ACCOUNTING : The systematic recording, reporting, and analysis of financial transactions of

a business. The person in charge of accounting is known as an accountant, and this individual is
typically required to follow a set of rules and regulations, such as the Generally Accepted
Accounting Principles. Accounting allows a company to analyze the financial performance of the
business, and look at statistics such as net profit.

ACCOUNTING CONCEPTS:

To ensure uniformity in preparation of accounts across entities, the following concepts are
applied
when recording accounting transactions:
1)Business Entity Concept: The business for which accounts are maintained is treated as an
entity distinct from its owners and managers.
2)Money Measurement Concept: All transactions affecting the business are stated in money
terms and recorded in the Books of Account.
3)Dual Aspect Concept: Every transaction has two aspects – a ‘debit’ and a ‘credit’ – and the
sumof all debits will equal the sum of all credits.For example, when an asset is acquired, one of
thefollowing events will also take place:
•another asset is forgone
•a liability (obligation to pay) is undertaken
•a profit has been earned
4)Cost Concept: Transactions are recorded at the actual cost.
5)Going Concern Concept: At the time of recording the transactions, it is assumed that the
entity
will continue to remain in business for as long as can be foreseen.
6)Accrual Concept: Income is recorded when goods are supplied or a service is rendered,
eventhough the money may be received later; expenditure is recorded when goods are procured
or aservice is availed, even though the money may be paid later.
7)Realisation Concept: Transactions are recorded only when they occur and not in anticipation
of their occurrence.
8)Matching Concept: Income and expenses for a period are correlated to ensure that the
accounts project an accurate picture.
Therefore:
• when an income is recorded, all expenses incurred to earn that income must be recorded.
• Related income and expenditure must be recorded during the same reporting period.

Subsidiary Books
Generally, a set of subsidiary books is also maintained.Subsidiary books are registers in
whichfrequently occurring transactions are recorded, such as the Purchase Register, Sales
Register and PettyCash Book.The totals of transactions recorded in the subsidiary books are
periodically posted to theprincipal books.
Voucher:
Each accounting entry has an underlying document – called ‘Voucher’ in accounting
terminology – insupport of its validity.The term ‘Books of Account’ generally includes the
primary and subsidiarybooks, as well as the vouchers.

ACCOUNTING TERMS:

Accounting - process of identifying, measuring, and reporting financial information of an entity

Accounting Equation - assets = liabilities + equity

Accounts Payable - money owed to creditors, vendors, etc.

Accounts Receivable - money owed to a business, i.e.: credit sales

Accrual Accounting - a method in which income is recorded when it is earned and expenses are
recorded when they are incurred

Asset - property with a cash value that is owned by a business or individual

Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity

Bookkeeping - recording financial information

Cash-Basis Accounting - a method in which income and expenses are recorded when they are
paid.

Chart of Accounts - a listing of a company's accounts and their corresponding numbers

Cost Accounting - a type of accounting that focuses on recording, defining, and reporting costs
associated with specific operating functions

Credit - an account entry with a negative value for assets, and positive value for liabilities and
equity.

Debit - an account entry with a positive value for assets, and negative value for liabilities and
equity.

Depreciation - recognizing the decrease in the value of an asset due to age and use
Double-Entry Bookkeeping - system of accounting in which every transaction has a
corresponding positive and negative entry (debits and credits)

Equity - money owed to the owner or owners of a company, also known as "owner's equity"

Financial Accounting - accounting focused on reporting an entity's activities to an external

party; ie: shareholders

Financial Statement - a record containing the balance sheet and the income statement.

Fixed Asset - long-term tangible property; building, land, computers, etc.

General Ledger - a record of all financial transactions within an entity

Income Statement - a summary of income and expenses

Job Costing - system of tracking costs associated with a job or project (labor, equipment, etc)
and comparing with forecasted costs

Journal - a record where transactions are recorded, also known as an "account"

Liability - money owed to creditors, vendors, etc

Liquid Asset - cash or other property that can be easily converted to cash

Loan - money borrowed from a lender and usually repaid with interest

Net Income - money remaining after all expenses and taxes have been paid

Non-operating Income - income generated from non-recurring transactions; ie: sale of an old
building

Note - a written agreement to repay borrowed money; sometimes used in place of "loan"

Operating Income - income generated from regular business operations

Payroll - a list of employees and their wages

Profit - see "net income"

Profit/Loss Statement - see "income statement"

Revenue - total income before expenses.

Single-Entry Bookkeeping - system of accounting in which transactions are entered into one
account
Labor hour rate: a method of absorption where the costs of a cost centre are shared out amongst
products on the basis of the number of hours of direct labor used on each product.

Leverage: another word for gearing.

LIFO: Last in first out – a valuation method for fungible items where the newest items are
assumed to be used first. Means stocks will be valued at old prices. Not used in certain
jurisdictions such as the U.K for tax reasons.

Limiting or key factor: a factor of production which is in limited supply and therefore
constrains output.

Liquidation: the procedure whereby a company is wound up, its assets realized and the proceeds
divided up amongst the creditors and shareholders.

Liquidity: the ease with which funds can be raised by the sale of assets.

Liquidity ratios: ratios which purport to indicate the liquidity of a business. They include the
current ratio and the acid test ratio.

Listed companies: companies whose shares are traded on the stock exchange.

Machine hour rate: a method of absorption of the costs of a cost center where the costs are
shared out among the products which use the centre in proportion to the use of machine hours by
the relevant products.

Management accounting: the provision and interpretation of information which assists

management in planning, controlling, decision making, and appraising performance.

Management by exception: control and management of costs and revenues by concentrating on

those instances where significant variances by actual from budgets have occurred.

Manufacturing accounts: financial statements which measure and demonstrate the total costs of
manufacturing in a period. They are followed by Trading and Profit and Loss (P&L) Accounts.

Marginal costing: a system of cost analysis which distinguishes fixed costs from variable costs.

Marginal cost: the additional cost incurred by the production of one extra unit.

Margin of safety: the excess of budgeted activity over breakeven activity. Usually expressed as
a percentage of budgeted activity.

Mark-up: gross profit expressed as a percentage of cost of goods sold.

Matching convention: the idea that revenues and costs are accrued, matched with one another as
far as possible so far as their relationship can be established or justifiably assumed, and dealt
with in the Profit and Loss (P&L) Account of the period in which they relate. An example is the
matching of sales of a product with the development costs of that product. The appropriate
periods would be when the sales occur.

Master budgets: the overall budgets of an enterprise comprising cash budget, forecast Profit and
Loss (P&L) Account and forecast Balance Sheet (BS). They are made up from subsidiary
budgets.

Materiality: the accounting convention that recognizes that accounting is a summarizing

process. Some items and transactions are large (i.e. material) enough to merit separate disclosure
rather than inclusion with others in a lump sum. Examples are an exceptionally large bad debt or
an exceptionally large loss on sale of a fixed asset.

Minority interest: the interests in the assets of a Group relating to shares in group companies
not held by the holding company or other members of the group.

Modified accounts: financial statements which are shortened versions of full accounts. Small
and medium sized companies can file these with the Registrar of Companies instead of full
accounts.

Money measurement: the convention that requires that all assets, liabilities, revenues and
expenses shall be expressed in money terms.

Net: usually means after deductions. For example net current assets current assets less current
liabilities and net cash flow means cash inflows less cash outflows. Contrast gross.

Net book value: the valuation on the Balance Sheet of an asset. Also known as the carrying
value or written down value.

Net present value: the value obtained by discounting all cash inflows and outflows attributable
to a proposed capital investment project by a selected discount rate.

Net realizable value: the actual or estimated selling price of an asset less all further costs to
completion (e.g. Cost of a repair if it needs to be repaired before sale) and all costs to be incurred
before and on sale (e.g. commission).

NIFO: Next in first out – a pricing policy where costs are collected on the basis that the cost of
materials and components is the next input price.

Nominal value: the face value of a share or debenture as stated in the official documents. Will
not usually be the same as the issue price which may be at a premium and which will almost
never correspond to actual value.

Objectivity: the convention of using reliable and verifiable facts (e.g. the input cost of an asset)
rather than estimates of ‘value’ even if the latter is more realistic.
Operating cycle: the period of time it takes a firm to buy inputs, make or market a product and
sell to and collect the cash from a customer.

Opportunity cost: the value of a benefit sacrificed in favor of an alternative course of action.

Ordinary shares: the equity capital of a company.

Outsourcing: the use of services (such as administration or computing) from separate outside
firms instead of using the enterprise’s own employees.

Overheads: Indirect cost.

Overtrading: a paradoxical situation when a company does so much business that stocks and
debtors rise leading to working capital and liquidity difficulties.

Par value: the nominal sum imprinted on a share certificate and which spears on the Balance
Sheet (BS) of a company as share capital. It has no significance as a value.

Payback: the number of years which will elapse before the total incoming cash receipts of a
proposed project are forecast to exceed the initial outlays.

Periodicity: the convention that financial statements are produced at regular intervals usually at
least annually.

Preference shares: shares in which holders are entitled to a fixed rate of dividend (if one is
declared) in priority to the ordinary shareholders in a winding up situation.

Planning variance: a variance arising because the budgeted cost is now seen as out of date.
Examples are wage or price rises.

Prepayments: expenditure already made on goods or services but where the benefit will be felt
after the Balance Sheet (BS) date. Examples are rent or rates or insurances paid in advance.

Price earnings ratio: an investor ratio calculated as – share / earnings per share.

Prime cost: the direct costs of production.

Private company: any company that is not a public company.

Profitability index: in investment appraisal, the net present value of cash inflows / the initial out
lays.

Profit and Loss (P&L) Account: a financial statement which measures and reports the profit
earned over a period of time.

Pro Rata: in proportion to.

Prospectus: an official document being in advertisement offering shares for sale to the public.

Provision: a charge in the Profit and Loss (P&L) Account of a business for an expense which
arose in the past but which will only give rise to a payment in the future. To be a provision the
amount payable must be uncertain as to amount or as to payability or both. An example is
possible damages awardable by a court in a future action over a past incident (e.g. a libel).

Prudence (or conservatism): the convention whereby revenue and profits are not anticipated,
but provision is made for all known liabilities (expenses and losses) whether the amount of these
is known with certainty or is a best estimate. Essentially future profit, wait until it happens –
future loss, count it now.

Quick ratio: also known as acid test ratio, current assets (except stock) / current liabilities.

Quoted company: also known as a listed company, a company whose shares are traded on the
stock exchange.

Realizable value: the amount that an asset can be sold for.

Realization: to sell an asset and hence turn it into cash.

Realization convention: the concept that a profit is accounted (or when a good is sold and not
when the cash is received.

Receiver: an insolvency practitioner who is appointed by a debenture holder with a fixed or

floating charge when a company defaults.

Redemption: repayment of shares, debentures or loans.

Redemption yield: the yield given by an investment expressed as a percentage and taking into
account both income and capital gain or loss.

Reducing balance: a method of depreciation whereby the asset is expensed to the Profit and
Loss (P&L) Account over its useful life by applying a fixed percentage to the written down
value.

Relevant costs: costs that will only be incurred if a proposed course of action is actually taken.
The only ones relevant to an actual decision.

Relevant range: the range of activity which is likely. Within it variable costs are expected to be
linearly variable with output and fixed costs are expected to be unchanged.

Reporting: the process whereby a company or other institution seeks to inform shareholders and
other interested parties of the results and position of the entity by means of financial statements.
Reserves: a technical term indicating that a company has total assets which exceed in amount the
sum of liabilities and share capital. This excess arises from retained profits or from revaluations
of assets.

Resource accounting and budgeting: the use of normal accruals accounting and Balance Sheets
in federal / government departments and agencies.

Retained profits: also known as retentions, the excess of profits over dividends.

Return on capital employed: a profitability ratio being income expressed as a percentage of the
capital which produced the income.

Return on sales: the ratio of profit to sales expressed as a percentage.

Returns: the income flowing from the ownership of assets. May include capital gains.

Revenue: amounts charged to customers for goods or services rendered.

Revenue expenditure: expenditure that benefits only the current period and which will therefore
be charged in the Profit and Loss (P&L) Account.

Rights issue: an invitation to existing shareholders to subscribe cash for new shares in the
company in proportion to their holdings.

Salvage value: also known as residual value, the amount estimated to be recoverable from the
sale of a fixed asset at the end of its useful life.

Secured liabilities: liabilities secured by a fixed or floating charge or by other operation of law
such as hire purchase commitments.

Securities: financial assets such as shares, debentures and loan stocks.

Segmental reporting: the practice of breaking down turnover, profits and capital employed into
sections to show the separate contributions of each to the overall picture. Segments can be
distinct products, geographical areas, or classes of customers, etc.
COMMODITY : A physical substance, such as food, grains, and metals, which is
interchangeable with another product of the same type, and which investors buy or sell, usually
through futures contracts. The price of the commodity is subject to supply and demand.

DEBENTURE : A Debenture is a long-term Debt Instrument issued by governments and big

institutions for the purpose of raising funds. Debenture is regarded as an unsecured
investment because there are no pledges (guarantee) or liens available on particular
assets. One example of debenture is an unsecured bond

Debentures are categorized into the following types :

• Convertible Debentures: This is a debenture which can be converted into some other
type of securities (for example stocks).
• Corporate Debentures: Corporate Debentures are Debentures issued by companies and
they are insecure in nature.
• Bank Debentures: This type of Debentures is issued by banks.
• Government Debentures: These include Treasury bond (T-Bond) and Treasury bill (T-
Bill) issued by the government. They are usually regarded as risk-free investments.
• Subordinated Debentures: This is a particular type of Debenture, which ranks below
regular Debentures, senior debt, and in some instances below specific general creditors.
• Corporation Debentures: Corporation Debentures are issued by various corporations.
• Exchangeable Debentures: They are like Convertible Debentures, but this Debenture
can only be converted to the common stock of a subsidiary company or affiliated
company of the Debenture issuer.

PORTFOLIO :The various financial assets and securities held by an individual or institution are
referred to collectively as the portfolio.

STOCK : An instrument that signifies an ownership position (called equity) in a corporation,

and represents a claim on its proportional share in the corporation's assets and profits.

EQUITY : Ownership interest in a corporation in the form of common stock or preferred stock.
It also refers to total assets minus total liabilities, here also called shareholder's equity or net
worth or book value.

BOND : A debt instrument issued for a period of more than one year with the purpose of raising
capital by borrowing. The Federal government, states, cities, corporations, and many other types
of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest
(coupons) on a specified date (maturity).
 TYPES OF BONDS:

• Government Bonds :
In general, fixed-income securities are classified according to the length of time before
maturity. These are the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.

• Municipal Bonds
Municipal bonds, known as "munis", are the next progression in terms of risk. Cities
don't go bankrupt that often, but it can happen. The major advantage to munis is that the
returns are free from federal tax.

• Corporate Bonds
A company can issue bonds just as it can issue stock. Large corporations have a lot of
flexibility as to how much debt they can issue: the limit is whatever the market will bear.
Generally, a short-term corporate bond is less than five years; intermediate is five to 12
years, and long term is over 12 years. Other variations on corporate bonds include
convertible bonds, which the holder can convert into stock, and callable bonds, which
allow the company to redeem an issue prior to maturity.

• Zero-Coupon Bonds
This is a type of bond that makes no coupon payments but instead is issued at a
considerable discount to par value. For example, let's say a zero-coupon bond with a
$1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today
for a bond that will be worth $1,000 in 10 years.

DEBT : An amount owed to a person or organization for funds borrowed. Debt can be
represented by a loan note, bond, mortgage or other form stating repayment terms and, if
applicable, interest requirements. These different forms all imply intent to pay back an amount
owed by a specific date, which is set forth in the repayment terms.