ACCOUNTING: Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information to the

management, and advising on taxation matters. It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. Accounting provides information on the resources available to a firm, the means employed to finance those resources, and the results achieved through their use.

2. BRANCHES OF ACCOUNTING: The three main branches of accounting are cost accounting, financial accounting and management accounting, and they have been developed in order to deal with different kinds of objectives.

• Cost accounting Cost accounting is used to determine the cost of materials, tools and equipment in order to help management make informed decisions and to be able to control the cost of the end product. • Financial accounting This is the original form of any accounting and is confined, in the main, to preparing financial statements that will satisfy outside agencies such as banks and other financial institutions, creditors and, of course, the IRS.

The primary purpose of financial accounting is to make it possible to calculate the profit or loss that has been made by the business during the year, and to be able to show the financial position of that business on any given date. • Management accounting This is also sometimes referred to as managerial accounting, and it gives essential information to the management team so that it is able to make decisions that are crucial to the running of the business, and also to be able to control pertinent activities.

3. ACCOUNTING CYCLE: This is the sequence of events that are required within the accounting period, and they have to be repeated in the same order each time. The first is the recording of all transactions as and when they occur. The second stage is classifying the entries in the correct ledger accounts so that information can be got from a glance. The final stage is summarizing, which is to prepare the trial balance and the final accounts with the idea of discovering the profit or loss made within a trading period.






5. ACCOUNTING EQUATION: The 'basic accounting equation' is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. Assets = liabilities + capital A=L+C 6. DEBIT AND CREDIT: Credit and debit are the two fundamental aspects of every financial transaction in the double-entry bookkeeping system in which every debit transaction must have a corresponding credit transaction(s) and vice versa. Debits and credits are a system of notation used in bookkeeping to determine how to record any financial transaction. In financial accounting or bookkeeping, "Dr" (Debit) means left side of a ledger account and "Cr" (Credit) is the right side of a ledger account. To determine whether one must debit or credit a specific account we use the modern accounting equation approach which consists of five accounting elements or rules. An alternative to this approach is to make use of the traditional three rules of accounting for: Real accounts, Personal accounts, and Nominal accounts to determine whether to debit or credit an account.

7. ACCOUNTING CONCEPTS AND CONVENTIONS: Accounting concepts and conventions evolved as a result of information needed by the users of accounting information which became conflicting over time because of different methodology or procedure used in its

preparation .it was thereby adopted to ensure that accounting information is presented accurately and consistently Accounting concepts and conventions could be defined as ground or laid down rules of accounting that should be followed in preparation of all accounts and financial statements. There are different kinds of accounting concepts and conventions The concepts include i. GOING CONCERN CONCEPT Giving the fact that a business entity is solvent and viable this concept assumes the notion that the business unit will have a perpetual existence and will not be sold or liquidated. ii. ENTITY CONCEPT This concept states that every business unit not withstanding its legal existence is treated a separate entity from the body or bodies that owe it, this implies that its existence is distinct from its owner(s). iii. MATCHING OR ACCURAL CONCEPT This concept states that in an accounting period the earned income and the incurred cost which earned the income should be properly matched and reported for the period. This concept is also universally accepted in Manufacturing, Trading organization. iv. REALISATION CONCEPT Realization concept encourages the periodic recognition of revenue as soon as it can be measured and the value of the assets is reasonably certain. In realization the revenue are realized in three basis 1. Basis of cash 2. Basis of sale 3. Basis of production.

v. HISTORICAL COST CONCEPT This concept implies that all assets acquired, service rendered or received, expenses incurred etc. should be recorded in the books at the price at which it was acquired. vi. DUAL ASPECT CONCEPT This concept ensures that transaction are recorded in books at least in two accounts, if one account is debited it’s also credited with the same amount in a different account. The recording system is also known as double entry system. Assets = Liabilities + Capital. vii. MONEY MEASUREMENT CONCEPT This concept states that an item should not be recorded unless it can be quantified in monetary terms in other words it specifies that accountants should not record facts that are not expressed in money terms.



CONSISTENCY: It states that accounting method used in one accounting period should be the same as the method used for events or transactions which are materially similar in other period (i.e. accounting practices should remain unchanged from period to period )


MATERIALITY According to AMERICAN ACCOUNITNG ASSOCIATION, an item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investors.


PRUDENCE OR CONSERVATISM This is an accounting practice that emphasizes great care in the anticipation of possible gains while possible losses are efficiently provided for. Prudence requires an accountant to attempt to ensure that the degree of success is not overstated.


OBJECTIVITY This convention states that the financial statement should be made on verifiable evidence.


DISCLOSURE It states that information relating to the economic affairs of the enterprise which are of material interest should be clearly disclosed to the readers.

8. CURRENT ASSETS: A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

9. CURRENT LIABILITY: A company's debts or obligations that is due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

10. DEPRECIATION: Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for two reasons: Wear and tear For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle. Obsolescence Assets also decrease in value as they are replaced by newer models. Last year's car model is less valuable because there is a newer model in the marketplace.

11. PREPAID EXPENSES: Prepaid expenses are assets that become expenses as they expire or get used up. For example, office supplies are considered an asset until they are used in the course of doing business, at which time they become an expense. At the end of each accounting period, adjusting entries are necessary to recognize the portion of prepaid expenses that have become actual expenses through use.

12. FINANCIAL STATEMENT: The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are

called the financial statements. They typically include four basic financial statements, accompanied by a management discussion and analysis

Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. 13. USES OF BALANCE SHEET: The balance sheet provides a snapshot of a company's resources and obligations at a given point in time. Specifically, the balance sheet allows an investor to recognize a company's future earnings capacity and its ability to meet debt obligations. Balance sheets (of the same company) from two different periods can be used to understand how the company's financial position has changed. 15. RATIO: A ratio is a relationship between two numbers of the same kind (e.g., objects, persons, students), usually expressed as "a to b" or a: b, sometimes expressed arithmetically as a dimensionless quotient of the

two which explicitly indicates how many times the first number contains the second. 16. VARIOUS FINANCIAL STATEMENT ANALYSIS: Horizontal Analysis With the help of horizontal financial analysis, you can compare a business entity over different months or defined periods within a fiscal year. For example, revenue generated over different months of a year can be compared to analyze the overall performance of business or a particular project. Vertical Analysis This involves the procedure of comparing different figures of separate entities to one specific figure of an entity for one specific period of time. This type of analysis is of great significance in carrying out the decision making process. An accountant can also expand the vertical analysis by comparing the figures of one specific period with those of another period. Ratio Analysis This is the method in which the ratio between two or more variables related to the business is compared.

17. SHAREHOLDERS FUNDS: Shareholders' funds is all the money belonging to common stock shareholders which includes the balance of share capital, all profits retained and money classified as reserves.

18. PROFITABILITY, TURNOVER AND SOLVENCY RATIO: Profitability ratios are those which measure the profitability of the company in relation to the sales or investments it has made during an accounting year. Here is list of profitability ratios – 1. Gross profit margin ratio – Gross profit/Net sales x 100 2. Operating Profit ratio – Operating profit/Net sales x 100, where operating profit is (gross profit – operating cost) 3. Net Profit ratio – Net profit/ Net sales x 100 4. Return on capital employed – Net profit/Capital employed x 100 5. Return on Equity – Profit after tax – preference dividend/Equity shareholders fund x 100 Turnover ratios: Cash Turnover: Measures how effective a company is utilizing its cash. NetSales Cash Total Asset Turnover: Measures the activity of the assets and the ability of the business to generate sales through the use of the assets. NetSales Average Total Assets Fixed Asset Turnover: Measures the capacity utilization and the quality of fixed assets. NetSales Net Fixed Assets

Accounts Receivable Turnover: Indicates the liquidity of the company's receivables. Net Sales Average Gross Receivables Inventory Turnover: Indicates the liquidity of the inventory. Cost of Goods Sold Average Inventory Solvency ratio: Any of several formulas used to gauge a company's ability to meet its long-term obligations. It is calculated as total net worth divided by total assets.

19. SOURCES OF CASH: Cash from Operations (Sales/Accounts Receivable) Cash from Loans Cash from Capital Investment/Stock issuance (Equity)

20. FUNDS: In the stock markets of the world, funds refer to groupings of individual investors, known as shareholders, in a larger investment account. The larger investment account is known as the fund, or more commonly mutual fund.

The key difference to a fund in comparison to stock market investment in commodities, stocks or bonds, is that in a fund an investor owns a share, or a piece, of the fund and not the financial instruments it comprises.


Cash flow statement

Fund flow statement

Cash flow statement reveals the funds flow statement reveals the change in the cash position of the change in the working capital of a company between two balance sheet company between two balance sheet dates. dates

Cash flow statement deals only with funds flow statement shows the cash and cash equivalents. change in working capital it deals with all the components of working capital cash is As far as funds flow statement is concerned there is no such classification of cash flows as cash classification. flow from operating activities, cash flow from investment activities and cash flow from financing activities, flow statement there


Cash flow statement

Balance sheet

Without cash a company cannot Evaluating the capital structure survive. The ratios indicate whether the Analysis the company’s liquidity, company can pay off its current solvency, financial flexibility. liabilities from its operations. the company may have to borrow Assess risks and future cash flows. or issue equity securities to pay bills.

23. FUNDS FROM OPERATION: A fund from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement.

24. CASH FROM OPERATION: Cash flow from operating activities is a section of the cash flow statement that provides information regarding the cash-generating abilities of a company's core activities.

25. WORKING CAPITAL: A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:








Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable)

Also known as "net working capital", or the "working capital ratio".

26. CLASSIFICATION OF COSTS: Material cost: Cost of materials used for the manufacture of the product, a particular work order, or provision of a service. Labour cost: The sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labour is broken into direct and indirect costs. Direct costs include wages for the employees physically making a product, like workers on an assembly line. Indirect costs are associated with support labour, such as employees that maintain factory equipment but don't operate the machines themselves. Expenses: There are other so many expenses than material and labour. There are like factory rent, office rent etc.

27. METHODS OF COSTING: Job Costing: Job costing is concerned with the finding of the cost of each job or work order. This method is followed by these concerns when work is carried on by the customer’s request, such as printer general engineering work shop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order. Contract Costing: Contract costing is applied for contract work like construction of dam building civil engineering contract etc. each contract or job is treated as separate cost unit for the cost ascertainment and control. Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. The total costs of a batch are divided by the total number of units in a batch to arrive at the costs per unit. This type of costing is generally used in industries like bakery, toy manufacturing etc. Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until final product is obtained. This type of costing is generally used in industries like textile, chemical paper, oil refining etc.

Service (Operating) Costing: This method is used in those industries which rendered services instead of producing goods. Under this method cost of providing a service is also determined. It is also called service costing. The organisation like water supply department, electricity department etc. are the examples of using operating costing. Operation Costing: This is suitable for industries where production is continuous and units are exactly identical to each other. This method is applied in industries like mines or drilling, cement works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. Multiple Costing: It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. This type of costing is applicable to industries producing motor vehicle, aeroplane radio, T.V. etc. 28. TECHNIQUES OF COSTING: Uniform Costing: It is the use of same costing principles and practices by several undertakings for common control or comparison of costs. Marginal Costing: It is the ascertainment of marginal cost by differentiating between fixed and variable cost. It is used to ascertain the effect of changes in volume or type of output on profit.

Standard Costing: A comparison is made of the actual cost with a prearranged standard cost and the cost of any deviation (called variances) is analyzed by causes. This permits the management to investigate the reasons for these variances and to take suitable corrective action. Historical Costing: It is ascertainment of costs after they have been incurred. It aims at ascertaining costs actually incurred on work done in the past. It has a limited utility, though comparisons of costs over different periods may yield good results. Direct Costing: It is the practice of charging all direct costs, variable and some fixed costs relating to operations, processes or products leaving all other costs to be written off against profits in which they arise. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processes or products. This differs from marginal costing where fixed costs are excluded. 29. ELEMENTS OF COST: Material: Material considered direct at one time may be indirect on other occasion. Nail used in manufacturing wooden box is treated as direct material, but treated as indirect material when used to repair the factory building. Labour: Human efforts used for conversion of materials into finished products or doing various jobs in the business are known as labour. Payment made towards the labour is called labour cost. It can also be direct and indirect.

Expenses: All expenditures other than material and labour incurred for manufacturing a product or rendering service are termed as 'expenses'. Expenses may be direct or indirect.

30. Cost sheet: A cost sheet is a report on which is accumulated all of the costs associated with a product or production job. A cost sheet is used to compile the margin earned on a product or job, and can form the basis for the setting of prices on similar products in the future. It can also be used as the basis for a variety of cost control measures.

31. Various formats of cost sheet:
Particulars Opening Stock of Raw Material Add: Purchase of Raw materials Add: Purchase Expenses Less: Closing stock of Raw Materials Raw Materials Consumed Direct Wages (Labour) Direct Charges Prime cost (1) Add :- Factory Over Heads: Factory Rent Factory Power Indirect Material Indirect Wages Supervisor *** *** *** Amount *** *** *** *** *** *** *** *** Amount

Salary Drawing Office Salary Factory Insurance Factory Asset Depreciation

*** *** *** *** ***

Works cost Incurred Add: Opening Stock of WIP Less: Closing Stock of WIP Works cost (2) Add:- Administration Over Heads:Office Rent Asset Depreciation General Charges Audit Fees Bank Charges Counting house Salary Other Office Expenses Cost of Production (3) Add: Opening stock of Finished Goods Less: Closing stock of Finished Goods Cost of Goods Sold Add:- Selling and Distribution OH:Sales man Commission Sales man salary Travelling Expenses Advertisement Delivery man expenses *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***





Sales Tax Bad Debts Cost of Sales (5) Profit (balancing figure) Sales

*** *** *** *** ***

32. MARGINAL COSTING: The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. The marginal cost is the derivative of total production costs with respect to the level of output.

33. CONTRIBUTION: The Unit Contribution Margin (C) is Unit Revenue (Price, P) minus Unit Variable Cost (V):

The Contribution Margin Ratio is the percentage of Contribution over Total Revenue, which can be calculated from the unit contribution over unit price or total contribution over Total Revenue:

34. BREAK EVEN POINT: The accounting method of calculating break-even point does not include cost of working capital. The financial method of calculating break-even, called value added break-even analysis is used to assess the feasibility of a project.

This method not only accounts for all costs, it also includes the opportunity costs of the capital required to develop a project. Specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". 35. MARGIN OF SAFETY: The margin of safety is a tool to help management understand how far sales could change before the company would have a net loss. It is computed by subtracting break-even sales from budgeted or forecasted sales. To state the margin of safety as a percent, the difference is divided by budgeted sales.

37. BUDGET: An estimation of the revenue and expenses over a specified period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the trade off made when one good is exchanged for another. 38. VARIOUS TYPES OF BUDGETS: Master budget: Is the set of financial and operating budgets for a specific accounting period, usually the next fiscal or calendar year, Master budget is prepared quarterly or annually. The format of the master budget varies with business nature and size

Operating budget: Is the budget for income statement elements such as revenues and expenses, Operating budgets are used in daily operations and are the basis for financial budget. Operating budgets include the following: sales, production, direct materials, direct labour, overhead, selling and administrative expenses, cost of goods manufactured, and cost of goods sold. Financial budget: Is the budget for balance sheet elements. In other words, financial budget deals with the expected assets, liabilities, and stockholders’ equity. Financial budgets include a budgeted income statement and balance sheet, cash budget, and capital expenditures budget. Budgeted income statement and budgeted balance sheet are also called pro forma financial statements. Cash budget: Is the budget for expected cash inflows and outflows during the specific period of time. Cash budget consists of four sections: receipts, disbursements, cash surplus or deficit, and financing section. The receipts section lists the beginning cash balance, cash collections from customers, and other receipts. Static (fixed) budget: Is the budget at the expected capacity level. Because static budget is fixed, it is usually used by stable companies. Also, this type of budget can be used by departments with operations independent from capacity levels.

Flexible (expense) budget: Is the budget at the actual capacity level. Because flexible budget is dynamic, it is commonly used by companies. Flexible budget is adjusted to the actual activity of the company. It can be easily prepared using a computerized spreadsheet (e.g., Excel). Capital expenditure budget: Is the budget for expected investments in capital assets and long-term projects. It is usually prepared for 3 to 10 years. Investments in capital assets include purchasing fixed assets such as plant, land, buildings, machinery, equipment, and mineral resources. Long-term projects might be undertaken to develop new products, expand existing product lines, or reduce costs. Sometimes a capital project committee is created to overlook capital budgeting processes. Such a committee is typically separate from the budgeting committee. Program budget: Is the budget for a specific program or activity such as marketing, research and development, public relations, training, engineering, etc. Usually program budgets are created for product lines. As program budgets are typically created for activities of multiple departments, such budgets cannot be used for control purposes.

39. ZERO BASED BUDGETING: A method of budgeting in which all expenses must be justified for each new period. A zero-based budgeting start from a “zero base” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. 40. OVERHEADS: In business, overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an "operating expense". Examples include rent, gas, electricity, and wages. The term overhead is usually used when grouping expenses that are necessary to the continued functioning of the business but cannot be immediately associated with the products or services being offered. 41. PRIME COST: A business’s expenses for the materials and labour it uses in production. Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. By analyzing its prime costs, a company can determine how much it must charge for its finished product in order to make a profit. By lowering its prime costs, a company can increase its profit margin and/or undercut its competitors’ prices.

42. WORKS COST: Price of any commodity/ any item at its work place exclusive of taxes, transportation from place of work and accessories associated with it is called ex-works price. 43. COST OF PRODUCTION: The costs related to making or acquiring goods and services that directly generates revenue for a firm. It comprises of direct costs and indirect costs. Direct costs are those that are traceable to the creation of a product and include costs for materials and labour whereas indirect costs refer to those costs that cannot be traced to the product such as overhead. 44. COST OF SALES: The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labour costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appear on the income statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales". 45. PROFIT: The surplus remaining after total costs are deducted from total revenue and the basis on which tax is computed and dividend is paid. It is the best known measure of success in an enterprise.

Profit is reflected in reduction in liabilities, increase in assets, and/or increase in owners' equity. It furnishes resources for investing in future operations, and its absence may result in the extinction of a company. As an indicator of comparative performance, however, it is less valuable than return on investment (ROI). Also called earnings, gain, or income.

46. PERFORMANCE BUDGET: Performance-based budgeting is the practice of developing budgets based on the relationship between program funding levels and expected results from that program. The performance-based budgeting process is a tool that program administrators can use to manage more costefficient and effective budgeting outlays.

47. CVP ANALYSIS It is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.CVP analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.

48. DIFFERENTIATE BETWEEN DOUBLE ENTRY AND SINGLE ENTRY: Single entry system Double entry system

Single entry system is an incomplete Double entry system is a complete system of recording financial system of recording and reporting financial transactions


Single entry system maintains only Double entry system all personal, real personal accounts of debtors and and nominal accounts creditors and cash book. Single entry system cannot ascertain Double entry system ascertains true the true amount of profit or loss of profit or loss of the business as it the business as it does not maintain maintains all nominal accounts nominal accounts.

49. SCRAP VALUE: Is the value of an asset after it is fully depreciated, Once an asset reaches the point where it is fully depreciated, has lost the vast majority of production efficiency due to use, and is ready to be resold, it has reached the scrap value. At this point, managers must make the decision of whether to sell the asset for its material, or recyclable value, continue using it despite the fact that it is no longer in good operating condition, or trash the asset.

50. SUNK COST AND FICTITIOUS ASSETS: Sunk cost: A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.

Fictitious assets:

Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or realizable value but represents actual cash expenditure. The purpose of creating a fictitious asset is to account for expenses (such as those incurred in starting a business) that cannot be placed under any normal account heading. Fictitious assets are written off as soon as possible against the firm's earnings.

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