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There are two basic financial statements which are prepared by an enterprise:

1. Profit & Loss Statement, and

2. Balance Sheet.

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Accounting Equation

The three components of a balance sheet can be stated in the form of following basic accountingequation

Assets = Liabilities + Capital (owners equity)

eg: Rs.50,000=Rs. 10,000+Rs.40,000

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This equation tells at a glance that the resources of this enterprise total Rs. 50,000 and these assets

are financed by two sources Rs. 10,000 by the creditors(liabilities), also known as outsiders

claims, and Rs.40,000 by the owner (capital), also known as owner equity.

Business Transactions

It is an economic event that relates to a business entity. It can be a purchase of goods, collection of

money, payment to creditors for goods and expenses. An event to be a transaction must possess

the quality of economic substance, relate to business and affect the economic results. In other

words, an event must be capable of being measured in monetary terms and related to business

enterprise in terms of economic consequence.

Assets

These are economic resources of an enterprise that can be usefully expressed in monetary terms.

Assets are things of value used by the business in its operations.

For example, Departmental Store owns a fleet of trucks, which is used by it for delivering food stuff;

the trucks, thus, provides economic benefits to the enterprise. This item will be shown of the asset

side of the balance sheet of Departmental Store. Assets can be broadly classified into two types:

Fixed Assets and Current Assets.

Fixed Assets are assets held on a long term basis, such as land, buildings, machinery, plant,

furniture and fixtures. These assets are used for doing business and not for re-sale in normal

course of operation.

Current Assets are assets held on a short term basis such as debtors (account receivable),

bills receivable (notes receivable), stock (inventory), temporary investment in securities, cash

and bank balances. Normally the short term refers to an accounting year.

Also See: Stock Exchange Terminologies

Stock Market Terms

The place where company stock and derivatives are traded at an agreed price is called a stock

market or equity market. Some of the basic and important terms used in stock markets.

Liabilities

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These are the obligations or debts that the enterprise must pay in money or services at sometime in

the future.

Therefore, represent creditors, claims against assets of the firms. Both small and big businesses find

it necessary to borrow money at some time or the other, and to purchase goods on credit.

For example, super bazaar, purchases goods for Rs. 10,000 on credit for a month from Fast Foods

Products Company on 25 December 2001. If the balance sheet of Departmental stores is prepared

as at 31 December 2001, Fast Food Products Company will be shown as creditors (accounts

payable) on the liabilities side of the balance sheet. If the departmental store also takes a loan for a

period of three years from ABC Bank Ltd., this will be shown as a liability in the balance sheet of the

Departmental Stores.

Long term liabilities are those that are usually payable after a period of one year, for example,

a term loan from financial institution or debentures (bonds) issued by the company.

Short term liabilities are obligations that are payable within a period of one year, for example,

creditors (accounts payable), bills payable (notes payable), cash credit overdraft from a bank

for a short period.

Capital

Investment by the owners for the use in the firm is known as capital. From the accounting equation

given earlier, it can easily be found that the capital is Rs.40,000. Owners equity is the ownershipclaim on total assets. It is equal to total assets minus total external liabilities: E=A-L this is also

called residual interest. Owner's equity is equal to capital.

Sales

Sales are total revenues from goods sold and/or services sold or provided to customers. Sales may

be cash sales or credit sales.

RevenuesThese are the amounts the business earns by selling it products or providing services to customers.

These are called 'sales revenues'. Other items and sources of revenues common to many

businesses are: sales, fees, commission, interest, dividends, royalties, rent received, etc.

Expenses

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These are costs incurred by a business in the process of earning revenues. Generally, expenses are

measured by the cost of assets consumed or services used during an accounting period.

The usual items of expenses are: depreciation, rent, wages, salary, interest, costs of heat, light and

water, telephone, etc.

Expenditure

Expenditure is the amount of resources consumed. Usually, it is of long term in nature. Therefore, its

benefit is to be derived in future. For example: capital expenditure.

Loss

Loss is the gross decreases in the assets or gross increases in the liabilities. It is the excess of

expenses over revenues. It represents reduction in owners' equity due to inability of the firm to

recover the assets used in the business.

For example, a firm spends Rs. 70,000 and generates revenue of Rs. 60,000, there is a loss of Rs.

10,000 which represents non-recovery of assets consumed in doing business.

Income

Income is the increase in the net worth of the organization either from business activity or other

activities. Income is a comprehensive term, which includes profit also. In accounting income is the

positive change in the wealth of the firm over a period of time.

Profit

Profit is the excess of revenues overexpenses during an accounting year. It increases the owners

equity.

Gains

Gain is the change in the equity (net worth) arising from change in the form and place of goods and

holding of assets over a period of time whether realized or unrealized. It may either be of capital

nature or revenue nature or both.

Drawings

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It is the amount of cash or other assets withdrawn by the owner for his personal use.

Purchases

Purchases are total amounts of goods procured by a business on credit and for cash, for use or sale.In a trading concern, purchases are made of merchandise for resale with or without processing. In a

manufacturing concern, raw materials are purchased, processed further into finished goods and then

sold. Purchases may be cash purchases or credit purchases.

Stock

Stock (inventory) is a measure of something on hand-goods, spares and other items-in a business. It

is called stock on hand.

In a trading concern, the stock on hand is the amount of goods which have not been sold on the date

on which the balance sheet is prepared. This is also called closing stock (ending inventory). In a

manufacturing company, closing stock comprises raw materials, semi-finished goods and finished

goods on hand on the closing date.

Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the

accounting year.

Debtors/Accounts Receivable

Debtors (accounts receivable) are persons and/or other entities who owe to an enterprise an amount

for receiving goods and services on the credit. The total amount due from such persons and/or

entities on the closing date is shown in the balance sheet as the sundry debtors (account

receivables) on the asset side.

Creditors/Accounts Payable

Creditors (accounts payable) are persons and/or other entities who have to be paid by an enterprise

an amount for providing the enterprise goods and/ or services on credit. The total amount standing

due to such persons and/or entities on the closing date is shown on the balance sheet as sundry

creditors (accounts payable) on the liability side.

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Accounting - process of identifying, measuring, and reporting financial information of an entity

Accounting Equation - assets = liabilities + equity

Accounts Payable - money owed to creditors, vendors, etc.

Accounts Receivable - money owed to a business, i.e. credit sales

Accrual Accounting - a method in which income is recorded when it is earned and expenses are

recorded when they are incurred, all independent of cash flow

Accruals - a list of expenses that have been incurred and expensed, but not paid or a list of sales

that have been completed, but not yet billed

Amortizationgradual reduction of amounts in an account over time, either assets or liabilities

Asset - property with a cash value that is owned by a business or individual

Audit Traila record of every transaction, when it was done, by whom and where, used byauditors when validating the financial statement

Auditorsthird party accountants who review an entitys financial statements for accuracy andprovide a statement to that effect

Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity

Bookkeeping - recording financial information

Budgetingthe process of assigning forecasted income and expenses to accounts, which

amounts will be compared to actual income and expense for analysis of variances

Capital Stockfound in the equity portion of the balance sheet describing the number of shares

sold to shareholders at a predetermined value per share, also called common stock orpreferred stock

Capital Surplusfound in the equity portion of the balance sheet accounting for the amount

shareholders paid that is greater or lesser than the capital stock amount

Capitalized Expenseexpenses that are accumulated, not expensed as incurred, to be amortizedover a period of time; i.e. the development cost of a new product

Chart of Accounts - a listing of a company's accounts and their corresponding numbers

Cash-Basis Accounting - a method in which income and expenses are recorded when they arepaid.

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Cash Flow - a summary of cash received and disbursed showing the beginning and ending

amounts

Closing the Books/Year End Closingthe process of reversing the income and expense for a

fiscal or calendar year and netting the amount into retained earnings

Cost Accounting - a type of accounting that focuses on recording, defining, and reporting costs

associated with specific operating functions

Credit - an account entry with a negative value for assets, and positive value for liabilities and

equity.

Debit - an account entry with a positive value for assets, and negative value for liabilities and

equity.

Departmental Accountingseparating operating divisions into their own sub entities on the

income statement, showing individual income, expenses, and net profit by entity

Depreciation - recognizing the decrease in the value of an asset due to age and use

Dividendsamounts paid to shareholders out of current or retained earnings

Double-Entry Bookkeeping - system of accounting in which every transaction has a

corresponding positive and negative entry (debits and credits)

Equity - money owed to the owner or owners of a company, also known as "owner's equity"

Financial Accounting - accounting focused on reporting an entity's activities to an externalparty; ie: shareholders

Financial Statement - a record containing the balance sheet and the income statement

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Fixed Asset - long-term tangible property; building, land, computers, etc.

General Ledger - a record of all financial transactions within an entity

Goodwillan intangible asset reflecting the value of an entity in excess of its tangible assets

Income Statement - a summary of income and expenses

Inventorymerchandise purchased for resale at a profit

Inventory Valuationthe method to set the book value of unsold inventory: i.e. LIFO, last

in, first out; FIFO, first in, first out; average, an average cost over a given period, last cost,

the cost based on the last purchase; standard, a deemed amount related to but not tied to a

specific purchase, serialized, based on a uniquely identifiable serial number or character ofeach inventory item

Invoicethe original billing from the seller to the buyer, outlining what was purchased and theterms of sale, payment, etc.

Job Costing - system of tracking costs associated with a job or project (labor, equipment, etc)

and comparing with forecasted costs

Journal - a record where transactions are recorded, also known as an "account"

Liability - money owed to creditors, vendors, etc

Liquid Asset - cash or other property that can be easily converted to cash

Loan - money borrowed from a lender and usually repaid with interest

Master Accountan account on the general ledger that subtotals the subsidiary accounts

assigned to it; i.e. Cash might be the master account for a list of depository accounts at banks

Net Income - money remaining after all expenses and taxes have been paid

Non Cash Expense - recognizing the decrease in the value of an asset; i.e. depreciation and

amortization

Non-operating Income - income generated from non-recurring transactions; ie: sale of an oldbuilding

Note - a written agreement to repay borrowed money; sometimes used in place of "loan"

Operating Income - income generated from regular business operations

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Other Income - income generated from other than regular business operations, i.e. interest,

rents, etc.

Payroll - a list of employees and their wages

Postingthe process of entering then permanently saving or archiving accounting data

Profit - see "net income"

Profit/Loss Statement - see "income statement"

Reconciliationthe process of matching one set of data to another; i.e. the bank statement to the

check register, the accounts payable journal to the general ledger, etc.

Retained Earningsthe amount of net profit retained and not paid out to shareholders over the

life of the business

Revenue - total income before expenses.

Shareholder Equity - the capital and retained earnings in an entity attributed to the shareholders

Single-Entry Bookkeeping - system of accounting in which transactions are entered into one

account

Statement of Account - a summary of amounts owed to a vendor, lender, etc.

Subsidiary Accountsthe subaccounts that are totaled on the financial statement under master

accounts; i.e. Cash-ABC Bank might be one of several subsidiary accounts that are subtotaledunder Cash

Suppliesassets purchased to be consumed by the entity

Treasury Stockshares purchased by the entity from shareholders, reducing shareholder equity

Write-down/Write-offan accounting entry that reduces the value of an asset due to animpairment of that asset; i.e. the account receivable from the bankrupt customer