SOCPA Financial Accounting key terms

A set of coherent ideas that guides how financial statements are prepared and presented, covering the objective of reporting, qualitative characteristics of useful information, elements of statements, and recognition and measurement concepts.

A qualitative characteristic meaning information can influence users' economic decisions because it has predictive value, confirmatory value, or both. Information that is immaterial is not relevant.

A qualitative characteristic meaning information depicts economic substance completely, neutrally, and free from material error. It is not the same as accuracy alone, since it also requires completeness and neutrality.

The threshold at which omitting or misstating information could influence decisions of primary users. It depends on the size and nature of the item judged in surrounding circumstances.

The exercise of caution when making judgments under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. It supports neutrality rather than justifying deliberate bias.

The assumption that an entity will continue operating for the foreseeable future without intention or need to liquidate or curtail operations materially. If untrue, statements are prepared on a different basis.

Accounting that records transactions when they occur, not when cash is received or paid. Effects are recognized in the periods to which they relate, matching revenues with the expenses incurred to earn them.

The idea that expenses are recognized in the same period as the revenues to which they relate, rather than when cash is paid. It underlies accruals, depreciation, and cost of sales.

A listing of all ledger account balances at a point in time, used to check that total debits equal total credits before preparing financial statements. It does not detect all errors.

An entry made at period end to update account balances for accruals, deferrals, depreciation, or estimates so that revenues and expenses fall in the correct period. It is recorded before statements are finalized.

Entries that transfer balances of temporary accounts such as revenues, expenses, and dividends into retained earnings at period end, resetting those accounts to zero for the next period.

An account whose balance is offset against a related account on the statement of financial position, such as accumulated depreciation against equipment or an allowance against receivables. It carries the opposite normal balance.

A promise in a contract with a customer to transfer a distinct good or service. Revenue is recognized when each obligation is satisfied, either at a point in time or over time.

The amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services, adjusted for variable consideration, significant financing components, and non-cash consideration.

A portion of the transaction price that is not fixed, such as discounts, rebates, refunds, or penalties. It is estimated and included only to the extent it is highly probable no significant reversal will occur.

A contra-asset estimate of receivables expected not to be collected. It reduces receivables to their net realizable value and is adjusted through bad debt expense.

A probability-weighted estimate of credit losses over the life of a financial asset, reflecting present value of cash shortfalls. It is recognized regardless of whether a loss event has occurred.

The rule that inventory is measured at the lower of its cost and the amount it is expected to realize on sale less costs to complete and sell. Write-downs are recognized as expense.

The estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale. It is used to test inventory carrying amounts.

The expense recognized for inventory sold during the period, comprising purchase or production cost adjusted for opening and closing inventory. It is deducted from revenue to arrive at gross profit.

An inventory costing method that assigns the average cost of similar items to each unit, recalculated after each purchase. It smooths price fluctuations compared with first-in, first-out.

The systematic allocation of the depreciable amount of a tangible asset over its useful life. It reflects consumption of economic benefits and is not a measure of market value decline.

The total depreciation charged on an asset since acquisition, presented as a contra-asset. Carrying amount equals cost less this balance and any impairment.

The estimated amount an entity would currently obtain from disposing of an asset, after deducting estimated disposal costs, if the asset were already of the age and condition expected at the end of its useful life.

The period over which an asset is expected to be available for use by an entity, or the number of production units expected from it. It may be shorter than physical life.

A reduction in the carrying amount of an asset when its recoverable amount falls below book value. The loss is recognized immediately in profit or loss unless a revaluation standard applies.

The higher of an asset's fair value less costs of disposal and its value in use. It is compared with carrying amount to determine whether an impairment loss is required.

A liability of uncertain timing or amount, recognized when a present obligation exists from a past event, an outflow is probable, and the amount can be reliably estimated.

A possible obligation whose existence will be confirmed only by uncertain future events, or a present obligation that fails the recognition criteria. It is disclosed rather than recognized, unless the outflow is remote.

A duty arising from a past event that the entity has little or no realistic alternative but to settle. It may be legal or constructive, the latter arising from established practice or stated policy.

A transaction in which goods or services are received in exchange for equity instruments of the entity, or for amounts based on its share price. Equity-settled awards are measured at grant-date fair value.

The period during which specified conditions must be met before an employee becomes entitled to share-based awards. Expense is recognized over this period with a corresponding increase in equity.

Profit or loss attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period. It is presented for each class of ordinary share.

A measure that adjusts basic earnings and share counts for the effect of all dilutive potential ordinary shares, such as options and convertible instruments, showing the worst-case per-share outcome.

The number of ordinary shares outstanding, adjusted for the portion of the period each was outstanding. It accounts for issues, buybacks, and bonus issues when computing per-share amounts.

An asset representing a lessee's right to use an underlying asset for the lease term, measured initially at the lease liability plus initial direct costs and any prepayments or restoration costs.

The present value of lease payments not yet paid, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate. It is subsequently measured using the effective interest method.

The non-cancellable period of a lease plus periods covered by an option to extend that the lessee is reasonably certain to exercise, and periods after an option to terminate the lessee is reasonably certain not to exercise.

A technique that allocates interest income or expense over a period using the rate that exactly discounts estimated future cash flows to the instrument's carrying amount. It produces constant periodic yield.

The amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus cumulative amortization using the effective interest method, adjusted for impairment.

The power to direct the relevant activities of an investee, exposure to variable returns from that involvement, and the ability to use the power to affect those returns. It determines consolidation.

An entity controlled by another entity, the parent. Its financial statements are combined with the parent's and other controlled entities into consolidated financial statements.

The portion of a subsidiary's equity and results not attributable to the parent, presented separately within consolidated equity and profit or loss.

The excess of consideration transferred plus non-controlling interest over the fair value of identifiable net assets acquired in a business combination. It is not amortized but tested annually for impairment.

A transaction in which an acquirer obtains control of one or more businesses. It is accounted for using the acquisition method, recognizing identifiable assets and liabilities at fair value.

The process of combining the financial statements of a parent and its subsidiaries as a single economic entity, eliminating intra-group balances, transactions, and unrealized profits.

Revenue less cost of sales for a period. It measures profitability before operating expenses and is often expressed as a margin percentage for trend and comparative analysis.

Current assets divided by current liabilities. It indicates short-term liquidity, showing how many times short-term obligations could be covered by assets expected to convert to cash within a year.

Cash, marketable securities, and receivables divided by current liabilities. It excludes inventory and prepayments to give a stricter test of immediate liquidity than the current ratio.

Cumulative profit or loss of an entity less distributions to owners and any adjustments such as prior period corrections or transfers to reserves. It forms part of total equity.