned and expenses when incurred, regardless of cash movement. It ensures the income statement reflects the period's activity.
- Going concern
- Financial statements assume the business will continue operating for the foreseeable future. Assets are therefore not valued at forced-sale prices.
- Prudence concept
- Accounting should not overstate assets or income, nor understate liabilities or expenses. It supports making allowances for doubtful debts.
- Trial balance
- A list of ledger balances at a date, split into debit and credit columns. Equal totals confirm arithmetic accuracy but do not prove the absence of errors.
- Straight-line depreciation
- Annual charge = (Cost − Residual value) ÷ Useful life. The same amount is charged each year, giving a constant expense over the asset's life.
- Reducing balance depreciation
- Annual charge = Net book value × fixed percentage. The expense is higher in early years and falls as the asset's carrying amount declines.
- FIFO inventory method
- First-in, first-out assumes the oldest inventory is sold first. Cost of sales uses older, usually lower, costs, leaving newer costs in closing inventory.
- Gross profit
- Sales revenue minus cost of sales. It measures the profit from trading before operating expenses, interest and tax are deducted.
- Fixed cost
- A cost that remains constant in total within the relevant activity range, such as rent. Per unit, it falls as output rises.
- Variable cost
- A cost that changes in direct proportion to activity, such as direct materials. It is constant per unit but rises in total as output increases.
- Contribution
- Sales revenue minus variable costs. It first covers fixed costs; any surplus becomes profit, making it central to marginal costing decisions.
- Break-even point
- The activity level at which total revenue equals total cost and profit is zero. In units it equals fixed costs divided by contribution per unit.
- Margin of safety
- Actual or budgeted sales minus break-even sales. It shows how much sales can fall before the business makes a loss.
- High-low method
- Splits a semi-variable cost by comparing the highest and lowest activity levels. Variable rate = change in cost ÷ change in activity.
- Overhead absorption rate
- Budgeted production overhead divided by a budgeted absorption base such as labour hours. It allocates overhead to units produced.
- Over-absorption
- Occurs when overhead absorbed into production exceeds overhead actually incurred. The difference is written off as a credit to the income statement.
- Marginal costing
- Values inventory at variable production cost only. Fixed production overhead is treated as a period cost and charged in full to the income statement.
- Absorption costing
- Values inventory at variable cost plus a share of fixed production overhead. Profit differs from marginal costing when inventory levels change.
- Relevant cost
- A future, incremental cash flow that differs between alternatives. Sunk costs and committed fixed costs are excluded from decision making.
- Sales day book
- A book of prime entry listing credit sales invoices in date order. Totals are posted periodically to the sales ledger and general ledger.
- Petty cash imprest
- A fixed float is maintained. At intervals, the cashier reimburses exactly the total of vouchers paid, restoring the float to its original amount.
- Bank reconciliation
- Explains the difference between the bank statement balance and the cash book balance using unpresented cheques, uncredited deposits and bank errors.
- Suspense account
- A temporary account opened when a trial balance does not agree. Its balance is cleared once the underlying errors are located and corrected.
- Error of principle
- Recording a transaction in the wrong class of account, such as capital expenditure in a repairs account. The trial balance still balances.
- Error of omission
- A transaction is completely left out of the accounting records. Because both debit and credit are missing, the trial balance still agrees.
- Control account
- A summary ledger account of total receivables or payables. It is reconciled to the individual ledger balances to detect errors and fraud.
- Gross profit margin
- Gross profit divided by revenue, expressed as a percentage. It shows the proportion of sales left after covering cost of sales.
- Net profit margin
- Net profit divided by revenue, expressed as a percentage. It reflects profitability after all operating expenses, interest and tax.
- Return on capital employed
- Operating profit divided by capital employed, expressed as a percentage. It measures how efficiently capital generates operating profit.
- Current ratio
- Current assets divided by current liabilities. It indicates short-term liquidity; a ratio below 1 suggests possible difficulty paying debts.
- Gearing ratio
- Long-term debt divided by long-term debt plus equity, as a percentage. Higher gearing means greater reliance on debt and higher financial risk.