MATSEC IM Accounting key terms

An expense that has been incurred during the period but not yet invoiced or paid, so it is charged in the current income statement and shown as a liability in the statement of financial position.

An amount paid in one period that relates to a later period, so the unused portion is removed from the current expense and carried as a current asset until it is consumed.

Recording transactions when the underlying event occurs rather than when cash moves, so revenue is recognised when earned and expenses when incurred, regardless of the timing of receipts and payments.

The convention that expenses are recognised in the same period as the revenue they helped to generate, which drives adjustments for accruals, prepayments, inventory and depreciation.

The convention of exercising caution when judging under uncertainty, so liabilities and losses are recognised as soon as they are probable while gains are only recognised when realised.

The assumption that the entity will continue trading for the foreseeable future, which justifies carrying non-current assets at cost less depreciation rather than at break-up values.

The systematic allocation of the depreciable amount of a non-current asset over its useful life, reflecting consumption of economic benefit rather than a fall in market value.

A depreciation method charging an equal amount each year, calculated as cost less residual value divided by useful life, suited to assets whose benefit is consumed evenly.

A depreciation method applying a fixed percentage to the asset's carrying amount each year, giving higher charges early in life and matching the pattern of benefit from assets such as vehicles.

The amount at which an asset is recognised in the statement of financial position, being cost less accumulated depreciation and any accumulated impairment losses.

The estimated amount an entity would currently obtain from disposing of an asset at the end of its useful life, deducted from cost before calculating the depreciable amount.

A reduction in the recoverable amount of an asset below its carrying amount, recognised immediately as an expense so the asset is not reported above the benefit it can generate.

A liability of uncertain timing or amount recognised when a present obligation exists, an outflow is probable and the amount can be reliably estimated, such as a warranty or legal claim.

A possible obligation whose existence depends on uncertain future events, or a present obligation that cannot be measured reliably, so it is disclosed in the notes rather than recognised.

A list of all ledger balances at a date, debit and credit columns totalling equally, used to check arithmetical accuracy before preparing financial statements.

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

A bookkeeping error where a transaction is entered in the wrong class of account, such as capital expenditure recorded as revenue expenditure, which a trial balance will not reveal.

Spending to acquire, construct or improve a non-current asset, or to extend its useful life, recorded as an asset rather than charged to the income statement.

Spending on day-to-day running costs or on maintaining an asset in its existing condition, charged to the income statement in the period it is incurred.

A record of a transaction in the general journal showing the accounts to be debited and credited with a narrative, used for adjustments, corrections and transactions without a source document.

The system in which every transaction is recorded with equal debits and credits in two or more accounts, keeping the accounting equation in balance.

The main set of accounts, including assets, liabilities, equity, income and expenses, into which transactions are posted from books of prime entry before balances are extracted.

The daybooks in which transactions are first recorded from source documents: sales, purchases, sales returns, purchases returns, cash book and the general journal.

The book of prime entry listing credit sales invoices in date order, totalled periodically and posted to the sales account and to individual receivable accounts.

A summary account in the general ledger, such as the receivables or payables control account, whose balance should equal the total of the individual balances in the related subsidiary ledger.

A statement explaining the difference between the bank statement balance and the cash book balance by adjusting for unpresented cheques, outstanding lodgements, bank charges and errors.

A book of prime entry and ledger account recording receipts and payments, with a debit column for receipts and a credit column for payments, reconciled regularly to the bank statement.

An amount owed to the entity by a customer for goods or services supplied on credit, presented as a current asset and tested for recoverability.

An amount owed by the entity to a supplier for goods or services bought on credit, presented as a current liability and settled within the normal credit period.

A contra-asset estimate of receivables unlikely to be collected, charged to the income statement and deducted from trade receivables so they are stated at expected recoverable value.

The estimated selling price of inventory less the costs of completion and sale, used to value inventory at the lower of cost and this figure.

Revenue less cost of sales, measuring the margin earned from trading before operating expenses, interest and tax are deducted.

The cost of goods actually sold in the period, calculated as opening inventory plus purchases less closing inventory for a trading business.

The financial statement presenting revenue, expenses and the resulting profit or loss for a period, prepared on the accrual basis.

A statement at a point in time listing assets, liabilities and equity, demonstrating that assets equal equity plus liabilities.

Current assets less current liabilities, representing the short-term funds available to run day-to-day operations and a key indicator of liquidity.

Current assets divided by current liabilities, showing how many times short-term obligations are covered by short-term resources; a result near 1 signals tight liquidity.

Current assets excluding inventory divided by current liabilities, a stricter liquidity test used where inventory is slow-moving or difficult to convert into cash.

Gross profit expressed as a percentage of revenue, showing the average mark-up retained after the direct cost of goods sold.

The amount added to cost to arrive at selling price, usually expressed as a percentage of cost, in contrast to margin which is a percentage of selling price.

The number of times inventory is sold and replaced in a period, calculated as cost of sales divided by average inventory; a falling rate may signal obsolescence or overstocking.

A costing method that assigns both variable and fixed production overheads to products using a predetermined absorption rate, so inventory carries a share of fixed cost.

A costing method in which only variable production costs are assigned to products, with fixed costs treated as period costs charged in full to the income statement.

The rate used to charge indirect production costs to products, typically budgeted overheads divided by budgeted labour hours or machine hours for the period.

The situation where overheads charged to production using the absorption rate exceed the overheads actually incurred, creating a credit balance that reduces the cost of sales.

The situation where overheads charged to production fall short of overheads actually incurred, creating a debit balance that increases the cost of sales.

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

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

The excess of budgeted or actual sales over break-even sales, showing how far sales can fall before a loss arises, in units, revenue or percentage terms.

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

The process of comparing actual performance with budgeted or standard performance, calculating and interpreting differences to explain why profit differs from plan.

A difference between actual and standard or budgeted figures that increases profit, such as actual cost being below standard or actual revenue above budget.

A difference between actual and standard or budgeted figures that reduces profit, such as actual cost exceeding standard or sales volume falling short of budget.

A budget adjusted to the actual level of activity achieved, allowing fair comparison of actual costs with what costs should have been at that volume.

The ability of a business to meet short-term obligations as they fall due, assessed using ratios such as the current ratio and quick ratio.