ICAP PRC-1 Fundamentals of Accounting flashcards

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

Conceptual Framework objective

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Fundamental qualitative characteristics

Relevance and faithful representation. Relevant information can make a difference to decisions; faithful representation is complete, neutral and free from error.

Going concern assumption

The entity is viewed as continuing in operation for the foreseeable future, so assets and liabilities are measured on that basis rather than on a break-up basis.

Accounting equation

Assets equal liabilities plus equity. Every transaction preserves this equality because each has equal debits and credits.

Books of prime entry

The first records of transactions: sales day book, purchase day book, returns day books, cash book and general journal, from which entries are posted to the ledgers.

Imprest system

A petty cash system where a fixed float is restored by the value of vouchers paid out, returning the cash balance to the original imprest amount.

Trial balance purpose

Lists debit and credit ledger balances at a date. Equal totals show arithmetical accuracy only; many errors still leave it in balance.

Suspense account

A temporary account opened for the difference when trial balance totals disagree. It is cleared once the underlying errors are found and corrected.

Error of principle

Recording a transaction in the wrong class of account, such as treating a non-current asset purchase as an expense. It does not affect trial balance agreement.

Accrued expense adjustment

Debit the expense and credit accruals for costs incurred but not yet invoiced, so the expense is matched to the period.

Prepayment adjustment

Debit prepayments and credit the expense for amounts paid in advance, so only the current period's expense is recognised.

Cost of sales formula

Opening inventory plus purchases less closing inventory. It is deducted from revenue to give gross profit.

Bank reconciliation purpose

Explains differences between the cash book and bank statement balances, adjusting the cash book for bank items and the reconciliation for unpresented cheques and lodgements.

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.

Sales ledger control account

A memorandum account summarising receivables: debit opening balance and credit sales; credit cash received, discounts, returns and irrecoverable debts.

Control account reconciliation

Comparing the control account balance with the total of the subsidiary ledger balances. Differences arise from errors or omissions in either record.

Lower of cost and NRV

IAS 2 rule that inventory is measured at the lower of cost and net realisable value, with any write-down charged to profit or loss.

FIFO cost formula

Assumes the earliest inventory purchased is sold first, so closing inventory is valued at the most recent purchase costs.

Straight-line depreciation

Annual charge equals cost less residual value, divided by useful life. It allocates the depreciable amount evenly over the asset's life.

Carrying amount

The amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses.

Provision recognition criteria

Recognise a provision when a present obligation from a past event exists, an outflow is probable, and the amount can be reliably estimated.

Allowance for receivables

An estimate of receivables unlikely to be collected. It is netted against trade receivables and the movement is charged or credited to profit or loss.

Partnership appropriation account

Shows how profit is shared: interest on capital, partners' salaries, interest on drawings, and residual profit in the agreed profit-sharing ratio.

Partnership current account

Records drawings, salaries, interest on capital and share of profit for each partner, separate from the fixed capital account.

Share premium

The amount received for shares above their nominal value. It is presented in equity and is not distributable as a dividend.

Return on capital employed

Operating profit divided by capital employed (equity plus non-current liabilities), expressed as a percentage, measuring profitability of funds invested.

Quick ratio

Current assets less inventory, divided by current liabilities. It tests short-term liquidity without relying on inventory realisation.

Receipts and payments account

A cash-based summary of money received and paid by a not-for-profit entity, not an accruals measure of income and expenditure.

Mark-up versus margin

Mark-up is gross profit divided by cost of sales; margin is gross profit divided by revenue. Margin equals mark-up divided by one plus mark-up.

Statement of affairs

A list of assets and liabilities used to estimate capital when accounting records are incomplete, often to derive opening or closing capital.

Integrity principle

Being straightforward and honest in all professional and business relationships, including not being associated with misleading information.

Audit trail

A computerised accounting system's record of who entered each transaction and when, supporting error correction, review and fraud detection.