What is 'Earnest Money'

Earnest money is a deposit made to a seller showing the buyer's good faith in a
transaction. Often used in real estate transactions, earnest money allows the
buyer additional time when seeking financing. Earnest money is typically held
jointly by the seller and buyer in a trust or escrow account.

Definition and Explanation:

The account, through which annual net profit or loss of a business is ascertained,
is called profit and loss account. Gross profit or loss of a business is
ascertained through trading account and net profit is determined by deducting all
indirect expenses (business operating expenses) from the gross profit through
profit and loss account. Thus profit and loss account starts with the result
provided by trading account.
The particulars required for the preparation of profit and loss account are
available from the trial balance. Only indirect expenses and indirect revenues are
considered in it. This account starts from the result of trading account (gross
profit or gross loss). Gross profit is shown on the credit side of the profit and loss
account and gross loss is shown on the debit side of this account. All indirect
expenses are transferred on the debit side of this account and all indirect
revenues on credit side. If the total of the credit side exceeds the debit side, the
result is "net profit" and if the total of the debit side exceeds the total of the
credit side, the result is net loss. As the net profit or net loss of a certain
accounting period is determined through profit and loss account, so its heading
is:

Features of Profit and Loss Account:

1. This account is prepared on the last day of an account year in order to
determine the net result of the business.
2. It is second stage of the final accounts.
3. Only indirect expenses and indirect revenues are shown in this account.
4. It starts with the closing balance of the trading account i.e. gross profit or
gross loss.
5. All items of revenue concerning current year - whether received in cash or
not - and all items of expenses - whether paid in cash or not - are
considered in this account. But no item relating to past or next year is
included in it.

Balance sheet is a list of the accounts having debit balance or credit balance in
the ledger. On one side it shows the accounts that have a debit balance and on
the other side the accounts that have a credit balance. The purpose of a balance

sheet is to show a true and fair financial position of a business at a particular

date. Every business prepares a balance sheet at the end of the account year. A
balance sheet may be defined as:
1. "It is a statement of assets, liabilities and owner's equity (capital) on a
particular date".
2. "It is a statement of what a business concern owns and what it owes on a
particular date". What is owns are called assets and what it owes are
called liabilities.
3. "It is a statement which discloses total assets, total liabilities and total
capital (owner's equity) of a concern on a particular date".
4. "It is a statement where all the ledger account balances which remain
open after the preparation of trading and profit and loss account, find
place".
Balance sheet is so called because it is prepared with the closing balance of
ledger accounts at the end of the year. It has two sides - assets side or left hand
side and liabilities side or right hand side. The accounts have a debit balance are
shown on the asset side and those have a credit balance are shown on the
liabilities side and the total of the two sides will agree.
Assets means all the things and properties under the ownership of the business
i.e. building, plant, furniture, machinery, stock, cash etc. Assets also include
anything against which money or service will be received i.e. creditors accrued
income, prepaid expenses etc.
Liabilities mean our dues to others or anything against which we are to pay
money or render service, i.e. creditors, outstanding expenses, amount payable to
the owner of the business (capital) etc.
Asset side of the balance sheet indicates the different types of assets owned by a
concern, while liabilities side discloses the various sources through which funds
have been obtained in order to acquire those assets. Balance sheet reveals the
financial position of the firm on a particular date at a point of time, so it is also
called "position statement". It is prepared on the last day of the accounting
year and discloses concern for the whole year cannot be determined through the
balance sheet because financial position is ever changing. The is why the heading
of the balance sheet is given as under:

Features of Balance Sheet:

Balance sheet has the following features:

1. It is the last stage of final accounts

2. It is prepared on the last day of an accounting year.
3. It is not an account under the double entry system - it is a
statement only.

4. It has two sides - left hand side known as asset side and right
hand side known as liabilities side.
5. The total of both sides are always equal.
6. The balances of all asset accounts and liability accounts are
shown in it. No expense accounts and revenue accounts are
shown here.
7. It discloses the financial position and solvency of the business.
8. It is prepared after the preparation of trading and profit and
loss account because the net profit or net loss of a concern is
included in it through capital account.
LEDGER
Collection of an entire group of similar accounts in double-entry bookkeeping. Also called
book of final entry, a ledger records classified and summarized financial information from
journals (the 'books of first entry') as debits and credits, and shows their current
balances. In manual accounting systems, a ledger is usually a loose-leaf binder with a
separate page for each ledger account. In computerized systems, it consists of interlinked
digital files, but follows the same accounting principles as the manual system.

INDEMNITY BOND
An indemnity bond is a bond that is intended to reimburse the holder for any actual or
claimed loss caused by the issuers conduct or another persons conduct. An indemnity
bond acts as coverage for loss of an obligee when a principal fails to perform according to
the standards agreed upon between the obligee and the principal. During the time of
foreclosure, if the house is sold to pay off the loan and there is negative equity, then the
indemnity bond pays the difference

QUANTUM MERUIT
Latin for "as much as he deserved," the actual value of services performed. Quantum meruit
determines the amount to be paid for services when no contract exists or when there is doubt
as to the amount due for the work performed but done under circumstances when payment
could be expected. This may include a physician's emergency aid, legal work when there was
no contract, or evaluating the amount due when outside forces cause a job to be terminated
unexpectedly. If a person sues for payment for services in such circumstances the judge or
jury will calculate the amount due based on time and usual rate of pay or the customary
charge, based on quantum meruit by implying a contract existed.

Depreciation means the reduction in the value of an asset or the

reduction in the utility of an asset due to natural wear and tear
obsolescence, time, or other similar causes
Objectives:
To present through and fair value of asset
To ascertain cost of production
To find useful life of asset
2 methods:
Straight-line method (fixed amount is deducted every year)
Reducing balances method