1.

Definition of accounting: 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 there of.
2. Book keeping: It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Concepts of accounting:
A. Separate entity concept
B. Going concern concept
C. Money measurement concept
D. Cost concept
E. Dual aspect concept
F. Accounting period concept
G. Periodic matching of costs and revenue concept
H. Realization concept.
4 Conventions of accounting:
A. Conservatism
B. Full disclosure
C. Consistency
D. Materiality
5. Systems of book keeping:
A. single entry system
B. double entry system
6. Systems of accounting:
A. Cash system accounting
B. Mercantile system of accounting.
7. Principles of accounting:
A. Personal a/c: Debit the receiver
Credit the giver
B. Real a/c: Debit what comes in
Credit what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their
respective accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on
a particular date.

12. Credit note: The customer when returns the goods get credit for the value of the
goods returned. A credit note is sent to him intimating that his a/c has been credited with the
value of the goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him
indicating that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side
of the cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses
of the business, such as postage, cartage, stationery, etc.
16. Promisory note: an instrument in writing containing an unconditional undertaking
signed by the maker, to pay certain sum of money only to or to the order of a certain person or to
the barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six
months the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by
the bank passbook and the balance as shown by the Cash Book. Obj: to know the difference &
pass necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the
revenue.
22. Capital income: The term capital income means an income which does not grow out
of or pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular
business transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the
purpose of obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an
accounting period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were
sold on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of
asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And
loss account when shown on the assets side in the balance sheet.
30. Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And its have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the
business during the accounting year but which has not yet been due and, therefore, has not been
received.
32. Outstanding Income: Outstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
33. Suspense account: The suspense account is an account to which the difference in the
trial balance has been put temporarily.

34. Depletion: It implies removal of an available but not replaceable source, Such as
extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property
during tenancy.
37. Capital employed: The term capital employed means sum of total long term funds
employed in the business. i.e.
(Share capital+ reserves & surplus +long term loans (non business assets +
fictitious assets)
38. Equity shares: Those shares which are not having pref. rights are called equity
shares.
39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the event of
company winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue
greater changes in EBIT.
42. Financial leverage: it is nothing but a process of using debt capital to increase the
rate of return on equity
43. Combine leverage: It is used to measure of the total risk of the firm = operating risk +
financial risk.

44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their of an
agreed ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share the
profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives
advances against its receivables, from financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital
reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is
called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like
surplus cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders
in a subsidiary company.
51. Capital receipts: Capital receipts may be defined as non-recurring receipts from
the owner of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as A recurring receipts against sale
of goods in the normal course of business and which generally the result of the trading
activities.
53. Meaning of Company: A company is an association of many persons who contribute
money or moneys worth to common stock and employs it for a common purpose. The common
stock so contributed is denoted in money and is the capital of the company.
54. Types of a company:

1. Statutory companies
2. Government company
3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company
55. Private company: A private co. is which by its AOA: Restricts the right of the
members to transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the
public to subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain
the requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.
58. Formation of company:
> Promotion
> Incorporation
> Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a
company can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the
public for subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the
public
63. Called up capital: It has been portion of the subscribed capital which has been called
up by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has
been received.
65. Debentures: Debenture is a certificate issued by a company under its seal
acknowledging a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to
public company it satisfies the following terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public

3. No restriction of the transferable of shares

4. No restriction of no. of members.
5. Accepting deposits from the investors
68. Secret reserves: Secret reserves are reserves the existence of which does not appear
on the face of balance sheet. In such a situation, net assets position of the business is stronger
than that disclosed by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of
providing depreciation, renewals or diminutions in the value of assets or retained by way of
providing for any known liability of which the amount cannot be determined with substantial
accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose
it was originally made is also considered as reserve Provision is charge against profits while
reserves is an appropriation of profits Creation of reserve increase proprietors fund while
creation of provisions decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clearly
investment etc.,
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with
some other a/c or group of accounts so that the existence of the reserve is not known such reserve
is called an undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and
their effective utilization in business.
74. Objectives of financial management: financial management having two objectives
that Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so
that the profits of the concern are maximized.
2. Wealth maximization: Wealth maximization means the objective of a firm should be
to maximize its value or wealth, or value of a firm is represented by the market price of its
common stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis
76. Time value of money: The time value of money means that worth of a rupee
received today is different from the worth of a rupee to be received in future.

77. Capital structure: It refers to the mix of sources from where the long-term funds
required in a business may be raised; in other words, it refers to the proportion of debt,
preference capital and equity capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a
combination of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of
capital computed by reference to the proportion of each component of capital as weights.
80. Financial break-even point: It denotes the level at which a firms EBIT is just
sufficient to cover interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with
regard to investment in fixed assets. Or decision making with regard to investment of money in
longterm projects.
82. Payback period: Payback period represents the time period required for complete
recovery of the initial investment in the project.
83. ARR: Accounting or average rates of return means the average annual yield on the
project.
84. NPV: The Net present value of an investment proposal is defined as the sum of the
present values of all future cash inflows less the sum of the present values of all cash out flows
associated with the proposal.
85. Profitability index: Where different investment proposal each involving different
initial investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash
inflows equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of
liquidity and financial risk in business.
88. Concentration banking: It means identify locations or places where customers are
placed and open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be invested in short term instruments in
order to earn interest.
90. Ageing schedule: In an ageing schedule the receivables are classified according to
their age.
91. Maximum permissible bank finance (MPBF): It is the maximum amount that
banks can lend a borrower towards his working capital requirements.
92. Commercial paper: A cp is a short term promissory note issued by a company,
negotiable by endorsement and delivery, issued at a discount on face value as may be determined
by the issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from
commercial banks for a short period pending disbursement of loans sanctioned by the financial
institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new
qualified ntrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the
basis of a package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and
permits its views by another party (lessee) over a specified period

97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course
of business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower
allowed to overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up
to certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back
by any tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is
called share capital.
102. Funds flow statement: It is the statement deals with the financial resources for
running business activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds internal sources and external
sources. Internal source: Funds from operations is the only internal sources of funds and some
important points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the
following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend
(c)Payment of tax liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a short period.
For example 6 months or less from another company which have surplus liquidity? Such deposits
made by one company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit
receipt issued by banks there is no prescribed interest rate on such CDs it is based on the
prevailing market conditions.
107. Public deposits: It is very important source of short term and medium term finance.
The company can accept PD from members of the public and shareholders. It has the maturity
period of 6 months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock
Exchange. The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable
certificate, dominated in us dollars that represents a non-US company publicly traded in local
currency equity shares.
110. ADR (American depository receipts): Depository receipts issued by a company in
the USA are known as ADRs. Such receipts are to be issued in accordance with the provisions
stipulated by the securities Exchange commission (SEC) of USA like SEBI in India.

111. Commercial banks: Commercial banks extend foreign currency loans for
international operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign
currency loans
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc.
provide indirect assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI
for professionally or technically qualified entrepreneurs and persons possessing
relevantexperience and skills and entrepreneur traits.
115. Unsecured loans: It constitutes a significant part of long-term finance available to
an enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one
period to another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an
estimate prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which
all operations are forecasted and so for as possible planned ahead, and the actual results
compared with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firms expected cash inflow and outflow
over a specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the
purpose of presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of
the level of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic
method for evaluating all operations and programmes, current of new allows for budget

reductions and expansions in a rational inner and allows reallocation of source from low to high
priority programs.
125. Goodwill: The present value of firms anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and
balance shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the
causes of difference between the two balances and pass necessary correcting or adjusting entries
in the books of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating
the Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense
incurs and revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be
ascertained and used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing
costs for determination of costs of products or services planning, controlling and reducing such
costs and furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also
known as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include
cost of indirect material indirect labour and indirect expenses incurred in factory. This cost is
also known as works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory
cost, office cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production
to get the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs
may be ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing
(D)Operation costing (E)Operating costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing
(d) uniform costing.
142. Standard costing: standard costing is a system under which the cost of the product
is determined in advance on certain predetermined standards.
143. Marginal costing: it is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, i.e., materials,
labour, direct expenses and variable overheads.

144. Derivative: derivative is product whose value is derived from the value of one or
more basic variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were
settlement takes place on a specific date in the future at todays pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Future contracts are standardized exchange
traded contracts.
147. Options: An option gives the holder of the option the right to do something. The
option holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an
asset by a certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset
by a certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option
seller. It is also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called
expiration date.
152. European option: It is the option at exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be
summarized in terms of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of
first entered into future contract is known as initial margin.
156 Maintenance margin: This is somewhat lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c
is adjusted to reflect the investors gains or loss depending upon the futures selling price. This is
called mark to market.
158. Baskets: basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in
the future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects
the costs faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment
funds. It consists of two markets 1.primary market 2.secondary market.
163. Primary market: Those companies which are issuing new shares in this market. It
is also called new issue market.
164. Secondary market: Secondary market is the market where shares buying and
selling. In India secondary market is called stock exchange.
165. Arbitrage: It means purchase and sale of securities in different markets in order to
profit from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused
by price fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships expressed in mathematical terms
between figures which are connected with each other in same manner.

167. Activity ratio: It is a measure of the level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is
invested according to certain investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio diversification Professional management
Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means investors can buy and sell units of
fund, at NAV related prices at any time, directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means it is open for sale to investors for a
specific period, after which further sales are closed. Any further transaction for buying the units
or repurchasing them, happen, in the secondary markets.
174. Dividend option: investors who choose a dividend on their investments, will
receive dividends from the MF, as when such dividends are declared.
175. Growth option: investors who do not require periodic income distributions can be
choose the growth option.
176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of
company.
177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds
Index funds
178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the
equity markets.
179. Index funds: The fund manager takes a view on companies that are expected to
perform well, and invests in these companies
180. Debt funds: the debt funds are those that are pre-dominantly invest in debt
securities.
181. Liquid funds: the debt funds invest only in instruments with maturities less than
one year.
182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and
therefore does not carry any credit risk.
183. Balanced funds: Funds that invest both in debt and equity markets are called
balanced funds.
184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and
the AMC with prior approval of SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for
managing the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business face of
the MF, as it manages all the affairs of the MF.
187. R & T Agents: the R&T agents are responsible for the investor servicing functions,
as they maintain the records of investors in MF.
188. Custodians: Custodians are responsible for the securities held in the mutual funds
portfolio.
189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is
called as scheme take over.

190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive
at the price.
192. Market capitalization: market capitalization means number of shares issued
multiplied with market price per share.
193. Price earnings ratio: The ratio between the share price and the post tax earnings of
company is called as price earnings ratio.
194. Dividend yield: The dividend paid out by the company, is usually a percentage of
the face value of a share.
195. Market risk: It refers to the risk which the investor is exposed to as a result of
adverse movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an investor has to face as a result of a fall in
the interest rates at the time of reinvesting the interest income flows from the fixed income
security.
197. Call risk: Call risk is associated with bonds have an embedded call option in them.
This option hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans
199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the
cash flows resulting from the fixed income security.
200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be
traded in the market.

201. Drawings: Drawings denotes the money withdrawn by the proprietor from the
business for his personal use.
202. Outstanding Income: Outstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
203. Outstanding Expenses: Outstanding Expenses refer to those expenses which have
become due during the accounting period for which the Final Accounts have been prepared but
have not yet been paid.
204. Closing stock: The term closing stock means goods lying unsold with the
businessman at the end of the accounting year.
205. Methods of depreciation:
1. Unirorm charge methods:
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods:
a. Diminishing balance method
b. Sum of years digits method
c. Double declining method
3. Other methods:
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.

206. Accrued Income: Accrued Income means income which has been earned by the
business during the accounting year but which has not yet become due and, therefore, has not
been received.

207. Gross profit ratio: it indicates the efficiency of the production/trading operations.
Formula :
Gross profit
-------------------X100
Net sales
208. Net profit ratio: it indicates net margin on sales
Formula:
Net profit
--------------- X 100
Net sales
209. Return on share holders funds: it indicates measures earning power of equity
capital.
Formula:
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to
each equity share.
Formula:
Profits available for Equity shareholders
---------------------------------------------Number of Equity shares
211. Dividend yield ratio: it shows the rate of return to shareholders in the form of
dividends based in the market price of the share
Formula:
Dividend per share
---------------------------- X100
Market price per share
212. Price earnings ratio: it a measure for determining the value of a share. May also be
used to measure the rate of return expected by investors.
Formula:
Market price of share (MPS)
------------------------------------X 100
Earnings per share (EPS)
213. Current ratio: it measures short-term debt paying ability.
Formula:
Current Assets
-----------------------Current Liabilities

214. Debt-Equity Ratio: it indicates the percentage of funds being financed through
borrowings; a measure of the extent of trading on equity.
Formula:
Total Long-term Debt
--------------------------Shareholders funds
215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate longterm funds to meet its fixed assets requirements.
Formula:
Fixed Assets
------------------Long-term Funds
216. Quick Ratio: The ratio termed as liquidity ratio. The ratio is ascertained y
comparing the liquid assets to current liabilities.
Formula:
Liquid Assets
-----------------------Current Liabilities
217. Stock turnover Ratio: The ratio indicates whether investment in inventory in
efficiently used or not. It, therefore explains whether investment in inventory within proper limits
or not.
Formula:
cost of goods sold
-----------------------------Average stock
218. Debtors Turnover Ratio: The ratio the better it is, since it would indicate that debts
are being collected more promptly. The ration helps in cash budgeting since the flow of cash
from customers can be worked out on the basis of sales.
Formula:
Credit sales
---------------------------Average Accounts Receivable
219. Creditors Turnover Ratio: It indicates the speed with which the payments for
credit purchases are made to the creditors.
Formula:
Credit Purchases
----------------------Average Accounts Payable
220. Working capital turnover ratio: It is also known as Working Capital Leverage
Ratio. This ratio indicates whether or not working capital has been effectively utilized in making
sales.
Formula:
Net Sales
---------------------------Working Capital

221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the
investments in fixed assets contribute towards sales.
Formula:
Net Sales
-------------------------Fixed Assets
222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been
used for paying dividend.
Formula:
Dividend per Equity Share
--------------------------------------------X100
Earning per Equity share
223. Overall Profitability Ratio: It is also called as Return on Investment (ROI) or
Return on Capital Employed (ROCE). It indicates the percentage of return on the total capital
employed in the business.
Formula:
Operating profit
------------------------X 100
Capital employed
The term capital employed has been given different meanings a.sum total of all assets
Whether fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In
the business, i.e., share capital +reserves &surplus +long term loans (non business assets +
fictitious assets). Operating profit means profit before interest and tax
224. Fixed Interest Cover ratio: The ratio is very important from the lenders point of
view. It indicates whether the business would earn sufficient profits to pay periodically the
interest charges.
Formula:
Income before interest and Tax
--------------------------------------Interest Charges
225. Fixed Dividend Cover ratio: This ratio is important for preference shareholders
entitled to get dividend at a fixed rate in priority to other shareholders.
Formula:
Net Profit after Interest and Tax
-----------------------------------------Preference Dividend
226. Debt Service Coverage ratio: This ratio is explained ability of a company to make
payment of principal amounts also on time.
Formula:
Net profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship
between the proprietors funds and the total tangible assets.
Formula:
Shareholders funds
-----------------------------Total tangible assets

228. Difference between joint venture and partnership: In joint venture the business is
carried on without using a firm name, In the partnership, the business is carried on under a firm
name. In the joint venture, the business transactions are recorded under cash system In the
partnership, the business transactions are recorded under mercantile system. In the joint venture,
profit and loss is ascertained on completion of the venture In the partnership, profit and loss is
ascertained at the end of each year. In the joint venture, it is confined to a particular operation and it
is temporary. In the partnership, it is confined to a particular operation and it is permanent.
229. Meaning of Working capital: The funds available for conducting day to day operations
of an enterprise. Also represented by the excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the business is treated as a separate
entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the accounting records only those
transactions which can be expressed in terms of money only.
4. Cost concept: - According to this concept, an asset is recorded in the books at the price
paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be two aspects the receiving aspect
and the giving aspect; both are recorded by debiting one accounts and crediting another account. This
is called double entry.
6. Accounting period concept: - It means the final accounts must be prepared on a periodic
basis. Normally accounting period adopted is one year, more than this period reduces the utility of
accounting data.
7. Realization concept: - According to this concepts, revenue is considered as being earned on
the data which it is realized, i.e., the date when the property in goods passes the buyer and he become
legally liable to pay.
8. Materiality concepts: - It is a one of the accounting principle, as per only important
information will be taken, and UN important information will be ignored in the preparation of the
financial statement.
9. Matching concepts: - The cost or expenses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an increase in owners capital,
which is a result of excess of revenue over expenses and loss.
231. Financial analysis: The process of interpreting the past, present, and future financial
condition of a company.
232. Income statement: An accounting statement which shows the level of revenues,
expenses and profit occurring for a given accounting period.
233. Annual report: The report issued annually by a company, to its share holders. it
containing financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the owner of the asset
gives the right to use the asset to the user over an agreed period of the time for a consideration.
236. Opportunity cost: The cost associated with not doing something.
237. Budgeting: The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.

238. Capital: The term capital refers to the total investment of company in money, tangible
and intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization: When a business is unable to earn fair rate on its outstanding
securities.
241. Under capitalization: When a business is able to earn fair rate or over rate on it is
outstanding securities.
242. Capital gearing: The term capital gearing refers to the relationship between equity and
long term debt.
243. Cost of capital: It means the minimum rate of return expected by its investment.
244. Cash dividend: The payment of dividend in cash
245. Define the term accrual: Recognition of revenues and costs as they are earned or
incurred. it includes recognition of transaction relating to assets and liabilities as they occur
irrespective of the actual receipts or payments.
245. Accrued expenses: An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.
246. Accrued revenue: Revenue which has been earned is an earned is an accounting period
but in respect of which no enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet enforceable claim by another person which
accumulates with the passage of time or the receipt of service or otherwise. It may rise from the
purchase of services which at the date of accounting have been only partly performed and are not yet
billable.
248. Convention of Full disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information will be
made.
249. Convention of consistency: According to this convention it is essential that accounting
practices and methods remain unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure relating to the formation of an
enterprise. There include legal accounting and share issue expenses incurred for formation of the
enterprise.
251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be
fixed charge and floating charge.
252. Appropriation: It is application of profit towards Reserves and Dividends.
253. Absorption costing: A method where by the cost is determine so as to include the
appropriate share of both variable and fixed costs.
254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a
product. It is also called variable cost.
255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related
to the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on
the sale of fixed assets, interest received from other company investments, profit or loss on foreign
exchange, unexpected dividend received.
256. Share premium: The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the
liabilities side under the head of reserves & surplus.
257. Accumulated Depreciation: The total to date of the periodic depreciation charges on
depreciable assets.
258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.

259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid
up share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital assets which are in the process of
construction as completion.
261. Convertible Debenture: A debenture which gives the holder a right to conversion
wholly or partly in shares in accordance with term of issues.
262. Redeemable Preference Share: The preference share that is repayable either after a
fixed (or) determinable period (or) at any time dividend by the management.
263. Cumulative preference shares: A class of preference shares entitled to payment of
emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.
264. Debenture redemption reserve: A reserve created for the redemption of debentures at a
future date.
265. Cumulative dividend: A dividend payable as cumulative preference shares which it
unpaid Emulates as a claim against the earnings of a corporate before any distribution is made to the
other shareholders.
266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in
future years.
267. Opening Stock: The term opening stock means goods lying unsold with the
businessman in the beginning of the accounting year. This is shown on the debit side of the trading
account.
268. Closing Stock: The term Closing Stock includes goods lying unsold with the
businessman at the end of the accounting year. The amount of closing stock is shown on the credit
side of the trading account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued on the basis of Cost or Market
prices whichever is less principle.
272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss
will be known as determined only as the occurrence or non occurrence of one or more uncertain
future events.
273. Contingent Asset: An asset the existence ownership or value of which may be known
or determined only on the occurrence or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an existing condition or situation which may
arise in future depending on the occurrence of one or more uncertain future events.
275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called
deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes included as a separate section of the
profit and loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on redemption of the average cost: - the
cost of an item at a point of time as determined by applying an average of the cost of all items of the
same nature over a period. When weights are also applied in the computation it is termed as weight
average cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.
281. Difference between Funds flow and Cash flow statement: A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with

change in working capital position between two balance sheet dates. A cash flow statement is merely
a record of cash receipts and disbursements. While studying the short-term solvency of a business
one is interested not only in cash balance but also in the assets which are easily convertible into cash.
282. Difference between the Funds flow and Income statement:
A funds flow statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used, whereas an income
statement discloses the results of the business activities, i.e., how much has been earned and how it
has been spent. A funds flow statement matches the funds raised and funds applied during a
particular period. The source and application of funds may be of capital as well as of revenue nature.
An income statement matches the incomes of a period with the expenditure of that period, which are
both of a revenue nature.

What is an irrevocable letter of credit?

An irrevocable letter of credit is a financial instrument used by banks to guarantee a buyer's
obligations to a seller. It is irrevocable because the letter of credit cannot be modified unless
all parties agree to the modifications.
Irrevocable letters of credit are often used to facilitate international trade because of the
additional risks involved. The irrevocable letter of credit removes the seller's credit risk by
assuring the seller that payment will be made by the buyer's bank if the buyer does not pay the
seller.
In an irrevocable letter of credit, the buyer is known as the applicant, the seller is the beneficiary,
the buyer's bank is the issuing bank, and the seller's bank is the advising bank.

What is the difference between an invoice

and a voucher?
An invoice from a vendor is the bill that is received by the purchaser of goods or services from
an outside supplier. The vendor invoice lists the quantities of items, brief descriptions, prices,
total amount due, credit terms, where to remit payment, etc.
A voucher is an internal document used in a company's accounts payable department in
order to collect and organize the necessary documentation and approvals before paying a vendor
invoice. The voucher acts as a cover page to which the following will be attached: vendor
invoice, company's purchase order, company's receiving report, and other information needed to
process the vendor invoice for payment.

What is a trade discount?

A trade discount is a reduction to the published price of a product. For example, a high-volume
wholesaler might be entitled to a 40% trade discount, while a medium-volume wholesaler is
given a 30% trade discount. A retail customer will receive no trade discount and will have to pay
the published or list price. The use of trade discounts allows for having just one published price
for each product.
The sale and purchase will be recorded at the amount after the trade discount is subtracted. For
example, when goods with list prices totaling $1,000 are sold to a wholesale customer entitled to
a 30% trade discount, both the seller and the buyer will record the transaction at the net amount
of $700.
Trade discounts are different from early-payment discounts. (Early-payment discounts of
1% or 2% are likely to be recorded by the seller as a sales discount and by the buyer using the
periodic inventory method as a purchase discount.)

What is the monthly close?

In accounting the monthly close is the processing of transactions, journal
entries and financial statements at the end of each month. Under the accrual method
of accounting, it is imperative that the financial statements reflect only the transactions and
journal entries having relevance to the current month's revenues and expenses, and end-of-themonth assets and liabilities. Expressed another way, the monthly close must achieve a
proper cutofof each month's financial activities.
To ensure that the monthly financial statements are accurate and timely, companies will use
standard journal entries, recurring journal entries, and checklists for the tasks that must be
completed.
If a company has inventories, its monthly close will be more challenging as it will have to be
certain that the costs are recorded in the same month as the goods are added to the inventories. In
short, the accrual of expenses becomes immensely important when goods are received and are
sold.
Another important step in the monthly close is to compare the amounts and percentages on the
current financial statements to those of earlier months. For example, if the current income
statement shows the cost of goods sold as 88% instead of the typical 81%, the current month's
amounts need to be reviewed before releasing the financial statements. Often the comparison of

the balance sheet amounts to those of earlier months will provide insight as to unusual amounts
shown on the income statement.

What does drop ship mean?

One example of drop ship is a manufacturer shipping goods directly to one of its customers'
customer (instead of delivering the goods to the customer that placed the order with the
manufacturer). The following illustrates the concept of drop ship, drop shipping or a drop
shipment.
Assume that XYZ Distributors Inc (XYZ) sells only the Premier brand of water heaters. XYZ
receives an order for 40 of the water heaters from a condominium developer located 30 miles
away. XYZ then places an order for 40 water heaters from Premier Manufacturing Corp.
However, XYZ instructs Premier to deliver them directly to the condo project. So
instead of delivering them to XYZ's warehouse, Premier is asked to drop ship them to the
condo project. The drop ship means that XYZ will not have to receive the water heaters, unload
them, reload them onto its trucks and then deliver them to the condo project. Hence the drop ship
allows XYZ to avoid some expensive non-value-added activities.
When Premier ships the water heaters, it will bill XYZ and will send the invoice to XYZ. As a
result XYZ will have a purchase and an account payable for the amount charged by Premier.
XYZ will prepare its own sales invoice to bill the condo developer.

What is a current liability?

A current liability is an obligation that is 1) due within one year of the date of a
company's balance sheet and 2) will require the use of a current asset or will create
another current liability. If a company's operating cycle is longer than one year,
current liabilities are those obligation's due within the operating cycle.
Current liabilities are usually presented in the following order:

1.

the principal portion of notes payable that will become due within one year

2.

accounts payable

3.

the remaining current liabilities such as payroll taxes payable, income taxes
payable, interest payable and other accrued expenses

The parties who are owed the current liabilities are referred to as creditors. If the
creditors have a lien on company assets, they are known as secured creditors. The
creditors without a lien are referred to as unsecured creditors.
The amount of current liabilities is used to determine a company's working
capital (current assets minus current liabilities) and the company's current
ratio (current assets divided by current liabilities).

What is a creditor?
A creditor may be a bank, supplier or person that has provided credit to a company.
In other words, a company owes money to its creditors. The amounts owed to
creditors are reported on the company's balance sheet as liabilities.
If a creditor required the company to sign a promissory note for the amount owed,
the company will record and report the amount as Notes Payable. If a creditor is a
vendor or supplier that did not require the company to sign a promissory note, the
company will likely report the amounts owed as Accounts Payable. Other examples
of creditors include company's employees (who are owed wages and bonuses),
governments (who are owed taxes), and customers (who made deposits or other
prepayments).
Some creditors are known as secured creditors because they have a lien or other
legal claim to the company's (debtor's) assets. Other creditors are often unsecured
creditors since they do not have a lien or legal right to specific assets of the
company.
Most balance sheets report the amounts owed to creditors in two groupings: current
liabilities and non-current (or long-term) liabilities.

What is a liability account?

A liability account is a general ledger account in which a company records its debt,
obligations, customer deposits and customer prepayments, certain deferred income
taxes, etc. that are the result of a past transaction. Common liability accounts under
the accrual method of accounting include Accounts Payable, Accrued Liabilities

(amounts owed but not yet recorded in Accounts Payable), Notes Payable, Unearned
Revenues, Deferred Income Taxes (certain temporary timing differences), etc.
The balances in liability accounts are nearly always credit balances and will be
reported on the balance sheet as either current liabilities or noncurrent (or longterm) liabilities.
The company with the liability account for the debt or payables is known as the
debtor. The lenders, vendors, suppliers, employees, tax agencies, etc. who are owed
the money are known as the company's creditors.

What is an account payable?

An account payable is an obligation to a supplier or vendor for goods or services
that were provided in advance of payment.
To illustrate an account payable let's assume that Joe's Plumbing Service provides
XCorp with repair services on August 29 and agrees to bill XCorp. On August 31
XCorp receives an invoice from Joe's for $900. The invoice states that the $900 is
due within 30 days. After reviewing and approving the invoice, XCorp enters Joe's
invoice into its accounting records with a credit to Accounts Payable and debit to
Repairs and Maintenance Expense.
Until the invoice from Joe's Plumbing Service is paid, Joe's invoice serves as the
supporting document for XCorp's accounts payable and also as a supporting
document for Joe's accounts receivable.

What are direct materials?

Direct materials are the traceable matter used in manufacturing a product. The direct materials
for a manufacturer of dessert products will include flour, sugar, eggs, milk, vegetable oil, spices,
and other ingredients in the recipes. In manufacturing, the direct materials are listed in each
product's bill of materials. (Indirect materials such as oil for greasing the baking pans, etc.
will likely be viewed as part of the manufacturing supplies and will be allocated to products
along with other manufacturing overhead.)
The direct materials contained in manufactured products are also defined as:

a product cost (along with the costs of the direct labor and
manufacturing overhead)

an inventoriable cost (along with the costs of direct labor and

manufacturing overhead)
a prime cost (along with the cost of direct labor)

The costs of direct materials should be reported in the financial statements according to their
location or position:

if not yet put into production, report as raw materials inventory on the
balance sheet

if put into production but the goods are not completed, report as part
of the cost of work-in-process inventoryon the balance sheet

if put into production and the goods are completed but not yet sold,
report as part of the cost of the finished goods inventory on the balance
sheet

if put into production and the goods have been completed and sold,
report as part of the cost of goods sold on the income statement

What is a rubber check?

A rubber check is a check that is not paid (or honored) by the bank on which it is
drawn. The reason the check is not paid is the maker's account had insufficient
funds or not sufficient funds (NSF). Instead of the check being paid, it will be
returned (or bounced back) through the banking system. Because the check was
bounced back by the bank, the check is described as a rubber check.
A rubber check also causes bank fees for the maker of the check and for the
depositor of the check. These fees need to be recorded in the general ledger
accounts. If the fees are overlooked initially, they will be adjusting items to the
balance per books in the bank reconciliation.
If a rubber check is not redeposited by the payee, the payee must also reduce its

general ledger cash account for the amount of the check (and also debit another
general ledger account).

Why does a company prepare a bank

reconciliation?
My top 3 reasons for a company to prepare a bank reconciliation are:

1.

To be certain that the amount of cash reported on the company's

balance sheet (and the balance in its general ledger Cash account) is the
correct amount. The additions and deductions on the bank statement are
compared (or reconciled) with the items that are entered in the
company's general ledger Cash account. Some differences, such
as outstanding checks and deposits in transit, are noted as simply timing
differences.

2.

Since most companies use double-entry accounting or bookkeeping,

any omission or error in the company's general ledger Cash account also
means that another general ledger account will have a corresponding
omission or error. For example, if a company had wired money from its
bank account for emergency computer maintenance services and had not
recorded the credit to its Cash account, it is also omitting the debit to the
account Computer Maintenance Expense. The bank reconciliation could
prevent this company from issuing an incorrect balance sheet (incorrect
Cash and incorrect Retained Earnings) and an incorrect income statement
(expenses would be too low, net income would be too high).

3.

Performing a bank reconciliation results in improved internal control

over the company's cash if done by someone other than the employee(s)
handling and/or recording receipts and payments. Having another person
reconciling the bank statement is known as the separation or segregation
of duties and it should reduce the odds of dishonest acts involving the
company's cash.

What is a credit memo?

One type of credit memo is issued by a seller in order to reduce the amount that a
customer owes from a previously issued sales invoice. For instance, assume that
SellerCorp had issued a sales invoice for $800 for 100 units of product that it
shipped to BuyerCo at a price of $8 each. BuyerCo informs SellerCorp that one of
the units is defective and SellerCorp issues a credit memo for $8. The credit memo
will cause the following in SellerCorp's accounting records: 1) a debit of $8 to Sales
Returns and Allowances, and 2) a credit of $8 to Accounts Receivable. In other
words, the credit memo reduced SellerCorp's net sales and its accounts receivable.
When BuyerCo records the credit memo, the following will occur in its accounting
records: 1) a debit of $8 to Accounts Payable, and 2) a credit of $8 to Purchases
Returns and Allowances (or Inventory).

What is an uncleared cheque?

An uncleared cheque is a cheque that has been written and recorded in the payer's
records, but the cheque has not yet been paid by the bank on which it is drawn. In
the U.S. accounting textbooks, an uncleared cheque is referred to as an outstanding
check.
In the bank reconciliation process an uncleared cheque (or outstanding check) is
deducted from the balance shown on the bank statement to arrive at the correct or
adjusted balance per bank.

What is a promissory note?

A promissory note is a written promise to pay an amount of money by a specified
date (or on demand). The promissory note could involve a loan from a bank, a loan
from a relative, a replacement for an account payable, etc.
The written amount of money is referred to as the face amount. The face amount
will be recorded in the promisor's (borrower's) general ledger with a credit to the
liability account Notes Payable or Loans Payable. The promisee (lender) will record
the face amount with a debit to its asset account Notes Receivable.
If the promissory note specifies a fair interest rate, it is used to accrue
interest expense and interest payable on the books of the borrower. The lender will
accrue interest revenue or income and interest receivable.
If the promissory note does not specify interest, it should be assumed that the face

amount includes some interest. The estimated future amount of interest should be
recorded by the borrower in the contra accountDiscount on Notes Payable. The
lender should record the same amount in a contra account Discount on Notes
Receivable. The discount is then amortized over the life of the note to Interest
Expense (borrower) and Interest Revenue (lender).

What is accounts receivable?

Accounts receivable is the money that a company has a right to receive because it
had provided customers with goods and/or services. For example, a manufacturer
will have an account receivable when it delivers a truckload of goods to a customer
on June 1 and the customer is allowed to pay in 30 days. From June 1 until the
company receives the money, the company will have an account receivable (and
the customer will have an account payable). Accounts receivables are also known as
trade receivables.
Companies who sell on credit are unlikely to have liens on their customers' property.
Hence, there is a risk that the full amount of their accounts receivable might not be
collected. This means that companies need to cautious when granting credit and
establishing an account receivable. If there is uncertainty of a potential (or existing)
customer's credit worthiness, it is wise for the company to require the customer to
pay with a credit card before delivering goods or services.
It is also important for a company to monitor its accounts receivable and to
immediately follow up with any customer who has not paid as agreed. An aging of
accounts receivable is a tool that will help and it is readily available with most
accounting software. A general rule is that the older a receivable gets, the less likely
it will be collected in full.
Accounts receivable are reported as a current asset on a company's balance sheet.
Good accounting requires that an estimate be made for the amount that is unlikely
to be collected. That estimate is reported as a credit balance in a related receivable
account such as Allowance for Doubtful Accounts. Any adjustments to the Allowance
balance will also be recorded in the income statement account Uncollectible
Accounts Expense.

What is the aging method?

The aging method usually refers to the technique used for determining the credit
balance needed in the account Allowance for Doubtful (or Uncollectible) Accounts.
This Allowance account is a contra asset account connected with Accounts

Receivable. Usually when a credit adjustment is entered into the Allowance account,
a corresponding debit amount is entered into Bad Debts Expense (or Uncollectible
Accounts Expense).
The aging method takes place by sorting a company's accounts receivable
according to the dates of these unpaid invoices. The invoice amounts that are not
yet due are entered into the first of perhaps five columns. The invoice amounts that
are 1-30 days past due are entered into the second column. Amounts that are 31-60
days past due are entered into the third column, and so on. (Accounting software
will likely have a feature for generating an aging of accounts receivable.) The aging
will be reviewed in order to determine the approximate amount of the receivables
that may not be collected.
The goal of the aging method is to have the company's balance sheet report the
true amount of the receivables that will be turning to cash. For example, if the
company's Accounts Receivable has a debit balance of $89,400 but the company
estimates (based on its aging) that only $82,000 will be collected, the Allowance
account must report a credit balance of $7,400.
If a company fails to report a needed credit balance in its Allowance account, it will
be overstating its assets, working capital, current ratio, retained earnings,
and stockholders' equity. Its current period's earnings may also be overstated.

Are the goods purchased by a retailer an expense or an asset?

Some retailers view the goods purchased as part of the expense known as the cost
of goods sold. Other retailers view the goods purchased as part of the
asset inventory.
To appreciate both views, let's assume that a retailer begins the year with inventory
having a cost of $800. It ends the year with inventory having a cost of $900. During
the year the retailer purchased goods having a cost of $7,000. Let's also assume
that the cost per unit did not change during the year.
Retailer X may view the $7,000 of purchases as an expense (cost of goods sold)
except for $100, which was the cost of the goods added to its inventory ($900 vs.
$800). Retailer X's income statement reports its cost of goods sold as: purchases of
$7,000 minus the $100 increase in inventory = $6,900.
Retailer Y may view the $7,000 of purchases as an increase to its asset inventory
and will report its cost of goods sold as: beginning inventory of $800 + purchases of

$7,000 = cost of goods available of $7,800 minus the ending inventory of $900 =
$6,900.
Regardless of whether the goods purchased are initially recorded in an inventory
account or in a cost of goods sold account, the amounts reported on the financial
statements must be the same: the expense (reported as the cost of goods sold on
the income statement for the year) is $6,900 and the asset inventory (reported on
the balance sheet as of the end of the year) is $900.

Why are some expenses deferred?

Generally, expenses are deferred in order to comply with the accounting guideline
known as the matching principle.
To illustrate the concept, let's assume that a company pays $3,000 on December 30
to rent a warehouse for the upcoming three-month period of January 1 through
March 31. Since none of the $3,000 expires or is used up in December, none of the
amount should be reported as rent expense on the income statement for the month
of December. Hence the $3,000 is deferred to a balance sheet account such as
Prepaid Rent (or Prepaid Expenses), which is a current asset account.
During the three months of January 1 through March 31 (when the prepaid rent is
expiring) the $3,000 prepayment must be moved from the balance sheet asset
account to an income statement expense account. The usual allocation will involve
an adjusting entry to debit Rent Expense for $1,000 and credit Prepaid Rent for
$1,000 on January 31, February 28 and March 31.

When do you adjust the amount of prepaid expenses?

The balance in the current asset account Prepaid Expenses should be adjusted prior
to issuing a company's financial statements. If the company issues financial
statements for each calendar month, you will need to adjust the balance in Prepaid
Expenses as of the end of each month. If your company issues only quarterly
financial statements, you will need to adjust the balance at the end of each quarter.
The goal is to have the balance in Prepaid Expenses be equal to the amount of the
unexpired costs as of the end of the accounting period (which is also the date
appearing in the heading of the balance sheet).

Usually the adjusting entry for prepaid expenses will be a credit to Prepaid Expenses
and a debit to the appropriate expense account(s). For instance, if Prepaid Expenses
involve the prepayment of insurance premiums the adjusting entry will include a
debit to Insurance Expense.

What are prepaid expenses?

Prepaid expenses are future expenses that have been paid in advance. You can
think of prepaid expenses as costs that have been paid but have not yet been used
up or have not yet expired.
The amount of prepaid expenses that have not yet expired are reported on a
company's balance sheet as an asset. As the amount expires, the asset is reduced
and an expense is recorded for the amount of the reduction. Hence, the balance
sheet reports the unexpired costs and the income statement reports the expired
costs. The amount reported on the income statement should be the amount that
pertains to the time interval shown in the statement's heading.
A common prepaid expense is the six-month premium for insurance on a company's
vehicles. Since the insurance company requires payment in advance, the amount
paid is often recorded in the current asset account Prepaid Insurance. If the
company issues monthly financial statements, its income statement will
report Insurance Expense that is one-sixth of the amount paid. The balance in the
account Prepaid Insurance will be reduced by the amount that was debited to
Insurance Expense.

What is prepaid insurance?

Prepaid insurance is the portion of an insurance premium that has been paid in
advance and has not expired as of the date of the balance sheet. This unexpired
cost is reported in the current asset account Prepaid Insurance.
As the amount of prepaid insurance expires, the expired cost is moved from the
asset account Prepaid Insurance to the income statement account Insurance
Expense. This is usually done at the end of each accounting periodthrough an
adjusting entry.
To illustrate prepaid insurance, let's assume that on November 20 a company pays
an insurance premium of $2,400 for the six-month period of December 1 through

May 31. On November 20, the payment is entered with adebit of $2,400 to Prepaid
Insurance and a credit of $2,400 to Cash. As of November 30 none of the $2,400
has expired and the entire $2,400 will be reported as Prepaid Insurance. On
December 31, an adjusting entry will debit Insurance Expense for $400 (the amount
that expired: 1/6 of $2,400) and will credit Prepaid Insurance for $400. This means
that the debit balance in Prepaid Insurance at December 31 will be $2,000 (5
months of insurance that has not yet expired times $400 per month; or 5/6 of the
$2,400 insurance premium cost).

What is a noncash expense?

A noncash expense is an expense that is reported on the income statement of the
current accounting period, but there was no related cash payment during the
period.
A common example of a noncash expense is depreciation. For instance, if a
company purchased equipment on December 31, 2012 for $200,000 cash, it could
have Depreciation Expense of $20,000 in each of the next 10 years. As a result its
income statement will report Depreciation Expense of $20,000 in each of the years
2013 through 2022. Since there is no cash payment in any of those years, each
year's $20,000 of depreciation expense is referred to as a noncash expense.
Another example of a noncash expense is the amortization of bond issue costs.
Perhaps a corporation costs incurred of $300,000 for professional fees and
registration fees in order to issue $20 million in bonds. If the bonds will mature in 10
years, the corporation will defer the $300,000 of bond issue costs to the balance
sheetand will then amortize the cost (send the cost to expense) at a rate of $30,000
per year. In each of the years of the bonds' life the corporation's income statement
will report $30,000 of bond issue costs expense which will be a noncash expense.

What is the accrual method?

The accrual method of accounting reports revenues on the income statement when
they are earned even if the customer will pay 30 days later. At the time that the
revenues are earned the company will credit a revenue account and will debit the
asset account Accounts Receivable. (When the customer pays 30 days after the
revenues were earned, the company will debit Cash and will credit Accounts
Receivable.)

The accrual method of accounting also requires that expenses and losses be
reported on the income statement when they occur even if payment will take place
30 days later. For example, if a company has a $15,000 repair done on December
15 and the vendor allows for payment on January 15, the company will report a
repair expense and a liability of $15,000 as of December 15. (On January 15 the
company will credit Cash and will debit the liability account.)
The accrual method of accounting, which is also known as the accrual basis of
accounting, is required for large companies. (The cash method of accounting may
be used by individuals and some small companies.) The accrual method and the
associated adjusting entries will result in a more complete and accurate reporting of
a company's assets, liabilities, equity, and earnings during each accounting period.

What is scrap value?

In financial accounting, scrap value is associated with the depreciation of assets
used in a business. In this situation, scrap value is defined as the expected or
estimated value of the asset at the end of its useful life. Scrap value is also referred
to as an asset's salvage value or residual value. The following example illustrates
how the scrap value is used.
A business acquires equipment at a cost of $150,000 and estimates that its scrap
value will be $10,000 at the end of its useful life of 7 years. The annual straight-line
depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value)
divided by 7 years]. Accountants and U.S. income tax regulations often assume that
for the depreciation calculation the asset will have no scrap value. (If cash is
received when the asset is scrapped, any amount that is in excess of the asset's
carrying value will be reported as a gain.)
In cost accounting, scrap value often refers to the amount that a manufacturer will
receive from materials or products that will be scrapped.

What is accumulated depreciation?

Accumulated depreciation is the total amount of a plant asset's cost that has
been allocated to depreciation expense since the asset was put into service.
Accumulated depreciation is associated with constructed assets such as buildings,
machinery, office equipment, furniture, fixtures, vehicles, etc.
Accumulated Depreciation is also the title of the contra asset account which is

credited when Depreciation Expense is recorded each accounting period.

The amount of accumulated depreciation is used to determine a plant asset's book
value (or carrying value). For example, a delivery truck having a cost of $50,000
and accumulated depreciation of $31,000 will have a book value of $19,000. (It is
important to note that an asset's book value does not indicate the asset's market
value since depreciation is merely an allocation technique.)
The accumulated depreciation of each plant asset cannot exceed the asset's cost. If
an asset remains in use after its cost has been fully depreciated, the asset's cost
and its accumulated depreciation will remain in the general ledger accounts and the
depreciation expense stops. When the asset is disposed (sold, retired, etc.) the
asset's cost and accumulated depreciation are removed from the accounts.

What is depreciation expense?

Depreciation expense is the allocated portion of the cost of a company's fixed
assets that is appropriate for the accounting period indicated on the company's
income statement. For instance, if a company had paid $2,400,000 for its office
building (excluding land) and the building has an estimated useful life of 40 years,
each monthly income statement will report straight-line depreciation expense of
$5,000 for 480 months. [However, the allocated cost of the fixed assets used
in manufacturing will be part of the manufacturing overhead which will become part
of the cost of the products manufactured.]
Depreciation expense is referred to as a noncash expense because the recurring,
monthly depreciation entry (a debit to Depreciation Expense and a credit
to Accumulated Depreciation) does not involve a cash payment. As a result, the
statement of cash flows prepared under the indirect method will add depreciation
expense to the amount of net income.
The common methods for computing depreciation expense include straightline, double-declining balance, sum-of-the-years digits, and units of production or
activity.

What is accelerated depreciation?

Accelerated depreciation is the allocation of a plant asset's cost in a faster manner
than the straight line depreciation. Compared to straight line depreciation,

accelerated depreciation will mean 1) more depreciation in the earlier years of an

asset's life and 2) less depreciation in the later years of the asset's life. [Note that
the total amount of depreciation over the asset's life will be the same regardless of
the depreciation method used.] Hence, the difference between accelerated
depreciation and straight line depreciation is the timingof the depreciation.
Three examples of accelerated depreciation methods include double-declining
(200% declining) balance, 150% declining balance, and sum-of-the-years' digits
(SYD).
The U.S. income tax regulations allow a business to use accelerated depreciation on
its income tax return while using straight line depreciation on its financial
statements. For profitable corporations this will likely result in deferred income tax
payments being reported on its financial statements.

What is straight line depreciation?

Straight line depreciation is likely to be the most common method of matching
a plant asset's cost to the accounting periods in which it is in service. Under the
straight line method of depreciation, each full accounting year will be allocated the
same amount or percentage of an asset's cost. (The total amount
of depreciation over the years of the asset's useful life will be the asset's cost minus
any expected or assumed salvage value.)
To illustrate straight line depreciation let's assume that a company purchases
equipment at a cost of $430,000 and it is expected to be used in the business for 10
years. At the end of the 10 years, the company expects to receive a salvage value
of $30,000. Under the straight line method each full accounting year will be
allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000
that needs to be depreciated over the useful life of the equipment. If the asset is
purchased in the middle of the accounting year there will be $20,000 of
depreciation in the first and the eleventh accounting year and $40,000 in each of
the years 2 through 10.
In the U.S. a company may use the straight line method for its financial
statements while at the same time be using the Internal Revenue Service's faster
depreciation on its federal income tax return.

What is depreciation?
Depreciation is the assigning or allocating of a plant asset's cost to expense over
the accounting periods that the asset is likely to be used. For example, if a business
purchases a delivery truck with a cost of $100,000 and it is expected to be used for
5 years, the business might have depreciation expense of $20,000 in each of the
five years. (The amounts can vary depending on the method and assumptions.)
In our example, each year there will be an adjusting entry with a debit to
Depreciation Expense for $20,000 and acredit to Accumulated Depreciation for
$20,000. Since the adjusting entries do not involve cash, depreciation expense is
referred to as a noncash expense.

Are depreciation, depletion and amortization similar?

In accounting the terms depreciation, depletion and amortization often involve the
movement of costs from the balance sheet to the income statement in a systematic
and logical manner.
For example, the systematic expensing of the cost of assets such as buildings,
equipment, furnishings and vehicles is known as depreciation. The systematic
expensing of the cost of natural resources is referred to asdepletion. The systematic
expensing of other long-term costs such as bond issue costs and organization costs
is referred to as amortization.
Depreciation, depletion and amortization are also described as noncash expenses,
since there is no cash outlay in the years that the expense is reported on the
income statement. As a result, these expenses are added back to the net income
reported in the operating activities section of the statement of cash flows when it is
prepared under the indirect method.
The term amortization is also used to indicate the systematic reduction in a loan
balance resulting from a predetermined schedule of interest and principal
payments.

What is burn rate?

In business, burn rate is usually the monthly amount of cash spent in the early
years of a start-up business. Burn rate is an important metric since the new
business must spend time and money developing a product or service before it
obtains cash from revenues.
If a company has $200,000 in initial cash and its burn rate is $20,000 per month,
the company will be out of cash in 10 months unless it raises additional money,
begins to generate significant revenues, or reduces its burn rate. Hence, it is
important that a start-up business monitor all of its expenditures and avoid
payments that will not speed up or increase revenues.
The cash flow statement, formally known as the statement of cash flows, is an
important financial statement that can be helpful in computing a realistic burn rate.

How can a company have a profit but not have cash?

A company can have a profit but not have cash because profit is computed
using revenues and expenses, which are different from the company's cash receipts
and cash disbursements. In other words, there is a difference between revenues and
receipts. There is also a difference between expenses and expenditures.
To illustrate, let's assume that a new company uses the accrual method of
accounting. It provides $10,000 of services to its clients in its first month and the
clients are allowed to pay in 30 days. The company will have $10,000 of revenues in
its first month, but the cash will not be received until the second month. If the
company's expenses are $7,000 in the first month, the company will report a profit
of $3,000 but will not have received any cash from its clients.
Another company might have a profit of $60,000 in its first year, but during its first
year it uses $65,000 of cash to acquire equipment that will be put into service at
the beginning of the second year. This company will have a profit, but will not have
the cash.
Other examples where cash is paid out, but the profits are not reduced at the time
of the payment, include prepayments of insurance, payments to increase
the inventory of merchandise on hand, and payments to reduce liabilities.

How can a business increase its cash flow from operations?

A business can increase its cash flow from operations (or operating activities) by
looking closely at each of its current assets and current liabilities. For instance, a
manufacturer should examine its inventories of materials, work-in-process, finished
goods, and supplies to identify the inventory items which have not turned over in a
long time. Those items may need to be scrapped so that a loss can be reported and
cash will not flow for income taxes. It may also mean less cash flowing out for new
materials. Reviewing the turnover of each and every item may allow the company
to reduce the inventory quantities thereby freeing up cash that would have been
sitting ininventory.
Accounts receivable needs to be monitored to be certain that every customer is
adhering to the agreed upon credit terms and that the terms are consistent with
your industry. You need to get those receivables turning to cash. Accounts
payable should be reviewed to be sure that your company's cash is not being paid
to suppliers prior to the required payment dates.
In addition to the in-depth review of each of the current assets and current
liabilities, companies need to review its staffing in light of current levels of business
and the recent advances in software and technology. Perhaps the company can
function just fine with a few less salaried employees.
Lastly, the selling prices of some of a company's products, especially those that
require lots of complex activities and result in many inefficiencies and headaches,
may need to be increased.

What is working capital?

Working capital is the amount of a company's current assets minus the amount of
its current liabilities. For example, if a company's balance sheet dated June 30 reports
total current assets of $323,000 and total current liabilities of $310,000 the company's working
capital on June 30 was $13,000. If another company has total current assets of $210,000 and total
current liabilities of $60,000 its working capital is $150,000.
The adequacy of a company's working capital depends on the industry in which it competes, its
relationship with its customers and suppliers, and more. Here are some additional factors to
consider:

The types of current assets and how quickly they can be

converted to cash. If the majority of the company's current assets
are cash and cash equivalents and marketable investments, a smaller
amount of working capital may be sufficient. However, if the current

assets include slow-moving inventory items, a greater amount of working

capital will be needed.

The nature of the company's sales and how customers pay. If a

company has very consistent sales via the Internet and its customers pay
with credit cards at the time they place the order, a small amount of
working capital may be sufficient. On the other hand, a company in an
industry where the credit terms are net 60 days and its suppliers must be
paid in 30 days, the company will need a greater amount of working
capital.

The existence of an approved credit line and no borrowing. An

approved credit line and no borrowing allows a company to operate
comfortably with a small amount of working capital.

How accounting principles are applied. Some companies are

conservative in their accounting policies. For instance, they might have a
significant credit balance in their allowance for doubtful accounts and will
dispose of slow-moving inventory items. Other companies might not
provide for doubtful accounts and will keep slow-moving items in inventory
at their full cost.

In short, analyzing working capital should involve more than simply subtracting current
liabilities from current assets.

What is goodwill?
In accounting, goodwill is an intangible asset associated with a business
combination. Goodwill is recorded when a company acquires (purchases) another
company and the purchase price is greater than the combination or net of 1) the fair
value of the identifiable tangible and intangible assets acquired, and 2) the
liabilities that were assumed.
Goodwill is reported on the balance sheet as a noncurrent asset. Since 2001, U.S.
companies are no longer required to amortize the recorded amount of goodwill.
However, the amount of goodwill is subject to a goodwill impairment test at least
once per year.
Outside of accounting, goodwill could refer to some value that has been developed
within a company as a result of delivering amazing customer service, unique

management, teamwork, etc. This goodwill, which is unrelated to a business

combination, is not recorded or reported on the company's balance sheet.

What is par value?

Par value is a per share amount appearing on stock certificates. It is also an amount
that appears on bondcertificates.
In the case of common stock the par value per share is usually a very small amount
such as $0.10 or $0.01 or $0.001 and it has no connection to the market value of
the share of stock. The par value is usually described as the common stock's legal
capital and it is part of the corporation's paid-in (or contributed) capital.
When a share of common stock having a par value of $0.01 is issued for $25, the
account Common Stock will be credited for $0.01 and an additional paid-in
capital account will be credited for $24.99 (and Cash will be debited for $25.00).
If a state no longer requires a corporation's common stock to have a par value, a
corporation might issue no-par stock (which may or may not have a stated value).
In the case of bonds, the par value is also the face amount or maturity value of the
bonds.

What is treasury stock?

Treasury stock is a corporation's previously issued shares of stock which have been
repurchased from the stockholders and the corporation has not retired the
repurchased shares. The number of shares of treasury stock (or treasury shares) is
the difference between the number of shares issued and the number of
sharesoutstanding. Since the treasury shares result in fewer shares outstanding,
there may be a slight increase in the corporation's earnings per share.
Treasury Stock is also the title of a general ledger account that will typically have
a debit balance equal to the cost of the repurchased shares being held by the
corporation. (Some corporations use the par value method instead.) The cost of the
treasury stock purchased with cash will reduce the corporation's cash and the
amount of its total stockholders' equity.
The shares of treasury stock will not receive dividends, will not have voting rights,

and cannot result in an income statement gain or loss. The shares of treasury stock
can be sold, retired, or could continue to be held as treasury stock.