Theories used in measurement and valuation systems of accounting that are based on deductive reasoning from certain axioms or assumptions rather than experience. The 1960s was a particularly fruitful period for a priori research in financial accounting.
Accounting is the process of identifying, measuring, recording, and communicating economic transactions. Typically, this is done using monetary terms and involves the preparation of financial statements such as profit and loss accounts and balance sheets.
The concept of an accounting entity is fundamental in financial accounting and establishes the financial boundaries for businesses, organizations, or any other entities.
The Accounting Equation forms the foundation of the balance sheet and illustrates how assets, liabilities, and equity are interrelated, ensuring that the balance sheet remains balanced.
Accounting principles are the fundamental rules, concepts, and guidelines governing currently accepted accounting practices and procedures. They form the foundation upon which financial transactions are recorded and reported, ensuring consistency, reliability, and comparability of financial statements.
The Accounting Principles Board (APB) was the authoritative body of the American Institute of Certified Public Accountants (AICPA) charged with the establishment of accounting principles and the promotion of consistency and improvement in the field of financial accounting and reporting.
Accounting records are the documentation used to prepare, verify, and audit the financial statements of a company. They provide a detailed account of all financial transactions, assets, liabilities, equity, revenues, and expenses.
An Accounts Receivable Ledger is a detailed listing of transactions for each customer, showing how much each customer owes. Each transaction that generates a receivable is recorded under that customer, making it possible to determine individual balances. The total balance in this ledger should match the corresponding figure in the General Ledger.
Accretion is an increase in the value of an asset as a result of a physical change, such as a growing crop, rather than due to a change in its market price. It describes the natural growth or incremental increase in the value of an asset.
Aggregate depreciation refers to the total amount of depreciation expense that has been accumulated over time for a fixed asset or group of assets since the beginning of their use.
Allowance for Doubtful Accounts is a contra-asset account that estimates the portion of receivables that may not be collectible.
Appraisal costs are associated with the valuation and inspection processes to ensure the quality of products or the fair market value of assets. They play a crucial role in both financial accounting and quality management.
A Bad-Debt Reserve is an offset to Accounts Receivable, with amounts that can be expected to be uncollectible. Businesses use this reserve to account for receivables that are not likely to be collected.
The practice of totaling the debit and credit sides of an account and inserting a balance to make them equal at the end of a financial accounting period.
A bank reconciliation statement reconciles the bank balance in an organization's books with the bank statement. Differences may arise from cheques drawn by the organization but not yet presented to the bank, bank charges deducted from the account not yet notified to the organization, and payments made to the bank but not yet recorded by the organization. Bank reconciliations are usually performed weekly or monthly and serve as a form of internal control.
A bargain purchase option is a provision in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease term for a price significantly lower than the expected fair market value.
A certain volume of stock, assumed to be constant in that stock levels are not allowed to fall below this level. When the stock is valued, this proportion of the stock is valued at its original cost. This method is not normally acceptable for financial accounting purposes.
The Bought Ledger, also known as Creditors’ Ledger, is a sub-ledger accounting record that details all the credit purchases a company makes from its suppliers, providing a clear view of all owed amounts and due dates.
A capital asset is property of any type held by an individual or business, excluding inventory and certain other types of property. Capital assets can include buildings, land, equipment, vehicles, stocks, and bonds.
Capital maintenance in units of constant purchasing power (CUPP) is an approach that maintains the financial capital's purchasing power by adjusting for changes in the general price level or inflation.
In the USA, capital surplus refers to the difference between the par value of a share and its issue price. It is the equivalent of a share premium in the UK.
Carryover refers to the process by which deductions and credits of one taxable year that cannot be used to reduce tax liability in that year are applied against tax liability in subsequent years.
Cash at Bank refers to the total amount of money held in bank accounts by an individual or company. This can be in the form of current accounts or deposit accounts and is reflected in the balance sheet under current assets.
A charge-off is a debt that a creditor declares as unlikely to be collected after the debtor has become significantly delinquent. This status often affects the debtor's credit score negatively.
The chargeable account period, often refered to as the accounting period, is the specific time duration under consideration for which financial transactions are recorded and financial statements are prepared.
Charity accounts are the financial records of a charitable organization, highlighting both receipts like donations and expenditures like grants. They must comply with specific regulations depending on legal structure and size, including directives set by the Charities Act 2011 and Statements of Recommended Practice (SORPs) issued by the Charity Commission.
A collection account is a specific type of bank account opened with the purpose of reducing bank float for remittances from specific customers or groups of customers, often those located abroad or who remit payments in a foreign currency.
Financial statements covering different dates but prepared consistently and therefore lending themselves to comparative analysis, as accounting convention requires.
A statement of theoretical principles that provides guidance for financial accounting and reporting. It serves as a foundation for setting accounting standards and provides a coherent system of interrelated objectives and fundamentals.
Contingent consideration refers to a payment made as part of a business acquisition that is contingent on future events. This concept is commonly used in earn-out agreements.
Contra accounts are used in financial accounting to offset balances between accounts, often simplifying the settlement process and providing clearer financial statements.
The cost convention refers to the basis used for recording costs charged against profit during an accounting period, which can be based on historical cost, current cost, or replacement cost.
The Cost Ledger Control Account, also known as the Cost Control Account, is an essential component of an accounting system where separate books are maintained for financial and cost records, ensuring the accuracy and integrity of the overall accounting system.
Cost tracing refers to the process of directly associating costs with specific cost objects such as projects, departments, or products, ensuring more accurate tracking of financial performance.
A sale made on terms in which cash is to be paid at an agreed future date. As the debtors, who are customers to whom credit sales have been made, pay, the debtors' control account balance will be reduced.
Current liabilities are amounts owed by a business to other organizations and individuals that should be paid within one year from the balance-sheet date, including trade creditors, bills of exchange payable, and short-term loans.
Current Replacement Cost refers to the expense involved in replacing an asset or the services it provides, calculated at the balance-sheet date. Determining this cost can be challenging, especially if the asset is obsolete.
A debit is an entry on the left-hand side of an account in double-entry bookkeeping that increases assets or recorded expenditures of an organization. In the context of a bank account, a debit indicates an outflow of funds.
Understanding the fundamental rules of debit and credit in double-entry bookkeeping is essential for accurate financial accounting.
The Debtors' Ledger, also known as the Sales Ledger or Sold Ledger, is a memorandum ledger account where individual debtors' accounts are recorded. It is an essential component in the internal control system used to monitor sales, payments, discounts, and returns.
Development costs refer to expenses associated with the creation and launch of new products or services. This includes the research, testing, design, and other activities necessary to bring an idea to market.
Direct expenses are expenditures that are directly attributable to the production of a particular cost unit, excluding direct labor and materials.
The Direct Method is an accounting approach for preparing a cash-flow statement by aggregating operating cash receipts and payments to demonstrate the net cash flow from operating activities.
Taxation, the effect of which is intended to be borne by the person or organization that pays it.
A discount granted by a company to a client, for example for a bulk purchase or a prompt payment. It is shown as an expense in the profit and loss account.
A discount granted to a supplier for bulk purchases or prompt payment, usually recorded as a credit in the profit and loss account, reducing the overall expense.
A distribution to owners represents the transfer of assets from a business to its shareholders or owners, often observed as dividends in the USA.
In the USA, donated capital refers to a gift of an asset to a company. The value is credited to a donated-capital account, which is a stockholders' equity account.
Fully paid capital stock of a corporation contributed without consideration to the same issuing corporation. Donated stock is generally classified as capital stock and can impact both the financial and operational aspects of the corporation.
The Double Declining Balance Method is a form of accelerated depreciation method that spreads the cost of an asset more heavily in the early years of its service life.
Economic accrual of interest refers to the cost of an indebtedness for a given period, calculated by multiplying the period’s interest rate by the unpaid loan balance, including prior accrued interest.
Emerging Issues Task Force (EITF) is responsible for assisting the Financial Accounting Standards Board (FASB) by suggesting appropriate treatments for emerging accounting issues and practices to accelerate standard-setting processes.
A nonrecurring occurrence that must be explained to shareholders in an annual or quarterly report.
The Financial Accounting Standards Advisory Council (FASAC) serves as an advisory body to the Financial Accounting Standards Board (FASB) on matters related to accounting standards, offering broad perspectives from diverse financial communities, ensuring comprehensive and sustainable financial reporting standards.
Financial accounting is the branch of accounting concerned with classifying, measuring, and recording the transactions of a business, ultimately presenting the performance and financial position of a business through standardized financial statements.
The Financial Accounting Standards Board (FASB) is an independent organization that establishes and improves standards of financial accounting and reporting for companies and non-profit organizations in the United States.
The Financial Accounting Standards Board (FASB) is a private, non-governmental organization established in 1973 to develop and issue standards for financial accounting and reporting. These standards are commonly referred to as Generally Accepted Accounting Principles (GAAP).
Financial Reporting Standards (FRS) provide guidelines and regulations on how financial statements should be prepared and presented. These standards ensure consistency, reliability, and comparability of financial reports across different entities, fostering transparency and trust in financial information.
A fixed charge is the portion of an expense that remains constant, regardless of the amount of a commodity or service used or consumed.
Fixed production overhead consists of factory costs that remain constant regardless of changes in the level of production or sales. Understanding these overheads is crucial for accurate financial and managerial accounting.
A situation that arises when two transactions, especially foreign-exchange transactions, offset each other commercially but not in terms of taxation.
A technique used to estimate inventory at the end of an interim period, commonly used for preparing interim financial statements and estimating inventory for insurance reimbursement in case of loss.
Identifiable assets and liabilities, also known as separable assets and liabilities, are those parts of a business that can be disposed of separately without having to dispose of the entire business. They play a crucial role in financial accounting and business valuation.
Income represents an economic benefit, encompassing money or value received over a period. It is a crucial concept in various domains like accounting, taxation, and economics.
The ICAEW is a prestigious professional accounting body founded in 1880, known for its significant role in the development and regulation of accounting practices in England and Wales.
Integrated accounts refer to a comprehensive set of accounting records that seamlessly combines both financial accounting and cost accounting into a single coherent system. This integration eliminates the need for reconciling separate financial and cost records, ensuring consistency, accuracy, and efficiency in data management.
An accounting system that maintains cost accounting and financial accounting information separately, regularly reconciling the two by use of control accounts.
Joint costs are costs that are incurred up to the point where multiple products are separately identifiable in a production process. They are essential in evaluating the cost-effectiveness and profitability of production processes.
Managerial accounting is the practice of using financial accounting records as basic data to enable better business planning and decision-making. It is designed to aid in decision-making, planning, and control within a business organization.
Mark to Market (MTM) is a financial accounting method where the value of an asset is adjusted to reflect its current market value rather than its book value. It's used in margin accounts to ensure compliance and by mutual funds to report daily net asset values.
A merger reserve, also known as merger capital reserve, is credited in place of a share premium account when merger relief is applied. Goodwill on consolidation may be written off against a merger reserve, unlike the share premium account.
A monetary item is an asset or liability whose amounts are fixed or determinable in dollars without reference to future prices of specific goods or services. Their economic significance depends heavily upon the general purchasing power of money.
An asset of little or no value, often used for capital gains tax purposes. Such assets can be treated as sold and immediately reacquired at a negligible value, resulting in an allowable capital loss.
A nominal account is a type of ledger account that records expenses, losses, incomes, or gains, rather than transactions involving tangible or intangible assets.
A noncurrent asset is an asset that is not expected to be converted into cash, sold, or exchanged within the normal operating cycle of the firm, usually one year. Examples include fixed assets such as real estate, machinery, and other equipment.
A not-for-profit organization (NFP) is an entity formed for purposes other than generating a profit and where no part of the organization's income is distributed to its members, directors, or officers.
An outstanding check is a check that has been written by a company or individual but has not yet been cleared by the bank.
Outstanding shares represent the total number of a company's shares that are currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.
An obligation recognized by the employer for the future liability to make annuity payments to employees. The reserve is typically a liability when it results from charging a pension expense. However, in a revocable plan, the reserve is considered an appropriation of retained earnings regardless of whether it affects specific assets.
A basis used in absorption costing for absorbing the manufacturing overhead into the cost units produced. The formula used is: Overhead Absorption Rate = (Total Overhead / Total Direct Material Cost) * 100.
Period costs are expenses that are incurred over a specific period of time and are not directly tied to a specific product or production activity. These costs are typically fixed, such as rent, insurance, and business rates.
A permanent difference refers to a discrepancy between profits or losses calculated for tax purposes and those reported in the financial statements. For example, certain expenses may be included in financial statements but not allowed as deductions for tax purposes.
Pre-acquisition profits refer to retained earnings accumulated by a company before it is acquired by another entity. These profits are not to be distributed to the shareholders of the acquiring company as dividends, as they represent a recovery of the cost of investment rather than income.
A preference dividend is a type of dividend that is paid to holders of preference shares and often carries preferential rights compared to common share dividends. This term is closely associated with cumulative preference shares, especially concerning unpaid dividends from prior periods.
A private ledger is a subset of an accounting ledger that holds confidential and sensitive financial information, isolated from the general ledger for security and privacy reasons.
Purchased Goodwill represents the premium amount paid over the fair value of the identifiable net assets during the acquisition of a company, reflecting the value of the company’s brand, customer base, and other intangible elements.
The purchases ledger control account is a summary account within the general ledger used to record the total amount owed to suppliers and other creditors for goods or services received on credit.
Real accounts refer to ledger accounts used to record property, plant, equipment, and other assets, distinguishing them from nominal accounts which track revenues and expenses.
The revenue expenditure incurred in maintaining the assets of an organization in their original condition as far as possible. Any expenditure incurred in improving the assets would normally be regarded as capital expenditure and therefore not repairs and maintenance.
Replacement cost is the cost of replacing an asset, either in its present physical form or as the cost of obtaining equivalent services. This valuation method helps companies determine the expense of acquiring new or similar assets.
A restricted surplus refers to the portion of shareholders' equity that is not available for dividend distribution to shareholders, often due to legal or regulatory requirements.
A transaction that is generally of a short-term nature and is only expected to benefit the current period. Revenue transactions appear in the profit and loss account of the period.
The Sales Returns Book, also known as the Returns Inwards Book, is a specialized ledger maintained by businesses to record the return of goods sold to customers. It helps track and manage returned inventory, ensuring accurate financial accounting and inventory control.
An expense containing both fixed and variable cost elements, impacting overall costs depending on the level of business activity.
A share premium account records the amount received by a company over and above the par value of its shares. Such balances are used for specific purposes under regulatory stipulations.
A method for valuing the entire equity in a company, based on the net present value of future cash flows. Developed by Alfred Rappaport in the 1980s, Shareholder Value Analysis (SVA) emphasizes the time value of money and focuses on future performance rather than past accounting records.
The Statement of Financial Accounting Concepts (SFAC) is a series of reports issued by the Financial Accounting Standards Board (FASB) to outline the foundational concepts underpinning financial accounting and reporting in the United States.
Statements detailing the financial accounting and reporting requirements established by the Financial Accounting Standards Board (FASB), forming part of the generally accepted accounting principles (GAAP) in the USA.
Statutory total income refers to the aggregate amount of income that is subject to taxation according to the relevant laws and regulations. It encompasses total income from various sources such as salaries, business income, capital gains, and other categories defined by tax legislation.
Stock-in-trade refers to the merchandise or goods available to a business for sale to customers. It is integral to a company's operations and directly impacts revenue.
