FINANCIAL ACCOUNTING MEANING OF ACCOUNTING According to AICPA "Accounting is the art of recording, classifying and summarizing in a significant manner

and in terms of money; transactions and events which are, in part at least, of a financial character, and interpreting the results thereof." According to American Accounting Association "Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information." In simple words, accounting is the process of collecting, recording, summarizing and communicating financial information. Accounting is an information system that provides accounting information to users for correct decision-making. The definition given by the American Accounting Association is more appropriate in the present circumstances because many to arrive at informed judgments and decisions use the accounting information.

1. Functions of Accounting

Identification: Economic events are identified and measured in terms of money. Recording: Accounting is an art of recording business transactions in the books of accounts. Recording is the process of entering business transactions financial character in the book of original entry, i.e., in Journal. Classifying: Classification is the process of grouping transactions or entries of one nature at one place. The transactions recorded in the 'Journal' or the subsidiary books are classified and posted to the main book of account known as the 'Ledger'. This book contains the preparation of the following statements: (i) Trial Balance, (ii) trading and individual account heads under which all financial transactions of a similar nature are collected. Summarizing: This involves presenting the classified data in a manner, which is understandable and useful to internal as well as external end-users of accounting statements. This process leads to Profit and Loss Account, and (iii) Balance Sheet. Interpreting: The final stage in the accounting process is analyzing and interpreting the financial data contained in the final accounts so that parties concerned with the business can make a meaningful judgment about the profitability and financial business can make a meaningful judgment about the profitability and financial position of the business unit. This helps in planning for the future in a better way. 5. Service Accounting

Accounting, we have discussed, is an art of recording, classifying and summarizing the financial data and interpreting the results thereof. Thus accounting is a wider concept than book keeping, i.e., bookkeeping is a part of accounting. ACCOUNTING PROCESS Based on the main attributes of accounting, we may list the steps of Accounting Process as follows: (i) (ii) (iii) (iv) (v) Financial Transactions, Recording Classifying Summarizing Analysis and Interpretation

We have discussed in detail the above steps earlier in this Chapter. We may now explain the accounting process with the help of a diagram: BRANCHES OF ACCOUNTING The changing business scenario through centuries has given rise to specialized branches of accounting, which could cater to the changing requirements. These branches are:

Branches of Accounting

FIANCIAL ACCOUNTING Financial Accounting is concerned with recording financial transactions, summarizing and interpreting them and communicating the results to users. It ascertains profit earned or loss suffered during a period (usually a year) and the financial position on the date when the accounting period ends. COST ACCOUNTING The limitation of financial accounting in respect of information relating to the cost of products or services led to the development of a specialized branch, i.e. Cost Accounting. It ascertains the cost of products manufactured or services rendered and helps the management in decision making (say price fixation) and exercising controls. MANAGEMENT ACCOUNTING Management Accounting is the most recently developed branch of accounting. It is concerned with generating accounting information relating to funds, cost, profits, etc., as it enables the management in decision making. We may say that Management Accounting addresses the needs of a single user group, i.e. the management. MEANING AND NATURE OF ACCOUNTING PRINCIPLES

According to the AICPA "Principles of Accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice." Accounting Principles may be defined as those rules of action or conduct which are adopted by accountants universally while recording accounting transactions. They are the norms or rules which are followed in treating various items of assets, liabilities, expenses incomes, etc. Principles are the basis or fundamental prepositions and are generally accepted set of accounting principles based on which transactions are recorded and financial statements are prepared. These principles are classified into two categories: (i) Accounting Concepts; (ii) Accounting Conventions

Accounting Concepts
Accounting Concepts are the basic assumptions or fundamental propositions concerning the economic, political and social environment within which accounting operates. They are generally accepted set of accounting rules based on which transactions are recorded and financial statements prepared. It is important to follow these rules because it will enable the user to understand the financial statements of the enterprise better, which otherwise would become difficult if not impossible.

Accounting Conventions
Accounting Conventions are outcome of accounting practices or principles being followed by the enterprises over a period of time. Conventions may undergo a change with time to bring about improvement in the quality of accounting information. Features of Accounting Principles 1.Accounting Principles are Man-Made: Accounting

principles are man-made and, therefore, do not stand scrutiny like principles of natural science. They are the best possible suggestions based on practical experiences. and understandability. 2. Accounting Principles are Flexible: Accounting principles are not rigid but flexible. Whenever a situation arises that requires solution, accountants arrive at a reasonable decision, which gradually becomes the accepted accounting principle. It must be remembered that accounting principles are not permanent and change with time. 3. Accounting Principles are Generally Accepted: Accounting principles are the bases and guide for accounting and are generally accepted. The general acceptance of accounting principle usually depends on how it meets the criteria of relevance, objectivity and feasibility. They are recommended for use by all enterprises to ensure uniformity

(i) Relevance: Accounting principles are relevant if they result in information that is useful to the users of accounting information. (ii) Objective: Accounting principles are objective if they are not influenced by the personal bias of the persons preparing the accounting information. (iii) Feasible: Accounting principles are feasible if they can be applied without undue complexity and cost. Accounting Concepts
1. The Business Entity Concept: The Business Entity Concept holds

the business to be separate and distinct from its owners. Business transactions, therefore, are recorded in the books of accounts from the business point of view and not owners. Owners considered separate from the business are considered creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year, etc. and debited by the drawing made.
2. The Money Measurement Concept: The Money Measurement

Concept holds that transactions and events that can be measured in money terms are recorded in the books of accounts of the enterprise. In other words, money is common denominator in recording and reporting all transactions. Consider that an enterprise has Rs. 10,000 cash, 6 tonnes of raw material, 6 trucks and 10,000 sq. yards land. These assets cannot be added and show in the financial statements unless their monetary value is ascertained. However, the concept suffers from two major limitations:

(i) Transactions and events that cannot be measured in money terms are not recorded, howsoever, important they may be to the enterprise. (ii) The yardstick of measurement, i.e., money is considered as having static value as the transactions are recorded at the value on the transaction date.
3. the Going Concern Concept: The Going Concern Concept holds that

a business shall continue for an indefinite period and there is no intention to close the business or scale down the operations significantly. It is because of this concept that a distinction is made between an expenditure that will render benefit for a long period and one whose benefit will be exhausted quickly, say, with the year. Of course, if it is certain the business will exist only for a limited time, accounting will keep the expected life in view. On the basis of this concept, fixed assets are recorded a their original cost and depreciated in a systematic manner without reference to their market value.
4. The Accounting Period Concept: The Accounting Period Concept

holds that the life of an enterprise be broken into smaller periods so that its performance is measured at regular intervals. The accounts of an enterprise are maintained following the Going Concern Concept meaning the enterprise shall continue its activities in the foreseeable future. One may argue that the financial statements of the enterprise should be prepared at the end of its life. It is possible to do so but, a number of users of financial statements and many of them, especially the management and bankers, require the information from the accounts at regular intervals so that decisions can be taken at the appropriate time. Management requires information at regular

intervals to assess the performance, funds requirement (short term as well as long term), bankers require accounting information periodically because they have invested money and have to ensure its safety and returns. Similarly, the Government has to assess the tax dues fro the enterprise.
5. The Cost Concept: The Cost Concept holds that an asset is recorded

in the books of account at the price paid to ac1quire it and the cost is the basis for all subsequent accounting of the asset. Asset is recorded at the cost at the time of its purchase but is systematically reduced in value by charging depreciation. The market value of an asset may change with the passage of time, but for accounting purposes it continues to be shown in the books of accounts at its book value (i.e., cost at which it was purchased minus depreciation provided up-todate). According to the cost principle, if an asset is acquired and nothing is paid for it, it is usually not recorded as an asset. The cost principle has the advantage of bringing objectivity into the accounts, information given in the financial statements is not influenced by the personal bias or judgments of those who furnish such statements. In the absence of this principle, the amount shown in the accounting records would depend on the objective views of a person.
6. The Dual Aspect Concept: This is the basic concept of accounting.

According to this concept, every transaction entered into by an enterprise has two aspects. If a transaction has taken place or an event has occurred, it is bound to have a two sided effect. This two sided

effect can be better understood, it we recollect the business entity concept under which the enterprise is considered to be separate from its proprietor. When the proprietor starts the business and invests money, the enterprise will have that much money but, also, the enterprise shall owe that much amount to the proprietor. One may, therefore, say that the assets (cash in hand in this case) are equal to the owner's equity or capital.
7. The Revenue Recognition Concept:

The Revenue Recognition

Concept holds that revenue is considered to have been realized when a transaction has been entered into and the obligation to receive the amount has been established. It is to be noted that recognizing revenue and receipt of an amount are two separate aspects. Let us take an example to understand it. An enterprise sells goods in February 2006 and receives the amount in April 2006. Revenue of this sale should be recognized in February 2006, i.e., when the goods are sold. It is so because the legal obligation has been established (upon sale) in February 2006. Let us take another example. Suppose an enterprise has received an advance in February 2006 for the sale to be made in May 2006, revenue shall be recognized in May 2006, upon sale having been made because the legal obligation to receive the amount has been established in May 2006.
8. The Matching Concept: The Matching Concept is based on the

accrual concept of accounting and related to the revenue concept. It holds that the cost incurred to earn the revenue should be set out against the revenue in the period during which it is recognized as earned. For matching expenses with revenue, first revenue is

recognized and then costs associated with those recognized. ADVANTAGES OF ACCOUNTING 1. Financial Information about

revenue are

Business:

Accounting makes available financial information, i.e., the profit earned or loss suffered and also what are the assets and liabilities of the enterprise. 2. Assistance to Management: The management is responsible for the functioning of the business and has to therefore plan, make decisions and exercise effective control on the affairs of the business. The management performs these functions on the basis of accounting information. 3. Replaces Memory: No businessman can remember everything about his business since human memory has limitations. It is necessary to record transactions in the books of accounts promptly. This will obviate the necessity of remembering various transaction, since on need, the records will furnish the necessary information. 4. Facilitates Comparative Study: a systematic record will enable a businessman to compare one year's results with those of other years and locate significant factors leading to the change, if any. 5. Facilitates Settlement of Tax Liabilities: A systematic accounting record immensely helps settlement

of income tax, sales tax, VAT and excise duty liabilities since it is a good evidence of the correctness of transactions. 6. Facilitates Loans: Loan is granted by the banks and financial institution of basis of growth potential which is supported by the performance. 7. Evidence in Court: Systematic record of transactions is often treated by the Courts as good evidence. 8. Facilitates sale of Business: If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper price. 9. Assistance in the Event of Insolvency: Insolvency proceedings involve explaining many transactions that have taken place in the past. Systematic accounting records assist a great deal in such a situation. 10. Helpful in Partnership Accounts: At the time of admission of a partner, retirement or death of a partner and dissolution of the firm, accounting record is of vital importance and use. It is so because it provides the basis to reach a settlement. LIMITATIONS OF ACCOUNTING Accounting has many advantages and that much significant information is available from financial accounting such as profit earned or loss suffered

during a period and the financial position at its end. But it has some limitations also.
1. Accounting is Not fully Exact: Although most of the transactions are

recorded on the basis of evidence such as sale or purchase or receipt of cash, yet some estimates are also made for ascertaining profit or loss.
2. Accounting Does not indicate the Realisable Value: The Balance

Sheet does not show the amount of cash which the firm may realize by the sale of all the assets. This is because many assets are not meant to be sole; they are meant for use and are shown at cost less depreciation that may have been written off.
3. Accounting Ignores the Qualitative Elements: Since accounting is

confined to monetary matters only, qualitative elements like quality of management and labour force, industrial relations and public relations are ignored.
4. Accounting Ignores the effect of Price Level Changes: Accounting

statements are prepared at historical cost. Money, as a measurement unit, changes in value. It does not remain stable. Unless price level changes are considered while preparing financial statement, accounting information will not show true financial results.
5. Accounting May Lead to Window Dressing: The term window

dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statements in a way to show better position than what it is actually. In this situation, income statement (i.e., Profit and loss Account) fails to provide a true and fair view of

the result of operations and the Balance Sheet fails to provide a true and fair view of the financial position of the enterprise.

Users of accounting information The primary aim of financial accounting is to make accounting information available to the users to enable them top arrive at informed decisions. It is unlikely that users will have common interests and it is not possible to meet their individual requirements. Therefore, general purpose of financial statements that includes Profit and Loss Account. Balance Sheet, schedules and notes to accounts forming part of financial statements are prepared and communicated to the users. Users of accounting information may be categorized into Internal Users and External Users. INTERNAL USERS
1. Owners: Owners contribute capital in the business and thus are

always exposed to risk. In view of the risk involved, the owners are always interested in knowing the profit earned or loss suffered by the business besides the safety of the capital invested by them. In small and medium sized enterprises, owners generally exercise direct

control on the affairs and thus, always possess the information as to profit and financial position. But, in large sized enterprises, owners do not exercise direct control and are dependent on the mangers for financial information.
2. Management: We have discussed above that in large sized

enterprises, ownership and management are separate. Businesses are managed by professional managers who are in direct control. Management has the responsibility to not only safeguard the owner's investment but also to increase its value by managing the business efficiently so that it earns the maximum profit. The management makes extensive use of accounting information to arrive at informed decisions such as determination of selling price, cost controls and reduction, investment into new projects, etc.

EXTERNAL USERS
3. Banks and Financial Institutions: Bankers and Financial Institutions

are an essential part of any business as they provide loans to the businesses. It is natural that the Banks and Financial Institutions will watch the performance of the business to know, whether it is making progress as projected to ensure the safety and recovery of the loan advanced.
4. Investors and Potential Investors: Investment involves risk and also

the investors do not have direct control over the business affairs. Therefore, they rely on the accounting information available to them

and seek answers to the questions such as- what is the earning capacity of the enterprise and how safe is their investment?
5. Creditors: Creditors are those parties who supply goods or services

on credit. It is a common business practice that a large amount of suppliers remains invested in credit sales. Before granting credit, creditors satisfy themselves about the credit worthiness of the business.
6. Government and its Authorities: The Government makes use of

financial statements to compile national income accounts and other informations. The information so available to it enables them to take policy decisions. Government levies varied taxes such as Excise Duty, VAT, Service Tax and Income Tax. These government aurthorities assess the correct tax dues from an analysis of financial statements.
7. Employees and Workers: Employees and Workers are entitled to

bonus at the year end besides the salary and wages taken every month. Bonus is directly linked to the profit earned by an enterprise. Therefore, the employees and workers are interested in financial statements. Besides, the financial statements also reflect whether the enterprise has deposited its dues into the provident fund and employees state insurance, etc. or not.
8. Researchers: Financial statements are of immense use to the

Researchers undertaking research in topical areas like accounting theory and business practices. Stock brokers also carry out research on

financial statements to assess the future profitability and a result assess what should be the value of the share
9. Society: Enterprises have a social responsibility towards the Society

and thus, both directly and indirectly, contribute to its welfare with respect to economic betterment, protecting environment, providing educational facilities, etc. Indirect contribution is not reflected in the financial statements but is visible through increased business activity, better infrastructure, better educational facilities and so on. Direct contributions are reflected in the financial statements.

Users of accounting information The primary aim of financial accounting is to make accounting information available to the users to enable them top arrive at informed decisions. It is unlikely that users will have common interests and it is not possible to meet their individual requirements. Therefore, general purpose of financial statements that includes Profit and Loss Account. Balance Sheet, schedules and notes to accounts forming part of financial statements are prepared and communicated to the users. Users of accounting information may be categorized into Internal Users and External Users. INTERNAL USERS

1. Owners: Owners contribute capital in the business and thus are

always exposed to risk. In view of the risk involved, the owners are always interested in knowing the profit earned or loss suffered by the business besides the safety of the capital invested by them. In small and medium sized enterprises, owners generally exercise direct control on the affairs and thus, always possess the information as to profit and financial position. But, in large sized enterprises, owners do not exercise direct control and are dependent on the mangers for financial information.
2. Management: We have discussed above that in large sized

enterprises, ownership and management are separate. Businesses are managed by professional managers who are in direct control. Management has the responsibility to not only safeguard the owner's investment but also to increase its value by managing the business efficiently so that it earns the maximum profit. The management makes extensive use of accounting information to arrive at informed decisions such as determination of selling price, cost controls and reduction, investment into new projects, etc. EXTERNAL USERS
3. Banks and Financial Institutions: Bankers and Financial Institutions

are an essential part of any business as they provide loans to the businesses. It is natural that the Banks and Financial Institutions will watch the performance of the business to know, whether it is making progress as projected to ensure the safety and recovery of the loan advanced.
4. Investors and Potential Investors: Investment involves risk and also

the investors do not have direct control over the business affairs.

Therefore, they rely on the accounting information available to them and seek answers to the questions such as- what is the earning capacity of the enterprise and how safe is their investment?
5. Creditors: Creditors are those parties who supply goods or services

on credit. It is a common business practice that a large amount of suppliers remains invested in credit sales. Before granting credit, creditors satisfy themselves about the credit worthiness of the business.
6. Government and its Authorities: The Government makes use of

financial statements to compile national income accounts and other informations. The information so available to it enables them to take policy decisions. Government levies varied taxes such as Excise Duty, VAT, Service Tax and Income Tax. These government aurthorities assess the correct tax dues from an analysis of financial statements.
7. Employees and Workers: Employees and Workers are entitled to

bonus at the year end besides the salary and wages taken every month. Bonus is directly linked to the profit earned by an enterprise. Therefore, the employees and workers are interested in financial statements. Besides, the financial statements also reflect whether the enterprise has deposited its dues into the provident fund and employees state insurance, etc. or not.
8. Researchers: Financial statements are of immense use to the

Researchers undertaking research in topical areas like accounting theory and business practices. Stock brokers also carry out research on

financial statements to assess the future profitability and a result assess what should be the value of the share
9. Society: Enterprises have a social responsibility towards the Society

and thus, both directly and indirectly, contribute to its welfare with respect to economic betterment, protecting environment, providing educational facilities, etc. Indirect contribution is not reflected in the financial statements but is visible through increased business activity, better infrastructure, better educational facilities and so on. Direct contributions are reflected in the financial statements.

BASIC ACCOUNTING TERMS It is necessary to understand the basic accounting terms which are used in the business. These terms are a part of the standa5rd accounting terminology.
1. Assets: Assets are property or legal rights owned by an individual or

business to which money value can be attached. In other words, anything which will enable the firm to get cash or a benefit in the future, is an asset. Assets can be classified to be: (i) Fixed Assets: Fixed Assets are those assets which are purchased for the purpose of operating the business and not for resale. Examples of fixed assets are land, building, machinery, furniture etc. (ii) Current Assets: Current Assets are those assets of a business which are kept for short term with a purpose to convert

them into cash or for resale. Examples of current assets are unsold goods, debtors, bills receivables, bank balance etc. (iii) (iv) touched. (v) Wasting Assets: Wasting Assets are those assets which are natural resources consumed during the process of use.
2. Liabilities: Liabilities mean the amount which the business owes to

Tangible Assets: Tangible Assets are those assets Intangible Assets: Intangible Assets are those assets

which have physical existence, i.e. they can be seen and touched. which do not have any physical form, i.e., they cannot be seen and

outsiders, that is, excepting the proprietors. In the words of Finny and Miller, " Liablilities are debts, they are amounts owed to creditors."
3. Capital: Capital means the amount (in terms of money or assets

having money value) which the proprietor has invested in the business and can claim from it. For the firm, it is a liablility towards the owner. It is so because the owner is treated separate from the business. Capital is also known as Owner's Equity, Proprietorship and net worth. Owner's Equity means owner's claim against the assets of the business.
4. Expense: Expense is the amount spent in order to produce and sell the

goods and services which produce the revenue. "Expense is the cost of the use of things or services for the purpose of generating revenue.
5. Income: Income is the profit earned during a period of time. In other

words, the difference between revenue and expense is called income.

6. Expenditure: Expenditure is the amount spent or liability incurred for

the vlue received. An expenditure is a payment for a benefit received. Expenditure may be categorized into: (i) Capital Expenditure: Capital Expenditure is the amount spent in purchasing assets which will give benefits over a number of accounting periods. It means expenditure incurred to acquire fixed assets or its improvement. (ii) Revenue Expenditure: Revenue Expenditure is the amount spent to purchase goods and services that are consumed during the accounting period. Revenue expenditure does not increase the earning capacity but it maintains the earning capacity in the current year. Revenue expenditure is shown on the debit side of the Profit and Loss Account.
7. Revenue: Revenue means the amount, which as a result of operations,

is added to the capital. "Revenue is an inflow of assets, which results in an increase in the owner's equity."
8. Debtor: A person who owes money to the firm generally on account

of credit sales of goods is called a Debtor.

9. Creditor: A person to whom a firm owes money is called a Creditor. 10. Goods: They refer to items forming part of the stock-in-trade of a

business firm, which are purchased and are to be resold. In other words, they refer to the products in which a business unit is dealing. For a firm dealing in home appliances such as TV, Fridge, AC etc. these are goods.
11. Cost: It is the amount of expenditure incurred on or attributable to a

specified article, product or activity.

12. Gain: It is a profit that arises from transactions which are incidental to

business such as sale of investments or fixed assets ate more than their book values. The term gain is used to indicate increase in capital from incidental transactions. Gain may be operating gain or non-operating gain.
13. Stock or Inventory: Stock is the tangible property held by an

enterprise for the purpose of sale in the ordinary course of business or for the purpose of using it in the production of goods meant for sale or services to be rendered. Stock may be opening stock or closing stock. In case of a trading concern it comprises of closing stock in hand or the amount of goods which are lying unsold at the end of an accounting period.
14. Purchase: The term purchase is used only for purchase of goods.

Goods are those things which are purchased for resale or for producing the finished products which are also to be sold. The term 'Purchases' includes both cash and credit purchases of goods. Goods purchased for cash are called cash purchases but if goods are purchased on credit, it is referred to as credit purchases. Purchases Returns: Goods purchased may be returned due to any reason, say, they are not as per specifications or are defective. Goods returned are known as Purchases Returns or Returns Outward.
15. Sale: This term is used for the sale of only those goods dealt by the

firm. The term 'sales' includes both cash and credit sales. When goods are sold for cash, they are cash sales but if goods are sold and payment is not received at the time of sale, it is referred to as credit sales.

Sales Returns: Goods sold when returned by the purchaser are termed as Sales Returns or Return Inwards.
16. Loss: A loss is an excess of expenses of a period over its related

revenues which may arise from normal business activities. It decreases the owner's equity. It also refers to money or money's worth lost (or cost incurred) against which the firm receives no benefit, e.g. cash or goods lost in theft.
17. Profit: It is the surplus of revenues of a business over its costs. Profit

is normally categorized into gross profit and net profit. Gross Profit: Gross Profit is the difference between sales revenue or the proceeds of goods sold and /or services rendered over its direct cost. Net Profit: Net Profit is the profit made after allowing for all expenses. In case expenses are more than the revenue, it is Net Loss.
18. Voucher: Voucher is an evidence of a business transaction. Examples

of voucher are: Cash Memo, Invoice or Bill, Receipt Debit/Credit Notes, etc.
19. Discount: When customers are allowed any type of reduction in the

prices of goods by the business, it is called a Discount.

20. Transaction: Transaction is a financial event of a nature that is

entered into by the parties and is recorded in the books of accounts. A transaction is a particular kind of external event that involves transfer of something valuable between two entities. It changes the financial position of the enterprise.

21. Drawings: It is the amount of money or the value of goods which the

proprietor takes for his domestic or personal use. Drawing reduces the investment of the owners.
22. Account: Account is a summarised record of relevant transactions at

one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.
23. Books of Accounts: Books of accounts refer to Journal and Ledgers

in which transactions are recorded.

24. Entry: A transaction and event when recorded in the books of

accounts is known as an entry.

25. Debit: An account has two parts, i.e., debit and credit. The left side is

the debit side while the right side is the credit side. If an account is to be debited, then the entry is posted to the debit side of the account.
26. Credit: Credit is the right side of an account. If n account is to be

credited, then the entry is posted to the credit side of the account.
27. Proprietor: The person who makes the investment and bears all the

risks connected with the business is called the proprietor.

28. Receivables: The term 'Receivables' includes the outstanding amount

due from others. Sometimes, a debtor may accept a Bill of Exchange, which is payable after a given period. Such a bill is known as bill receivable.
29. Payables: The term 'Payables' include the amounts due to others.

Accounts Payable includes trade creditors as well as bills payable and promissory notes payable. The term payable includes all the amounts due to others.

30. Bill Receivable: Bill Receivable means a bill of exchange accepted

by a debtor the amount of which will be received on the specified date.

31. Bill Payable: Bill Payable means a bill of exchange, the amount of

which will be payable on the specified date.

32. Depreciation: Depreciation is a fall in the value of an asset because

of usage or with passage of time or obsolescence or accident.

33. Cost of Goods Sold: Cost of Goods Sold is the direct costs of the

goods or services sold.

34. Bad Debts: Bad Debts is the amount that has become irrecoverable.

It is a business loss and is debited to Profit and Loss Account.

35. Insolvent: Insolvent is a person or enterprise which is not in a

position to pay its debts.

36. Solvent: Solvent is a person or enterprise which is in a position to pay

its debts.
37. Book Value: This is the amount at which an item appears in the

books of accounts or financial statements.

38. Balance Sheet: It is a statement of the financial position of an

individual or enterprise as at a given date, which exhibits its assets, liabilities, capital, reserves and other account balances at their respective book values.
39. Entity: An entity means an economic unit which performs economic

activities (e.g. Reliance industries, Bajaj Auto, Maruti, TISCO). Business entity means a specifically identifiable business enterprise like ITC Ltd., An accounting system is always devised for a specific business entity.

Thanks