Professional Documents
Culture Documents
By Srikanth Benoni
This booklet is designed to give the reader an overview of general book-
keeping practices and accounting/Finance terminology. As you read
through, please note that words or phrases underlined appear in a glossary
at the end of the booklet.
Apart from this this Booklet gives the overview of Accounting Concepts and
Conventions along with useful Accounting & Finance terms.
For suggestions and for free Accounting & Finance Dictionaries send me an
email to Srikanth_benonimv@yahoo.co.in or Srikanthbenonimv@
gmail.com.
Regards,
M V Srikanth Benoni
CONTENTS :
PART I
Few Accounting Basics 4 — 10
Glossary 11— 12
PART II
Accounting Concepts & Conventions 13 — 14
Accounting & Finance Terminology 15 — 29
CHAPTER
1
Accounting Basics :
Assets: Assets are tangible and intangible items of value which the business owns.
Examples of assets are:
Cash
Cars
Buildings
Machinery
Furniture
Stock / Inventory
Liabilities
Liabilities are those items which are owed by the business to bodies outside of the
business. Examples of liabilities are:
Loans to banks
Bank overdrafts
Owner’s Equity
The simplest way to understand the accounting equation is to understand what
makes up ‘owner’s equity’.
CHAPTER
1
Accounting Basics :
By rearranging the accounting equation you can see that Owner’s Equity is made up
of Assets and Liabilities.
The balance sheet shows a snapshot of the business’s net worth at a given point in
time. Below is a basic balance sheet. Have a look at how it displays the elements of
the accounting equation:
Balance Sheet
Assets $
Current Assets
Stock X
Debtors X
Bank X
Cash X
Fixed Assets
Buildings X
Vehicles X
Total Assets XX
Liabilities
Current Liabilities
Overdraft X
Creditors X
Long-term Liabilities
Bank Loan X
Total Liabilities XX
Total Assets less Total Liabilities ZZ
Owner’s Capital Y
Retained Earnings Y
Owner’s Equity ZZ
CHAPTER
All accounting transactions are made up of 2 entries in the accounts: a debit and a
credit.
For example, if you purchased a book, your value of books would increase, but your
value of cash would decrease by the same value and at the same time. This is dou-
ble entry bookkeeping.
Ledger Accounts
A ledger account is an item in either the Profit & Loss account (which we’ll discuss
shortly) or the balance sheet. A Ledger account is either a:
Asset
Liability
Equity
Income
Expense
The example of purchasing a book, mentioned above, can be shown in the form of
ledger “T” accounts as follows:
Cash 20
Alert :
4 Trial Balance :
A trial balance is a list of all of the ledger accounts of a business and the balance of
each. Debits are shown as positive numbers and credits as negative numbers.
The trial balance should therefore always equal zero.
Following on from the previous example, if we were to sell a CD for Rs.25 for cash
then the ledger accounts and trial balance would look like this:
Cash 25
CHAPTER
5
Profit and Loss account :
Whereas the balance sheet shows a snapshot at a point in time of the net worth of the
business, the profit and loss account shows the current financial year’s net operating
profits, broken down into various sales, cost of sales and expenses ledger accounts.
Sales
Profit and Loss account
Sales accounts show all sales made
Sales $
in the period, regardless of whether
Books X or not money has been received
CD’s X yet, and are shown as a credit in the
Profit and Loss accounts. Where
Magazines X
money has not yet been received,
Total Sales XX the debit is not to cash (as per the
CD example above), but to a Debt-
Cost of Sales
ors account (money owed from cus-
Purchases of Books X tomer account).
Purchases of CDs X
Cost of Sales
Purchases of Magazines X
Cost of Sales are expenses that
Total Cost of Sales XX can be directly attributed to sales
Gross Profit (Sales – Cost of Sales) YY items, such as purchases of stocks.
Expenses
Expenses
Advertising X
These are all other expenses (other
Marketing X than purchases of assets) which
Salaries & Wages X cannot be attributed directly to
sales items, such as rent, electricity
Electricity X
or advertising.
Total Expenses XX
Net Profit (Gross profit – Expenses) ZZ
CHAPTER
The reporting period is usually a 12 month period ending 31st March each year. At the
end of each financial year the profit and loss account balance is transferred to the
Retained Earnings account in the Balance Sheet (under Equity). A new profit and loss
account is started for the new financial year.
The conversion period is the month in which you transfer over to a new accounting
system. If you are transferring to a new accounting system at the beginning of a
financial year, the final balance in the profit and loss account would be transferred to
the new system (retained earnings account) along with all of the current balance sheet
account balances.
Other conversion issues
Only the balances of accounts will usually be transferred to the new system. Generally
a business would not re-input all of their individual transactions, such as invoices,
receipts, payments etc. This means that there are likely to be cut-over issues.
For example you may have written a cheque to a supplier but as at the cut-over date
the supplier has not cashed the cheque. Even though the bank would have been
credited and the supplier’s account would be correct, this cheque would be
outstanding, and the new accounting system would not have a record of
the outstanding cheque to enable a reconciliation of the bank account.
ACCOUNTING CONCEPTS:
business entity and the person who is investing money is that business are not the
same. So who is investing money must be treated as loan giver. If the person invests
Money Measurement Concept: Business records only those transactions, which are
expressed in money terms. They will not record transactions if only expressed in other
Cost Concept: Transactions in books are recorded at cost i.e. at the actual amount in-
Going Concern Concept: It is assumed that every business will be running for future
seeable years. That the business entity doesn’t have any intention to stop any business
activities in year future. If we feel that the business will not run or have to be stopped in
year foreseeable future. Them all the things have to be recorded at realisable values.
Dual Aspect Concept (Balance Sheet Concept): Every transaction has two activities
Accrual Concepts: Not only cash items are recorded in the books but also credit items
are to be recorded. Ex. Credit sales made are also even before cash is received.
CHAPTER
PART II
1 ACCOUNTING CONCEPTS & CONVENTIONS :
ACCOUNTING CONVENTIONS :
In order to bring the results of accounting perfectly in practice & to know and compare the
accounting practices of various business concerns, the following accounting conventions are
also useful.
1. Consistency: Business concern should follow uniform accounts for all years. This is use-
ful as and when the entrepreneur wants to compare the present year performance with that
of last year or with different firms. This does not mean that adjustments are not possible.
Any change or deviation in the practice & its impact should be clearly defined in advance.
For ex: if the a/c year is 1st April – 31st March in one year, that should not be changed to
1st April – 31st December in another year, without clearly defining its objective.
2. Discloser: The results of the business have to be disclosed from time to time to the
shareholders and creditors of the business, Govt., employees etc., However, it is the prime
responsibility of the Board of Directors of the company to disclose the business results in a
systematic and comprehensive way to all concerned. It is essential to disclose even, every
minute information, which has a clear-cut impact on assets, debts and profits of the busi-
ness.
3. Relevance: According to this convention, the firm should give relevant accounting infor-
mation as and when required documentary proof like invoices, vouchers, cash memos etc.,
4. Feasibility: The practice of comparing expenses incurred for the business transactions
with that of the income received during the year by the firm is called feasibility. According to
5. Conservation: According to this convention the accountant has to record the actual fi-
nancial position. While recording the accounts, the accountant should not give different pic-
ture of the business either by inflating or deflating, the value of transaction. In this conven-
tion, to be on the safe side, the accountant record all the anticipated losses, however ig-
nores the anticipated profits. For ex: While taking the value of the closing stock, the market
2
Accounting & Finance Terminology :
2
Accounting & Finance Terminology :
COMPANY Vs PARTNERSHIP:
1.Company comes in to existence only when it is registered under the companies act 1956.
2. Membership: Min. Private- 2 members Public - 7 members Max. 50 & no limit.
3. A company on its incorporation enjoys a separate legal entity.
In case of company members the liability is limited.
A firm is created by mutual agreement between partners. Registration is optional.
Min. firm: 2 members
Max. Banking – 10,
Others- 20.
A firm does not have any separate legal entity.
In case of firms the partners are jointly and severally liable.
2
Accounting & Finance Terminology :
DEPOSIT Vs DEBENTURE:
Deposits are amounts received by the company from the public.
Deposits are short term or middle term financial sources.
Deposits are unsecured.
It is easy to rise public deposits.
Debenture is a document which acknowledges debt which is issued by company.
Debentures are long term financial sources.
Debentures are generally secured.
Issue of debentures restricted by RBI.
SHARES Vs DEBENTURES:
Shares are a part of the capital of the company.
Shares holders are members or owners of the company.
When recommended by the board dividend could be declared to share holders.
Shares do not carry on any charge.
Shares have a restrictions issue at a discount.
Shareholders have voting rights.
Dividend is payable when profits are there.
No fixed dividend.
Debentures constitute a loan.
Debenture holders are creditors.
Fixed amount of interest in debentures paid before dividend declaration.
Debentures generally have a charge on the asset of the company.
There are no restrictions to issue at a discount.
They don’t have any voting right.
Interest is payable whether profits are there or not.
Rate of interest is fixed.
CHAPTER
2
Accounting & Finance Terminology :
SHARES Vs STOCKS:
Has a nominal value.
May be fully paid or partly paid.
Can be transferred in whole numbers and not in fractions.
Each and every share shall be of equal denomination.
Shares are identifies with distinctive numbers.
Can be issued directly to the public.
No nominal value.
Always fully paid.
Can be transferred in fractions also.
May be unequal amounts.
Don’t have any distinctive numbers.
Only fully paid up shares can be converted in to stock and can not be issued directly.
SHARE CERTIFICATE Vs SHARE WARRANT:
The holder is a registered member of the company.
The holder of a share certificate is a essentially a member.
For the issue of share certificate may not required of the central Govt.
All companies must issue share certificates.
Shares certification issued in partly paid or fully paid.
Share certificate is not negotiable.
The holder of a share certificate can present a petition for winding up.
The bearer of the share warrant is a not a registered member.
Can be a member if the articles so provided in AOA. (Articles Of Association).
If share warrant is issued, the central Govt. approval is must.
It is only issued by public companies.
Can be issued only fully paid shares.
It is negotiable.
Can not present a petition for winding up.
CAPITAL EXPENDITURE Vs REVENUE EXPENDITURE:
These assets are shown at the asset side of the balance sheet.
Expenditure for the purchase and installation of asset.
The benefits will flow or enjoyed by the organization for more than one year. Ex: Plant and
Machinery. Asset is purchased for utilization in business.
5. Depreciation is considered for the life of the asset.
Expenses are shown in the debit side of the P&L a/c.
Expenditure is used for maintenance of asset.
The benefits for the expenditure will flow or enjoyed by the organization for the current year
only. Ex: Salaries, printing and stationary, etc..
Goods are purchased with intention to sell.
CHAPTER
2
Accounting & Finance Terminology :
PARTNER Vs DIRECTOR:
1. Partner is one of the owners.
2. Partnership is Governed by partnership act 1932.
3. Partner has an unlimited liability.
Director is one of the members of the executive body.
Companies are governed by companies’ act 1956.
Director is generally not liable.
PROVISON Vs RESERVE:
Provision is a charge against the profits.
Is made for known liability or expenditure.
It is used for that purpose only.
It shown above the line.
Above the line means P&L a/c.
Reserve is an appropriation on profits.
It is made for future unknown liability.
It can be utilized for future purpose.
It shown below the line.
Below the line means P&L appropriation a/c.
2
Accounting & Finance Terminology :
Merchant Banking: “ An institution which covers a wide range of activities, such as man-
agement of customer services, portfolio management, credit syndication acceptance credit,
counseling, insurance…etc.,
Any person who is engaged in the business of issue management either by making arrange-
ments regarding selling buying or subscribing to the securities a manager, consultant, advi-
sor or rendering corporate advisory service in relation to such issue management.
Function: The area of activity of merchant banker is equity and equity related finance, they
deal with mainly funds raised through many market and capital market.
A merchant banker can claim a change 0.5% as the commission for the whole issue.
The direct sale of securities to investors is called private placement.
Merchant banks deal with funds raised through money market and capital market.
CHAPTER
2
Accounting & Finance Terminology :
Debtor: A person who owing money to the business firm is called debtor. In other
words a debtor one who received benefit from the firm and yet to repay it or purchased
goods on credit basis.
Creditor: A person who lent money or sell goods on credit to the firm. In other words
creditor means who gave benefit to the firm and yet to receive the equaling benefit from
the firm.
Accounting: The method of identifying, analyzing, and passing on the required financial
information to the decision-makers in the business.
Goods: Those with which the business concern does business. If a commodity is pro-
duced or purchased for the purpose of sale. It is called goods.
Capital: The amount invested by the 0wner for running the business is called capital.
This can be in the form of goods / cash.
Asset: Asset means conglomeration of benefits. Assets are which essential and benefi-
cial for running the business operations.
Contingent Liabilities: These are not the real liabilities. They are not actual liabilities
at present. They might become a liability in future on condition that the contemplated
even occurs. Ex: liability in respect of pending. This is not shown in balance sheet that
may be shown as not under it.
Drawings: cash, goods or services drawn by the owner / investors for self-consumption
are called drawings.
Expenditure: Account spent for acquiring goods / services for running business is known
as expenditure. It may be capital / revenue expenditure.
Capital Expenditure: Spent for the acquisition of fixed assets which have long life and
which are useful for the long-term benefit of the business.
CHAPTER
2
Accounting & Finance Terminology :
Revenue Expenditure: All expenditure incurred for running the business for the cur-
rent year is known as revenue expenditure. Ex: salaries, rent, interest etc.
Income: The amount earned by a firm out of its business transaction during a period is
called income.
Capital Gain: Is the excess amount received over the book value of the asset owned by
the firm ex: profit earned over sale of building.
Revenue Income: Revenue income is the income received during business transac-
tions or sale and purchase of goods or on services render to outsiders.
Journal: This is called the book of prime entry. The word journal is derived from the
Latin word Journ. That means a day. Hence, journal is also termed, as a daybook where
in the day to day transactions are recorded in chronological order.
Journal entry: The process of recording the business transactions in the journal is
known as journalizing.
Ledger: ledger means a set of accounts. This is also called a book of final entry. All the
transactions from the journal entries are recorded in the ledger by opening separate ac-
counts and their balances are found.
Cheque: Is an instrument, by means of which a depositor can order the bank to pay
certain sum of money only to the order of a or to the bearer of the instrument.
Invoice: Is a statement by the seller to the purchaser which contains the details of the
quantity of goods sold and price of the goods, terms and conditions of payment particu-
lars.
P&L a/c: Has to be prepared to ascertain the net profit or gross profit or net loss of the
firm for the accounting period. This is prepared based on Accounting period concept.
CHAPTER
2
Accounting & Finance Terminology :
Trail balance: It is a statement prepared by putting all debts one side and all credits
on the other side to check arithmetical accuracy of the ledger balance.
Prepaid expenditure: The amount paid for the expenditure. Relation to the future
years.
O/S expenses: Expenditure incurred but the payment for which is not yet paid and will
be shown in the balance sheet liability side.
Recurring expenses: Items, which are repeated. Ex: sales and wages.
Non- Recurring expenses: which are not regular and repeated. Ex: buying of fixed
assets, legal exp. Profit/ loss on sale of asset, insurance.
Promisory Note: Sec – 4 of the negotiable instrument act, 1881 defines promissory
note as “an instrument in writing containing an unconditional undertaking signed by the
maker to pay a certain sum of money only to the order of a certain person or to the
bearer of the instrument”.
Bill of exchange: Sec – 5 of the negotiable instrument act, 1881 defined a bill of ex-
change “as an instrument in writing containing an unconditional undertaking signed by
the maker the order of a certain person or to the bearer of the instrument”.
Parties:
Drawer: He is the person who draws the bill. He is usually creditor or seller.
Drawee: He is the person on whom the bill is drawn, He is also known as acceptor
as he accepts the bill.
Payee: He is the person who is entitled to receive payment.
Consignment: The dispatch of goods from one place to another place for the purpose
of the sake through an agent is called consignment. The person who sends goods is
called consignor, the person whom the goods sent is known as consignee.
CHAPTER
2
Accounting & Finance Terminology :
Joint venture: A joint venture is practically partnerships between two are more per-
sons confined to a particular venture or piece of business.
Bad debts: The businessmen may be tempted to sell goods on credit just to increase
sales volume. But owing to variety of reasons the debtor may not be in a position to re-
pay the debt. In this way, the debt or claim from debtors, which becomes unrealizable is
called a bad debt.
Depreciation: nothing but a decreasing in value of an asset caused due to constant use
of the asset, lapse of time and technical advancement. Depreciation charged based on
Going concern concept.
Operating Profit: The net profit arising from the normal operating of an enterprise
without taking accounting of extraneous transactions and expenses of a purely financial
nature.
The transaction, which is not related to the business, is termed as ex-ordinary transac-
tions or extra-ordinary items. It is as well as called exceptional items and prior period
items. Ex: Loss due to earthquake, Profit or losses on the sale of fixed assets, interest
received from other company investments, profit or loss on foreign exchange, unex-
pected dividend received.
2
Accounting & Finance Terminology :
Sweat Equity Shares: Equity shares issued by the company to employees or directors.
Such issue should be authorized by a special resolution passed by the company in gen-
eral meeting.
Unclaimed Dividend: Dividend, which has been declared by a corporate enterprise and
a warrant or a cheque in respect where has been dispatched but has not been En-
cashed by the shareholders connected.
Unpaid Dividend: Dividend, which has been declared by a corporate enterprise but has
not been paid. In respect where has not been dispatched with in the prescribed period.
Scrip Dividend: A scrip dividend promises to pay the shareholders at a future specific
date.
The objective of scrip dividend is to postpone the immediate payment of cash.
Stock Dividend: It means the issue of bonus shares to the existing shareholders.
CHAPTER
2
Accounting & Finance Terminology :
Cash Dividend: The payment of dividend in cash to shareholders is called cash divi-
dend. Payment of dividend in cash results in out flow of funds and reduces the com-
pany.
Annual Report: Annual Reports shows the financial position of the company and the
performance of the company during the last year. It contains B/S, P&L a/c and notes to
accounts.
Notes to Accounts: It gives the information about:
Fixed assets & dep., R&D expenditure, foreign exchange transactions, excise duty, in-
terim dividend/ Proposed dividend, investments, miscellaneous expenditure inventories.
Bankrupt: A statement in which affirm is unable to meet its obligations and hence, it is
assets are surrendered to court for administration.
Bridge Loan: Temporary finance provided to a project until long term arrangement are
need.
Differed revenue expenses: The benefit of the expenditure will be differed to the fu-
ture periods for which the expenditure is charged. Differed revenue expenditure known
as asset in balance sheet. Ex: Preliminary expenses.
Sinking Fund: A fund created for the repayment of a liability or for the replacement of
an asset.
Mortgage: A transfer of interest in specific Immovable property for the purpose of se-
curing a loan advanced or to be advanced. An existing on future debt or the perform-
ance of an engagement which may give rise to a percipiency liability.
Differed Revenue income: which is a income differed to the future periods. That
means it is not related to one period related to more than one period.
Called of share capital: That part of the subscribed share capital which shareholders
has been required to pay.
Capital Assets: Assets, including investments not held for sale, conversion or redeem-
able preference share of a corporate enterprise out of its profits which could other wise
gave been available for distribution as dividend.
Capital W.I.P.: Expenditure on capital assets, which are in the process of construction
as completion.
Capital receipts: Amount received on capital items. Amount received by selling fixed
assets. Show the balance sheet in liability side.
CHAPTER
2
Accounting & Finance Terminology :
Capital profits: capital profits are, profits realized on sale of fixed assets or on disposal
of investments. They may be distributed by a way of dividend.
Revenue Profits: revenue profits are, the profits earned by the company through its or-
dinary activities.
General Reserve: G.R. is a reserve, which is to meet any future unknown liability. It
can be utilized as dividend.
Capital Reserve: profits in the nature of capital or profits in the form of capital nature
ex: share premium, share forfeiture.
Reserve Capital: reserve capital is called up only at the time of liquidation. If assets
held are not sufficient to meat the liabilities.
Subsidiary company: A company, which is selling more than 51% of shares to another
company, is called subsidiary company.
Holding company: A company, which is buying more than 51% of shares from another
company, is called holding company.
A Company shall be deemed to be a subsidiary of another company.
If that another company,
Controls the composition of its board of directors.
Holds more than 50% of the voting power or paid up capital in the other company.
Is the subsidiary of any other company, which is the subsidiary of holding company.
Minority Interest: In a subsidiary company the majority share holding is held by hold-
ing company (say suppose 80% or so, the remaining 20% is held by sum other people
who are little interested in the company. This little interest is called as minority inter-
est). These people are called as minority interest shareholders.
BOOK KEEPING
Means the method of recording the business transactions in an order for providing infor-
mation that may be required to the business in future.
ACCOUNTING
Means recorded information is to be summarized, analyzed and submitted in the form of
financial results.
CHAPTER
2
Accounting & Finance Terminology :
Government Company: A Govt. co. is a company is a company in which not less than
51% of the paid up share capital of the company is held by 1.central Govt., 2. State
Govt., 3. Partly by the central govt. and partly by one or more.
Prime Cost: The cost of direct materials, direct wages and other direct production ex-
penses.
Marginal Cost: M.C. is the additional cost to produce an additional unit of a product.
Marginal Costing: It also be defined as the aggregate of variable costs or prime cost +
variable overheads.
Standard Costing: The technique of using standard costs for the purpose of cost con-
trol is known as standard costing.
Share Premium: The excess of issue of price of shares over their face value. It will be
showed with allotment entry in the journal. It will be adjusted in the balance sheet on
the liabilities side under the head of reserves and surpluses.
Capitalization: Capitalization is a quantitative aspect of the financial planning’s of an
enterprise. It is refers to the total amount of securities issued by a company.
Capital Structure: It is refers to the kind of securities and the proportionate amounts
or the term capital structure is used to represent the proportionate relationship between
debt and equity. Equity includes paid up share capital, share premium, reserves and
surplus (retained earnings).
CHAPTER
2
Accounting & Finance Terminology :
Financial Structure: It means the entire liabilities side of the balance sheet. It refers
to all the financial resources marshaled by the firm short as well as ling term and all
forms of debt as well as equity.
Capital Gearing: The term capital gearing refers to the relationship between equity
and long term debt.
Cost of Capital: It means the minimum rate of return expected by its investment.
Bonus Shares: Bonus issue amounts to reduction in the amount of accumulated profits
and reserves.
The residual reserves after the proposed capitalization should be at least 40% of the
paid up capital of the company.
The bonus issue is permitted to be made out of free reserves and premium collected in
cash.
The notice to accept right shares should not be less than 15 days.
Right is issue is also known as pre- emptive right.
Bonus issue is made to make the nominal value and the market value of the share of
the company comparable.
Foreign Exchange Rate: The price of one currency expressed in terms of other.
Accrual: An Expense that has been incurred but not yet paid.