ICSAN Intro Accounting flashcards

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

Accounting Equation

Assets = Capital + Liabilities. Every transaction preserves this balance, so total debits always equal total credits in the double-entry system.

Stewardship

The accountability of management for resources entrusted to them. It explains why owners and lenders need periodic, reliable reports of how funds were used.

Business Entity Concept

The business is treated as separate from its owner. Private spending is recorded as drawings, not as an expense of the business.

Accruals Concept

Revenue and expenses are recognised in the period they are earned or incurred, regardless of cash timing. It creates accruals, prepayments and allowances.

Prudence Convention

Under uncertainty, recognise liabilities and losses when reasonably expected, but do not recognise unrealised gains. It prevents overstating profit and assets.

Going Concern

The assumption that the entity will continue operating for the foreseeable future. If invalid, assets are valued on a break-up basis instead of historical cost.

DEAD CLIC Rule

Debit Expenses, Assets and Drawings; Credit Liabilities, Income and Capital. This mnemonic determines which side of a ledger account receives an entry.

Books of Prime Entry

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

Trade Discount

A reduction on the list price deducted on the invoice itself. It is never recorded in the ledger; only the net invoice amount is entered.

General Journal

The book of prime entry for non-routine transactions such as opening entries, error corrections, asset disposals and year-end adjustments.

Error of Principle

A transaction recorded in the wrong class of account, such as capital expenditure debited to repairs expense. It does not affect trial balance agreement.

Suspense Account

A temporary account holding the difference when a trial balance does not agree. It is cleared as one-sided errors are located and corrected.

Compensating Errors

Two or more separate errors that cancel each other out, leaving the trial balance in agreement despite incorrect ledger balances.

Error of Commission

An entry posted to the correct class of account but the wrong individual account within that class, for example the wrong customer's account.

Unpresented Cheques

Cheques issued and recorded in the cash book but not yet cleared the bank. They are deducted from the bank statement balance in the reconciliation.

Bank Reconciliation Statement

A schedule explaining the difference between the cash book bank balance and the bank statement balance using timing items and bank errors.

Sales Ledger Control Account

A summary account of all receivables: opening balances plus credit sales, less returns, receipts, discounts allowed and bad debts written off.

Dishonoured Cheque

A customer's cheque rejected by the bank. The cash book entry is reversed by debiting the customer and crediting the bank account.

Accrued Expense

An expense incurred but not yet paid at the reporting date. Debit the expense, credit accruals; it becomes a current liability.

Prepaid Expense

An expense paid before it is incurred. Debit prepayments, credit the expense; it becomes a current asset in the statement of financial position.

Allowance for Doubtful Debts

A provision reducing trade receivables to expected recoverable amounts. An increase is an expense; a decrease is income in the income statement.

Bad Debt Written Off

A receivable confirmed irrecoverable. Debit bad debts expense, credit the customer's account, removing the balance from receivables.

Cost of Sales

Opening inventory plus purchases plus carriage inwards, less purchase returns, less closing inventory. It is deducted from revenue to give gross profit.

Closing Capital Formula

Closing capital = Opening capital + Capital introduced + Net profit − Drawings. It links the income statement to the statement of financial position.

Carriage Outwards

The cost of delivering goods to customers. It is a distribution expense in the income statement, not part of cost of sales.

Straight-Line Depreciation

Annual charge = (Cost − Residual value) / Useful life. The same amount is expensed each year, giving a constant charge over the asset's life.

Reducing Balance Depreciation

Annual charge = Net book value × fixed rate. The charge falls each year and the asset is never fully written down to zero.

Profit on Disposal

Proceeds received minus the net book value of the asset at the disposal date. A positive result is a gain reported in the income statement.

Appropriation Account

The partnership account that distributes profit: interest on capital, partners' salaries, interest on drawings and the residual share in the agreed ratio.

Interest on Drawings

A charge on partners for amounts withdrawn. Debit each partner's current account and credit the appropriation account; it is income to the firm.

Incomplete Records Profit

Profit = Closing capital + Drawings − Capital introduced − Opening capital. It is used when no full double-entry records exist.

Quick (Acid Test) Ratio

(Current assets − Inventory) / Current liabilities. It measures the ability to meet short-term debts without relying on selling inventory.

Return on Capital Employed

Operating profit / Capital employed × 100, where capital employed is total assets less current liabilities. It measures operating efficiency.

Gearing Ratio

Long-term debt / (Long-term debt + Equity) × 100. A high ratio indicates greater financial risk and fixed interest obligations.