Some basic important concepts
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”.
book keeping:It is mainly concerned with recording of financial data relating to the business operations in a significant and
3. Branches of accounting
a. financial accounting
b. management accounting
4. Concepts of accounting(vvimp)
A. separate entity concept B. going concern concept
C. money measurement concept D. cost concept
E. dual aspect concept F. accounting period concept
G. periodic matching of costs and revenue concept
H. realization concept.
5 Conventions of accounting
A. conservatism B. full disclosure
C. consistency D materiality.
6. Systems of book keeping:
A. single entry system B. double entry system
7. Systems of accounting
A. cash system accounting B. mercantile system of accounting.
8. Principles of accounting(vvimp)
a. personal a/c : debit the receiver
Credit the giver
b. real a/c : debit what comes in
Credit what goes out
c. nominal a/c : debit all expenses and losses
credit all gains and incomes
9. Meaning of journal: journal means chronological record of transactions.
10 Meaning of ledger: ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal,
11. Posting: it means transferring the debit and credit items from the journal to their respective accounts in the ledger.
12. Trial balance: trial balance is a statement containing the various ledger balances on a particular date.
13. 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.
14. 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.
15. Contra entry: which accounting entry is recorded on both the debit and credit side of the cash book is known as the
16. Petty cash book: petty cash is maintained by business to record petty cash expenses of the business, such as postage,
cartage, stationery, etc.
17.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.
18. Cheque: a bill of exchange drawn on a specified banker and payable on demand.
19. 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 pass book 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
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 means the assets which is not having the physical appearance. And its have the real
value, it shown on the assets side of the balance sheet.
31. Accrued Income : Accrued income means income which has been earned by the business during the accounting year but
which has not yet been due and, therefore, has not been received.
32. Out standing Income : Outstanding Income means income which has become due during the accounting year but which
has not so far been received by the firm.
33. Suspense account: the suspense account is an account to which the difference in the trial balance has been put
34. Depletion: it implies removal of an available but not replaceable source, Such as extracting coal from a coal mine.
35. Amortization: the process of writing of intangible assets is term as amortization.
36. Dilapidations: the term dilapidations to damage done to a building or other property during tenancy.
37. Capital employed: the term capital employed means sum of total long term funds employed in the business. i.e.
(share capital+ reserves & surplus +long term loans – (non business assets + fictitious assets)
38. Equity shares: those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights is called pref. shares
• Pref.rights in respect of fixed dividend.
• Pref.right to repayment of capital in the even of company winding up.
40. Leverage: It is a force applied at a particular point to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue greater changes in EBIT.
42. Financial leverage : it is nothing but a process of using debt capital to increase the rate of return on equity
43. Combine leverage: it is used to measure of the total risk of the firm = operating risk + financial risk.
44. Joint venture : A joint venture is an association of two or more the persons who combined for the execution of a specific
transaction and divide the profit or loss their of an agreed ratio.
45. Partnership: partnership is the relation b/w the persons who have agreed to share the profits of business carried on by all
or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives advances against its receivables, from a
financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus cash.
50. Minority Interest: minority interest refers to the equity of the minority shareholders in a subsidiary company.
51. Capital receipts: capital receipts may be defined as “non-recurring receipts from the owner of the business or lender of the
money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of goods in the normal course of
business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute money or money’s worth to common
stock and employs it for a common purpose. The common stock so contributed is denoted in money and is the capital of the
54. Types of a company:
1. Statutory companies
2. government company
3. foreign company
4. Registered companies:
a. Companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
D. private company
E. public company
55. Private company: A private co. is which by its AOA:
• Restricts the right of the members to transfer of shares
• Limits the no. of members 50.
• Prohibits any Invitation to the public to subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain the requisite restrictions to make it a
private limited company, is called a public company..
57. Characteristics of a company:
• Voluntary association
• Separate legal entity
• Free transfer of shares
• Limited liability
• Common seal
• Perpetual existence.
58. Formation of company:
• Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: it is the maximum amount of the share capital which a company can raise for the time being.
61. Issued capital: It is that part of the authorized capital which has been allotted to the public for subscriptions.
62. Subscribed capital: it is the part of the issued capital which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has been received.
65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to public company it satisfies the following
terms/conditions Sec 3(1)3:
1. having minimum share capital 5 lakhs
2. accepting investments from the public
3. no restriction of the transferable of shares
4. No restriction of no. of members.
5. accepting deposits from the investors
68. Secret reserves: secret reserves are reserves the existence of which does not appear on the face of balance sheet. In such a
situation, net assets position of the business is stronger than that disclosed by the balance sheet.
These reserves are crated by:
1. Excessive dep.of an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of providing depreciation, renewals or
diminutions in the value of assets or retained by way of providing for any known liability of which the amount can not be
determined with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it was originally made is also considered
• 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
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
81. Capital budgeting: capital budgeting involves the process of decision making with regard to investment in fixed assets. Or
decision making with regard to investment of money in long term projects.
82. Pay back period: payback period represents the time period required for complete recovery of the initial investment in the
83. ARR: accounting or average rate of return means the average annual yield on the project.
84. NPV: the net present value of an investment proposal is defined as the sum of the present values of all future cash in flows less
the sum of the present values of all cash out flows associated with the proposal.
85. Profitability index: where different investment proposal each involving different initial investments and cash inflows are to be
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 centre.
89. Marketable securities: surplus cash can be invested in short term instruments in order to earn interest.
90. Ageing schedule: in a ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): it is the maximum amount that banks can lend a borrower towards his
working capital requirements.
92. Commercial paper: a cp is a short term promissory note issued by a company, negotiable by endorsement and delivery, issued
at a discount on face value as may be determined by the issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from a commercial banks for a short period pending
disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the financing of high risk ventures promoted by new qualified entrepreneurs who require funds
to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a package of assets (called asset
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
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is called share capital.
102. Funds flow statement: It is the statement deals with the financial resources for running business activities. It explains how
the funds obtained and how they used.
103. Sources of funds: There are two sources of funds Internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and some important points add to it they do not
result in the outflow of funds
(a)Depreciation on fixed assets (b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation of fixed assets
External sources: (a) Funds from long term loans (b) Sale of fixed assets (c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax liability (d) Payment of fixed
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 issues is listed on a European stock Exchange. The subscription can come from
any part of the world except India.
109.GDR (Global depository receipts): A depository receipt is basically a negotiable certificate , dominated in us dollars that
represents a non-US company publicly traded in local currency equity shares.
110. ADR (American depository receipts): Depository receipt issued by a company in the USA are known as ADRs. Such
receipts are to be issued in accordance with the provisions stipulated by the securities Exchange commission (SEC) of USA like
SEBI in India.
111.Commercial banks: Commercial banks extend foreign currency loans for international operations, just like rupee loans. The
banks also provided overdraft.
112.Development banks: It offers long-term and medium term loans including foreign currency loans
113.International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for professionally or technically qualified
entrepreneurs and persons possessing relevant experience and skills and entrepreneur traits.
115. Unsecured l0ans: It constitutes a significant part of long-term finance available to an enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one period to another.
117.Sources of cash: Internal sources-(a)Depreciation (b)Amortization (c)Loss on sale of fixed assets (d)Gains from sale of fixed
assets (e) Creation of reserves External sources-(a)Issue of new shares (b)Raising long term loans (c)Short-term borrowings (d)Sale
of fixed assets, investments
118. Application of cash: (a) Purchase of fixed assets (b) Payment of long-term loans (c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend (e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate prepared in advance of the period
to which it applies.
120. Budgetary control: It is the system of management control and accounting in which all operations are forecasted and so for
as possible planned ahead, and the actual results compared with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose of presenting in one report the
highlights of the budget forecast.
123. Fixed budget: It is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method for evaluating all operations and
programmes, current of new allows for budget reductions and expansions in a rational manner and allows reallocation of source
from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of difference between the two balances
and pass necessary correcting or adjusting entries in the books of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating the responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense incurs and revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be ascertained and used for the purpose of cost
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs for determination of costs of
products or services planning, controlling and reducing such costs and furnishing of information management for decision making.
133. Elements of cost: (A) Material (B) Labour (C) Expenses (D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost (C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also known as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of indirect material indirect labour
and indirect expenses incurred in factory. This cost is also known as works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory cost, office cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to get the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may be ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation costing (E)Operating costing
(F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c)absorption costing (d) uniform costing.
142. Standard costing: standard costing is a system under which the cost of the product is determined in advance on certain
143. Marginal costing: it is a technique of costing in which allocation of expenditure to production is restricted to those expenses
which arise as a result of production, i.e., materials, labour, direct expenses and variable overheads.
144. Derivative: derivative is product whose value is derived from the value of one or more basic variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were settlement takes place on a specific date in
the future at today’s pre agreed price.
146. Futures: a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a
certain price. Future contracts are standardized exchange traded contracts.
147. Options: an option gives the holder of the option the right to do some thing. The option holder option may exercise or not.
148. Call option: a call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.
149. Put option: a put option gives the holder the right but not obligation to sell an asset by a certain date for a certain price.
150. Option price: option price is the price which the option buyer pays to the option seller. It is also referred to as the option
151. Expiration date: the date which is specified in the option contract is called expiration date.
152. European option: it is the option at exercised only on expiration date it self.
153. Basis: basis means future price minus spot price.
154. Cost of carry: the relation between future prices and spot prices can be summarized in terms of what is known as cost of
155. Initial margin: the amount that must be deposited in the margin a/c at the time of first entered into future contract is known
as initial margin.
156 Maintenance margin: this is some what lower than initial margin.
157. Mark to market: in future market, at the end of the each trading day, the margin a/c is adjusted to reflect the investors’ gains
or loss depending upon the futures selling price. This is called mark to market.
158. Baskets : basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in the future according to a pre agreed
160. Impact cost: impact cost is cost it is measure of liquidity of the market. It reflects the costs faced when actually trading in
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
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
169. characteristics of mutual fund :
• Ownership of the MF is in the hands of the of the investors
• MF managed by investment professionals
• The value of portfolio is updated every day
170.advantage of MF to investors :
• Portfolio diversification
• Professional management
• Reduction in risk
• Reduction of transaction casts
• Convenience and flexibility
171.net asset value : the value of one unit of investment is called as the Net Asset Value
172.open-ended fund : open ended funds means investors can buy and sell units of fund, at NAV related prices at any time,
directly from the fund this is called open ended fund.
For ex; unit 64
173.close ended funds : close ended funds means it is open for sale to investors for a specific period, after which further sales are
closed. Any further transaction for buying the units or repurchasing them, happen, in the secondary markets.
174. dividend option : investors who choose a dividend on their investments, will receive dividends from the MF, as when such
dividends are declared.
175.growth option : investors who do not require periodic income distributions can be choose the growth option.
176.equity funds : equity funds are those that invest pre-dominantly in equity shares of company.
177.types of equity funds :
• Simple equity funds
• Primary market funds
• Sectoral funds
• Index funds
178. sectoral funds : sectoral funds choose to invest in one or more chosen sectors of the equity markets.
179.index funds :the fund manager takes a view on companies that are expected to perform well, and invests in these companies
180.debt funds : the debt funds are those that are pre-dominantly invest in debt securities.
181. liquid funds : the debt funds invest only in instruments with maturities less than one year.
182. gilt funds : gilt funds invests only in securities that are issued by the GOVT. and therefore does not carry any credit risk.
183.balanced funds :funds that invest both in debt and equity markets are called balanced funds.
184. sponsor : sponsor is the promoter of the MF and appoints trustees, custodians and the AMC with prior approval of SEBI .
185. trustee : trustee is responsible to the investors in the MF and appoint the AMC for managing the investment portfolio.
186. AMC : the AMC describes Asset Management Company, it is the business face of the MF, as it manages all the affairs of the
187. R & T Agents : the R&T agents are responsible for the investor servicing functions, as they maintain the records of investors
188. custodians : custodians are responsible for the securities held in the mutual fund’s portfolio.
189. scheme take over : if an existing MF scheme is taken over by the another AMC, it is called as scheme take over.
190.meaning of load: load is the factor that is applied to the NAV of a scheme to arrive at the price.
192. market capitalization : market capitalization means number of shares issued multiplied with market price per share.
193.price earning ratio : the ratio between the share price and the post tax earnings of company is called as price earning ratio.
194. dividend yield : the dividend paid out by the company, is usually a percentage of the face value of a share.
195. market risk : it refers to the risk which the investor is exposed to as a result of adverse movements in the interest rates. It
also referred to as the interest rate risk.
196. Re-investment risk : it the risk which an investor has to face as a result of a fall in the interest rates at the time of reinvesting
the interest income flows from the fixed income security.
197. call risk : call risk is associated with bonds have an embedded call option in them. This option hives the issuer the right to call
back the bonds prior to maturity.
198. credit risk : credit risk refers to the probability that a borrower could default on a commitment to repay debt or band loans
199.inflation risk : inflation risk reflects the changes in the purchasing power of the cash flows resulting from the fixed income
200.liquid risk : it is also called market risk, it refers to the ease with which bonds could be traded in the market.
201.drawings : drawings denotes the money withdrawn by the proprietor from the business for his personal use.
202.outstanding Income : Outstanding Income means income which has become due during the accounting year but which has
not so far been received by the firm.
203.Outstanding Expenses : Outstanding Expenses refer to those expenses which have become due during the accounting
period for which the Final Accounts have been prepared but have not yet been paid.
204.closing stock : The term closing stock means goods lying unsold with the businessman at the end of the accounting year.
205. Methods of depreciation :
1.Unirorm charge methods :
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods :
a. Diminishing balance method
b.Sum of years digits method
c. Double declining method
3. Other methods :
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.
206.Accrued Income : Accrued Income means income which has been earned by the business during the accounting year but
which has not yet become due and, therefore, has not been received.
207.Gross profit ratio : it indicates the efficiency of the production/trading operations.
Formula : Gross profit X100
208.Net profit ratio : it indicates net margin on sales
Formula : Net profit X 100
209. return on share holders funds : it indicates measures earning power of equity capital.
Formula : profits available for Equity shareholders X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS) : it shows the amount of earnings attributable to each equity share.
Formula : profits available for Equity shareholders
Number of Equity shares
211.dividend yield ratio : it shows the rate of return to shareholders in the form of dividends based in the market price of the
Formula : Dividend per share X 100
Market price per share
212. price earning ratio : it a measure for determining the value of a share. May also be used to measure the rate of return
expected by investors.
Formula : Market price of share (MPS) X 100
Earning per share (EPS)
213.Current ratio : it measures short-term debt paying ability.
Formula : Current Assets
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
215.Fixed Assets ratio : This ratio explains whether the firm has raised adepuate long-term funds to meet its fixed assets
Formula Fixed Assets
216 . Quick Ratio : The ratio termed as ‘ liquidity ratio’. The ratio is ascertained y comparing the liquid assets to current liabilities.
Formula : Liquid Assets
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
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
221.Fixed Assets Turnover ratio : This ratio indicates the extent to which the investments in fixed assets contributes towards
Formula : Net Sales
222 .Pay-out Ratio : This ratio indicates what proportion of earning per share has been used for paying dividend.
Formula : Dividend per Equity Share X 100
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
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
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
226. Debt Service Coverage ratio : This ratio is explained ability of a company to make payment of principal amounts also on
Formula : Net profit before interest and tax
Interest + Principal payment installment
1- Tax rate
227. Proprietary ratio : It is a variant of debt-equity ratio . It establishes relationship between the proprietor’s funds and the total
Formula : Shareholders funds
Total tangible assets
228.Difference between joint venture and partner ship :
In joint venture the business is carried on without using a firm name,
In the partnership, the business is carried on under a firm name.
In the joint venture, the business transactions are recorded under cash system
In the partnership, the business transactions are recorded under mercantile system.
In the joint venture, profit and loss is ascertained on completion of the venture
In the partner ship , profit and loss is ascertained at the end of each year.
In the joint venture, it is confined to a particular operation and it is temporary.
In the partnership, it is confined to a particular operation and it is permanent
229.Meaning of Working capital
The funds available for conducting day to day operations of an enterprise. Also represented by the excess of current assets
over current liabilities .
230.concepts of accounting :
1. Business entity concepts :- According to this concept, the business is treated as a separate entity distinct from its owners
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
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
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
238.Capital : The term capital refers to the total investment of company in money, tangible and intangible assets. It is the total
wealth of a company.
239.Capitalization : It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization : When a business is unable to earn fair rate on its outstanding securities.
241. Under capitalization : When a business is able to earn fair rate or over rate on it is outstanding securities.
242. Capital gearing : The term capital gearing refers to the relationship between equity and long term debt.
243.Cost of capital : It means the minimum rate of return expected by its investment.
244.Cash dividend : The payment of dividend in cash
245.Define the term accrual : Recognition of revenues and costs as they are earned or incurred . it includes recognition of
transaction relating to assets and liabilities as they occur irrespective of the actual receipts or payments.
245. accrued expenses : An expense which has been incurred in an accounting period but for which no enforceable claim has
become due in what period against the enterprises.
246.Accrued revenue : Revenue which has been earned is an earned is an accounting period but in respect of which no
enforceable claim has become due to in that period by the enterprise.
247.Accrued liability : A developing but not yet enforceable claim by an 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
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 are 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
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 cumulates dividends. Preference shares
are always deemed to be cumulative unless they are expressly made non-cumulative preference shares.
264.Debenture redemption reserve : A reserve created for the redemption of debentures at a future date.
265. Cumulative dividend : A dividend payable as cumulative preference shares which it unpaid cumulates as a claim against the
earnings of a corporate before any distribution is made to the other shareholders.
266. Dividend Equalization reserve : A reserve created to maintain the rate of dividend in future years.
267. Opening Stock : The term ‘opening stock’ means goods lying unsold with the businessman in the beginning of the
accounting year. This is shown on the debit side of the trading account.
268.Closing Stock : The term ‘Closing Stock’ includes goods lying unsold with the businessman at the end of the accounting year.
The amount of closing stock is shown on the credit side of the trading account and as an asset in the balance sheet.
269.Valuation of closing stock : The closing stock is valued on the basis of “Cost or Market price whichever is less” principle.
272. Contingency : A condition (or) situation the ultimate out come 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 events.
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
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.
Revenue is the value of out put supplied to customers
Gross inflow of assets or the gross decrease in liabilities
Arising from the main operations or business (sale of products manufactured by a company)
Indirect to the main operations of the firm (sale of an old equipment similarly dividend and interest from temporary
The cost of earning revenue. When assets or consumed or liabilities are increased.
Relating to the main operations (manufacturing expenses)
Which are indirect to the main operations (legal expenses)
Money spent to acquire physical assets, which are buildings, machinery, and land.
Is a voluntary and autonomous association of certain persons which capital divided into numerous transferable shares
formed to carry out a particular purpose. Company formed and registered under the company’s act 1956.
Kinds of companies:
Charted companies: East India company
Statutory companies: RBI, IFC
Registered companies: Incorporated under company’s act 1956.
Difference between Private limited company and Public limited company:
1. Minimum number of its members Private: (2), Public (7)
2. Maximum number of its members Private: (50), Public: unlimited
3. Issue of prospects: a private company cannot invite public to subscribe to its shares or debentures by issue of
prospects. Public company must issue the prospects.
4. Transfer of shares: restrict to private company, freely transferable to public company.
5. Number of Directors: Private (2), Public (5)
6. Use of the word Limited
7. Restriction regarding managerial remuneration, public limited company not more than 11% of the net profit.
8. Legal formalities
9. Commencement of business
Represent the ownership position in a company; equity shareholders will get dividend and repayment of capital after
meeting the claims of preference shareholders.
Equity shareholders have the voting right.
Preference shareholders will get dividend and repayment of capital in the winding up of the company over the equity
Cumulative preference shares, Non-cumulative preference shares
Redeemable preference shares (usually non-redeemable)
Participating and non-participating preference shares (on surplus profits)
Acknowledgement of debt, certificate issued by a company under its seal as an evidence of a debt due from the
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
Value greater than its face value
Bank account Dr
To share application account
(Being application money along with premium received)
Share application account Dr
To share capital account
To share premium account
(Share application money transferred to share capital account)
Share allotment account Dr
To share capital account
To share premium account
(The allotment money and share premium money due on shares)
Bank account Dr
To share allotment account
(Share allotment money received)
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To share capital account
Initial public offering of securities (IPO), newly floated shares, first issue of shares
Buying and selling of securities (shares) is traded in secondary market
Over the counter exchange of India (no particular place to buy and selling of shares)
Memorandum of association:
It determines the scope of the activities of the company and defines the relations of the
Company with out side world.
Registered office, company name, objectives,
7 members have to promise to take at least one share each, their names and addresses.
Articles of association:
Rules and regulations of the internal management of the company and very important to the
Shareholders, because they determine the relation between the company and its members.
A company that is completely control by the company
A company that has control over other companies through ownership of a sufficient portion
Of those companies common stock. A company that owns enough voting stock in another
Firm to control management
EX: CAPITLA IQ is subsidiary of S & P (standard and poor, credit rating company)
S & P is holding company of CAPITLA IQ.
Stock exchanges in India and abroad:
Place where buying and selling of shares takes place is stock exchange
EX: BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange
Reduction in the value of asset due to wear tear and laps of time, depletion and obsolesce
Convert the cost of asset into cost of operation
Diminishing balance method or declining balance method or accelerated method
Sinking fund method
Represent a liability that a firm has to pay for the services which has already receive,
Obligations payable by the firm. Ex: wages, salaries outstanding.
Represent funds received by the firm for goods and services, which it has agreed to supply in
Future Ex: advanced payments by the customers
Securities and Exchange Board of India (12th
To promote fair dealing. To provide a degree of protection
To regulate and develop a code of conduct, register and working of stock brokers
Preparatory action of measure, money kept aside for a specific work
Some amount of profit kept aside to meet contingent expenses, put aside for future purpose
The ownership interest in a company held by the person other than the parent company and
Its subsidiary undertakings
It can be used for any purpose including distribution of dividend
For specific purpose
Shareholders will expect some return from their investments by them in the share capital
Are generally paid in cash
Dividend declared by the board of directors in the AGM (annual general meeting)
Dividend declared for 6 months is called interim dividend
Declared at the end of the financial year
Relevance: Walters model, Gardens model, Bird in a hand argument
Irrelevance: Modigliani and Miller’s Hypothesis
Aggregate amount of variable cost
One which various directly with changes in the level of output over a defined period of time
One which is not affected by changes in the level of out put over a defined period of time
Which does not vary proportionally but simultaneously cannot remain stationary at all times
Ex: Depreciation, repairs
A business relationship where two or more persons carry on a business with a view to make a profit.
A foreign company joins hands with local company for local interest to carry out a single project pr a limited number of
projects, in specific period of time.
Non-recurring items in P & L account (Profit and loss account):
Sale of investments
Non-cash expenditure in P & L account:
Used of oil wells, mines or deposits for depreciation
For long term investments such as patens copyrights, paying of debt gradually
Sale of fixed assets
From main operation of the firm (sale of goods and services)
An open-ended fund operated by an investment company, which arises money from shareholders and investments in a
group of assets
Raise money by selling shares of the fund to the public (income fund, growth fund)
Which is not shown in the books
50% out of MRP like that
To the credit that a customer gets from supplier of goods in the normal course
Duties of Finance Manager:
Raising of funds, allocation of funds, profit planning, understanding capital markets
Interim audit and statutory audit:
Chairman: One of the person elected by the directors in the board of directors meeting.
Who is the Director: one of the shareholders becomes director
CEO: chief executive officer, top officer in the company in the executive cadre
Who can appoint CEO: board of directors
AGM: shareholders annual general meeting
Quorum: attend the minimum number of members in the meeting
Register of investment holders and their names, register of earnings, register of debenture and shareholders, register of
directors and their shares
Cash book, general ledger, return outwards and return inwards, invoice, bills payable, bills receivables
Resolution: solving the problem
Who can appoint auditor: board of directors
Minute books: recording of the board of directors meeting
Agenda: the meeting, which is discussed by the board of directors
Duties of director: to appoint officers and auditors, to take policy decisions.
Contribution: sales – variable cost
Role of stock exchange: to regulate the share trading in India
Business firm whose articles of incorporation have been approved in some state
A business, which is a completely separate entity from its owners
Difference between Corporation and Company:
Company: an institution created to conduct business
He only invest in large well established company
He can start the company in his garage
Principles of accounting:
Policies: prudent, materiality, consistency
Assumptions: continuing, consistency, accrual (revenue and cost)
Proxy: it includes every proxy consensus and authorization with in the meaning of section
14 (a) of the act (representative)
Auction are quite simple
A consignor brings merchandise for you to sell online
Consignor – owner
Consignee – agent
Debt & Credit: every account has two sides left side Debit and right side Credit
Open market: a market, which is widely accessible to all investors or consumers
Annual report: (10 K)
Audited document required by the SEC and send to the public company’s or mutual funds share at the end of each
fiscal year (balance sheet, income statement, cash flow statement and description of company operations, auditors
report, summary of operations, chairman’s speech) contain in annual report.
Quarterly report: (10 Q)
Un audited document required by the SEC of all us public companies reporting the financial results for the quarter and
noting any significant changes and events in the quarter (financial statements, discussion from the management, list of
Merger: two or more companies combine into one company they may form a new company
Absorption: two or more companies combine into an existing company
Consolidation: is a combination of 2 or more companies into a new company
As an act of acquiring effective control by one company over the assets or management of another company without any
combination of companies.
Take over: as obtaining of control over management of a company by another
Types of merger: horizontal, vertical, and conglomerate
One way of a company to become publicly traded by acquiring a public company and then installing its own
management team and renaming the acquiring company.
The acquiring of a public company by a private company allowing the private company to bypass the usually lengthy
and complex process of going public.
ADR: American depository receipts, a negotiable certificate issued by a U.S
Debt: a liability or economic obligation in the form of bonds, loans
Equity: ownership interest in a company in the form of common stock or preferred stock
Shareholders equity: total assets – total liabilities
Depression: a period during which business activity drops significantly
A collection of investments allowed by the same individual or organization (equity, bonds, debentures, preferred stock)
Choosing and maintaining appropriate investments and allocating funds accordingly
Security analysis: the entire process of estimating return and risk for individual securities
To determine the future risk and return in holding various blends of individual securities
A legal document offering securities for sale required by the securities section act 1933 it must explain the offer
including the terms, issuer, objectives, historical financial statements
The sale of securities directly to institutional investors such as banks, mutual funs, LIC
Bad debt reserve: an amount set aside as reserve for bad debts
The acceptance of securities for trading in a registered stock exchange (at least 49 % offer to public) total paid up
capital should not be less than 3 crore
GDR: global depositary receipts (CITI Bank 1990 introduced)
The procedure by which an underwriter brings a new security issue to the investing public in an offering. The process of
insuring someone or something
Inventory: raw material, work-in-progress, finished goods not at been sold
A company in which another company has a minority interest related to another company
Funds made available for startup firms small business with exceptional growth potential
Capital: cash or goods used to generate income
Firms decision to invest its current funds most effectively in the long-term assets in anticipation of an expected flow of
benefits over a series of years
Stock of large, national company with a solid record of stable earnings and/or dividend growth and reputation for high
quality management, (first class equity shares)
Board of directors:
Individuals elected by a corporation’s shareholders to over the management of the company
An agreement between two or more individuals to achieve a common goal
To attract the potential investors changing the shareholder’s equity announcing two or one split of common stock to
reduce the face value of the share (pare value)
The process of aggregating similar investment such as loan mortgage into negotiable securities,
An index composed of 30 largest and most actively trading stock companies in BSE, NSE
Cost of capital:
Minimum acceptable rate of return that a firm must earn on its investments for the market value.
Trader sells the shares with a small profit a short period by gaining limited returns in a short period.
Statistical tool used over inventory that a firm should not excuse some degree of control over its items which are most
costly as compared to less costly items.
EOQ: (economic order quantity)
Refers to the order size that will result in the lowest total of orders and carrying of an item of an inventory.
Meeting a fixed cost or paying a fixed return for employing resources or funds, Describe the firm’s ability to use fixed
cost assets or funds to magnify the returns to its owners.
Defined as tendency of operating profit to vary disproportionately with sales
High operating leverage – fixed cost more than the variable cost
Formula: Contribution/operating profit
Degree of operating leverage: % of change in EBIT/ %change in sales
EBIT: earning before interest and tax, Contribution: sales – variable cost
Defines as tendency of the residual income to vary disproportionately with operating profit
Formula: operating profit (EBIT)/ PBT
Degree of financial leverage: %change in EPS/ %change in EBIT
EPS: earnings per share, PBT: profit before tax
Combination of operating and financial leverage:
%Change in EPS/ % change in sales
Discounted cash flow technique: time value of money concept NPV, IRR, PI
Bankruptcy: becoming insolvent
Is that the rate of which the sum of discounted cash inflow equals the sum of discounted cash outflow. Where NPV is ‘0’
Shareholder: one who owns share of stock in a corporate or mutual funds
To convert into cash (or) to sell all of a company assets pay outstanding debts and distribute the remaining to
shareholders and then go out of business.
A deposit account at a bank or savings and loan which pay’s interest but cannot be withdrawn by check writing
An agreement between a buyer and a seller to exchange an asset for payment
Credit: the borrowing capacity of an individual or company
Money which is owned to vendor’s for products and services purchased on credit
Money which is owned to a company by a customer for products and services provided on credit.
An individual or firm acting as intermediary between a buyer and seller, usually charging a commission.
The practice by a broker of acting as an agent and simultaneously acting as a dealer (buying and selling of one’s own
The amount borrowed dividend by the appraised value of the collateral (securities) in %
A company’s common stock divided by its total capitalization
A fee charged (levied) by a government on a product, income or activity
If tax is levied directly a personal or corporation income it’s called as direct tax.
If tax is levied on price of goods or services is called as indirect tax
Annual tax levied by the federal government on an individual or corporations net profit
An official quarterly or annually final document published by a public company
Shows earnings, expenses and net profit
Net profit: gross sales – (taxes + interest + depreciation + other expenses)
Retail price: price charged to retail customers
Whole sage: the purchase of goods in quantity for resale purpose
Retail: selling directly to consumers or customers
Any card that may be used repeatedly to borrow money or buy products and services on credit issued by bank
A card, which allows customer to access their funds immediately electronically
Profit: the positive gain from an investment or business operations
Face value: the nominal $ amount assigned to a security by the issuer
AMEX: (American stock exchange)
Second largest stock exchange in the US after NYSE (Newyork stock exchange) largest representation of stock and
bonds issued by smaller companies than the NYSE
In 1998 the NASDAQ purchased the AMEX
Interest which is calculated not only on the initial principal but also the accumulated interest of prior period.
Capitalization: the sum of corporation’s long-term debt stock and retained earnings
American depositary shares the share issued under American depositary agreement, which is actually traded
General agreement on tariffs and trade affiliate with the United Nations, to facilitate international trade
A tax imposed on a product when it is imported into a country or company
EBITDA: earning before interest tax dividend and amortization
The number of shares of the acquiring company that shareholders will receive for one share of the acquired company
Form S 1: a registration statement used in the initial public offering of securities
Pooling of interest:
In which the balance sheet of the two companies combined line by line without a tax impact
Capital budgeting decisions: operating, administration and strategic
Define investment, identify decision alternatives, draw decision tree, and analyze data
Concept of cash flow:
Initial investment, annual net cash flow, terminal cash flow
Estimation of cash flow, estimation of required rate of return decision rule for making the choice.
It is the process of identifying the financial strength and weakness of the firm by properly establishing relationship
between the items of the balance sheet and the profit and loss a/c
Liquidity: Refers to the firm’s ability to pay debts as they mature
Solvency: refers to the firm’s ability to meet eventually all its long-term and short-term debt
A source of financial information of a firm should know the financial implications of its operations
Treasurer: auditing cost control
Controller: planning and budgeting, inventory management, accounting
Is the conversion of accumulated funds to productive use
Finance aptly been called as science of money
Scope: finance, production and marketing
Is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources
Forfeiture of shares: when a shareholder fails to pay calls
Profit and loss a/c Dr
To proposed dividend a/c
(Being dividend proposed by the directors)
Are those expenses which are incurred on the formation of the company
Cost: the amount of expenditure incurred on attributable to a specific thing or activity
Trade credit, bank credit, public deposits, advances, personal loans, retained earnings, accrued expenses, and provision
for tax, depreciation
Calls in erriers will be disclosed in balance sheet:
Deduction from subscribed capital
Father of scientific management: F.W Tayler
Employee at all levels should be given the opportunity to take initiative and exercise judgment
Central government or state government holds 51 % more of the total paid up capital
Entrepot trade: import of foreign goods view to re export
Calls in advances will be disclosed in balance sheet:
Deduction from subscribed capital
Under share premium disclosed in B/S: reserves and surplus
Net profit on reissue of forfeited shares will be transferred to: capital reserve
Condition for issue of shares at discount:
After one year from the date of certificate of commencement of business
Discount on issue of shares will be disclosed in B/S: miscellaneous expenses
Purpose of preparing receipts and payment account:
To know balance of cash and bank at the end of the year
Tangible assets: which are having physical existence (Fixed assets)
Intangible assets: which does not having physical existence (patents, copyrights, and trademarks, franchises, intellectual
Not a negotiable instrument: deed of partnership
Unclaimed dividend: dividend paid out not yet claimed by the shareholder
Deferred revenue expenditure:
Expenditure whose benefits lasts for more than one accounting period (advertisement exp)
Right issue: issue of shares to existing shareholders
Which how many days the minimum subscription amount should be received by a company: 90 days
A public company needs the business to start:
Certificate of commencement of business
To find out the intrinsic value of a security, true economic worth of a financial asset
(It contains economic analysis, industry analysis, and company analysis)
Based on past information prices of stock depends on supply and demand
Raising trend line – no single individual or buyer can influence the major trend of the market
Flat trend line – market discounts natural calamities can influence the market
Falling trend line – it is provided way to understand it
Bull market: up ward
Bear market: down ward
NSDL: national securities depository limited
Random walk theory:
Strong efficient market all information is reflected on prices big one
Semi strong all public information is reflect on security prices second one
Weakly efficient market all historical market influence the security prices small one
Markwitz theory: the effect of combining two securities
CAPM: (capital asset pricing model)
The relationship between expected return and UN avoidable risk
Combine risk free securities with risk securities
A financial derivative is a product that derives its value from an underlying asset
Tools for better financial and risk management
Confer on the financial system are well known
Types of contract between two parties
Put option: to sell the securities to fixed amount
Call option: to purchase securities for fixed amount
Is an agreement to pay or sell an asset at a certain time in the future for a certain price
Organized exchange – which are traded in over the counter (OTCI)
Standardization, clearing house, margins
Foregoing of money (systematic, unsystematic, business risk, market risk, financial risk)
Through brokers and dealers
Commission brokers, floor brokers, odd-lot dealers, Taravaniwala, bundiwalars, arbitrager, security dealers
It records business transactions takes place during the accounting period with a view to prepare financial statements
Accounting is art of recording classifying and summarizing in a sufficient manner in terms of money, (to communicate
To measure the profit of the company, to ascertain the financial position of the company
Recording – transaction in subsidiary books
Classifying – data by posting them from subsidiary books to accounts
Closing the books – and preparing of final accounts
Scope of what is to be recorded or what is being excluded from the accounting books (ex: drawings account) important
to the accountant
Corporate capital paid out only at the time of winding up of the company
Dual aspect concept:
It is transaction based purchase, sales, payments, receipts total amount debit is equal total amount credited capital +
liabilities = assets
The enterprise will continue to exist in the foreseeable future continuing in operation for the foreseeable future
Accounting period concept:
The time interval is called accounting period, natural business year 12 months
Money measurement concept:
Transaction is recorded in terms of money ex: purchase of building
Profit = revenue – expenses
Cost concept: (historic)
Asset is recorded at the price paid to acquire it purchase land 80,000 (whether it is 1,75,000 at the time of preparation of
balance sheet) will not be considered
Revenue recognition concept:
The amount received (receivables) sale of out put are called revenue
Revenue is the gross inflow of cash (sale of goods manufactured by the company)
Cost or recognized when they are incurred and not when paid until cash is received
Objectivity concept: (evidence)
Transaction should be supported by verifiable document asset is shown by replacement cost
Convention of disclosure:
Accounts must be honestly prepared and all material information must be disclosed there in
Contingent liabilities appearing as a note, market value of investments appearing as a note
Convention of materiality:
Material and immaterial matters
Value of stock: loss of markets due to competition or government regulations, increase in wage bill
Allocation of cost: allocated to every one of the three years
Convention of consistency:
Important conclusions regarding the working of a company over a number of years, accounting procedures, and
policies should be consisting.
Convention of conservatism: (playing sage)
Considering of all prospective losses but leaves all prospective profits
Make the provision of all prospective losses but leaves all prospective profits
Make the provision for doubtful debts
Valuation of stock, provision for fluctuation of investments
To ascertain the financial results
Profit & loss in the operations of the business during the accounting period
To analyze the expenditure
To ascertain the cost of various products manufacture by the company
To assist the management in taking rational policy decisions
It contains summarized information of the firm’s financial affairs organized systematically
Financial statements are prepared from the accounting records maintained by the firm
Generally accepted accounting principles (GAAP) and procedures are followed to prepare those statements
It presents firm’s financial situation to users
Preparation for the purpose of external reporting to owner’s investors and creditors
For decision making
To provide reliable financial information about economic resources and obligations of business enterprise.
For estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & L a/c):
Periodic statement FPO (for the period of)
It presents the summary of revenues, expenses and net income or net loss of a firm
Measure the firm’s profitability; it is a scoreboard for a period of time
Office salary, wages, insurance, rent, rates, taxes, stationary, printing, post office, repairs
Sales man salary, traveling exp, advertising, discount paid, bad debts, commission for sales
Sales traveling, wear housing rent, insurance
Bank charges, bank commission, and bank overdraft interest, interest on capital
Non-debiting expenses in P & L account:
Drawings, income tax, life insurance
P & L account credit items:
Interest received, discount received, rent received, and collection of bad debts
Portrays an exact picture of the financial position of the enterprise
About economic resources and obligations of a business entity and about it owners as a specific date, it is a measure of
the firm’s liquidity and solvency
What is business owns (assets) and owes (liability) the difference is capital or owner’s equity all its contain in balance
Uses: communicating to the users, for raising further capital
Statement of retained earnings:
It means the accumulated excess of earnings over losses and dividends the balance shown by the income statement is
transferred to the valance sheet through this statement after making necessary appropriations
Statement of changes in financial position: (cash flow statement)
It is essential to identify the movement of working capital or cash in and out of the business
Changes in the firm’s working capital
Changes in the firm’s cash position
Changes in the firm’s total financial position
Increase in the net worth of the business arising out of business operations
Cost of goods sold:
Opening stock + purchases + direct expenses – closing stock
Assets = liabilities + share holders equity
Any owned physical object (tangible) or right (intangible) having economic value to its owners
A substantial part of its capital in acquiring what are known as fixed assets 80% - 90% of long-term funds used to acquire fixed
Valuation of fixed assets:
Historical cost method, discounted cash flow method, replacement cost method
Means that old customer will resort to the old place, name fame and reputation of the company, goodwill arises when a new
partner admitted, acquire by another, spent on R & D
Methods of calculating goodwill:
Average method, super annuation method, capitalization method
Preliminary expenses, share issuing expenses, discount on issue of shares and debentures, these should be written of from out of
Un called share capital of the company, not shown in the balance sheet because principal of conservatism
Are those, which are realized within the operating cycle of the business
Idle funds of a business are invested in marketable securities
Objective: convert them into cash with in a period of one year
Investments in government securities
Capital of partnership business
Economic obligation of an enterprise
Which are paid within one year (paid out of current assets)
Which do not become due for payment in one year
Uncalled liability on investments in another companies
Erriers of fixed cumulative dividend
Bills discount (if drawee doesn’t pay the bill amount to bank)
Owner’s equity: equal to net worth
Sales book – purchase book
Returns book – sales, purchases
Bills book – payable receivables
Opening entries adjusting and closing post entries, correcting entries
Proprietor’s, suppliers, creditors
Artificial persons – limited company a/c, insurance company a/c, government company a/c
Representative persons – common title, salaries outstanding, rent prepaid
Tangible – land, buildings, machinery
Intangible – goodwill, patents, intellectual properties,
Salaries, rent, commission, discount, insurance
Personal accounts: the receiver the giver
Real accounts: what comes in what goes out
Nominal accounts: all losses and exp all gains
Ledger: is a set of accounts, ledger is the important book of the double entry system
Posting: process of entering in the ledger
Journal entry: The book of first entry (original entry) chronological record
All the accounts of a concern are thus balanced off then they are put in a list
Debit side trail to credit side
Debit side: losses, expenses, and assets
Credit side: gains, revenues, liabilities
To find out the figures arithmetically correct or not
To find out the gross profit
Debit side: wages, carriage, and royalties – if it is used for production
Factory expenses, package – goods are incomplete such as biscuits consumable stores (cotton waste, grease, engine oil) factory rent
Gross profit: sales – cost of goods sold
Raw materials, work in progress, finished goods
Need for holding inventories:
Transaction motive – smooth production
Precautionary motive – risk, unpredictable changes
Speculative motive – price fluctuations
First-in first-out method (FIFO)
Last-in first-out method (LIFO)
Weighted average method
Specific identification method
Ordering cost: entire cost of acquiring raw materials
Carrying cost: incurred for maintaining – storage, insurance, taxes
Refers the mix of long-term sources of funds, preference capital and equity capital and retained earnings
Total revenues equals to total cost
Behavior of profits in response to the changes in volume, cost and prices
What minimum level of sales need be achieved to avoid losses
What should be the sales level to earn a target profit
Make or buy decision, production planning
BEP (units): total fixes cost/ selling price – variable cost per unit
BEP (rupees): total fixed cost/ 1- variable cost per unit/ selling price
P/V ratio: sales – variable cost/ sales
BEP (rupees): fixed cost/ p/v ratio (or) contribution ratio
Angle of 45:
The vertical and horizontal lines are spaced equally with the same distance
Intersection between sales line and total cost line is the break-even point
Margin of safety:
The excess of actual sales (or) budgeted sales over the break even sales is known as M.S
Ratio: budgeted sales – break-even sales/ budgeted sales
Target sales: fixed cost + desired profit/ contribution ratio (or) p/v ratio
Is a detailed plan of operations for some specific future period
It is concerned with the raising and administration of funds used in business
Deals with practices and policies
Deals with financial problems
Are the temporary short-term investments in shares, debentures and bonds
Commercial papers, UTI units, inter corporate lending
Bad debts: debts, which will never be collected, are called
Represents the promises made in writing by debtors to pay definite some of money after some specific period of time
Loans and advances: due from employees and associates
Right granted by the government enabling the holder to control the use of an invention
Exclusive right to reproduce and sell literacy musical and artistic works
Contracts giving exclusive right to perform certain functions or to sell certain products or services
Other assets (preliminary exp, deferred revenue expenditure):
Prepayments for services or benefits for period longer than the accounting period
Ex: advertising, preliminary exp
Relation ship between B/S and P & L a/c:
Revenue is an inflow of assets (or outflow of liabilities)
Expenses is an outflow of assets (or inflow of liabilities)
Bills of exchange:
The seller draws a bill of exchange for a specific amount payable at a specified date in future
It is accepted by the customer or by a bank
Brawer: who write the bill
Drawee: who accepted the bill
Purchase or discount of bills:
The amount provided under this agreement is covered within the overall cash credit or overdraft limit implies that the bank
becomes owner of the bill
Banks holds the bill as a security for the credit
Banks charge – discount charges
The borrower is allowed to withdraw funds in excess of the balance in his current account
Up to a certain specified limit during a stipulated period, interest charged on daily basis operates the account through cheques
Borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit
Funds flow statement: (statement of sources and uses of funds)
The statement of changes in financial position prepared to determine only the sources and application (or uses) of working capital
between the dates of two balance sheets
Banks and financial institutions required it when a company approaches them for loans
Increase in assets is use of funds
Increase in liabilities and net worth (shareholder’s equity) is source of funds
Decrease in assets is source of funds
Decrease in liabilities and retained earnings is use of funds
It’s a financial product, change in cash only,
Change in working capital, change in financial resources
Fund required to run the day-to-day business activities cannot be overemphasized
Finance provided to support the short-term assets of the business
Over draft, cash credit, purchase or discounting of bills
What is the need to invest funds in current assets
How much funds should be invest in each type of current assets
Gross working capital: current assets
Net working capital: current assets – current liabilities (net current assets)
Need: To run the day to day operations of the business
Fixed working capital:
Minimum level of current assets is referred to as permanent or fixed working capital
Degree of excessive working capital:
Chances of inventory mishandling, waste, losses increase
Defective credit policy, stock collection period
Higher incident of bad debts, managerial inefficiency
Inadequate working capital:
Difficult to implement operating plan, operating inefficiency,
Fixed assets are not efficiently utilized, losses its reputation
Working capital cycle:
Acquiring raw materials – resources
Manufacturing the products – finished goods
Accounts receivables – through sales if credit sales book debts
Use of working capital:
Adjusted net loss from operations
Purchase of non-current assets
Repayment of long-term debt
Redemption of redeemable preferred shares
Payment of cash dividend
Nature and size of business
Price level changes
Operating efficiency and performance
Firms credit policy
Availability of credit
Estimating working capital:
Current assets holdings period
Ratio of sales
Ratio of fixed investments
Cash flow statements:
Summarizes the causes of changes in cash position between dates of two B/S
Only cash transactions – depreciation is not considering
It is useful for short-term planning
Statements of changes in financial statements on cash basis
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
Comparative statement analysis:
To find out the periodic changes in the financial performance of a company, at least for two years, changes: income or decrease
Take sales as 100
Take total assets and total liabilities as 100
Trend analysis: (time series analysis)
The direction of changes over a period of years
Applicable to the items of P & L a/c
Trends of sales and net income
The relationship between two or more things
Benchmark for evaluating the financial position and performance of a firm
To make large quantitative of financial data and to make qualitative judgment about the firm’s financial performance
Standards of comparison:
Past ratios from the past reports, project ratios, competition ratios
Industry ratios – ratios of the industry to which the firms belongs
Uses of ratio analysis:
The ability of the firm to meet its current obligations
Long-term solvency by borrowing funds
The efficiency utilizing assets in generating sales revenue
Overall operating efficiency and performance of the firm
Financial ratios as predicators of failure
Types: liquidity, leverage, activity, and profitability
Essential for a firm to be able to meet its obligations as they become due
Measure the ability of the firm to meet its current obligations
Firm should not suffer from lack of liquidity will result in a poor credit worthiness
Loss of creditors confident
A very high degree of liquidity is also bad idle assets earn nothing
Current ratio: current assets/ current liabilities
Standard is 2 to 1 (or) 2:1
For measuring short-term solvency
It represents a margin of safety for creditors
Quick ratio: current assets – inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity – fluctuate
Cash ratio: cash + marketable securities/ current liabilities
Internal measure: current assets – inventory/ average daily operating expenses
Total operating expenses/360
A firm’s ability to meet its regular cash expenses is internal measure
Operating exp: expenses + cost of goods sold + selling & administrative expenses + general expenses – depreciation
Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
For bankers - firm’s current debt paying ability
For firm’s long-term financial strength
The firm has a legal obligation to pay interest to debt holders irrespective of the profit made or loss incurred by the firm
Total debt ratio: total debt/ total debt + net worth (or) TD/ NA
TD: total debt, NA: net assets
For long term solvency of a firm
Capital employed = net assets (or) Shareholder’s equity + long term debt
Net worth = shareholder’s equity
Debt equity ratio: external equity/ internal equity or TD/NW (net wroth)
A high ratio shows that claims of creditors are greater than those of owners
A low ratio implies greater claims of owners than creditors
Capital employed to net worth ratio (CE): CE/ NW
By lenders and owners contribution
Total liabilities to total assets ratio: TL/ TA
Financial risk: preference capital include in net worth
Lease payment = debt
Debt ratio: TD + value of lease/ TD + value of lease + net worth
Interest coverage ratio: EBIT/ interest (or) EBIDT/ interest
Whether the business would earn sufficient profits to pay periodical the interest charges
Standard is 6 to 7 times
Debt service coverage ratio:
EBIT/ interest + principle payment installment/ 1 – tax rate
Whether the company to make payment of principle amount
Funds of creditors and owners are invested in various assets to generate sales and profits
The better the management of assets the larger the amount of sales
Turnover ratios: balance between sales and assets
Inventory turnover ratio: cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in selling its product
Days of inventory holdings: 360/ inventory turnover
How rapidly the inventory is turning into receivable through sales
Debtor’s turnover ratio: credit sales/ average debtors (or) sales/ debtors
Average debtors: opening balance + closing balance/ 2
Collection period: 360/ debtors’ turnover
Average collection period measures the quality of debtor’s speed of their collection
Creditors turnover ratio: credit purchases/ average creditors (not important)
Assets turnover ratio: sales/ net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
Total assets: sales/ TA
Fixed assets: sales/ net F.A (fixed assets)
Working capital turnover ratio: sales/ net CA
Ex: The one rupee of sales the company need as 0.31 of net current assets
The company should earn profits to serve and grow over a long period of time
Profitability in relation to sales
Profitability in relation to investment
Gross profit margin: sales – cost of goods sold/ sales
Efficiency which management produces each unit of product
Contribution ratio: sales – variable exp/ sales (or)
1 – variable exp/ sales
Net profit margin: profit after tax (PAT)/ sales
It indicates management efficiency in manufacturing and administrative and selling the products (or) EBIT (1 – T)/ sales T: tax
Operating expenses ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
Cost of goods sold ratio (CGS): CGS/ sales
Return on investment (ROI):
Return on total assets: EBIT (1 –T)/ TA (or) EBIT/ TA
Return on net assets: EBIT (1 –T)/ NA (or) EBIT/ NA
Return on equity (ROE): PAT/ NW
Earnings per share (EPS): PAT/ number of common shares outstanding
Dividend per share (DPS): earnings paid to shareholders/ no. Of ordinary shares out
Dividend payout ratio: DPS/ EPS
Dividend yield ratio: DPS/ market value of the share
Price earning ratio P/E ratio: market value of the shares/ EPS
Market value of book value: Market value/ book value
Fixed assets ratio: fixed assets/ long-term funds
This ratio should not be more than 1
If less than 1 it shows that a part of the working capital has been financed through long-term funds
Proprietary ratio: shareholder’s funds/ total tangible assets
Importance to creditors
High proprietary ratio will indicates relatively little danger to the creditors
Oil wells (lease) coal mines
Pre incorporation profit are transferred to capital reserve
Section 210 to 220 of the companies act 1956 legal position relating to the final accounts of joint stock company
Section 210 – preparation and presentation of final accounts
Section 211 – balance sheet and P & L a/c
Profit and loss appropriation a/c
To transfer for reserves By last years balance b/d
To income tax for previous year By net profit for the year b/d
Not provided for
To interim dividend By amount withdraw from general reserve or any other
To proposed dividend By provision such as income tax
To surplus carried to B/S By provision no longer required
Divisible profits: dividend to shareholders
Transfer to reserve: not exceed 10% of the PAT should not less than 2.5%
Interest on dividend: 23%
Are those persons who have already advanced some money or money’s worth to the business
Conflicts of accounting principles:
Valuation of stock: some year’s market value
Some years cost, because of principle of conservatism
But the principle of consistency will controversy
Feasibility: assets are recorded at cost less depreciation
Petty cash book:
Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and carriage
Errors not disclosed by Trail Balance:
Omission in recording the transaction in the books of original entry debit and credit side both
Wrong recording in the original books
Posting to wrong account with correct amount and no correct side
Compensatory error: forgetting to post
Error of principle
Errors disclosed by trail balance:
Error in casting of subsidiary books (make total)
Error in carrying forward the one page to another page
Error in posting to ledger
Error in balancing the amount
Preparation of debtors and creditors schedule
How to find out the errors:
Divide the difference by 2 and find out the equal figure appear in the trail balance
If the difference is evenly divisible by ‘9’ error the trans position (847 treated as 987)
If the amount is net round figure its mistake in posting
If the amount is round figure mistake in casting or carrying forward
If the difference is large amount compare this year trail balance to previous year
Free samples: debit to advertisement a/c and credited to purchase a/c
In an account is having debit balance that is credited either trading a/c or P & L a/c similarly like the way to credit
Debit sales a/c debit p & l a/c
Credit trading a/c credit salaries a/c
Post closing trail balance:
In order to see whether the amount in the ledger are still in balance, which are still open
Mercantilist system: period taken into account
Stock destroyed: deducted from closing stock loss is shown in debit side of P & L a/c
When not insured:
P & L a/c Dr
To Trading a/c
When fully insured:
Insurance claim a/c Dr
To Trading a/c
When partially insured:
Insurance claim a/c Dr
P & L a/c Dr
To Trading a/c
Expenses out standing:
Debit expenses (p & l a/c)
Credit expenses out standing a/c (liability)
Expenses paid in advance:
Prepaid expenses (asset)
Credit expenses (p & l a/c)
Out standing or accrued income: (asset)
Like interest on securities, dividend on shares, commission are earned but not received
It has to credited to insurance a/c
Debit accrued income (asset)
Credit income (p & l a/c credit side)
Income received in advance:
Debit income (p & l a/c)
Credit income received in advance (liability)
Debit depreciation a/c (p & l a/c)
Credit asset (B/S)
Debit bad debt (p & l a/c)
Credit debtors (B/S)
Bad debt provision:
Balancing of debtors (objective)
Debit p & la/c
Credit bad debts provision
Provision for discount on debtors and creditors
Discount on debtors: debit p & l a/c
Credit provision of discount on debtors
Discount on creditors: debit provision for discount on creditors
Credit p & l a/c
Interest on capital
Debit p & l a/c
Credit capital a/c
Interest on drawings:
Debit capital a/c
Credit p & l a/c
Cash paid allowed discount:
Cash a/c Dr ‘X’ a/c Dr
Discount a/c Dr To cash a/c
To ‘X’ a/c To discount a/c
Advance tax payment:
Advance tax a/c Dr Tax a/c Dr
To Bank a/c To advance tax a/c
To bank a/c
Life insurance premium: paid on life it is add to drawings
If shop – p & l a/c
If goods purchased, factory building, factory machine – Trading a/c
Loss or gain on asset sold: p & l a/c
Discount received and allowed: P & L a/c
Stock at the end appear in trail balance:
Debit purchase a/c