ICSAN Financial Accounting flashcards

32 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. Expanded, assets equal capital plus profit minus drawings plus liabilities, where profit is income less expenses.

DEAD CLIP rule

Debits increase expenses, assets and drawings; credits increase liabilities, income and capital. This rule determines which side of an account to post.

Accrual concept

Income is recognised when earned and expenses when incurred, regardless of cash movement. It underpins matching of costs with the revenue they generate.

Business entity concept

The owner and the business are treated as separate. Owner withdrawals are drawings that reduce capital and are never treated as an expense.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, without intention or need to liquidate.

Fundamental qualitative characteristics

Relevance and faithful representation. Information must be capable of making a difference to decisions and must be complete, neutral and free from material error.

Asset definition

A present economic resource controlled by the entity as a result of past events. Control, not legal ownership, is the decisive factor.

FRC and CAMA 2020

The Financial Reporting Council of Nigeria regulates financial reporting standards, while CAMA 2020 governs company formation, accounts and filing with the Corporate Affairs Commission.

Books of prime entry

Sales, purchases, sales returns and purchases returns day books, the cash book, petty cash book and general journal. Only credit transactions enter the day books.

Imprest system

A petty cash float restored to a fixed amount by reimbursing exactly the amount spent, supported by vouchers. It keeps the float constant and controls small payments.

General journal uses

Records non-routine entries such as corrections of errors, opening entries, depreciation charges, accruals and credit purchases of non-current assets.

Trade versus cash discount

Trade discount reduces the invoice price before recording. Cash discount is a settlement incentive recorded separately as discount allowed or discount received.

Error of principle

Treating capital expenditure as revenue expenditure, such as debiting motor vehicle repairs to the motor vehicle asset account. It does not affect trial balance agreement.

Suspense account

Opened when the trial balance does not agree, with a balance equal to the difference. Corrections involving the original entry must clear it.

Complete reversal of entries

Both sides of a transaction were posted to the wrong sides. Correction requires twice the amount, debiting the account originally credited and crediting the one debited.

Compensating errors

Two or more errors that cancel each other in the trial balance. They leave the trial balance in agreement while individual account balances remain misstated.

Receivables control reconciliation

The control account balance should equal the sum of individual receivables ledger balances. Differences arise from omissions, mispostings, casts and one-sided entries.

Unpresented cheques

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

Adjusted cash book

The cash book updated for bank charges, interest, standing orders, direct credits and dishonoured cheques before preparing the bank reconciliation statement.

Trial balance limitation

Agreement proves total debits equal total credits only. Errors of omission, commission, principle, reversal and compensating errors remain undetected.

Receivables control account

Opening balance plus credit sales less sales returns, receipts, discounts allowed and bad debts written off equals the closing balance of trade receivables.

Straight-line depreciation

Cost less residual value, divided by useful life. It produces an equal charge each year and is suited to assets used evenly over their lives.

Provision recognition criteria

A present obligation from a past event, a probable outflow of resources and a reliable estimate. A contingent liability is disclosed but not recognised.

Allowance for receivables

An estimate of doubtful debts deducted from trade receivables. An increase in the allowance is charged as an expense in profit or loss.

Partnership appropriation account

Distributes profit by partners' salaries, interest on capital and interest on drawings, with the residual shared in the agreed profit-sharing ratio.

Partnership Act default rules

Without an agreement: profits and losses shared equally, no interest on capital, no salaries, and five percent interest on partners' advances or loans.

Share premium

The excess of issue proceeds over the nominal value of shares. It is equity, not income, and is not available for dividend distribution.

Adjusting events after reporting period

Events providing evidence of conditions existing at the reporting date, such as a customer bankruptcy, require adjustment to the financial statements under IAS 10.

Quick ratio

Current assets excluding inventory, divided by current liabilities. It tests short-term liquidity without relying on inventory being sold quickly.

Return on capital employed

Operating profit divided by total assets less current liabilities, expressed as a percentage. It measures efficiency in generating profit from employed capital.

Cash equivalents

Short-term, highly liquid investments with original maturity of three months or less, readily convertible to known cash amounts with insignificant risk of change.

Threats to independence

Self-interest, self-review, advocacy, familiarity and intimidation. Safeguards include rotation, independent review and declining engagements where threats cannot be reduced.