Accounting Basics by Srikanth Benoni

8/8/2019 Accounting Basics by Srikanth Benoni

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Accounting BasicsBy Srikanth Benoni


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This booklet is designed to give the reader an overview of general book-

keeping practices and accounting/Finance terminology. As you read

through, please note that words or phrases underlined appear in a glossary

at the end of the booklet.

Apart from this this Booklet gives the overview of Accounting Concepts and

Conventions along with useful Accounting & Finance terms.

For suggestions and for free Accounting & Finance Dictionaries send me an

email to [email protected] or Srikanthbenonimv@

gmail.com.

Visit My Blog : www.srikanmvsmile.blogspot.com

Regards,

M V Srikanth Benoni


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CONTENTS :

PART I

Few Accounting Basics 4 10

Glossary 11 12

PART II Accounting Concepts & Conventions 13 14

Accounting & Finance Terminology 15 29


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The Accounting Equation :

All accounting entries in the books of account for an organization have a relationshipbased on the accounting equation:

Assets: Assets are tangible and intangible items of value which the business owns.Examples of assets are:

Cash

Cars

Buildings

Machinery

Furniture

Debtors (money owed from customers)

Stock / InventoryLiabilities

Liabilities are those items which are owed by the business to bodies outside of thebusiness. Examples of liabilities are:

Loans to banks

Creditors (money owed to suppliers)

Bank overdrafts

Owners EquityThe simplest way to understand the accounting equation is to understand whatmakes up owners equity.

Assets = Liabilities + Owners equity

CHAPTER

Accounting Basics :1


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By rearranging the accounting equation you can see that Owners Equity is made upof Assets and Liabilities.

Owners Equity can also be expressed as:

Rearranging the equation again, therefore:

Owners Equity = Total Assets less Total Liabilities

Owners Equity = Capital invested by owner + Profits (Losses) to date(also known as Retained Earnings )

Total Assets - Total Liabilities = Capital + Retained Earnings

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Accounting Basics :1


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The Balance Sheet :2

The balance sheet shows a snapshot of the businesss net worth at a given point in

time. Below is a basic balance sheet. Have a look at how it displays the elements of

the accounting equation:

Balance Sheet

Assets $

Current Assets

Stock X

Debtors X

Bank X

Cash X

Fixed Assets

Buildings X

Vehicles X

Total Assets XX

Liabilities

Current Liabilities

Overdraft X

Creditors X

Long-term Liabilities

Bank Loan XTotal Liabilities XX

Total Assets less Total Liabilities ZZ

Owners Capital Y

Retained Earnings Y

Owners Equity ZZ

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Double Entry Bookkeeping :3

All accounting transactions are made up of 2 entries in the accounts: a debit and a

credit.

For example, if you purchased a book, your value of books would increase, but your

value of cash would decrease by the same value and at the same time. This is dou-

ble entry bookkeeping.

Ledger Accounts

A ledger account is an item in either the Profit & Loss account (which well discuss

shortly) or the balance sheet. A Ledger account is either a:

Asset

Liability

Equity

Income

Expense

The example of purchasing a book, mentioned above, can be shown in the form of

ledger T accounts as follows:

CHAPTER

Dr. Purchases Book Cr.

Cash 20

Dr. Cash Book Cr.

Books 20


Cash 20

Dr. Cash Book Cr.


Cash 20

Alert :

If all transactions are en-

tered into the books in this

way, then the sum of all of

the debits would equal the

sum of all of the credits


Cash 20


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Trial Balance :4

CHAPTER

A trial balance is a list of all of the ledger accounts of a business and the balance of

each. Debits are shown as positive numbers and credits as negative numbers.

The trial balance should therefore always equal zero.

Following on from the previous example, if we were to sell a CD for Rs.25 for cash

then the ledger accounts and trial balance would look like this:

Books 20

Dr. Cash Book Cr.


Cash 20

Cash 25

Dr. Sales Cr.

Trial Balance

Purchases - Books 20

Sales - CDs (25)

Cash (25 - 20) 5

Total 0

Sales 25


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Profit and Loss account :5

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Whereas the balance sheet shows a snapshot at a point in time of the net worth of the

business, the profit and loss account shows the current financial years net operating

profits, broken down into various sales, cost of sales and expenses ledger accounts.

Profit and Loss account

Sales $

Books XCDs X

Magazines X

Total Sales XX

Cost of Sales

Purchases of Books X

Purchases of CDs X

Purchases of Magazines X

Total Cost of Sales XX

Gross Profit (Sales Cost of Sales) YY

Expenses

Advertising X

Marketing X

Salaries & Wages X

Electricity X

Total Expenses XX

Net Profit (Gross profit Expenses) ZZ

Sales

Sales accounts show all sales made

in the period, regardless of whether

or not money has been receivedyet, and are shown as a credit in the

Profit and Loss accounts. Where

money has not yet been received,

the debit is not to cash (as per the

CD example above), but to a Debt-

ors account (money owed from cus-

tomer account).

Cost of Sales

Cost of Sales are expenses that

can be directly attributed to sales

items, such as purchases of stocks

Expenses

These are all other expenses (othe

than purchases of assets) which

cannot be attributed directly to

sales items, such as rent, electricityor advertising.


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Reporting Period & Conversion Period :6

CHAPTER

The reporting period is usually a 12 month period ending 31st March each year. At the

end of each financial year the profit and loss account balance is transferred to the

Retained Earnings account in the Balance Sheet (under Equity). A new profit and loss

account is started for the new financial year.

The conversion period is the month in which you transfer over to a new accounting

system. If you are transferring to a new accounting system at the beginning of a

financial year, the final balance in the profit and loss account would be transferred to

the new system (retained earnings account) along with all of the current balance sheet

account balances.

Other conversion issues

Only the balances of accounts will usually be transferred to the new system. Generally

a business would not re-input all of their individual transactions, such as invoices,

receipts, payments etc. This means that there are likely to be cut-over issues.

For example you may have written a cheque to a supplier but as at the cut-over date

the supplier has not cashed the cheque. Even though the bank would have been

credited and the suppliers account would be correct, this cheque would be

outstanding, and the new accounting system would not have a record of

the outstanding cheque to enable a reconciliation of the bank account.

Other similar cut-over issues would include:

Monies received but not yet cleared through the bank

Supplier invoices not yet paid

Customer receipts not yet received


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Glossary :

Accounting Equation All accounting entries made in the books of account of a

business having a relationship based on the accounting equation: Assets = Liabilities +Owners Equity

Asset Tangible or intangible items of value owned by a business e.g. cash, stock, build-

ings & vehicles

Balance Sheet Shows a snapshot at a given point in time of the net worth of the busi-

ness. It details the assets, liabilities and owners equity

Capital Amount invested in the business (usually at start up, but may include additional

funds raised)

Conversion Period The period (month) in which the accounts are being converted, or

transferred over, from one system to another

Cost of Sales Expenses in the financial year which can be directly attributed to sales of

those goods or services

Credit Revenue in the Profit and Loss or Liability in the Balance sheet

Creditor Amount owed to a supplier from the business

Current Asset Short-term asset (items or amounts to be used or received within 12

months) e.g. stock or cash

Current Liability Short-term liability (items or amounts to be paid within 12 months) e.g.

supplier or bank overdraft

Debit Expenses in the Profit and Loss or Asset in the Balance sheet

Debtor Amount owed to the business from a customer

Double Entry Bookkeeping System of bookkeeping where all transaction have 2

entries, a debit and a credit, which net to zero.

Expense Amount relating to expenditure for the financial year (excluding purchases ofassets or cost of sales) regardless of whether cash has been paid or not

Fixed Asset Long-term asset (items or amounts to be used or received after 12 months)

e.g. building or vehicle.


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Glossary :

Gross Profit Sales less Cost of Sales

Income Amount of sales made in the current financial year, regardless of whether cas

has been received or not.

Ledger Account An account containing transaction data relating to a specific type o

item, whether in the Profit and Loss or Balance sheet. The full list of ledger accounts for a

business is called the businesss Chart of Accounts

Liability Amounts owed to entities outside of the business e.g. bank loan, supplier pay

ments & overdrafts

Long-term Liability Long-term liability (items or amounts to be paid after 12 months) e.

bank loan.

Net Profit Gross Profit less Expenses. Amount to be carried over to retained earnings a

the end of each financial year

Owners Equity Net worth of the business to the owner

Reporting Period The 12 month period which the business runs / reports to in a norm

year (period may be shorter in start and end years). Normally 1st April to 31st March.

Retained Earnings Total profits and/or losses from start of business, to date

Trial Balance A list of all the businesss account balances which should net to zero i.e

should balance.


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PART II

ACCOUNTING CONCEPTS & CONVENTIONS :1

ACCOUNTING CONCEPTS:

Business Entity Concepts: In accounting language business is separate person i.e.

business entity and the person who is investing money is that business are not the

same. So who is investing money must be treated as loan giver. If the person invests

money in business should be shown as capital.

Money Measurement Concept: Business records only those transactions, which are

expressed in money terms. They will not record transactions if only expressed in other

unit of measurement. Ex: expressed in kegs, liters, tones, etc..

Cost Concept: Transactions in books are recorded at cost i.e. at the actual amount in-

curred. Market value is not considered.

Going Concern Concept: It is assumed that every business will be running for future

seeable years. That the business entity doesnt have any intention to stop any business

activities in year future. If we feel that the business will not run or have to be stopped in

year foreseeable future. Them all the things have to be recorded at realisable values.

Dual Aspect Concept (Balance Sheet Concept): Every transaction has two activities

a) Power to receive some thing (goods purchased).

b) Duty to pay some thing (duty to pay money).

Accrual Concepts: Not only cash items are recorded in the books but also credit items

are to be recorded. Ex. Credit sales made are also even before cash is received.

CHAPTER


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PART II

ACCOUNTING CONCEPTS & CONVENTIONS :1

ACCOUNTING CONVENTIONS :

In order to bring the results of accounting perfectly in practice & to know and compare the

accounting practices of various business concerns, the following accounting conventions ar

also useful.

1. Consistency: Business concern should follow uniform accounts for all years. This is use

ful as and when the entrepreneur wants to compare the present year performance with tha

of last year or with different firms. This does not mean that adjustments are not possible.

Any change or deviation in the practice & its impact should be clearly defined in advance.

For ex: if the a/c year is 1st April 31st March in one year, that should not be changed to

1st April 31st December in another year, without clearly defining its objective.

2. Discloser: The results of the business have to be disclosed from time to time to the

shareholders and creditors of the business, Govt., employees etc., However, it is the prime

responsibility of the Board of Directors of the company to disclose the business results in a

systematic and comprehensive way to all concerned. It is essential to disclose even, every

minute information, which has a clear-cut impact on assets, debts and profits of the busi-

ness.

3. Relevance: According to this convention, the firm should give relevant accounting infor

mation as and when required documentary proof like invoices, vouchers, cash memos etc.,

4. Feasibility: The practice of comparing expenses incurred for the business transactions

with that of the income received during the year by the firm is called feasibility. According

this convention expenditure should be less than the income.

5. Conservation: According to this convention the accountant has to record the actual fi-

nancial position. While recording the accounts, the accountant should not give different pic

ture of the business either by inflating or deflating, the value of transaction. In this conven

tion, to be on the safe side, the accountant record all the anticipated losses, however ig-

nores the anticipated profits. For ex: While taking the value of the closing stock, the marke

cost or actual cost whichever is less is taken in to the books of accounts.

CHAPTER


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Accounting & Finance Terminology :2

CHAPTER

ABSORBTION COSTING Vs MARGINAL COSTING

1. A.C. is the practice of charging all costs both fixed & variable, to operations, processes o

products. Variable or fixed cost is treated as product costs in the absorption costing.

2. The stick of finished goods & W.I.P. is valued at total cost, which include both variable &

fixed. 3. In A.C. marginal decision-making is based up on profit. This is the excess of sales

value over variable cost. This is the excess of sales value over variable cost.

In marginal costing, only variable costs are treated as product costs, fixed cost is treated a

period cost and is charged to P & L a/c for that period.

In marginal costing such stock are valued at marginal cost i.e. variable cost.

In marginal costing, the managerial decisions are guided by contribution.

JOURNAL Vs LEDGER

1.Journal in the book of first or original entry. It is also called the book of first entry.

2. When once the entries are posted to ledger the journal looses its importance.

3. In the preparation of final accounts journal is not useful.

4. The authorities generally may not depend on journal.

The ledger is the book of second entry.

It will never loose importance as it is the main book of accounts which is relied upon perma

nently.

In the preparation of trial balance and final accounts ledger is a must.

In the finalization of income tax to be paid, the tax authorities depend on ledger.

PROFI T & LOSS A/ C Vs BALANCE SHEET

1.Objective of preparing of P&L a/c to ascertain the net profit /loss of the business during

the year.

2. Is an account having debit ad credit does as such TO and BY is used.

3. Revenue expenditure and incomes are recorded in the P&L a/c.

4.Balancing figure of this account either net profit or net loss.

The objective of preparing balance sheet is to show the financial position of the business on

a specific date.

Balance sheet is a statement and balance TP and BY are not used.

Capital incomes and expenditures are shown in the balance sheet.

Balance sheet will not show any balancing figure. A total of liabilities and assets side should

always be equal.

JOINT VENTURE Vs CONSIGNMENT

1.Parties associated are called co- ventures.

2. Capital is contributed by all the ventures.

3. Profit and losses of the joint ventures are shared by all the ventures at agreed ratio.

Parties associated are called consignor and consignee. Capital is contribution only by con-

signor. The consignor receives only commission at a fixed rate & the consignor enjoys all th

profits of the consignment.


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CHAPTER

TRAIL BALANCE Vs BALANCE SHEETThe trail balance is prepared to check the arithmetical accounting of the books of accounts.

Trail balance does not show the financial position of the business.

The trail balance is prepared based on ledger accounts.

The preparation of trail balance is not compulsory.

Trail balance can not shown as documentary evidence.

Balance sheet is prepared to know the true position of assets and liabilities on a particular

date.

The financial position can be known from balance sheet.

The balance sheet prepared on the base of information from trail balance.

The preparation of balance sheet is must.But balance sheet will be accepted as a documentary evidence by a tax authorities and

courts.

COMPANY Vs PARTNERSHIP :

1.Company comes in to existence only when it is registered under the companies act 1956.

2. Membership: Min. Private- 2 members Public - 7 members Max. 50 & no limit.

3. A company on its incorporation enjoys a separate legal entity.

In case of company members the liability is limited.

A firm is created by mutual agreement between partners. Registration is optional.

Min. firm: 2 membersMax. Banking 10,

Others- 20.

A firm does not have any separate legal entity.

In case of firms the partners are jointly and severally liable.

PARTNERSHIP Vs JOINT VENTURE:

It is a going concern.

It always has a name.

Persons carrying a business are called partners.

Profits are ascertained at regular intervals i.e. annually.Generally accrual basis of accounting is followed.

It is a terminable venture.

It may not bear a name.

Persons carrying on business are called co- ventures.

The profits are ascertained for each venture separately.

Cash basis of accounting is followed.


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DEPOSIT Vs DEBENTURE:Deposits are amounts received by the company from the public.

Deposits are short term or middle term financial sources.

Deposits are unsecured.

It is easy to rise public deposits.

Debenture is a document which acknowledges debt which is issued by company.

Debentures are long term financial sources.

Debentures are generally secured.

Issue of debentures restricted by RBI.

PROMISORY NOTE Vs BILL OF EXCHANGE:In a promissory note there is a promise to pay.

In a p.n. there are two parties, i.e., the maker and payee.

A Pro. Note can not made payable to the maker himself.

The maker a pro.note is primarily.

A pro.note is signed by the person liable to pay. So no acceptance is needed.

In a bill there is an order to pay.

In a bill there are 3 parties i.e. Drawer, Drawyee, payee.

In a bill the drawer and payee may be the same.

The maker of a bill is liable only. When the Drawee does not accept or pay.

SHARES Vs DEBENTURES:

Shares are a part of the capital of the company.

Shares holders are members or owners of the company.

When recommended by the board dividend could be declared to share holders.

Shares do not carry on any charge.

Shares have a restrictions issue at a discount.

Shareholders have voting rights.

Dividend is payable when profits are there.

No fixed dividend.

Debentures constitute a loan.Debenture holders are creditors.

Fixed amount of interest in debentures paid before dividend declaration.

Debentures generally have a charge on the asset of the company.

There are no restrictions to issue at a discount.

They dont have any voting right.

Interest is payable whether profits are there or not.

Rate of interest is fixed.


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CHAPTER

SHARES Vs STOCKS:Has a nominal value.

May be fully paid or partly paid.

Can be transferred in whole numbers and not in fractions.

Each and every share shall be of equal denomination.

Shares are identifies with distinctive numbers.

Can be issued directly to the public.

No nominal value.

Always fully paid.

Can be transferred in fractions also.

May be unequal amounts.Dont have any distinctive numbers.

Only fully paid up shares can be converted in to stock and can not be issued directly.

SHARE CERTIFICATE Vs SHARE WARRANT:

The holder is a registered member of the company.

The holder of a share certificate is a essentially a member.

For the issue of share certificate may not required of the central Govt.

All companies must issue share certificates.

Shares certification issued in partly paid or fully paid.

Share certificate is not negotiable.

The holder of a share certificate can present a petition for winding up.The bearer of the share warrant is a not a registered member.

Can be a member if the articles so provided in AOA. (Articles Of Association).

If share warrant is issued, the central Govt. approval is must.

It is only issued by public companies.

Can be issued only fully paid shares.

It is negotiable.

Can not present a petition for winding up.

CAPITAL EXPENDITURE Vs REVENUE EXPENDITURE:

These assets are shown at the asset side of the balance sheet.

Expenditure for the purchase and installation of asset.The benefits will flow or enjoyed by the organization for more than one year. Ex: Plant and

Machinery. Asset is purchased for utilization in business.

5. Depreciation is considered for the life of the asset.

Expenses are shown in the debit side of the P&L a/c.

Expenditure is used for maintenance of asset.

The benefits for the expenditure will flow or enjoyed by the organization for the current year

only. Ex: Salaries, printing and stationary, etc..

Goods are purchased with intention to sell.


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CHAPTER

MEMBER Vs SHARE HOLDER:Name entered in the register of members.

Member is also a shareholder.

Shares warrant holder is not a member.

Name not entered in the register of members.

Shareholder is a not a member unless name is entered in the register of members.

Shares warrant holder is a shareholder.

PARTNER Vs DIRECTOR:

1. Partner is one of the owners.

2. Partnership is Governed by partnership act 1932.3. Partner has an unlimited liability.

Director is one of the members of the executive body.

Companies are governed by companies act 1956.

Director is generally not liable.

PROVISON Vs RESERVE:

Provision is a charge against the profits.

Is made for known liability or expenditure.

It is used for that purpose only.

It shown above the line.

Above the line means P&L a/c.Reserve is an appropriation on profits.

It is made for future unknown liability.

It can be utilized for future purpose.

It shown below the line.

Below the line means P&L appropriation a/c.

PUBLI C Ltd.CO. Vs PRIVATE Ltd.CO:

Min. members 7.

Max. Unlimited.

Min. directors 3.After getting business commencement certificate, they can do the business.(but not after

incorporation).

Public ltd. Co. go for public issue.

Min. Members 2.

Max. Members 50.

Min. directors 2.

Can start after incorporation.

Private co. shall not issue its shares to outsiders.


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CHAPTER

Difference Between Charge and Appropriation:

An encumbrance on an asset to secure indebtedness or other obligations. It may be fixed or

floating. Is termed as charge.

An account sometimes included as a separate section of the profit and loss statement show-

ing application (Appropriation) of profits towards dividends, reserves etc.

Difference between Accumulated Depletion and Accumulated Depreciation:

The total to date of the periodic depletion charges on wasting assets.

The total to date of the periodic depreciation charges in depreciable assets.

Merchant Banking: An institution which covers a wide range of activities, such as man-

agement of customer services, portfolio management, credit syndication acceptance credit,

counseling, insuranceetc.,

Any person who is engaged in the business of issue management either by making arrange-

ments regarding selling buying or subscribing to the securities a manager, consultant, advi-

sor or rendering corporate advisory service in relation to such issue management.

Function: The area of activity of merchant banker is equity and equity related finance, theydeal with mainly funds raised through many market and capital market.

A merchant banker can claim a change 0.5% as the commission for the whole issue.

The direct sale of securities to investors is called private placement.

Merchant banks deal with funds raised through money market and capital market.


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CHAPTER

Debit: Incoming benefits or receiving benefits called debit.

Credit: Outgoing benefit or giving benefits called credit.

Debtor: A person who owing money to the business firm is called debtor. In other

words a debtor one who received benefit from the firm and yet to repay it or purchased

goods on credit basis.

Creditor: A person who lent money or sell goods on credit to the firm. In other words

creditor means who gave benefit to the firm and yet to receive the equaling benefit from

the firm.

Account: Account is a summarized statement of Debit and credit.

Accounting: The method of identifying, analyzing, and passing on the required financial

information to the decision-makers in the business.

Goods: Those with which the business concern does business. If a commodity is pro-

duced or purchased for the purpose of sale. It is called goods.

Capital: The amount invested by the 0wner for running the business is called capital.

This can be in the form of goods / cash.

Asset: Asset means conglomeration of benefits. Assets are which essential and benefi-

cial for running the business operations.

Contingent Liabilities: These are not the real liabilities. They are not actual liabilities

at present. They might become a liability in future on condition that the contemplated

even occurs. Ex: liability in respect of pending. This is not shown in balance sheet that

may be shown as not under it.

Drawings: cash, goods or services drawn by the owner / investors for self-consumptionare called drawings.

Expenditure: Account spent for acquiring goods / services for running business is known

as expenditure. It may be capital / revenue expenditure.

Capital Expenditure: Spent for the acquisition of fixed assets which have long life and

which are useful for the long-term benefit of the business.


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CHAPTER

Revenue Expenditure: All expenditure incurred for running the business for the cur-

rent year is known as revenue expenditure. Ex: salaries, rent, interest etc.

Income: The amount earned by a firm out of its business transaction during a period is

called income.

Capital Gain: Is the excess amount received over the book value of the asset owned by

the firm ex: profit earned over sale of building.

Revenue Income: Revenue income is the income received during business transac-

tions or sale and purchase of goods or on services render to outsiders.

Journal: This is called the book of prime entry. The word journal is derived from the

Latin word Journ. That means a day. Hence, journal is also termed, as a daybook where

in the day to day transactions are recorded in chronological order.

Journal entry: The process of recording the business transactions in the journal is

known as journalizing.

Ledger: ledger means a set of accounts. This is also called a book of final entry. All the

transactions from the journal entries are recorded in the ledger by opening separate ac-

counts and their balances are found.

Cheque: Is an instrument, by means of which a depositor can order the bank to pay

certain sum of money only to the order of a or to the bearer of the instrument.

Invoice: Is a statement by the seller to the purchaser which contains the details of the

quantity of goods sold and price of the goods, terms and conditions of payment particu-

lars.

Balance sheet: It is a statement prepared on a particular date to reflect the financialposition of the firm with all assets and liabilities of the firm. This is prepared based on

Accounting period concept.

P&L a/c: Has to be prepared to ascertain the net profit or gross profit or net loss of the

firm for the accounting period. This is prepared based on Accounting period concept.


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CHAPTER

Trail balance: It is a statement prepared by putting all debts one side and all credits

on the other side to check arithmetical accuracy of the ledger balance.

Cash: The purchasing power in hand is called cash.

Cash expenses: cash is paid for expenses incurred.

Non- cash expenses: It is a expenditure, there is no cash involvement. Expenses are

incurred but cash is not paid (that cash is not going out of the business). Ex. Deprecia-

tion.

Prepaid expenditure: The amount paid for the expenditure. Relation to the future

years.

O/ S expenses: Expenditure incurred but the payment for which is not yet paid and will

be shown in the balance sheet liability side.

Recurring expenses: Items, which are repeated. Ex: sales and wages.

Non- Recurring expenses: which are not regular and repeated. Ex: buying of fixed

assets, legal exp. Profit/ loss on sale of asset, insurance.

Promisory Note: Sec 4 of the negotiable instrument act, 1881 defines promissory

note as an instrument in writing containing an unconditional undertaking signed by the

maker to pay a certain sum of money only to the order of a certain person or to the

bearer of the instrument.

Bill of exchange: Sec 5 of the negotiable instrument act, 1881 defined a bill of ex-

change as an instrument in writing containing an unconditional undertaking signed by

the maker the order of a certain person or to the bearer of the instrument.

Parties:

Drawer: He is the person who draws the bill. He is usually creditor or seller.

Drawee: He is the person on whom the bill is drawn, He is also known as acceptor

as he accepts the bill.

Payee: He is the person who is entitled to receive payment.

Consignment: The dispatch of goods from one place to another place for the purpose

of the sake through an agent is called consignment. The person who sends goods is

called consignor, the person whom the goods sent is known as consignee.


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CHAPTER

Joint venture: A joint venture is practically partnerships between two are more per-

sons confined to a particular venture or piece of business.

Bad debts: The businessmen may be tempted to sell goods on credit just to increase

sales volume. But owing to variety of reasons the debtor may not be in a position to re-

pay the debt. In this way, the debt or claim from debtors, which becomes unrealizable is

called a bad debt.

Depreciation: nothing but a decreasing in value of an asset caused due to constant use

of the asset, lapse of time and technical advancement. Depreciation charged based on

Going concern concept.

Depletion: A measure if exhaustion of wasting asset represented by periodic write of

cost another substituted value.

Amortization: writing of intangible assets. Ex: patents, goodwill.

Preliminary Expenses: Expenditure relating to the formation of an enterprise. There

include legal accounting and share issue expenses incurred for formation of the enter-

prise.

Operating Profit: The net profit arising from the normal operating of an enterprise

without taking accounting of extraneous transactions and expenses of a purely financial

nature.

Extra-ordinary items in the P & L a/ c:

The transaction, which is not related to the business, is termed as ex-ordinary transac-

tions or extra-ordinary items. It is as well as called exceptional items and prior period

items. Ex: Loss due to earthquake, Profit or losses on the sale of fixed assets, interest

received from other company investments, profit or loss on foreign exchange, unex-

pected dividend received.

Debenture: A formal document constituting acknowledgement of a debt by an enter-

prise. Debenture is a document bearing the common seal. 1)This creates or acknowl-

edges a debt. 2)It need not be secured (it may/may not). 3)It does not carry any voting

right, but it carries interest.


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CHAPTER

Convertible Debenture: A debenture, which gives the holder a right to conversion

wholly or partly in shares in accordance with term of issue.

Debenture Redemption Reserve: A reserve creates for the purpose of redemption of

debentures at a future date.

Redemption: Repayment as per given forms normally used in connections with prefer-

ence share and debenture.

Redeemable P reference Share: The preference share that is repayable either after a

fixed or determinable period or at any time dividend by the management. Under certain

credit any prescribed by the instrument of incorporation on the terms of issues.

Cumulative Preference Shares: A class of preference shares entitled to payment of

cumulative dividends. Preference shares are always deemed to be cumulative, unless

they are expressly made non- cumulative preference shares.

Sweat Equity Shares: Equity shares issued by the company to employees or directors.

Such issue should be authorized by a special resolution passed by the company in gen-

eral meeting.

Dividend: Dividend is a return on the investment to the shareholders. It is paid out of

the divisible profits of the company. Dividend is normally expressed in terms of percent-

age of the face value of the share.

Types : 1. Dividend on preference shares. 2. Dividend on equity shares 3. Interim-

dividend.

Dividend Equalization Reserve: A reserve created to maintain the rate of dividend in fu-

ture years.

Unclaimed Dividend: Dividend, which has been declared by a corporate enterprise and

a warrant or a cheque in respect where has been dispatched but has not been En-

cashed by the shareholders connected.

Unpaid Dividend: Dividend, which has been declared by a corporate enterprise but hasnot been paid. In respect where has not been dispatched with in the prescribed period.

Scrip Dividend: A scrip dividend promises to pay the shareholders at a future specific

date.

The objective of scrip dividend is to postpone the immediate payment of cash.

Stock Dividend: It means the issue of bonus shares to the existing shareholders.


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Cash Dividend: The payment of dividend in cash to shareholders is called cash divi-

dend. Payment of dividend in cash results in out flow of funds and reduces the com-

pany.

Annual Report: Annual Reports shows the financial position of the company and the

performance of the company during the last year. It contains B/S, P&L a/c and notes to

accounts.

Notes to Accounts: It gives the information about:

Fixed assets & dep., R&D expenditure, foreign exchange transactions, excise duty, in-

terim dividend/ Proposed dividend, investments, miscellaneous expenditure inventories.

Bankrupt: A statement in which affirm is unable to meet its obligations and hence, it is

assets are surrendered to court for administration.

Bridge Loan: Temporary finance provided to a project until long term arrangement are

need.

Differed revenue expenses: The benefit of the expenditure will be differed to the fu-

ture periods for which the expenditure is charged. Differed revenue expenditure known

as asset in balance sheet. Ex: Preliminary expenses.

Sinking Fund: A fund created for the repayment of a liability or for the replacement of

an asset.

Mortgage: A transfer of interest in specific Immovable property for the purpose of se-

curing a loan advanced or to be advanced. An existing on future debt or the perform-

ance of an engagement which may give rise to a percipiency liability.

Differed Revenue income: which is a income differed to the future periods. That

means it is not related to one period related to more than one period.

Called of share capital: That part of the subscribed share capital which shareholders

has been required to pay.

Capital Assets: Assets, including investments not held for sale, conversion or redeem-

able preference share of a corporate enterprise out of its profits which could other wise

gave been available for distribution as dividend.

Capital W.I.P.: Expenditure on capital assets, which are in the process of construction

as completion.

Capital receipts: Amount received on capital items. Amount received by selling fixed

assets. Show the balance sheet in liability side.


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Revenue Receipts: Amount receives on revenue items. Amount received by sale of

goods or services show the trading and p& l a/c credit side.

Capital profits: capital profits are, profits realized on sale of fixed assets or on disposal

of investments. They may be distributed by a way of dividend.

Revenue Profits: revenue profits are, the profits earned by the company through its or-

dinary activities.

General Reserve: G.R. is a reserve, which is to meet any future unknown liability. It

can be utilized as dividend.

Capital Reserve: profits in the nature of capital or profits in the form of capital nature

ex: share premium, share forfeiture.

Reserve Capital: reserve capital is called up only at the time of liquidation. If assets

held are not sufficient to meat the liabilities.

Subsidiary company: A company, which is selling more than 51% of shares to another

company, is called subsidiary company.

Holding company: A company, which is buying more than 51% of shares from another

company, is called holding company.

A Company shall be deemed to be a subsidiary of another company.

If that another company,

Controls the composition of its board of directors.

Holds more than 50% of the voting power or paid up capital in the other company.

Is the subsidiary of any other company, which is the subsidiary of holding company.

Minority Interest: In a subsidiary company the majority share holding is held by hold-

ing company (say suppose 80% or so, the remaining 20% is held by sum other people

who are little interested in the company. This little interest is called as minority inter-

est). These people are called as minority interest shareholders.

BOOK KEEPING

Means the method of recording the business transactions in an order for providing infor-

mation that may be required to the business in future.

ACCOUNTING

Means recorded information is to be summarized, analyzed and submitted in the form of

financial results.


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Government Company: A Govt. co. is a company is a company in which not less than

51% of the paid up share capital of the company is held by 1.central Govt., 2. State

Govt., 3. Partly by the central govt. and partly by one or more.

Cost: The amount of expenditure incurred on specified article, product on activity.

Direct cost: An item on that can be reasonably identified with a specific unit of product

or which a specific operation or other cost center.

Direct costing: A method where by the cost is determined so as to trade appropriate

share of variable costs only all fixed cost, all fixed costs being changed against revenue

in the period in which they are incurred.

Prime Cost: The cost of direct materials, direct wages and other direct production ex-

penses.

Marginal Cost: M.C. is the additional cost to produce an additional unit of a product.

Marginal Costing: It also be defined as the aggregate of variable costs or prime cost +

variable overheads.

Absorption Costing: A method where by the cost is determined so as to include the

appropriate share of both variable and fixed cost.

Contribution: The difference between sales and variable cost or marginal cost of sales.

It may also be defined as the excess of selling price over variable cost per unit.

It is also known as contribution margin or gross margin.

Standard cost: A predetermined cost, which is, calculated from managements stan-

dards of efficient operation and the relevant necessary expenditure.

Standard Costing: The technique of using standard costs for the purpose of cost con-

trol is known as standard costing.

Share Premium: The excess of issue of price of shares over their face value. It will be

showed with allotment entry in the journal. It will be adjusted in the balance sheet on

the liabilities side under the head of reserves and surpluses.

Capitalization: Capitalization is a quantitative aspect of the financial plannings of an

enterprise. It is refers to the total amount of securities issued by a company.

Capital Structure: It is refers to the kind of securities and the proportionate amounts

or the term capital structure is used to represent the proportionate relationship between

debt and equity. Equity includes paid up share capital, share premium, reserves and

surplus (retained earnings).


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Financial Structure: It means the entire liabilities side of the balance sheet. It refers

to all the financial resources marshaled by the firm short as well as ling term and all

forms of debt as well as equity.

Capital Gearing: The term capital gearing refers to the relationship between equity

and long term debt.

Cost of Capital: It means the minimum rate of return expected by its investment.

Bonus Shares: Bonus issue amounts to reduction in the amount of accumulated profits

and reserves.

The residual reserves after the proposed capitalization should be at least 40% of the

paid up capital of the company.

The bonus issue is permitted to be made out of free reserves and premium collected in

cash.

The notice to accept right shares should not be less than 15 days.

Right is issue is also known as pre- emptive right.

Bonus issue is made to make the nominal value and the market value of the share of

the company comparable.

ACRS = Accelerated cost recovery system.

FASB = Financial account standard Board.

Foreign Exchange Rate: The price of one currency expressed in terms of other.

Accrual: An Expense that has been incurred but not yet paid.

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Accounting Basics by Srikanth Benoni

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