ICSAN Intro Accounting key terms

The process of identifying, recording, classifying and summarising economic transactions, then communicating the resulting financial information to users so they can make informed decisions.

The routine, mechanical recording of business transactions in books of prime entry and ledgers. It is the data-capture stage that feeds the wider accounting process.

Structured reports summarising an entity's financial position and performance, typically comprising the statement of profit or loss, statement of financial position, and supporting notes.

The parties relying on financial reports, such as owners, managers, lenders, suppliers, employees, customers, government agencies and the public, each with different information needs.

The accountability of management for resources entrusted to it by owners. Accounting reports show how faithfully and effectively those resources have been used.

The assumption that an entity will continue operating for the foreseeable future, without intention or need to liquidate or curtail operations significantly.

Income and expenses are recognised when earned or incurred, not when cash is received or paid, so reported profit reflects the period's economic activity.

Expenses are recognised in the same period as the revenues they helped generate, so profit is measured by pairing related income and cost.

The exercise of caution when making judgements under uncertainty, so assets and income are not overstated and liabilities and expenses are not understated.

Applying the same accounting policies and methods from period to period, so financial statements remain comparable over time unless a change is justified and disclosed.

The principle that the business is treated as separate from its owners, so personal transactions of the proprietor are excluded from the entity's accounting records.

Only transactions and events that can be expressed reliably in monetary terms are recorded in the accounts; non-financial factors are excluded.

Recording assets and transactions at the amount originally paid or received, rather than at current market value, giving reliable but sometimes outdated figures.

A system in which every transaction is recorded with equal debits and credits, so total debits always equal total credits and the accounting equation stays balanced.

An entry on the left side of a ledger account. It increases assets and expenses and decreases liabilities, capital and income.

An entry on the right side of a ledger account. It increases liabilities, capital and income and decreases assets and expenses.

The first books in which transactions are recorded from source documents, comprising sales, purchases, returns, cash book and the general journal, before posting to ledgers.

A book of prime entry used to record transactions that do not fit the other day books, including adjustments, corrections of errors and opening entries.

A book of prime entry and ledger account recording receipts and payments, often with a bank column and a cash column, and acting as part of the double-entry system.

The collection of accounts in which transactions are classified and posted, with separate accounts for each asset, liability, capital, income and expense item.

A list of all ledger balances at a given date, with debits and credits in separate columns, used to check arithmetical accuracy before preparing financial statements.

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

A mistake where a transaction is recorded in the wrong class of account, such as treating a non-current asset purchase as an expense, which does not affect trial balance agreement.

A transaction is completely left out of the accounting records, so neither the debit nor the credit is posted and the trial balance still agrees.

A transaction is entered on the correct side and with the correct amount but in the wrong account of the same class, for example the wrong customer's account.

An incorrect amount is entered in a book of prime entry and then posted at that same wrong amount to both the debit and credit accounts.

A statement that explains the difference between the bank balance in the cash book and the balance on the bank statement, adjusting for unpresented cheques, uncredited deposits and bank charges.

A cheque issued and recorded in the cash book but not yet presented to and paid by the bank, so it appears as a deduction in the bank reconciliation.

A summary ledger account, such as the sales or purchases ledger control account, whose balance should equal the total of the individual customer or supplier balances it controls.

An amount owed but unpaid at the reporting date, such as unpaid wages or electricity, recognised as an expense of the period and a current liability.

An amount paid in advance for goods or services not yet consumed, recognised as a current asset and released to expense in the following period.

An amount owed by a customer that is considered irrecoverable and is written off as an expense in the statement of profit or loss.

A reduction in the carrying amount of trade receivables to reflect amounts expected to be irrecoverable, charged as an expense rather than written off against a specific debt.

The systematic allocation of the depreciable amount of a non-current asset over its useful life, reflecting consumption of its economic benefits.

A method charging an equal annual amount calculated as cost less residual value, divided by useful life, producing a constant expense each period.

A method charging a fixed percentage of the asset's carrying amount each year, giving higher expense in early years and lower expense later.

The owner's residual interest in the business, increased by capital introduced and profit, and reduced by drawings and losses.

Amounts or assets withdrawn by the owner from the business for personal use, reducing capital and excluded from profit.

A business owned by two or more persons who share profits and losses according to an agreed partnership agreement, each being personally liable for partnership debts unless a limited liability form applies.

The account that shows how a partnership's net profit is divided among partners, including interest on capital, partner salaries, interest on drawings and the residual profit share.

In a partnership, the account recording each partner's share of profit, drawings, interest on capital and salary, with the balance settled periodically rather than representing a fixed capital sum.

A situation where an entity has not maintained full double-entry records, so figures such as sales, purchases and profit must be derived using control accounts, mark-ups and the accounting equation.

The percentage added to the cost of goods to arrive at selling price, used in incomplete records to derive sales or cost of sales from the other figure.

The calculation and interpretation of relationships between financial statement figures, such as profitability, liquidity, efficiency and gearing, to assess performance and position.

Current assets divided by current liabilities, indicating whether short-term assets are sufficient to settle short-term obligations as they fall due.

Current assets excluding inventory, divided by current liabilities, giving a stricter test of immediate liquidity because inventory may be slow to convert to cash.

Operating profit expressed as a percentage of capital employed, measuring how efficiently the funds invested in the business generate profit.