NSSCO Accounting (6143) flashcards

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

Accounting equation

Assets = Capital + Liabilities. It states that everything the business owns is financed either by the owner or by outside creditors, and it holds after every transaction.

Business entity concept

The business is treated as separate from its owner. Private transactions and personal assets are excluded from the business records, and amounts taken by the owner are recorded as drawings.

Accruals (matching) concept

Revenue and expenses are recognised in the period they are earned or incurred, regardless of when cash is received or paid. It requires year-end adjustments for accruals and prepayments.

Prudence concept

Accounting treatment that avoids overstating assets or profits and avoids understating liabilities or losses. It supports provisions for doubtful debts and the lower of cost and NRV rule.

Purchases day book

Book of original entry listing credit purchases of goods for resale, taken from suppliers' invoices. Its periodic total is posted to the debit of the purchases account.

Trial balance

A list of all ledger balances at a date, with debits and credits in separate columns. It proves arithmetical accuracy only and does not reveal errors of principle or omission.

General journal

Book of original entry used for opening entries, corrections of errors, purchase or sale of fixed assets on credit, and other transactions not recorded in the specialised day books.

Returns outwards account

Records goods returned by the business to suppliers. It has a credit balance, is deducted from purchases in the trading account, and is supported by debit notes sent to suppliers.

Unpresented cheques

Cheques issued and entered in the cash book but not yet presented to the bank for payment. They are deducted when reconciling the adjusted cash book balance to the bank statement balance.

Imprest system

Petty cash method in which a fixed float is maintained. At the end of each period the cashier is reimbursed exactly the amount of vouchers spent, restoring the float to its original level.

Uncredited lodgements

Deposits paid into the bank and recorded in the cash book but not yet credited by the bank at the statement date. They are added when reconciling the cash book balance to the statement.

Suspense account

A temporary account opened when the trial balance does not agree, its balance equalling the difference. It is cleared by correcting the errors and must close to nil.

Error of principle

A transaction recorded in the wrong class of account, such as vehicle repairs debited to the motor vehicles asset account. It does not affect the agreement of the trial balance.

Compensating errors

Two or more errors of equal amount on opposite sides that cancel each other, so the trial balance still agrees. They cannot be found through the suspense account.

Error of complete reversal

The debit and credit entries for a transaction have been entered the wrong way round. Correction requires entering twice the amount on the correct side.

Cost of goods sold

Opening inventory plus purchases plus carriage inwards, less returns outwards, less closing inventory. It is deducted from net sales in the trading account to give gross profit.

Gross profit

Net sales revenue less cost of goods sold. It represents the trading margin before operating expenses, other income, depreciation and financial charges are deducted.

Working capital

Current assets minus current liabilities. It measures the funds available to finance day-to-day operations and indicates short-term liquidity of the business.

Carriage outwards

The cost of delivering goods sold to customers. It is a selling and distribution expense, shown in the profit and loss account, not in the trading account.

Reducing-balance depreciation

Depreciation calculated as a fixed percentage of the asset's net book value each year. The annual charge falls over the asset's life and never reduces book value to zero.

Provision for doubtful debts

An estimate of receivables unlikely to be collected, calculated as a percentage of trade receivables after bad debts are written off. It is shown as a deduction from receivables.

Prepaid expense

An expense paid in the current period that relates to a future period. It is removed from the expense account and shown as a current asset in the statement of financial position.

Net realisable value

Estimated selling price less the estimated costs of completion and sale. Inventory is valued at the lower of cost and net realisable value, applied item by item.

Partnership appropriation account

An account that distributes net profit by deducting interest on capital, partners' salaries and interest on drawings, then sharing the remaining divisible profit in the agreed ratio.

Partners' current accounts

Accounts recording each partner's share of profit, interest on capital and salary as credits, and drawings plus interest on drawings as debits. Balances are shown as capital owed or owing.

Income and expenditure account

The equivalent of a profit and loss account for a non-profit organisation. It matches income earned with expenses incurred on an accruals basis and shows a surplus or deficit.

Accumulated fund

The capital of a non-profit organisation, equal to its assets less liabilities. It increases by a surplus and by legacies, and decreases by a deficit.

Share premium

The amount received on issuing shares above their nominal value. It is credited to a share premium account, a capital reserve, and is not available for dividend distribution.

Retained earnings

Accumulated profits kept in the business rather than distributed. It equals opening retained earnings plus profit for the year less dividends declared, and forms part of shareholders' equity.

Acid test ratio

Current assets excluding inventory, divided by current liabilities. It tests whether a company can settle short-term debts without selling inventory, and a ratio near 1 is generally acceptable.

Return on capital employed

Operating profit divided by capital employed, expressed as a percentage. Capital employed equals total assets less current liabilities; the ratio measures how efficiently capital generates profit.

Prime cost

Direct materials consumed plus direct labour plus direct expenses such as royalties. It is the first total in the manufacturing account, before factory overheads are added.

Contribution per unit

Selling price per unit minus variable cost per unit. It contributes first towards covering fixed costs, and any excess becomes profit; break-even units equal fixed costs divided by contribution.