Double entry glossary Flashcards
Account
A record in a double entry bookkeeping system that is kept for each (or each class) of asset, liability, income, expense, capital and drawings.
Accountant
A person who practises accountancy.
Accounting
A set of theories, concepts and techniques by which financial data are processed into information for reporting, planning, controlling and decision making purposes, or the process of recording, classifying, reporting and interpreting the financial data of an organisation.
Accounting equation
An expression of the equivalence, in total, of assets = liabilities + owner’s equity.
Accounting period
The time period, typically one year, to which financial statements are related.
Accounts payable
Amounts owed to suppliers for the purchase of goods and services: commonly called creditors.
Accounts receivable
Amounts that customers owe an organisation for goods and services supplied: commonly called debtors.
Accruals
Expenses which have been consumed or enjoyed but which have not been paid for at the accounting date. For example, telephone calls made but not yet paid for.
Accruals concept
Concept whereby revenue and costs are matched to the period to which they relate rather than the period in which they are received or paid. Also called the ‘matching’ concept.
Accumulation depreciation
The extent to which the original cost of an asset has been charged to the income statement. Cost less accumulated depreciation = net book value.
Assets
The economic resources of an enterprise that are expected to be used in future time periods and that can be expressed in money terms.
Auditing
The independent examination of, and expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation.
Authorised share capital
The amount of capital stated in the Memorandum of Association. The company cannot issue more than the authorised capital but the amount can be increased providing the prescribed procedures are followed.
Bad debuts
Debts known to be irrecoverable and therefore treated as losses by inclusion in the income statement as an expense.
Bank reconciliation
A statement which explains the difference in the balance shown by a cash book from that shown by a bank statement. The differences are normally caused by differences in the timing of issuing cheques and their presentation to the bank and similar timing differences.
Bonus issue
An issue of new shares to existing shareholders. No payment is made for the shares.
Bookkeeping
The art of recording an enterprise’s transactions in the books of account of the enterprise. Bookkeeping is ideally carried out using the formal system known as double entry bookkeeping.
Book value
The amount at which an asset is carried in the accounting records. The value is usually the original cost less accumulated depreciation. Alternative phrases are net book value and written down value. Book value rarely corresponds to ‘real’ values such as saleable value.
Called-up capital
When shares are issued the sums due may be payable by instalments either at fixed dates or when the directors so determine. A request for payment is known as a call and that part of the share capital which has been paid or requested is known as the called up capital.
Capital
An imprecise term meaning the whole quantity of assets less liabilities owned by a person or business. The capital account of a sole proprietor is equal to the assets less liabilities of the business.
Capital expenditure
Expenditure that provides long term benefits. Most capital expenditure is on fixed assets.
Casting
The accounting term for adding up.
Cheque
A bill of exchange drawn on a bank and payable on demand.
Compensating error
A bookkeeping term for two separate errors whose separate effects are cancelled out. Thus the errors do not give rise to a difference in the trial balance.
Consistency
An accounting principle whereby there is consistency of accounting treatment of like terms within each accounting period and from one period to the next.
Contra
A bookkeeping entry by which a liability to a supplier is reduced by (is set against) a sum due by the supplier who is also a customer.
Control account
An account reflecting the total balances of either debtors or creditors.
Credit
The right hand side of a double entry account. See Chapter 4, paragraph 7 for associated rules.
Credit control
A term for all those measures and procedures instituted by a firm that trades on credit to ensure that customers pay their accounts. Procedures include evaluation of a customer’s credit worthiness and comprehensive collection procedures.
Current accounts
In a partnership the sums due to partners which have arisen due to undrawn profits shares.
Current assets
Those assets which the management intend to convert into cash or consume in the normal course of business within one year.
Current liabilities
Debts or obligations that will be paid within one year of the accounting date. The Companies Act 1985 requires the expression Creditors - amounts falling due within one year.
Day book
A book of prime entry. The sales day book is a listing of sales invoices. The purchase daybook is a listing of purchase invoices. From the daybooks postings are made to the double entry system.
Depreciation
A measure of the wearing out, consumption or other reduction in useful economic life of a fixed asset whether arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation should be allocated to accounting periods so as to charge a fair proportion to each accounting period during the expected useful life of the asset.
Direct debit
A facility given by banks by which (by prior agreement) a person can extract money directly from his/her debtor’s bank account.
Directors
Persons elected by the shareholders of a company to manage the company. Collectively the directors form the Board of directors. Most boards have a chairman and one director is often designated as managing director or chief executive.
Discount
A monetary deduction or reduction. Settlement discount is given for early payment of a sum due. Trade discount is a simple reduction in price given to favoured customers for reasons such as status or bulk purchase. Sales and purchases in the income statement should be shown net of trade discounts and gross of settlement discounts.
Dishonour
To fail to pay or be unable to pay a cheque.
Dividend
A distribution of its earnings to its shareholders by a company.
Double entry bookkeeping
A method of record keeping developed in Renaissance Italy which now has universal acceptance.
Doubtful debts
A reduction in profits (by a charge to the income statement) to recognise the probable loss to be suffered because a debt is likely to prove uncollectable. The debts remain in the books (unlike actual bad debts) but are reduced on the statement of financial poistion by an account with a credit balance called a provision for doubtful debts.
Drawings
Cash or goods withdrawn from a business by a proprietor for his/her own use.
Dual effect
A principle that implies that all transactions have two aspects and thus affect two double entry accounts. For example a credit sale involves a debit to the debtor’s account and a credit to the sales account.
Equity
The ordinary shares or risk capital of an enterprise.
Expense
A cost which will be debited in a income statement as a period cost.
FIFO
First in, first out; a method of valuing assets, especially stocks, which values the items at most recent input prices.
Financial statement
Statement of financial poistions, income statements, income and expenditure accounts, cash flow statements and other documents which formally convey information of a financial nature to interested parties concerning an enterprise. In companies, the financial statements are subject to audit opinion, whereas other statements such as the chairman’s report are not.
General ledger
The collection of accounts of a double entry system. (See Nominal Ledger).
Going concern
An accounting concept which assumes that the enterprise will continue in operational existence for the foreseeable future. This means in particular that the income statement and statement of financial poistion assume no intention or necessity to liquidate or curtail significantly the scale of operations.
Goodwill
An intangible asset representing the value of the whole business in excess of the separable net assets which comprise it.
Gross profit
The excess of sales price over the cost of the product sold, prior to deduction of operating expenses.
Historical cost
The accounting convention whereby goods, resources and services are recorded at cost. Cost is defined as the exchange or transaction price which had been paid to acquire the assets.
Imprest
A fixed amount of money used to meet petty cash (or other) expenditures for a period. At the end of the period the imprest is made up again to its original figure.
Incomplete records
That branch of accounting which deals with the production of financial statements of enterprises which do not have full double entry bookkeeping.
Intangible assets
Assets which have long term value but which have no physical existence. Examples are goodwill, copyright, patents and trademarks.
Interest
The amount paid by a borrower to a lender for the use of the money lent.
Interim dividend
Many companies pay a dividend in respect of a financial year in two instalments. The final dividend is paid after the year end and when the results are known. The interim dividend is paid during the year usually after the results for the first half of the year are known.
Inventory
A detailed list of articles of any kind. Used by accountants as another word for stock.
Investments
A class of asset consisting of shares or loan stock of companies, financial institutions or the government.
Invoice
A document issued by a vendor to a buyer giving details of the transaction.
Issued capital
That part of the authorised capital of a company which has actually been issued to shareholders.
Journal
A double entry transaction to be put into the accounts but explained in narrative.
Leasehold
Land rented from the owner of the freehold. Leases can be for any period. Leases with less than 50 years to run are called short leases and other leases are called long leases.
Ledger
The book or computer file in which the double entry accounts are kept.
Liabilities
Present obligations resulting from past transactions or events that require the enterprise to pay money, provide goods, or perform services in the future.
LIFO
Last in, first out, a method of valuing assets whereby an asset is valued at very old input prices.
Limited companies
Companies registered under the Companies Acts in which the liability of the members is limited to the amount unpaid on the share capital.
liquidation
The procedure whereby a company is wound up, its assets realised and the proceeds distributed to the persons entitled.
Listed companies
Companies whose shares are quoted on a recognised stock exchange.
Market value
The amount that an asset would realise if sold on a completely open market. Market values are influenced by whether the asset would be sold by forced sale or in the normal course of business and by whether the value takes into account existing use or possible alternative uses.
Mark up
Gross profit expressed as a percentage of cost of goods sold.
Matching concept
An accounting convention whereby revenue and costs are accrued, matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the income statement of the period to which they relate. The same as the accruals concept.
Materiality
A subjective assessment of the maximum amount a figure can be mis-stated by before it begins to affect a reader’s assessment of the enterprise. Materiality influences the degree of aggregation in financial statements and the extent of disclosure of particular items.
Net book value
The statement of financial poistion or carrying value of an asset; cost or valuation less accumulated depreciation.
Net realisable value
The actual or estimated selling price of an asset (net of trade but before settlement discounts) less all further costs to completion and all costs to be incurred in marketing, selling and distribution.
Nominal ledger
The collection of accounts for the double entry bookkeeping system. Also called general ledger.
Non-current assets
Business assets which have a useful life extending over more than one accounting period. Examples are land, buildings, plant, machinery, vehicles.
Ordinary shares
The equity capital of a company. The holders of these shares are entitled to the balance of the distributable profits and in a winding up to the balance of the assets after all other claims have been met.
Overdraft facility
An arrangement with a bank whereby the account holder can borrow up to an agreed amount.
Paid up capital
That part of a company’s share capital which has been both called and paid up.
Partnership
The relationship which subsists between persons carrying on a business in common with a view to profit.
Par value
An amount specified in the Memorandum of Association for each share and imprinted on the face of each share certificate. It is the figure which appears on the statement of financial poistion for share capital. As a value it has no significance. Also called Nominal value.
Payables
Those to whom a business owes money. In a statement of financial poistion the term describes the aggregate sum owed to its payables.
Petty cash
A fund used to make small cash payments, usually kept on the imprest system
Posting
The process of entering up double entry accounts from the data in books of prime entry.
Premium
An amount paid in excess of par or nominal value. Premiums can arise on issues and redemptions of shares and debentures.
Prepayments
An amount on a statement of financial poistion representing the cost of future benefits which have already been paid for.
Prime entry
“Books of;” a bookkeeping term for the books or computer files containing the first recording of transactions. From the books of prime entry the double entry accounts are posted.
Provision
Provisions for liabilities or charges are defined in the Companies Act 1985 as any amount retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which it will arise. Increasing a provision will result in an expense in the income statement.
Prudence
An accounting principle whereby revenue and profits are not anticipated, but provision is made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate in the light of the information available.
Public company
A public company is a company which states in its Memorandum that it is a public company, ends its name with the designation ‘public limited company’ and has a minimum share capital of £50,000.
Purchase ledger
A memorandum ledger in which an account is kept for each credit supplier. Also called creditors ledger or bought ledger.
Realisable value
The amount for which an asset can be sold.
Receivables
Those who owe money. Used in a statement of financial poistion to describe the total sum due to the business by its receivables.
Reducing balance
A method of depreciation whereby the cost is expensed over its useful life by the application of a percentage to the written down value.
Registrar of Companies
A civil service department located in Cardiff which maintains a file for each registered company. Companies have a legal obligation to file numerous documents with the registrar. Company files are open to the inspection of members of the public.
Reserves
A company has reserves if its assets exceed its specific liabilities. Reserves are thus liabilities to shareholders, arising primarily from undistributed profits. They are not stores of cash.
Replacement cost
The cost at which an identical asset could be purchased or manufactured. Standard accounting practice in the UK is that replacement cost should not be used for stock valuation.
Revenue
Amounts charged to customers for goods sold or services rendered.
Revenue expenditure
An expenditure that benefits only the current accounting period.
Rights issue
An invitation to existing shareholders to subscribe for new shares in the company at below market price.
Sales ledger
A memorandum ledger in which an account is kept for each credit customer. Also called debtors ledger.
Settlement discount
A reduction in the amount payable offered to a debtor to induce rapid payment.
Shares
A division of a company’s ownership into numerous equal parts. A shareholder may have one or more shares.
Standing order
An instruction to a bank to make specific payments at specified intervals, eg. mortgage repayments or subscriptions.
Statement of financial position
A financial statement showing the financial position of an enterprise in terms of assets, liabilities and owner’s equity at a specified date.
Straight line
A method of depreciation that allocates the cost of a depreciable asset, less salvage value over the estimated useful life, in equal instalments.
Suspense account
An account which has as its balance the difference on the trial balance which was caused by bookkeeping errors or because the bookkeeper was unsure which account to post an entry to.
T account
A form of presentation of a double entry account named for its shape - debit on the left, credit on the right and title at the top.
Trade discount
Reductions in sales price given to favoured customers, special classes of customer or for bulk purchase. Accounting is always on the net amount of the invoice.
Trading account
A financial statement which measures and demonstrates the gross profit of a period (i.e. sales less cost of those sales).
Transaction
An event or activity of a firm requiring an entry in the double entry system.
Transposition error
Posting errors in which digits are transposed, eg. 69 entered as 96.
Trial balance
A listing in two columns (debit balances and credit balances) of all the balances in a double entry system.
Turnover
Another term for the total sales in a period.
Weighted average
Any average calculation which involves giving differing weights to the several elements of the set, particularly used in the valuation of stock on the average cost method.
Window dressing
The manipulation of the items in financial statements to show the results or position in the most favourable light to attract investors etc.
Working capital
The excess of current assets over current liabilities.
Write-offs
To write something off is to debit it to the income statement. If something has continuing value (eg. a fixed asset) then the whole cost is not written off but only a part of the cost (by the depreciation process) on a regular basis.
Written down value
The cost of an asset less accumulated depreciation. Also known as net book value and carrying value.
