ACCOUNTING - CONCEPTS

1. definition of accounting: the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events which are, in
part at least of a financial character and interpreting the results there of.
2. book keeping:
It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Branches of accounting
a. financial accounting
b. management accounting
4. Concepts of accounting:
A. separate entity concept B. going concern concept
C. money measurement concept . cost concept
!. dual aspect concept ". accounting period concept
#. periodic matching of costs and revenue concept $. realization concept.
5 Conventions of accounting
A. conservatism
B. full disclosure
C. consistency
materiality.
6. Systes of book keeping:
A. single entry system
B. double entry system
!. Systes of accounting
A. cash system accounting
B. mercantile system of accounting.
". #rincip$es of accounting
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 e'penses and losses
credit all gains and incomes



%. &eaning of 'ourna$: (ournal means chronological record of transactions.
1( &eaning of $edger: ledger is a set of accounts. It contains all accounts of the
business enterprise whether real, nominal, personal.
11. #osting: it means transferring the debit and credit items from the (ournal to their
respective accounts in the ledger.
12. )ria$ ba$ance: trial balance is a statement containing the various ledger balances
on a particular date.
13. Credit note: the customer when returns the goods get credit for the value of the
goods returned. A credit note is sent to him intimating that his a%c has been credited
with the value of the goods returned.
14. *ebit note: when the goods are returned to the supplier, a debit note is sent to him
indicating that his a%c has been debited with the amount mentioned in the debit note.
15. Contra entry: which accounting entry is recorded on both the debit and credit side
of the cash boo) is )nown as the contra entry.
16. #etty cash book: petty cash is maintained by business to record petty cash
e'penses of the business, such as postage, cartage, stationery, etc.
1!.proisory note: an instrument in writing containing an unconditional
underta)ing signed by the ma)er, to pay certain sum of money only to or to the order of
a certain person or to the barer of the instrument.
1". Che+ue: a bill of e'change drawn on a specified ban)er and payable on demand.
1%. Sta$e che+ue: a stale che*ue means not valid of che*ue that means more than si'
months the che*ue is not valid.
2(. Bank reconci$iation stateent: it is a statement reconciling the balance as
shown by the ban) pass boo) and the balance as shown by the Cash Boo). +b(& to
)now the difference , pass necessary correcting, ad(usting entries in the boo)s.
21. &atching concept: matching means re*uires proper matching of e'pense with
the revenue.
22. Capita$ incoe: the term capital income means an income which does not grow
out of or pertain to the running of the business proper.
23. ,evenue incoe: the income which arises out of and in the course of the regular
business transactions of a concern.



24. Capita$ e-penditure: it means an e'penditure which has been incurred for the
purpose of obtaining a long term advantage for the business.
25. ,evenue e-penditure: an e'penditure that incurred in the course of regular
business transactions of a concern.
26. *iffered revenue e-penditure: an e'penditure which is incurred during an
accounting period but is applicable further periods also. .g& heavy advertisement.
2!. Bad debts: bad debts denote the amount lost from debtors to whom the goods were
sold on credit.
2". *epreciation: depreciation denotes gradually and permanent decrease in the
value of asset due to wear and tear, technology changes, laps of time and accident.
2%. /ictitious assets: -hese are assets not represented by tangible possession or
property. !'amples of preliminary e'penses, discount on issue of shares, debit balance
in the profit and loss account when shown on the assets side in the balance sheet.
3(.0ntang$be 1ssets & Intangible assets means the assets which is not having the
physical appearance. And its have the real value, it shown on the assets side of the
balance sheet.
31. 1ccrued 0ncoe : Accrued income means income which has been earned by the
business during the accounting year but which has not yet been due and, therefore, has
not been received.
32. 2ut standing 0ncoe & +utstanding Income means income which has become
due during the accounting year but which has not so far been received by the firm.
33. Suspense account: the suspense account is an account to which the difference in
the trial balance has been put temporarily.
34. *ep$etion: it implies removal of an available but not replaceable source, .uch as
e'tracting coal from a coal mine.
35. 1orti3ation: the process of writing of intangible assets is term as amortization.
36. *i$apidations: the term dilapidations to damage done to a building or other
property during tenancy.
3!. Capita$ ep$oyed: the term capital employed means sum of total long term
funds employed in the business. i.e.
/share capital0 reserves , surplus 0long term loans 1 /non business assets 0 fictitious
assets2



3". .+uity shares: those shares which are not having pref. rights are called e*uity
shares.
3%. #ref.shares: -hose shares which are carrying the pref.rights is called pref.
shares
3ref.rights in respect of fi'ed dividend.
3ref.right to repayment of capital in the even of company winding up.
4(. 4everage: It is a force applied at a particular point to get the desired result.
41. 2perating $everage: the operating leverage ta)es place when a changes in
revenue greater changes in !BI-.
42. /inancia$ $everage : it is nothing but a process of using debt capital to
increase the rate of return on e*uity
43. Cobine $everage: it is used to measure of the total ris) of the firm 4 operating
ris) 0 financial ris).
44. 5oint venture : A (oint venture is an association of two or more the persons who
combined for the e'ecution of a specific transaction and divide the profit or loss their of
an agreed ratio.
45. #artnership: partnership is the relation b%w the persons who have agreed to share
the profits of business carried on by all or any of them acting for all.
46. /actoring: It is an arrangement under which a firm /called borrower2 receives
advances against its receivables, from a financial institutions /called factor2
4!. Capita$ reserve: -he reserve which transferred from the capital gains is called
capital reserve.
4". 6enera$ reserve: the reserve which is transferred from normal profits of the firm is
called general reserve
4%. /ree Cash: -he cash not for any specific purpose free from any encumbrance li)e
surplus cash.
5(. &inority 0nterest: minority interest refers to the e*uity of the minority shareholders
in a subsidiary company.
51. Capita$ receipts: capital receipts may be defined as non5recurring receipts from the
owner of the business or lender of the money crating a liability to either of them.
52. ,evenue receipts: 6evenue 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. &eaning of Copany: A company is an association of many persons who contribute
money or money7s worth to common stoc) and employs it for a common purpose. -he
common stoc) so contributed is denoted in money and is the capital of the company.
54. )ypes of a copany:
8. .tatutory companies
9. government company
:. foreign company
;. 6egistered companies&
a. Companies limited by shares
b. Companies limited by guarantee
c. <nlimited companies
. private company
!. public company
55. #rivate copany: A private co. is which by its A+A&
6estricts the right of the members to transfer of shares
=imits the no. of members >?.
3rohibits any Invitation to the public to subscribe for its shares or debentures.
56. #ub$ic copany: A company, the articles of association of which does not contain the
re*uisite restrictions to ma)e it a private limited company, is called a public company..
5!. Characteristics of a copany:
@oluntary association
.eparate legal entity
"ree transfer of shares
=imited liability
Common seal
3erpetual e'istence.
5". /oration of copany:
3romotion
Incorporation
Commencement of business
5%. .+uity share capita$: -he total sum of e*uity shares is called e*uity share capital.
6(. 1uthori3ed share capita$: it is the ma'imum amount of the share capital which a
company can raise for the time being.
61. 0ssued capita$: It is that part of the authorized capital which has been allotted to the
public for subscriptions.



62. Subscribed capita$: it is the part of the issued capital which has been allotted to the
public
63. Ca$$ed up capita$: It has been portion of the subscribed capital which has been called
up by the company.
64. #aid up capita$: It is the portion of the called up capital against which payment has
been received.
65. *ebentures: ebenture is a certificate issued by a company under its seal
ac)nowledging a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
6!. *eeed pub$ic 4td. Copany: A private company is a subsidiary company to
public company it satisfies the following terms%conditions .ec :/82:&
8. having minimum share capital > la)hs
9. accepting investments from the public
:. no restriction of the transferable of shares
;. Ao restriction of no. of members.
>. accepting deposits from the investors
6". Secret reserves: secret reserves are reserves the e'istence of which does not appear
on the face of balance sheet. In such a situation, net assets position of the business is
stronger than that disclosed by the balance sheet.
-hese reserves are crated by&
8. !'cessive dep.of an asset, e'cessive over5valuation of a liability.
9. Complete elimination of an asset, or under valuation of an asset.
6%. #rovision: provision usually means any amount written off or retained by way of
providing depreciation, renewals or diminutions in the value of assets or retained by way
of providing for any )nown liability of which the amount can not be determined with
substantial accuracy.
!(. ,eserve: -he provision in e'cess of the amount considered necessary for the purpose it
was originally made is also considered as reserve
3rovision is charge against profits while reserves is an appropriation of profits
Creation of reserve increase proprietor7s fund while creation of provisions
decreases his funds in the business.
!1. ,eserve fund: the term reserve fund means such reserve against which clearly
investment etc.,
!2. 7ndisc$osed reserves: .ometimes a reserve is created but its identity is merged with
some other a%c or group of accounts so that the e'istence of the reserve is not )nown such
reserve is called an undisclosed reserve.



!3. finance anageent: financial management deals with procurement of funds and
their effective utilization in business.
!4. 2b'ectives of financia$ anageent: financial management having two
ob(ectives that Is&
1. #rofit a-ii3ation: the finance manager has to ma)e his decisions in a manner so
that the profits of the concern are ma'imized.
2. 8ea$th a-ii3ation: wealth ma'imization means the ob(ective of a firm should be
to ma'imize its value or wealth, or value of a firm is represented by the mar)et price of its
common stoc).
!5. /unctions of financia$ anager:
Investment decision
ividend decision
"inance decision
Cash management decisions
3erformance evaluation
Bar)et impact analysis
!6. )ie va$ue of oney: the time value of money means that worth of a rupee received
today is different from the worth of a rupee to be received in future.
!!. Capita$ structure: it refers to the mi' of sources from where the long5term funds
re*uired in a business may be raisedC in other words, it refers to the proportion of debt,
preference capital and e*uity capital.
!". 2ptiu capita$ structure: capital structure is optimum when the firm has a
combination of e*uity and debt so that the wealth of the firm is ma'imum.
!%. 8acc: it denotes weighted average cost of capital. It is defined as the overall cost of
capital computed by reference to the proportion of each component of capital as weights.
"(. /inancia$ break even point: it denotes the level at which a firm7s !BI- is (ust
sufficient to cover interest and preference dividend.
"1. Capita$ budgeting: capital budgeting involves the process of decision ma)ing with
regard to investment in fi'ed assets. +r decision ma)ing with regard to investment of
money in long term pro(ects.
"2. #ay back period: paybac) period represents the time period re*uired for complete
recovery of the initial investment in the pro(ect.
"3. 1,,: accounting or average rate of return means the average annual yield on the
pro(ect.



"4. 9#:: 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.
"5. #rofitabi$ity inde-: where different investment proposal each involving different
initial investments and cash inflows are to be compared.
"6. 0,,: internal rate of return is the rate at which the sum total of discounted cash
inflows e*uals the discounted cash out flow.
"!. )reasury anageent: it means it is defined as the efficient management of
li*uidity and financial ris) in business.
"". Concentration banking: it means identify locations or places where customers are
placed and open a local ban) a%c in each of these locations and open local collection centre.
"%. &arketab$e securities: surplus cash can be invested in short term instruments in
order to earn interest.
%(. 1geing schedu$e: in a ageing schedule the receivables are classified according to
their age.
%1. &a-iu perissib$e bank finance ;&#B/<: it is the ma'imum amount that
ban)s can lend a borrower towards his wor)ing capital re*uirements.
%2. Coercia$ 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.
%3. Bridge finance: It refers to the loans ta)en by the company normally from a
commercial ban)s for a short period pending disbursement of loans sanctioned by the
financial institutions.
%4. :enture capita$: It refers to the financing of high ris) ventures promoted by new
*ualified entrepreneurs who re*uire funds to give shape to their ideas.
%5. *ebt securiti3ation: It is a mode of financing, where in securities are issued on the
basis of a pac)age of assets /called asset pool2.
%6. 4ease financing: =easing is a contract where one party /owner2 purchases assets
and permits its views by another party /lessee2 over a specified period
%!. )rade Credit: It represents credit granted by suppliers of goods, in the normal course
of business.
%". 2ver draft: <nder this facility a fi'ed limit is granted within which the borrower
allowed to overdraw from his account.



%%. Cash credit: It is an arrangement under which a customer is allowed an advance up
to certain limit against credit granted by ban).
1((. C$ean overdraft: It refers to an advance by way of overdraft facility, but not bac)
by any tangible security.
1(1. Share capita$: -he sum total of the nominal value of the shares of a company is
called share capital.
1(2. /unds f$o= stateent: It is the statement deals with the financial resources for
running business activities. It e'plains how the funds obtained and how they used.
1(3. Sources of funds: -here are two sources of funds Internal sources and e'ternal
sources.
0nterna$ source: "unds from operations is the only internal sources of funds and some
important points add to it they do not result in the outflow of funds
/a2epreciation on fi'ed assets /b2 3reliminary e'penses or goodwill written off, =oss on
sale of fi'ed assets
educt the following items as they do not increase the funds&
3rofit on sale of fi'ed assets, profit on revaluation of fi'ed assets
.-terna$ sources: /a2 "unds from long term loans /b2 .ale of fi'ed assets /c2 "unds from
increase in share capital
1(4. 1pp$ication of funds: /a2 3urchase of fi'ed assets /b2 3ayment of dividend
/c23ayment of ta' liability /d2 3ayment of fi'ed liability
1(5. 0C* ;0nter corporate deposits<: Companies can borrow funds for a short period.
"or e'ample D months or less from another company which have surplus li*uidity. .uch
deposits made by one company in another company are called IC.
1(6. Certificate of deposits: -he C is a document of title similar to a fi'ed deposit
receipt issued by ban)s there is no prescribed interest rate on such Cs it is based on the
prevailing mar)et conditions.
1(!. #ub$ic deposits: It is very important source of short term and medium term
finance. -he company can accept 3 from members of the public and shareholders. It has
the maturity period of D months to : years.
1("..uro issues: -he euro issues means that the issues is listed on a !uropean stoc)
!'change. -he subscription can come from any part of the world e'cept India.
1(%.6*, ;6$oba$ depository receipts<: A depository receipt is basically a negotiable
certificate , dominated in us dollars that represents a non5<. company publicly traded in
local currency e*uity shares.



11(. 1*, ;1erican depository receipts<: epository receipt issued by a company in
the <.A are )nown as A6s. .uch receipts are to be issued in accordance with the
provisions stipulated by the securities !'change commission /.!C2 of <.A li)e .!BI in
India.
111.Coercia$ banks: Commercial ban)s e'tend foreign currency loans for
international operations, (ust li)e rupee loans. -he ban)s also provided overdraft.
112.*eve$opent banks: It offers long5term and medium term loans including foreign
currency loans
113.0nternationa$ agencies: International agencies li)e the I"C,IB6,AB,IB" etc.
provide indirect assistance for obtaining foreign currency.
114. Seed capita$ assistance: -he seed capital assistance scheme is desired by the IBI
for professionally or technically *ualified entrepreneurs and persons possessing relevant
e'perience and s)ills and entrepreneur traits.
115. 7nsecured $(ans: It constitutes a significant part of long5term finance available to
an enterprise.
116. Cash f$o= stateent: It is a statement depicting change in cash position from one
period to another.
11!.Sources of cash: Internal sources5/a2epreciation /b2Amortization /c2=oss on sale of
fi'ed assets /d2#ains from sale of fi'ed assets /e2 Creation of reserves !'ternal sources5
/a2Issue of new shares /b26aising long term loans /c2.hort5term borrowings /d2.ale of
fi'ed assets, investments
11". 1pp$ication of cash: /a2 3urchase of fi'ed assets /b2 3ayment of long5term loans /c2
ecrease in deferred payment liabilities /d2 3ayment of ta', dividend /e2 ecrease in
unsecured loans and deposits
11%. Budget: It is a detailed plan of operations for some specific future period. It is an
estimate prepared in advance of the period to which it applies.
12(. Budgetary contro$: 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 firm7s e'pected cash inflow and outflow
over a specified time period.
122. &aster 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. /i-ed budget: It is a budget which is designed to remain unchanged irrespective of
the level of activity actually attained.
124. >ero? 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 e'pansions in a rational manner and allows reallocation of source from low
to high priority programs.
125. 6ood=i$$: -he present value of firm7s anticipated e'cess earnings.
126. B,S& It is a statement reconciling the balance as shown by the ban) pass boo) and
balance shown by the cash boo).
12!. 2b'ective of B,S: -he ob(ective of preparing such a statement is to )now the causes
of difference between the two balances and pass necessary correcting or ad(usting entries
in the boo)s of the firm.
12". ,esponsibi$ities of accounting: It is a system of control by delegating and
locating the responsibilities for costs.
12%. #rofit centre: A centre whose performance is measured in terms of both the expense incurs
and revenue it earns.
13(. Cost centre: A location, person or item of e*uipment for which cost may be
ascertained and used for the purpose of cost control.
131. Cost: -he amount of e'penditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and
summarizing costs for determination of costs of products or services planning, controlling
and reducing such costs and furnishing of information management for decision ma)ing.
133. .$eents of cost: /A2 Baterial /B2 =abour /C2 !'penses /2 +verheads
134. Coponents of tota$ costs: /A2 3rime cost /B2 "actory cost /C2-otal cost of
production /2 -otal c?st
135. #rie cost: It consists of direct material direct labour and direct e'penses. It is also
)nown as basic or first or flat cost.
136. /actory cost: It comprises prime cost, in addition factory overheads which include
cost of indirect material indirect labour and indirect e'penses incurred in factory. -his cost
is also )nown as wor)s cost or production cost or manufacturing cost.



13!. Cost of production: In office and administration overheads are added to factory
cost, office cost is arrived at.
13". )ota$ cost: .elling and distribution overheads are added to total cost of production
to get the total cost or cost of sales.
13%. Cost unit: A unit of *uantity of a product, service or time in relation to which costs
may be ascertained or e'pressed.
14(.&ethods of costing: /A2Eob costing /B2Contract costing /C23rocess costing
/2+peration costing /!2+perating costing /"2<nit costing /#2Batch costing.
141. )echni+ues of costing: /a2 marginal costing /b2 direct costing /c2absorption
costing /d2 uniform costing.
142. Standard costing& standard costing is a system under which the cost of the product
is determined in advance on certain predetermined standards.
143. &argina$ costing: it is a techni*ue of costing in which allocation of e'penditure to
production is restricted to those e'penses which arise as a result of production, i.e.,
materials, labour, direct e'penses and variable overheads.
144. *erivative: derivative is product whose value is derived from the value of one or
more basic variables of underlying asset.
145. /or=ards: a forward contract is customized contracts between two entities were
settlement ta)es place on a specific date in the future at today7s pre agreed price.
146. /utures: a future contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. "uture contracts are standardized
e'change traded contracts.
14!. 2ptions& an option gives the holder of the option the right to do some thing. -he
option holder option may e'ercise or not.
14". Ca$$ option: a call option gives the holder the right but not the obligation to buy an
asset by a certain date for a certain price.
14%. #ut option: a put option gives the holder the right but not obligation to sell an asset
by a certain date for a certain price.
15(. 2ption price& option price is the price which the option buyer pays to the option
seller. It is also referred to as the option premium.
151. .-piration date: the date which is specified in the option contract is called
e'piration date.



152. .uropean option& it is the option at e'ercised only on e'piration 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 )nown as cost of carry.
155. 0nitia$ argin: the amount that must be deposited in the margin a%c at the time of
first entered into future contract is )nown as initial margin.
156 &aintenance argin& this is some what lower than initial margin.
15!. &ark to arket: in future mar)et, at the end of the each trading day, the margin
a%c is ad(usted to reflect the investors7 gains or loss depending upon the futures selling
price. -his is called mar) to mar)et.
15". Baskets & bas)et options are options on portfolio of underlying asset.

15%. S=aps& swaps are private agreements between two parties to e'change cash flows in
the future according to a pre agreed formula.
16(. 0pact cost: impact cost is cost it is measure of li*uidity of the mar)et. It reflects the
costs faced when actually trading in inde'.
161. @edging: hedging means minimize the ris).
162. Capita$ arket: capital mar)et is the mar)et it deals with the long term investment
funds. It consists of two mar)ets 8.primary mar)et 9.secondary mar)et.
163. #riary arket: those companies which are issuing new shares in this mar)et. It is
also called new issue mar)et.
164. Secondary arket: secondary mar)et is the mar)et where shares buying and
selling. In India secondary mar)et is called stoc) e'change.
165. 1rbitrage: it means purchase and sale of securities in different mar)ets in order to
profit from price discrepancies. In other words arbitrage is a way of reducing ris) of loss
caused by price fluctuations of securities held in a portfolio.
166. &eaning of ratio: 6atios are relationships e'pressed in mathematical terms
between figures which are connected with each other in same manner.
16!. 1ctivity ratio: it is a measure of the level of activity attained over a period.



16". utua$ fund : a mutual fund is a pool of money, collected from investors, and is
invested according to certain investment ob(ectives.
16%. characteristics of utua$ fund :
+wnership of the B" is in the hands of the of the investors
B" managed by investment professionals
-he value of portfolio is updated every day
1!(.advantage of &/ to investors :
3ortfolio diversification
3rofessional management
6eduction in ris)
6eduction of transaction casts
=i*uidity
Convenience and fle'ibility
1!1.net asset va$ue : the value of one unit of investment is called as the Aet Asset @alue
1!2.open?ended fund : open ended funds means investors can buy and sell units of fund,
at AA@ related prices at any time, directly from the fund this is called open ended fund.
"or e'C unit D;
1!3.c$ose 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 mar)ets.
1!4. dividend option : investors who choose a dividend on their investments, will receive
dividends from the B", as when such dividends are declared.
1!5.gro=th option : investors who do not re*uire periodic income distributions can be
choose the growth option.
1!6.e+uity funds : e*uity funds are those that invest pre5dominantly in e*uity shares of
company.
1!!.types of e+uity funds :
.imple e*uity funds
3rimary mar)et funds
.ectoral funds
Inde' funds
1!". sectora$ funds & sectoral funds choose to invest in one or more chosen sectors of the
e*uity mar)ets.



1!%.inde- funds &the fund manager ta)es a view on companies that are e'pected to
perform well, and invests in these companies
.
1"(.debt funds : the debt funds are those that are pre5dominantly invest in debt
securities.
1"1. $i+uid funds & the debt funds invest only in instruments with maturities less than one
year.
1"2. gi$t funds : gilt funds invests only in securities that are issued by the #+@-. and
therefore does not carry any credit ris).
1"3.ba$anced funds &funds that invest both in debt and e*uity mar)ets are called
balanced funds.
1"4. sponsor : sponsor is the promoter of the B" and appoints trustees, custodians and
the ABC with prior approval of .!BI .
1"5. trustee : trustee is responsible to the investors in the B" and appoint the ABC for
managing the investment portfolio.
1"6. 1&C : the ABC describes Asset Banagement Company, it is the business face of the
B", as it manages all the affairs of the B".

1"!. , A ) 1gents : the 6,- agents are responsible for the investor servicing functions,
as they maintain the records of investors in B".
1"". custodians : custodians are responsible for the securities held in the mutual fund7s
portfolio.
1"%. schee take over : if an e'isting B" scheme is ta)en over by the another ABC, it is
called as scheme ta)e over.
1%(.eaning of $oad: load is the factor that is applied to the AA@ of a scheme to arrive
at the price.
1%2. arket capita$i3ation : mar)et capitalization means number of shares issued
multiplied with mar)et price per share.
1%3.price earning ratio & the ratio between the share price and the post ta' earnings of
company is called as price earning ratio.
1%4. dividend yie$d : the dividend paid out by the company, is usually a percentage of
the face value of a share.



1%5. arket risk & it refers to the ris) which the investor is e'posed to as a result of
adverse movements in the interest rates. It also referred to as the interest rate ris).
1%6. ,e?investent risk : it the ris) 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 fi'ed income
security.
1%!. ca$$ risk : call ris) is associated with bonds have an embedded call option in them.
-his option hives the issuer the right to call bac) the bonds prior to maturity.
1%". credit risk & credit ris) refers to the probability that a borrower could default on a
commitment to repay debt or band loans
1%%.inf$ation risk & inflation ris) reflects the changes in the purchasing power of the cash
flows resulting from the fi'ed income security.
2((.$i+uid risk & it is also called mar)et ris), it refers to the ease with which bonds could
be traded in the mar)et.
2(1.dra=ings : drawings denotes the money withdrawn by the proprietor from the
business for his personal use.
2(2.outstanding 0ncoe & +utstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
2(3.2utstanding .-penses & +utstanding !'penses refer to those e'penses which have
become due during the accounting period for which the "inal Accounts have been prepared
but have not yet been paid.
2(4.c$osing stock & -he term closing stoc) means goods lying unsold with the
businessman at the end of the accounting year.
2(5. &ethods of depreciation :
8.<nirorm charge methods &
a. "i'ed installment method
b .epletion method
c. Bachine hour rate method.
9. eclining charge methods &
a. iminishing balance method
b..um of years digits method
c. ouble declining method
:. +ther methods &
a. #roup depreciation method
b. Inventory system of depreciation
c. Annuity method
d. epreciation fund method



e. Insurance policy method.
2(6.1ccrued 0ncoe & Accrued Income means income which has been earned by the
business during the accounting year but which has not yet become due and, therefore, has
not been received.
2(!.6ross profit ratio & it indicates the efficiency of the production%trading operations.
/oru$a & #ross profit F8??
Aet sales
2(".9et profit ratio & it indicates net margin on sales
/oru$a & Aet profit F 8??
Aet sales
2(%. return on share ho$ders funds & it indicates measures earning power of e*uity
capital.
/oru$a & profits available for !*uity shareholders F 8??
Average !*uity .hareholders "unds
21(. .arning per .+uity share ;.#S< & it shows the amount of earnings attributable
to each e*uity share.
/oru$a & profits available for !*uity shareholders
Aumber of !*uity shares
211.dividend yie$d ratio & it shows the rate of return to shareholders in the form of
dividends based in the mar)et price of the share
/oru$a & ividend per share F 8??
Bar)et price per share
212. price earning ratio & it a measure for determining the value of a share. Bay also
be used to measure the rate of return e'pected by investors.
/oru$a & Bar)et price of share /B3.2 F 8??
!arning per share /!3.2
213.Current ratio & it measures short5term debt paying ability.
/oru$a & Current Assets
Current =iabilities
214. *ebt?.+uity ,atio & it indicates the percentage of funds being financed through
borrowingsC a measure of the e'tent of trading on e*uity.
/oru$a : -otal =ong5term ebt



.hareholders funds
215./i-ed 1ssets ratio & -his ratio e'plains whether the firm has raised adepuate long5
term funds to meet its fi'ed assets re*uirements.
/oru$a "i'ed Assets
=ong5term "unds
216 . Buick ,atio & -he ratio termed as G li*uidity ratio7. -he ratio is ascertained y
comparing the li*uid assets to current liabilities.
/oru$a : =i*uid Assets
Current =iabilities
21!. Stock turnover ,atio & the ratio indicates whether investment in inventory in
efficiently used or not. It, therefore e'plains whether investment in inventory within proper
limits or not.
/oru$a & cost of goods sold
Average stoc)
21". *ebtors )urnover ,atio & the ratio the better it is, since it would indicate that debts
are being collected more promptly. -he ration helps in cash budgeting since the flow of cash
from customers can be wor)ed out on the basis of sales.
/oru$a & Credit sales
Average Accounts 6eceivable
21%.Creditors )urnover ,atio & it indicates the speed with which the payments for
credit purchases are made to the creditors.
/oru$a & Credit 3urchases
Average Accounts 3ayable
22(. 8orking capita$ turnover ratio & it is also )nown as Hor)ing Capital =everage
6atio. -his ratio indicates whether or not wor)ing capital has been effectively utilized in
ma)ing sales.
/oru$a & Aet .ales
Hor)ing Capital
221./i-ed 1ssets )urnover ratio & -his ratio indicates the e'tent to which the
investments in fi'ed assets contributes towards sales.
/oru$a & Aet .ales
"i'ed Assets



222 .#ay?out ,atio : -his ratio indicates what proportion of earning per share has been
used for paying dividend.
/oru$a : ividend per !*uity .hare F 8??
!arning per !*uity share
223.2vera$$ #rofitabi$ity ,atio & It is also called as 6eturn on Investment /6+I2 or
6eturn on Capital !mployed /6+C!2 . It indicates the percentage of return on the total
capital employed in the business.
/oru$a & +perating profit F 8??
Capital employed
-he term capita$ ep$oyed has been given different meanings
a. sum total of all assets whether fi'ed or current
b. sum total of fi'ed assets,
c. sum total of long5term funds employed in the business, i.e.,
share capital 0reserves ,surplus 0long term loans 1/non business assets 0 fictitious
assets2.
2perating profit means Gprofit before interest and ta'7
224 . /i-ed 0nterest Cover ratio & the ratio is very important from the lender7s point of
view. It indicates whether the business would earn sufficient profits to pay periodically the
interest charges.
/oru$a & Income before interest and -a'
Interest Charges
225 . /i-ed *ividend Cover ratio & -his ratio is important for preference shareholders
entitled to get dividend at a fi'ed rate in priority to other shareholders.
/oru$a : Aet 3rofit after Interest and -a'
3reference ividend
226. *ebt Service Coverage ratio : -his ratio is e'plained ability of a company to
ma)e payment of principal amounts also on time.
/oru$a & Aet profit before interest and ta'
Interest 0 3rincipal payment installment
85 -a' rate
22!. #roprietary ratio : It is a variant of debt5e*uity ratio . It establishes relationship
between the proprietor7s funds and the total tangible assets.
/oru$a : .hareholders funds
-otal tangible assets



22".*ifference bet=een 'oint venture and partner ship &
In (oint venture the business is carried on without using a firm name,
In the partnership, the business is carried on under a firm name.
In the (oint venture, the business transactions are recorded under cash system
In the partnership, the business transactions are recorded under mercantile
system.
In the (oint venture, profit and loss is ascertained on completion of the venture
In the partner ship , profit and loss is ascertained at the end of each year.
In the (oint venture, it is confined to a particular operation and it is temporary.
In the partnership, it is confined to a particular operation and it is permanent
.
22%.&eaning of 8orking capita$
&
-he funds available for conducting day to day operations of an enterprise. Also
represented by the e'cess of current assets over current liabilities .
23(.concepts of accounting :

1. Business entity concepts &5 According to this concept, the business is treated as a
separate entity distinct from its owners and others.
2. 6oing concern concept &5 According to this concept, it is assumed that a business
has a reasonable e'pectation of continuing business at a profit for an indefinite
period of time.
3. &oney easureent concept &5 -his concept says that the accounting records
only those transactions which can be e'pressed in terms of money only.
4. Cost concept &5According to this concept, an asset is recorded in the boo)s at the
price paid to ac*uire it and that this cost is the basis for all subse*uent accounting
for the asset.
5. *ua$ aspect concept &5 In every transaction, there will be two aspects 1 the
receiving aspect and the giving aspectC both are recorded by debiting one accounts
and crediting another account. -his is called double entry.
6. 1ccounting period concept &5 It means the final accounts must be prepared on a
periodic basis. Aormally accounting period adopted is one year, more than this
period reduces the utility of accounting data.



!. ,ea$i3ation concept &5 According to this concepts, revenue is considered as being
earned on the data which it is realized, i.e., the date when the property in goods
passes the buyer and he become legally liable to pay.
". &ateria$ity concepts &5 It is a one of the accounting principle, as per only
important information will be ta)en, and un important information will be ignored
in the preparation of the financial statement.
%. &atching concepts &5 -he cost or e'penses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
1(. 1ccrua$ concept :? -he profit arises only when there is an increase in
owners capital, which is a result of e'cess of revenue over e'penses and loss.
9:8. /inancia$ ana$ysis &-he process of interpreting the past, present, and future
financial condition of a company.
232. 0ncoe stateent & An accounting statement which shows the level of revenues,
e'penses and profit occurring for a given accounting period.
233.1nnua$ report & -he report issued annually by a company, to its share holders. it
containing financial statement li)e, trading and profit , lose account and balance sheet.
234. Bankrupt & A statement in which a firm is unable to meets its obligations and hence,
it is assets are surrendered to court for administration
235 . 4ease & =ease 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
236.2pportunity cost & -he cost associated with not doing something.
23!. Budgeting & -he term budgeting is used for preparing budgets and other producer
for planning,co5ordination,and control of business enterprise
.
23".Capita$ & -he term capital refers to the total investment of company in money,
tangible and intangible assets. It is the total wealth of a company.
23%.Capita$i3ation & It is the sum of the par value of stoc)s and bonds out standings.
24(. 2ver capita$i3ation & Hhen a business is unable to earn fair rate on its outstanding
securities.
241. 7nder capita$i3ation & Hhen a business is able to earn fair rate or over rate on it is
outstanding securities.



242. Capita$ gearing & -he term capital gearing refers to the relationship between e*uity
and long term debt.
243.Cost of capita$ & It means the minimum rate of return e'pected by its investment.
244.Cash dividend & -he payment of dividend in cash
245.*efine the ter accrua$ & 6ecognition 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 e-penses & An e'pense which has been incurred in an accounting period
but for which no enforceable claim has become due in what period against the enterprises.
246.1ccrued revenue & 6evenue which has been earned is an earned is an accounting
period but in respect of which no enforceable claim has become due to in that period by the
enterprise.
24!.1ccrued $iabi$ity & 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.
24".Convention of /u$$ disc$osure & According to this convention, all accounting
statements should be honestly prepared and to that end full disclosure of all significant
information will be made.
24%.Convention of consistency & According to this convention it is essential that
accounting practices and methods remain unchanged from one year to another.
25(.*efine the ter pre$iinary e-penses & !'penditure relating to the formation of
an enterprise. -here include legal accounting and share issue e'penses incurred for
formation of the enterprise.
251.&eaning of Charge & charge means it is a obligation to secure an indebt ness. It may
be fi'ed charge and floating charge.
252.1ppropriation & It is application of profit towards 6eserves and ividends.
253.1bsorption costing & A method where by the cost is determine so as to include the
appropriate share of both variable and fi'ed costs.
254.&argina$ Cost & Barginal cost is the additional cost to produce an additional unit of
a product. It is also called variable cost.



255. 8hat are the e-?ordinary ites in the #A4 aCc & -he transaction which are not
related to the business is termed as e'5ordinary transactions or e'5ordinary items. !gg&5
profit or losses on the sale of fi'ed assets, interest received from other company
investments, profit or loss on foreign e'change, une'pected dividend received.
256 . Share preiu & -he e'cess of issue of price of shares over their face value. It will
be showed with the allotment entry in the (ournal, it will be ad(usted in the balance sheet
on the liabilities side under the head of reserves , surplus.
25!.1ccuu$ated *epreciation & -he total to date of the periodic depreciation charges
on depreciable assets.
25".0nvestent & !'penditure on assets held to earn interest, income, profit or other
benefits.
25%.Capita$ & #enerally refers to the amount invested in an enterprise by its owner. !'C
paid up share capital in corporate enterprise.
26(. Capita$ 8ork 0n #rogress & !'penditure on capital assets which are in the process
of construction as completion.

261. Convertib$e *ebenture & A debenture which gives the holder a right to conversion
wholly or partly in shares in accordance with term of issues.
262.,edeeab$e #reference Share & -he preference share that is repayable either after
a fi'ed /or2 determinable period /or2 at any time dividend by the management.

263. Cuu$ative preference shares & A class of preference shares entitled to payment
of cumulates dividends. 3reference shares are always deemed to be cumulative unless they
are e'pressly made non5cumulative preference shares.
264.*ebenture redeption reserve & A reserve created for the redemption of
debentures at a future date.
265. Cuu$ative 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. *ividend .+ua$i3ation reserve & A reserve created to maintain the rate of
dividend in future years.
26!. 2pening Stock : -he term Gopening stoc)7 means goods lying unsold with the
businessman in the beginning of the accounting year. -his is shown on the debit side of the
trading account.



26".C$osing Stock : -he term GClosing .toc)7 includes goods lying unsold with the
businessman at the end of the accounting year. -he amount of closing stoc) is shown on the
credit side of the trading account and as an asset in the balance sheet.
26%.:a$uation of c$osing stock : -he closing stoc) is valued on the basis of Cost or
Bar)et price whichever is less principle.
2!2. Contingency : A condition /or2 situation the ultimate out come of which gain or loss
will be )nown as determined only as the occurrence or non occurrence of one or more
uncertain future events.
2!3.Contingent 1sset : An asset the e'istence ownership or value of which may be
)nown or determined only on the occurrence or non occurrence of one more uncertain
future events.
2!4. Contingent $iabi$ity & An obligation to an e'isting condition or situation which may
arise in future depending on the occurrence of one or more uncertain future events.
2!5. *eficiency & the e'cess of liabilities over assets of an enterprise at a given date is
called deficiency.
2!6.*eficit & -he debit balance in the profit and loss a%c is called deficit.
2!!.Surp$us : Credit balance in the profit , loss statement after providing for proposed
appropriation , dividend , reserves.
2!".1ppropriation 1ssets & An account sometimes included as a separate section of the
profit and loss statement showing application of profits towards dividends, reserves.
2!%. Capita$ redeption reserve & A reserve created on redemption of the average
cost&5 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. Hhen weights are also applied in the
computation it is termed as weight average cost.
2"(./$oating Change & Assume change on some or all assets of an enterprise which are
not attached to specific assets and are given as security against debt.
2"1. *ifference bet=een /unds f$o= and Cash f$o= stateent :
A Cash flow statement is concerned only with the change in cash position while a
funds flow analysis is concerned with change in wor)ing capital position between
two balance sheet dates.
A cash flow statement is merely a record of cash receipts and disbursements. Hhile
studying the short5term solvency of a business one is interested not only in cash
balance but also in the assets which are easily convertible into cash.



9I9. *ifference Bet=een the /unds f$o= and 0ncoe stateent :
A funds flow statement deals with the financial resource re*uired for running the
business activities. It e'plains how were the funds obtained and how were they
used,
Hhereas an income statement discloses the results of the business activities,
i.e., how much has been earned and how it has been spent.
A funds flow statement matches the funds raised and funds applied during a
particular period. -he 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
e'penditure of that period, which are both of a revenue nature.
concepts of accounting :

11. Business entity concepts &5 According to this concept, the business is treated as a
separate entity distinct from its owners and others.
12.6oing concern concept &5 According to this concept, it is assumed that a business
has a reasonable e'pectation of continuing business at a profit for an indefinite
period of time.
13.&oney easureent concept &5 -his concept says that the accounting records
only those transactions which can be e'pressed in terms of money only.
14.Cost concept &5According to this concept, an asset is recorded in the boo)s at the
price paid to ac*uire it and that this cost is the basis for all subse*uent accounting
for the asset.
15.*ua$ aspect concept &5 In every transaction, there will be two aspects 1 the
receiving aspect and the giving aspectC both are recorded by debiting one accounts
and crediting another account. -his is called double entry.
16.1ccounting period concept &5 It means the final accounts must be prepared on a
periodic basis. Aormally accounting period adopted is one year, more than this
period reduces the utility of accounting data.
1!. ,ea$i3ation concept &5 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.



1".&ateria$ity concepts &5 It is a one of the accounting principle, as per only
important information will be ta)en, and un important information will be ignored
in the preparation of the financial statement.
1%.&atching concepts &5 -he cost or e'penses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
2(. 1ccrua$ concept :? -he profit arises only when there is an increase in
owners capital, which is a result of e'cess of revenue over e'penses and loss.