A Level Accounting — Complete Glossary

A costing method that charges both variable costs and a share of fixed overhead to each unit produced. Fixed overheads are absorbed using the Overhead Absorption Rate (OAR). Required for inventory valuation under IAS 2. Compare with marginal costing.

An investment appraisal method. ARR = (Average Annual Profit ÷ Initial Investment) × 100. Uses accounting profit, not cash flows. Does not consider the time value of money. Accept if ARR ≥ target rate.

Income and expenses are recognised in the period they are earned or incurred — not when cash is received or paid. One of the most fundamental accounting concepts, embedded in IAS 1. Also called the matching concept.

When one company (the parent) obtains control over another company (the subsidiary) by purchasing more than 50% of its voting shares. Results in the preparation of consolidated financial statements. Governed by IFRS 3.

The equivalent of capital in a non-profit organisation — represents the net assets (assets minus liabilities) accumulated over the organisation's lifetime. Increased by surpluses and reduced by deficits.

A variance that reduces profit compared to budget — actual revenue below budget, or actual cost above budget. Denoted (A). Opposite of favourable variance.

An ethical threat arising when an accountant promotes a client's position so strongly that objectivity is compromised — acting as an advocate rather than a professional adviser. Example: representing a client in litigation.

The section of the partnership Income Statement showing how net profit is distributed among partners — after charging interest on capital, interest on drawings, and partners' salaries. The residual is shared in the profit-sharing ratio.

A cost that is directly caused by an activity, decision or product. Can be eliminated if that activity ceases. Contrasts with unavoidable fixed costs which continue regardless.

The conversion of distributable reserves (e.g. retained earnings or share premium) into permanent share capital by issuing free shares to existing shareholders. No cash received. Total equity unchanged — only its composition changes. Also called a capitalisation issue.

The output level at which total revenue exactly equals total costs — neither profit nor loss. BEP (units) = Fixed Costs ÷ Contribution per unit. BEP (revenue) = Fixed Costs ÷ CS Ratio.

A formal financial plan expressed in monetary terms for a defined future period. Purposes: planning, coordination, control, communication and motivation. A budget implies commitment and accountability — unlike a forecast which is merely predictive.

The process of comparing actual results against the budget, identifying variances, investigating causes and taking corrective action. The control function of budgeting — "management by exception" focuses attention on significant variances only.

A temporary clearing account used in a company reconstruction scheme. CR side: sources of capital reduction (share capital reduction, share premium, reserves). DR side: write-offs (accumulated losses, goodwill, overvalued assets). Must close to nil after all entries.

A reserve arising from a capital transaction — not from trading profits. Non-distributable as a dividend. Examples: share premium, revaluation reserve, capital redemption reserve, surplus on reconstruction. Compare with revenue reserve (distributable).

One of the primary financial statements required by IAS 7. Shows cash receipts and payments classified into three activities: Operating (indirect method), Investing and Financing. Mandatory for all entities. Closing cash must agree with SFP bank balance.

One of the five IFAC fundamental principles. Accountants must respect the confidentiality of information obtained in professional relationships and not disclose it without proper authority. Three exceptions: client consent, legal requirement, and public interest (serious wrongdoing).

A combined Statement of Financial Position presenting the parent company and all its subsidiaries as a single economic entity. Intra-group balances are eliminated. The subsidiary's share capital is cancelled against the parent's investment. Goodwill, NCI and group retained earnings are calculated from three workings (W1, W2, W3).

The difference between selling price and variable cost per unit. Contribution = SP − VC. Each unit contributes first towards covering fixed costs, then towards profit. The core concept of marginal costing and breakeven analysis.

CS Ratio = Contribution per unit ÷ Selling Price per unit. Also called the profit-volume (PV) ratio. Used to calculate BEP in revenue: Fixed Costs ÷ CS Ratio. Tells what proportion of each dollar of revenue becomes contribution.

Tax charged on a company's taxable profits. Appears as an expense in the Income Statement (reducing profit before tax to profit after tax). Creates a current liability in the SFP until paid. Not applicable to partnerships or sole traders — those pay personal income tax.

Current Assets ÷ Current Liabilities. Measures short-term liquidity. Ideal range: 1.5:1 to 2:1. Below 1:1 suggests inability to meet short-term obligations. Above 3:1 may indicate idle working capital. For company SFPs, corporation tax payable and dividend payable reduce this ratio.

A long-term loan to a company, usually secured on assets, carrying a fixed rate of interest. Interest is a charge in the Income Statement (before tax). Shown as a non-current liability in the SFP with the interest rate and redemption date stated. Different from shares — debenture holders are creditors, not owners.

The fixed interest payment on a debenture, calculated as: nominal value × interest rate. Charged as a finance cost in the Income Statement (before appropriation). Accrued but unpaid interest appears as a current liability in the SFP.

The systematic allocation of the depreciable amount of a non-current asset over its useful life — required by IAS 16. Methods include straight-line, reducing balance and units of production. Depreciation is non-cash — it reduces profit but no cash leaves the business.

A distribution of profit to shareholders. Ordinary dividends vary with profitability. Preference dividends are fixed. Interim dividends are paid during the year (charged to retained earnings when paid). Final dividends are proposed at year end (become a current liability when declared).

The winding up of a partnership. Assets are sold through the Realisation Account, liabilities settled, and remaining cash distributed to partners in order: loans, capital balances, then profit sharing. Capital deficiencies are handled using Garner v Murray rule.

EPS = (PAT − Preference Dividend) ÷ Number of Ordinary Shares. Expressed in cents per share. Widely watched by investors. Rising EPS signals improving profitability per share. A bonus issue dilutes EPS — more shares for the same profit.

The IFAC approach to professional ethics requires accountants to identify threats to fundamental principles, evaluate their significance and apply appropriate safeguards — rather than following a fixed rulebook. Requires professional judgement. Adopted by ACCA and other professional bodies.

Budgeted Fixed Overhead − Actual Fixed Overhead. Measures whether the company spent more or less on fixed overheads than budgeted. Favourable if actual < budgeted; adverse if actual > budgeted.

One of the two fundamental qualitative characteristics in the IASB Conceptual Framework (the other is relevance). Information must be complete, neutral and free from error to faithfully represent what it purports to represent. Substance over form is a key element.

An ethical threat arising from a close personal or long-standing professional relationship — the accountant becomes too sympathetic to the client's interests and loses professional scepticism. Example: auditing the same client for many consecutive years.

A variance that increases profit compared to budget — actual revenue above budget, or actual cost below budget. Denoted (F). Does not automatically mean performance was good — investigate the cause (e.g. cheaper materials may cause quality problems).

The interest element of a finance lease payment, calculated as: opening lease liability × implicit interest rate. Charged to the Income Statement as a finance cost. The remainder of each lease payment is capital repayment (reduces the liability).

A lease in which the lessee assumes substantially all the risks and rewards of ownership. The lessee recognises both an asset and a lease liability in its SFP. Depreciation is charged on the asset; finance charge on the liability. Application of substance over form principle.

A budget prepared for one level of activity — it does not change when actual output differs from budgeted output. Comparing actual results against a fixed budget when activity levels differ is misleading for variable costs. Compare with flexible budget.

Costs that remain constant in total regardless of output level (within the relevant range). Examples: rent, insurance, depreciation, management salaries. Fixed cost per unit falls as output increases. In marginal costing, fixed costs are treated as period costs — charged in full to the I/S.

A budget that is adjusted to the actual level of activity achieved — variable costs are recalculated at the actual output level, providing a fair basis for comparison with actual results. More meaningful than a fixed budget when actual output differs from budget.

The legal rule for allocating a partner's capital deficiency on dissolution when the deficient partner cannot pay. The deficiency is shared among the remaining solvent partners in proportion to their last agreed capital balances — not their profit-sharing ratio.

Non-Current Liabilities ÷ (Equity + NCL) × 100. Measures the proportion of long-term financing from debt. Above 50% = high gearing (higher financial risk — fixed interest obligations). Below 50% = low gearing. High gearing can amplify returns to equity shareholders when profits are good.

An accounting concept assuming the business will continue to operate for the foreseeable future — it will not cease trading or be liquidated. Assets are therefore valued at going concern (economic) value, not forced liquidation value. IAS 1 requires directors to assess going concern annually.

The excess of purchase consideration over the parent's share of the fair value of the subsidiary's net assets at acquisition. Goodwill = Consideration − (Parent% × FV Net Assets). Recognised as a non-current intangible asset. Not amortised — subject to annual impairment review (IFRS 3).

The value placed on the reputation, customer relationships and established position of a partnership when a partner joins or leaves. Treated using the two-step method: raised in the old profit-sharing ratio (credit partners' capital accounts), then written off in the new ratio (debit partners' capital accounts). Never shown as an asset on the SFP.

(Gross Profit ÷ Revenue) × 100. Measures profitability after cost of sales. A falling GPM may indicate rising input costs, increased discounting, or a shift to lower-margin products. Compare year-on-year and with industry benchmarks.

A parent company together with all its subsidiaries, treated as a single economic entity for financial reporting purposes. The group prepares consolidated financial statements — combining the parent and subsidiary line by line, eliminating intra-group balances, recognising goodwill and NCI.

The default accounting convention under which assets are recorded at their original purchase cost. Provides objectivity and verifiability. Limitation: during inflation, assets become understated relative to current market value, and depreciation may be insufficient to fund replacement.

Requires a complete set of financial statements: Statement of Profit or Loss, SFP, Statement of Changes in Equity, Statement of Cash Flows, and Notes. Mandates comparative figures, disclosure of accounting policies, and assessment of going concern.

Inventory must be valued at the lower of cost and net realisable value (NRV). Permitted cost formulas: FIFO and weighted average. LIFO is specifically prohibited. Application of the prudence concept — anticipated losses are recognised immediately.

Two measurement models permitted: cost model (asset at cost less accumulated depreciation) or revaluation model (asset at fair value less subsequent depreciation). Revaluation gains go to Revaluation Reserve (equity — non-distributable). Land is not depreciated.

A provision is recognised when: a present obligation exists from a past event, an outflow of resources is probable, and a reliable estimate can be made. Contingent liabilities are disclosed in notes (not recognised). Contingent assets are never recognised — only disclosed if receipt is probable.

Internally generated goodwill is never recognised. Purchased goodwill is recognised. Research costs are always expensed. Development costs may be capitalised if specific criteria are met. Intangible assets with finite useful lives are amortised; indefinite-life intangibles are tested for impairment.

The independent body that sets global accounting standards — IFRS and IAS. Based in London. Aims to create one global set of financial reporting standards to improve consistency and comparability across countries.

The equivalent of an Income Statement for a non-profit organisation. Prepared on the accruals basis. Excludes capital items (shown in SFP). Adjusts for accruals, prepayments and subscriptions arrears/advance. Results in a surplus (income > expenditure) or deficit.

Preparation of financial statements from limited records — where a full double entry bookkeeping system has not been maintained. Techniques include: Statement of Affairs (for opening capital), mark-up/margin (for missing sales or purchases), control account reconstruction, and cash account reconstruction.

One of the five IFAC fundamental principles. Requires accountants to be straightforward and honest in all professional and business relationships — not making false or misleading statements or associating with information they believe to be false.

Operating Profit ÷ Finance Costs (times). Measures how many times the company can pay its interest from operating profit. Below 2 times = concern. Below 1 time = cannot cover interest — serious danger of financial distress.

The discount rate at which NPV = 0. Found by interpolation using one positive and one negative NPV. IRR = Lower rate + [NPVₗ ÷ (NPVₗ − NPVₕ) × (Higher − Lower rate)]. Accept if IRR ≥ cost of capital.

Amounts owed between companies within the same group — e.g. a parent's receivable from a subsidiary and the subsidiary's corresponding payable. These must be eliminated in the consolidated SFP because the group cannot owe money to itself. Failure to eliminate overstates both assets and liabilities.

An ethical threat where an accountant is deterred from acting objectively by actual or perceived threats — bullying, coercion or dominant personalities. Example: threatened with dismissal if they refuse to sign off incorrect financial statements.

(Closing Inventory ÷ Cost of Sales) × 365. Measures how many days inventory is held before being sold. Use Cost of Sales (not Revenue) because inventory is valued at cost. Rising inventory days may indicate falling demand or overstocking.

A formal record of a double entry transaction: DR (debit) and CR (credit) with a narrative explaining the transaction. Used for complex entries such as share issues, reconstructions, consolidation adjustments and year-end accruals. Every DR must have an equal and opposite CR.

(Standard hours for actual output − Actual hours worked) × Standard rate. Measures whether workers were faster or slower than standard. Adverse if actual hours > standard hours. Responsibility of production manager. Often linked to material usage variance — poor quality materials slow workers down.

(Standard rate − Actual rate) × Actual hours worked. Measures whether workers were paid more or less than the standard rate. Adverse if actual rate > standard rate. Responsibility of HR/payroll — may reflect unexpected wage increases or use of higher-grade workers.

Under a finance lease, the lessee records a liability equal to the fair value of the leased asset (or PV of minimum lease payments if lower). Split into current portion (capital repayment due in next 12 months) and non-current portion in the SFP. Reduced by the capital element of each payment.

A single lump sum payment entitling a member to lifetime club membership. Under the accruals concept, the full amount cannot be recognised as income when received. Credited to a Life Membership Fund (liability/deferred income) and transferred to Income and Expenditure in instalments over the membership period.

The scarce resource that constrains output — typically sales demand, but may be machine hours, labour hours or raw materials. When a limiting factor exists, products should be ranked by Contribution per unit of limiting factor (not contribution per unit) to maximise total contribution.

A costing method that includes only variable costs in product cost. Fixed costs are period costs — charged in full to the Income Statement regardless of output. Contribution = SP − VC. Profit = Contribution − Fixed Costs. More useful for short-term decisions than absorption costing. Not permitted for external reporting (IAS 2).

The amount by which actual/budgeted sales exceed the breakeven point. MoS (units) = Budgeted Sales − BEP Sales. MoS% = MoS ÷ Budgeted Sales × 100. A larger margin of safety indicates lower risk — sales can fall further before the business makes a loss.

Gross profit expressed as a percentage of cost. Mark-up = GP ÷ Cost of Sales × 100. A mark-up of 25% means: for every $100 of cost, $25 is added to give a selling price of $125. Compare with margin (GP as % of sales). Always identify which is given before calculating.

Gross profit expressed as a percentage of sales revenue. Margin = GP ÷ Revenue × 100. A margin of 20% means: for every $100 of sales, $80 is cost and $20 is gross profit. Different from mark-up — the denominator changes.

(Standard price − Actual price) × Actual quantity purchased. Measures whether material was bought at the right price. Responsibility of purchasing manager. May be linked to usage variance — cheaper materials often cause more wastage.

(Standard quantity for actual output − Actual quantity used) × Standard price. Measures whether material was used efficiently. Responsibility of production manager. Adverse if more material was used than standard. Often linked to material price variance — poor quality cheap material causes excess usage.

Information is material if its omission or misstatement could influence the economic decisions of users. Immaterial items may be treated differently — e.g. a small asset expensed immediately rather than capitalised. Materiality depends on size and nature of the item relative to the financial statements as a whole.

The sum of all discounted cash flows (including the Year 0 investment). NPV = Σ(Cash flow × Discount factor). Positive NPV = accept (project earns more than cost of capital). Higher positive NPV is better. Theoretically the best investment appraisal method — considers time value of money and all cash flows.

The estimated selling price in the ordinary course of business less estimated costs of completion and estimated selling costs. Under IAS 2, inventory must be written down to NRV if NRV < cost — application of the prudence concept.

The portion of a subsidiary's equity not owned by the parent. NCI = NCI% × Subsidiary's net assets at reporting date. Shown in the equity section of the consolidated SFP — not as a liability. Represents the outside shareholders' stake in the subsidiary's net assets.

An organisation that exists to serve its members or the community — not to generate profit for owners. Uses different terminology: Accumulated Fund (not capital), Surplus/Deficit (not profit/loss), Income and Expenditure Account (not Income Statement). Examples: sports clubs, charities, professional associations.

One of the five IFAC fundamental principles. Requires accountants not to allow bias, conflict of interest or undue influence to override professional judgement. All five threats (self-interest, self-review, advocacy, familiarity, intimidation) primarily threaten objectivity.

A lease where the lessor retains substantially all the risks and rewards of ownership. The lessee records no asset or liability — only a rental expense in the Income Statement on a straight-line basis over the lease term. Simpler accounting than a finance lease.

OAR = Budgeted Fixed Overhead ÷ Budgeted Activity Level. Calculated using budgeted (not actual) figures. Applied to actual production to absorb overhead into product cost. If absorbed overhead < actual overhead: under-absorption (adverse). If absorbed > actual: over-absorption (favourable).

A business owned and operated by two or more partners. Governed by a Partnership Agreement (or the Partnership Act 1890 in its absence). Partners share profits/losses according to the agreed profit-sharing ratio. Each partner has a Capital Account (fixed contributions) and a Current Account (movements during the year).

Investment appraisal method measuring how quickly the initial investment is recovered from cumulative cash inflows. Simple to calculate and understand. Does not consider time value of money or cash flows after payback. Accept if payback ≤ target period. Shorter payback = lower risk.

(Trade Payables ÷ Credit Purchases) × 365. Measures how long the company takes to pay suppliers. Rising payables days may indicate cash flow difficulties — company delaying payments. Very low payables days = paying too quickly, losing free credit.

The agreed ratio in which partners share the residual profit (after salaries, interest on capital and interest on drawings). Not necessarily equal. Changes when partners join or leave — requiring goodwill to be raised in the old ratio and written off in the new ratio.

When there is uncertainty, caution should be exercised — do not overstate assets or income, do not understate liabilities or expenses. Losses are recognised as soon as anticipated; gains only when realised. Application: IAS 2 (inventory at lower of cost and NRV), IAS 37 (provisions for probable losses).

The total price paid by the parent to acquire the subsidiary's shares. May be cash, shares issued (valued at market price) or deferred consideration (discounted to present value). The consideration is the starting point of the goodwill calculation (Working W1).

(Current Assets − Inventories) ÷ Current Liabilities. A more stringent liquidity test than the current ratio — excludes inventories (the least liquid current asset). Ideal: approximately 1:1. Below 0.8:1 = potential liquidity concern.

An account used on dissolution of a partnership to record the disposal of assets and settlement of liabilities. Assets are transferred at book value (DR), liabilities settled (CR), proceeds of asset sales credited (CR), and the resulting profit or loss shared among partners in the profit-sharing ratio.

(Trade Receivables ÷ Credit Revenue) × 365. Measures how long customers take to pay. Should approximate the company's credit terms. Rising receivables days = poor credit control. Falling receivables days = collecting faster (positive).

A summary of all cash and bank transactions during the year for a non-profit organisation — prepared on a cash basis. Includes capital items and prior/next year amounts. Starts with opening cash balance and ends with closing cash balance. Does not show accruals, prepayments or depreciation.

One of the two fundamental qualitative characteristics in the IASB Conceptual Framework. Information is relevant if it is capable of making a difference to the decisions of users — through predictive value or confirmatory value.

A non-distributable capital reserve in equity. Created when a non-current asset is revalued upwards under IAS 16's revaluation model. The gain goes to Revaluation Reserve — not the Income Statement. Cannot be paid as a dividend (unrealised gain). Transferred to retained earnings as the asset is depreciated (optional).

(Operating Profit ÷ Capital Employed) × 100. Capital Employed = Total Equity + Non-Current Liabilities. Uses operating profit (before interest and tax) because capital employed includes debt. The most important single measure of overall business efficiency. Should exceed the cost of borrowing.

An offer to existing shareholders to buy additional new shares at a discount to the current market price — in proportion to their existing holding. Raises new cash for the company. Different from a bonus issue (no cash raised). Share premium = rights price − nominal value.

An ethical threat where a financial or other personal interest inappropriately influences an accountant's judgement. Examples: owning shares in an audit client, fear of losing a major client, contingent fees based on outcome.

An ethical threat where an accountant reviews their own previous work — making it difficult to identify and correct mistakes objectively. Example: an auditor who also prepared the financial statements they are now auditing.

When shares are issued above their nominal value, the excess is credited to the Share Premium Account — a capital reserve. Non-distributable as a dividend. Uses: fund bonus issues, write off preliminary expenses, fund share buybacks. Appears in the equity section of the SFP.

A listing of all assets and liabilities at a point in time, used to calculate opening capital (or accumulated fund) when no formal capital account exists. Capital = Assets − Liabilities. Used in incomplete records and NPO accounting.

A predetermined cost for one unit of product — calculated as: standard quantity × standard price for each input. Represents the cost that should be incurred under efficient operating conditions. Forms the basis for variance analysis — actual costs are compared against standard to identify variances.

Transactions should be accounted for according to their economic substance — not their strict legal form. Example: a finance lease asset is recognised on the lessee's SFP (economic substance: lessee bears risks and rewards) even though the lessor legally owns it. Essential for faithful representation.

Annual membership fees — the main income of most NPOs. The amount recognised in the I&E Account is the income earned (accruals basis), not the cash received. Income = Cash received + Closing arrears − Opening arrears − Closing advance + Opening advance. Arrears = asset; Advance = liability in SFP.

A company controlled by a parent — the parent owns more than 50% of its voting shares. The subsidiary is a separate legal entity but is included in the group's consolidated financial statements. The subsidiary's pre-acquisition retained earnings are included in the goodwill calculation — not the group retained earnings.

The NPO equivalent of profit or loss. Surplus = income exceeds expenditure (positive). Deficit = expenditure exceeds income (negative). Added to (or deducted from) the Accumulated Fund. Never described as "profit" or "loss" in NPO accounts.

The output required to achieve a specific profit goal. Units = (Fixed Costs + Target Profit) ÷ Contribution per unit. Revenue: (Fixed Costs + Target Profit) ÷ CS Ratio. An extension of breakeven analysis.

The principle that $1 received today is worth more than $1 received in the future — because money received now can be invested to earn a return. The foundation of discounted cash flow (DCF) methods — NPV and IRR. Cash flows are discounted to their present value using discount factors.

The overriding requirement of all published financial statements — they must give a true and fair view of the company's financial position and performance. All accounting standards (IAS/IFRS) serve this fundamental objective. Auditors express an opinion on whether accounts give a true and fair view.

When the overhead absorbed into production (OAR × actual activity) is less than the actual overhead incurred. An adverse position — charged as an additional expense in the Income Statement. Caused by actual activity being lower than budgeted, or actual overhead exceeding budget.

Costs that change in direct proportion to output level. Total variable cost rises with output; variable cost per unit remains constant. Examples: direct materials, direct labour, sales commission. In marginal costing, variable costs are the only costs included in product cost.

The difference between a budgeted or standard figure and the actual result. Favourable (F) if profit is improved; Adverse (A) if profit is reduced. Sub-variances (price/usage, rate/efficiency) explain why the total variance arose. Always check: price variance + usage variance = total material variance.

An operating statement reconciling budgeted profit to actual profit by listing all variances — favourable ones added, adverse ones deducted. A key output of standard costing. Starts with budgeted profit, applies all sales and cost variances, arrives at actual profit.

The essential first working in a consolidation question. Goodwill = Purchase consideration − (Parent% × Fair value of subsidiary's net assets at acquisition). Goodwill is a non-current intangible asset in the consolidated SFP.

The second essential working. NCI = NCI% × Subsidiary's net assets at reporting date. Shown in the equity section of the consolidated SFP. NCI% = 100% − parent's ownership percentage.

The third essential working. Group RE = Parent's own retained earnings + (Parent% × Subsidiary's post-acquisition retained earnings). Only post-acquisition earnings of the subsidiary are included — pre-acquisition earnings are part of the goodwill calculation.

A budgeting approach where every activity must be justified from scratch each period — budgets start at zero rather than being based on the previous year with incremental adjustments. More time-consuming but avoids entrenched spending patterns. Encourages efficiency but may be impractical for large organisations.