ICAEW Certificate Level: Accounting Fundamentals

Comprehensive vocabulary flashcards covering accounting concepts, the regulatory and ethical frameworks, the double-entry accounting equation, inventory and depreciation calculations, and preparation of financial statements under IFRS Standards.

Accounting

A way of recording, analysing, and summarising transactions of an entity.

Primary Users of Financial Statements

Existing and potential investors, lenders, and other creditors who rely on general purpose financial reports to make decisions about providing resources to the entity.

Statement of Financial Position

A list of all assets controlled and liabilities owed by a business at a specific date, providing a snapshot that quantifies the owners' equity.

Statement of Profit or Loss

A financial statement displaying items of income and expense over a reporting period to show whether a business generated a profit or a loss.

Generally Accepted Accounting Practice (GAAP)

The complete set of rules, legislation, statutory requirements, and accounting standards that govern accounting practices within a specific jurisdiction.

Integrity

An ethical fundamental principle requiring professional accountants to be straightforward and honest in all professional and business relationships.

Objectivity

An ethical fundamental principle requiring professional accountants not to allow bias, conflict of interest, or undue influence of others to override professional judgements.

Professional Competence and Due Care

An ethical principle requiring accountants to maintain professional knowledge and skills, act diligently, and ensure they and their staff do not operate beyond their current level of competence.

Confidentiality

An ethical fundamental principle requiring professional accountants to respect the confidentiality of information acquired through professional relationships and not disclose it without proper authority.

Professional Behaviour

An ethical fundamental principle requiring accountants to comply with relevant laws and regulations and avoid any action that discredits the profession.

Sustainability

The practice of fulfilling the needs of the current generation without jeopardising the ability of future generations to meet their own.

International Sustainability Standards Board (ISSB)

A board formed by the IFRS Foundation in $2021$ to develop and issue global IFRS Sustainability Disclosure Standards focused on investor information needs.

IFRS S1

The sustainability standard requiring disclosure of material information about sustainability-related risks and opportunities across governance, strategy, risk management, and metrics and targets.

IFRS S2

The climate-related standard requiring specific disclosures on physical risks, transition risks, and climate-related opportunities.

Physical Risks

Climate-related risks resulting from more frequent and severe adverse natural events, such as droughts, heatwaves, wildfires, and floods.

Transition Risks

Climate-related risks arising from operational, technological, market, and policy shifts made in response to climate change.

Relevance

A fundamental qualitative characteristic where information has predictive value, confirmatory value, or both, making a difference to users' economic decisions.

Faithful Representation

A fundamental qualitative characteristic where financial information is complete, neutral (supported by prudence), and free from error.

Going Concern

The assumption that an entity will continue in operational existence for the foreseeable future, having neither the intention nor the necessity of liquidation.

Accruals Basis of Accounting

The accounting concept where transactions are recognised as income or expenses when earned or incurred, rather than when cash is received or paid.

Business Entity Concept

The convention that a business is treated as a separate economic entity distinct from its owners or managers.

Historical Cost Convention

The convention of valuing assets and recording transactions at the original monetary amount paid to acquire them.

Capital Expenditure

Expenditure resulting in the acquisition of long-term non-current assets or the enhancement of their earning capacity.

Revenue Expenditure

Expenditure incurred for trade purposes or to maintain the existing earning capacity of non-current assets, charged directly to profit or loss.

Asset

A present economic resource controlled by the entity as a result of past events from which future economic benefits are expected to flow.

Liability

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of economic resources.

Capital (Equity)

The residual interest in the assets of the entity after deducting all of its liabilities.

The Accounting Equation

The fundamental formula stating that $\text{Assets} = \text{Capital} + \text{Liabilities}$, or $\text{Assets} - \text{Liabilities} = \text{Equity}$.

Drawings

Amounts of cash or goods withdrawn from a business by a sole trader or partner for personal use, reducing owner's capital.

Trade Payables

Current liabilities representing amounts owed to suppliers for goods or services purchased on credit.

Trade Receivables

Current assets representing amounts owed by customers for goods or services sold on credit.

Standing Data

Permanent reference data stored in an accounting system that does not regularly change, such as customer delivery addresses and supplier payment details.

Batch Processing

The method of processing transactions where a group of similar source documents are gathered and entered together in bulk at the end of a period.

Credit Note

A source document issued to a customer to record returns or rectify overcharges, acting as a negative invoice.

Debit Note

A document sent by a customer formally requesting a credit note from a supplier; it is not a source document.

Total Payroll Cost

The overall expense to the employer, comprising gross pay plus employer's National Insurance (NI) and employer pension contributions.

Nominal Ledger

The principal record grouping together all individual general ledger (T) accounts maintained by an entity.

DEAD CLIC

A mnemonic for double entry bookkeeping rules: Debits increase Expenses, Assets, and Drawings; Credits increase Liabilities, Income, and Capital.

Trade Discount

A reduction in the list price of goods typically granted for bulk buying, deducted before recording sales or purchases in the ledgers.

Early Settlement Discount

A reduction in the amount payable offered to encourage payment within an agreed timeframe, recorded net if expected to be taken.

Trial Balance

A listing of all debit and credit balances extracted from the nominal ledger accounts used to check the arithmetic accuracy of double entry bookkeeping.

Transposition Error

An accounting error that occurs when two adjacent digits are accidentally swapped or reversed during recording.

Error of Omission

An error resulting from completely failing to record a transaction in the accounting records.

Error of Principle

An error that occurs when a transaction is recorded in breach of an established accounting principle or convention, such as recording capital expenditure as an expense.

Error of Commission

An error where an entry is posted to the correct side and type of account, but to the wrong individual ledger account.

Compensating Error

Two or more distinct errors that coincidentally balance each other out, leaving the trial balance debits and credits equal.

Contra Entry

An accounting adjustment offsetting mutual debts where a single entity is simultaneously a credit customer and a credit supplier.

Suspense Account

A temporary account opened to record unmatched, uncertain, or imbalanced transactions until their correct allocation is resolved.

Cost of Sales

The direct cost of goods sold during a reporting period, calculated as $\text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory}$.

Carriage Inwards

Transport costs incurred to deliver purchased goods into the business premises, treated as an addition to cost of sales.

Carriage Outwards

Transport costs incurred by the business to deliver goods to customers, treated as an operating distribution expense.

Net Realisable Value (NRV)

The estimated selling price of inventory in the ordinary course of business, less estimated costs of completion and estimated selling costs.

FIFO (First In, First Out)

An inventory valuation method assuming the earliest acquired units are sold first, leaving the most recent acquisitions in closing inventory.

Weighted Average Cost (AVCO)

An inventory valuation method where a new average cost per unit is recalculated after each delivery and applied to cost of sales and closing inventory.

Mark-up

The profit margin expressed as a percentage of cost of sales.

Margin

The profit margin expressed as a percentage of selling price or revenue.

Irrecoverable Debt

A trade receivable balance that is confirmed as uncollectible and written off by crediting trade receivables and debiting profit or loss.

Allowance for Receivables

An estimated contra-asset account established to reflect the probability of non-payment across total trade receivables at the year end.

Accrual

A current liability representing an expense incurred in the current period that has not yet been paid or invoiced by the reporting date.

Prepayment

A current asset representing an expense paid in advance during the current period relating to a subsequent accounting period.

Deferred Income

A current liability recognised when cash has been received from a customer before the related goods or services have been provided.

Accrued Income

A current asset recognised when income has been earned during the period but the cash has not yet been received or billed.

Depreciation

The systematic allocation of the depreciable amount (cost less residual value) of a tangible non-current asset over its estimated useful life.

Residual Value

The estimated net amount an entity expects to obtain from the disposal of an asset at the end of its useful life, after deducting disposal costs.

Carrying Amount

The net amount at which an asset is recognized in the statement of financial position, calculated as $\text{Cost} - \text{Accumulated Depreciation}$.

Straight Line Depreciation

A method of depreciation that allocates an equal depreciable charge to each period over the asset's estimated useful life.

Reducing Balance Depreciation

A method of depreciation that applies a constant percentage to the asset's opening carrying amount, charging higher depreciation in earlier years.

Asset Register

A comprehensive listing of all non-current assets held by an entity, detailing descriptions, costs, dates, locations, and depreciation, maintained outside the double entry system.

Intangible Asset

An identifiable non-monetary asset without physical substance, such as patents, licences, and development costs meeting capitalisation criteria.

Purchased Goodwill

An intangible asset arising when an entity acquires another business, measured as the excess of the purchase consideration over the fair value of net identifiable assets acquired.

Share Premium

An equity reserve crediting the surplus funds received from shareholders above the nominal (par) value of shares issued.

Retained Earnings

An equity account accumulating the cumulative net profits and losses of an entity over time, less any dividends paid or transfers to other reserves.

Rights Issue

An offer of new shares to existing shareholders in proportion to their existing shareholding, made for cash at a stated issue price.

Bonus Issue

An issue of fully paid shares to existing shareholders free of charge in proportion to existing holdings, funded by capitalising reserves such as share premium.

Redeemable Preference Shares

Preference shares where the company has an obligation to buy back the shares at a future date; presented as a liability with dividends treated as finance costs.

Provision (IAS 37)

A liability of uncertain timing or amount recognised when there is a present legal or constructive obligation and an outflow of economic benefits is probable.

Management-Defined Performance Measure (MPM)

A sub-total of income and expenses not specified by IFRS Standards but used by management in public communications outside financial statements, requiring specific footnote disclosures under IFRS 18.