NSSCAS Accounting (8244) flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting equation

Assets equal capital plus liabilities. Every transaction changes at least two elements while keeping this equality, which underlies the whole double-entry system and the statement of financial position.

Double-entry rule

Each transaction is recorded with equal total debits and credits. Debits increase assets and expenses; credits increase liabilities, capital and income. This keeps the trial balance in agreement.

Trial balance limitation

A trial balance proves debits equal credits but cannot detect errors of principle, omission, commission, original entry, reversal or compensating errors, because these do not disturb the equality of totals.

Books of prime entry

The first records of transactions: sales, purchases, sales returns and purchases returns day books, the cash book, petty cash book and general journal. Totals are later posted to the ledger.

Capital versus revenue expenditure

Capital expenditure acquires or improves a non-current asset and is capitalised. Revenue expenditure relates to daily trading and is charged to profit or loss in the period incurred.

Cost of sales formula

Opening inventory plus purchases plus carriage inwards minus closing inventory. Deducted from revenue it gives gross profit in the income statement of a trading business.

Accruals concept

Income and expenses are recognised when earned or incurred, not when cash is received or paid. Year-end adjustments record accrued expenses, prepayments, accrued income and income in advance.

Dividends in company accounts

Dividends paid and proposed are not expenses. They are deducted from retained earnings in the statement of changes in equity; declared but unpaid dividends are current liabilities.

Straight-line depreciation

Annual charge equals cost minus residual value, divided by useful life. The same amount is charged each year, giving a constant expense and a carrying amount falling to residual value.

Reducing balance depreciation

A fixed percentage is applied to the carrying amount each year, so the charge falls over time. The asset is never fully depreciated to zero under this method.

Profit on asset disposal

Sale proceeds minus carrying amount at disposal date, where carrying amount equals cost less accumulated depreciation to that date. A positive result is a profit, a negative one a loss.

Non-current asset register

A record for each asset showing cost, acquisition date, depreciation method, accumulated depreciation, carrying amount and disposal details. It is reconciled periodically to the asset ledger accounts.

Bank reconciliation adjustments

Items on the bank statement not yet in the cash book, such as bank charges, interest, standing orders and dishonoured cheques, are entered in the cash book before reconciling the two balances.

Petty cash imprest

A fixed float is maintained. Vouchers plus remaining cash always equal the float, and the float is restored by reimbursing exactly the amount spent.

Suspense account

An account opened to hold the difference when a trial balance does not agree. It is cleared by correcting one-sided errors; two-sided errors never affect it.

Error of principle

A transaction is recorded in the wrong class of account, for example revenue expenditure debited to a non-current asset account. It does not affect trial balance agreement.

Partnership appropriation account

Shows how profit is shared: interest on capital, partners' salaries and interest on drawings are applied first, then the residual profit or loss is divided in the profit-sharing ratio.

Partner's current account

Records the partner's share of profits, salaries and interest on capital, less drawings and interest on drawings. Its balance is owed to or by the partner, separate from fixed capital.

Goodwill on partner admission

The incoming partner pays for a share of existing goodwill. It is credited to old partners in the old ratio and then written off to all partners in the new ratio.

Partnership dissolution

Assets are realised, liabilities and realisation expenses paid, and the resulting realisation profit or loss shared in the profit-sharing ratio before final settlement with each partner.

Share premium

The amount received on issuing shares above nominal value. It is a non-distributable reserve and cannot be paid out as a dividend.

Bonus issue of shares

Existing reserves, usually share premium or retained earnings, are capitalised into new fully paid shares issued free to shareholders. No cash is raised and total equity is unchanged.

Debenture interest treatment

Debenture interest is a finance cost charged to profit or loss for the period, accrued whether paid or not. The debenture itself remains a non-current liability.

Distributable reserves

Retained earnings available for dividend payment. Share premium and revaluation reserves are non-distributable and cannot be used to pay cash dividends.

Return on capital employed

Operating profit divided by capital employed, where capital employed is total assets less current liabilities, expressed as a percentage. It measures overall profitability of funds invested.

Quick ratio

Current assets excluding inventory, divided by current liabilities. It tests short-term liquidity without relying on selling inventory and is a stricter measure than the current ratio.

Inventory turnover days

Average inventory divided by cost of sales, multiplied by 365. It shows how many days inventory is held before sale; a rising figure may indicate slow-moving or obsolete stock.

Gearing ratio

Non-current liabilities divided by non-current liabilities plus equity, as a percentage. High gearing indicates greater dependence on debt and higher financial risk for shareholders.

Prime cost

Direct materials plus direct labour plus direct expenses. It excludes production overhead, which is absorbed separately to arrive at the total production cost of goods manufactured.

Contribution per unit

Selling price minus variable cost per unit. It contributes first towards covering fixed costs and then towards profit, and is the basis of break-even and marginal costing decisions.

Break-even point

Fixed costs divided by contribution per unit gives break-even units. Fixed costs divided by the contribution-to-sales ratio gives break-even revenue in money terms.

Absorption costing inventory

Inventory value includes direct costs plus absorbed fixed production overhead. Profit differs from marginal costing only by the fixed overhead carried in opening and closing inventory.

Relevant cost for decisions

A future incremental cash cost that differs between alternatives. Sunk costs, committed costs and apportioned fixed overhead are irrelevant to make-or-buy and special-order decisions.