MATSEC SEC Accounting key terms

The principle that income and expenses are recorded in the period they are earned or incurred, not when cash changes hands. It requires adjusting entries for amounts owed and amounts prepaid at the period end.

A cost incurred during the period but not yet invoiced or paid, such as unpaid wages or electricity used but unbilled. It is added to the expense and shown as a current liability.

Revenue earned in the period but not yet received or invoiced, such as interest due on a deposit. It is added to income and shown as a current asset.

An amount paid in one period that relates to a later period, such as rent paid in advance. The unused portion is removed from the expense and shown as a current asset.

The systematic allocation of the cost of a non-current asset, less any residual value, over its useful life. It spreads the expense across the periods that benefit from the asset's use.

A depreciation method charging an equal amount each year, calculated as cost minus residual value divided by useful life. It suits assets whose benefit is spread evenly over time.

A depreciation method applying a fixed percentage to the asset's carrying amount each year, so the charge falls over time. It suits assets that lose value fastest when new.

The value at which an asset appears in the statement of financial position, being its cost less accumulated depreciation. It is also called net book value.

A receivable that is confirmed as irrecoverable and written off, usually because the customer is insolvent or untraceable. The amount is removed from receivables and charged as an expense.

A provision created against receivables for amounts expected to prove irrecoverable, based on past experience. It reduces the net receivables figure and is reviewed at each period end.

The convention that accountants should exercise caution, recognising likely losses and liabilities but not anticipating profits. It underpins allowances, stock valuation at the lower of cost and net realisable value, and similar adjustments.

The assumption that the entity will continue trading for the foreseeable future. It justifies preparing accounts on a historical cost basis rather than on break-up values.

A statement listing assets, liabilities and capital at a specified date, showing that assets equal capital plus liabilities. It presents the financial position rather than the profit for a period.

A statement showing income earned and expenses incurred over a period, ending with the profit or loss. It is prepared from the income and expense ledger balances after year-end adjustments.

The owner's investment in the business, increased by profit and further contributions and reduced by drawings and losses. It appears in the statement of financial position as the owner's claim on the net assets.

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

A business owned and controlled by one person, with no separate legal personality. The owner is personally liable for business debts and reports capital and drawings separately from profit.

Sales revenue less cost of sales. It measures trading performance before operating expenses such as rent, wages and depreciation are deducted.

The cost of goods actually sold in the period, calculated as opening inventory plus purchases less closing inventory. It excludes operating expenses such as administration and selling costs.

Gross profit plus other income less operating expenses. It is the figure added to capital in the statement of financial position and the starting point for many ratio calculations.

Goods held for resale or raw materials awaiting use, valued at the lower of cost and net realisable value. Inventory appears as a current asset and forms part of the cost of sales calculation.

A list of ledger balances at a given date, arranged in debit and credit columns to check that total debits equal total credits. It detects certain errors but not errors of principle, omission or commission.

The system in which every transaction is recorded with equal debits and credits in at least two accounts. It keeps the accounting equation in balance and allows a trial balance to be extracted.

The book of prime entry for transactions not recorded in the other day books, such as corrections, opening entries and adjusting entries. Each entry states the accounts, amounts and a narrative explanation.

The main set of accounts in which transactions are classified, with a separate account for each asset, liability, income and expense. Balances from the ledger are used to prepare the trial balance and financial statements.

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

A statement explaining the difference between the bank balance in the cash book and the balance on the bank statement. It lists unpresented cheques, uncredited deposits and items such as bank charges or standing orders.

A book of prime entry and ledger account recording receipts and payments, usually with bank and cash columns. It is checked against the bank statement through a reconciliation.

A book recording small cash payments, commonly operated on the imprest system so that the float is restored to a fixed amount at intervals. It reduces the burden on the main cash book.

The policies and procedures designed to safeguard assets, ensure records are accurate and prevent fraud and error. Examples include segregation of duties, authorisation limits and physical controls.

An internal control splitting responsibilities so that no one person records, authorises and handles the same transaction. It reduces the risk of error or fraud going undetected.

The total of direct materials, direct labour and direct expenses. It represents the costs that can be traced directly to the product before production overheads are added.

Indirect costs of making goods, such as factory rent, depreciation of machinery and supervisors' salaries, which cannot be traced directly to units. They are charged to products using an absorption or activity-based method.

The rate used to charge production overhead into product costs, usually total budgeted overhead divided by budgeted labour hours, machine hours or units. Applying it to actual activity gives the overhead absorbed.

The difference between overhead absorbed into production and overhead actually incurred. Over-absorption means absorbed exceeded incurred; under-absorption means incurred exceeded absorbed, and the difference is written off or credited.

A costing method that includes direct costs plus an share of production overhead in the cost of a unit. It values inventory at full production cost and is required for external financial reporting.

A costing method that charges only variable production costs to units, treating fixed overheads as a period cost. It supports contribution and break-even analysis and explains profit differences from absorption costing.

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 activity at which total contribution equals fixed costs, so neither profit nor loss arises. It can be expressed in units or in sales revenue.

The excess of budgeted or actual sales over the break-even level, expressed in units, revenue or percentage. It indicates how far sales can fall before a loss is made.

A system setting predetermined costs for materials, labour and overhead, then comparing them with actual results. The differences are variances used for control and performance evaluation.

The process of calculating and investigating differences between standard or budgeted figures and actual figures. Variances are labelled favourable or adverse and analysed by cause.

A budget adjusted to the actual level of activity achieved, so that variable costs reflect real output. Comparing it with actual results gives a fairer view of cost control than a fixed budget.

Gross profit expressed as a percentage of sales revenue. It shows the proportion of sales left after cost of sales and is watched for changes in pricing, mix or supplier costs.

Net profit expressed as a percentage of sales revenue. It reflects the effect of operating expenses as well as trading performance and is compared over time and with competitors.

Gross profit expressed as a percentage of cost of sales, rather than of sales revenue. It states how much is added to cost to set the selling price.

Operating profit expressed as a percentage of capital employed, showing how efficiently the funds invested in the business generate profit. It is a key measure of overall profitability and management performance.

Current assets divided by current liabilities, indicating whether short-term assets cover short-term obligations. A result well below 1 signals possible liquidity difficulty, though acceptable levels vary by industry.

Current assets excluding inventory divided by current liabilities. Because inventory may be slow to convert into cash, it gives a stricter test of short-term solvency than the current ratio.

Current assets less current liabilities. It represents the funds tied up in day-to-day operations and must be sufficient to meet obligations as they fall due.