Financial Accounting Glossary

Annual Report

A document as prescribed under the Companies Act and sent to the shareholders of a
public company at the end of each fiscal year is called an annual report. The report
provides information on the company's financial results (Balance Sheet, P & L
Statement, CashFlow Statement) for the year along with comments on its future outlook.

Annual results

Financial results issued by the company at the end of each financial year indicating its
increase/decrease in profits/losses and sales are called annual results.

Quarterly results

Financial results issued by the company every three months indicating its
increase/decrease in profits/losses and sales are called quarterly results. Unlike the
annual results these results are not required to be audited by external audit agencies.
The Big Four (Ernst & Young, KPMG, Deloitte and PwC-formerly
PricewaterhouseCoopers) are the four largest audit companies in the world.

Current Assets

Assets like bills receivables, debtors, etc, in lieu of which the company is expecting cash
in a short period of time are called Current Assets. Cash is also a current asset.

Current liabilities

Liabilities like bills payable, creditors, short-term bank loan, etc, which have to be repaid
within a short span of time are called current liabilities.

Provisions

Any expense likely to be incurred in future and having a bearing on the firm's profitability
provided for earlier is called a provision. Suppose an electronics company XYZ
estimates that its warranty expense for goods sold in the year FY 2010 is likely to be 2%
of its sales. It will factor that expense in the P & L statement of the year FY10 (the
matching principle) irrespective whether the warranty is claimed in FY2010 or later.

Other Income
Any income earned by a company other than from its normal course of operations is
called 'Other Income'. For example, an iron and steel producing company may earn
dividend or bonus from its share investments in a telecom company. Since the income is
not earned from its normal course of business, i.e., manufacture and sale of steel pipes,
the income is categorized as Other Income.

Net Profit

The profit earned after deducting interest, dividend and income-tax expenses from the
gross profit is called the net profit.

Market Capitalization

Market Capitalization of a company is the current market price of a share multiplied by

the total number of outstanding shares.

Dividend

Dividend is be defined as a part of the company's profit which is paid to equity and
preference shareholders.

Return on Capital Employed

Return on Capital Employed is defined as a measure of return that a company realizes

from its capital. It is calculated as profit before interest and tax, divided by the
shareholder’s equity. The resulting ratio represents the efficiency with which capital is
being utilized to generate revenue.

Return on Net Worth or Return on Equity

Return on Net Worth is defined as a measure of Profit After Tax/Net Worth. Here, Profit
After Tax = Net Profit, and, Net Worth = Ordinary Equity + Reserves - Revaluation
Reserve.

Debt/Equity Ratio

It is a measure of a company's financial leverage and is calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
 Note: Sometimes only interest-bearing, long-term debt(instead of all the liabilities) is
used instead of total liabilities in the calculation.

Secured Loans

Any asset hypothecated or any charge made on a firm's assets by a bank or any other
financial institution as a collateral security against a loan taken is a secured loan.

Unsecured Loan

When a loan is taken without any charge on the firm's assets, it is called an unsecured
loan.

Sundry Debtors

When goods/services are sold on credit, the suppliers/buyers are called debtors as they
owe money to the firm.

Sundry Creditors

When goods/services are purchased on credit, the suppliers are sundry creditors as the
firm owes money to them.

Depreciation

The allocation of the cost of an asset over a period of time for accounting and tax
purposes is called depreciation. It is also referred to as the decline in the value of a
property due to the general wear and tear or obsolescence.

Depreciation is used in accounting to try to match the expense of an asset to the income
that the asset helps the company earn. For example, if a company buys a piece of
equipment for $1 million and expects it to have a useful life of 10 years, it will be
depreciated over 10 years. Every accounting year, the company will expense
$100,000 (assuming straight-line depreciation), which will be matched with the money
that the equipment helps to make each year.