The financial system offers two different ways to lend: (1) direct lending through financial markets, and

(2) indirect lending through financial intermediaries, such as banks, finance companies, and mutual funds. Direct Lending Direct lending involves the transfer of funds from the ultimate lender to the ultimate borrower, most often through a third party. An example is a private party purchasing the securities issued by a firm. The securities are usually sold to the public through an underwriter, someone who purchases them from the issuer with the intention of reselling them at a profit. The underwriter negotiates the terms of the contract with the borrower and appoints a trustee, typically a commercial bank, to monitor compliance. Because of the costs involved, the issue of securities makes sense for the borrower only when the amount to be raised is substantial. If the security is a bond issue, the borrower is obligated to return the principal at maturity and to pay interest during the period of the loan. If the securities are equities, the borrower has no obligation to return the principal, but is expected to pay dividends. What if the lender needs his money back immediately? The only solution is to sell the security in the secondary market. However a secondary market will exist only if someone has created it. Secondary Markets There are two types of secondary markets, dealers and brokers. Dealers stand ready to buy or sell from their own inventory at quoted prices, profiting by the markup in those prices. Brokers simply bring buyers and sellers together but do not buy or sell securities. Their profit is normally a commission on the resulting sale. The existence of a good secondary market is of benefit to borrowers as well as lenders. It makes the loans more liquid and therefore more attractive to lenders. A more attractive loan lowers the cost to the borrower. Indirect Lending Indirect lending is lending by the ultimate lender to a financial intermediary who pools the funds of many lenders in order to re-lend at a markup over the cost of the funds. The ultimate borrowers are normally unknown to the ultimate lenders. A lender faces less risk in indirect lending because, as a specialist in the field, the intermediary normally has a well-established credit standing. Of course, lower risk usually means less gain for the lender.

Indirect lending generally offers lower cost to the ultimate borrower for small or short-term loans. Most borrowers lack sufficient credit standing to borrow directly. Borrowers who do have that option may find it cheaper, especially for large sums. In fact it may not even be possible to borrow large sums indirectly through intermediaries. The capacity of the direct financial markets is much larger than that of even the largest intermediaries. Comparison of Risks The two types of lenders face different problems with borrowers in financial difficulty. With direct lending, rescheduling a loan is problematic because the relationship is generally at arms length and legalistic. The risks are often unknown to the lender. With indirect lending, the intermediary is usually in a much better position to know whether the problem is permanent or temporary. As the sole lender, the intermediary can alter the terms without having to obtain the agreement of others. Accounting
Ground rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. The four fundamental concepts are (1) Accruals concept: revenue and expenses are taken account of when they occur and not when the cash is received or paid out; (2) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a sound reason to do otherwise. Any change in the accounting method must be disclosed; (3) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and viable, and will continue to be in business in the foreseeable future; (4) Prudence concept: revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is a reasonable 'possibility' of incurring them. Also called conservation concept. Other concepts include (5) Accounting equation: total assets of an entity equal total liabilities plus owners' equity; (6) Accounting period: financial records pertaining only to a

specific period are to be considered in preparing accounts for that period; (7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value; (8) Entity: accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees; (9) Full disclosure: fin

Read more: http://www.businessdictionary.com/definition/accountingconcepts.html#ixzz26v0XD3QLGround rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. The four fundamental concepts are (1) Accruals concept: revenue and expenses are taken account of when they occur and not when the cash is received or paid out; (2) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a sound reason to do otherwise. Any change in the accounting method must be disclosed; (3) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and viable, and will continue to be in business in the foreseeable future; (4) Prudence concept: revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is a reasonable 'possibility' of incurring them. Also called conservation concept. Other concepts include (5) Accounting equation: total assets of an entity equal total liabilities plus owners' equity; (6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period; (7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value; (8) Entity: accounting records reflect the financial activities of a specific business or organization,

and not of its owners or employees; (9) Full disclosure: fifinancial statements and their notes (footnotes) should contain all pertinent data; (10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower) to reflect the effects of obsolescence; (11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level; (12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period; (13) Materiality: relatively minor events may be ignored, but the major ones should be fully disclosed; (14) Money measurement: accounting process records only those activities that can be expressed in monetary terms (with some exceptions, as in cost-accounting); (15) Monetary measurement: only the activities measurable in terms of money should should be recorded;

(16) Objectivity: financial statements should be based only on verifiable evidence, comprising an audit trail; (17) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off (discharged); (18) Unit of measurement: financial data should be recorded with acommon unit of measure (dollar, pound sterling, yen, etc.). Also called accounting conventions, accounting postulates, or accounting principles.