Definitions Chapter 3 Flashcards
(25 cards)
Profit
The increase in wealth attributable to the owners of the business that arises through business operations
Revenue
A measure of the inflow of assets (for example, cash or amounts owed to a business by credit customers, or a reduction in liabilities, arising as a result of trading operations
Expense
A measure of the outflow of assets (or increase in liabilities) incurred as a result of generating revenue
Reporting period
The time span for which a business prepares its financial statements
Gross profit
The amount remaining (if positive) after the cost of sales has been deducted from trading revenue
Operating profit
The profit achieved during a period after all operating expense have been deducted from revenues from operations.
Financing expenses are deducted after the calculation of operating profit
Profit for the period
The final result after all appropriately matched expenses of running a business have been deducted from the revenue for the year, but before the taxation charge is deducted
Cost of sales
The cost of goods sold during a period.
Cost of sales can be derived by adding the opening inventories held to the inventories purchased during the period and then deducting the closing inventories held.
Matching convention
The accounting convention that holds that expenses should be matched to revenue, which they help generate, in the same reporting period
Accrued expenses
Expenses that remain unpaid at the end of a reporting period
Prepaid expenses
Expenses that have been paid in advance at the end of the reporting period
Materiality convention
The accounting convention threat states that, where the amounts involved are immaterial, only what is expedient should be considered
Accruals convention
The convention of accounting that asserts that profit is the excess of revenue over expense, not the excess of cash receipts over cash payments
Accruals accounting
The system of accounting that adheres to the accruals convention.
The system is followed in preparing the statement of financial position and income statement
Depreciation
A measure of that portion of the cost (or fair value) of a non-current asset that has been consumed during a reporting period
Amortisation
A measure of that portion of the cost (or fair value) of a non-current asset that has been consumed during a reporting period.
The word ‘amortisation’ tends to be used where the particular non-current asset is an intangible one, whereas ‘depreciation’ is normally used with tangible assets
Residual value
The amount for which a non-current asset is sold when the business has no further use for it
Straight-line method
A method of accounting for depreciation that allocates the amount to be depreciated evenly over the useful life of the asset
Carrying amount
The difference between the cost (or fair value) of a non-current asset and the accumulated depreciation relating to the asset.
The carrying amount is also referred to as the written-down value (WDV) and the net book value (NBV)
Reducing-balance method
A method of calculating depreciation that applies a fixed percentage rate of depreciation to the carrying amount of an asset in each period
First in, first out (FIFO)
A method of inventories costing which assumes that the earliest acquired inventories are used (in production of sales) first
Last in, first out (LIFO)
A method of inventories costing that assumes that the most recently acquired inventories are used (in production of sales) first
Weighted average cost (AVCO)
A method of inventories costing, which assumes that inventories entering the business lose their separate identity and any issues of inventories reflect the weighted average cost of the inventories held
Consistency convention
The accounting convention that holds that, when a particular method of accounting is selected to deal with a transaction, this method should be applied consistently over time
