Key Accounting & Financial Terms
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 concernconcept
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 igned 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. Intangible 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. Out standing 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 is called pref. shares
Pref.rights in respect of fixed dividend.
Pref.right to repayment of capital in the even 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 a 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 money’s 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 crated by:
1.Excessive dep.of 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 can not 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 proprietor’s 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
firm’s 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 long-term projects.
82. Pay back period:
payback period represents the time period required for complete recovery
of the initial investment in the project.
83. ARR: accounting or average rate 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 in flows 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 a 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 a 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 entrepreneurs 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
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 eposits 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 receipt 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 relevant experience
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 firm’s 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 manner and allows reallocation of
source from low to high priority programs.
125. Goodwill:
The present value of firm’s 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 today’s 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 some thing. 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 it self.
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 some what 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. For ex; unit 64
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 fund’s portfolio.
189. Scheme take over: if an existing MF scheme is taken
over by the 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 earning ratio: the ratio between the share price
and the post tax earnings of company is called as price earning 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 earning 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
Earning
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 adepuate long-term 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 contributes towards sales.
Formula: Net Sales
--------------------------
Fixed
Assets
222. Pay-out 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 lender’s 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 proprietor’s funds and the
total tangible assets.
Formula: Shareholders funds
----------------------------
Total tangible assets
228. Difference between joint
venture and partner ship: 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 partner ship , 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 transactions which are not related to the business are 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 umulates 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 cumulates 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.
