ACCOUNTING BASICS 1. Definition of accounting: 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. oing concern concept !. "oney measurement concept #. !ost concept $. #ual aspect concept %. Accounting Accounting period concept . &eriodic matching of costs and revenue concept '. (ealization concept. 4 Conentions of accounting:
A. !onservatism B. %ull disclosure !. !onsistency #. "ateriality !. S"ste#s of $ook keeping:
A. single entry system B. double entry system %. S"ste#s of accounting:
A. !ash system accounting B. "ercantile system of accounting. &. '(incip)es of accounting:
A. &ersonal a)c* #ebit the receiver !redit the giver B. (eal a)c* #ebit what comes in !redit what goes out !. +ominal a)c* #ebit all epenses and losses !redit all gains and incomes
*. +eaning of ,ou(na): -ournal means chronological record of transactions. -. +eaning of )ege(: edger is a set of accounts. It contains all accounts of the business enterprise whether
real, nominal, personal. 1/. 'osting: It means transferring the debit and credit items from the /ournal to their respective accounts in the
ledger. 11. T(ia) $a)ance: 0rial balance is a statement containing the various ledger balance s on a particular date.
credit 12. C(eit note: 0he customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him intimating that his a)c has been credited with the value of the goods returned. 13. De$it note: 1hen 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. Cont(a ent(": 1hich accounting entry is recorded on both the debit and credit side of the cashboo2 is
2nown as the contra entry. 1!. 'ett" cas0 $ook: &etty cash is maintained by business to record petty cash epenses of the business, such as
postage, cartage, stationery, etc. 1%. '(o#isso(" note: an instrument in writing containing an unconditional underta2ing signed by the ma2er, to
pay certain sum of money only to or to the order of a certain person or to the barer of the instrument. 1&. C0eue: A bill of echange drawn on a specified ban2er and payable on demand. 1*. Sta)e C0eue: A stale che3ue means not valid of che3ue that means more than si months the che3ue is not
valid. 2/. Bank (econci)iation state#ent: It is a statement reconciling the balance as shown by the ban2 passboo2
and the balance as shown by the !ash Boo2. 4b/* to 2now the difference 5 pass necessary correcting, ad/usting entries in the boo2s. e pense with the revenue. 21. +atc0ing concept: "atching means re3uires proper matching of epense 22. Capita) inco#e: 0he term capital income means an income which does not grow out of or pertain to the
running of the business proper. 23. eenue inco#e: 0he income, which arises out of and in the course of the regular business transactions of
a concern. 24. Capita) epenitu(e: It means an ependiture which has been incurred for the purpose of obtaining a long
term advantage for the business. 2!. eenue epenitu(e: An ependiture that incurred in the course of regular business transactions of a
concern. 2%. Diffe(e (eenue epenitu(e: An ependiture, which is incurred during an accounting period but is
applicable further periods also. $g* heavy advertisement. goo ds were sold on credit. 2&. Ba e$ts: Bad debts denote the amount lost from debtors to whom the goods 2*. Dep(eciation: D epreciation denotes gradually and permanent decrease in the value of asset due to wear and
tear, technology changes, laps of time and accident.
*. +eaning of ,ou(na): -ournal means chronological record of transactions. -. +eaning of )ege(: edger is a set of accounts. It contains all accounts of the business enterprise whether
real, nominal, personal. 1/. 'osting: It means transferring the debit and credit items from the /ournal to their respective accounts in the
ledger. 11. T(ia) $a)ance: 0rial balance is a statement containing the various ledger balance s on a particular date.
credit 12. C(eit note: 0he customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him intimating that his a)c has been credited with the value of the goods returned. 13. De$it note: 1hen 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. Cont(a ent(": 1hich accounting entry is recorded on both the debit and credit side of the cashboo2 is
2nown as the contra entry. 1!. 'ett" cas0 $ook: &etty cash is maintained by business to record petty cash epenses of the business, such as
postage, cartage, stationery, etc. 1%. '(o#isso(" note: an instrument in writing containing an unconditional underta2ing signed by the ma2er, to
pay certain sum of money only to or to the order of a certain person or to the barer of the instrument. 1&. C0eue: A bill of echange drawn on a specified ban2er and payable on demand. 1*. Sta)e C0eue: A stale che3ue means not valid of che3ue that means more than si months the che3ue is not
valid. 2/. Bank (econci)iation state#ent: It is a statement reconciling the balance as shown by the ban2 passboo2
and the balance as shown by the !ash Boo2. 4b/* to 2now the difference 5 pass necessary correcting, ad/usting entries in the boo2s. e pense with the revenue. 21. +atc0ing concept: "atching means re3uires proper matching of epense 22. Capita) inco#e: 0he term capital income means an income which does not grow out of or pertain to the
running of the business proper. 23. eenue inco#e: 0he income, which arises out of and in the course of the regular business transactions of
a concern. 24. Capita) epenitu(e: It means an ependiture which has been incurred for the purpose of obtaining a long
term advantage for the business. 2!. eenue epenitu(e: An ependiture that incurred in the course of regular business transactions of a
concern. 2%. Diffe(e (eenue epenitu(e: An ependiture, which is incurred during an accounting period but is
applicable further periods also. $g* heavy advertisement. goo ds were sold on credit. 2&. Ba e$ts: Bad debts denote the amount lost from debtors to whom the goods 2*. Dep(eciation: D epreciation denotes gradually and permanent decrease in the value of asset due to wear and
tear, technology changes, laps of time and accident.
0hese are assets assets not repres represent ented ed by tangib tangible le pos posses sessio sion n or proper property ty.. $ample $ampless of 2-. ictitio ictitious us assets: assets: 0hese preliminary epenses, discount on issue of shares, debit balance in the profit And loss account when shown on the assets side in the balance sheet. Intangible assets mean the assets which is not having the physical physical appearance. And it6s 3/. Intang)$e Intang)$e Assets: Assets: Intangible have the real value, it shown on the assets side of the balance sheet. 31. Acc(ue Inco#e: 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. Outstaning Inco#e: 4utstanding 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: 0he suspense account is an account to which the difference in the trial balance has been
put temporarily. 34. Dep)etion: It implies removal of an available but not replaceable source, Such as etracting coal from a coal
mine. 3!. A#o(ti5ation: 0he process of writing of intangible assets is term as amortization.
d one to a building or other o ther property during tenancy. 3%. Di)apiations: 0he term dilapidations to damage done 3&. Capita) e#p)o"e: 0he term capital employed means sum of total long term funds employed in the
business. i.e. 6S0a(e capita)7 (ese(es 8 su(p)us 7)ong te(# )oans 9 6non $usiness assets 7 fictitious assets 3*. ;uit" s0a(es: 0hose shares which are not having pref. rights are called e3uity shares. 3-. '(ef.s0a(es: 0hose shares which are carrying the pref.rights are called pref. shares &ref.rights in respect of
fied dividend. &ref.right to repayment of capital in the event of company winding up. 4/.
$BI0. 42. inancia) )ee(age: it is nothing but a process of using debt capital to increase the rate of return on e3uity 43. Co#$ine )ee(age: It is used to measure of the total ris2 of the firm 7 operating ris2 8 financial ris2. 44. =oint entu(e: A /oint venture is an association of two or more the persons who combined for the eecution
of a specific transaction and divide the profit or loss their of an agreed ratio. 4!. 'a(tne(s0ip: 'a(tne(s0ip: &artnership is the relation b)w the persons who have agreed to share the profits of business
carried on by all or any an y of them acting for all. arrangeme ement nt under under which which a firm firm 9calle 9called d borrow borrower: er: receiv receives es advance advancess against against its its 4%. acto(ing: acto(ing: It is an arrang receivables, from financial institutions 9called factor: 4&. Capita) (ese(e: 0he reserve which transferred from the capital gains is called capital reserve. 4*. Gene(a) (ese(e: the reserve which is transferred from normal profits of the firm is called general reserve
an y specific purpose free from any encumbrance li2e surplus cash. 4-. (ee Cas0: 0he cash not for any !/. +ino(it" Inte(est: Inte(est: "inority interest refers to the e3uity of the minority shareholders in a subsidiary
company.
!1. Capita) (eceipts: !apital 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. !2. eenue (eceipts: (evenue 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”. !3. +eaning of Co#pan": A company is an association of many persons who contribute money or money6s
worth to common stoc2 and employs it for a common purpose. 0he common stoc2 so contributed is denoted in money and is the capital of the company. !4. T"pes of a co#pan": 1. Statuto(" co#panies 2. Goe(n#ent co#pan" 3. o(eign co#pan" 4. egiste(e co#panies:
A. !ompanies limited by shares B. !ompanies limited by guarantee !.
shares imits the no. 4f members =>. &rohibits any Invitation to the public to subscribe for its shares or debentures. !%. 'u$)ic co#pan": A company, the articles of association of which does not contain the re3uisite restrictions
to ma2e it a private limited company, is called a public company. !&. C0a(acte(istics of a co#pan":
? @oluntary association ? Separate legal entity ? %ree transfer of shares ? imited liability ? !ommon seal ? &erpetual eistence. !*. o(#ation of co#pan":
? &romotion ? Incorporation ? !ommencement of business !-. ;uit" s0a(e capita): 0he total sum of e3uity shares is called e3uity share capital. %/. Aut0o(i5e s0a(e capita): It is the maimum amount of the share capital, which a company can raise for
the time being.
%1. Issue capita): It is that part of the authorized capital, which has been allotted to the public for
subscriptions. %2. Su$sc(i$e capita): it is the part of the issued capital, which has been allotted to the public %3. Ca))e up capita): It has been portion of the subscribed capital which has been called up by the company. %4. 'ai up capita): It is the portion of the called up capital against which payment has been received. %!. De$entu(es: #ebenture is a certificate issued by a company under its seal ac2nowledging a debt due by it to
its holder. %%. Cas0 p(ofit: cash profit is the profit it is occurred from the cash sales. %&. Dee#e pu$)ic
the following terms)conditions Sec 9:* . 'aving minimum share capital = la2hs C. Accepting investments from the public . +o restriction of the transferable of shares D. +o restriction of no. of members. =. Accepting deposits from the investors %*. Sec(et (ese(es: Secret reserves are reserves the eistence 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. T0ese (ese(es a(e c(eate $":
. $cessive depot an asset, ecessive over;valuation of a liability. C. !omplete elimination of an asset, or under valuation of an asset. %-. '(oision: provision usually means any amount written off or retained by way of providing depreciation,
renewals or diminutions in the value of assets or retained by way of providing for any 2nown liability of which the amount cannot be determined with substantial accuracy. &/. ese(e: 0he provision in ecess of the amount considered necessary for the purpose it was originally made
is also considered as reserve &rovision is charge against profits while reserves is an appropriation of profits !reation of reserve increase proprietor6s fund while creation of provisions decreases his funds in the business. &1. ese(e fun: 0he term reserve fund means such reserve against which clearly investment etc., &2. Unisc)ose (ese(es: Sometimes a reserve is created but its identity is merged with some other a)c or
group of accounts so that the eistence of the reserve is not 2nown such reserve is called an undisclosed reserve. &3. inance #anage#ent: %inancial management deals with procurement of funds and their effective
utilization in business. &4. O$,ecties of financia) #anage#ent: financial management having two ob/ectives that Is* 1. '(ofit #ai#i5ation: 0he finance manager has to ma2e his decisions in a manner so that the profits of the
concern are maimized. 2. >ea)t0 #ai#i5ation: 1ealth maimization means the ob/ective of a firm should be to maimize its value
or wealth, or value of a firm is represented by the mar2et price of its common stoc2. &!. unctions of financia) #anage(:
? Investment decision ? #ividend decision ? %inance decision ? !ash management decisions ? &erformance evaluation ? "ar2et impact analysis &%. Ti#e a)ue of #one": 0he 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. &&. Capita) st(uctu(e: It refers to the mi of sources from where the long;term funds re3uired in a business
may be raisedE in other words, it refers to the proportion of debt, preference capital and e3uity capital. &*. Opti#u# capita) st(uctu(e: !apital structure is optimum when the firm has a combination of e3uity and
debt so that the wealth of the firm is maimum. &-. >acc: 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. */. inancia) $(eak?een point: It denotes the level at which a firm6s $BI0 is /ust sufficient to cover interest
and preference dividend. *1. Capita) $ugeting: !apital budgeting involves the process of decision ma2ing with regard to investment in
fied assets. 4r decision ma2ing with regard to investment of money in longterm pro/ects. *2. 'a"$ack pe(io: &aybac2 period represents the time period re3uired for complete recovery of the initial
investment in the pro/ect. *3. A: Accounting or average rates of return means the average annual yield on the pro/ect. *4. N'@: The +et 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. *!. '(ofita$i)it" ine: 1here different investment proposal each involving different initial investments and
cash inflows are to be compared. *%. I: Internal rate of return is the rate at which the sum total of discounted cash inflows e3uals the
discounted cash out flow. *&. T(easu(" #anage#ent: It means it is defined as the efficient management of li3uidity and financial ris2 in
business. **. Concent(ation $anking: It means identify locations or places where customers are placed and open a local
ban2 a)c in each of these locations and open local collection canter. *-. +a(keta$)e secu(ities: Surplus cash can be invested in short term instruments in order to earn interest. -/. Ageing sc0eu)e: In an ageing schedule the receivables are classified according to their age. -1. +ai#u# pe(#issi$)e $ank finance 6+'B: It is the maimum amount that ban2s can lend a borrower
towards his wor2ing capital re3uirements. -2. Co##e(cia) pape(: A cp is a short term promissory note issued by a company, negotiable by endorsement
and delivery, issued at a discount on face value as may be determined by the issuing company.
-3. B(ige finance: It refers to the loans ta2en by the company normally from commercial ban2s for a short
period pending disbursement of loans sanctioned by the financial institutions. -4. @entu(e capita): It refers to the financing of high;ris2 ventures promoted by new 3ualified entrepreneurs
who re3uire funds to give shape to their ideas. -!. De$t secu(iti5ation: It is a mode of financing, where in securities are issued on the basis of a pac2age of
assets 9called asset pool:. -%.
another party 9lessee: over a specified period -&. T(ae C(eit: It represents credit granted by suppliers of goods, in the normal course of business. -*. Oe( (aft:
his account. --. Cas0 c(eit: It is an arrangement under which a customer is allowed an advance up to certain limit against
credit granted by ban2. 1//. C)ean oe((aft: It refers to an advance by way of overdraft facility, but not bac2 by any tangible security. 1/1. S0a(e capita): 0he sum total of the nominal value of the shares of a company is called share capital. 1/2. uns f)o state#ent: It is the statement deals with the financial resources for running business activities.
It eplains how the funds obtained and how they used. 1/3. Sou(ces of funs: 0here are two sources of funds internal sources and eternal sources. Internal source*
%unds 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 9a: #epreciation on fied assets 9b: &reliminary epenses or goodwill written off, oss on sale of fied assets #educt the following items, as they do not increase the funds* &rofit on sale of fied assets, profit on revaluation 4f fied assets $ternal sources* 9a: %unds from long;term loans 9b:Sale of fied assets 9c: %unds from increase in share capital 1/4. App)ication of funs: 9a: &urchase of fied assets 9b: &ayment of dividend 9c:&ayment of ta liability 9d:
&ayment of fied liability 1/!. ICD 6Inte( co(po(ate eposits: !ompanies can borrow funds for a short period. %or eample F months
or less from another company which have surplus li3uidityG Such deposits made by one company in another company are called I!#. 1/%. Ce(tificate of eposits: 0he !# is a document of title similar to a fied deposit receipt issued by ban2s
there is no prescribed interest rate on such !#s it is based on the prevailing mar2et conditions. 1/&. 'u$)ic eposits * It is very important source of short term and medium term finance. 0he company can
accept &# from members of the public and shareholders. It has the maturity period of F months to years.
1/*. ;u(o issues: 0he euro issues means that the issue is listed on a $uropean stoc2 $change. 0he
subscription can come from any part of the world ecept India. 1/-. GD 6G)o$a) eposito(" (eceipts: A depository receipt is basically a negotiable certificate, dominated in
us dollars that represents a non;
A#(s. Such receipts are to be issued in accordance with the provisions stipulated by the securities $change commission 9S$!: of
li2e rupee loans. 0he ban2s also provided overdraft. 112. Dee)op#ent $anks: It offers long;term and medium term loans including foreign currency loans 113. Inte(nationa) agencies: International agencies li2e the I%!,IB(#,A#B,I"% etc. provide indirect
assistance for obtaining foreign currency. 114. See capita) assistance: 0he seed capital assistance scheme is desired by the I#BI for professionally or
technically 3ualified entrepreneurs and persons possessing relevanteperience and s2ills and entrepreneur traits. 11!. Unsecu(e )oans: It constitutes a significant part of long;term finance available to an enterprise. 11%. Cas0 f)o state#ent: It is a statement depicting change in cash position from one period to another. 11&. Sou(ces of cas0: Inte(na) sou(ces
9a:#epreciation 9b:Amortization 9c:oss on sale of fied assets 9d:ains from sale of fied assets 9e: !reation of reserves ;te(na) sou(ces?
9a:Issue of new shares 9b:(aising long term loans 9c:Short;term borrowings 9d:Sale of fied assets, investments 11*. App)ication of cas0:
9a: &urchase of fied assets 9b: &ayment of long;term loans 9c: #ecrease in deferred payment liabilities 9d: &ayment of ta, dividend 9e: #ecrease in unsecured loans and deposits 11-. Buget: 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.
12/. Bugeta(" cont(o): 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. Cas0 $uget: It is a summary statement of firm6s epected cash inflow and outflow over a specified time
period. 122. +aste( $uget: A summary of budget schedules in capsule form made for the purpose of presenting in
one report the highlights of the budget forecast. 123. ie $uget: It is a budget, which is designed to remain unchanged irrespective of the level of activity
actually attained. 124. e(o? $ase? $ugeting: It is a management tool which provides a systematic method for evaluating all
operations and programmes, current of new allows for budget reductions and epansions in a rational inner and allows reallocation of source from low to high priority programs. 12!. Gooi)): 0he present value of firm6s anticipated ecess earnings. 12%. BS: It is a statement reconciling the balance as shown by the ban2 pass boo2 and balance shown by the
cash boo2. 12&. O$,ectie of BS: 0he ob/ective of preparing such a statement is to 2now the causes of difference
between the two balances and pass necessary correcting or ad/usting entries in the boo2s of the firm. 12*. esponsi$i)ities of accounting: It is a system of control by delegating and locating the (esponsibilities
for costs. 12-. '(ofit cent(e: A centre whose performance is measured in terms of both the epense incurs and revenue it
earns. 13/. Cost cent(e: A location, person or item of e3uipment for which cost may be ascertained and used for the
purpose of cost control. 131. Cost: 0he amount of ependiture 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 ma2ing. 133. ;)e#ents of cost:
9A: "aterial 9B: abour 9!: $penses 9#: 4verheads 134. Co#ponents of tota) costs: 9A: &rime cost 9B: %actory cost
9!:0otal cost of production 9#: 0otal c>st 13!. '(i#e cost: It consists of direct material direct labour and direct epenses. It is also 2nown as basic or first
or flat cost.
13%. acto(" cost: It comprises prime cost, in addition factory overheads which include cost of indirect
material indirect labour and indirect epenses incurred in factory. 0his cost is also 2nown as wor2s cost or production cost or manufacturing cost. 13&. Cost of p(ouction: In office and administration overheads are added to factory cost, office cost is arrived
at. 13*. Tota) cost: Selling and distribution overheads are added to total cost of production to get the total cost or
cost of sales. 13-. Cost unit: A unit of 3uantity of a product, service or time in relation to which costs may be ascertained or
epressed. 14/.+et0os of costing: 9A:-ob costing 9B:!ontract costing 9!:&rocess costing 9#:4peration costing
9$:4perating costing 9%:
advance on certain predetermined standards. 143. +a(gina) costing: it is a techni3ue of costing in which allocation of ependiture to production is restricted
to those epenses which arise as a result of production, i.e., materials, labour, direct epenses and variable overheads. 144. De(iatie: derivative is product whose value is derived from the value of one or more basic variables of
underlying asset. 14!. o(a(s: a forward contract is customized contracts between two entities were settlement ta2es place on
a specific date in the future at today6s pre agreed price. 14%. utu(es: 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. %uture contracts are standardized echange traded contracts. 14&. Options: An option gives the holder of the option the right to do something. 0he option holder option may
eercise or not. 14*. Ca)) 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. 14-. 'ut option: A put option gives the holder the right but not obligation to sell an asset by a certain date for a
certain price. 1!/. Option p(ice: 4ption price is the price which the option buyer pays to the option seller. It is also referred
to as the option premium. 1!1. ;pi(ation ate: 0he date which is specified in the option contract is called epiration date. 1!2. ;u(opean option: It is the option at eercised only on epiration date itself. 1!3. Basis: Basis means future price minus spot price. 1!4. Cost of ca((": 0he relation between future prices and spot prices can be summarized in terms of what is
2nown as cost of carry.
1!!. Initia) #a(gin: 0he amount that must be deposited in the margin a)c at the time of first entered into future
contract is 2nown as initial margin. 1!% +aintenance #a(gin: T his is somewhat lower than initial margin. 1!&. +a(k to #a(ket: In future mar2et, at the end of the each trading day, the margin a)c is ad/usted to reflect
the investors6 gains or loss depending upon the futures selling price. 0his is called mar2 to mar2et. 1!*. Baskets: bas2et options are options on portfolio of underlying asset. 1!-. Saps: swaps are private agreements between two parties to echange cash flows in the future according
to a pre agreed formula. 1%/. I#pact cost: Impact cost is cost it is measure of li3uidity of the mar2et. It reflects the costs faced when
actually trading in inde. 1%1. eging: 'edging means minimize the ris2. 1%2. Capita) #a(ket: !apital mar2et is the mar2et it deals with the long term investment funds. It consists of
two mar2ets .primary mar2et C.secondary mar2et. 1%3. '(i#a(" #a(ket: 0hose companies which are issuing new shares in this mar2et. It is also called new issue
mar2et. 1%4. Secona(" #a(ket: S econdary mar2et is the mar2et where shares buying and selling. In India secondary
mar2et is called stoc2 echange. 1%!. A($it(age: It means purchase and sale of securities in different mar2ets in order to profit from price
discrepancies. In other words arbitrage is a way of reducing ris2 of loss caused by price fluctuations of securities held in a portfolio. 1%%. +eaning of (atio: (atios are relationships epressed in mathematical terms between figures which are
connected with each other in same manner. 1%&. Actiit" (atio: It is a measure of the level of activity attained over a period. 1%*. +utua) fun: A mutual fund is a pool of money, collected from investors, and is invested according to
certain investment ob/ectives. 1%-. C0a(acte(istics of #utua) fun: 4wnership of the "% is in the hands of the of the investors "% managed
by investment professionals 0he value of portfolio is updated every day 1&/. Aantage of + to inesto(s: &ortfolio diversification &rofessional management (eduction in ris2
(eduction of transaction casts i3uidity !onvenience and fleibility 1&1. Net asset a)ue: the value of one unit of investment is called as the +et Asset @alue 1&2. Open?ene fun: open ended funds means investors can buy and sell units of fund, at +A@ related prices
at any time, directly from the fund this is called open ended fund. 1&3. C)ose ene funs: 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 mar2ets. 1&4. Diien option: Investors, who choose a dividend on their investments, will receive dividends from the
"%, as when such dividends are declared.
1&!. G(ot0 option: investors who do not re3uire periodic income distributions can be choose the growth
option. 1&%. ;uit" funs: e3uity funds are those that invest pre;dominantly in e3uity shares of company. 1&&. T"pes of euit" funs: Simple e3uity funds &rimary mar2et funds Sectoral funds Inde funds 1&*. Secto(a) funs: Sectoral funds choose to invest in one or more chosen sectors of the e3uity mar2ets. 1&-. Ine funs: 0he fund manager ta2es a view on companies that are epected to perform well, and invests
in these companies 1*/. De$t funs: the debt funds are those that are pre;dominantly invest in debt securities. 1*1.
any credit ris2. 1*3. Ba)ance funs: %unds that invest both in debt and e3uity mar2ets are called balanced funds. 1*4. Sponso(: sponsor is the promoter of the "% and appoints trustees, custodians and the A"! with prior
approval of S$BI. 1*!. T(ustee: 0rustee is responsible to the investors in the "% and appoint the A"! for managing the
investment portfolio. 1*%. A+C: the A"! describes Asset "anagement !ompanyE it is the business face of the "%, as it manages all
the affairs of the "%. 1*&. 8 T Agents: the (50 agents are responsible for the investor servicing functions, as they maintain the
records of investors in "%. 1**. Custoians: !ustodians are responsible for the securities held in the mutual fund6s portfolio. 1*-. Sc0e#e takes oe(: if an eisting "% scheme is ta2en over by another A"!, it is called as scheme ta2e
over. 1-/. +eaning of )oa: oad is the factor that is applied to the +A@ of a scheme to arrive at the price. 1-2. +a(ket capita)i5ation: mar2et capitalization means number of shares issued multiplied with mar2et price
per share. 1-3. '(ice ea(nings (atio: 0he ratio between the share price and the post ta earnings of company is called as
price earnings ratio. 1-4. Diien "ie): 0he dividend paid out by the company, is usually a percentage of the face value of a
share. 1-!. +a(ket (isk: It refers to the ris2 which the investor is eposed to as a result of adverse movements in the
interest rates. It also referred to as the interest rate ris2. 1-%. e?inest#ent (isk: It the ris2 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 fied income security. 1-&. Ca)) (isk: !all ris2 is associated with bonds have an embedded call option in them. 0his option hives the
issuer the right to call bac2 the bonds prior to maturity.
1-*. C(eit (isk: !redit ris2 refers to the probability that a borrower could default on a commitment to repay
debt or band loans 1--. Inf)ation (isk: Inflation ris2 reflects the changes in the purchasing power of the cash flows resulting from
the fied income security. 2//.
mar2et. 2/1. D(aings: #rawings denotes the money withdrawn by the proprietor from the business for his personal
use. 2/2. Outstaning Inco#e: 4utstanding Income means income which has become due during the accounting
year but which has not so far been received by the firm. 2/3. Outstaning ;penses: 4utstanding $penses refer to those epenses which have become due during the
accounting period for which the %inal Accounts have been prepared but have not yet been paid. 2/4. C)osing stock: 0he term closing stoc2 means goods lying unsold with the businessman at the end of the
accounting year. 2/!. +et0os of ep(eciation: 1. Uni(o(# c0a(ge #et0os:
a. %ied installment method b .#epletion method c. "achine hour rate method. 2. Dec)ining c0a(ge #et0os:
a. #iminishing balance method b. Sum of years digits method c. #ouble declining method 3. Ot0e( #et0os:
a. roup depreciation method b. Inventory system of depreciation c. Annuity method d. #epreciation fund method e. Insurance policy method. 2/%. Acc(ue Inco#e: 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. 2/&. G(oss p(ofit (atio: it indicates the efficiency of the production)trading operations.
%ormula *
ross profit ;;;;;;;;;;;;;;;;;;;H>> +et sales
2/*. Net p(ofit (atio: it indicates net margin on sales
%ormula*
+et profit
;;;;;;;;;;;;;;; H >> +et sales 2/-. etu(n on s0a(e 0o)e(s funs: it indicates measures earning power of e3uity capital.
%ormula* &rofits available for $3uity shareholders ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;H >> Average $3uity Shareholders %unds 21/. ;a(ning pe( ;uit" s0a(e 6;'S: it shows the amount of earnings attributable to each e3uity share.
%ormula* &rofits available for $3uity shareholders ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; +umber of $3uity shares 211. Diien "ie) (atio: it shows the rate of return to shareholders in the form of dividends based in the
mar2et price of the share %ormula* #ividend per share ;;;;;;;;;;;;;;;;;;;;;;;;;;;; H>> "ar2et price per share 212. '(ice ea(nings (atio: it a measure for determining the value of a share. "ay also be used to measure the
rate of return epected by investors. %ormula*
"ar2et price of share 9"&S: ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;H >> $arnings per share 9$&S:
213. Cu((ent (atio: it measures short;term debt paying ability.
%ormula* !urrent Assets ;;;;;;;;;;;;;;;;;;;;;;;; !urrent iabilities 214. De$t?;uit" atio: it indicates the percentage of funds being financed through borrowingsE a measure of
the etent of trading on e3uity. %ormula*
0otal ong;term #ebt
;;;;;;;;;;;;;;;;;;;;;;;;;;; Shareholders6 funds
21!. ie Assets (atio: 0his ratio eplains whether the firm has raised ade3uate long;term funds to meet its
fied assets re3uirements. %ormula*
%ied Assets ;;;;;;;;;;;;;;;;;;;
ong;term %unds 21%. Euick atio: 0he ratio termed as li3uidity ratio6. 0he ratio is ascertained y comparing the li3uid assets to
current liabilities. %ormula* i3uid Assets ;;;;;;;;;;;;;;;;;;;;;;;; !urrent iabilities 21&. Stock tu(noe( atio: 0he ratio indicates whether investment in inventory in efficiently used or not. It,
therefore eplains whether investment in inventory within proper limits or not. %ormula*
cost of goods sold
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; Average stoc2
21*. De$to(s Tu(noe( atio: 0he ratio the better it is, since it would indicate that debts are being collected
more promptly. 0he ration helps in cash budgeting since the flow of cash from customers can be wor2ed out on the basis of sales. %ormula*
!redit sales ;;;;;;;;;;;;;;;;;;;;;;;;;;;; Average Accounts (eceivable
21-. C(eito(s Tu(noe( atio: It indicates the speed with which the payments for credit purchases are made
to the creditors. %ormula*
!redit &urchases ;;;;;;;;;;;;;;;;;;;;;;; Average Accounts &ayable
22/. >o(king capita) tu(noe( (atio: It is also 2nown as 1or2ing !apital everage (atio. 0his ratio indicates
whether or not wor2ing capital has been effectively utilized in ma2ing sales. %ormula*
+et Sales ;;;;;;;;;;;;;;;;;;;;;;;;;;;; 1or2ing !apital
221. ie Assets Tu(noe( (atio: 0his ratio indicates the etent to which the investments in fied assets
contribute towards sales. %ormula*
+et Sales ;;;;;;;;;;;;;;;;;;;;;;;;;; %ied Assets
222 .'a"?outs atio: 0his ratio indicates what proportion of earning per share has been used for paying
dividend. %ormula*
#ividend per $3uity Share ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;H>>
$arning per $3uity share 223. Oe(a)) '(ofita$i)it" atio: It is also called as “(eturn on Investment” 9(4I: or (eturn on !apital
$mployed 9(4!$:. It indicates the percentage of return on the total capital employed in the business. %ormula*
4perating profit ;;;;;;;;;;;;;;;;;;;;;;;;H >> !apital employed
0he term capital employed has been given different meanings a.sum total of all assets 1hether fied or current b.sum total of fied assets, c.sum total of long;term funds employed In the business, i.e., share capital 8reserves 5surplus 8long term loans J 9non business assets 8 fictitious assets:. 4perating profit means profit before interest and ta6 224. ie Inte(est Coe( (atio: 0he ratio is very important from the lender6s point of view. It indicates
whether the business would earn sufficient profits to pay periodically the interest charges. %ormula*
Income before interest and 0a
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
Interest!harges
22!. ie Diien Coe( (atio: 0his ratio is important for preference shareholders entitled to get dividend at
a fied rate in priority to other shareholders. +et &rofit after Interest and 0a
o(#u)a:
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; &reference #ividend 22%. De$t Se(ice Coe(age (atio: 0his ratio is eplained ability of a company to ma2e payment of principal
amounts also on time. o(#u)a:
+et profit before interest and ta ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; ;0a rate Interest 8 &rincipal payment installment
22&. '(op(ieta(" (atio: It is a variant of debt;e3uity ratio . It establishes relationship between the proprietor6s
funds and the total tangible assets. o(#u)a:
Shareholders funds
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; 0otal tangible assets
22*. Diffe(ence $eteen ,oint entu(e an pa(tne(s0ip: In /oint 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 /oint venture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system. In the /oint 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 /oint 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.
22-. +eaning of >o(king capita): 0he funds available for conducting day to day operations of an enterprise.
Also represented by the ecess of current assets over current liabilities. 23/. Concepts of accounting: 1. Business entit" concepts: ? According to this concept, the business is treated as a separate entity distinct
from its owners and others. 2. Going conce(n concept: ? According to this concept, it is assumed that a business has a reasonable
epectation of continuing business at a profit for an indefinite period of time. 3. +one" #easu(e#ent concept: ? 0his concept says that the accounting records only those transactions which
can be epressed in terms of money only. 4. Cost concept: ; According to this concept, an asset is recorded in the boo2s at the price paid to ac3uire it and
that this cost is the basis for all subse3uent accounting for the asset. !. Dua) aspect concept: ; In every transaction, there will be two aspects J the receiving aspect and the giving
aspectE both are recorded by debiting one accounts and crediting another account. 0his is called double entry. %. Accounting pe(io concept: ; It means the final accounts must be prepared on a periodic basis. +ormally
accounting period adopted is one year, more than this period reduces the utility of accounting da ta. &. ea)i5ation 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. *. +ate(ia)it" concepts: ? It is a one of the accounting principle, as per only important information will be
ta2en, and <+ important information will be ignored in the preparation of the financial statement. -. +atc0ing concepts: ? 0he cost or epenses of a business of a particular period are compared with the
revenue of the period in order to ascertain the net profit and loss. 1/. Acc(ua) concept: ? 0he profit arises only when there is an increase in owners capital, which is a result of
ecess of revenue over epenses and loss. 231. inancia) ana)"sis: 0he process of interpreting the past, present, and future financial condition of a
company. 232. Inco#e state#ent: An accounting statement which shows the level of revenues, epenses and profit
occurring for a given accounting period. 233. Annua) (epo(t: 0he report issued annually by a company, to its share holders. it containing financial
statement li2e, trading and profit 5 lose account and balance sheet. 234. Bank(upt: A statement in which a firm is unable to meets its obligations and hence, it is assets are
surrendered to court for administration 23!.
use the asset to the user over an agreed period of the time for a consideration. 23%. Oppo(tunit" cost: 0he cost associated with not doing something. 23&. Bugeting: 0he term budgeting is used for preparing budgets and other producer for planning, co;
ordination, and control of business enterprise.
23*. Capita): 0he term capital refers to the total investment of company in money, tangible and intangible
assets. It is the total wealth of a company. 23-. Capita)i5ation: It is the sum of the par value of stoc2s and bonds out standings. 24/. Oe( capita)i5ation: 1hen a business is unable to earn fair rate on its outstanding securities. 241. Une( capita)i5ation: 1hen a business is able to earn fair rate or over rate on it is outstanding securities. 242. Capita) gea(ing: 0he term capital gearing refers to the relationship between e3uity and long term debt. 243. Cost of capita): It means the minimum rate of return epected by its investment. 244. Cas0 iien: 0he payment of dividend in cash 24!. Define t0e te(# acc(ua): (ecognition 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. 24!. Acc(ue epenses: An epense which has been incurred in an accounting period but for which no
enforceable claim has become due in what period against the enterprises. 24%. Acc(ue (eenue: (evenue 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. 24&. Acc(ue )ia$i)it": 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. 24*. Conention of u)) isc)osu(e: According to this convention, all accounting statements should be
honestly prepared and to that end full disclosure of all significant information will be made. 24-. Conention of consistenc": According to this convention it is essential that accounting practices and
methods remain unchanged from one year to another. 2!/. Define t0e te(# p(e)i#ina(" epenses: $penditure relating to the formation of an enterprise. 0here
include legal accounting and share issue epenses incurred for formation of the enterprise. 2!1. +eaning of C0a(ge: charge means it is a obligation to secure an indebt ness. It may be fied charge and
floating charge. 2!2. App(op(iation: It is application of profit towards (eserves and #ividends. 2!3. A$so(ption costing: A method where by the cost is determine so as to include the appropriate share of
both variable and fied costs. 2!4. +a(gina) Cost: "arginal cost is the additional cost to produce an additional unit of a product. It is also
called variable cost. 2!!. >0at a(e t0e e?o(ina(" ite#s in t0e '8< aFc: 0he transaction which is not related to the business is
termed as e;ordinary transactions or e;ordinary items. $gg*; profit or losses on the sale of fied assets, interest received from other company investments, profit or loss on foreign echange, unepected dividend received.
2!%. S0a(e p(e#iu#: 0he ecess of issue of price of shares over their face value. It will be showed with the
allotment entry in the /ournalE it will be ad/usted in the balance sheet on the liabilities side under the head of “reserves 5 surplus”. 2!&. Accu#u)ate Dep(eciation: 0he total to date of the periodic depreciation charges on depreciable assets. 2!*. Inest#ent: $penditure on assets held to earn interest, income, profit or other benefits. 2!-. Capita): enerally refers to the amount invested in an enterprise by its owner.
$p* paid up share capital in corporate enterprise. 2%/. Capita) >o(k In '(og(ess: $penditure on capital assets which are in the process of construction as
completion. 2%1. Cone(ti$)e De$entu(e: A debenture which gives the holder a right to conversion wholly or partly in
shares in accordance with term of issues. 2%2. eee#a$)e '(efe(ence S0a(e: 0he preference share that is repayable either after a fied 9or:
determinable period 9or: at any time dividend by the management. 2%3. Cu#u)atie p(efe(ence s0a(es: A class of preference shares entitled to payment of emulates dividends.
&reference shares are always deemed to be cumulative unless they are epressly made non;cumulative preference shares. 2%4. De$entu(e (ee#ption (ese(e: A reserve created for the redemption of debentures at a future d ate. 2%!. Cu#u)atie iien: A dividend payable as cumulative preference shares which it unpaid $mulates as a
claim against the earnings of a corporate before any distribution is made to the other shareholders. 2%%. Diien ;ua)i5ation (ese(e: A reserve created to maintain the rate of dividend in future years. 2%&. Opening Stock: 0he term opening stoc26 means goods lying unsold with the businessman in the
beginning of the accounting year. 0his is shown on the debit side of the trading account. 2%*. C)osing Stock: 0he term !losing Stoc26 includes goods lying unsold with the businessman at the end of
the accounting year. 0he amount of closing stoc2 is shown on the credit side of the trading account and as an asset in the balance sheet. 2%-. @a)uation of c)osing stock: 0he closing stoc2 is valued on the basis of “!ost or "ar2et prices whichever
is less” principle. 2&2. Contingenc": A condition 9or: situation the ultimate out comes of which gain or loss will be 2nown as
determined only as the occurrence or non occurrence of one or more uncertain future events. 2&3. Contingent Asset: An asset the eistence ownership or value of which may be 2nown or determined only
on the occurrence or non occurrence of one more uncertain future event. 2&4. Contingent )ia$i)it": An obligation to an eisting condition or situation which may arise in future
depending on the occurrence of one or more uncertain future events. 2&!. Deficienc": the ecess of liabilities over assets of an enterprise at a given date is called deficiency. 2&%. Deficit: 0he debit balance in the profit and loss a)c is called deficit. 2&&. Su(p)us: !redit balance in the profit 5 loss statement after providing for proposed appropriation 5
dividend, reserves.
2&*. App(op(iation Assets: An account sometimes included as a separate section of the profit and loss
statement showing application of profits towards dividends, reserves. 2&-. Capita) (ee#ption (ese(e: 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. 1hen weights are also applied in the computation it is termed as weight average cost. 2*/. )oating C0ange: Assume change on some or all assets of an enterprise which are not attached to specific
assets and are given as security against debt. 2*1. Diffe(ence $eteen uns f)o an Cas0 f)o state#ent: A !ash flow statement is concerned only with
the change in cash position while a funds flow analysis is concerned with change in wor2ing capital position between two balance sheet dates. A cash flow statement is merely a record of cash receipts and disbursements. 1hile 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. 2*2. Diffe(ence $eteen t0e uns f)o an Inco#e state#ent:
A funds flow statement deals with the financial resource re3uired for running the business activities. It eplains 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. 0he 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 ependiture of that period, which are both of a revenue nature. 2*3. >0at is t0e a$$(eiation fo( t0e accounting te(#s e$it an c(eit
#ebit abbreviation is “dr” and credit abbreviation is “cr”. 2*4. o #an" t"pes of $usiness t(ansactions a(e t0e(e in accounting
0here are two types of transactions in accounting i.e. revenue and capital. 2*!. >0at is $a)ance s0eet
It is a statement that states all the liabilities and assets of the company at certain point. 2*%. ae "ou ee( 0ea( a$out TDSH 0at it is
Kes, 0#S abbreviates 0a #eduction at Source. 2*&. In $a)ance s0eetH 0e(e o "ou s0o TDS
It is shown on the assets section, right after the head current asset. 2**. Do "ou 0ae an" iea a$out Se(ice Ta o( ;cise
It is a 2ind of hidden ta that is included in the service provided by the service provider and paid by the service receiver. 2*-. Do "ou t0ink t0e(e is an" iffe(ence $eteen inactie an o(#ant accounts
Kes, both are different terms in accounting. Inactive accounts means that accounts have been closed and will not be used in future as well. 1hile, dormant accounts are those that are not functional today but may be used in future. 2-/. >0at is ta))" accounting
It is the software used for accounting in small business and shops for managing routine accounting transactions. o can "ou efine epa(t#enta) accounting
It is a type of accounting in which separate account is created for departments. It is managed separately as well as shown independently in the balance sheet. 2-1. Define fictitious assets
0hese are the assets that cannot be shown or touch. %ictitious assets can only be felt such as good will, rights etc. 2-2. B" sa"ingH pe(petua) o( pe(ioic inento(" s"ste# 0at o e #ean
In the first one i.e. the perpetual inventory system, the accounts are ad/usted on continual basis. In the periodic inventory system, the accounts are ad/usted periodically. 2-3. In accountingH 0o o "ou efine p(e#ises
&remises refer to fied assets that are shown in the balance sheet. 2-4. In accountingH @AT a$$(eiates 0at
@A0 means @alue Added 0a. 2-!. Do "ou possess an" kno)ege a$out accounting stana(s
Kes, as per my 2nowledge there are total accounting standards published so far by I!AI. 0he purpose of these standards is to implement same policies and practices in an y country. 2-%. >0at is ICAI
It is the abbreviation of Institute of !hartered Accountants in India. 2-&. o can "ou ep)ain t0e $asic accounting euation
1e 2now that accounting is all about assets, liabilities and capital. 0herefore, the accounting e3uation is* Assets 7 iabilities 8 4wners $3uity. 2-*. Define ;ecutie accounting
It is a type of accounting that is specifically designed for the business that offers services to users. 2--. Define 'u$)ic accounting
&ublic accounting offers audits and !&As to review company financial records to ensure accountability. It is for general public. 3//. >0at is a C'A
!&A stands for !ertified &ublic Accountant. 0o become a !&A, one should have to do many other 3ualifications as well. It is a 3ualification with => hour re3uirementE it means that one should complete => credit hours at any accredited university. 3/1. >0at o "ou t0ink is $ank (econci)iation state#ent
A reconciliation statement is prepared when the passboo2 balance differs from the cashboo2 balance. 3/2. Diffe(entiate 'u$)ic an '(iate Accounting
&ublic accounting is a type of accounting that is done by one company for another company. &rivate accounting is done for your own company. 3/3. >0at is p(o,ect i#p)e#entation
&ro/ect implementation involves si steps in total such as* •
Identify +eed
•
enerate and Screen Ideas
•
!onduct %easible Study
•
#evelop the &ro/ect
•
Implement the &ro/ect
•
!ontrol the &ro/ect 3/4. Do "ou t0ink Accounting Stana(s a(e #anato(" an 0"
Kes, I do believe that accounting standards play a very important role to prepare good 3uality and accurate financial reports. It ensures reliability and relevance in financial reports. 3/!. Can "ou na#e iffe(ent $(anc0es of accounting
0here are three branches of accounting named as “%inancial Accounting”, “"anagement Accounting” and “!ost Accounting”. 3/%. Diffe(entiate Accounting an Auiting
Accounting is all about recording daily business activities while auditing is the chec2ing that whether all these events have been noted down correctly or not. 3/&. Define ua) aspect te(# in accounting
As the name implies, the dual aspect concept states that every transaction has two sides. %or eample, when you buy something, you give the cash and get the thing. Similarly, when you sale something, you lose the thing and gets the money. So this getting and losing is basically two aspects of every transaction. 3/*. >0at o e #ean $" pu(c0ase (etu(n in accounting
It is the term introduced in the records for every defective or unsatisfactory good returned bac2 to its supplier. 3/-. Define t0e te(# #ate(ia) facts in accounting
"aterial facts are the bills or any document that becomes the base of every account boo2. It means that all those documents, on which account boo2 is prepared, are called material facts. 31/. ae "ou ee( p(epa(e +IS (epo(ts an 0at a(e t0ese
Kes, I have prepared few "IS reports during my previous /obs. "IS reports are created to identify the efficiency of any department of a company. 311. Define co#pan"s pa"a$)e c"c)e
It is the time re3uired by the company to pay all its account payables. 312. Define (etai) $anking
It is a type of ban2ing that involves a retail client. 0hese clients are the normal people and not any organizational customers. 313. o #uc0 #at0e#atics kno)ege is necessa(" o( (eui(e in accounting
+ot much 2nowledge but basic mathematical bac2ground is re3uired in accounting for operations li2e addition, subtraction, multiplication and division. 314. Define $i))s (eceia$)e
All types of echange bills, bonds and other securities owned by a merchant that is payable to him are said as bills receivable. 31!. Define ep(eciation an its t"pes
By depreciation we mean that a value of an asset is decreasing as it is in use. It has two types such as “Straight ine "ethod” and “1ritten #own @alue "ethod”. 31%. Diffe(entiate $eteen consigno( an consignee
!onsigner is the owner of the goods or you can say he is the person who delivers the goods to the consignee. 0he consignee is the person who receives the goods. 31&. Define $a)ancing in accounting
Balancing means to e3uate both sides of the 0;account i.e. the debit and credit sides of a 0;account must be e3ual)balanced. 31*. o #uc0 statistics kno)ege is necessa(" o( (eui(e in accounting
Kou must be very good at statistics if you want to do well in accounting. 4therwise, with minimum 2nowledge you cannot manage your day to day transactions effectively in accounting. 31-. Define Sc(ap a)ue in accounting
It is the residual value of an asset. 0he residual value is the value that any asset holds after its estimated life time. 32/. Define +a(gina) Cost
Suppose you have to produce an additional unit of output. 0he estimated cost of additional inputs to produce that output is actually the marginal cost.
321. Define 'a(titioning in accounting
It is a 2ind of groups made on the basis of same responses by a system. 322. Diffe(entiate $eteen p(oision an (ese(e
&rovisions are the liabilities or the anticipated items such as depreciation. Kou can say provisions are epenses. (eserves are the profits of any company and a part of that profit is placed bac2 to the business to 2eep it sustainable in tough times of a company. 324. Define Offset accounting
4ffset accounting is one that decreases the net amount of another account to create a net balance. 32!. Define oe(0ea in te(#s of accounting
It is the indirect ependiture of a company such as salaries, rent dues etc. 32%. Define t(ae $i))s
1e 2now that all types of transactions need to be documented. 0he trade bills are the documents, generated against each transaction. 32&. Define fai( a)ue accounting
As per fair value accounting, a company has to show the value of all of its assets in terms of price on balance sheet on which that asset can be sold. 32*. ;p)ain 0at is co#poun ,ou(na) ent("
A compound /ournal entry is /ust li2e other accounting entry where there is more than one debit, more than one credit, or more than one of both debits and credits. It is essentially a combination of several simple /ournal entries. 32-. >0at a(e t0e accounting eents t0at a(e f(euent)" ino)e in co#poun ent(ies
0he accounting events that are fre3uently involved in compound entries areE •
(ecord multiple line items in a supplier invoice that address to different epenses
•
(ecord all ban2 deductions associated to a ban2 reconciliation
•
(ecord all deduction and payments related to a payroll
•
(ecord the account receivable and sales taes related to a customer invoice
33/. +ention t0e t"pes of accounts ino)e in ou$)e ent(" $ook?keeping
#ouble entry boo2;2eeping involves five types of accounts, •
Income accounts
•
$pense accounts
•
Asset accounts
•
iability accounts
•
!apital accounts 331. +ention 0at a(e t0e (u)es fo( e$it an c(eit fo( iffe(ent accounts to inc(ease t0e a#ount in "ou( $usiness accounts
0he rules for debit and credit for different accounts, •
fo( a capita) account , you credit to increase it and debit to decrease it
•
fo( an asset account , you debit to increase it and credit to decrease it
•
fo( a )ia$i)it" account , you credit to increase it and debit to decrease it
•
fo( an epense account , you debit to increase it, and credit to decrease it
•
fo( an inco#e account , you credit to increase it and debit to decrease it 332.
•
(ecording of transactions in the /ournal
•
&osting of /ournal entry in to the respective ledger accounts and then preparing a trial balance
•
&reparing final accounts and closing of boo2s of accounts 333. +ention 0at is t0e isaantage of ou$)e ent(" s"ste#
0he disadvantage of double entry system, •
If there is any compensatory errors, it is difficult to find out by this system
•
0his system needs more clerical labour
•
It is difficult to find the errors if the errors are in the transactions recorded in the boo 2s
•
It is not preferable to disclose all the information of a transaction, which is not properly recorded in the /ournal 334. +ention 0at is Gene(a) )ege( account
0he eneral ledger account is an account where the company records all the information for its various epenses and income types into separate accounts. Such that all the debits and credits pertaining to that particular type of transaction can be entered in one place and 2ept balanced. 33!. >0at is t0e gene(a) c)assification of accounts t0at usua))" )ege( account ino)e
0he general classification of accounts that usually ledger accou nt involves are •
Assets; !ash, Accounts (eceivable
•
iabilities; Accounts &ayable, oans &ayable
•
Stoc2holders6 e3uity; !ommon Stoc2
•
4perating revenues; (evenues through Sales
•
4perating epenses; (ent $pense, Salaries $pense
•
+on;operating revenues and gains; Investment Income, gain on #isposal of $3uipment
•
+on;operating revenues and losses; Interest $pense, oss on #isposal of $3uipment 33%. +ention 0at a(e t0ings i)) not $e inc)ue in $ank (econci)iation state#ent
In a ban2 reconciliation statement, following thing can be ecluded. •
#irect payments made by ban2 not entered in !ash boo2
•
!he3ues deposited but not cleared
•
!he3ues dishonoured not recorded in cash boo2
•
1rong debits given by ban2
•
Ban2 !harges or Interst debited by ban2
•
Ban2s direct payment not entered in !ash boo2 33&. Une( t0e acc(ua) $asis of accountingH 0en (eenues a(e (epo(te in t0e accounting pe(io
1hen service or goods have been delivered, then revenues are reported in the accounting period. 33*. Une( 0at t"pe of account oes t0e unea(ne (eenues fa))
0he unearned revenues falls under “iability” account. 33-. +ention 0et0e( t0e account JCas0K i)) $e c(eite o( e$iteH 0en a co#pan" pa"s a $i))
0he account “!ash” will be credited when a company pays a bill.
34/. +ention 0at is assets #inus )ia$i)ities
Assets minus liabilities is e3ual to owners6 e3uity or stoc2holders e3uity. 341. ;nt(ies to (eenues accounts suc0 as Se(ice eenues a(e usua))"
$ntries to revenues accounts such as Service (evenues usually goes into credit side. 342. ;p)ain 0at is t0e iffe(ence $eteen accu#u)ate ep(eciation an ep(eciation epense
0he difference between accumulated depreciation and depreciation epense is that •
Accu#u)ate ep(eciation * It is the total amount of depreciation that has been ta2en on a company6s assets up
to the date of the balance sheet •
Dep(eciation epense * It is the amount of depreciation that is reported on the income statement. Basically, it is
the amount that corresponds only to the period of time indicated in the heading of the income statement. 343.
Some of the eamples for liability accounts •
Accounts &ayable
•
Accrued $penses
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Short;term oans &ayable
•
•
Installment oans &ayable
•
!urrent &ortion of ong;term #ebt
•
"ortgage oans &ayable 344. ;p)ain 0o "ou can a,ust ent(ies into account
0o ad/ust entries into account, you can sort entries into five categories. •
Accrued epenses* $penses have been incurred but the vendors invoices are not generated or processed yet
•
Accrued revenues* (evenues have been earned but the sales invoices are not generated or processed yet
•
#eferred revenues* "oney was received in advance of having been paid or earned
•
#eferred epenses* "oney was paid for a future epense
•
#epreciation epense* An asset purchased in one period must be allocated to epense in each of the accounting periods of the asset6s useful life
34!. ;p)ain 0at a efe((e asset is an gie an ea#p)e
A deferred asset refers to a deferred debit or a deferred charge. An eample of a deferred charge is bond issue costs. 0hese costs involves all of the fees or charges that an organization incurs in order to register and issue bonds. 0his fees are paid in a near time when the bonds are issued but it will not be epensed at that time. 34%. +ention 0at is Bank econci)iation
A ban2 reconciliation is a process done by a company to ensure that the company6s records 9chec2 register, balance sheet, general ledger account, etc.: are correct and that the ban26s records are also correct. 34&. +ention 0at is Jeposit in t(ansitK
A deposit in transit is a chec2s and cash that have been received and recorded by an entity, but which have not yet been entered in the records of the ban2 where the funds are deposited. 34*. ;p)ain 0at is an oe( acc(ua)
An over accrual is a condition where the estimate for an accrual /ournal entry is too high. 0his estimate may apply to an accrual of epense or revenue. 34-. +ention 0at is account (eceia$)e
A short term amounts due from buyers to a seller, who have purchased goods or services from the seller on credit is referred as account receivable. 3!/. ;p)ain 0at a(e t0e actiities t0at inc)ues in Cas0 )o State#ent
0he cash flow statement showcase the cash generated and used during the year or months. @arious activities that are involved for the !ash %low are •
4perating activities J business activities accounting to cash
•
Investing activities J sale and purchase of e3uipment or property
•
%inancial activities; purchase of stoc2 and own bonds
•
Supplemental information; echange of significant items that don6t involve cash 3!1. +ention 0at 0appens to co#pan"s JCas0 AccountK if it $o((os #one" f(o# t0e $ank $" signing a note pa"a$)e
#ue to double entry, the “cash account” will increase as such the liability account increases.
3!2. +ention 0ic0 account is (esponsi$)e fo( inte(est pa"a$)e
Account which is responsible or affected by the interest payable is “!urrent liability account” 3!3. +ention 0at is (ee(sing ,ou(na) ent(ies
(eversing /ournal entries are entries made at the beginning of an accounting period to cancel out the ad/usting /ournal entries made at the end of the previous accounting period. 3!4. +ention 0e(e o gene(a))" acc(ua)s appea( on t0e $a)ance s0eet
Accrued epenses usually tend to be etremely short;term. So you would record them within the “current liabilities section” of the balance sheet. 3!!.
1age accrual is entered with a credit to the “wages payable account”
•
Interest accrual is entered with a credit to the “interest payable account”
•
&ayroll ta accrual is entered with a credit to the “payroll taes payable account” 3!%. Defe((e taation is a pa(t of 0ic0 euit"
#eferred taation is a part of owner6s e3uity. 3!&. +ention 0at oes t0e inest#ent of pe(sona) assets $" t0e one( i)) o
0he investment of personal assets by the owner will increase total a ssets and increase owner6s e3uity. 3!*. >0at is t0e euation fo( Aci?Test atio in accounting
0he e3uation for Acid;0est (atio in accounting •
Acid;0est (atio 7 9!urrent assets J Inventory: ) !urrent iabilities 3!-.
0hings that fall under intangible asset are, •
&atents
•
!opyrights
•
0rademar2s
•
Brand names
•
#omain names, and so on. 3%/. +ention 0at is t(ia) $a)ance in accounting
In accounting, trial balance is an accounting report that lists the balances in each of an organization6s general ledger accounts. 0his is done at the end of posting /ournal entry to ensure that there are no posting errors. 3%1. >0e(e a cas0 iscount s0ou) $e (eco(e in ,ou(na) ent("
A cash discount should be recorded in /ournal entry as a reduction of epense in “cash account”. 3%2. +ention 0" so#e asset accounts 0ae a c(eit $a)ance
Some asset accounts have a credit balance due to following reasons, •
(eceiving and posting an amount that was higher than the recorded receivable
•
$penses occurred faster than the agreed upon prepayments
•
An error caused by posting an amount to a wrong account
•
0he amount of chec2s written eceeded the positive amount in the !ash account
•
!ontinuing to amortize or depreciate an asset after its balance has reached zero 3%3. Define 0at is Ba e$t epense
A Bad debt epense is the amount of an account receivable that is considered to +40 be collectible. 3%4. ;p)ain 0at is t0e +aste( Account
A "aster Account has subsidiary accounts. A master account receivable could be anything, it could be account receivable for various individual receivable accounts. 3%!. +ention in 0ic0 account oes t0e unp(esente c0eue i)) get (eco(e
0he unpresented che3ue will get recorded as a credit to the cash account in the company6s eneral ledger. 3%%. >0at kno)ege s0ou) financia) accountant 0ae
A certified financial accountant should have 2nowledge about •
Accounting principles and practices
•
(eporting and analysis of financial data
•
Auditing practices and principles
•
Account management
•
Budgets
•
Software 2nowledge dealing with Accounting
•
Lnowledge of relevant laws, codes and regulations 3%&. >0at a(e t0e t0(ee facto(s t0at can affect "ou( cas0 f)o an $usiness p(ofita$i)it"
0he three factors that can affect your cash flow and business profit includes •
Cas0 f)os f(o# inesting actiities: It includes shares, bonds, physical property, machineries, etc.
•
Cas0 f)os f(o# ope(ating actiities: It does not include cash received from other sources li2e investments
•
Cas0 f)o f(o# financing actiities: It includes any activities that involves dividend payments that the
company made to its shareholders, any money that includes stoc2 to the public, any money borrowed from the lender etc. in other words, it is a report that tells the firm about the money borrowed and paid out in order to finance its activities. 3%*. ;p)ain 0at is acc(ua) accounting
Accrual Accounting is a method for measuring the performance and position of the company by identifying economic events regardless of when cash transaction happened. In this method, revenue is compared with the ependitures, at the time in which the transaction happens rather than when the payment is made. 3%-. ;p)ain t0e te(# account pa"a$)e
Account payable is referred as the amount company owes to its suppliers, its employees, and its partners. In other words, it is the basic cost levied on the company to run business process that is outstanding. Account payable for one company may be account receivable for another firm or company. 3&/. ;p)ain t0e #eaning of )ong?te(# notes pa"a$)e is o( )ong te(# )ia$i)ities
ong;term notes payable or liabilities are referred for that loan that are not supposed to due for more than a year. 0hese are the loans from ban2s or financial institution that are secured against various assets on the balance sheet, such as inventories. 3&1. +ention 0at is t0e iffe(ence $eteen ep(eciation an a#o(ti5ation
!apital epenses are either depreciated or amortized based upon the type of asset.
Dep(eciation
A#o(ti5ation •
Amortize means to write off or pay the debt over a period of time. Amortization can be for loans, or it can
•
•
#epreciate means to lose value of an asset due to their
be for Intangible assets
usage, wear and tear, outdated, etc.
Amortization cost is calculated in terms of intangible
•
#epreciation cost is calculated in terms of tangible assets li2e furniture, plant 5 machinery, building, etc.
•
0he purpose of calculating depreciation costs recovery
•
0he easiest way to calculate depreciation is to 2now the loss
assets li2e goodwill, trademar2, loans, patents, etc. •
recovery •
of value of an asset over its life. •
•
%or eample, a car worth M>,>>> has estimated the lifetime
0he purpose of calculating amortization is also for cost
Amortization calculates the amount spent after the intangible assets throughout the life for that asset
•
%or eample, &harmaceutical !ompany spent MC>
of > years after that it will have no value in the mar2et. 0he
million dollars on a drug patent with a useful life of C>
cost or loss in value throughout this > years is 2nown as
years. 0he amortization value for that company will be
depreciation
M million each year
@arious method for depreciation includes straight line
@arious
depreciation, declining balance method, group depreciation
amortization,
method, unit of time)production depreciation method, etc.
amortization, etc.
•
method
for
amortization
zoning
is
amortization,
negative business
3&2. +ention 0at oes financia) state#ent of t0e co#pan" inc)ues
%inancial statement of the company includes various information li2e •
Balance Sheet 9 Assets, liabilities, and e3uity:
•
Income statement 9 &rofit or oss statement:
•
$3uity statement
•
!ash flow statement 3&3. ;p)ain 0at is o(king capita)
1or2ing capital is a financial metric that calculates the resources available to the company to finance its day;to; day operations. It is typically calculated by deducting current liabilities from current assets. 3&4. ;p)ain 0at is )ege(
A ledger can be referred as an accounting boo2 that 2eeps the record of /ournal entries in a chronological order to individual accounts. 0he process of recording this /ournal entries is 2nown as posting. 3&!. +ention t0e t"pes of )ege(
0here are three types of ledger •
eneral ledger
•
#ebtors ledger
•
!reditors ledger 3&%. ;p)ain 0at is GAA'
AA& means Gene(a))" Accepte Accounting '(incip)e E it is a framewor2 of accounting, standards, procedures 5 rules determined by the professional accounting industry and practiced by publicly traded <.S companies all over the <.S.A. 3&*. ;p)ain 0at is ou$)e?ent(" accounting ;p)ain it0 an ea#p)e
#ouble entry accounting is an accounting system that re3uires recording business transaction or event in at least two accounts. It is the same concept of accounting, where every debit account should be matched with a credit account. %or eample, if a company ta2es a loan from a ban2, it receives cash as an asset but at the same time it creates a liability on a company. 0his single entry will affect both accounts, the asset accountsH and the )ia$i)ities accounts , such entry is referred as double entry accounting. 3&-. ;p)ain 0at oes t0e stana( ,ou(na) ent(" inc)ues
A standard /ournal entry includes, date of business transaction, name of the accounts affected, amounts to be debited or credited and a brief description of the event. 3*/. ;p)ain 0at is )ia$i)ities an 0at a)) oes inc)ue in cu((ent )ia$i)ities
iability can be defined as an obligation towards another company or party. It may consist of delivering goods, rendering services or paying money. 0hey are the opposite of assets, and it may include •
Account payable
•
Interest and dividend payable
•
Bonds payable
•
!onsumer deposits
•
(eserves for federal taes
•
Short term loans 3*1. +ention in si#p)e te(#s 0at is t0e iffe(ence $eteen AssetH euit"H an )ia$i)ities
