Accounting

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Accounting

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The process of identifying, measuring, recording and communicating economic transactions. Measurement is normally made in monetary terms and the accountant will prepare records in the form of financial statements.

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Accounting concepts

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The fundamental principles applied to financial statements.

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Accounting equation

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If a business starts trading it will require resourcrd , expressed as: resources supplied by the owner = recorded in the business or 'capital = assets - liabilities'.

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Accruals concept

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It requires the revenue and costs are recognized as the are earned or incurred, not as money is received or paid. Income and expenses should be matched with one another and dealt with in the profit and loss account of the period to which they relate.

Expenses when incurred (not paid) and income when earned (not received).

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Accrued expense

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An expense that has been incurred and the benefit received but that has not been paid for at the end of the accounting period.

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Accumulated fund

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A term used instead of capital in non-profit making organisations. (Clubs)

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Appreciation

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An increase in the value of an asset, usually as a result of inflation. This usually occurs with land and buildings.

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Bank reconciliation statement

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A statement that reconciles the bank balance in the books of an organization with the bank statement. Differences may be due to unpresented cheques, bank charges etc. Bank reconciliations are usually performed monthly as a form of internal control check.

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Business entity concept

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Assumption that only transactions that affect the firm and not the owner's private transactions will be recorded.

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Capital employed

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The amount of money that is being used up in the business. It is the balance of the capital account plus any long term loan or alternatively the total net assets of the business.

NCA + CA - CL

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Capital expenditure

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When a business spends money to buy or add value to a fixed asset.

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Compensating error

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Where two errors of equal amounts but on opposite sides of the accounts cancel out each other.

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Complete reversal of entries

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Where the correct amounts are entered in the correct accounts but each item is shown on the wrong side of each account.

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Consistency concept

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A concept using in accounting that ensures consistency of treatment of like items within each accounting period and from one period to the next.

Keeping the same methods of accounting from year to year.

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Cost of goods sold/ sales

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How much is spent on the goods which are sold during the year. This is calculated as follows :

Opening inventory + purchases during the period - the closing inventory

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Daybook

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A specializes journal or book of prime entry recording specific transactions. For example the sales day book records invoices for sales.

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Depreciation

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The measure of the cost or economic benefits of a tangible fixed asset that have been consumed during a financial period. This includes the wearing out, using up or other reduction in the useful economic life of a tangible fixed asset.

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Dividends

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The amounts given to shareholders as their share of profits made by the company.

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Dual aspect concept

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The principal that every financial event has an aspect that gives rise to a debit entry and an aspect that gives rise to a credit entry.

For every debit there is a credit.

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Error of commission

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Where a correct amount is entrered , but in the a wrong person's account.

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Error of complete reversal

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Where the correct amounts are entered in the correct accounts but each item is shown on the wrong side of each account.

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Error of omission

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Where a transaction is completely omitted from the books.

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Error of original entry

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Where an item is entered but both the debit and credit entries are of the same incorrect amount.

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Error of principle

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Where an item is entered in the wrong type of account.

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Error of transposition

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Where figures are switched incorrectly.

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Fixed costs

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Expenses which remain constant whether activity rises or falls within a given range of activity.

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Going concern concept

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A principle of accounting practice that assumes busnisses to be going concern, i.e. that an enterprise will continue in operation for the foreseeable future.

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Goodwill

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The difference between the value of the separable net assets of a business and the total value of the business.

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Imprest System

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A means of controlling petty-cash expenditure in which a person is given a certain sum of money. When some of it has been spent, that person provides appropriate vouchers for the amounts spents and is then reimbursed so that the float is restored.

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Indirect costs

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Costs relating to manufacture that cannot be economically traced to the item being manufactured. These are often known as factory overheads.

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Invoice

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A document prepared by the seller and sent to the purchaser whenever a business buys goods or services on credit. It gives details of the supplier and the customer, the goods purchased and their price.

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Limited company

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An organisation owned by its shareholders, whose liability is limited is limited to their share capital invested.

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Liquidity

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The ability of a business to pay its debts as they fall due and to meet unexpected expenses within a reasonable settlement period.

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Manufacturing account

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An account prepared before the income statement in which total production cost is calculated.

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Materiality concept

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This concept applies when the value of an iytem is relatively small and does not warrant separate recording.

Assessing the actual value of an item bought.

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Money measurement concept

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Accounting is only concerned with the money measurement of things and where most people will agree to monetary value of a transaction.

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Nominal accounts

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Accounts in which expenses, revenues and capital are recorded.

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Ordinary Shares (Equity)

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Shares entitled to dividends after the preference shareholders have been paid.

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Preference Shares

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Shares that are entitled to an agreed rate of dividend before ordinary shareholders are paid.

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Prime Cost

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The total of direct material, direct labour and direct expenses.

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Production cost

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The total costs involved when a business produces its goods instead of buying them ready-made. It includes the prime cost plus any indirect manufacturing costs.

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Allowance for doubtful debts

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A provision calculated to cover the debts during an accounting period that are not expected to be paid.

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Prudence Concept

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The accounting concept that insists on a realistic view of business activity and stresses that anticipated revenues and profits have no place in the profit and loss account until the have been realized in the form of cash. Moreover, provision should be made for all known expenses and losses whether the amount of these is known with certainty or is a best estimate in the context of the information available.

Never overstate or understate profits.

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Reserves

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Accounts to which profits are transferred for use in future years.

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Revenue expenditure

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Expenses needed for the day-to-day running of the business.

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Capital expenditure

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When a business spends money to buy or add value to a fixed asset.

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Suspense account

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An account which is opened temporarily to correct errors and settle the difference in the trial balance totals.

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Trade discount

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A reduction from the price before it is charged to customers. It is not shown anywhere in the accounts.

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Variable Costs

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Expenses which change according to the level of output.

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Working Capital

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Current assets minus Current liabilities. The figure represents the amount of resources the business has in a form that is readily convertible into cash.