UNIT - I INTRODUCTION TO ACCOUNTING CONCEPTS Synopsis: 1. Introduction 2. Objectives and Principles 3. Accounting Concepts and conventions 4.

Principles of accountancy according to GAAP . !ouble entry syste" #. Classification of accounts $. Accounting cycle

1. INTRODUCITON FINANCIAL ACCOUNTING %&e "ain object of any business is to "a'e profits. It is "ay be a business engaged in t&e purc&ase and sales of goods or it "ay be engaged in t&e production of goods or provision of services (&atever be it)s nature* t&e "ain object is to earn profits. A business"an enters into business in order to earn profits. in t&e business"an (is&es to find out &o( "uc& profit &e &as "ade during a given period* &e "ust be able to re"e"ber all t&e transactions t&at &ave ta'en place in &is business. +ut it is not possible for any business"an to re"e"ber all t&e transactions t&at &ave ta'es place in &is business. ,o &e &as to record t&e" in &is boo's of accounts. History of Acco ntin!: Accounting is as old as civili-ation itself. .ro" t&e ancient relics of +abylon* it can be (ill proved t&at accounting did e/ist as long as 2#00 +.C. 1o(ever* in "odern for" accounting based on t&e principles of !ouble 2ntry ,yste" ca"e into e/istence in 1$t& Century. Fra Luka Paciolo* a De computic et .ransiscan "on' and "at&e"atician publis&ed a boo'

scripturies in 1434 at 4enice in Italyl. %&is boo' (as translated into 2nglis& in 1 43. In t&is boo' &e covered a brief section on 5boo'6'eeping). Accounting in India is no( a fast developing discipline. %&e t(o pre"ier Accounting Institutes in India vi-.* c&artered Accountants of India and t&e Institute of Cost and 7or's Accountants of India are "a'ing continuous and substantial contributions. %&e international Accounts ,tandards Co""ittee 8IA,C9 (as establis&ed as on 23 t& :une. In India t&e 5Accounting ,tandards +oard 8A,+9 is for"ulating 5Accounting ,tandards) on t&e lines of standards fra"ed by International Accounting ,tandards Co""ittee. "oo#-#$$pin! is t&e art of recording all business transactions in t&e boo's of account "aintained by business"an for t&at purpose. ;eeping a separate boo' to recording all t&e business transaction by using principle of accounting is also called +oo'6'eeping. Acco ntin! is an art as (ell as sciences of identifying* analy-ing* recording* classifying and su""ari-ing of business transactions (&ic& are of a financial c&aracter and are e/pressed in ter"s of "oney. It also includes interpretation aspect of t&e recorded infor"ation. A%$ric&n Instit t$ of C$rtifi$' P ()ic Acco nt&nts *AICPA+: <%&e art of recording* classifying and su""ari-ing in a significant "anner and in ter"s of "oney transactions and events* (&ic& are in part at least* of a financial c&aracter and interpreting t&e results t&ereof.= %&us* accounting is an art of identifying* recording* su""ari-ing and interpreting business transactions of financial nature. 1ence accounting is t&e L&n! &!$ of " sin$ss. • • • • • • O",ECTI-ES OF "OO. .EEPING / ACCOUNTANC0 %o ascertain"ent of financial position of t&e business organi-ation. %o deter"ine t&e profit and loss of organi-ation %o 'no(ing t&e infor"ation about capital e"ployed in t&e business. %o 'no( t&e value of asset of t&e organi-ation %o Calculation of a"ounts due to and due by ot&ers. %o 'no( &o( "uc& ta/ to pay to t&e govern"ent

• • • •

%o co"parison bet(een t&e current year and t&e previous year)s records. %o plan t&e organi-ation %o 'no( t&e financial infor"ation of t&e ot&er organi-ation %o preparation of financial state"ents

"ASIC ACCOUNTING CONCEPTS Accounting is a syste" evolved to ac&ieve a set of objectives. In order to ac&ieve t&e goals* (e need a set of rules or guidelines. %&ese guidelines are ter"ed &ere as <+A,IC ACCO>?%I?G CO?C2P%,=. %&e ter" concept "eans an idea or t&oug&t. +asic accounting concepts are t&e funda"ental ideas or basic assu"ptions underlying t&e t&eory and profit of .I?A?CIA@ ACCO>?%I?G. %&ese concepts &elp in bringing about unifor"ity in t&e practice of accounting. In accountancy follo(ing concepts are Auite popular. 1+ " sin$ss Entity Conc$pt %&is concept treats t&e o(ner as totally a different entity fro" t&e business. %o put in to nuts&ell BO(ner is different and +usiness is differentB. %&e capital (&ic& is broug&t inside t&e fir" by t&e o(ner* at t&e co""ence"ent of t&e fir" is 'no(n as capital. %&e a"ount of t&e capital* (&ic& (as initially invested s&ould be returned to t&e o(ner considered as due to t&e o(nerC (&o (as not&ing but t&e contributory of t&e capital. 1+ Goin! Conc$rn Conc$pt %&e concept deals (it& t&e Auality of long lasting status of t&e business enterprise irrespective of t&e o(nersD status* (&et&er &e is alive or not. %&is concept is 'no(n as concept of long6ter" assets. %&e fi/ed assets are boug&t in t&e intention to earn profits during t&e season of t&e business. %&e assets (&ic& are idle during t&e slac' season of t&e business retained for future usage* in spite of t&at t&ose assets are freAuently sold out by t&e fir" i""ediately after t&e utility leads to "ean t&at t&ose assets are not fi/ed assets but tradable assets. %&e fi/ed assets are retained by t&e fir" even after t&e usage is only due to t&e principle of long lastingness of t&e business enterprise. If t&e business disposes t&e assets i""ediately after t&e current usage by not considering t&e future utility of t&e assets in t&e fir" (&ic& (ill

not distinguis& in bet(een t&e long6ter" assets and s&ort6ter" assets 'no(n as tradable in categories 2+ 3on$y 3$&s r$%$nt Conc$pt %&is is t&e concept tunes t&e syste" of accounting as fruitful in recording t&e transactions and events of t&e enterprise only in ter"s of "oney. %&e "oney is used as (ell as e/pressed as a deno"inator of t&e business events and transactions. %&e transactions (&ic& are not in t&e e/pression of "onetary ter"s cannot be registered in t&e boo' of accounts as transactions. 4+ Cost Conc$pt It is t&e concept closely relevant (it& t&e going concern concept. >nder t&is concept* t&e transactions are recorded only in ter"s of cost rat&er t&an in "ar'et value. .i/ed assets are only entered in ter"s of t&e purc&ase price (&ic& is a original cost of t&e asset at t&e "o"ent of purc&ase. %&e depreciation is deducted fro" t&e original value (&ic& is t&e initial purc&ase price of t&e asset (ill &ig&lig&t t&e boo' value of t&e asset at t&e end of t&e accounting period. %&e "ar'eting value of t&e asset s&ould not be ta'en into consideration* 7&yE %&e "ain reason is t&at t&e "ar'et value of t&e asset is subject to fluctuations due to de"and and supply forces. %&e entry of "ar'et value of t&e asset (ill reAuire t&e freAuent update of infor"ation to t&e tune of c&anges in t&e "ar'et 5+ Acco ntin! P$rio' Conc$pt %&oug& t&e life period of t&e business is longer in span* (&ic& is classified into t&e operating periods (&ic& are s"aller in duration. %&e accounting period "ay be eit&er calendar year of :an6!ec or fiscal year of April6Far. %&e operating periods are not Concept of fusion in bet(een t&e e/penses and revenues O(ner and business organi-ations are t(o separate entities Accounting concept for long lastingness of t&e business enterprise eAuivalent a"ong t&e trading fir"s* (&ic& "eans t&at t&e operating period of one fir" .inancial Accounting "ay be s&orter t&an t&e ot&er one. %&e ulti"ate ai" of t&e concept is to nullify t&e deviations of t&e operating periods of various traders in t&e trading practice 6+ D &)ity or Do ()$ $ntry &cco ntin! conc$pt

It is t&e only concept (&ic& portrays t&e t(o sides of a single transaction. %&e la( of entire business revolves around only on "utual agree"ent s&aring policy a"ong t&e players. 1o( "utual agree"ent is ta'ing place E %&e entire principle of business is "ainly conducted on "utual agree"ent a"ong t&e parties fro" one occasion to anot&er. %&e pay"ent of (ages are only "ade by t&e fir" out of t&e services of labourers. 7&at 'ind of "utual agree"ent in s&aring t&e benefits is ta'ing placeE %&e services of t&e labourers are availed by t&e fir" t&roug& t&e pay"ent of (ages. @i'e6(ise* t&e labourers are regularly getting (ages for t&eir services in t&e fir". ACCOUNTING CON-ENTIONS Accounting is based on so"e custo"s or usages. ?aturally accountants &ere to adopt t&at usage or custo".%&ey are ter"ed as convert conventions in accounting. %&e follo(ing are so"e of t&e i"portant accounting conventions. 1. F )) Disc)os r$G According to t&is convention accounting reports s&ould disclose fully and fairly t&e infor"ation. %&ey purport to represent. %&ey s&ould be prepared &onestly and sufficiently disclose infor"ation (&ic& is if "aterial interest to proprietors* present and potential creditors and investors. %&e co"panies AC%* 13 # "a'es it co"pulsory to provide all t&e infor"ation in t&e prescribed for". 2.3&t$ri&)ityG >nder t&is convention t&e trader records i"portant factor about t&e co""ercial activities. In t&e for" of financial state"ents if any uni"portant infor"ation is to be given for t&e sa'e of clarity it (ill be given as footnotes. 3.Consist$ncyG It "eans t&at accounting "et&od adopted s&ould not be c&anged fro" year to year. It "eans t&at t&ere s&ould be consistent in t&e "et&ods or principles follo(ed. Or else t&e results of a year Cannot be conveniently co"pared (it& t&at of anot&er. 4. Cons$r7&tis%G %&is convention (arns t&e trader not to ta'e unreali-ed inco"e in to account. %&at is (&y t&e practice of valuing stoc' at cost or "ar'et price* (&ic& ever is lo(er is in vague. %&is is t&e policy of <playing safe=C it ta'es in to consideration all prospective losses but leaves all prospective profits.

DOU"LE ACCOUNTING S0STE3 !ouble entry syste" of +oo'6'eeping is si"ple and universal in its application. It &as t&e test of four &undred years continuous use. It "ay be clai"ed t&at it is t&e only syste" (ort&y of adoption by t&e practical business"an. %o understand t&e syste" of double entry syste" of boo'6 'eeping all t&at (e need to re"e"ber is t&e funda"ental ruleG “Debit the account which receives the benefit.” “Credit the account which gives the benefit” %ypes of account 19 Personal Account 29 Heal Account 39 ?o"inal Account RULES FOR DE"IT / CREDIT. 1+P$rson&) Acco ntG 6 %&is account deals (it& t&e individuals of t&e organi-ation t&ese includes accounts of natural persons in varied capacities li'es suppliers and buyers of goods* lenders and borro(ers of loans etc. “Debit the receiver” “Credit the giver” 29 R$&) Acco ntG 6 %&is account deals (it& t&e group of individuals of t&e organi-ation t&ese include co"binations of t&e properties or assets are 'no(n as real account. “Debit what comes in” “Credit what goes out” 39 No%in&) Acco ntG 6 ?o"inal accounts relate to suc& ite"s (&ic& e/ist in na"e only. %&ese ite"s pertain to e/penses and gains li'e interest* rent* co""ission* discount* salary etc* “Debit all expenses and losses” “Credit all incomes and gains”

"r&nc8$s9c)&ssific&tion of Acco ntin!: %&e i"portant branc&es of accounting areG 1. Fin&nci&) Acco ntin!: %&e purpose of Accounting is to ascertain t&e financial results i.e. profit or loass in t&e operations during a specific period. It is also ai"ed at 'no(ing t&e financial position* i.e.

assets* liabilities and eAuity position at t&e end of t&e period. It also provides ot&er relevant infor"ation to t&e "anage"ent as a basic for decision6"a'ing for planning and controlling t&e operations of t&e business. 1. Cost Acco ntin!: %&e purpose of t&is branc& of accounting is to ascertain t&e cost of a product I operation I project and t&e costs incurred for carrying out various activities. It also assist t&e "anage"ent in controlling t&e costs. %&e necessary data and infor"ation are gat&err4ed for" financial and ot&er sources. 2. 3&n&!$%$nt Acco ntin!: Its ai" to assist t&e "anage"ent in ta'ing correct policy decision and to evaluate t&e i"pact of its decisions and actions. %&e data reAuired for t&is purpose are dra(n accounting and cost6accounting. ACCOUNTING C0CLE: %&e accounting cycle is a series of steps perfor"ed during t&e accounting period to analyze* classify* record* summarize* and report useful financial infor"ation for t&e purpose of preparing financial state"ents. In boo''eeping* t&e accounting period is t&e period for (&ic& t&e boo's are balanced and t&e financial state"ents are prepared. Generally* t&e accounting period consists of 12 "ont&s. 1o(ever* t&e beginning of t&e accounting period differs according to t&e co"pany. .or e/a"ple* one co"pany "ay use t&e regular calendar year* :anuary to !ece"ber* as t&e accounting year* (&ile anot&er entity "ay follo( April to Farc& as t&e accounting period. St$ps in t8$ Acco ntin! Cyc)$ • :ournali-e transactions in t&e journal. • Post journal entries to t&e accounts in t&e ledger. • Prepare a trial balance of t&e accounts and co"plete t&e (or's&eet 8includes adjusting entries9. • Prepare .inancial ,tate"entsI.inal Accounts Journalize Transactions

Prepare Financial Statements/Final Accounts Prepare a Trial Balance

Ledger Accounts

1.

!efine t&e concepts 5Accounting)* .inancial Accounting and Accounting ,yste"). 2. Give a brief account on t&e i"portant records of Accounting under !ouble 2ntry ,yste" and discuss briefly t&e scope of eac&E 3. 2/plain t&e accounting principles of GAAP and accounting cycle E

G)oss&ry Acco nt -- a record of financial transactionsC usually refers to a specific category or type* suc& as travel e/pense account or purc&ase account. Acco nt&nt -- a person (&o trained to prepare and "aintain financial records. Acco ntin! -- a syste" for 'eeping score in business* using dollars. Acco ntin! p$rio' -- t&e period of ti"e over (&ic& profits are calculated. ?or"al accounting periods are "ont&s* Auarters* and years 8fiscal or calendar9. Acco nts p&y&()$ -- a"ounts o(ed by t&e co"pany for t&e goods or services it &as purc&ased fro" outside suppliers. Acco nts r$c$i7&()$ -- a"ounts o(ed to t&e co"pany by its custo"ers. Accr &) (&sis: syst$%: or %$t8o' -- an accounting syste" t&at records revenues and e/penses at t&e ti"e t&e transaction occurs* not at t&e ti"e cas& c&anges &ands. If you buy a coat and c&arge it* t&e store records or accrues t&e sale (&en you (al' out (it& t&e coat* not (&en you pay your bill. Cas& basis accounting is used by individuals. Accrual basis accounting is used by "ost businesses. Accr $' $;p$ns$s: &ccr &)s -- an e/pense (&ic& &as been incurred but not yet paid for. ,alaries are a good e/a"ple. 2"ployees earn or accrue salaries eac& &our t&ey (or'. %&e salaries continue to accrue until payday (&en t&e accrued e/pense of t&e salaries is eli"inated.

A!in! -- a process (&ere accounts receivable are sorted out by age 8typically current* 30 to #0 days old* #0 to 120 days old* and so on.9 Aging per"its collection efforts to focus on accounts t&at are long overdue. A%orti<$ -- to c&arge a regular portion of an e/penditure over a fi/ed period of ti"e. .or e/a"ple if so"et&ing cost J100 and is to be a"orti-ed over ten years* t&e financial reports (ill s&o( an e/pense of J10 per year for ten years. If t&e cost (ere not a"orti-ed* t&e entire J100 (ould s&o( up on t&e financial report as an e/pense in t&e year t&e e/penditure (as "ade. (See entries on xpenditure and xpense.! Appr$ci&tion -- an increase in value. If a "ac&ine cost J1*000 last year and is no( (ort& J1*200* it &as appreciated in value by J200. 8%&e opposite of depreciation.9 Ass$ts -- t&ings of value o(ned by a business. An asset "ay be a p&ysical property suc& as a building* or an object suc& as a stoc' certificate* or it "ay be a rig&t* suc& as t&e rig&t to use a patented process. Current "ssets are t&ose assets t&at can be e/pected to turn into cas& (it&in a year or less. Current assets include cas&* "ar'etable securities* accounts receivable* and inventory. #ixed "ssets cannot be Auic'ly turned into cas& (it&out interfering (it& business operations. .i/ed assets include land* buildings* "ac&inery* eAuip"ent* furniture* and long6ter" invest"ents. $ntangible "ssets are ite"s suc& as patents* copyrig&ts* trade"ar's* licenses* franc&ises* and ot&er 'inds of rig&ts or t&ings of value to a co"pany* (&ic& are not p&ysical objects. %&ese assets "ay be t&e "ost i"portant ones a co"pany o(ns. Often t&ey do not appear on financial reports. A 'it -- a careful revie( of financial records to verify t&eir accuracy. "&' '$(ts -- a"ounts o(ed to a co"pany t&at are not going to be paid. An account receivable beco"es a bad debt (&en it is recogni-ed t&at it (onDt be paid. ,o"eti"es* bad debts are (ritten off (&en recogni-ed. %&is is an e/pense. ,o"eti"es* a reserve is set up to provide for possible bad debts. Creating or adding to a reserve is also an e/pense. "&)&nc$ s8$$t -- a state"ent of t&e financial position of a co"pany at a single specific ti"e 8often at t&e close of business on t&e last day of t&e "ont&* Auarter* or year.9 %&e balance s&eet nor"ally lists all assets on t&e left side or top (&ile liabilities and capital are listed on t&e rig&t side or botto". %&e total of all nu"bers on t&e left side or top "ust eAual or balance t&e total of all nu"bers on t&e rig&t side or botto". A balance s&eet balances according to t&is eAuationG Assets K @iabilities L Capital.

"on' -- a (ritten record of a debt payable "ore t&an a year in t&e future. %&e bond s&o(s a"ount of t&e debt* due date* and interest rate. "oo# 7&) $ -- total assets "inus total liabilities. 8,ee also net (ort&.9 +oo' value also "eans t&e value of an asset as recorded on t&e co"panyDs boo's or financial reports. +oo' value is often different t&an true value. It "ay be "ore or less. "r$&#$7$n point -- t&e a"ount of revenue fro" sales (&ic& e/actly eAuals t&e a"ount of e/pense. +rea'even point is often e/pressed as t&e nu"ber of units t&at "ust be sold to produce revenues e/actly eAual to e/penses. ,ales above t&e brea'even point produce a profitC belo( produces a loss. C&pit&) -- "oney invested in a business by its o(ners. 8,ee eAuity.9 On t&e botto" or rig&t side of a balance s&eet. Capital also refers to buildings* "ac&inery* and ot&er fi/ed assets in a business. A capital invest"ent is an invest"ent in a fi/ed asset (it& a long6ter" use. C&pit&)i<$ -- to capitali-e "eans to record an e/penditure on t&e balance s&eet as an asset* to be a"orti-ed over t&e future. %&e opposite is to e/pense. .or e/a"ple* researc& e/penditures can be capitali-ed or e/pensed. If e/pensed* t&ey are c&arged against inco"e (&en t&e e/penditure occurs. If capitali-ed* t&e e/penditure is c&arged against inco"e over a period of ti"e usually related to t&e life of t&e products or services created by t&e researc&. C&s8 -- "oney available to spend no(. >sually in a c&ec'ing account. C&s8 f)o= -- t&e a"ount of actual cas& generated by business operations* (&ic& usually differs fro" profits s&o(n. C8&rt of &cco nts -- a listing of all t&e accounts or categories into (&ic& business transactions (ill be classified and recorded. 2ac& account usually &as a nu"ber. %ransactions are coded by t&is nu"ber for "anipulation on co"puters. Contin!$nt )i&(i)iti$s -- liabilities not recorded on a co"panyDs financial reports* but (&ic& "ig&t beco"e due. If a co"pany is being sued* it &as a contingent liability t&at (ill beco"e a real liability if t&e co"pany loses t&e suit. Cost of s&)$s: cost of !oo's so)' -- t&e e/pense or cost of all ite"s sold during an accounting period. 2ac& unit sold &as a cost of sales or cost of t&e goods sold. In businesses (it& a great "any ite"s flo(ing t&roug&* t&e cost of sales or cost of goods sold is often co"puted by t&is for"ulaG Cost of ,ales K +eginning Inventory L Purc&ases !uring t&e Period 6 2nding Inventory. Cr$'it -- an accounting entry on t&e rig&t or %op of a Account. >sually an increase in liabilities or capital* or a reduction in assets. %&e opposite of

credit is debit. 2ac& credit in a balance s&eet &as a balancing debit. Credit &as ot&er usages* as in BMou &ave to pay cas&* your credit is no good.B Or B(e (ill credit your account (it& t&e refund.B D$(it -- an accounting entry on t&e left or top of a Account. >sually an increase in assets or a reduction in liabilities. 2very debit &as a balancing credit. D$f$rr$' c8&r!$s -- see prepaid e/penses. D$f$rr$' inco%$ -- a liability t&at arises (&en a co"pany is paid in advance for goods or services t&at (ill be provided later. .or e/a"ple* (&en a "aga-ine subscription is paid in advance* t&e "aga-ine publis&er is liable to provide "aga-ines for t&e life of t&e subscription. %&e a"ount in deferred inco"e is reduced as t&e "aga-ines are delivered. D$pr$ci&tion -- an e/pense t&at is supposed to reflect t&e loss in value of a fi/ed asset. .or e/a"ple* if a "ac&ine (ill co"pletely (ear out after ten yearDs use* t&e cost of t&e "ac&ine is c&arged as an e/pense over t&e ten6 year life rat&er t&an all at once* (&en t&e "ac&ine is purc&ased. ,traig&t line depreciation c&arges t&e sa"e a"ount to e/pense eac& year. Accelerated depreciation c&arges "ore to e/pense in early years* less in later years. !epreciation is an accounting e/pense. In real life* t&e fi/ed asset "ay gro( in value or it "ay beco"e (ort&less long before t&e depreciation period ends. Disco nt$' c&s8 f)o= -- a syste" for evaluating invest"ent opportunities t&at discounts or reduces t&e value of future cas& flo(. 8,ee present value.9 Di7i'$n' -- a portion of t&e after6ta/ profits paid out to t&e o(ners of a business as a return on t&eir invest"ent. Do ()$ $ntry -- a syste" of accounting in (&ic& every transaction is recorded t(ice 66 as a debit and as a credit. E&rnin!s p$r s8&r$ -- a co"panyDs net profit after ta/es for an accounting period* divided by t&e average nu"ber of s&ares of stoc' outstanding during t&e period. >? - 1? r )$ -- a general rule of t&u"b in business t&at says t&at 20N of t&e ite"s produce O0N of t&e action 66 20N of t&e product line produces O0N of t&e sales* 20 percent of t&e custo"ers generate O0N of t&e co"plaints* and so on. In evaluating any business situation* loo' for t&e s"all group (&ic& produces t&e "ajor portion of t&e transactions you are concerned (it&. %&is rule is not e/actly accurate* but it reflects a general trut&* not&ing is evenly distributed. E@ ity -- t&e o(nersD s&are of a business.

E;p$n'it r$ -- an e/penditure occurs (&en so"et&ing is acAuired for a business 66 an asset is purc&ased* salaries are paid* and so on. An e/penditure affects t&e balance s&eet (&en it occurs. 1o(ever* an e/penditure (ill not necessarily s&o( up on t&e inco"e state"ent or affect profits at t&e ti"e t&e e/penditure is "ade. All e/penditures eventually s&o( up as e/penses* (&ic& do affect t&e inco"e state"ent and profits. 7&ile "ost e/penditures involve t&e e/c&ange of cas& for so"et&ing* e/penses need not involve cas&. 8,ee e/pense belo(.9 E;p$ns$ -- an e/penditure (&ic& is c&argeable against revenue during an accounting period. An e/pense results in t&e reduction of an asset. All e/penditures are not e/penses. .or e/a"ple* a co"pany buys a truc'. It trades one asset 6 cas& 6 to acAuire anot&er asset. An e/penditure &as occurred but no e/pense is recorded. Only as t&e truc' is depreciated (ill an e/pense be recorded. %&e concept of e/pense as different fro" an e/penditure is one reason financial reports do not s&o( nu"bers t&at represent spendable cas&. %&e distinction bet(een an e/penditure and an e/pense is i"portant in understanding &o( accounting (or's and (&at financial reports "ean. 8%o e/pense is a verb. It "eans to c&arge an e/penditure against inco"e (&en t&e e/penditure occurs. %&e opposite is to capitali-e.9 Fisc&) y$&r -- an accounting year t&an begins on a date ot&er t&an :anuary 1. Fi;$' &ss$t -- see asset. Fi;$' cost -- a cost t&at does not c&ange as sales volu"e c&anges 8in t&e s&ort run.9 .i/ed costs nor"ally include suc& ite"s as rent* depreciation* interest* and any salaries unaffected by ups and do(ns in sales. Goo'=i)) -- in accounting* t&e difference bet(een (&at a co"pany pays (&en it buys t&e assets of anot&er co"pany and t&e boo' value of t&ose assets. ,o"eti"es* real good(ill is involved 6 a co"panyDs good reputation* t&e loyalty of its custo"ers* and so on. ,o"eti"es* good(ill is an overpay"ent. Inco%$ -- see profit. Int$r$st -- a c&arge "ade for t&e use of "oney. In7$ntory -- t&e supply or stoc' of goods and products t&at a co"pany &as for sale. A "anufacturer "ay &ave t&ree 'inds of inventoryG ra( "aterials (aiting to be converted into goods* (or' in process* and finis&ed goods ready for sale. In7$ntory o(so)$sc$nc$ -- inventory no longer salable. Per&aps t&ere is too "uc& on &and* per&aps it is out of fas&ion. %&e true value of t&e

inventory is seldo" e/actly (&at is s&o(n on t&e balance s&eet. Often* t&ere is unrecogni-ed obsolescence. In7$ntory s8rin#&!$ -- a reduction in t&e a"ount of inventory t&at is not easily e/plainable. %&e "ost co""on cause of s&rin'age is probably t&eft. In7$ntory t rno7$r -- a ratio t&at indicates t&e a"ount of inventory a co"pany uses to support a given level of sales. %&e for"ula isG Inventory %urnover K Cost of ,ales P Average Inventory. !ifferent businesses &ave different general turnover levels. %&e ratio is significant in co"parison (it& t&e ratio for previous periods or t&e ratio for si"ilar businesses. In7$st$' c&pit&) -- t&e total of a co"panyDs long6ter" debt and eAuity. ,o rn&) -- a c&ronological record of business transactions. L$'!$r -- a record of business transactions 'ept by type or account. :ournal entries are usually transferred to ledgers. Li&(i)iti$s -- a"ounts o(ed by a co"pany to ot&ers. Current liabilities are t&ose a"ounts due (it&in one year or less and usually include accounts payable* accruals* loans due to be paid (it&in a year* ta/es due (it&in a year* and so on. %ong&term liabilities nor"ally include t&e a"ounts of "ortgages* bonds* and long6ter" loans t&at are due "ore t&an a year in t&e future. Li@ i' -- &aving lots of cas& or assets easily converted to cas&. 3&r!in&) cost: %&r!in&) r$7$n $ -- "arginal cost is t&e additional cost incurred by adding one "ore ite". Farginal revenue is t&e revenue fro" selling one "ore ite". 2cono"ic t&eory says t&at "a/i"u" profit co"es at a point (&ere "arginal revenue e/actly eAuals "arginal cost. N$t =ort8 -- total assets "inus total liabilities. ?et (ort& is seldo" t&e true value of a co"pany. Opport nity cost -- a useful concept in evaluating alternate opportunities. If you c&oose alternative A* you cannot c&oose +* C* or !. 7&at is t&e cost or loss of profit of not c&oosing +* C* or !E %&is cost or loss of profit is t&e opportunity cost of alternative A. In personal life you "ay buy a car instead of ta'ing a 2uropean vacation. %&e opportunity cost of buying t&e car is t&e loss of t&e enjoy"ent of t&e vacation. O7$r8$&' -- a cost t&at does not vary (it& t&e level of production or sales* and usually a cost not directly involved (it& production or sales. %&e c&ief e/ecutiveDs salary and rent are typically over&ead. Post -- to enter a business transaction into a journal or ledger or ot&er financial record.

Pr$p&i' $;p$ns$s: '$f$rr$' c8&r!$s -- assets already paid for* t&at are being used up or (ill e/pire. Insurance paid for in advance is a co""on e/a"ple. %&e insurance protection is an asset. It is paid for in advance* it lasts for a period of ti"e* and e/pires on a fi/ed date. Pr$s$nt 7&) $ -- a concept t&at co"pares t&e value of "oney available in t&e future (it& t&e value of "oney in &and today. .or e/a"ple* J$O.3 invested today in a N savings account (ill gro( to J100 in five years. %&us t&e present value of J100 received in five years is J$O.3 . %&e concept of present value is used to analy-e invest"ent opportunities t&at &ave a future payoff. Pric$-$&rnin!s *p9$+ r&tio -- t&e "ar'et price of a s&are of stoc' divided by t&e earnings 8profit9 per s&are. PIe ratios can vary fro" s'y &ig& to dis"ally lo(* but often do not reflect t&e true value of a co"pany. Profit -- t&e a"ount left over (&en e/penses are subtracted revenues. 'ross profit is t&e profit left (&en cost of sales is subtracted fro" sales* before any operating e/penses are subtracted. (perating profit is t&e profit fro" t&e pri"ary operations of a business and is sales "inus cost of sales "inus operating e/penses. )et profit before taxes is operating profit "inus non6operating e/penses and plus non6operating inco"e. )et profit after taxes is t&e botto" line* after everyt&ing &as been subtracted. Also called inco"e* net inco"e* earnings. ?ot t&e sa"e as cas& flo( and does not represent spendable dollars. R$t&in$' $&rnin!s -- profits not distributed to s&are&olders as dividends* t&e accu"ulation of a co"panyDs profits less any dividends paid out. Hetained earnings are not spendable cas&. R$t rn on in7$st%$nt *ROI+ -- a "easure of t&e effectiveness and efficiency (it& (&ic& "anagers use t&e resources available to t&e"* e/pressed as a percentage. *eturn on e+uity is usually net profit after ta/es divided by t&e s&are&oldersD eAuity. *eturn on invested capital is usually net profit after ta/es plus interest paid on long6ter" debt divided by t&e eAuity plus t&e long6ter" debt. *eturn on assets used is usually t&e operating profit divided by t&e assets used to produce t&e profit. %ypically used to evaluate divisions or subsidiaries. HOI is very useful but can only be used to co"pare consistent entities 66 si"ilar co"panies in t&e sa"e industry or t&e sa"e co"pany over a period of ti"e. !ifferent co"panies and different industries &ave different HOIs. R$7$n $ -- t&e a"ounts received by or due a co"pany for goods or services it provides to custo"ers. Heceipts are cas& revenues. Hevenues can also be represented by accounts receivable. Ris# -- t&e possibility of lossC in&erent in all business activities. 1ig& ris' reAuires &ig& return. All business decisions "ust consider t&e a"ount of ris' involved.

S&)$s -- a"ounts received or due for goods or services sold to custo"ers. 'ross sales are total sales before any returns or adjust"ents. )et sales are after accounting for returns and adjust"ents. Stoc# -- a certificate 8or electronic or ot&er record9 t&at indicates o(ners&ip of a portion of a corporationC a s&are of stoc'. ,referred stoc- pro"ises its o(ner a dividend t&at is usually fi/ed in a"ount or percent. Preferred s&are&olders get paid first out of any profits. %&ey &ave preference. Common stoc- &as no preference and no fi/ed rate of return. .reasury stoc- (as originally issued to s&are&olders but &as been subseAuently acAuired by t&e corporation . "uthorized by unissued stoc- is stoc' (&ic& official corporate action &as aut&ori-ed but &as not sold or issued. 8,toc' also "eans t&e stoc' of goods* t&e stoc' on &and* t&e inventory of a co"pany.9 S n# costs -- "oney already spent and gone* (&ic& (ill not be recovered no "atter (&at course of action is ta'en. +ad decisions are "ade (&en "anagers atte"pt to recoup sun' costs. Tri&) (&)&nc$ -- at t&e close of an accounting period* t&e transactions posted in t&e ledger are added up. A test or trial balance s&eet is prepared (it& assets on one side and liabilities and capital on t&e ot&er. %&e t(o sides s&ould balance. If t&ey donDt* t&e accountants "ust searc& t&roug& t&e transactions to find out (&y. %&ey 'eep "a'ing trial balances until t&e balance s&eet balances. -&ri&()$ cost -- a cost t&at c&anges as sales or production c&ange. If a business is producing not&ing and selling not&ing* t&e variable cost s&ould be -ero. 1o(ever* t&ere (ill probably be fi/ed costs. Aor#in! c&pit&) -- current assets "inus current liabilities. In "ost businesses t&e "ajor co"ponents of (or'ing capital are cas&* accounts receivable* and inventory "inus accounts payable. As a business gro(s it (ill &ave larger accounts receivable and "ore inventory. %&us t&e need for (or'ing capital (ill increase. Arit$-'o=n -- t&e partial reduction in t&e value of an asset* recogni-ing obsolescence or ot&er losses in value. Arit$-off -- t&e total reduction in t&e value of an asset* recogni-ing t&at it no longer &as any value. 7rite6do(ns and (rite6offs are non6cas& e/penses t&at affect profits.

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