NCEA Level 2 Accounting key terms

A resource controlled by the entity as a result of past events, from which future economic benefits are expected to flow. Examples include cash, inventory, vehicles and amounts owed by debtors.

A present obligation of the entity arising from past events, whose settlement is expected to result in an outflow of economic benefits. Examples are bank loans, creditors and GST payable.

The owner's residual interest in the assets of the entity after deducting all liabilities. It increases with owner contributions and profit, and decreases with drawings and losses.

The relationship that assets always equal liabilities plus equity. Every transaction keeps this equation balanced because it affects at least two elements by equal amounts.

A recording system in which every transaction is entered as equal debits and credits across at least two accounts, so total debits always equal total credits in the ledger.

The left-hand side of a ledger account. Debits increase assets, drawings and expenses, and decrease liabilities, equity and income.

The right-hand side of a ledger account. Credits increase liabilities, equity and income, and decrease assets, drawings and expenses.

The collection of all accounts of an entity, each recording increases and decreases in one item. Balances from the ledger are summarised to prepare the trial balance and reports.

A book of original entry used to record transactions that do not fit a specialised journal, such as corrections of error, opening entries and adjustments, with a narration explaining each entry.

A list of every ledger account balance at a point in time, split into debit and credit columns, used to check that total debits equal total credits before preparing reports.

A temporary account used to hold the difference when a trial balance does not balance, so errors can be located and corrected later. Its balance must be cleared before reports are finalised.

An asset expected to be converted to cash, sold or consumed within twelve months of the reporting date, such as cash, bank, accounts receivable, inventory and prepayments.

An asset expected to provide benefit to the entity for more than twelve months, such as land, buildings, equipment and vehicles. It is usually reported at carrying amount after depreciation.

An obligation expected to be settled within twelve months of the reporting date, such as accounts payable, GST payable, accrued expenses and the current portion of a loan.

An obligation that is not due to be settled within twelve months of the reporting date, such as a long-term mortgage or a loan repayable over several years.

Cash, goods or other assets taken from the business by the owner for personal use. Drawings reduce equity and are not an expense of the business.

Assets or cash introduced into the business by the owner, increasing equity. It is recorded separately from income because it does not arise from trading activity.

Inflows of economic benefits from ordinary trading activity, such as sales of goods or fees for services, that increase equity other than through owner contributions.

A decrease in economic benefits through the consumption of assets or incurring of liabilities during the period, such as wages, rent, power and depreciation, which reduces profit.

A report showing revenue earned and expenses incurred for a period, ending with profit or loss. It measures performance rather than the financial position at a single date.

A report at a single date listing assets, liabilities and equity, showing that assets equal liabilities plus equity. It shows financial position, not performance over a period.

A report classifying cash movements for a period into operating, investing and financing activities, explaining the change in the bank balance and reconciling opening and closing cash.

A report reconciling the opening and closing equity balances by showing capital contributions, drawings, profit or loss, and any other movements during the period.

Recording revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. It requires balance day adjustments for accruals and prepayments.

An expense that has been incurred during the period but not yet paid or recorded, such as unpaid wages at balance date. It is recorded as a current liability and an expense.

Revenue that has been earned during the period but not yet received or recorded, such as interest owing to the business at balance date. It is recorded as a current asset and revenue.

An amount paid in advance for goods or services not yet consumed, such as insurance for the following year. The unused portion is a current asset at balance date.

A journal entry made at the end of a period to apply accrual accounting, such as recording accrued expenses, prepayments, income received in advance or depreciation, so reports are accurate.

The systematic allocation of the cost of a non-current asset, less any residual value, over its useful life to reflect the benefit consumed each period. It is an expense, not a cash payment.

A depreciation method charging an equal amount each period, calculated as cost less residual value divided by useful life in years. It suits assets used evenly over time.

The value at which a non-current asset is reported, equal to its original cost less accumulated depreciation to date. It is not a market or resale valuation.

The cost to the business of the inventory actually sold during a period. It is deducted from sales to give gross profit and is calculated using opening stock, purchases and closing stock.

Sales revenue less cost of goods sold, showing the profit earned before operating expenses are deducted. It is often expressed as a percentage of sales for comparison.

The percentage added to the cost price of goods to set the selling price, calculated as gross profit divided by cost of goods sold. It differs from margin, which uses sales as the base.

Goods held for sale in the ordinary course of business, including stock on hand at balance date. It is a current asset and its value directly affects cost of goods sold and profit.

A process comparing the business's cash journals and bank ledger with the bank statement to explain differences such as unpresented cheques, deposits in transit, bank fees and dishonoured cheques.

The policies and procedures an entity uses to safeguard its assets, ensure records are accurate and reliable, and reduce the risk of error and fraud, such as separating duties and requiring approval.

The original evidence that a transaction occurred, such as an invoice, receipt, cheque butt or deposit slip. It supports the journal entry and provides an audit trail for internal control.

The movement of cash into and out of the business over a period, classified as operating, investing or financing. Positive cash flow does not always mean the business made a profit.