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 conceptB. Going concern conceptC. Money measurement conceptD. Cost conceptE. Dual aspect conceptF. Accounting period conceptG. Periodic matching of costs and revenue conceptH. Realization concept.

4 Conventions of accounting:A. ConservatismB. Full disclosureC. ConsistencyD. Materiality

5. Systems of book keeping:A. single entry systemB. double entry system

6. Systems of accounting:

A. Cash system accountingB. Mercantile system of accounting.7. Principles of accounting:A. Personal a/c: Debit the receiverCredit the giver

B. Real a/c: Debit what comes in       Credit what goes outC. Nominal a/c: Debit all expenses and losses

Credit all gains and incomes

8. Meaning of journal: Journal means chronological record of transactions.9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business

enterprise whether real, nominal, personal.10. Posting: It means transferring the debit and credit items from the journal to their

respective accounts in the ledger.11. Trial balance: Trial balance is a statement containing the various ledger balances on

a particular date.

12. Credit note: The customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him intimating that his a/c has been credited with the value of the goods returned.

13. Debit note: When the goods are returned to the supplier, a debit note is sent to him indicating that his a/c has been debited with the amount mentioned in the debit note.

14. Contra entry: Which accounting entry is recorded on both the debit and credit side of the cashbook is known as the contra entry.

15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of the business, such as postage, cartage, stationery, etc.

16. Promisory note: an instrument in writing containing an unconditional undertaking signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument.

17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.18. Stale Cheque: A stale cheque means not valid of cheque that means more than six

months the cheque is not valid.20. Bank reconciliation statement: It is a statement reconciling the balance as shown by

the bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass necessary correcting, adjusting entries in the books.

21. Matching concept: Matching means requires proper matching of expense with the revenue.

22. Capital income: The term capital income means an income which does not grow out of or pertain to the running of the business proper.

23. Revenue income: The income, which arises out of and in the course of the regular business transactions of a concern.

24. Capital expenditure: It means an expenditure which has been incurred for the purpose of obtaining a long term advantage for the business.

25. Revenue expenditure: An expenditure that incurred in the course of regular business transactions of a concern.

26. Differed revenue expenditure: An expenditure, which is incurred during an accounting period but is applicable further periods also. Eg: heavy advertisement.

27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on credit.

28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset due to wear and tear, technology changes, laps of time and accident.

29. Fictitious assets: These are assets not represented by tangible possession or property. Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And loss account when shown on the assets side in the balance sheet.

30. Intanglbe Assets: Intangible assets mean the assets which is not having the physical appearance. And it’s have the real value, it shown on the assets side of the balance sheet.

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

32. Outstanding Income: Outstanding Income means income which has become due during the accounting year but which has not so far been received by the firm.

33. Suspense account: The suspense account is an account to which the difference in the trial balance has been put temporarily.

34. Depletion: It implies removal of an available but not replaceable source, Such as extracting coal from a coal mine.

35. Amortization: The process of writing of intangible assets is term as amortization.36. Dilapidations: The term dilapidations to damage done to a building or other property

during tenancy.37. Capital employed: The term capital employed means sum of total long term funds

employed in the business. i.e.(Share capital+ reserves & surplus +long term loans – (non business assets +

fictitious assets)38. Equity shares: Those shares which are not having pref. rights are called equity

shares.39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares

Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the event of company winding up.

40. Leverage: It is a force applied at a particular work to get the desired result.41. Operating leverage: the operating leverage takes place when a changes in revenue

greater changes in EBIT.42. Financial leverage: it is nothing but a process of using debt capital to increase the

rate of return on equity43. Combine leverage: It is used to measure of the total risk of the firm = operating risk +

financial risk.

44. Joint venture: A joint venture is an association of two or more the persons who combined for the execution of a specific transaction and divide the profit or loss their of an agreed ratio.

45. Partnership: Partnership is the relation b/w the persons who have agreed to share the profits of business carried on by all or any of them acting for all.

46. Factoring: It is an arrangement under which a firm (called borrower) receives advances against its receivables, from financial institutions (called factor)

47. Capital reserve: The reserve which transferred from the capital gains is called capital reserve.

48. General reserve: the reserve which is transferred from normal profits of the firm is called general reserve

49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus cash.

50. Minority Interest: Minority interest refers to the equity of the minority shareholders in a subsidiary company.

51. Capital receipts:  Capital receipts may be defined as “non-recurring receipts from the owner of the business or lender of the money crating a liability to either of them.

52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of goods in the normal course of business and which generally the result of the trading activities”.

53. Meaning of Company: A company is an association of many persons who contribute money or 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 companies2. Government company3. Foreign company4. Registered companies:A. Companies limited by sharesB. Companies limited by guaranteeC. Unlimited companiesD. private companyE. 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 business59. 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

public63. 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 lakhs2. Accepting investments from the public

3. No restriction of the transferable of shares4. No restriction of no. of members.5. Accepting deposits from the investors

68. Secret reserves: Secret reserves are reserves the existence of which does not appear on the face of balance sheet. In such a situation, net assets position of the business is stronger than that disclosed by the balance sheet.

These reserves are created by:1. Excessive depot an asset, excessive over-valuation of a liability.2. Complete elimination of an asset, or under valuation of an asset.

69. Provision: provision usually means any amount written off or retained by way of providing depreciation, renewals or diminutions in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

70. Reserve: The provision in excess of the amount considered necessary for the purpose it was originally made is also considered as reserve Provision is charge against profits while reserves is an appropriation of profits Creation of reserve increase 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 longterm projects.

82. Payback period: Payback period represents the time period required for complete recovery of the initial investment in the project.

83. ARR: Accounting or average rates of return means the average annual yield on the project.

84. NPV: The Net present value of an investment proposal is defined as the sum of the present values of all future cash inflows less the sum of the present values of all cash out flows associated with the proposal. 

85. Profitability index: Where different investment proposal each involving different initial investments and cash inflows are to be compared.

86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows equals the discounted cash out flow.

87. Treasury management: It means it is defined as the efficient management of liquidity and financial risk in business.

88. Concentration banking: It means identify locations or places where customers are placed and open a local bank a/c in each of these locations and open local collection canter.

89. Marketable securities: Surplus cash can be invested in short term instruments in order to earn interest.

90. Ageing schedule: In an ageing schedule the receivables are classified according to their age.

91. Maximum permissible bank finance (MPBF): It is the maximum amount that banks can lend a borrower towards his working capital requirements.

92. Commercial paper: A cp is a short term promissory note issued by a company, negotiable by endorsement and delivery, issued at a discount on face value as may be determined by the issuing company.

93. Bridge finance: It refers to the loans taken by the company normally from commercial banks for a short period pending disbursement of loans sanctioned by the financial institutions.

94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified ntrepreneurs who require funds to give shape to their ideas.

95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a package of assets (called asset pool).

96. Lease financing: Leasing is a contract where one party (owner) purchases assets and permits its views by another party (lessee) over a specified period

97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of business.

98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to overdraw from his account.

99. Cash credit: It is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank.

100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any tangible security.

101. Share capital: The sum total of the nominal value of the shares of a company is called share capital.

102. Funds flow statement: It is the statement deals with the financial resources for running business activities. It explains how the funds obtained and how they used.

103. Sources of funds: There are two sources of funds internal sources and external sources. Internal source: Funds from operations is the only internal sources of funds and some important points add to it they do not result in the outflow of funds

(a) Depreciation on fixed assets(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the

following items, as they do not increase the funds:Profit on sale of fixed assets, profit on revaluation Of fixed assetsExternal sources: (a) Funds from long-term loans(b)Sale of fixed assets(c) Funds from increase in share capital

104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax liability (d) Payment of fixed liability

105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For example 6 months or less from another company which have surplus liquidity? Such deposits made by one company in another company are called ICD.

106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing market conditions.

107. Public deposits: It is very important source of short term and medium term finance. The company can accept PD from members of the public and shareholders. It has the maturity period of 6 months to 3 years.

108. Euro issues: The euro issues means that the issue is listed on a European stock Exchange. The subscription can come from any part of the world except India.

109. GDR (Global depository receipts): A depository receipt is basically a negotiable certificate, dominated in us dollars that represents a non-US company publicly traded in local currency equity shares.

110. ADR (American depository receipts): Depository receipts issued by a company in the USA are known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by the securities Exchange commission (SEC) of USA like SEBI in India.

111. Commercial banks: Commercial banks extend foreign currency loans for international operations, just like rupee loans. The banks also provided overdraft.

112. Development banks: It offers long-term and medium term loans including foreign currency loans

113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining foreign currency.

114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for professionally or technically qualified entrepreneurs and persons possessing relevantexperience and skills and entrepreneur traits.

115. Unsecured loans: It constitutes a significant part of long-term finance available to an enterprise.

116. Cash flow statement: It is a statement depicting change in cash position from one period to another.

117. Sources of cash:Internal sources(a)Depreciation(b)Amortization(c)Loss on sale of fixed assets(d)Gains from sale of fixed assets(e) Creation of reservesExternal sources-(a)Issue of new shares(b)Raising long term loans(c)Short-term borrowings(d)Sale of fixed assets, investments118. 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 inner 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) Overheads134. Components of total costs: (A) Prime cost (B) Factory cost(C)Total cost of production (D) Total c0st135. 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 something. The option holder option may exercise or not.

148. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.

149. Put option: A put option gives the holder the right but not obligation to sell an asset by a certain date for a certain price.

150. Option price: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.

151. Expiration date: The date which is specified in the option contract is called expiration date.

152. European option: It is the option at exercised only on expiration date itself.153. Basis: Basis means future price minus spot price.154. Cost of carry: The relation between future prices and spot prices can be

summarized in terms of what is known as cost of carry.155. Initial margin: The amount that must be deposited in the margin a/c at the time of

first entered into future contract is known as initial margin.156 Maintenance margin: This is somewhat lower than initial margin.157. Mark to market: In future market, at the end of the each trading day, the margin a/c

is adjusted to reflect the investors’ gains or loss depending upon the futures selling price. This is called mark to market.

158. Baskets: basket options are options on portfolio of underlying asset.159. Swaps: swaps are private agreements between two parties to exchange cash flows in

the future according to a pre agreed formula.160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects

the costs faced when actually trading in index.161. Hedging: Hedging means minimize the risk.162. Capital market: Capital market is the market it deals with the long term investment

funds. It consists of two markets 1.primary market 2.secondary market.163. Primary market: Those companies which are issuing new shares in this market. It

is also called new issue market.164. Secondary market: Secondary market is the market where shares buying and

selling. In India secondary market is called stock exchange.

165. Arbitrage: It means purchase and sale of securities in different markets in order to profit from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price fluctuations of securities held in a portfolio.

166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures which are connected with each other in same manner.

167. Activity ratio: It is a measure of the level of activity attained over a period.168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is

invested according to certain investment objectives.169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the

investors MF managed by investment professionals The value of portfolio is updated every day170. Advantage of MF to investors: Portfolio diversification Professional management

Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility171. Net asset value: the value of one unit of investment is called as the Net Asset Value172. Open-ended fund: open ended funds means investors can buy and sell units of

fund, at NAV related prices at any time, directly from the fund this is called open ended fund.173. Close ended funds: close ended funds means it is open for sale to investors for a

specific period, after which further sales are closed. Any further transaction for buying the units or repurchasing them, happen, in the secondary markets.

174. Dividend option: investors who choose a dividend on their investments, will receive dividends from the MF, as when such dividends are declared.

175. Growth option: investors who do not require periodic income distributions can be choose the growth option.

176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of company.

177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index funds

178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the equity markets.

179. Index funds: The fund manager takes a view on companies that are expected to perform well, and invests in these companies

180. Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.

181. Liquid funds: the debt funds invest only in instruments with maturities less than one year.

182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and therefore does not carry any credit risk.

183. Balanced funds: Funds that invest both in debt and equity markets are called balanced funds.

184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC with prior approval of SEBI.

185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for managing the investment portfolio.

186. AMC: the AMC describes Asset Management Company; it is the business face of the MF, as it manages all the affairs of the MF.

187. R & T Agents: the R&T agents are responsible for the investor servicing functions, as they maintain the records of investors in MF.

188. Custodians: Custodians are responsible for the securities held in the mutual fund’s portfolio.

189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is called as scheme take over.

190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the price.

192. Market capitalization: market capitalization means number of shares issued multiplied with market price per share.

193. Price earnings ratio: The ratio between the share price and the post tax earnings of company is called as price earnings ratio.

194. Dividend yield: The dividend paid out by the company, is usually a percentage of the face value of a share.

195. Market risk: It refers to the risk which the investor is exposed to as a result of adverse movements in the interest rates. It also referred to as the interest rate risk.

196. Re-investment risk: It the risk which an investor has to face as a result of a fall in the interest rates at the time of reinvesting the interest income flows from the fixed income security.

197. Call risk: Call risk is associated with bonds have an embedded call option in them. This option hives the issuer the right to call back the bonds prior to maturity.

198. Credit risk: Credit risk refers to the probability that a borrower could default on a commitment to repay debt or band loans

199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash flows resulting from the fixed income security.

200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be traded in the market.

201. Drawings: Drawings denotes the money withdrawn by the proprietor from the business for his personal use.

202. Outstanding Income: Outstanding Income means income which has become due during the accounting year but which has not so far been received by the firm.

203. Outstanding Expenses: Outstanding Expenses refer to those expenses which have become due during the accounting period for which the Final Accounts have been prepared but have not yet been paid.

204. Closing stock: The term closing stock means goods lying unsold with the businessman at the end of the accounting year.

205. Methods of depreciation:1. Unirorm charge methods:a. Fixed installment methodb .Depletion methodc. Machine hour rate method.2. Declining charge methods:a. Diminishing balance methodb. Sum of years digits methodc. Double declining method3. Other methods:a. Group depreciation methodb. Inventory system of depreciationc. Annuity methodd. Depreciation fund methode. 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 sales208. Net profit ratio: it indicates net margin on salesFormula:                      Net profit                                  --------------- X 100                                      Net sales209. Return on share holders’ funds: it indicates measures earning power of equity

capital.Formula:Profits available for Equity shareholders-----------------------------------------------X 100Average Equity Shareholders Funds210. 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---------------------------- X100Market price per share

212. Price earnings ratio: it a measure for determining the value of a share. May also be used to measure the rate of return expected by investors.

Formula:                            Market price of share (MPS)                                          ------------------------------------X 100                                             Earnings per share (EPS)

213. Current ratio: it measures short-term debt paying ability.Formula:Current Assets------------------------Current Liabilities

214. Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings; a measure of the extent of trading on equity.

Formula:                            Total Long-term Debt                                           ---------------------------                                              Shareholders’ funds

215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate 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 contribute towards sales.

Formula:                            Net Sales                                  --------------------------                                         Fixed Assets

222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for paying dividend.

Formula:                            Dividend per Equity Share                                --------------------------------------------X100                                             Earning per Equity share

223. Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or Return on Capital Employed (ROCE). It indicates the percentage of return on the total capital employed in the business.

Formula:                      Operating profit                                 ------------------------X 100                                     Capital employed

The term capital employed has been given different meanings a.sum total of all assets Whether fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In the business, i.e., share capital +reserves &surplus +long term loans – (non business assets + fictitious assets). Operating profit means ‘profit before interest and tax’

224. Fixed Interest Cover ratio: The ratio is very important from the 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 Dividend226. 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 rateInterest + Principal payment installment227. 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 partnership: In joint venture the business is carried on without using a firm name, In the partnership, the business is carried on under a firm name. In the joint venture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system. In the joint venture, profit and loss is ascertained on completion of the venture In the partnership, profit and loss is ascertained at the end of each year. In the joint venture, it is confined to a particular operation and it is temporary. In the partnership, it is confined to a particular operation and it is permanent.

229. Meaning of Working capital: The funds available for conducting day to day operations of an enterprise. Also represented by the excess of current assets over current liabilities.

230. Concepts of accounting:1. Business entity concepts: - According to this concept, the business is treated as a separate

entity distinct from its owners and others.2. Going concern concept :- According to this concept, it is assumed that a business has a

reasonable expectation of continuing business at a profit for an indefinite period of time.3. Money measurement concept :- This concept says that the accounting records only those

transactions which can be expressed in terms of money only.4. Cost concept: - According to this concept, an asset is recorded in the books at the price

paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.5. Dual aspect concept: - In every transaction, there will be two aspects – the receiving aspect

and the giving aspect; both are recorded by debiting one accounts and crediting another account. This is called double entry.

6. Accounting period concept: - It means the final accounts must be prepared on a periodic basis. Normally accounting period adopted is one year, more than this period reduces the utility of accounting data.

7. Realization concept: - According to this concepts, revenue is considered as being earned on the data which it is realized, i.e., the date when the property in goods passes the buyer and he become legally liable to pay.

8. Materiality concepts: - It is a one of the accounting principle, as per only important information will be taken, and UN important information will be ignored in the preparation of the financial statement.

9. Matching concepts: - The cost or expenses of a business of a particular period are compared with the revenue of the period in order to ascertain the net profit and loss.

10. Accrual concept: - The profit arises only when there is an increase in owners capital, which is a result of excess of revenue over expenses and loss.

231. Financial analysis: The process of interpreting the past, present, and future financial condition of a company.

232. Income statement: An accounting statement which shows the level of revenues, expenses and profit occurring for a given accounting period.

233. Annual report: The report issued annually by a company, to its share holders. it containing financial statement like, trading and profit & lose account and balance sheet.

234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is assets are surrendered to court for administration

235. Lease: Lease is a contract between to parties under the contract, the owner of the asset gives the right to use the asset to the user over an agreed period of the time for a consideration.

236. Opportunity cost: The cost associated with not doing something.237. Budgeting: The term budgeting is used for preparing budgets and other producer for

planning,co-ordination,and control of business enterprise.

238. Capital: The term capital refers to the total investment of company in money, tangible and intangible assets. It is the total wealth of a company.

239. Capitalization: It is the sum of the par value of stocks and bonds out standings.240. Over capitalization: When a business is unable to earn fair rate on its outstanding

securities.241. Under capitalization: When a business is able to earn fair rate or over rate on it is

outstanding securities.242. Capital gearing: The term capital gearing refers to the relationship between equity and

long term debt.243. Cost of capital: It means the minimum rate of return expected by its investment.244. Cash dividend: The payment of dividend in cash245. Define the term accrual: Recognition of revenues and costs as they are earned or

incurred. it includes recognition of transaction relating to assets and liabilities as they occur irrespective of the actual receipts or payments.

245. Accrued expenses: An expense which has been incurred in an accounting period but for which no enforceable claim has become due in what period against the enterprises.

246. Accrued revenue: Revenue which has been earned is an earned is an accounting period but in respect of which no enforceable claim has become due to in that period by the enterprise.

247. Accrued liability: A developing but not yet enforceable claim by another person which accumulates with the passage of time or the receipt of service or otherwise. It may rise from the purchase of services which at the date of accounting have been only partly performed and are not yet billable.

248. Convention of Full disclosure: According to this convention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information will be made.

249. Convention of consistency: According to this convention it is essential that accounting practices and methods remain unchanged from one year to another.

250. Define the term preliminary expenses: Expenditure relating to the formation of an enterprise. There include legal accounting and share issue expenses incurred for formation of the enterprise.

251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be fixed charge and floating charge.

252. Appropriation: It is application of profit towards Reserves and Dividends.253. Absorption costing: A method where by the cost is determine so as to include the

appropriate share of both variable and fixed costs.254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a

product. It is also called variable cost.

255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related to the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on the sale of fixed assets, interest received from other company investments, profit or loss on foreign exchange, unexpected dividend received.

256. Share premium: The excess of issue of price of shares over their face value. It will be showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the liabilities side under the head of “reserves & surplus”.

257. Accumulated Depreciation: The total to date of the periodic depreciation charges on depreciable assets.

258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.

259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid up share capital in corporate enterprise.

260. Capital Work In Progress: Expenditure on capital assets which are in the process of construction as completion.

261. Convertible Debenture: A debenture which gives the holder a right to conversion wholly or partly in shares in accordance with term of issues.

262. Redeemable Preference Share: The preference share that is repayable either after a fixed (or) determinable period (or) at any time dividend by the management.

263. Cumulative preference shares: A class of preference shares entitled to payment of emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly made non-cumulative preference shares.

264. Debenture redemption reserve: A reserve created for the redemption of debentures at a future date.

265. Cumulative dividend: A dividend payable as cumulative preference shares which it unpaid Emulates as a claim against the earnings of a corporate before any distribution is made to the other shareholders.

266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in future years.

267. Opening Stock: The term ‘opening stock’ means goods lying unsold with the businessman in the beginning of the accounting year. This is shown on the debit side of the trading account.

268. Closing Stock: The term ‘Closing Stock’ includes goods lying unsold with the businessman at the end of the accounting year. The amount of closing stock is shown on the credit side of the trading account and as an asset in the balance sheet.

269. Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market prices whichever is less” principle.

272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss will be known as determined only as the occurrence or non occurrence of one or more uncertain future events.

273. Contingent Asset: An asset the existence ownership or value of which may be known or determined only on the occurrence or non occurrence of one more uncertain future event.

274. Contingent liability: An obligation to an existing condition or situation which may arise in future depending on the occurrence of one or more uncertain future events.

275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called deficiency.

276. Deficit: The debit balance in the profit and loss a/c is called deficit.277. Surplus: Credit balance in the profit & loss statement after providing for proposed

appropriation & dividend, reserves.278. Appropriation Assets: An account sometimes included as a separate section of the

profit and loss statement showing application of profits towards dividends, reserves.279. Capital redemption reserve: A reserve created on redemption of the average cost: - the

cost of an item at a point of time as determined by applying an average of the cost of all items of the same nature over a period. When weights are also applied in the computation it is termed as weight average cost.

280. Floating Change: Assume change on some or all assets of an enterprise which are not attached to specific assets and are given as security against debt.

281. Difference between Funds flow and Cash flow statement: A Cash flow statement is concerned only with the change in cash position while a funds flow analysis is concerned with

change in working capital position between two balance sheet dates. A cash flow statement is merely a record of cash receipts and disbursements. While studying the short-term solvency of a business one is interested not only in cash balance but also in the assets which are easily convertible into cash.

282. Difference between the Funds flow and Income statement:A funds flow statement deals with the financial resource required for running the business

activities. It explains how were the funds obtained and how were they used, whereas an income statement discloses the results of the business activities, i.e., how much has been earned and how it has been spent. A funds flow statement matches the “funds raised” and “funds applied” during a particular period. The source and application of funds may be of capital as well as of revenue nature. An income statement matches the incomes of a period with the expenditure of that period, which are both of a revenue nature.

What is an irrevocable letter of credit?An irrevocable letter of credit is a financial instrument used by banks to guarantee a buyer's obligations to a seller. It is irrevocable because the letter of credit cannot be modified unless all parties agree to the modifications.

Irrevocable letters of credit are often used to facilitate international trade because of the additional risks involved. The irrevocable letter of credit removes the seller's credit risk by assuring the seller that payment will be made by the buyer's bank if the buyer does not pay the seller.

In an irrevocable letter of credit, the buyer is known as the applicant, the seller is the beneficiary, the buyer's bank is the issuing bank, and the seller's bank is the advising bank.

What is the difference between an invoice and a voucher?An invoice from a vendor is the bill that is received by the purchaser of goods or services from an outside supplier. The vendor invoice lists the quantities of items, brief descriptions, prices, total amount due, credit terms, where to remit payment, etc.

A voucher is an internal document used in a company's accounts payable department in order to collect and organize the necessary documentation and approvals before paying a vendor invoice. The voucher acts as a cover page to which the following will be attached: vendor invoice, company's purchase order, company's receiving report, and other information needed to process the vendor invoice for payment.

What is a trade discount?A trade discount is a reduction to the published price of a product. For example, a high-volume wholesaler might be entitled to a 40% trade discount, while a medium-volume wholesaler is given a 30% trade discount. A retail customer will receive no trade discount and will have to pay the published or list price. The use of trade discounts allows for having just one published price for each product.

The sale and purchase will be recorded at the amount after the trade discount is subtracted. For example, when goods with list prices totaling $1,000 are sold to a wholesale customer entitled to a 30% trade discount, both the seller and the buyer will record the transaction at the net amount of $700.

Trade discounts are different from early-payment discounts. (Early-payment discounts of 1% or 2% are likely to be recorded by the seller as a sales discount and by the buyer using the periodic inventory method as a purchase discount.)

What is the monthly close?In accounting the monthly close is the processing of transactions, journal entries and financial statements at the end of each month. Under the accrual method of accounting, it is imperative that the financial statements reflect only the transactions and journal entries having relevance to the current month's revenues and expenses, and end-of-the-month assets and liabilities. Expressed another way, the monthly close must achieve a proper cutoffof each month's financial activities.

To ensure that the monthly financial statements are accurate and timely, companies will use standard journal entries, recurring journal entries, and checklists for the tasks that must be completed.

If a company has inventories, its monthly close will be more challenging as it will have to be certain that the costs are recorded in the same month as the goods are added to the inventories. In short, the accrual of expenses becomes immensely important when goods are received and are sold.

Another important step in the monthly close is to compare the amounts and percentages on the current financial statements to those of earlier months. For example, if the current income statement shows the cost of goods sold as 88% instead of the typical 81%, the current month's amounts need to be reviewed before releasing the financial statements. Often the comparison of

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

What does drop ship mean?One example of drop ship is a manufacturer shipping goods directly to one of its customers' customer (instead of delivering the goods to the customer that placed the order with the manufacturer). The following illustrates the concept of drop ship, drop shipping or a drop shipment.

Assume that XYZ Distributors Inc (XYZ) sells only the Premier brand of water heaters. XYZ receives an order for 40 of the water heaters from a condominium developer located 30 miles away. XYZ then places an order for 40 water heaters from Premier Manufacturing Corp. However, XYZ instructs Premier to deliver them directly to the condo project. So instead of delivering them to XYZ's warehouse, Premier is asked to drop ship them to the condo project. The drop ship means that XYZ will not have to receive the water heaters, unload them, reload them onto its trucks and then deliver them to the condo project. Hence the drop ship allows XYZ to avoid some expensive non-value-added activities.

When Premier ships the water heaters, it will bill XYZ and will send the invoice to XYZ. As a result XYZ will have a purchase and an account payable for the amount charged by Premier. XYZ will prepare its own sales invoice to bill the condo developer.

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

Current liabilities are usually presented in the following order:

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

2. accounts payable

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

The parties who are owed the current liabilities are referred to as creditors. If the creditors have a lien on company assets, they are known as secured creditors. The creditors without a lien are referred to as unsecured creditors.

The amount of current liabilities is used to determine a company's working capital (current assets minus current liabilities) and the company's current ratio (current assets divided by current liabilities).

What is a creditor?A creditor may be a bank, supplier or person that has provided credit to a company. In other words, a company owes money to its creditors. The amounts owed to creditors are reported on the company's balance sheet as liabilities.

If a creditor required the company to sign a promissory note for the amount owed, the company will record and report the amount as Notes Payable. If a creditor is a vendor or supplier that did not require the company to sign a promissory note, the company will likely report the amounts owed as Accounts Payable. Other examples of creditors include company's employees (who are owed wages and bonuses), governments (who are owed taxes), and customers (who made deposits or other prepayments).

Some creditors are known as secured creditors because they have a lien or other legal claim to the company's (debtor's) assets. Other creditors are often unsecured creditors since they do not have a lien or legal right to specific assets of the company.

Most balance sheets report the amounts owed to creditors in two groupings: current liabilities and non-current (or long-term) liabilities.

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

Accounts Payable, Accrued Liabilities (amounts owed but not yet recorded in Accounts Payable), Notes Payable, Unearned Revenues, Deferred Income Taxes (certain temporary timing differences), etc.

The balances in liability accounts are nearly always credit balances and will be reported on the balance sheet as either current liabilities or noncurrent (or long-term) liabilities.

The company with the liability account for the debt or payables is known as the debtor. The lenders, vendors, suppliers, employees, tax agencies, etc. who are owed the money are known as the company's creditors.

What is an account payable?An account payable is an obligation to a supplier or vendor for goods or services that were provided in advance of payment.

To illustrate an account payable let's assume that Joe's Plumbing Service provides XCorp with repair services on August 29 and agrees to bill XCorp. On August 31 XCorp receives an invoice from Joe's for $900. The invoice states that the $900 is due within 30 days. After reviewing and approving the invoice, XCorp enters Joe's invoice into its accounting records with a credit to Accounts Payable and debit to Repairs and Maintenance Expense.

Until the invoice from Joe's Plumbing Service is paid, Joe's invoice serves as the supporting document for XCorp's accounts payable and also as a supporting document for Joe's accounts receivable.

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

The direct materials contained in manufactured products are also defined as:

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

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

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

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

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

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

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

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

What is a rubber check?A rubber check is a check that is not paid (or honored) by the bank on which it is drawn. The reason the check is not paid is the maker's account had insufficient funds or not sufficient funds (NSF). Instead of the check being paid, it will be returned (or bounced back) through the banking system. Because the check was bounced back by the bank, the check is described as a rubber check.

A rubber check also causes bank fees for the maker of the check and for the depositor of the check. These fees need to be recorded in the general ledger accounts. If the fees are overlooked initially, they will be adjusting items to the balance per books in the bank reconciliation.

If a rubber check is not redeposited by the payee, the payee must also reduce its general ledger cash account for the amount of the check (and also debit another general ledger account).

Why does a company prepare a bank reconciliation?

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

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

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

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

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

will occur in its accounting records: 1) a debit of $8 to Accounts Payable, and 2) a credit of $8 to Purchases Returns and Allowances (or Inventory).

What is an uncleared cheque?An uncleared cheque is a cheque that has been written and recorded in the payer's records, but the cheque has not yet been paid by the bank on which it is drawn. In the U.S. accounting textbooks, an uncleared cheque is referred to as an outstanding check.

In the bank reconciliation process an uncleared cheque (or outstanding check) is deducted from the balance shown on the bank statement to arrive at the correct or adjusted balance per bank.

What is a promissory note?A promissory note is a written promise to pay an amount of money by a specified date (or on demand). The promissory note could involve a loan from a bank, a loan from a relative, a replacement for an account payable, etc.

The written amount of money is referred to as the face amount. The face amount will be recorded in the promisor's (borrower's) general ledger with a credit to the liability account Notes Payable or Loans Payable. The promisee (lender) will record the face amount with a debit to its asset account Notes Receivable.

If the promissory note specifies a fair interest rate, it is used to accrue interest expense and interest payable on the books of the borrower. The lender will accrue interest revenue or income and interest receivable.

If the promissory note does not specify interest, it should be assumed that the face amount includes some interest. The estimated future amount of interest should be recorded by the borrower in the contra accountDiscount on Notes Payable. The lender should record the same amount in a contra account Discount on Notes Receivable. The discount is then amortized over the life of the note to Interest Expense (borrower) and Interest Revenue (lender).

What is accounts receivable?Accounts receivable is the money that a company has a right to receive because it had provided customers with goods and/or services. For example, a manufacturer will have an account receivable

when it delivers a truckload of goods to a customer on June 1 and the customer is allowed to pay in 30 days. From June 1 until the company receives the money, the company will have an account receivable (and the customer will have an account payable). Accounts receivables are also known as trade receivables.

Companies who sell on credit are unlikely to have liens on their customers' property. Hence, there is a risk that the full amount of their accounts receivable might not be collected. This means that companies need to cautious when granting credit and establishing an account receivable. If there is uncertainty of a potential (or existing) customer's credit worthiness, it is wise for the company to require the customer to pay with a credit card before delivering goods or services.

It is also important for a company to monitor its accounts receivable and to immediately follow up with any customer who has not paid as agreed. An aging of accounts receivable is a tool that will help and it is readily available with most accounting software. A general rule is that the older a receivable gets, the less likely it will be collected in full.

Accounts receivable are reported as a current asset on a company's balance sheet. Good accounting requires that an estimate be made for the amount that is unlikely to be collected. That estimate is reported as a credit balance in a related receivable account such as Allowance for Doubtful Accounts. Any adjustments to the Allowance balance will also be recorded in the income statement account Uncollectible Accounts Expense.

What is the aging method?The aging method usually refers to the technique used for determining the credit balance needed in the account Allowance for Doubtful (or Uncollectible) Accounts. This Allowance account is a contra asset account connected with Accounts Receivable. Usually when a credit adjustment is entered into the Allowance account, a corresponding debit amount is entered into Bad Debts Expense (or Uncollectible Accounts Expense).

The aging method takes place by sorting a company's accounts receivable according to the dates of these unpaid invoices. The invoice amounts that are not yet due are entered into the first of perhaps five columns. The invoice amounts that are 1-30 days past due are entered into the second column. Amounts that are 31-60 days past due are entered into the third column, and so on. (Accounting software will likely have a feature for generating an aging of accounts receivable.) The aging will be reviewed in order to determine the approximate amount of the receivables that may not be collected.

The goal of the aging method is to have the company's balance sheet report the true amount of the receivables that will be turning to cash. For example, if the company's Accounts Receivable has a debit balance of $89,400 but the company estimates (based on its aging) that only $82,000 will be collected,

the Allowance account must report a credit balance of $7,400.

If a company fails to report a needed credit balance in its Allowance account, it will be overstating its assets, working capital, current ratio, retained earnings, and stockholders' equity. Its current period's earnings may also be overstated.

Are the goods purchased by a retailer an expense or an asset?Some retailers view the goods purchased as part of the expense known as the cost of goods sold. Other retailers view the goods purchased as part of the asset inventory.

To appreciate both views, let's assume that a retailer begins the year with inventory having a cost of $800. It ends the year with inventory having a cost of $900. During the year the retailer purchased goods having a cost of $7,000. Let's also assume that the cost per unit did not change during the year.

Retailer X may view the $7,000 of purchases as an expense (cost of goods sold) except for $100, which was the cost of the goods added to its inventory ($900 vs. $800). Retailer X's income statement reports its cost of goods sold as: purchases of $7,000 minus the $100 increase in inventory = $6,900.

Retailer Y may view the $7,000 of purchases as an increase to its asset inventory and will report its cost of goods sold as: beginning inventory of $800 + purchases of $7,000 = cost of goods available of $7,800 minus the ending inventory of $900 = $6,900.

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

Why are some expenses deferred?Generally, expenses are deferred in order to comply with the accounting guideline known as the matching principle.

To illustrate the concept, let's assume that a company pays $3,000 on December 30 to rent a warehouse for the upcoming three-month period of January 1 through March 31. Since none of the $3,000 expires or is used up in December, none of the amount should be reported as rent expense on the income

statement for the month of December. Hence the $3,000 is deferred to a balance sheet account such as Prepaid Rent (or Prepaid Expenses), which is a current asset account.

During the three months of January 1 through March 31 (when the prepaid rent is expiring) the $3,000 prepayment must be moved from the balance sheet asset account to an income statement expense account. The usual allocation will involve an adjusting entry to debit Rent Expense for $1,000 and credit Prepaid Rent for $1,000 on January 31, February 28 and March 31.

When do you adjust the amount of prepaid expenses?The balance in the current asset account Prepaid Expenses should be adjusted prior to issuing a company's financial statements. If the company issues financial statements for each calendar month, you will need to adjust the balance in Prepaid Expenses as of the end of each month. If your company issues only quarterly financial statements, you will need to adjust the balance at the end of each quarter.

The goal is to have the balance in Prepaid Expenses be equal to the amount of the unexpired costs as of the end of the accounting period (which is also the date appearing in the heading of the balance sheet).

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

What are prepaid expenses?Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired.

The amount of prepaid expenses that have not yet expired are reported on a company's balance sheet as an asset. As the amount expires, the asset is reduced and an expense is recorded for the amount of the reduction. Hence, the balance sheet reports the unexpired costs and the income statement reports the expired costs. The amount reported on the income statement should be the amount that pertains to the time interval shown in the statement's heading.

A common prepaid expense is the six-month premium for insurance on a company's vehicles. Since the

insurance company requires payment in advance, the amount paid is often recorded in the current asset account Prepaid Insurance. If the company issues monthly financial statements, its income statement will report Insurance Expense that is one-sixth of the amount paid. The balance in the account Prepaid Insurance will be reduced by the amount that was debited to Insurance Expense.

What is prepaid insurance?Prepaid insurance is the portion of an insurance premium that has been paid in advance and has not expired as of the date of the balance sheet. This unexpired cost is reported in the current asset account Prepaid Insurance.

As the amount of prepaid insurance expires, the expired cost is moved from the asset account Prepaid Insurance to the income statement account Insurance Expense. This is usually done at the end of each accounting periodthrough an adjusting entry.

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

What is a noncash expense?A noncash expense is an expense that is reported on the income statement of the current accounting period, but there was no related cash payment during the period.

A common example of a noncash expense is depreciation. For instance, if a company purchased equipment on December 31, 2012 for $200,000 cash, it could have Depreciation Expense of $20,000 in each of the next 10 years. As a result its income statement will report Depreciation Expense of $20,000 in each of the years 2013 through 2022. Since there is no cash payment in any of those years, each year's $20,000 of depreciation expense is referred to as a noncash expense.

Another example of a noncash expense is the amortization of bond issue costs. Perhaps a corporation costs incurred of $300,000 for professional fees and registration fees in order to issue

$20 million in bonds. If the bonds will mature in 10 years, the corporation will defer the $300,000 of bond issue costs to the balance sheetand will then amortize the cost (send the cost to expense) at a rate of $30,000 per year. In each of the years of the bonds' life the corporation's income statement will report $30,000 of bond issue costs expense which will be a noncash expense.

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

The accrual method of accounting also requires that expenses and losses be reported on the income statement when they occur even if payment will take place 30 days later. For example, if a company has a $15,000 repair done on December 15 and the vendor allows for payment on January 15, the company will report a repair expense and a liability of $15,000 as of December 15. (On January 15 the company will credit Cash and will debit the liability account.)

The accrual method of accounting, which is also known as the accrual basis of accounting, is required for large companies. (The cash method of accounting may be used by individuals and some small companies.) The accrual method and the associated adjusting entries will result in a more complete and accurate reporting of a company's assets, liabilities, equity, and earnings during each accounting period.

What is scrap value?In financial accounting, scrap value is associated with the depreciation of assets used in a business. In this situation, scrap value is defined as the expected or estimated value of the asset at the end of its useful life. Scrap value is also referred to as an asset's salvage value or residual value. The following example illustrates how the scrap value is used.

A business acquires equipment at a cost of $150,000 and estimates that its scrap value will be $10,000 at the end of its useful life of 7 years. The annual straight-line depreciation expense will be $20,000 [($150,000 cost minus $10,000 scrap value) divided by 7 years]. Accountants and U.S. income tax regulations often assume that for the depreciation calculation the asset will have no scrap value. (If cash is received when the asset is scrapped, any amount that is in excess of the asset's carrying value will be reported as a gain.)

In cost accounting, scrap value often refers to the amount that a manufacturer will receive from materials or products that will be scrapped.

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

Accumulated Depreciation is also the title of the contra asset account which is credited when Depreciation Expense is recorded each accounting period.

The amount of accumulated depreciation is used to determine a plant asset's book value (or carrying value). For example, a delivery truck having a cost of $50,000 and accumulated depreciation of $31,000 will have a book value of $19,000. (It is important to note that an asset's book value does not indicate the asset's market value since depreciation is merely an allocation technique.)

The accumulated depreciation of each plant asset cannot exceed the asset's cost. If an asset remains in use after its cost has been fully depreciated, the asset's cost and its accumulated depreciation will remain in the general ledger accounts and the depreciation expense stops. When the asset is disposed (sold, retired, etc.) the asset's cost and accumulated depreciation are removed from the accounts.

What is depreciation expense?Depreciation expense is the allocated portion of the cost of a company's fixed assets that is appropriate for the accounting period indicated on the company's income statement. For instance, if a company had paid $2,400,000 for its office building (excluding land) and the building has an estimated useful life of 40 years, each monthly income statement will report straight-line depreciation expense of $5,000 for 480 months. [However, the allocated cost of the fixed assets used in manufacturing will be part of the manufacturing overhead which will become part of the cost of the products manufactured.]

Depreciation expense is referred to as a noncash expense because the recurring, monthly depreciation entry (a debit to Depreciation Expense and a credit to Accumulated Depreciation) does not involve a cash payment. As a result, the statement of cash flows prepared under the indirect method will add depreciation expense to the amount of net income.

The common methods for computing depreciation expense include straight-line, double-declining balance, sum-of-the-years digits, and units of production or activity.

What is accelerated depreciation?Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. Compared to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the difference between accelerated depreciation and straight line depreciation is the timingof the depreciation.

Three examples of accelerated depreciation methods include double-declining (200% declining) balance, 150% declining balance, and sum-of-the-years' digits (SYD).

The U.S. income tax regulations allow a business to use accelerated depreciation on its income tax return while using straight line depreciation on its financial statements. For profitable corporations this will likely result in deferred income tax payments being reported on its financial statements.

What is straight line depreciation?Straight line depreciation is likely to be the most common method of matching a plant asset's cost to the accounting periods in which it is in service. Under the straight line method of depreciation, each full accounting year will be allocated the same amount or percentage of an asset's cost. (The total amount of depreciation over the years of the asset's useful life will be the asset's cost minus any expected or assumed salvage value.)

To illustrate straight line depreciation let's assume that a company purchases equipment at a cost of $430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of $30,000. Under the straight line method each full accounting year will be allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000 that needs to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be $20,000 of depreciation in the first and the eleventh accounting year and $40,000 in each of the years 2 through 10.

In the U.S. a company may use the straight line method for its financial statements while at the same time be using the Internal Revenue Service's faster depreciation on its federal income tax return.

What is depreciation?Depreciation is the assigning or allocating of a plant asset's cost to expense over the accounting periods that the asset is likely to be used. For example, if a business purchases a delivery truck with a cost of $100,000 and it is expected to be used for 5 years, the business might have depreciation expense of $20,000 in each of the five years. (The amounts can vary depending on the method and assumptions.)

In our example, each year there will be an adjusting entry with a debit to Depreciation Expense for $20,000 and acredit to Accumulated Depreciation for $20,000. Since the adjusting entries do not involve cash, depreciation expense is referred to as a noncash expense.

Are depreciation, depletion and amortization similar?In accounting the terms depreciation, depletion and amortization often involve the movement of costs from the balance sheet to the income statement in a systematic and logical manner.

For example, the systematic expensing of the cost of assets such as buildings, equipment, furnishings and vehicles is known as depreciation. The systematic expensing of the cost of natural resources is referred to asdepletion. The systematic expensing of other long-term costs such as bond issue costs and organization costs is referred to as amortization.

Depreciation, depletion and amortization are also described as noncash expenses, since there is no cash outlay in the years that the expense is reported on the income statement. As a result, these expenses are added back to the net income reported in the operating activities section of the statement of cash flows when it is prepared under the indirect method.

The term amortization is also used to indicate the systematic reduction in a loan balance resulting from a

predetermined schedule of interest and principal payments.

What is burn rate?

In business, burn rate is usually the monthly amount of cash spent in the early years of a start-up business. Burn rate is an important metric since the new business must spend time and money developing a product or service before it obtains cash from revenues.

If a company has $200,000 in initial cash and its burn rate is $20,000 per month, the company will be out of cash in 10 months unless it raises additional money, begins to generate significant revenues, or reduces its burn rate. Hence, it is important that a start-up business monitor all of its expenditures and avoid payments that will not speed up or increase revenues.

The cash flow statement, formally known as the statement of cash flows, is an important financial statement that can be helpful in computing a realistic burn rate.

How can a company have a profit but not have cash?A company can have a profit but not have cash because profit is computed using revenues and expenses, which are different from the company's cash receipts and cash disbursements. In other words, there is a difference between revenues and receipts. There is also a difference between expenses and expenditures.

To illustrate, let's assume that a new company uses the accrual method of accounting. It provides $10,000 of services to its clients in its first month and the clients are allowed to pay in 30 days. The company will have $10,000 of revenues in its first month, but the cash will not be received until the second month. If the company's expenses are $7,000 in the first month, the company will report a profit of $3,000 but will not have received any cash from its clients.

Another company might have a profit of $60,000 in its first year, but during its first year it uses $65,000 of cash to acquire equipment that will be put into service at the beginning of the second year. This company will have a profit, but will not have the cash.

Other examples where cash is paid out, but the profits are not reduced at the time of the payment, include prepayments of insurance, payments to increase the inventory of merchandise on hand, and payments to reduce liabilities.

How can a business increase its cash flow from operations?

A business can increase its cash flow from operations (or operating activities) by looking closely at each of its current assets and current liabilities. For instance, a manufacturer should examine its inventories of materials, work-in-process, finished goods, and supplies to identify the inventory items which have not turned over in a long time. Those items may need to be scrapped so that a loss can be reported and cash will not flow for income taxes. It may also mean less cash flowing out for new materials. Reviewing the turnover of each and every item may allow the company to reduce the inventory quantities thereby freeing up cash that would have been sitting ininventory.

Accounts receivable needs to be monitored to be certain that every customer is adhering to the agreed upon credit terms and that the terms are consistent with your industry. You need to get those receivables turning to cash. Accounts payable should be reviewed to be sure that your company's cash is not being paid to suppliers prior to the required payment dates.

In addition to the in-depth review of each of the current assets and current liabilities, companies need to review its staffing in light of current levels of business and the recent advances in software and technology. Perhaps the company can function just fine with a few less salaried employees.

Lastly, the selling prices of some of a company's products, especially those that require lots of complex activities and result in many inefficiencies and headaches, may need to be increased.

What is working capital?Working capital is the amount of a company's current assets minus the amount of its current liabilities. For example, if a company's balance sheet dated June 30 reports total current assets of $323,000 and total current liabilities of $310,000 the company's working capital on June 30 was $13,000. If another company has total current assets of $210,000 and total current liabilities of $60,000 its working capital is $150,000.

The adequacy of a company's working capital depends on the industry in which it competes, its relationship with its customers and suppliers, and more. Here are some additional factors to consider:

The types of current assets and how quickly they can be converted to cash. If the majority of the company's current assets are cash and cash equivalents and marketable investments, a smaller amount of working capital may be sufficient. However, if the current assets include slow-moving inventory items, a greater amount of working capital will be needed.

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

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

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

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

What is goodwill?In accounting, goodwill is an intangible asset associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of 1) the fair value of the identifiable tangible and intangible assets acquired, and 2) the liabilities that were assumed.

Goodwill is reported on the balance sheet as a noncurrent asset. Since 2001, U.S. companies are no longer required to amortize the recorded amount of goodwill. However, the amount of goodwill is subject to a goodwill impairment test at least once per year.

Outside of accounting, goodwill could refer to some value that has been developed within a company as a result of delivering amazing customer service, unique management, teamwork, etc. This goodwill, which is unrelated to a business combination, is not recorded or reported on the company's balance sheet.

What is par value?

Par value is a per share amount appearing on stock certificates. It is also an amount that appears on bondcertificates.

In the case of common stock the par value per share is usually a very small amount such as $0.10 or $0.01 or $0.001 and it has no connection to the market value of the share of stock. The par value is usually described as the common stock's legal capital and it is part of the corporation's paid-in (or contributed) capital.

When a share of common stock having a par value of $0.01 is issued for $25, the account Common Stock will be credited for $0.01 and an additional paid-in capital account will be credited for $24.99 (and Cash will be debited for $25.00).

If a state no longer requires a corporation's common stock to have a par value, a corporation might issue no-par stock (which may or may not have a stated value).

In the case of bonds, the par value is also the face amount or maturity value of the bonds.

What is treasury stock?Treasury stock is a corporation's previously issued shares of stock which have been repurchased from the stockholders and the corporation has not retired the repurchased shares. The number of shares of treasury stock (or treasury shares) is the difference between the number of shares issued and the number of sharesoutstanding. Since the treasury shares result in fewer shares outstanding, there may be a slight increase in the corporation's earnings per share.

Treasury Stock is also the title of a general ledger account that will typically have a debit balance equal to the cost of the repurchased shares being held by the corporation. (Some corporations use the par value method instead.) The cost of the treasury stock purchased with cash will reduce the corporation's cash and the amount of its total stockholders' equity.

The shares of treasury stock will not receive dividends, will not have voting rights, and cannot result in an income statement gain or loss. The shares of treasury stock can be sold, retired, or could continue to be held as treasury stock.