ICSAN Financial Accounting key terms

A body of principles that guides how financial statements are prepared and presented, setting out the objective of general purpose reporting, the qualitative characteristics of useful information, and definitions of the elements of financial statements.

The attributes that make financial information useful to users: relevance and faithful representation are fundamental, while comparability, verifiability, timeliness and understandability are enhancing characteristics applied to decision-useful reporting.

The building blocks recognised in reporting: assets, liabilities, equity, income and expenses. Each has a definition in the Conceptual Framework and must meet recognition criteria before appearing in the statements.

The exercise of caution when making judgements under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated, without permitting deliberate bias or hidden reserves.

The assumption that an entity will continue operating for the foreseeable future without intention or need to liquidate or curtail operations materially, so assets are not valued at break-up amounts.

Accounting that records income when earned and expenses when incurred, regardless of when cash moves, so transactions are matched to the period they economically belong to.

The fundamental identity that assets equal liabilities plus equity. Every transaction changes at least two elements while keeping the equation balanced, forming the basis of double entry bookkeeping.

A bookkeeping system in which every transaction is recorded with equal debits and credits in two or more accounts, so the ledger remains arithmetically balanced at all times.

The first records where transactions are logged before posting to the ledger: sales day book, purchases day book, returns books, cash book and the general journal.

The book of prime entry used for transactions that do not fit the specialised day books, such as corrections of errors, adjustments, depreciation charges and opening entries.

The collection of accounts, each recording increases and decreases in a particular asset, liability, equity, income or expense item, from which the trial balance and financial statements are prepared.

A list of all ledger account balances at a date, split into debit and credit columns, used to check that total debits equal total credits before statements are prepared.

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

A cheque issued and recorded in the cash book but not yet cleared through the bank, so the bank statement balance is higher than the cash book until it is presented for payment.

A customer cheque previously deposited and credited but later rejected by the paying bank, requiring reversal of the original entry and reinstatement of the receivable.

A fixed regular payment instruction given by an account holder to the bank to pay a set amount to a named beneficiary on agreed dates, appearing directly on the bank statement.

An arrangement authorising a third party to collect varying amounts from the account on agreed dates, which the payer must record in the cash book once notified by the bank.

A summary ledger account, such as the receivables or payables control, whose balance should equal the total of the underlying individual customer or supplier accounts, providing a check on posting accuracy.

The memorandum ledger holding an individual account for each credit customer, used to monitor amounts owed and support the receivables control account balance.

A temporary account opened to hold the difference when a trial balance fails to balance, cleared once the underlying errors are found and corrected.

A bookkeeping mistake where a transaction is recorded in the wrong class of account, such as capital expenditure charged to repairs, which does not disturb the trial balance balance.

A failure to record a transaction at all, or to post only one side of a double entry, which leaves the trial balance out of agreement only in the latter case.

Two or more separate errors that happen to cancel each other out, so the trial balance still balances even though individual account balances are wrong.

An expense incurred in the period but not yet invoiced or paid, recognised as a liability and charged to the statement of profit or loss to match it with the period.

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

The systematic allocation of the depreciable amount of a non-current asset over its useful life, reflecting consumption of economic benefits rather than a change in market value.

A method charging an equal annual amount, calculated as cost less residual value divided by useful life, producing a constant expense and steadily declining carrying amount.

A method applying a fixed percentage to the asset's carrying amount each year, giving a higher charge in early years and a declining charge thereafter.

A liability of uncertain timing or amount recognised when a present obligation from a past event is probable and can be reliably estimated, such as a warranty or legal claim.

A possible obligation whose existence depends on uncertain future events, or a present obligation that cannot be reliably measured, so it is disclosed rather than recognised in the statements.

An account showing how the profit of a partnership is divided among partners through interest on capital, salaries, interest on drawings and the residual profit-sharing ratio, before transfer to current accounts.

In a partnership, the account tracking each partner's share of profits, drawings, salaries and interest, separate from capital, showing the amount owed to or by the partner.

The premium paid for a business above the fair value of its identifiable net assets, arising from reputation, customers and location, recognised on admission or retirement of a partner.

A statement presenting an entity's assets, liabilities and equity at a reporting date, showing the resources controlled and the claims against them.

A statement reporting income and expenses for a period to derive profit or loss, presented separately from other comprehensive income under current reporting standards.

A primary statement reconciling opening and closing equity, showing profit, other comprehensive income, owner transactions such as dividends or share issues, and prior period adjustments.

A distribution of profits to shareholders, declared by the directors and recognised as a liability only when approved or paid, never charged as an expense in profit or loss.

The computation and interpretation of relationships between financial statement figures, covering profitability, liquidity, efficiency, gearing and investor ratios, to assess performance and position.

Current assets divided by current liabilities, indicating whether short-term resources cover short-term obligations; a very high figure may suggest idle or poorly managed working capital.

Current assets excluding inventory divided by current liabilities, a stricter liquidity test showing ability to meet immediate obligations without relying on selling stock.

The proportion of an entity's capital financed by debt, often debt divided by debt plus equity, indicating financial risk and sensitivity of returns to changes in operating profit.

Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue, a key investor ratio presented on the face of the statement of profit or loss.

A statement classifying cash movements into operating, investing and financing activities, reconciling opening and closing cash and explaining how profit converts into cash.

The principal revenue-producing activities of an entity, whose cash flows are derived by adjusting profit for non-cash items and working capital movements in the indirect method.

Financial reporting by government and public bodies, typically on a modified accrual or cash basis, emphasising budgetary control, accountability to citizens and stewardship of public funds.

A system separating resources into funds with specific purposes or restrictions, so each fund's income and expenditure is reported separately to demonstrate compliance with donor or legal conditions.

Reporting for entities whose objective is service delivery rather than profit, using receipts and payments or income and expenditure accounts, with surplus reinvested in the mission rather than distributed.

A computerised system where sales, purchases, inventory, payroll and ledger modules share one database, so entries post automatically and controls shift towards access rights and audit trails.

The documented, retrievable record of every transaction and system change, enabling an auditor to trace an item from source document to financial statements and to detect unauthorised alterations.

The policies and procedures, including segregation of duties, authorisation limits and reconciliations, designed to safeguard assets and ensure records are accurate and reliable.

The ethical duty not to disclose information acquired through professional work without proper authority or legal obligation, and not to use it for personal advantage.

The ethical obligation to avoid bias, conflict of interest or undue influence of others when making professional judgements, so conclusions rest on evidence rather than preference.

Being straightforward and honest in all professional and business relationships, including avoiding association with misleading information or records that omit material facts.