Accounting Appendix

Accounting Glossary

Precise definitions linked to their use

Use a definition to re-enter a worked example, not as a substitute for one.

Financial reporting

Term	Working definition
Asset	A present economic resource controlled by the entity as a result of past events
Economic resource	A right that has the potential to produce economic benefits
Liability	A present obligation to transfer an economic resource as a result of past events
Equity	Residual interest in assets after deducting liabilities
Income	Increases in assets or decreases in liabilities that increase equity, excluding owner contributions
Expense	Decreases in assets or increases in liabilities that decrease equity, excluding owner distributions
Accrual basis	Recognition of economic effects in the periods in which they occur, not merely when cash moves
Carrying amount	Amount at which an asset or liability is recognised after applicable adjustments
Materiality	Entity-specific aspect of relevance based on whether information could influence decisions
Prudence	Caution under uncertainty that supports neutral judgement

Term	Working definition
Debit / credit	Left / right recording directions whose effect depends on account type
Journal	Chronological record of entries
Ledger	Record of transactions and balance by account
Trial balance	List of ledger balances used to test debit-credit equality
Accrued expense	Expense recognised before related cash payment
Prepayment	Payment recognised as an asset until benefit is consumed
Contract liability	Obligation to transfer goods or services for consideration received or due
Receivable	Unconditional right to consideration except for passage of time
Contract asset	Conditional right to consideration for transferred goods or services
Loss allowance	Contra-asset estimate of expected credit losses

Term	Working definition
Cost of sales	Carrying amount of inventory recognised as expense when related goods are sold
Net realisable value	Estimated ordinary-course selling price less completion and necessary selling costs
Depreciation	Systematic allocation of a tangible asset’s depreciable amount
Amortisation	Systematic allocation of a finite-life intangible asset’s depreciable amount
Impairment	Reduction when an asset’s carrying amount exceeds the applicable recoverable measure
Right-of-use asset	Lessee’s right to use an underlying asset during the lease term
Lease liability	Present obligation for lease payments included in measurement
Tax base	Amount attributed to an asset or liability for tax purposes
Temporary difference	Difference between carrying amount and tax base
Deferred tax asset / liability	Recognised future tax consequence of deductible / taxable differences and specified carryforwards

Term	Working definition
Contribution margin	Revenue less variable costs for the defined model
Relevant cost	Future cost that differs between alternatives
Sunk cost	Past cost that the current decision cannot change
Opportunity cost	Benefit sacrificed by choosing one alternative
Break-even	Activity at which modelled profit is zero
Flexible budget	Budget recalculated for actual activity using budgeted inputs
ROI	Defined operating return divided by defined operating assets
Residual income	Operating income less a capital charge
NPV	Present value of incremental project cash flows
IRR	Discount rate at which project NPV equals zero, when a meaningful root exists
Free cash flow	A management-defined cash measure that must be explicitly calculated and reconciled

Do not confuse	Difference
Profit / cash	Accrual performance / cash movement
Cost / expense	Resource sacrifice / amount recognised against the period
Provision / reserve	Recognised liability under applicable criteria / an imprecise term that may refer to equity or valuation amounts
Estimate change / error	New information applied prospectively / correction of an incorrect prior treatment
Favourable variance / good outcome	Arithmetic direction / overall operational judgement

Worked Examples and Error Diagnosis

Repair errors by locating the broken stage in the accounting chain

Reading and Evidence Map

Primary standards, real reports and selected accounting research