Accounting Definitions

  • Created by: sophiesss
  • Created on: 10-11-16 14:27
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information
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A static amount that represents a stock at a particular point in time. The stock can change over time. If wealth increases, performance increases
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Profit1 = Wealth1 - Wealth0 OR Profit = Revenue - Expenses
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The amount he/she can consume and still be as well off at the end of a period as he/she was at the start
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Original Cost
The cost of the item at the time of the transaction between the buyer/seller
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Historic Cost
The cost incurred by the individual in acquiring an item, measured at the time of the originating transaction
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Replacement Cost
The amount that would have to be paid at todays prices to purchase a similar item to the existing item
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Net Realisable Value
The amount that is likely to be obtained by selling an item, less any costs incurred in selling
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Economic Value
The value of expected earnings from using the item, discounted at an appropriate rate, to give a present-day value
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A measurement of wealth. A list of items owned and owed. Its purpose is to communicate information about the financial position of an entity at a point in time. It is usually produced annually
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The Business Entity Principle
Transactions, assets and liabilities that relate to the enterprise are accounted for separately from the assets of the owner
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A resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the entity
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Current Assets
One which is either part of the operating cycle of the enterprise or is likely to be realised in the form of cash within the year
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Non-Current (Fixed) Assets
One that is acquired for the purpose of use within the business for a considerable period of time. It can be: tangible/ intangible/ financial
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An obligation of the enterprise rising from past events, the statement of which is expected to result in an overflow from the enterprise of resources embodying economic benefits
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Current Liabilities
Those liabilities falling due payment within the year
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Non-Current Liabilities
Usually longer term and doesn't have to be repaid in full within the year
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Owners Equity
A claim on assets of the enterprise. The amount cannot necessarily be determined accurately. It can be viewed as a residual claim on the assets of the enterprise after all the other monies owed, the amounts have been paid off
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Refers to the ease with which assets can be converted to cash in the normal course of business
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The Principle of Duality
States that every transaction has two opposite and equal sides
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Income Statement
Summaries certain transactions taking place over that period
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The gross inflow of economic benefits during a period arising in the course of the ordinary actives of the entity, when these inflows result in an increase in equity, other then increases relating to contributions from equity participants
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Other items that meet the definition of income but are not revenue. When gains are recognised in the income statement, they are usually displayed separately because knowledge of them is useful for making decisions
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Realisation Principle
States that revenue should only be recognised when the earning process is substantially complete and when the receipt of payment of the goods/ services is reasonably certain
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Cash Sale
Receipt of cash and sale coincide
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Credit Sale
The sale is recorded on the invoice, you record the sale in advance of the cash being received. The customer is the debtor/ receivable
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Matching Principle
We must match the revenue earn during a period with the expenses incurred in earning that revenue
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An expired cost. Two types: ordinary activities/ one-off transactions
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An Expired Cost
A cost from which all benefit has been extracted during an accounting period
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Expenses of a period
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Cash Flow Statement
Concentrates on increases/ decreases in wealth overtime and is concerned with the flow of money in and out of the business entity
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Trail Balance
A list of balances in the books, shown in debit and credit columns
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Records the money kept at the bank by the entity. Shows receipts and payments
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Refers to notes and coins being transferred into and out of the business
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Capital (Owners Equity)
Records the contribution made by the owner to the entity. A special type of liability arising from the business entity principle
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A person whom the entity has purchased goods from on credit (payables)
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Debtor (Receivables)
Arises when the entity being accounted for sells goods/ services to customers and grants them credits. The customer later pays it back, until the amount owed is treated as an asset
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An account used to show any reduction from the price demanded as a result of prompt payment
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Used to record cash, cheques and goods withdrawn from the business by the owner for personal use
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Payments made for services rendered to the entity that help it to earn sales revenue. Separate accounts for each expense (e.g. wages/ depreciation/ advertising)
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Refers to goods bought with the intention of later resale, either immediately or after processing. It is an expense account
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Sales (Turnover)
Records the value of goods/ services sold by the entity. Whether the goods has been paid doesn't affect their entry
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Stock (Inventory)
A current asset (e.g. purchases made that remain unsold)
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A fixed asset account. Other fixed asset accounts include land/ buildings/ plant/ machinery/ computers
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What should/ shouldn't be reported
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Keep the affairs of the business and owner separate
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States when accounts will be prepared and over which period they will cover
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Going Concern
Assumes that an entity will continue in business for the foreseeable future
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Restricted to what can be easily quantified
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Measurement Rules
Determines how data should be recorded
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Money Measurement
Information that can be easily quantified is given a monetary value
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While we will depreciate long-term assets, we wouldn't be doing this for smaller items, e.g. a stapler, as it is insignificant
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Ethical Rules
Relates to the moral code or principles expected to be adopted in the preparation of accounts
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If there is some doubt over the treatment of a particular transaction, then income should be underestimated and expenditure overestimated. Therefore, the overall profit is likely to be lower and so there is less danger of it being paid out to owners
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The same accounting policies and rules should be followed in successive accounting periods unless there is a fundamental change in circumstances
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Requires you to avoid personal bias and prejudice when selecting and applying the accounting rules
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Financial statements shouldn't include matters that prevent users from gaining what they need to know. The information provided should be relevant
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Just-in-Time Techniques
Led to the reprisal of the production process and demand cycle in order that the level of production
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Work in Progress
Products and goods/ services that are in the intermediate stage of completion
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Finished goods
Goods that have been through the complete production or assembly cycle and are ready for resale to a customer
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Annual Inventory Count
Carried out at the reporting date, so the inventory figure, at that particular point in time, is a snapshot of that time period
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Opening Inventory
Obtained from the SOFP at the start of the year
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Closing Inventory
From a physical inventory count at the end of the year
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Operating Cash Flows
The cash inflows and outflows arising from the trading activities of the enterprise
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Stock Valuation Rule
Stock is valued at the lower cost and net realisable value. This is in accordance with the prudence concept. Different methods: FIFO/ LIFO/ WAVCO
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Assumes the first goods purchased will be the first to sell. At year end, stock comprises of most recently acquired stock. It is common and logical and acceptable for UK tax
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Assumes that the last goods purchased will be the first to sell. At year end, stock is valued at outdated prices. Less logical then FIFO. Acceptable for US tax, but not UK
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Uses an average of all purchase costs in the year. No assumptions made re. passage of units through the company. Acceptable for UK tax
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Arises when the business has paid for a service in advance of using it. If there is future benefit to the business we have an asset, if there is no future benefit we have an expense. The expense must be matched with revenue earnt in that period
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Bad Debt
When we come to the end of a quarter and review the balances we find that some of the amounts owed by customers are not likely to be collected (uncertainty)
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Trade Receivables
Arises when a business sells goods/ services to a third party on credit terms
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Trade Payables
Arise when goods/ services are supplied to an enterprise for which an invoice is subsequently received and for which no payment has been made at the date of receipt of goods/ services
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Amounts owing at a point in time, the amounts of which are known
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Systematic allocation of the depreciable amount of an asset over its useful life. Methods of depreciation: straight line/ reducing balance/ sum of digits/ units of service
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Depreciable Amount
The cost of an asset, or other amount substituted for cost, less its residual value
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All costs in getting the asset to its present condition and location and installed ready for use
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Economic Useful Life (EUL)
How long we believe the asset will be useful to us
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Scrap (Residual) Value
An estimate of the worth of an asset at the end of its EUL
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Net Book Value (NBV)
The accumulated appreciation
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Carrying Amount
The amount at which an asset is recognised after deducting any accumulated depreciation and impairment losses
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Straight Line Depreciation Equation
Depreciation expense = (cost - scrap value) / EUL
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Reducing Balance Depreciation Equation
Depreciation expense = reducing balance rate X NBV at the start of the year
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Sum of Digits Depreciation Equation
Depreciation expense = ((C-S) / sum of digits) X EUL remaining at start of year
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Units of Service Depreciation Equation
Depreciation expense = (C-S) X (use in the year/ total use)
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Profit on Disposal Equation
Profit on disposal = proceeds from sale - NBV at time of sale
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Bank Reconciliation Statement
Produced from the banks perspective on how much they owe people. Increase in money put into the bank (Cr), increases the banks liability
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Errors of Omission
A transaction has been completely omitted from the companies books
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Errors of Principle
Debating or crediting the wrong type of account
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Errors of Comission
Debating or crediting the correct type of account, but in the wrong personal account
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Errors of Original Entry
The monetary amount of a transaction is entered incorrectly
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Compensating Errors
Unconnected errors which cancel one another out
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Reversal of Entry Errors
The debit and credit entries have been confused
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A static amount that represents a stock at a particular point in time. The stock can change over time. If wealth increases, performance increases

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Original Cost


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