Revenue:

Revenue is the value of out put supplied to customers

Gross inflow of assets or the gross decrease in liabilities
Operating revenue:
Arising from the main operations or business (sale of products manufactured by a company)
Non-operating revenue:
Indirect to the main operations of the firm (sale of an old equipment similarly dividend and
interest from temporary investments)
Expenditure:
The cost of earning revenue. When assets or consumed or liabilities are increased.
Operating expenses:
Relating to the main operations (manufacturing expenses)
Non-operating expenses:
Which are indirect to the main operations (legal expenses)
Capital expenditure:
Money spent to acquire physical assets, which are buildings, machinery, and land.
Company:
Is a voluntary and autonomous association of certain persons which capital divided into
numerous transferable shares formed to carry out a particular purpose. Company formed and
registered under the company’s act 1956.
Kinds of companies:
Charted companies: East India company
Statutory companies: RBI, IFC
Registered companies: Incorporated under company’s act 1956.
Difference between Private limited company and Public limited company:
1. Minimum number of its members Private: (2), Public (7)
2. Maximum number of its members Private: (50), Public: unlimited
3. Issue of prospects: a private company cannot invite public to subscribe to its shares or
debentures by issue of prospects. Public company must issue the prospects.
4. Transfer of shares: restrict to private company, freely transferable to public company.
5. Number of Directors: Private (2), Public (5)
6. Use of the word Limited
7. Restriction regarding managerial remuneration, public limited company not more
than 11% of the net profit.
8. Legal formalities
9. Commencement of business
Equity shares:
Represent the ownership position in a company; equity shareholders will get dividend and
repayment of capital after meeting the claims of preference shareholders.
Equity shareholders have the voting right.
Preference shares:
Preference shareholders will get dividend and repayment of capital in the winding up of the
company over the equity shareholders
Types:
Cumulative preference shares, Non-cumulative preference shares
Redeemable preference shares (usually non-redeemable)
Participating and non-participating preference shares (on surplus profits)

1
Debentures:
Acknowledgement of debt, certificate issued by a company under its seal as an evidence of a
debt due from the company
Types:
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
Share premium:
Value greater than its face value
Bank account Dr
To share application account
(Being application money along with premium received)
Share application account Dr
To share capital account
To share premium account
(Share application money transferred to share capital account)
Share allotment account Dr
To share capital account
To share premium account
(The allotment money and share premium money due on shares)
Bank account Dr
To share allotment account
(Share allotment money received)
Share discount:
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To share capital account
Primary market:
Initial public offering of securities (IPO), newly floated shares, first issue of shares
Secondary market:
Buying and selling of securities (shares) is traded in secondary market
OTCI:
Over the counter exchange of India (no particular place to buy and selling of shares)
Memorandum of association:
It determines the scope of the activities of the company and defines the relations of the
Company with out side world.
Registered office, company name, objectives,
7 members have to promise to take at least one share each, their names and addresses.
Articles of association:
Rules and regulations of the internal management of the company and very important to the
Shareholders, because they determine the relation between the company and its members.
Subsidiary company:
A company that is completely control by the company

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Holding company:
A company that has control over other companies through ownership of a sufficient portion
Of those companies common stock. A company that owns enough voting stock in another
Firm to control management
EX: CAPITLA IQ is subsidiary of S & P (standard and poor, credit rating company)
S & P is holding company of CAPITLA IQ.
Stock exchanges in India and abroad:
Place where buying and selling of shares takes place is stock exchange
EX: BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange
Depreciation:
Reduction in the value of asset due to wear tear and laps of time, depletion and obsolesce
Convert the cost of asset into cost of operation
Methods:
Straight-line method
Diminishing balance method or declining balance method or accelerated method
Sinking fund method
Depletion method
Accrued expenses:
Represent a liability that a firm has to pay for the services which has already receive,
Obligations payable by the firm. Ex: wages, salaries outstanding.
Deferred income:
Represent funds received by the firm for goods and services, which it has agreed to supply in
Future Ex: advanced payments by the customers
SEBI:
Securities and Exchange Board of India (12th April 1988)
To promote fair dealing. To provide a degree of protection
To regulate and develop a code of conduct, register and working of stock brokers
Provision:
Preparatory action of measure, money kept aside for a specific work
Reserve:
Some amount of profit kept aside to meet contingent expenses, put aside for future purpose
Minority interest:
The ownership interest in a company held by the person other than the parent company and
Its subsidiary undertakings
General reserve:
It can be used for any purpose including distribution of dividend
Capital reserve:
For specific purpose
Dividend:
Shareholders will expect some return from their investments by them in the share capital
Are generally paid in cash
Dividend declared by the board of directors in the AGM (annual general meeting)
Interim dividend:
Dividend declared for 6 months is called interim dividend
Final dividend:
Declared at the end of the financial year

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Theories:
Relevance: Walters model, Gardens model, Bird in a hand argument
Irrelevance: Modigliani and Miller’s Hypothesis
Marginal cost:
Aggregate amount of variable cost
Variable cost:
One which various directly with changes in the level of output over a defined period of time
Fixed cost:
One which is not affected by changes in the level of out put over a defined period of time
Semi-variable cost:
Which does not vary proportionally but simultaneously cannot remain stationary at all times
Ex: Depreciation, repairs
Partnership:
A business relationship where two or more persons carry on a business with a view to make a
profit.
Joint-venture:
A foreign company joins hands with local company for local interest to carry out a single
project pr a limited number of projects, in specific period of time.
Non-recurring items in P & L account (Profit and loss account):
Sale of investments
Non-cash expenditure in P & L account:
Depreciation
Depletion:
Used of oil wells, mines or deposits for depreciation
Amortization:
For long term investments such as patens copyrights, paying of debt gradually
Capital profits:
Sale of fixed assets
Revenue profits:
From main operation of the firm (sale of goods and services)
Mutual fund:
An open-ended fund operated by an investment company, which arises money from
shareholders and investments in a group of assets
Raise money by selling shares of the fund to the public (income fund, growth fund)
Trade discount:
Which is not shown in the books
Cash discount:
50% out of MRP like that
Trade credit:
To the credit that a customer gets from supplier of goods in the normal course
Duties of Finance Manager:
Raising of funds, allocation of funds, profit planning, understanding capital markets
Interim audit and statutory audit:
Chairman: One of the person elected by the directors in the board of directors meeting.
Who is the Director: one of the shareholders becomes director
CEO: chief executive officer, top officer in the company in the executive cadre
Who can appoint CEO: board of directors

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AGM: shareholders annual general meeting
Quorum: attend the minimum number of members in the meeting
Statutory books:
Register of investment holders and their names, register of earnings, register of debenture
and shareholders, register of directors and their shares
Financial books:
Cash book, general ledger, return outwards and return inwards, invoice, bills payable, bills
receivables
Resolution: solving the problem
Who can appoint auditor: board of directors
Minute books: recording of the board of directors meeting
Agenda: the meeting, which is discussed by the board of directors
Duties of director: to appoint officers and auditors, to take policy decisions.
Contribution: sales – variable cost
Role of stock exchange: to regulate the share trading in India
Corporation:
Business firm whose articles of incorporation have been approved in some state
A business, which is a completely separate entity from its owners
Difference between Corporation and Company:
Company: an institution created to conduct business
He only invest in large well established company
He can start the company in his garage
Principles of accounting:
Policies: prudent, materiality, consistency
Assumptions: continuing, consistency, accrual (revenue and cost)
Proxy: it includes every proxy consensus and authorization with in the meaning of section
14 (a) of the act (representative)
Consignment:
Auction are quite simple
A consignor brings merchandise for you to sell online
Consignor – owner
Consignee – agent
Debt & Credit: every account has two sides left side Debit and right side Credit
Open market: a market, which is widely accessible to all investors or consumers
Annual report: (10 K)
Audited document required by the SEC and send to the public company’s or mutual funds
share at the end of each fiscal year (balance sheet, income statement, cash flow statement and
description of company operations, auditors report, summary of operations, chairman’s
speech) contain in annual report.
Quarterly report: (10 Q)
Un audited document required by the SEC of all us public companies reporting the financial
results for the quarter and noting any significant changes and events in the quarter (financial
statements, discussion from the management, list of material events)
Merger: two or more companies combine into one company they may form a new company
Absorption: two or more companies combine into an existing company
Consolidation: is a combination of 2 or more companies into a new company

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Acquisition:
As an act of acquiring effective control by one company over the assets or management of
another company without any combination of companies.
Take over: as obtaining of control over management of a company by another
Types of merger: horizontal, vertical, and conglomerate
Reverse acquisition:
One way of a company to become publicly traded by acquiring a public company and then
installing its own management team and renaming the acquiring company.
Reverse merger:
The acquiring of a public company by a private company allowing the private company to
bypass the usually lengthy and complex process of going public.
ADR: American depository receipts, a negotiable certificate issued by a U.S
Debt: a liability or economic obligation in the form of bonds, loans
Equity: ownership interest in a company in the form of common stock or preferred stock
Shareholders equity: total assets – total liabilities
Depression: a period during which business activity drops significantly
Portfolio:
A collection of investments allowed by the same individual or organization (equity, bonds,
debentures, preferred stock)
Portfolio Management:
Choosing and maintaining appropriate investments and allocating funds accordingly
Security analysis: the entire process of estimating return and risk for individual securities
Portfolio analysis:
To determine the future risk and return in holding various blends of individual securities
Prospects:
A legal document offering securities for sale required by the securities section act 1933 it
must explain the offer including the terms, issuer, objectives, historical financial statements
Private placement:
The sale of securities directly to institutional investors such as banks, mutual funs, LIC
Bad debt reserve: an amount set aside as reserve for bad debts
Listing:
The acceptance of securities for trading in a registered stock exchange (at least 49 % offer to
public) total paid up capital should not be less than 3 crore
GDR: global depositary receipts (CITI Bank 1990 introduced)
Underwritings:
The procedure by which an underwriter brings a new security issue to the investing public in
an offering. The process of insuring someone or something
Inventory: raw material, work-in-progress, finished goods not at been sold
Affiliate:
A company in which another company has a minority interest related to another company
Venture capital:
Funds made available for startup firms small business with exceptional growth potential
Capital: cash or goods used to generate income

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Capital budgeting:
Firms decision to invest its current funds most effectively in the long-term assets in
anticipation of an expected flow of benefits over a series of years
Blue chip:
Stock of large, national company with a solid record of stable earnings and/or dividend
growth and reputation for high quality management, (first class equity shares)
Board of directors:
Individuals elected by a corporation’s shareholders to over the management of the company
Strategic alliance:
An agreement between two or more individuals to achieve a common goal
Stock split:
To attract the potential investors changing the shareholder’s equity announcing two or one
split of common stock to reduce the face value of the share (pare value)
Securitization:
The process of aggregating similar investment such as loan mortgage into negotiable
securities,
SENSEX:
An index composed of 30 largest and most actively trading stock companies in BSE, NSE
Cost of capital:
Minimum acceptable rate of return that a firm must earn on its investments for the market
value.
Short selling:
Trader sells the shares with a small profit a short period by gaining limited returns in a short
period.
ABC analysis:
Statistical tool used over inventory that a firm should not excuse some degree of control over
its items which are most costly as compared to less costly items.
EOQ: (economic order quantity)
Refers to the order size that will result in the lowest total of orders and carrying of an item of
an inventory.
Leverage:
Meeting a fixed cost or paying a fixed return for employing resources or funds, Describe the
firm’s ability to use fixed cost assets or funds to magnify the returns to its owners.
Operating leverage:
Defined as tendency of operating profit to vary disproportionately with sales
High operating leverage – fixed cost more than the variable cost
Formula: Contribution/operating profit
Degree of operating leverage: % of change in EBIT/ %change in sales
EBIT: earning before interest and tax, Contribution: sales – variable cost
Financial leverage:
Defines as tendency of the residual income to vary disproportionately with operating profit
Formula: operating profit (EBIT)/ PBT
Degree of financial leverage: %change in EPS/ %change in EBIT
EPS: earnings per share, PBT: profit before tax
Combination of operating and financial leverage:
%Change in EPS/ % change in sales
Discounted cash flow technique: time value of money concept NPV, IRR, PI

7
Bankruptcy: becoming insolvent
IRR:
Is that the rate of which the sum of discounted cash inflow equals the sum of discounted cash
outflow. Where NPV is ‘0’
Shareholder: one who owns share of stock in a corporate or mutual funds
Liquidate:
To convert into cash (or) to sell all of a company assets pay outstanding debts and distribute
the remaining to shareholders and then go out of business.
Savings account:
A deposit account at a bank or savings and loan which pay’s interest but cannot be
withdrawn by check writing
Transaction:
An agreement between a buyer and a seller to exchange an asset for payment
Credit: the borrowing capacity of an individual or company
Accounts payable:
Money which is owned to vendor’s for products and services purchased on credit
Accounts receivables:
Money which is owned to a company by a customer for products and services provided on
credit.
Broker:
An individual or firm acting as intermediary between a buyer and seller, usually charging a
commission.
Dual trading:
The practice by a broker of acting as an agent and simultaneously acting as a dealer (buying
and selling of one’s own account)
Loan-value ratio:
The amount borrowed dividend by the appraised value of the collateral (securities) in %
Common-stock ratio:
A company’s common stock divided by its total capitalization
Tax:
A fee charged (levied) by a government on a product, income or activity
If tax is levied directly a personal or corporation income it’s called as direct tax.
If tax is levied on price of goods or services is called as indirect tax
Income Tax:
Annual tax levied by the federal government on an individual or corporations net profit
Earnings report:
An official quarterly or annually final document published by a public company
Shows earnings, expenses and net profit
Net profit: gross sales – (taxes + interest + depreciation + other expenses)
Retail price: price charged to retail customers
Whole sage: the purchase of goods in quantity for resale purpose
Retail: selling directly to consumers or customers
Credit card:
Any card that may be used repeatedly to borrow money or buy products and services on
credit issued by bank
Debit card:
A card, which allows customer to access their funds immediately electronically

8
Profit: the positive gain from an investment or business operations
Face value: the nominal $ amount assigned to a security by the issuer
AMEX: (American stock exchange)
Second largest stock exchange in the US after NYSE (Newyork stock exchange) largest
representation of stock and bonds issued by smaller companies than the NYSE
In 1998 the NASDAQ purchased the AMEX
Compound interest:
Interest which is calculated not only on the initial principal but also the accumulated interest
of prior period.
Capitalization: the sum of corporation’s long-term debt stock and retained earnings
ADS:
American depositary shares the share issued under American depositary agreement, which is
actually traded
GATT:
General agreement on tariffs and trade affiliate with the United Nations, to facilitate
international trade
Tariff:
A tax imposed on a product when it is imported into a country or company
EBITDA: earning before interest tax dividend and amortization
Exchange ratio:
The number of shares of the acquiring company that shareholders will receive for one share
of the acquired company
Form S 1: a registration statement used in the initial public offering of securities
Pooling of interest:
In which the balance sheet of the two companies combined line by line without a tax impact
Capital budgeting decisions: operating, administration and strategic
Decision tree:
Define investment, identify decision alternatives, draw decision tree, and analyze data
Concept of cash flow:
Initial investment, annual net cash flow, terminal cash flow
Investment evaluation:
Estimation of cash flow, estimation of required rate of return decision rule for making the
choice.
Financial analysis:
It is the process of identifying the financial strength and weakness of the firm by properly
establishing relationship between the items of the balance sheet and the profit and loss a/c
Liquidity: Refers to the firm’s ability to pay debts as they mature
Solvency: refers to the firm’s ability to meet eventually all its long-term and short-term debt
Accounting system:
A source of financial information of a firm should know the financial implications of its
operations
Treasurer: auditing cost control
Controller: planning and budgeting, inventory management, accounting

Finance:
Is the conversion of accumulated funds to productive use
Finance aptly been called as science of money

9
Finance functions:
Investment decision
Dividend decision
Liquidity decision
Financing decision
Scope: finance, production and marketing
Finance management:
Is that managerial activity which is concerned with the planning and controlling of the firm’s
financial resources
Forfeiture of shares: when a shareholder fails to pay calls
Dividend:
Profit and loss a/c Dr
To proposed dividend a/c
(Being dividend proposed by the directors)
Preliminary expenses:
Are those expenses which are incurred on the formation of the company
Cost: the amount of expenditure incurred on attributable to a specific thing or activity
Short-term finance:
Trade credit, bank credit, public deposits, advances, personal loans, retained earnings,
accrued expenses, and provision for tax, depreciation
Commerce: business
Calls in erriers will be disclosed in balance sheet:
Deduction from subscribed capital
Father of scientific management: F.W Tayler
Espit Decorps:
Employee at all levels should be given the opportunity to take initiative and exercise
judgment
Government Company:
Central government or state government holds 51 % more of the total paid up capital
Entrepot trade: import of foreign goods view to re export
Calls in advances will be disclosed in balance sheet:
Deduction from subscribed capital
Under share premium disclosed in B/S: reserves and surplus
Net profit on reissue of forfeited shares will be transferred to: capital reserve
Condition for issue of shares at discount:
After one year from the date of certificate of commencement of business
Discount on issue of shares will be disclosed in B/S: miscellaneous expenses
Purpose of preparing receipts and payment account:
To know balance of cash and bank at the end of the year
Tangible assets: which are having physical existence (Fixed assets)
Intangible assets: which does not having physical existence (patents, copyrights, and
trademarks, franchises, intellectual property rights)
Not a negotiable instrument: deed of partnership
Unclaimed dividend: dividend paid out not yet claimed by the shareholder
Deferred revenue expenditure:
Expenditure whose benefits lasts for more than one accounting period (advertisement exp)
Right issue: issue of shares to existing shareholders

10
Which how many days the minimum subscription amount should be received by a
company: 90 days
A public company needs the business to start:
Certificate of commencement of business
Fundamental analysis:
To find out the intrinsic value of a security, true economic worth of a financial asset
(It contains economic analysis, industry analysis, and company analysis)
Technical analysis:
Based on past information prices of stock depends on supply and demand
Dow theory:
Raising trend line – no single individual or buyer can influence the major trend of the market
Flat trend line – market discounts natural calamities can influence the market
Falling trend line – it is provided way to understand it
Bull market: up ward
Bear market: down ward
NSDL: national securities depository limited
Random walk theory:

Strong efficient market all information is reflected on prices big one

Semi strong all public information is reflect on security prices second one
Weakly efficient market all historical market influence the security prices small one
Markwitz theory: the effect of combining two securities
CAPM: (capital asset pricing model)
The relationship between expected return and UN avoidable risk
Combine risk free securities with risk securities
Derivatives:
A financial derivative is a product that derives its value from an underlying asset
Tools for better financial and risk management
Confer on the financial system are well known
Options:
Types of contract between two parties
Put option: to sell the securities to fixed amount
Call option: to purchase securities for fixed amount
Futures:
Is an agreement to pay or sell an asset at a certain time in the future for a certain price

Types
Organized exchange – which are traded in over the counter (OTCI)
Standardization, clearing house, margins
Risk:
Foregoing of money (systematic, unsystematic, business risk, market risk, financial risk)
Trading system:
Through brokers and dealers

11
Commission brokers, floor brokers, odd-lot dealers, Taravaniwala, bundiwalars, arbitrager,
security dealers
Accounting:
It records business transactions takes place during the accounting period with a view to
prepare financial statements
Accounting is art of recording classifying and summarizing in a sufficient manner in terms of
money, (to communicate quantitative information)
Objectives:
To measure the profit of the company, to ascertain the financial position of the company
Accounting cycle:
Recording – transaction in subsidiary books
Classifying – data by posting them from subsidiary books to accounts
Closing the books – and preparing of final accounts
Accounting concepts:
Entity concept:
Scope of what is to be recorded or what is being excluded from the accounting books (ex:
drawings account) important to the accountant
Corporate capital paid out only at the time of winding up of the company
Dual aspect concept:
It is transaction based purchase, sales, payments, receipts total amount debit is equal total
amount credited capital + liabilities = assets
Going concern:
The enterprise will continue to exist in the foreseeable future continuing in operation for the
foreseeable future
Accounting period concept:
The time interval is called accounting period, natural business year 12 months
Money measurement concept:
Transaction is recorded in terms of money ex: purchase of building
Matching concept:
Profit = revenue – expenses
Cost concept: (historic)
Asset is recorded at the price paid to acquire it purchase land 80,000 (whether it is 1,75,000
at the time of preparation of balance sheet) will not be considered
Revenue recognition concept:
The amount received (receivables) sale of out put are called revenue
Revenue is the gross inflow of cash (sale of goods manufactured by the company)
Accrual concept:
Cost or recognized when they are incurred and not when paid until cash is received

Objectivity concept: (evidence)

Transaction should be supported by verifiable document asset is shown by replacement cost
Accounting conventions:
Convention of disclosure:
Accounts must be honestly prepared and all material information must be disclosed there in
Contingent liabilities appearing as a note, market value of investments appearing as a note

12
Convention of materiality:
Material and immaterial matters
Value of stock: loss of markets due to competition or government regulations, increase in
wage bill
Allocation of cost: allocated to every one of the three years
Convention of consistency:
Important conclusions regarding the working of a company over a number of years,
accounting procedures, and policies should be consisting.
Convention of conservatism: (playing sage)
Considering of all prospective losses but leaves all prospective profits
Make the provision of all prospective losses but leaves all prospective profits
Make the provision for doubtful debts
Valuation of stock, provision for fluctuation of investments
Amortization
Financial accounting:
To ascertain the financial results
Profit & loss in the operations of the business during the accounting period
Cost accounting:
To analyze the expenditure
To ascertain the cost of various products manufacture by the company
Management accounting:
To assist the management in taking rational policy decisions
Financial statements:
It contains summarized information of the firm’s financial affairs organized systematically
Financial statements are prepared from the accounting records maintained by the firm
Generally accepted accounting principles (GAAP) and procedures are followed to prepare
those statements
It presents firm’s financial situation to users
Preparation for the purpose of external reporting to owner’s investors and creditors
Objective:
For decision making
To provide reliable financial information about economic resources and obligations of
business enterprise.
For estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & L a/c):
Periodic statement FPO (for the period of)
It presents the summary of revenues, expenses and net income or net loss of a firm
Measure the firm’s profitability; it is a scoreboard for a period of time

Operating expenses:
Office salary, wages, insurance, rent, rates, taxes, stationary, printing, post office, repairs
Selling expenses:
Sales man salary, traveling exp, advertising, discount paid, bad debts, commission for sales
Distribution expenses:
Sales traveling, wear housing rent, insurance

13
Financial expenses:
Bank charges, bank commission, and bank overdraft interest, interest on capital
Non-debiting expenses in P & L account:
Drawings, income tax, life insurance
P & L account credit items:
Interest received, discount received, rent received, and collection of bad debts
Balance sheet:
Pointed statement
Portrays an exact picture of the financial position of the enterprise
About economic resources and obligations of a business entity and about it owners as a
specific date, it is a measure of the firm’s liquidity and solvency
What is business owns (assets) and owes (liability) the difference is capital or owner’s
equity all its contain in balance sheet
Uses: communicating to the users, for raising further capital
Statement of retained earnings:
It means the accumulated excess of earnings over losses and dividends the balance shown by
the income statement is transferred to the valance sheet through this statement after making
necessary appropriations
Statement of changes in financial position: (cash flow statement)
It is essential to identify the movement of working capital or cash in and out of the business
Changes in the firm’s working capital
Changes in the firm’s cash position
Changes in the firm’s total financial position
Income:
Increase in the net worth of the business arising out of business operations
Cost of goods sold:
Opening stock + purchases + direct expenses – closing stock
Assets = liabilities + share holders equity
Assets:
Any owned physical object (tangible) or right (intangible) having economic value to its
owners
Fixes assets:
A substantial part of its capital in acquiring what are known as fixed assets 80% - 90% of
long-term funds used to acquire fixed assets
Valuation of fixed assets:
Historical cost method, discounted cash flow method, replacement cost method
Goodwill:
Means that old customer will resort to the old place, name fame and reputation of the
company, goodwill arises when a new partner admitted, acquire by another, spent on R & D

Methods of calculating goodwill:

Average method, super annuation method, capitalization method
Other assets:
Preliminary expenses, share issuing expenses, discount on issue of shares and debentures,
these should be written of from out of profits

14
Contingent assets:
Un called share capital of the company, not shown in the balance sheet because principal of
conservatism
Current assets:
Are those, which are realized within the operating cycle of the business
Investments:
Idle funds of a business are invested in marketable securities
Objective: convert them into cash with in a period of one year
Investments in government securities
Immovable properties
Capital of partnership business
Liability:
Economic obligation of an enterprise
Current liability:
Which are paid within one year (paid out of current assets)
Long-term liabilities:
Which do not become due for payment in one year
Contingent liabilities:
Uncalled liability on investments in another companies
Erriers of fixed cumulative dividend
Bills discount (if drawee doesn’t pay the bill amount to bank)
Owner’s equity: equal to net worth
Subsidiary books:
Special books:
Sales book – purchase book
Returns book – sales, purchases
Bills book – payable receivables
Cashbook
General books:
Opening entries adjusting and closing post entries, correcting entries
Personal accounts:
Proprietor’s, suppliers, creditors
Artificial persons – limited company a/c, insurance company a/c, government company a/c
Representative persons – common title, salaries outstanding, rent prepaid
Real accounts:
Tangible – land, buildings, machinery
Intangible – goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commission, discount, insurance

Debit credit
Personal accounts: the receiver the giver
Real accounts: what comes in what goes out
Nominal accounts: all losses and exp all gains
Ledger: is a set of accounts, ledger is the important book of the double entry system
Posting: process of entering in the ledger
Journal entry: The book of first entry (original entry) chronological record

15
Trail balance:
All the accounts of a concern are thus balanced off then they are put in a list
Debit side trail to credit side
Debit side: losses, expenses, and assets
Credit side: gains, revenues, liabilities
To find out the figures arithmetically correct or not
Trading account:
To find out the gross profit
Debit side: wages, carriage, and royalties – if it is used for production
Factory expenses, package – goods are incomplete such as biscuits consumable stores (cotton
waste, grease, engine oil) factory rent salaries
Gross profit: sales – cost of goods sold
Inventories:
Raw materials, work in progress, finished goods
Need for holding inventories:
Transaction motive – smooth production
Precautionary motive – risk, unpredictable changes
Speculative motive – price fluctuations
Methods:
First-in first-out method (FIFO)
Last-in first-out method (LIFO)
Weighted average method
Specific identification method
Ordering cost: entire cost of acquiring raw materials
Carrying cost: incurred for maintaining – storage, insurance, taxes
Capital structure:
Refers the mix of long-term sources of funds, preference capital and equity capital and
retained earnings
BEP: (break-even-point)
Total revenues equals to total cost
Behavior of profits in response to the changes in volume, cost and prices
Need:
What minimum level of sales need be achieved to avoid losses
What should be the sales level to earn a target profit
Make or buy decision, production planning
BEP (units): total fixes cost/ selling price – variable cost per unit
BEP (rupees): total fixed cost/ 1- variable cost per unit/ selling price
P/V ratio: sales – variable cost/ sales
BEP (rupees): fixed cost/ p/v ratio (or) contribution ratio
Angle of 45:
The vertical and horizontal lines are spaced equally with the same distance
Intersection between sales line and total cost line is the break-even point

Margin of safety:
The excess of actual sales (or) budgeted sales over the break even sales is known as M.S
Ratio: budgeted sales – break-even sales/ budgeted sales
Target sales: fixed cost + desired profit/ contribution ratio (or) p/v ratio

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Budget:
Is a detailed plan of operations for some specific future period
Corporate finance:
It is concerned with the raising and administration of funds used in business
Deals with practices and policies
Deals with financial problems
Marketable securities:
Are the temporary short-term investments in shares, debentures and bonds
Commercial papers, UTI units, inter corporate lending
Bad debts: debts, which will never be collected, are called
Bills receivables:
Represents the promises made in writing by debtors to pay definite some of money after
some specific period of time
Loans and advances: due from employees and associates
Patents:
Right granted by the government enabling the holder to control the use of an invention
Copy right:
Exclusive right to reproduce and sell literacy musical and artistic works
Franchises:
Contracts giving exclusive right to perform certain functions or to sell certain products or
services
Other assets (preliminary exp, deferred revenue expenditure):
Prepayments for services or benefits for period longer than the accounting period
Ex: advertising, preliminary exp
Relation ship between B/S and P & L a/c:
Revenue is an inflow of assets (or outflow of liabilities)
Expenses is an outflow of assets (or inflow of liabilities)
Bills of exchange:
The seller draws a bill of exchange for a specific amount payable at a specified date in future
It is accepted by the customer or by a bank
Brawer: who write the bill
Drawee: who accepted the bill
Purchase or discount of bills:
The amount provided under this agreement is covered within the overall cash credit or
overdraft limit implies that the bank becomes owner of the bill
Banks holds the bill as a security for the credit
Banks charge – discount charges
Over draft:
The borrower is allowed to withdraw funds in excess of the balance in his current account
Up to a certain specified limit during a stipulated period, interest charged on daily basis
operates the account through cheques

Cash credit:
Borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit
Funds flow statement: (statement of sources and uses of funds)
The statement of changes in financial position prepared to determine only the sources and
application (or uses) of working capital between the dates of two balance sheets

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Banks and financial institutions required it when a company approaches them for loans
Increase in assets is use of funds
Increase in liabilities and net worth (shareholder’s equity) is source of funds
Decrease in assets is source of funds
Decrease in liabilities and retained earnings is use of funds
Fund:
It’s a financial product, change in cash only,
Change in working capital, change in financial resources
Working capital:
Fund required to run the day-to-day business activities cannot be overemphasized
Finance provided to support the short-term assets of the business
Sources:
Over draft, cash credit, purchase or discounting of bills
What is the need to invest funds in current assets
How much funds should be invest in each type of current assets
Gross working capital: current assets
Net working capital: current assets – current liabilities (net current assets)
Need: To run the day to day operations of the business
Fixed working capital:
Minimum level of current assets is referred to as permanent or fixed working capital
Degree of excessive working capital:
Chances of inventory mishandling, waste, losses increase
Defective credit policy, stock collection period
Higher incident of bad debts, managerial inefficiency
Inadequate working capital:
Difficult to implement operating plan, operating inefficiency,
Fixed assets are not efficiently utilized, losses its reputation
Working capital cycle:
Acquiring raw materials – resources
Manufacturing the products – finished goods
Accounts receivables – through sales if credit sales book debts
Use of working capital:
Adjusted net loss from operations
Purchase of non-current assets
Repayment of long-term debt
Redemption of redeemable preferred shares
Payment of cash dividend
Determinants:
Nature and size of business
Manufacturing cycle
Sales growth
Production policy
Price level changes
Operating efficiency and performance
Firms credit policy
Availability of credit

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Estimating working capital:
Current assets holdings period
Ratio of sales
Ratio of fixed investments
Cash flow statements:
Summarizes the causes of changes in cash position between dates of two B/S
Only cash transactions – depreciation is not considering
It is useful for short-term planning
Statements of changes in financial statements on cash basis
Sources:
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
Comparative statement analysis:
To find out the periodic changes in the financial performance of a company, at least for two
years, changes: income or decrease aggregate changes
Common-size statements:
Vertical analysis
Take sales as 100
Take total assets and total liabilities as 100
Trend analysis: (time series analysis)
The direction of changes over a period of years
Applicable to the items of P & L a/c
Trends of sales and net income
Ratio analysis:
The relationship between two or more things
Benchmark for evaluating the financial position and performance of a firm
To make large quantitative of financial data and to make qualitative judgment about the
firm’s financial performance
Standards of comparison:
Past ratios from the past reports, project ratios, competition ratios
Industry ratios – ratios of the industry to which the firms belongs
Uses of ratio analysis:
The ability of the firm to meet its current obligations
Long-term solvency by borrowing funds
The efficiency utilizing assets in generating sales revenue
Overall operating efficiency and performance of the firm
Financial ratios as predicators of failure
Types: liquidity, leverage, activity, and profitability

Liquidity ratios:
Essential for a firm to be able to meet its obligations as they become due
Measure the ability of the firm to meet its current obligations
Firm should not suffer from lack of liquidity will result in a poor credit worthiness
Loss of creditors confident
A very high degree of liquidity is also bad idle assets earn nothing

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Current ratio: current assets/ current liabilities
Standard is 2 to 1 (or) 2:1
For measuring short-term solvency
It represents a margin of safety for creditors
Quick ratio: current assets – inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity – fluctuate
Cash ratio: cash + marketable securities/ current liabilities
Internal measure: current assets – inventory/ average daily operating expenses
Total operating expenses/360
A firm’s ability to meet its regular cash expenses is internal measure
Operating exp: expenses + cost of goods sold + selling & administrative expenses + general
expenses – depreciation
Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
Leverage ratios:
For bankers - firm’s current debt paying ability
For firm’s long-term financial strength
The firm has a legal obligation to pay interest to debt holders irrespective of the profit made
or loss incurred by the firm
Total debt ratio: total debt/ total debt + net worth (or) TD/ NA
TD: total debt, NA: net assets
For long term solvency of a firm
Capital employed = net assets (or) Shareholder’s equity + long term debt
Net worth = shareholder’s equity
Debt equity ratio: external equity/ internal equity or TD/NW (net wroth)
A high ratio shows that claims of creditors are greater than those of owners
A low ratio implies greater claims of owners than creditors
Capital employed to net worth ratio (CE): CE/ NW
By lenders and owners contribution
Total liabilities to total assets ratio: TL/ TA
Financial risk: preference capital include in net worth
Lease payment = debt
Debt ratio: TD + value of lease/ TD + value of lease + net worth
Coverage ratios:
Interest coverage ratio: EBIT/ interest (or) EBIDT/ interest
Whether the business would earn sufficient profits to pay periodical the interest charges
Standard is 6 to 7 times
Debt service coverage ratio:
EBIT/ interest + principle payment installment/ 1 – tax rate
Whether the company to make payment of principle amount
Activity ratios:
Funds of creditors and owners are invested in various assets to generate sales and profits
The better the management of assets the larger the amount of sales
Turnover ratios: balance between sales and assets

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Inventory turnover ratio: cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in selling its product
Days of inventory holdings: 360/ inventory turnover
How rapidly the inventory is turning into receivable through sales
Debtor’s turnover ratio: credit sales/ average debtors (or) sales/ debtors
Average debtors: opening balance + closing balance/ 2
Collection period: 360/ debtors’ turnover
Average collection period measures the quality of debtor’s speed of their collection
Creditors turnover ratio: credit purchases/ average creditors (not important)
Assets turnover ratio: sales/ net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
Total assets: sales/ TA
Fixed assets: sales/ net F.A (fixed assets)
Working capital turnover ratio: sales/ net CA
Ex: The one rupee of sales the company need as 0.31 of net current assets
Profitability ratios:
The company should earn profits to serve and grow over a long period of time
Profitability in relation to sales
Profitability in relation to investment
Gross profit margin: sales – cost of goods sold/ sales
Efficiency which management produces each unit of product
Contribution ratio: sales – variable exp/ sales (or)
1 – variable exp/ sales
Net profit margin: profit after tax (PAT)/ sales
It indicates management efficiency in manufacturing and administrative and selling the
products (or) EBIT (1 – T)/ sales T: tax
Operating expenses ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
Cost of goods sold ratio (CGS): CGS/ sales
Return on investment (ROI):
Return on total assets: EBIT (1 –T)/ TA (or) EBIT/ TA
Return on net assets: EBIT (1 –T)/ NA (or) EBIT/ NA
Return on equity (ROE): PAT/ NW
Earnings per share (EPS): PAT/ number of common shares outstanding
Dividend per share (DPS): earnings paid to shareholders/ no. Of ordinary shares out
Dividend payout ratio: DPS/ EPS
Dividend yield ratio: DPS/ market value of the share
Price earning ratio P/E ratio: market value of the shares/ EPS
Market value of book value: Market value/ book value
Other ratios:
Fixed assets ratio: fixed assets/ long-term funds
Standard 0.67
This ratio should not be more than 1
If less than 1 it shows that a part of the working capital has been financed through long-term
funds

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Proprietary ratio: shareholder’s funds/ total tangible assets
Standard 0.05
Importance to creditors
High proprietary ratio will indicates relatively little danger to the creditors
Wasting assets;
Oil wells (lease) coal mines
Pre incorporation profit are transferred to capital reserve
Section 210 to 220 of the companies act 1956 legal position relating to the final accounts of
joint stock company
Section 210 – preparation and presentation of final accounts
Section 211 – balance sheet and P & L a/c
Profit and loss appropriation a/c
To transfer for reserves By last years balance b/d
To income tax for previous year By net profit for the year b/d
Not provided for
To interim dividend By amount withdraw from general reserve or any other
To proposed dividend By provision such as income tax
To surplus carried to B/S By provision no longer required
Divisible profits: dividend to shareholders
Transfer to reserve: not exceed 10% of the PAT should not less than 2.5%
Interest on dividend: 23%
Creditors:
Are those persons who have already advanced some money or money’s worth to the business
Conflicts of accounting principles:
Valuation of stock: some year’s market value
Some years cost, because of principle of conservatism
But the principle of consistency will controversy
Feasibility: assets are recorded at cost less depreciation
Petty cash book:
Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and
carriage
Errors not disclosed by Trail Balance:
Omission in recording the transaction in the books of original entry debit and credit side both
Wrong recording in the original books
Posting to wrong account with correct amount and no correct side
Compensatory error: forgetting to post
Error of principle

Errors disclosed by trail balance:

Error in casting of subsidiary books (make total)
Error in carrying forward the one page to another page
Error in posting to ledger
Error in balancing the amount
Preparation of debtors and creditors schedule
How to find out the errors:
Divide the difference by 2 and find out the equal figure appear in the trail balance
If the difference is evenly divisible by ‘9’ error the trans position (847 treated as 987)

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If the amount is net round figure its mistake in posting
If the amount is round figure mistake in casting or carrying forward
If the difference is large amount compare this year trail balance to previous year
Free samples: debit to advertisement a/c and credited to purchase a/c
Closing entry:
In an account is having debit balance that is credited either trading a/c or P & L a/c similarly
like the way to credit
Debit sales a/c debit p & l a/c
Credit trading a/c credit salaries a/c
Post closing trail balance:
In order to see whether the amount in the ledger are still in balance, which are still open
Mercantilist system: period taken into account
Stock destroyed: deducted from closing stock loss is shown in debit side of P & L a/c
When not insured:
P & L a/c Dr
To Trading a/c
When fully insured:
Insurance claim a/c Dr
To Trading a/c
When partially insured:
Insurance claim a/c Dr
P & L a/c Dr
To Trading a/c
Expenses out standing:
Debit expenses (p & l a/c)
Credit expenses out standing a/c (liability)
Expenses paid in advance:
Prepaid expenses (asset)
Credit expenses (p & l a/c)
Out standing or accrued income: (asset)
Like interest on securities, dividend on shares, commission are earned but not received
It has to credited to insurance a/c
Debit accrued income (asset)
Credit income (p & l a/c credit side)
Income received in advance:
Debit income (p & l a/c)
Credit income received in advance (liability)

Depreciation:
Debit depreciation a/c (p & l a/c)
Credit asset (B/S)
Bad debts:
Debit bad debt (p & l a/c)
Credit debtors (B/S)
Bad debt provision:
Balancing of debtors (objective)
Debit p & la/c Credit bad debts provision

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Provision for discount on debtors and creditors
Discount on debtors: debit p & l a/c
Credit provision of discount on debtors
Discount on creditors: debit provision for discount on creditors
Credit p & l a/c
Interest on capital
Debit p & l a/c
Credit capital a/c
Interest on drawings:
Debit capital a/c
Credit p & l a/c
Cash paid allowed discount:
Cash a/c Dr ‘X’ a/c Dr
Discount a/c Dr To cash a/c
To ‘X’ a/c To discount a/c
Advance tax payment:
Advance tax a/c Dr Tax a/c Dr
To Bank a/c To advance tax a/c
To bank a/c
Life insurance premium: paid on life it is add to drawings
Insurance premium:
If shop – p & l a/c
If goods purchased, factory building, factory machine – Trading a/c
Loss or gain on asset sold: p & l a/c
Discount received and allowed: P & L a/c
Stock at the end appear in trail balance:
Opening stock:
Debit purchase a/c
Credit stock a/c
Closing stock:
Debit stock a/c
Credit purchase a/c
Bank reconciliation statement (BRS):
Two sources to find out the balance at bank
Bank columns of the cash book (or) bank account in the ledger
Pass book (copy of bank column in cash book)
Passbook: credit balance favorable
Cashbook: debit balance favorable
Purpose of preparing BRS:
To reconcile the two balances which often differ for various reasons
The statement show the difference between two balances
Reasons:
Cheques deposited for collection but not yet collected
Cash book – debit
Passbook - credit
If the cash book balance is given - less to the
If the pass book balance is given – add to the

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Cheques issued but not yet presented for payment:
Cashbook – credit
Pass book – debit
If the cash book balance is given – add to the
If the pass book balance is given – lee to the
Credits in the pass book only:
Interest on favorable balance
Interest on fixed deposits
Dividend and interest on securities collected
Sales proceeds of securities behave of the cash
Bills promises notes collected
Amount remitted to the account of the customer by the debtors (deposit)
In all cases cashbook shows the high balance than cashbook
If the cash book balance is given – add to the
If the pass book balance is given – less to the
Debits in the pass book:
payment as per LIC premium, subscription to club
Interest on unfavorable balance (overdraft)
Bank charges
Purchase of investments
In all cases passbook balance shows less balance than cashbook
If the cash book balance is given – less
If the passbook balance is given – add
Error in passbook and cashbook
Payment side of the cashbook is undercast by 200 in case of favorable balance – add to the
passbook
In case of un favorable balance – reduce from the passbook
A cheque for Rs 100 paid to a party entered error in the cashbook – the passbook balance is
more by 100
Sa cheque for 600 draws no 1 a/c wrongly charged by the bank to no 2 a/c
No 1 a/c pass book balance increase 600 reduce the pass book balance no 2
Bookkeeping: Recording of business transactions by following accounting procedures
Accounting: following the rules and procedures
Manufacturing account:
It shows the expenditure in an activity or product it will transfer to trading account

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