GLOSSARY

A

Accelerated depreciation methods: Any depreciation methods that result in greater depreciation expense in the early years of an asset’s life than in later years (p. 651).

Accommodation bills: See Commercial bills (p. 726).

Account: A device used to record increases and decreases for each item that appears in a financial statement (p. 71).

Account balance: The difference between the sum of the dollar amounts of debits and credits recorded in a particular account (p. 72).

Accountability: The responsibility of providing information to enable users to make informed judgements about the performance, financial position, financing and investing, and compliance of the reporting entity (p. 481).

Accounting: The process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions by users of the information (p. 8).

Accounting cycle: The sequence of accounting procedures (from transactions to financial statements) that takes place during each accounting period (p. 71).

Accounting entity assumption: The assumption that a business entity is separate and distinct from its owners and from other business entities (p. 40).

Accounting equation: An algebraic expression of the equality of assets to liabilities and equity: Assets - Liabilities + Equity (p. 35).

Accounting manual: A guide to the accounting policies and procedures used by the accounting staff of an entity (p. 79).

Accounting periods: Periods of time covered by a set of financial statements (p. 70).

Accounting practice statements (APSs): Statements issued by the accounting profession and made mandatory for practising accountants covering broad issues such as compliance with standards and practice quality controls (p. 473).

Accounting standards: Standards issued for recording and communicating transactions and other economic events in all types of entities (p. 473).

Accounting system: A collection of source documents, records, procedures, management policies and data-processing methods used to transform economic data into useful information (p. 286).

Accounts payable: Amounts owed to creditors for the purchase of merchandise, supplies and services in the normal course of business; also commonly referred to as creditors or trade creditors (pp. 36, 725).

Accounts receivable: Amounts due from customers for sale of goods or services performed on credit; also commonly referred to as debtors or trade debtors (pp. 37, 556).

Accrual basis: The effects of transactions and events are recognised in accounting records when they occur, and not when the cash is received or paid (p. 40).

Accrual basis assumption: Under this assumption, the effects of all transactions and other events are recognised in the accounting records when they occur, rather than when cash or its equivalent is received or paid (p. 494).

Accruals: Expenses that have been incurred but not recorded, or revenues that have been earned but not recorded (p. 134).

Accumulated depreciation: The amount of depreciation that has been recorded and accumulated on an asset since it was acquired; it is usually recorded in a contra account (p. 139).

Accumulated losses: Losses incurred by the company in previous periods, represented by a debit balance in the Retained Earnings account (pp. 218, 431).

Additional mark-ups: Increases above original retail prices (excluding GST) because of unusual demand or rises in the general level of prices (p. 619).

Adjusted trial balance: A trial balance taken from the ledger after the adjusting entries have been posted (p. 148).

Adjusting entries: Journal entries made at the end of an accounting period to update or correct the account balances (p. 133).

Adjustment (GST): An increase or decrease in the net GST payable or refundable for a given tax period as a result of goods returned, a refund, an allowance made, or an amount written off a debt (p. 244).

Adjustment note: A source document evidencing that an amount owing has been adjusted (also referred to as a credit note). For a GST-registered business, it also takes into account any GST included in the amount adjusted. The adjustment note must be in a format complying with GST legislative requirements (p. 244).

Administrative expenses: Expenses associated with the operations of the general, accounting and personnel offices (p. 241).

Ageing of accounts receivable: The process of classifying accounts receivable on the basis of the length of time they have been outstanding and probability of collection; also a basis for determining the amount of the allowance for doubtful debts (p. 560).

Agricultural produce: The harvested product of an entity’s biological assets (p. 693).

Allotment: The process whereby directors of the company allocate shares to those who have applied. Alternatively, an account recording an amount receivable on shares once allotment has been made (p. 433).

Allowance for doubtful debts: The estimated amount of accounts receivable expected to be uncollectable (p. 559).

Amortisation: The periodic allocation of the cost of intangible assets and natural resources to the periods benefiting from their use (pp. 691, 696).

Annual financial report: The income statement, balance sheet and cash flow statement, appropriate notes and a directors’ declaration presented to a company’s shareholders at the end of the financial year (p. 760). The annual financial report also includes a statement of changes in equity to comply with accounting standards.

Annual leave: Paid leave per year granted to all employees under industrial awards and employment contracts (p. 730).

Annual report: A set of financial statements issued at the end of an entity’s accounting period (p. 71).
Application: The process whereby prospective shareholders apply to the company for an allocation of shares. Alternatively, an account recording an amount of money receivable by the company on application for shares (p. 432).

Area of interest: An individual geological area whereby the presence of a mineral deposit or oil or natural gas field is considered favourable or has been proven to exist (p. 691).

Assets: Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (pp. 36, 486).

Assurance services: Independent professional review services that improve the quality of information, or its context, for decision makers (p. 17).

Audit: An examination by an independent accountant of the financial statements and supporting documents of an entity (p. 17).

Australian business number (ABN): An eleven-digit number given to each business entity which has registered for the goods and services tax (GST) in Australia (p. 69).

Average collection period: Number of days taken to collect amounts due from receivables for credit sales (p. 570).

Average cost: An inventory costing method in which an average unit cost is calculated by dividing the total cost of goods available for sale by the total number of units available for sale. Moving average (perpetual inventory system) and weighted average (periodic inventory system) are variations of the average cost method (p. 603).

B

Bad debts expense: The expense resulting when allowance is made for estimated uncollectable accounts (p. 559).

Balance sheet: A financial statement listing the assets, liabilities and equity of a business entity as at a specific date (p. 34).

Bank reconciliation statement: A statement prepared to reconcile the balance reported on the bank statement with the bank balance as shown in the entity’s records (p. 522).
Bank statement: A statement prepared by the bank that provides the detail of activity that has taken place in a current account for the period covered by the statement (p. 520).

Beginning inventory: Goods or stock on hand at the beginning of an accounting period that are available for sale to customers in the normal course of business (p. 257).

Bill of exchange: An unconditional order in writing, addressed by one person or entity to another, requiring the person or entity to whom it is addressed to pay a certain sum of money to a designated person or order on a determinable future date (pp. 556, 574).

Bill receivable: A receivable evidenced by a formal written promise or order to pay (p. 556).

Bills payable: Obligations evidenced by a formal written promise or order to pay a certain amount on a set date (p. 725).

Biological assets: Living animals and plants (p. 693).

Bonus method: A method which transfers a portion of the capital interest of one or more partners to another partner on the admission or retirement of one or more partners — unidentifiable assets such as goodwill are not valued and recorded in the accounts (p. 392).

Book of original entry: See Journal.

Book value: See Carrying amount.

Borrowing costs: Interest costs and other costs incurred in connection with the borrowing of funds (p. 642).

Budgeting: Preparing a plan for the future operating activities of a business entity (p. 19).

C

Call: An amount of money receivable on shares which have been allotted but not fully paid up (p. 430).

Capital budgeting: The planning and financing of capital investments, such as replacement of equipment, expansion of production facilities, and introduction of new products (p. 661).

Carrying amount (book value): The amount at which an asset is recorded in the accounts at a particular date. For a depreciable asset, carrying amount means the net amount after deducting accumulated depreciation from cost or revalued amount (pp. 141, 647, 678).

Cash: Money and any negotiable instrument such as a cheque, postal note, credit card duplicate or electronic transfer that a bank will accept for immediate deposit in a bank account (p. 514), i.e. cash on hand and cash equivalents (p. 799).

Cash budget: A projection of future cash receipts and cash payments over a period of time disclosing cash position at the end of that time (p. 531).

Cash discount: An incentive offered to the buyer to induce early payment of a credit sale; also known as a settlement discount (p. 246).

Cash equivalents: Short-term highly liquid investments that are readily convertible to cash at an entity’s option and which are subject to an insignificant risk of changes in value (p. 799).

Cash flow efficiency: The efficiency with which the entity generates cash from its income, profits and assets (p. 882).

Cash flow statement: A financial statement which reports the cash flows in and out of an entity. The cash flows are classified into operating, investing and financing activities (p. 39).

Cash payments journal: A special journal used to record all cash payments by an entity (p. 305).

Cash receipts journal: A special journal used to record transactions involving the receipt of cash by an entity (p. 301).

Cash sufficiency: The adequacy of the cash flows to meet the entity’s cash needs for long-term debt payments, dividends, and acquisition of non-current assets (p. 882).

Cash-generating unit: The smallest identifiable group of assets that generates cash inflows from continuing use, which are independent of cash inflows from other groups of assets
(p. 683).

Certificate of registration: The initial legal document registering a company (p. 427).

Certified practising accountant (CPA): An accountant who has met the qualifications and experience requirements for membership of CPA Australia (p. 16).

Chart of accounts: A schedule listing the titles of all accounts contained in the ledger together with an appropriate numbering system for the accounts (p. 78).

Chartered accountant (CA): An accountant who has met the qualifications and experience requirements for membership of the Institute of Chartered Accountants in Australia (p. 16).

Closing entries: Journal entries made at the end of an accounting period to reduce income, expense and drawings accounts to a zero balance and transfer the net balance to the capital account in a sole trader or partnership business or, in the case of a company, to the retained earnings accounts (p. 187).

Collateral: Something of value that is acceptable to a lender as security for a loan (p. 735).

Commercial bills: Bills of exchange used in obtaining short-term finance; also known as accommodation bills (p. 726).

Common size statements: Financial statements in which the amount of each item reported in the statement is stated as a percentage of some specific base amount also reported in the same statement (p. 871).

Company (or corporation): A form of business structure incorporated to operate as a business entity under the Corporations Act 2001 throughout Australia (p. 30).

Company limited by guarantee: A public company whose members undertake to contribute a guaranteed amount if the company is wound up (p. 424).

Comparability: That quality of financial information which exists when users are able to discern and evaluate similarities and differences between transactions and events, at one time and over time, for one entity or a number of entities (p. 484).

Comparative statements: Financial statements for the current year and previous years presented together to facilitate the analysis of changes in statement items (p. 869).

Composite-rate depreciation: A depreciation method under which a single average depreciation rate is applied to the cost of a functional group of assets (p. 689).

Compound journal entry: A journal entry involving three or more accounts (p. 85).

Concise report: A summarised set of financial reports plus directors’ and auditor’s reports sent to shareholders as an alternative to the full annual financial report (p. 761).

Consignee: An entity or individual holding goods on consignment; does not own the goods held (p. 597).

Consignment: A marketing arrangement whereby merchandise is transferred from one entity (the consignor) to another (the consignee or agent) in order that the consignee may sell the goods on behalf of the consignor; however, title and control of the goods remain with the consignor (p. 597).

Consignor: An individual or entity that ships goods on consignment. Title to the goods is retained by the consignor until the goods are sold by the consignee, at which time title passes to the purchaser (p. 597).

Consistency: The notion that once a particular accounting method is adopted it should not be changed from period to period unless a different method provides more useful information (p. 485).

Constitution: A document containing the rules for managing a company, particularly in terms of relationships and dealings between directors and shareholders, which are adopted by a company as an alternative to the replaceable rules in the Corporations Act 2001 (p. 427).

Constructive obligation: When the past practices of an entity, its published policies or a specific current statement indicate that it will accept responsibility for certain actions, so it becomes reasonable for others to assume the entity will fulfil those responsibilities (p. 719).

Contingent liability: A possible liability arising from a past event that will become an actual liability by the occurrence or non-occurrence of one or more uncertain future events that are not completely within the control of the entity, or a liability which does not satisfy the recognition criteria (pp. 579, 722).

Contra account: An account that is deducted from a related account (p. 139).

Control: In relation to an asset, the capacity of an entity to receive future economic benefits in pursuing its objectives and to deny or regulate the access of others to those benefits (p. 486).

Control account: A general ledger account that is supported by the detail of a subsidiary ledger (p. 293).

Copyright: An exclusive right to reproduce and sell an artistic or published work (p. 697).

Cost: The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction (p. 640).

Cost accounting: The aspect of accounting that deals with the collection, allocation and control of the cost of producing a product or providing a service (p. 19).

Cost of sales: An amount that is deducted from sales in the income statement and is a measure of the cost of the inventory sold during the accounting period (p. 241).

Coupon rate (nominal or stated rate): The interest rate stated as a percentage of nominal value and used to determine the interest paid periodically to the debenture holder (p. 736).

Credit: An amount entered on the right-hand side or in the credit column of an account (p. 72).

Credit card: A plastic card which enables the holder to obtain credit up to a predetermined limit from the issuer of the card for the purchase of goods and services (p. 572).

Credit department: The organisational unit responsible for the credit and collection policies of the business (p. 568).

Credit period: The period of time granted for the payment of an account (p. 246).

Credit terms: The agreement made between buyer and seller concerning the sale of goods on credit (p. 246).

Creditors: People or business entities to whom debts are owed; alternatively, another name for the Accounts Payable account (pp. 36, 75).

Crossadding: Adding or subtracting horizontally across a worksheet
(p. 159).

Cumulative preference shares: Preference shares on which undeclared dividends accumulate before any dividend can be paid to ordinary shares (p. 441).

Current assets: Cash and other types of assets that are held mainly for sale, or are reasonably expected to be converted to cash, sold or consumed by a business entity within its operating cycle (if this is discernible) or are expected to be realised within 12 months after the entity’s reporting date (p. 154).

Current cost: For an asset, the amount of cash or cash equivalents that would be paid if the same or equivalent asset was acquired currently (p. 496).

Current liabilities: Obligations of the entity that are reasonably expected to be settled in the entity’s normal operating cycle, or are held for the purpose of being traded, or are due to be settled within 12 months of the reporting date (pp. 155, 724).

Current replacement cost: The cost that an entity would incur to acquire an asset on the reporting date (p. 612).

D

DDP (delivered duty paid): A shipping/delivery term meaning the seller bears all the costs of delivering the goods to the buyer (p. 249).

Debentures (or bonds): A liability representing a written promise to pay a principal amount at a specified time, as well as interest on the principal at a specified rate per period (p. 735).

Debit: An amount entered on the left-hand side or in the debit column of an account (p. 72).

Debit card: A plastic card used in the electronic funds transfer point of sale (EFTPOS) system, where funds are debited to the card user’s account at the bank and transferred instantaneously to the credit of the account of the seller of the goods or services (p. 573).

Debtors: People or business entities from whom debts are owed; alternatively, another name for the Accounts Receivable account (pp. 37, 74).

Decision: The making of a choice between two or more alternatives (p. 5).

Defeasance: An arrangement whereby the terms and conditions of a debt are avoided or defeated (p. 738).

Deferrals: Assets that represent expenses paid in advance, and revenues received in advance that represent liabilities until the revenues can be recognised as earned (p. 134).

Deficit: A debit balance in a partner’s Capital account (p. 401).

Depreciable amount: The historical cost of a depreciable asset, or other revalued amount substituted for historical cost in the accounting records, less, in either case, the residual value (p. 646).

Depreciable asset: A non-current asset having a limited useful life (p. 645).

Depreciation: An allocation of a depreciable asset’s depreciable amount to reflect the consumption or loss of its future economic benefits through usage, wear and tear and obsolescence (pp. 139, 645).

Development: The application of research knowledge to a plan or design for the production of new materials, products, processes, systems or services before commercial production (p. 695).

Diminishing-balance depreciation: A depreciation method that results in a decreasing depreciation charge over the useful life of the asset, by applying a predetermined depreciation rate to the carrying amount of the asset (p. 648).

Direct write-off method: The recognition of bad debts expense at the time an account receivable is deemed to be uncollectable (p. 565).

Disclosing entity: An entity, which may or may not be incorporated, which has ‘enhanced disclosure’ securities (p. 762).

Discount (in relation to bills of exchange): Interest deducted in advance, in practice at the effective interest rate or yield (pp. 578, 726).

Discount (on debentures): The amount by which the issue price of a debenture is below the nominal value (p. 736).

Discount allowed: An expense which results from cash discounts taken by customers on the sale of inventory
(p. 246).

Discount period: The period of time in which a cash discount may be subtracted from the invoice price before payment or receipt (p. 246); the period of time for which interest on a discounted bill is charged (p. 578).

Discount received: Income which results from cash discounts taken by an entity on goods purchased for resale (p. 246).

Dishonoured bill: A bill the drawer has failed to pay on its maturity date (p. 577).

Dishonoured cheques: Cheques that are included in a customer’s deposit but are not paid by the drawer’s bank because of lack of sufficient funds or some other irregularity (p. 522).

Dissolution: The termination of a partnership either by the sale of non-cash assets, payment of creditors and distribution of remaining cash to the partners, or by sale of the partnership to an outside entity or entities (p. 396).

Dividends: Distributions of cash or other assets or a company’s own shares to its shareholders (pp. 218, 439, 491).

Dividends in arrears: Dividends on cumulative preference shares that are not declared in the year in which they are due (p. 441).

Double-entry accounting: The accounting system where every transaction affects two (or more) components of the accounting equation (p. 47).

Drawings: The withdrawal of assets from the business entity by its owner(s) (p. 38).

E

Economic entity: A group of entities comprising a controlling entity and one or more controlled entities operating together to achieve objectives consistent with those of the controlling entity (p. 481).

Economic resources: Resources which are scarce and which are traded in the marketplace at a price (p. 6).

Economic substance: Accounting transactions and events are reported on the basis of economic reality rather than legal form (p. 42).

Effectiveness: A measure of how well an entity attains its goals (p. 32).

Efficiency: Maintaining a satisfactory relationship between an entity’s resource inputs and its outputs of products or services (p. 32).

Electronic spreadsheet: A spreadsheet used to analyse business data and solve everyday business problems (p. 319).

Employee benefits: All forms of consideration that employees accumulate as a result of rendering services to their employer; these considerations include wages and salaries (including all monetary and non-monetary fringe benefits), annual leave, sick leave, maternity leave, long-service leave, superannuation, and post-employment benefits (p. 728).

Ending inventory: Goods or stock on hand at the end of an accounting period that are available for sale to customers in the ordinary course of the business (p. 257).

Entering or journalising: The process of recording a transaction in the journal (p. 84).

Equity: The residual interest in the assets of the entity after deducting all its liabilities (pp. 36, 487).

Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (pp. 37, 77, 489).

Expenses to sales ratio: A ratio that reflects the portion of each sales dollar needed to meet expenses (p. 268).

Expired cost: The cost of an asset used up in producing revenue; an expense
(p. 131).

External transactions: Transactions involving parties outside the business entity (p. 68).

EXW (ex works): A shipping/delivery term meaning freight costs incurred from the point of shipment are paid by the buyer (p. 249).

F

Factor: A business or financial institution which buys accounts receivable for a fee, and then collects the cash from those accounts (the receivables) (p. 571).

Factoring: The selling (purchase) of accounts receivable to (by) a factor business (p. 571).

Fair value: The amount for which an asset could be exchanged between knowledgeable, willing parties in
an arm’s-length transaction (pp. 357, 496, 640, 678).

Finance expenses: Expenses incurred in relation to the financing of the entity, collecting debts and running the credit department (p. 241).

Finance lease: A lease agreement whereby substantially all the benefits and risks of ownership of the leased property are transferred from the lessor to the lessee (pp. 644, 740).

Financial accounting: That part of accounting which provides information to external users to help them assess the entity’s financial performance, financial position, financing and investing activities, and solvency
(p. 14).

Financial capital: Capital is synonymous with the net assets or equity of the entity, measured either in terms of the actual number of calculated dollars by subtracting the total of liabilities from assets, or in terms of the purchasing power of the dollar amount recorded as equity. Profit exists only after the entity has maintained its capital, measured as either the dollar value of equity at the beginning of the period or the purchasing power of those dollars in the equity at the beginning of the period (p. 496).

Financial position: The economic condition of a reporting entity, with regard to its control over economic resources, financial structure, capacity for adaptation, and solvency (pp. 33, 481).

Financial stability: An entity’s ability to continue operating in the future and to satisfy its long-term cash obligations (p. 879).

Financial stability ratios: Ratios used to analyse the ability of an entity to continue operations in the long term and to satisfy long-term commitments while having sufficient working capital (p. 743).

Financing activities: Activities relating to the raising of funds for an entity to carry out its operating and investing activities, i.e. equity and borrowings which are not part of the definition of cash (pp. 34, 801).

First-in, first-out (FIFO): A cost flow assumption in inventory costing that assumes the first units purchased were the first units sold. The cost of ending inventory is assumed to be the cost of the most recently purchased units (p. 601).

Franchise: A right granted by a company or government body to conduct a franchised business at a specified location or in a specific geographical area (p. 698).

Freight inwards (transportation-in): A cost incurred by the buyer in transporting inventory purchases (p. 252). See also EXW (ex works).

Freight outwards: Transportation (delivery) expense incurred by the seller to deliver goods to customers (p. 249). See also DDP (delivered duty paid).

G

Gains: Income which does not necessarily arise from the ordinary activities of the entity (pp. 77, 488).

Gearing (leverage): The use of borrowed funds to earn a return greater than interest or dividends paid to creditors and preference shareholders respectively (pp. 740, 873).

General journal (two-column journal): A record book containing a chronological listing of transactions (p. 84).

General ledger: A collection of accounts maintained by an entity to enable the preparation of that entity’s financial statements (p. 72).

General ledger software: Computerised accounting systems consisting of modular programs covering each of the major funtional areas of accounting
(p. 319).

General partnership: Where each partner is individually liable for the partnership liabilities (p. 353).

General-purpose financial reports: Financial reports intended to meet the information needs of a range of users who are unable to command the preparation of reports tailored to satisfy, specifically, all of their information needs (pp. 11, 481).

Going concern assumption (continuity): The assumption that a business will continue to operate in the future unless there is evidence to the contrary (pp. 41, 494).

Goodwill: Future benefits from unidentifiable assets (pp. 358, 699).

Goodwill method: A method whereby the unidentifiable net assets, i.e. goodwill, are valued and recorded in the records of a partnership on the admission or the retirement of a partner from the partnership (p. 392).

Grants related to assets: Government grants to an entity to purchase, construct or otherwise acquire long-term assets (p. 492).

Grants related to income: Government grants to an entity other than those related to assets (p. 492).

Gross pay (gross earnings): The total amount of an employee’s wages or salary before any payroll deductions
(p. 728).

Gross profit method: A method used to estimate ending inventory value based on the assumption that the gross profit percentage is approximately the same from period to period (p. 620).

Gross profit (or gross margin) on sales: Net sales less cost of sales (p. 241).

Gross profit ratio: A ratio which represents the portion of sales reflected in gross profit (p. 268).

GST Collections: The account recording the GST received or receivable by a GST-registered entity from its customers and clients (p. 75).

GST Outlays: The account recording the GST paid or payable by a GST-registered entity to its suppliers (p. 75).

H

Historical cost: An asset is recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire it at its acquisition date (p. 496).

Horizontal analysis: That part of an analysis based on the comparison of amounts reported for the same item in two or more comparative statements with an emphasis on the change from year to year (p. 869).

I

Identifiable assets: Those assets that are capable of being both individually identified and specifically brought to account (p. 695).

Impairment loss: As applied to an individual asset, the situation where the asset’s recoverable amount is less than its carrying amount (p. 682). As applied to a cash-generating unit, the situation where the fair value of the group of assets as a whole is less than the carrying amount of that group (p. 683).

Imprest system: A system of petty cash fund operation where a fixed amount of cash can always be accounted for by a count of cash plus the value of expenditure vouchers issued (p. 530).

Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Includes revenues and gains (pp. 37, 76, 488).

Income statement (or profit and loss statement or operating statement): A financial statement listing the income, expenses and profit/operating surplus or loss/deficit of an entity for a certain time period (p. 36).

Insolvent: Unable to pay debts as they fall due (p. 18).

Insolvent partner: A partner who is unable to pay the partnership the deficit (debit balance) in his or her Capital account on finalisation of the dissolution of a partnership (p. 402).

Intangible assets: Identifiable non-monetary assets that usually do not have a physical existence and derive value from the rights that possession confers on their holders (pp. 155, 694).

Interest (in relation to bills of exchange): A charge made for the use of money, calculated as Principal \ Rate \ Time (p. 575).

Interim financial report: A set of half-yearly statements, including an income statement, a balance sheet, a cash flow statement and selected explanatory notes, to be prepared by a disclosing entity (p. 762).

Interim statements: Financial statements prepared between the annual reports, usually half-yearly or quarterly (pp. 71, 189).

Internal audit: The ongoing investigation of compliance with established procedures and policies of an entity by its internal audit staff (p. 19).

Internal control system: The overall procedures adopted by a business to safeguard its assets, promote the reliability of accounting data, and encourage compliance with management policies (p. 289).

Internal transactions: Business activities in which only the single business entity participates, such as the use of supplies by an employee (p. 68).

Inventory: Goods or property acquired by a retail business for the purposes of resale in the ordinary course of operations (p. 240).

Inventory turnover: A ratio that indicates the number of times average inventory has been sold during a period (p. 269).

Investing activities: Activities associated with the acquisition and sale of an entity’s non‑current assets (p. 34), and with the purchasing and selling of investments (e.g. shares) which are not part of the definition of cash (p. 800).

Investments: Assets held for investment purposes rather than for use in the normal activities of the entity (p. 155).

J

Journal (book of original entry): A record in which transactions are initially recorded (p. 84).

Journal entry: The format in which a transaction is entered in the general journal (p. 84).

L

Last-in, first-out (LIFO): A cost flow assumption in inventory costing that assumes the most recent units purchased were the first units sold. The cost of ending inventory is assumed to be the cost of the earliest units purchased (p. 602).

Lease: A rental agreement in which the lessee obtains from the lessor the right to use property for a stated period of time (p. 739).

Leasehold improvements: Permanent improvements to leased property made by the lessee (p. 656).
Legal obligation: Obligation evidenced by formal documentation such as a contract, legislation or other operations of the law which establish a present obligation (p. 719).

Lessee: The entity which has leased an asset from the lessor (p. 644).

Lessor: The entity which has leased an asset to the lessee (p. 644).

Liabilities: Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (pp. 36, 487, 718).

Limited company: A company whose members are liable only to the extent of the amount of issue price unpaid on their shares, or to the extent of a guaranteed amount (p. 423).

Limited liability: In a company, shareholders are liable to contribute to the assets of a company only to the extent of amounts unpaid on their shares (p. 30).

Limited partnership: Where one or more of the partners have limited their liability for partnership debts to the amount of their investment. However, at all times at least one partner must have unlimited liability (p. 353).

Liquidation: The process of winding up the affairs of a company so that it ceases to exist (p. 18).

Liquidity (solvency): The ability of an entity to satisfy its short-term financial obligations; also refers to the average length of time it takes to convert a non-cash asset into cash (pp. 152, 867).

Liquidity ratios: Ratios which provide a measure of an entity’s ability to pay its short-term obligations, and meet unexpected demands on cash resources (p. 742).

Long-service leave: Paid leave granted to employees who have remained with the same employer over an extended period of time (p. 731).

Loss: The excess of expenses over total income (revenues and gains) (pp. 38, 77).

Lower of cost and net realisable value: Inventory valuation method where inventory is valued at lower of original cost and net realisable value at the reporting date (p. 611).

Lump-sum acquisition: The purchase of a group of assets for one total payment (p. 643).

M

Management accounting: That part of accounting which provides information to management for planning, controlling and decision making (p. 14).

Management by exception: The concentration on performance results that deviate significantly from those planned (p. 33).

Management functions: The planning, organising, directing and controlling required to manage an organisation (p. 32).

Mark-down cancellation: Reversal of a mark-down whereby inventory not sold at a sales promotion reverts to its normal retail price (p. 619).

Mark-downs: Price reductions to promote sales (p. 619).

Mark-up cancellations: Reversal of mark-ups. A downward revision on retail prices because of lack of demand or an excessive mark-up (p. 619).

Materiality: The extent to which information can be omitted, misstated or grouped with other information without misleading the users of that information when they are making their economic decisions (pp. 42, 483).

Maturity date: The date on which a bill or debenture is due for payment (pp. 576, 735).

Maturity value: The amount of a bill due on its maturity date; it includes principal as well as interest (p. 575).

Monetary assumption: The use of money in accounting as the common denominator by which economic activity is measured and reported (p. 495).

Mortgage: A legal document setting forth the specific assets serving as collateral for a loan (p. 738).

Mortgage debenture: A debenture in which land held by the company is mortgaged as security for the debenture (p. 736).

Mortgage payable: A liability in which specific property of the borrower serves as collateral for a loan (p. 735).

Moving average: An inventory costing method by which an average unit cost is calculated after each purchase. The method applies only where a perpetual inventory system is being used (p. 609).

Mutual agency: A characteristic whereby each partner is an agent for the partnership and can bind the partnership to a contract if acting within the normal scope of the business (p. 353).

N

Net assets: Total assets minus total liabilities (as in the narrative form of the balance sheet) (p. 36).

Net fair value: Fair value less estimated point-of-sale costs (p. 693).

Net pay (net earnings): Gross pay of an employee less deductions (p. 728).

Net realisable value: The market value based on estimated proceeds of sales less, where applicable, GST and all further costs of production, marketing, selling and distribution to customers
(p. 611).

No-liability company: A company, being a mining company, which does not have the right to require shareholders to pay calls to the company (p. 424).

Nominal value (face value, principal): The amount due to a lender when a debt under debentures or unsecured notes matures (p. 735).

Non-cumulative preference shares: Preference shares on which the right to receive dividends is lost in any year in which dividends are not declared (p. 441).

Non-current liabilities: Obligations of the entity that do not require payment within the operating cycle or within 12 months of the reporting date (pp. 156, 724).

Non-reciprocal transfer: A transfer of assets in which the entity receives assets or services without giving approximately equal value in exchange for the assets or services received (p. 492).

Normal account balance: The side or column of the account on which increases are recorded (p. 83).

O

Onerous contract: A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (p. 732).

Operating activities: Activities associated with the provision of an entity’s goods or services, and other activities that are neither financing nor investing activities (pp. 34, 800).

Operating cycle: The average period of time it takes for an entity to purchase or manufacture inventory or perform services, and then receive cash from the sale (p. 154).

Operating lease: A lease where the lessor effectively retains all of the substantial risks and rewards associated with ownership of the leased asset (pp. 644, 740).

Operating statement: See Income statement.

Ordinary shares: A class of share that has no preferences relative to other classes (p. 438).

Organisation: A group of people who share common goals with a well-defined division of labour (p. 31).

P

Participating preference shares: Preference shares which have the right to receive further dividends above their fixed rate after ordinary shares have received dividends up to a stated percentage for the period (p. 441).

Partnership: A form of business structure under which a business entity is owned by two or more people as partners sharing profits and losses (pp. 30, 352).

Partnership agreement: The contract or agreement made among the partners to form and operate a partnership (p. 354).

Patent: An exclusive right to produce and sell a particular product or process for a period of 20 years (p. 696).

Percentage-of-completion method: A method of accounting for service contracts and long-term construction contracts under which revenue is recognised in proportion to the services or work completed during the period (p. 491).

Percentage of net credit sales: A method used to determine the amount of the allowance for doubtful debts (p. 560).

Performance: The entity’s ability to operate its assets efficiently and effectively in the conduct of its activities (pp. 33, 481).

Period assumption: The assumption that the economic life of an entity can be divided into arbitrary equal time intervals for reporting purposes (pp. 41, 495).

Periodic inventory system: A system of accounting for inventory in which the goods on hand are determined by a physical count and the cost of sales is equal to the beginning inventory plus net purchases less ending inventory (p. 256).

Permanent (real) accounts: Accounts reported in the statement of financial position (p. 132).

Perpetual inventory system: A system of accounting for inventory that provides a continuous and detailed record of the goods on hand and the cost of sales (p. 250).

Petty cash fund: A specified amount of cash placed under the control of an employee (petty cashier) for use in making small cash payments (p. 528).

Petty cash voucher or receipt: A form used as a receipt for payments from a petty cash fund (p. 528).

Physical capital: Capital is seen as the operating capability of the entity’s assets. Profit exists only after the entity has set aside enough capital to maintain the operating capability of its assets (p. 497).

Physical inventory count (stocktake): The process of counting and pricing the goods on hand (p. 255).

Post-closing trial balance: A trial balance taken after the adjusting and closing entries have been posted to the accounts and the permanent accounts balanced (p. 210).

Posting: The process of transferring information recorded in a journal to the individual accounts in the ledger (p. 86).

Preference shares: Shares which receive preferential treatment over ordinary shares such as a preference in dividend distributions, and/or a preference in asset distributions if the company is wound up (depending on the constitution) (p. 438).

Preliminary expenses: The expenditures made to form a company. They include incorporation fees, legal fees, and promoters’ and underwriters’ fees (p. 428).

Premium (on debentures): The price in excess of nominal value on issue of debentures (p. 736).
Present value: The single value at the present time of cash flows expected to be received or paid in the future which have been discounted at an appropriate rate of discount (p. 728).

Principal: The base figure (face amount) of an amount owing (a bill) (p. 575).

Proceeds: The maturity value of a bill less discount (p. 578).

Profit: When total income (revenues and gains) exceeds total expenses (pp. 38, 77).

Profit and loss statement: See Income statement.

Profit margin: A ratio which represents the portion of sales which ends up as profit (p. 268).

Promissory note: An unconditional written promise to pay a sum certain in money on demand or at a future determinable date (pp. 556, 575).

Property, plant and equipment: Resources of the entity that are physical in nature, have a relatively long useful life, and are used in the activities of the entity (p. 155).

Proprietary company: A company having a share capital in which the right to transfer shares is restricted as is the right to raise capital from the public (p. 423).

Prospectus: A legal document representing an approach by a company to raise funds in order to carry on business (p. 428).

Provisions: Liabilities of uncertain timing or amount (p. 721).

Prudence: A notion concerning the accountant’s desire to exercise care and caution in situations of uncertainty as part of ensuring the reliability of information (p. 484).

Public company: A company entitled to raise capital from the public and to have its shares listed on the stock exchange (p. 423).

Purchases: An account used in a periodic inventory system to record the cost of goods acquired for resale to customers (p. 258).

Purchases journal: A special journal used to record all purchases of inventory on credit (p. 299).

Purchases returns and allowances: An account used in the periodic inventory system to record the return by an entity of inventory or adjustments made to the purchase price (p. 258).

Q

Qualifying asset: An asset that necessarily takes a substantial period of time (i.e. usually longer than 1 year) to get ready for its intended use or sale (pp. 642, 765).

R

Ratio: Division of the amount reported for one financial statement item by the amount reported for another. Ratio analysis is the evaluation of the relationship indicated by this division (p. 871).

Realisable value: The amount of cash or cash equivalents that could be obtained currently by selling the asset in an orderly disposal or in the normal course of business (p. 496).

Receivables turnover ratio: A ratio which measures the number of times average receivables are converted into cash during a period (p. 569).

Recognition: The process of incorporating in the balance sheet or income statement an item that meets the definition of an element (p. 489).

Recoverable amount: The higher of an asset’s net selling price and its value in use (p. 683).
Redemption by sinking fund: The redemption of long-term debt by way of establishing a fund which will be used to pay the debt’s obligations on maturity (p. 738).

Relevance: A quality of financial information which influences economic decisions by helping users to form predictions, to confirm or correct past evaluations and to assess the rendering of accountability by preparers (pp. 41, 483).

Reliability: A quality of financial information which assures the user that information in financial reports represents faithfully, without bias or undue error, the transactions and events being reported (pp. 41, 484).

Replaceable rules: Rules contained in the Corporations Act 2001 relating to dealings between management and shareholders. If the company wishes to reject such rules, it must adopt a constitution (p. 427).

Reporting entity: Any entity or economic entity where it is reasonable to expect the existence of users depending on general-purpose financial reports for information used in economic decision making (p. 480).

Research: An original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding (p. 695).

Reserve: A category of equity created either by common business practice or in accordance with accounting standards (p. 445).

Residual value: The estimated amount that an entity could currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life (p. 646).

Retail inventory method: A method used to estimate the ending inventory value based on the relationship of cost to retail prices (excluding GST) (p. 617).

Retained earnings: The accumulated profits of a company that have been retained in the company rather than distributed to shareholders as dividends (pp. 218, 430).

Revaluation decrement: The amount by which the fair value of a non-current asset within a class at revaluation date is less than the asset’s carrying amount (p. 678).

Revaluation increment: The amount by which the fair value of a non-current asset within a class at revaluation date exceeds the asset’s carrying amount (p. 678).

Revenue: The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants (pp. 76, 488).

Reversing entries: Entries made to reverse the effects of certain adjusting entries (p. 212).

Royalties: Rights of composers and authors to receive payments from publishing companies for the sale of their music or books. Also money received by the owner of land from a mining company which has been given the right to mine mineral reserves on the owner’s land (p. 491).

Running balance account: An account format which enables the balance of the account to be calculated after each transaction affecting that account (p. 73).

S

Salary: Remuneration on a weekly, fortnightly or monthly basis paid to an employee, usually a fixed amount regardless of hours worked (p. 728).

Sales: Income (revenue) of a retail business represented by the sales price of goods sold (p. 241).

Sales journal: A special journal used to record all sales of inventory on credit (p. 296).

Sales returns and allowances: The selling price of inventory returned by customers or adjustments made to the sales price (p. 246).

Selling and distribution expenses: Expenses that result from efforts to store, sell and deliver goods to customers (p. 241).

Share capital: The amount of cash or other assets invested in the company by its shareholders (or members) (pp. 218, 430).

Share dividends: A pro rata distribution of a company’s own shares to its shareholders (p. 442).

Share issue costs: The costs directly associated with the issue of shares, including stamp duty, broker’s fees, underwriter’s fees, professional adviser’s fees and printing costs (p. 428).

Share split: A decrease in the issue price of shares with a proportionate increase in the number of shares (p. 444).

Shareholders: Persons or entities owning shares in a company (p. 30).
Single proprietorship (sole trader): A form of business structure in which the business entity is owned by an individual (p. 30).

Slide: An error in which the decimal point is shifted to the left or right (p. 107).

Solvency: The ability of an entity to pay its debts as and when they fall due (p. 535).

Source document: A paper, form or computer record that provides evidence that a transaction has occurred (p. 69).

Special journal: Book of original entry used for such repetitive transactions as sales, purchases, cash receipts and cash payments (p. 295).

Special-purpose financial reports: Reports prepared for users who have specialised needs and who possess the authority to obtain information to meet those needs (p. 10).

Specific identification: An inventory costing method by which the cost of a specific item sold can be separately identified from the cost of other units held in the inventory (p. 600).

Statement of changes in partners’ equity: A financial statement that shows the changes in each partner’s equity interest during the period (p. 368).

Stocktake: See Physical inventory count.

Straight-line depreciation: A depreciation method that allocates an equal amount of an asset’s depreciable amount to each period in its useful life (p. 647).

Subsidiary ledger: A group of individual accounts, the total of all balances of which should equal the balance of a related control account in the general ledger (p. 293).

Substance over form: A characteristic of information where the economic substance of a transaction takes precedence over its legal form (p. 484).

Sum-of-years’-digits depreciation: A depreciation method under which the depreciable amount of an asset is allocated to depreciation on a fractional basis. The denominators of the fractions are the sum of the digits in the asset’s useful life. The numerators of the fractions are the years remaining in the asset’s useful life at the beginning of the period (p. 649).

Systems analysis: The initial stage in the development of an accounting system through which an understanding of a business’s information requirements and sources of information is provided (p. 287).

Systems design: The second stage in the development of an accounting system through which the specific means to be used for input, processing and output are determined (p. 287).
Systems implementation and review: The final stage in the development of an accounting system through which the system is made operational (p. 288).

T

T account: An account format shaped like the letter T, in which the left-hand side of the account is the debit side and the right-hand side is the credit side (p. 72).

Tax invoice: A source document issued by a GST-registered business evidencing the sale of a taxable supply, and which complies with GST legislative requirements (p. 242).

Tax payable method: An accounting method whereby income tax expense is calculated as the tax rate times taxable income (p. 447).

Taxable income: The amount of profit as determined by the Australian Taxation Office on which the current income tax liability is calculated (p. 446).

Temporary (nominal) accounts: Accounts (income, expense and drawings accounts) which are reduced to a zero balance at the end of an accounting period (p. 132).

Term loan: A borrowing from a bank, life insurance company, and other financial institutions for periods of 1 to 10 years, usually at a fixed interest rate (p. 734).

Trade creditors: Another name for the Accounts Payable account (pp. 75, 725).

Trade debtors: Another name for the Accounts Receivable account (pp. 74, 556).

Trade discount: A reduction in the suggested list price granted to certain customers. Trade discount is not recorded in the accounts but appears as a deduction from the list price shown on the invoice (p. 248).

Transactions: The events that are identified as making up the economic activities of an entity (p. 8).

Transportation-in: See Freight inwards.

Transposition: An error in which the order of the digits of a number is altered (p. 107).

Trial balance: A statement listing all of the accounts in the general ledger and their debit or credit balances. A trial balance is prepared to verify the equality of debits and credits made to the accounts (p. 105).

Trust deed: A document setting down the terms of a debenture agreement and the appointment of a trustee (p. 735).

Trustee: A third party appointed to represent debenture holders (p. 736).
Two-column journal: See General journal.

U

Uncalled capital: The amount of issued share capital that has not yet been called by the company (p. 430).

Understandability: That quality of financial information which exists when users of that information are able to comprehend its meaning (p. 483).

Unexpired cost: A cost that has not been used to produce revenue and has future economic benefits to the entity; unexpired costs are initially recorded as assets (p. 131).

Units-of-production depreciation: A depreciation method under which the depreciable amount of an asset is allocated to depreciation expense based on the number of production units produced during the period (p. 650).

Unlimited company: A company in which shareholders are fully liable for all debts of the company (p. 424).

Unlimited liability: A characteristic of a partnership whereby each general partner is responsible for all debts of the partnership from personal assets if necessary (p. 353).

Unpresented cheques or outstanding cheques: Cheques written by a depositor that have not been presented to the bank for payment (p. 522).

Unsecured note: A borrowing with no security against the general assets of the borrower (p. 736).

Useful life: The estimated time period over which the future economic benefits embodied in a depreciable asset are expected to be consumed by the entity; or the estimated total service, expressed in terms of production or similar units, that is expected to be obtained from the asset by the entity (pp. 139, 646).

V

Value in use: The present value of future net cash flows expected from the continuing use of an asset and from its disposal at the end of its useful life (p. 683).

Vertical analysis: That part of an analysis in which the focus of the study is on the proportion of individual items expressed as a percentage of some specific item reported in the same statement (p. 871). See also Common size statement.

W

Wages: Remuneration calculated on an hourly rate paid to an employee (p. 728).

Weighted average: An inventory costing method by which an average cost per unit is calculated by dividing the total cost of units available for sale by the total number of units available for sale. It is used in the periodic inventory system (p. 603).

Workers compensation: An insurance scheme imposed by law whereby the employer purchases insurance which may be used to compensate employees for job-related injuries and consequential loss of wages through loss of work (p. 731).

Working capital: The excess of current assets over current liabilities (p. 153).

Worksheet: A spreadsheet, prepared either manually or electronically, used by accountants to gather and organise information to enable preparation of the financial statements, and/or for use in the adjusting and closing processes of the accounting cycle (p. 157).