SPM Accounting (3756) key terms

The statement that assets always equal capital plus liabilities. Every transaction changes at least two elements but keeps the two sides of the equation in balance.

The owner's residual interest in the business, calculated as assets minus liabilities. It increases with owner investment and profit, and decreases with drawings and loss.

Resources controlled by the business from which future economic benefit is expected, such as cash, inventory, receivables and equipment. They appear on the statement of financial position.

Present obligations of the business arising from past events, expected to be settled by an outflow of resources. Examples include trade payables, bank loans and accrued expenses.

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

The assumption that the business will continue operating for the foreseeable future, so assets are not valued at break-up prices and costs are spread over time.

Recording income when earned and expenses when incurred, regardless of when cash changes hands. It requires year-end adjustments for accruals and prepayments.

Exercising caution when making estimates under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. It supports making an allowance for doubtful debts.

Applying the same accounting methods and policies from period to period, so that figures remain comparable. A change of method must be disclosed with its effect.

The principle that the business is treated as separate from its owner for accounting purposes. Only transactions affecting the business are recorded, and owner withdrawals are treated as drawings.

Expenses are recognised in the same period as the revenue they helped to generate. It explains adjustments such as closing inventory, depreciation and accrued expenses.

The original written evidence supporting a transaction, such as an invoice, receipt, credit note or bank statement. It is the basis for entries in the books of original entry.

A document issued by a seller to reduce the amount owed by a customer, for example after goods are returned or an overcharge is corrected. It supports entries in the returns journals.

The journals in which transactions are first recorded from source documents before being posted to the ledger. They include sales, purchases, returns, cash book and general journal.

The book of original entry used to record credit sales of goods to customers, taken from copy invoices. Totals are posted to the sales account and individual amounts to customer accounts.

The book of original entry recording goods returned by credit customers, supported by credit notes issued. Its total is posted to the returns inwards account.

The book of original entry for transactions that do not fit the specialised journals, such as corrections of errors, opening entries, and purchases or sales of non-current assets on credit.

A record showing the accounts to be debited and credited, with amounts and a narration explaining the transaction. It is written before posting to the ledger.

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

A record of all increases and decreases in a particular item, with debits on the left and credits on the right. Its balance is carried down at the end of a period.

A list of ledger account balances at a date, with debits in one column and credits in another. If the totals agree, arithmetic accuracy is indicated, but some errors remain undetected.

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

An error in which a transaction is entered in the wrong class of account, such as recording equipment purchase as a repairs expense. It does not affect trial balance agreement.

An error where a correct amount is entered in the correct class of account but the wrong individual account, such as the wrong customer's account. The trial balance still agrees.

A statement explaining the difference between the bank column balance in the cash book and the balance on the bank statement, using items such as unpresented cheques and uncredited deposits.

A book combining the cash account and bank account, acting as both book of original entry and ledger. Its bank column is reconciled to the bank statement.

A cheque issued and recorded in the cash book but not yet presented to the bank for payment. It reduces the bank statement balance but not the cash book balance.

An entry recording a transfer between the cash and bank columns of the cash book, such as banking cash received. It appears on both sides and does not change the total.

An expense incurred in the period but not yet paid or invoiced, such as unpaid wages. It is added to the expense and shown as a current liability.

An amount paid in the current period that relates to a future period, such as rent paid in advance. It is deducted from the expense and shown as a current asset.

An amount owed by a customer that is considered irrecoverable and is written off. It is treated as an expense in the income statement.

A provision created against receivables estimated to be uncollectible, based on past experience. It is shown as a deduction from trade receivables and adjusted each year.

The systematic allocation of the cost of a non-current asset, less residual value, over its useful life. It reflects consumption of benefit, not a fall in market value.

A depreciation method charging an equal amount each year, calculated as cost less residual value divided by useful life. It suits assets used evenly over time.

A depreciation method charging a fixed percentage on the asset's carrying amount each year, giving higher charges early in the asset's life. It suits assets losing value quickly.

The value of a non-current asset shown in the statement of financial position, being cost less accumulated depreciation. It falls each year as depreciation is charged.

The section of a partnership's income statement showing how profit is shared between partners through interest on capital, salaries, interest on drawings and the residual profit-sharing ratio.

A partner's account recording drawings, interest on drawings, salary and share of profit. Its balance, unlike capital, changes each year and may be a debit or credit.

The agreed proportion in which residual partnership profits or losses are divided between partners after interest on capital and salaries. It is stated in the partnership agreement.

A statement showing the assets, liabilities and capital of a business at a specific date. It demonstrates that assets equal capital plus liabilities.

An asset expected to be realised, sold or consumed within one year or the normal operating cycle, such as inventory, trade receivables and cash.

An asset held for long-term use in the business rather than for resale, such as machinery, vehicles or buildings. It is depreciated over its useful life.

The amount raised by a company from issuing ordinary shares, whose holders are the residual owners and receive dividends only when declared.

Gross profit expressed as a percentage of revenue, showing the proportion left after cost of sales. A fall may indicate higher purchase costs or increased discounting.

Gross profit expressed as a percentage of cost of sales, showing the amount added to cost to set selling price. It relates to gross profit margin but is calculated on a different base.

A customer who owes the business money for goods or services supplied on credit. The balance is shown as a current asset, net of any allowance for doubtful debts.