1

BASIC ASPECTS OF FINANCIAL ACCOUNTING

Definition of accounting: “the art of Meaning of journal: journal means

recording, classifying and summarizing in a chronological record of truncation
significant manner and in terms of money ,
transactions and events which are, in part at Meaning of ledger is a set of accounts all
least of a financial character and interpreting accounting of the business enterprise
the results there of” whether real, normal personal

Book keeping: It is mainly concerned with Posting: it means transferring the debit and
recoding of financial data related business credit items from the journal to their
operations in a significant and orderly respective accounting in the ledger.
manner.
Trial balance: A statement containing the
Branches of accounting various ledgers balance on a particular date.
a. Financial accounting
b. Management accounting Credit note: The customer when returns the
good get credit for the value of the goods
Concepts of accounting returned. A credit note is sent to him
Separate entity concept intimating that a/c has been credit with the
going concern concept value the goods returned.
Money measurement concept
Cost concept
Dual aspect concept Debit note: When the goods are returned to
accounting period concept the supplier, a debit note is sent to him
Periodic matching of costs and indicating that his a/c has been debited with
revenue concept the amounting mentioned in the debit note.
Realization concept
Contra entry: which accounting entry is
Conventions of Accounting recounting on both the debit and credit side
A .Conservatism B .Disclosure of the cash book is known as the contra
C .Consistency D .Materiality entry.

Systems of book keeping Petty cash book: Petty cash is maintained

1. Single entry system by business to record petty cash expenses
2. Double entry system of the business such as printing &
stationary, postage and cartage etc.
Systems of accounting
1. Cash system Promisory note: An instrument in writing
2. mercantile system containing an unconditional undertaking
signed by the maker, to pay certain sum of
Principles of accounting money only to or to the order of a certain
person or to the barer of the instrument.
Personal A/c
Debit the receiver. Cheque: A bill of exchange drawn on a
Credit the giver. specified banker and payable on demand.
Real A/c
Debit what comes in. Stale Cheque: A stale cheque means not
Credit what goes out. valid of cheque that means more than six
Nominal A/c months the cheque is not valid.
Debit all expenses and losses.
Credit all gains and incomes. Bank Reconciliation Statement: It is a
statement reconciling the balance as shown

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by the bank pass book and the balance as

shown by the cash book. Depletion: It implies removal of an available
but not replaceable source, Such as
Matching Concept: It requires proper extracting coal from a coal mine.
matching of expenses with the revenues.
Amortization: The process of writing of
Capital Income: An income which does not intangible assets is termed as amortization.
grow of pertain to the running of a business
proper Dilapidations: Damage done to a building
or other property during tenancy.
Revenue Income: The income which arises
out of and in the course of the regular Capital employed: Sum of total long term
business transaction of the concern. funds employed in the business. (I.e. Share
capital+ Reserves& Surplus+ Long term
Capital Exp.: An expenditure which has loans- (Non business assets+ fictitious
been incurred for the purpose of obtaining a assets)
long term advantage for the business.
Equity shares: Those share which are not
Revenue Exp.: An expenditure that incurred having pref. rights.
in the course of regular business transaction
of concern. Pref. shares: Those share which are having
pref. rights
Differed revenue Exp: An expenditure Pref. rights in respect of
which is incurred during an accounting fixed dividend.
period but is applicable further period also. Pref. rights to repayment of
E.g. Heavy advertisement. capital even at winding up.

Bad Debts: The amount lost from debtors to Leverage: A force applied at a particular
whom the goods were sold on credit. point to get the desired result.

Depreciation: Gradual and Permanent Operating leverage: the operating leverage

decrease in the value in of asset due to takes place when a changes in revenue
wear and tear, technological changes, laps greater changes in EBIT.
of time and accident.
Financial leverage: it is nothing but a
Fictitious asset: These are assets not process of using debt capital to increase the
represented by tangible possession or rate of return on equity.
property.
Combine leverage: it is used to measure of
Intangible asset: The assets which is not the total risk of the firm = operating risk +
having the physical appearance and having financial risk.
the real value.
Joint venture: A joint venture is an
Accrued income: Income has been earned association of two or more the person who
by the business during accounting year but combined for the execution of a specific
which has not yet been due and, therefore, transaction and divide the profit or loss their
has not been received. Of an agreed ratio.

Outstanding Income: Income which has Partnership: partnership is the relation b/w
become due during the accounting year but the persons who have agreed to share the
which has not so far been received by the profit of business carried on by all or any of
firm. them acting for all.

Suspense account: An account to which Factoring: It is an arrangement under which

the difference in the trail balance has been a firm receivers advances against the
put temporarily. receivables, from a financial institutions.

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requisite restrictions to make it a private

Capital reserve: The reserve which limited company.
transferred from the capital gains.
Characteristics of company:
General reserve: The reserve which is  Voluntary association
transferred from normal profits of the firm.  Separate legal entity
 Free transfer of shares
Free cash: The cash not for any specific  Limited liability
purpose free from any encumbrance like  Common seal
surplus.  Perpetual existence
Minority interest: It refers to the equity of Formation of company:
the minority shareholders in a subsidiary  Promotion
company.
 Incorporation
 Commencement of business
Capital receipts: Non-recurring receipts
from the owner of the business or lender of
Equity share capital: The total sum of
the money creating a liability to either of
equity shares is called Equity share capital.
them.
Authorized share capital: It is the
Revenue receipts: A recurring receipt
maximum amount of share capital which a
against sale of goods in the normal course
company can raise for the time being.
of business and which generally the result of
the trading activities.
Issued capital: It is the part of authorized
capital which has been allotted to the public
Company: A company is an association of
for the time being.
many persons who contribute money or
money’s worth to common stock and
Subscribed capital: It is the part of issued
employs it for a common purpose. The
capital which has been allotted to public.
company stock so contributed is denoted in
money and is the capital of company.
Called up capital: The portion of
subscribed capital which has been called up
Types of Company:
by the company.
1. Statutory companies
2. Government companies
Paid up capital: It is the portion of the
3. Foreign companies
called up capital against which payment has
4. Registered companies
been received.
I. Comp. limited by shares
II. Comp. limited by guarantee
Debentures: A certificate issued by a
III. Unlimited companies
company under its seal acknowledging a
IV. Private company
debt due by it to its holder.
V. Public company
Cash profit: A profit occurred from cash
Private company: A private Co. is which by
sales.
its AOA
 Restrict the right of the
Deemed public limited company: A
members to transfer of
private company is a subsidiary company to
shares
public company it satisfies the following
 Limited no of members(50) terms/conditions
 Prohibits any invitation to  Having minimum share capital 5
the public to subscribe for lakhs.
its shares or debentures.
 Accepting investment from public
 No restriction of the transferable of
Public company: The articles of
shares
association of which does not contain the
 No restriction of no. of members

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 Accepting deposits from the Functions of financial manager:

investors  Investment decision
 Dividend decision
Secret reserves: secrete reserves are the  Finance decision
existence of which does not appear on the  Cash management decisions
face of balance sheet. In such a situation,  Performance evolution
net asset position of the business is stronger  Market impact analysis
than the disclosed by the balance sheet.
The reserves are, Time value of money: Worth of a rupee
1. Excessive dep. of an asset, received today is different from the worth of
excessive over-valuation of a liability a rupee to be received in future.
2. Complete elimination of an asset, or
under valuation of an asset. Capital structure: The mix of sources from
where the long- term funds required in a
Provision: Any amount written off or business may be raised, in other words, it
retained by way of providing depreciation, refers to the proportion of debt, preference
renewals or diminutions in the value of asset capital and equity capital.
or retained by way of providing for any
known liability of which the amount cannot Optimum capital structure: Capital
be determined with substantial accuracy. structure is optimum when the firm has a
combination of equity and debt so that the
Reserve: The provision in excess of the wealth of the firm is maximum
amount considered necessary for the
purpose it was originally made is also Financial breakeven point: It denotes the
considered as reserve, level at which a firm’s EBIT is just sufficient
1. Provision is charge against profits while to cover interest and preference dividend.
reserves is an appropriation of profits
2. Creation of reserve increase proprietor’s Capital budgeting: It involves the process
fund while creation of provisions decrease of decision making with regard to investment
his funds in the business. in fixed assets or decision making with
regard to investment of money in long term
Reserve fund: Means such reserve against projects.
which clearly investment etc.
Payback period: Payback period
Undisclosed reserve: Sometimes a represents the time period required for
reserve is created but its identity is merged complete recovery of the initial investment in
with some other a/c or group of accounts so the project.
that the existence of the reserve is not
known such reserve is called an undisclosed ARR: Accounting or Average Rate of Return
reserve. means the average annual yield on the
project.
Finance management: It deals with
procurement of funds and their effective NPV: The net present value of an
utilization in business. investment proposal is defined as the sum of
the present values of all future cash inflows
Objectives of financial management: less the sum of the present values of all
1. Profit maximization: The finance cash outflows associated with the proposal.
manager has to make his decisions
in a manner so that the profits of the Profitability index: Where different
concern are maximized. investment proposal each involving different
2. Wealth maximization: The objective initial investments and cash inflows are to be
of a firm should be to maximize its compared.
value or wealth, or value of a firm is IRR: Internal rate of return is the rate at
represented by the market price of which the sum total of discontinued cash
its common stock. inflows equal to the discontinued cash out
flows.

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Over draft: Under this facility a fixed limit is

Treasury management: The efficient granted within which the borrower allowed to
management of liquidity and financial risk in overdraw from his account.
business.
Cash credit: It is an arrangement under
Concentration banking: It means identify which a customer is allowed an advance up
locations or places where customers are to certain limit against credit granted by
placed and open a local bank a/c in each of bank.
these locations and open local collection
center. Clean overdraft: It refer to an advance by
way of overdraft facility, but not back by any
Marketable securities: Surplus cash can tangible security.
be invested in short term instruments in
order to earn interest. Share capital: The sum of the nominal
value of shares of a company is called share
Ageing schedule: In an ageing schedule capital.
the receivables are classified according to
their age. Funds flow statement: It is the statement
deals with the financial resources for running
Maximum Permissible Bank Finance: It is business activities. It explains how the funds
the maximum amount that banks can lend a obtained and how they used.
borrower towards his working capital
requirements. Sources of funds:
 Internal sources: Funds from
Commercial paper: CP is a short term operations is the only internal
promissory note issued by a company, sources of funds and some
negotiable by endorsement and delivery, important points added to it they do
issued at a discount on face value as may not result in the outflow of funds
be determined by the issuing company. 1. Depreciation on fixed assets
2. Preliminary expenses or good
Bridge finance: It refers to the loans taken will written off, Loss on sale of
by the company normally from commercial fixed assets.
banks for a short period pending Deduct the following items as they do not
disbursement of loans sanctioned by the increase the funds;
financial institutions. Profit on sale of fixed assets
Profit on revaluation of fixed assets
Venture capital: It refers to the financing of  External sources:
high risk ventures promoted by new qualified 1. Funds from long term loans
entrepreneurs who require funds to give 2. Sale of fixed assets
shape to their ideas. 3. Funds from increase in share
capital
Debt securitization: It is a mode of
financing, where in securities are issued on Application of funds:
the basis of a package of assets (Called 1. Purchase of fixed assets
asset proof). 2. Payment of dividend
3. Payment of tax liability
Lease financing: Leasing is a contract 4. Payment of fixed liability
where one party (owner) purchases assets
and permits its views by another party ICD (Inter corporate deposits): Companies
(lessee) over a specific period. can borrow funds for a short period.
Trade credit: It represents credit granted by For example six months or less than six
suppliers of goods, in the normal course of months from any company which have
business. surplus liquidity, such deposits made by one
company in another company are called ICD

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Certificate of deposit: The CD is a

document of title similar to a fixed deposit Cash flow statement: It is a statement
receipt issued by banks there is no depicting change in cash position from one
prescribed interest rate on such CDs it is period to another.
based on the prevailing market conditions.
Source of cash:
Public deposits: It is very important source Internal sources
of short term and medium term finance .The (a) Depreciation
Company can accept PD from members of (b) Amortization
the public and shareholders. It has the (c) Loss on sale of fixed assets
maturity period of 6months to 3years. (d) Gains from sale of fixed assets
(e) Creation of reserves
Euro issues: The euro issue means that the External sources
issue is listed on a European stock (a) Issue of new shares
Exchange .The subscription can come from (b) Raising long term loans
any part of the world except India. (c) Short term borrowings
(d) Sales of fixed assets, investments.

GDR (Global depository receipts): A Application of cash:

depository receipt is basically a negotiable (a) Purchase of fixed assets
certificate. Dominated in us dollars that (b) Payment of long- term loans
represents a non-US company publicly (c) Decrease in deferred payment of
traded in local currency equity shares. liabilities
(d ) Payment of tax, dividend
ADR (American depository receipts): (e) Decrease in unsecured loans and
Depository receipt issued by a company in deposits
the USA is known as ADRs. Such receipts
are to be issued in accordance with the Budget: It is a detailed plan of operations
provisions stipulated by the securities for some specific future period. It is an
Exchange commission (SEC) of USA like estimate prepared in advance of the period it
SEBI in India. which it applies.

Commercial banks: commercial banks Budgetary control: It is the system of

extend foreign currency loans for management control and accounting in
international operations, just like rupee which all operations are forecasted and so
loans. The banks also provided overdraft. far as possible planned ahead, and the
actual result compared with the forecasted
Development banks: It offers long-term and planned ones.
and medium term loans including foreign
currency loans. Cash budget: It is a summary statement of
firm’s expected cash inflow and out flow
International agencies: International over a specific period.
agencies like the IFC, IBRD, ADB, IMFF etc.
provide indirect assistance for obtaining Master budget: A summary of budget made
foreign currency. for the purpose of purpose of presenting in
the one report that highlights of the budget.
Seed capital assistance: The seed capital
assistance scheme is desired by the IDBI for Fixed budget: It is a budget which is
professionally or technically qualified designed to remain unchanged irrespective
entrepreneurs and persons possessing of the level of activity actually attained.
relevant experience and skills and
entrepreneur traits. Zero based budgeting: It is a management
tool which provides a systematic method for
Unsecured loans: It constitutes a significant evaluating all operations and programs,
part of long–term finance available to an current of new allows for budget reductions
enterprise. and expansions in a rational manner and

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allows reallocation of source from low t high cost of indirect material, indirect labour and
priority programs. indirect expenses in the factory. This cost is
also known as works cost or production cost
Goodwill: The present value of firm’s or manufacturing cost.
anticipating excess earnings.
Cost of production: In office and
BRS: It is a statement of reconciling the administrative overheads are added to
balance as shown by the pass book and the factory cost, office cost is arrived at.
balance shown by cash book.
Total cost: Selling and distribution
Objectives of BRS: The objectives of overheads are added to total cost of
preparing such a statement is to know the production to get the total cost or cost of
causes of difference between the two sales.
balances and pass necessary corrections or
adjusting entries in the books of the firm. Cost unit: A unit quantity of product, service
or time in relation to which costs may be
Responsibilities of accounting: It is a ascertained or expressed.
system of control by delegating and locating
the responsibilities for costs. Methods of costing:
a. Job costing
Profit centre: A centre whose performance b. Contract costing
is measured in terms of both the expenses c. Process costing
incurred and revenue it earns. d. Operation costing
e. Operating costing
Cost centre: A location, person or item of f. Unit costing
equipment for which cost may be g. Batch costing
ascertained and used for the purpose of cost
control. Techniques of costing:
 Marginal costing
Cost: The amount of expenditure incurred  Direct costing
on to a given thing  Absorption costing
 Uniform costing
Cost accounting: It is thus concerned with
recording, classifying, and summarizing Standard costing: A system under which
costs for determination of cost of products or the cost of the product is determined in
services, planning, controlling and reducing advance on certain predetermined
such costs and furnishing of information to standards.
management for decision making.
Marginal costing: It is a technique of
Elements of costs: costing in which allocation of expenditure to
 Material production is restricted to those expenses
 Labour which arise as a result of production.
 Overheads
Derivative: The product whose value is
Components of total costs: derived from the value of one or more basic
a) Prime cost variables of underlying asset.
b) Factory cost
c) Cost of production Forwards: A forward contract is customized
d) Total cost contracts between two entities, settlement
takes place on a specific date in the future at
Prime cost: It consists of direct material, today’s pre agreed price.
direct labour and direct expenses. It is also
known as basic or first or flat cost. Futures: A future contract is an agreement
between two parties to buy or sell an asset
Factory cost: It comprises prime cost, in at a certain time in the future at a certain
addition factory overheads which include price.

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Options: An option gives the holder of the Capital market: It deals with the long term
right to do something. The option holder investment funds. It consist of two markets
option may exercise or not. 1. Primary market: Those companies
which are issuing new shares in the
Call option: A call option gives the holder market. It is also called new issue
the right but not the obligation to buy an market.
asset by a certain date for a certain price. 2. Secondary market: The market
where shares buying and selling. In
Put option: A put option gives the right but India secondary market is called
not obligation to sell an asset by a certain stock exchange.
date for a certain price.
Arbitrage: It means purchase and sale of
Option price: The price which the option securities in different markets in order to
buyer pays to the option seller. It is also profit from discrepancies. In other words
referred as the option premium. arbitrage is a way of reducing risk of loss
caused by price fluctuations of securities
Expiration date: The date which is held in a portfolio.
specified in the option contract is called
expiration date. Meaning of ratio: Ratios are relationships
expressed in mathematical terms between
European date: It is the option at exercised figures which are connected with each other
only on expiration date itself. in same manner.

Basis: Future price – spot price. Activity ratio: It is a measure of the level of
activity attained a period.
Cost of carry: The relation between future
prices and spot prices can be summarized in Mutual fund: A mutual fund is a pool of
terms of what is known as cost of carry. money, collected from investors, and is
invested according to certain objectives.
Initial margin: the amount must be
deposited in the margin a/c at the time of Characteristics of mutual funds:
first entered into future contract is known as  Ownership of MF is in the hands
initial margin. of the investors.
 MF managed by investment
Maintenance margin: This is somewhat professionals
lower than initial margin.  The value of portfolio is updated
every day
Mark to market: In future market, at the end
of each trading day, the margin a/c is Advantage of MF to investors:
adjusted to reflect the investors gain or loss a. Portfolio diversification.
depending upon the future selling price. b. Professional management.
c. Reduction in risk
Baskets: Basket options are options on d. Reduction of transaction costs
portfolio of underlying asset. e. Liquidity
f. Convenience and flexibility
Swaps: Swaps are private agreements
between two parties to exchange cash flows Net asset value: The value of one unit of
in the future according to a pre agreed investment is called as the net asset value.
formula.
Open-ended fund: open ended funds
Impact cost: It is measure of liquidity of means investors can buy and sell units of
market. It reflects the costs faced when fund, at NAV related prices at any time,
actually trading in index. directly from the fund.

Heading: Minimizing the risk.

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Close ended fund: Close ended funds Trustee: Trustee is responsible to the
means it is open for sale to investors for a investors in the MF and appoints the AMC
specific period, after which further sales are for managing the investment portfolio.
closed. Any further transaction for buying
the units or repurchasing them, happen, in AMC: Describes Asset Management
the secondary markets. Company, it is the business face of the MF,
as it manages all the affairs of the MF.
Dividend option: Investors, who choose a
dividend on their investments, will receive R & T Agents: The R&T agents are
dividends from the MF, as when such responsible for the investor serving
dividends are declared. functions, as they maintain the records of
investors in MF.
Growth option: Investors who do not
require periodic income distributions can be Custodians: Custodians are responsible for
choose the growth option. the securities held in the mutual fund’s
portfolio.
Equity funds; Equity funds are those that
invest predominantly in equity shares of Schemes take over: If an existing MF
company. scheme to arrive at the price.

Types of equity funds: Meaning of load: Load is a factor that is

 Simple equity funds applied to the NAV of a scheme to arrive at
 Primary market funds the price.
 Sectoral funds
 Index funds Market capitalization: Number of shares
issues multiplies with market price per
Sectoral funds: sect oral funds choose to share.
invest in one or more chosen sectors of the
equity markets. Price earnings ratio: The ratio between the
share price and the post tax earnings of
Index funds: The fund manager takes a company is called as price earnings ratio.
view on companies that are expected to
perform well, and invests in these Dividend yield: The dividend paid out by
companies. the company, is usually a percentage of the
face value of a share.
Debt funds: The debt funds are those that
are pre- dominantly invest in debt securities. Market risk: It refers to the risk which the
investor is exposed to as a result of a fall in
Liquid funds: The debt funds invest only in the interest rates.
instruments with maturities less than one
year. Re-investment risk: It is the risk which an
investor has to face as a result of a fall in the
Gilt funds: Gilt funds invest only in interest rates at the time of reinvesting the
securities that are issued by the GOVT. and interest income flows from the fixed income
therefore do not carry any credit risk. security.

Balance funds: Funds that invest both in Call risk: Call risk is associated with bonds
debt and equity markets are called balanced have an embedded call option in them. This
funds. option hives the issuer the right to call back
the bonds prior to maturity.
Sponsor: Sponsor is the promoter of the
MF and appoints trustees, custodians and Credit risk: Credit risk refers to the
the AMC with prior approval of SEBI. probability that a barrower could default on a
commitment to repay debt or band loans.

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Inflation risk: Inflation risk refers the Price earnings ratio:

change in the purchasing power of cash Market price of share X 100
flows resulting from the fixed income Earning per share
security.
Current ratio:
Liquid risk: It refers to the ease with which Current assets
bonds could be traded in the market. Current liabilities

Drawings: Drawings denotes the money Debt-equity ratio:

withdrawn by the proprietor from the Total long-term debt
business for his personal use. Share holders fund

Outstanding income: outstanding income Fixed assets ratio:

means income which has become due Fixed assets
during the accounting year but which has Long term funds
not so far been received by the firm.
Quick ratio:
Outstanding Expenses: The expenses Liquid assets
which have become due during the Current liabilities
accounting period for which the final
accounts have been prepared but have not Stock turnover ratio:
been paid. Cost of goods sold
Average stock
Closing stock: The term closing stock
means goods lying unsold with the Debtor’s turnover ratio:
businessman at the end of the accounting Credit sales
year. Average accounts receivable

Accrued income: Accrued income means Creditor’s turnover ratio:

income which has been earned by the Credit purchases
business during the accounting year but Average accounts Payable
which has not yet become due and,
therefore, has not been received. Working capital turnover ratio:
Net sales
Gross profit ratio: It indicates the efficiency Working capital
of the production/ trading operations.
Fixed asset turnover ratio:
Gross profit X 100 Net sales
Net sales Fixed assets

Net profit ratio: Net profit X100 Pay-out ratio:

Net sales Dividend per equity share X 100
EPS
Return on share holder’s fund:
Profit available for equity share holders X100 Overall profitability ratio: It is also called
Ave. equity shareholders fund as “Return on Investment” or “Return on
capital employed”. It indicates the
Earning per equity share: percentage of return on the total capital
Profit available for equity share holders employed in the business.
Number of equity shares
Operating profit X 100
Capital employed
Dividend yield ratio:
Dividend per share X 100 The term capital employed has been given
Market price per share different meanings.
1. Sum of all assets.

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2. Sum of long term funds. i.e. Share Budgeting: The term budgeting is used for
capital+ reserves& surplus+ long preparing budgets and other procedure for
term loans- (Non buss. Assets+ planning, coordinating and control of
Fictitious assets) business enterprise.
Operating profit means- Profit before
interest and tax. Capital: The term capital refers to the total
investment of company in money, tangible
Fixed interest cover ratio: and intangible assets. It is the total wealth of
Income before interest and tax company.
Interest charges
Capitalization: It is the sum of par value of
Fixed dividend cover ratio: the outstanding stocks and bonds.
Net profit after interest and tax
Preference dividend Over capitalization: When the business is
unable to earn fair rate on its outstanding
Debt service cover ratio: securities.
Net profit before interest and tax
Under capitalization: When the business is
Interest+ Principle payment installment
1- Tax rate able to earn fair rate or over rate on its
outstanding securities.
Proprietary ratio:
Shareholders funds Capital gearing: The term capital gearing
Total tangible assets refers to the relationship between equity and
long term debt.
Working capital: The funds available for
conducting day to day operations of an Cost of capital: It means the minimum rate
enterprise. Also represented by the excess of return expected by its investment.
of current assets over current liabilities.
Cash dividend: The payment of dividend in
Financial analysis: The process of cash.
interpreting the past, present and future
financial condition of a company. Accrued expenses: An expense which has
been incurred in an accounting period but
Income statement: An accounting for which no enforceable claim has become
statement which shows the level of due to in that period by the enterprises.
revenues, expenses and profit occurring for
a given accounting period. Accrued revenue: Revenue which has
been earned in an accounting period but in
Annual report: The report issued annually respect of which no enforceable claim has
by a company, to its shareholders, it become due, in that period by the
containing financial statements like trading enterprise.
and profit& loss a/c and balance sheet.
Accrued liability: A developing but not yet
Bankrupt: A statement in which a firm is enforceable claim by a person which
unable to meet its obligations and hence the accumulates with the passage of time or the
assets are surrendered to court for receipt of service or otherwise. It may rise
administration. from the purchase of services which at the
date of accounting have been partly
Lease: Lease is a contract between two performed and are not yet billable.
parties under the contract, the owner of the
asset gives the right to use the asset to the Preliminary expenses: Expenditure relating
user over an agreed period of the time for a to the formation of an enterprise. There
consideration. include legal accounting and share issuing
expenses incurred for formation of the
enterprise.

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Appropriation: It is application of profit Accumulated Depreciation: The total

towards reserves and dividends. depreciation charges up to date on
depreciable assets.
Absorption costing: A method where by
the cost is determined, so as to include the Investment: Expenditure on assets held to
appropriate share of both variable and fixed earn income, interest, profit and other
costs. benefits.

Marginal cost: The additional cost to Capital: The amount invested in an

produce an additional unit of a product. enterprise by its owner.

Share premium: The excess issue of share Deficit: The debit balance in the profit& loss
price over the fair value. It will be showed a/c.
with the allotment entry in the journal, it will
be adjusted in the balance sheet on the Surplus: Credit balance in the profit& loss
liability side under the head “Reserves& a/c after providing appropriations, dividend&
surplus”. reserve.

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Anil