SHORT NOTES

Invoice Credit Terms:

The invoice terms indicate when an invoice becomes due and whether a discount may be
taken if the invoice is paid sooner. The invoice terms also dictate the point at which
ownership of goods will transfer from the seller to the buyer.

Net due upon receipt:

If the vendor's terms are Net due upon receipt, the invoice amount is due immediately. (Of
course, you should verify that the invoice is valid and accurate before it is entered for
payment.)

Net 30 days:

When the vendor invoice states Net 30 days, the amount of the invoice (minus any returns or
allowances) is due 30 days from the date of the invoice. For example, if a vendor invoice for
$1,000 is dated June 1 and the company is granted a $100 allowance, the net amount of
$900 should be paid by July 1. (If there were no allowance, the company should remit
$1,000 by July 1.)

1/10, n/30:

When a vendor invoice includes terms of 1/10, n/30, the "1" represents 1% of the amount
owed, the "10" represents 10 days, the "n" represents the word net, and the "30" represents
30 days. The terms 1/10, n/30 indicate that the buyer may take an early payment discount
of 1% of the amount owed if the amount owed is remitted within 10 days instead of the
normal 30 days. In other words, the buyer can choose either of the following:
 Pay within 10 days and deduct 1% of the net amount owed (the invoice amount
minus any authorized returns and/or allowances), or

 Pay in 30 days and take no discount.

2/10, n/30:

If the vendor's invoice has terms of 2/10, n/30, the "2" represents 2%, the "10" represents
10 days, the "n" represents the word net and the "30" represents 30 days. This means that
the buyer can take an early payment discount of 2% of the amount owed if the amount is
remitted within 10 days instead of the customary 30 days. In other words, the buyer can
choose either of the following:
 Pay within 10 days and deduct 2% of the net amount (invoice amount minus any
authorized returns and/or allowances), or

 Pay the full amount in 30 days with no discount.

Short Notes 1
3/10, n/30:

If the vendor's invoice has terms of 3/10, n/30, the "3" represents 3%, the "10" represents
10 days, the "n" represents the word net and the "30" represents 30 days. This means that
the buyer can take an early payment discount of 3% of the amount owed if the amount is
remitted within 10 days instead of the customary 30 days. In other words, the buyer can
choose either of the following:
 Pay within 10 days and deduct 3% of the net amount (invoice amount minus any
authorized returns and/or allowances), or

 Pay the full amount in 30 days with no discount.

2/10, n/30:

Indication "2/10, n/30" (or "2/10 net 30") on an invoice represents a cash (sales) discount
provided by the seller to the buyer for prompt payment.

The term 2/10, n/30 is a typical credit term and means the following:

"2" shows the discount percentage offered by the seller.

"10" indicates the number of days (from the invoice date) within which the buyer should pay
the invoice in order to receive the discount.

"n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to
qualify for the discount, then the net amount is due within 30 days after the sales invoice
date.

The terms offered by the seller usually depend on the trade custom. Some variations of the
cash discount terms, among others, may be "2/15, n/30" (2% discount for the payment
within 15 days and the full amount to be paid within 30 days) or "n/10 EOM" (the invoice is
due and payable 10 days after the end of the month in which the sale occurred).

In accounting, a cash (sales) discount represents an expense to the seller. The account used to
recognize the expense may be called "Sales Discount" or "Discount on Sales."

The buyer treats such a discount as a reduction of the cost and uses the account called
"Purchases Discount" or "Discount on Purchases."

Accounting cycle:

The accounting cycle is the name given to the collective process of recording and processing

the accounting events of a company. The series of steps begin when a transaction occurs and

end with its inclusion in the financial statements. Additional accounting records used during

the accounting cycle include the general ledger and trial balance.

Short Notes 2
Accounting Policy:

Accounting policies are the specific principles, rules and procedures implemented by a

company's management team and are used to prepare its financial statements. These include

any methods, measurement systems and procedures for presenting disclosures. Accounting

policies differ from accounting principles in that the principles are the accounting rules and

the policies are a company's way of adhering to those rules.

Accumulated Depreciation:

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its

life. An asset's carrying value on the balance sheet is the difference between its purchase price

and accumulated depreciation. A company buys and holds an asset on the balance sheet until

the salvage value matches the carrying value.

Adjusting journal entry:

An adjusting journal entry is an entry in financial reporting that occurs at the end of a

reporting period to record any unrecognized income or expenses for the period. When a

transaction is started in one accounting period and ended in a later period, an adjusting

journal entry is required to properly account for the transaction.

Adjusting journal entries can also refer to financial reporting that corrects a mistake made

previously in the accounting period.

An adjusting journal entry is also known as a balance day adjustment.

Adjusting Entries:

Adjusting entries are journal entries recorded at the end of an accounting period to adjust

income and expense accounts so that they comply with the accrual concept of accounting.

Their main purpose is to match incomes and expenses to appropriate accounting periods.

The transactions which are recorded using adjusting entries are not spontaneous but are

spread over a period of time. Not all journal entries recorded at the end of an accounting

period are adjusting entries. For example, an entry to record a purchase on the last day of a

period is not an adjusting entry. An adjusting entry always involves either income or expense

account.

Short Notes 3
Assumption of CVP analysis:

The assumptions underlying CVP analysis are:

a) The behavior of both costs and revenues are linear throughout the relevant range of

activity. (This assumption precludes the concept of volume discounts on either

purchased materials or sales.)

b) Costs can be classified accurately as either fixed or variable.

c) Changes in activity are the only factors that affect costs.

d) All units produced are sold (there is no ending finished goods inventory).

e) When a company sells more than one type of product, the product mix (the ratio of

each product to total sales) will remain constant.

The components of CVP analysis are:

a) Level or volume of activity.

b) Unit selling prices

c) Variable cost per unit

d) Total fixed costs

e) Manpower Cost Direct and indirect

Accrued Vs Deferred Revenue:

Accrued revenue is an asset class for goods or services that have been sold or completed but

the associated revenue that has not yet been billed to the customer. Accrued revenue – which

may include income that is due in arrears – is treated as an asset on the balance sheet

rather than a liability. This reporting is important to the valuation of a company, particularly

in the service industry where billing typically occurs after the work or service is complete

because this asset class ensures all earned revenue is reported.

On the other hand, deferred revenue, or unearned revenue, refers to advance payments for

products or services that are to be delivered in the future. The recipient of such prepayment

records unearned revenue as a liability on a balance sheet, because it refers to revenue that

has not yet been earned, but represents products or services that are owed to a customer. As

the product or service is delivered over time, it is recognized as revenue on the income

statement.

Short Notes 4
Adjusted Trial Balance:

An Adjusted Trial Balance is a list of the balances of ledger accounts which is created after

the preparation of adjusting entries. Adjusted trial balance contains balances of revenues and

expenses along with those of assets, liabilities and equities. Adjusted trial balance can be used

directly in the preparation of the statement of changes in stockholders' equity, income

statement and the balance sheet. However it does not provide enough information for the

preparation of the statement of cash flows.

The format of an adjusted trial balance is same as that of unadjusted trial balance.

Basel Accord:

The Basel Accords are three sets of banking regulations (Basel I, II and III) set by the Basel

Committee on Bank Supervision (BCBS), which provides recommendations on banking

regulations in regards to capital risk, market risk and operational risk. The purpose of the

accords is to ensure that financial institutions have enough capital on account to meet

obligations and absorb unexpected losses.

Balance of Payments:

The balance of payments is a statement of all transactions made between entities in one

country and the rest of the world over a defined period of time, such as a quarter or a year.

Bank Reconciliation Statement:

A bank reconciliation statement is a summary of banking and business activity that reconciles

an entity’s bank account with its financial records. The statement outlines the deposits,

withdrawals, and other activity impacting a bank account for a specific period. A bank

reconciliation statement is a useful financial internal control tool used to thwart fraud.

Short Notes 5
Break-Even Point:

The break-even point is the price level at which the market price of a security is equal to the

original cost. For options trading, the break-even point is the market price that a stock must

reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the

break-even point is the strike price plus the premium paid, while breakeven for a put position

is the strike price minus the premium paid.

Accountants define break-even as the sales level that pays for all costs and that generates a

profit of zero. Managers calculate the break-even sales level to cover all of the company's cost

and to forecast a desired level of profit. Break-even can be calculated based on units sold or

by using the total amount of sales and the break-even formula can be adjusted to estimate a

target level of profitability.

BAS and BFRS:

The Institute of Chartered Accountants of Bangladesh (ICAB) prescribes Financial Reporting

Standards which are known as Bangladesh Financial Reporting Standards (BFRS). Bangladesh

Accounting Standards (BAS) are also included in BFRS. International Accounting Standards

and International Financial Reporting Standards which are issued by the International

Accounting Standards Board are what the BFRS models on. For listed companies under the

Securities and Exchange Commission (SEC) rules, adopted BFRS are legally enforceable.

Cash Basis versus Accrual Basis:

The main difference between accrual and cash basis accounting lies in the timing of when
revenue and expenses are recognized. The cash method is mostly used by small businesses and
for personal finances. The cash method accounts for revenue only when the money is received
and for expenses only when the money is paid out.

On the other hand, the accrual method accounts for revenue when it is earned and expenses
goods and services when they are incurred. The revenue is recorded even if cash has not been
received or if expenses have been incurred but no cash has been paid. Accrual accounting is
the most common method used by businesses.

Short Notes 6
CAMELS Rating:

The CAMELS rating system is a recognized international rating system that bank supervisory

authorities use in order to rate financial institutions according to six factors represented by

the acronym "CAMELS." Supervisory authorities assign each bank a score on a scale, and a

rating of one is considered the best and the rating of five is considered the worst for each

factor.

The acronym CAMELS stand for the following factors that examiners use to rate bank

institutions:

C- Capital Adequacy

A- Asset Quality

M- Management

E- Earnings

L- Liquidity

S- Sensitivity

Cash Flow Statement:

In financial accounting, a cash flow statement, also known as statement of cash flows, is a
financial statement that shows how changes in balance sheet accounts and income affect cash
and cash equivalents, and breaks the analysis down to operating, investing and financing
activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of
the business. The statement captures both the current operating results and the
accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows
is useful in determining the short-term viability of a company, particularly its ability to pay
bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard
that deals with cash flow statements.

Closing entry:

A closing entry is a journal entry made at the end of the accounting period in which data is
moved into the permanent accounts on the balance sheet from temporary accounts on the
income statement. The purpose of the closing entry is to bring the temporary account
balances to zero on the general ledger, including revenue, expense and dividend accounts. All
income statement balances are eventually transferred to retained earnings.

Short Notes 7
Cheque Knitting and Lapping:

Cheque Knitting is extremely intentional. Someone engaged in knitting has a detailed

knowledge of how long it takes for checks to clear the bank, and will take advantage of the
timing delay to withdraw cash (even partial amounts) just before the bank discovers that
there is a problem. A sophisticated cheque knitting scheme can result in multi-million dollar
losses.

Lapping occurs when an employee steals cash by diverting a payment from one customer,
and then hides the theft by diverting cash from another customer to offset the receivable
from the first customer. This type of fraud can be conducted in perpetuity, since newer
payments are continually being used to pay for older debts, so that no receivable involved in
the fraud ever appears to be that old. Lapping is most easily engaged in when just one
employee is involved in all cash handling and recordation tasks. This situation most commonly
arises in a smaller business, where a bookkeeper may be responsible for all accounting tasks.

Closing Entries:

Closing entries are made to free up (to zero) the nominal (temporary) accounts so that they
are prepared to be used in the next accounting period. All revenue and expense account
balances are moved to the income summary account when closing entries are posted. The
difference between the debit and credit side in the income summary account represents net
income (credits exceed debits) or net loss (debits exceed credits) for the period. The net
income or loss is then transferred from the income summary account to the retained
earnings account. The new accounting period starts with zero balances in revenue and
expense accounts.

Comprehensive Income:

Comprehensive income is a statement of all income and expenses recognized during a

specified period. The statement includes revenue, finance costs, tax expenses, discontinued
operations, profit share and profit/loss. Most firms report comprehensive income in a
separate statement from income resulting from owner changes in equity but have the option
of providing information in a single statement.

Contribution Margin:

Contribution margin is a cost accounting concept that allows a company to determine the
profitability of individual products. The phrase "contribution margin" can also refer to a per
unit measure of a product's gross operating margin calculated simply as the product's price
minus its total variable costs. This metric allows an entity to evaluate different areas of
business to determine which service or product line to emphasize based on the highest
margin.

Short Notes 8
Conservatism Principle:

Conservatism principle is accounting principle that concern about the reliability of Financial
Statements of an entity. Conservatism principle provide the guidance to accountants on how
to records and recognize the uncertainty outcome of revenues, expenses, assets and liabilities
in financial statements. This principle also intend to ensure that the users who use the
financial statements receive enough and reliable information as they should be.

Conceptual Framework:

The Financial Accounting Standards Board (FASB) visualized a conceptual accounting

framework as a 'coherent system of interrelated objectives and fundamentals that can lead to
consistent standards that prescribes the nature, function, and limits of financial accounting
and financial statements'.

In financial reporting, a conceptual framework is a theory of accounting prepared by a

standard-setting body against which practical problems can be tested objectively. A
conceptual framework deals with fundamental financial reporting issues such as the objectives
and users of financial statements, the characteristics that make accounting information
useful, the basic elements of financial statements (e.g., assets, liabilities, equity, income, and
expenses), and the concepts for recognizing and measuring these elements in the financial
statements.

Cooking the Books of Accounts:

Cook the books is an idiom describing fraudulent activities performed by corporations in order
to falsify their financial statements. Typically, cooking the books involves augmenting financial
data to yield previously nonexistent earnings. Examples of techniques used to cook the books
involve accelerating revenues, delaying expenses, manipulating pension plans and
implementing synthetic leases.

CVP analysis:

Cost-volume profit (CVP) analysis is based upon determining the breakeven point of cost and
volume of goods and can be useful for managers making short-term economic decisions. Cost-
volume profit analysis makes several assumptions in order to be relevant including that the
sales price, fixed costs and variable cost per unit are constant. Running this analysis involves
using several equations using price, cost and other variables and plotting them out on an
economic graph.

Short Notes 9
Consistency Principle:

The consistency principle is an accounting concept that requires the same method of
accounting be used from one period to the next. The main purpose of this principle is to keep
the financial statements comparable from year to year.

External users need to be able to evaluate trends and compare financial data from year to
year when they are making their business decisions. If companies change their major
accounting methods and practices every year, none of their statements will be comparable
because the company’s activities will be measured in different ways each year.

This isn’t to say that companies can’t ever change their accounting methods. They can. It just
has to be infrequent and justifiable. A one-time change is fine. Companies just can’t flip-flop
their accounting methods every year.

Contingent Liability:

A contingent liability is a potential liability that may occur, depending on the outcome of an
uncertain future event. A contingent liability is recorded in the accounting records if the
contingency is probable and the amount of the liability can be reasonably estimated. If both of
these conditions are not met, the liability may be disclosed in a footnote to the financial
statements or not reported at all.

Outstanding lawsuits and product warranties are common examples of contingent liabilities,
because each outcome is uncertain. The accounting rules for reporting a contingent liability
differ, based on an estimate of the amount and the probability that the event might occur,
and these rules are in place to ensure that financial statement readers receive sufficient
information.

Current Ratio:

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
and long-term obligations. To gauge this ability, the current ratio considers the current total
assets of a company (both liquid and illiquid) relative to that company’s current total
liabilities. The formula for calculating a company’s current ratio is:

Current Assets
Current Ratio =
Current Liabilities

The current ratio is called “current” because, unlike some other liquidity ratios, it
incorporates all current assets and liabilities. The current ratio is also known as the working
capital ratio.

Short Notes 10
Control Account:

A control account, often called a controlling account, is a general ledger account that
summarizes and combines all of the subsidiary accounts for a specific type. In other words, it’s
a summary account that equals the sum of the subsidiary account and is used to simplify and
organize the general ledger.

The general ledger can have hundreds of accounts from asset and liability accounts to income
and expense accounts. Moreover, each account type can have hundreds of smaller accounts
called subsidiary accounts. If every single account was included in the general ledger, it would
be very large, unorganized, and difficult to use. That is why control accounts are used to
summary data from large numbers of related accounts.

The general ledger account that sums the subsidiary accounts is said to control the balances
that are reported in the ledger. Thus, we call it a controlling account. This makes sense
because the subsidiary accounts are not directly reported in the GL. They are summarized
and posted to the control account that in turn appears in the GL. In this way, the controlling
account really does dictate what appears in the GL and what is reported on the financial
statements.

Current Assets Vs Non-current Assets:

The resources owned by a business can be divided into two categories: current assets and
non-current assets. Some assets are considered liquid, meaning they can be converted into
cash relatively quickly. Other assets either cannot be converted or are not expected to be
converted into cash. Non-current assets can be considered anything not classified as current.
The primary determinant between current and non-current assets is the anticipated timeline
of their use. Current and non-current assets are listed on the balance sheet. They appear as
separate categories before being summed and reconciled against liabilities and equities.

Deferred Expenses:

Deferred expense, also called a prepaid expense, is a cost that has been incurred but is

recorded as an asset until the related goods or services are consumed. In other words, money

has been spent on goods or services in the current period, but the goods and services have not

been consumed in that period.

Short Notes 11
For example, insurance payments are a deferred expense because the buyer pays the

insurance in advance before consuming the coverage. Technically, businesses initially record

deferred expenses as assets before they become expenses over time.

Debit Memorandum Vs Credit Memorandum:

A debit memorandum, or debit memo for short, is notification from a buyer to a seller that

tells the seller that a debit was made in the seller’s account on the buyer’s books. Sounds

confusing, doesn’t it. To put it simply, a debit memorandum is a way for a buyer to inform

the seller that it wants a refund or discount on its purchase.

Many times when companies buy inventory from vendors the inventory is damaged in

shipping or the wrong inventory is shipped. In either of these cases, the buyer has the right to

return the damaged or incorrect inventory for a full refund. Sometimes returning the full

shipment isn’t always feasible.

On the other hand, a credit memorandum, often called a credit memo, is a notification that

from the sender indicating that it credited the recipient’s account in its records. In other

words, it’s a way for seller to notify a buyer that his account was credited.

The difference between these two memos can be kind of confusing for accounting students

because it references the point of view of the seller or sender of the memo. The sender of the

memo credits its own books. The receiver debits its books. This concept can be a little tricky

without remembering this.

Debit Note and Credit Note:

A debit note is a document used by a vendor to inform the buyer of current debt obligations,

or a document created by a buyer when returning goods received on credit. The debit note

can provide information regarding an upcoming invoice, or may serve as a reminder for

funds currently due. For items being returned, the total anticipated credit amount may be

included, as well as an inventory of the returned items and the reason for the return.

A Credit Note is a document sent by a seller to the buyer or, in other words, a vendor to a

purchaser, notifying that a credit has been made to their account against the goods returned

by the buyer. It notifies that the currency value in question is credited to the buyer’s account

Short Notes 12
(on records). A credit note is issued for the value of goods returned by the customer, it may

be less than or equal to total amount of the order.

Deferred Revenue:

The deferred revenue, also called unearned revenue, is advanced payments made for products

and services that will be delivered to the customer at a future date. This is a liability because

the company still owes the customer a good or service at the time this is recorded.

Typical examples of deferred revenues include prepaid insurance policies, annual subscriptions

to magazines and newspapers, and others. Once the product or the service is delivered and

the order is complete, the firm debits the deferred account and credits sales account. These

sales are then reported on the income statement.

Depreciation, Depletion and Amortization:

What is 'Depreciation, Depletion and Amortization – DD&A'?

Depreciation, depletion and amortization (DD&A) are noncash expenses used in accrual

accounting. Depreciation is a means of allocating the cost of a material asset over its useful

life, and depletion is used to allocate the cost of extracting natural resources from the Earth

and is the actual physical depletion of a natural resource by a company. Amortization is the

deduction of capital expenses over a specified time period, typically the life of an asset.

Duty paid value:

In respect to imported goods, duty paid value is the aggregate value for duty on imported

goods.

EFT:

Electronic Funds Transfer (EFT) is the electronic transfer of money from one bank account to

another, either within a single financial institution or across multiple institutions, via

computer-based systems, without the direct intervention of bank staff. EFT transactions are

known by a number of names. It is able to handle a wide variety of credit and debit transfers.

Short Notes 13
EFT is gaining increasing popularity among the corporate and govt. bodies. Salary of more

than 28 ministries and govt. offices are now paid through EFT. Listed public companies are

paying their cash dividends through EFT network.

EPS and NAV:

An Earnings per share (EPS) is the portion of a company's profit allocated to each

outstanding share of common stock. An Earnings per share serves as an indicator of a

company's profitability. EPS is calculated as:

Net Income−Dividends on Preferred Stock

EPS =
Average Outstanding Shares

Net asset value (NAV) is value per share of a mutual fund or an exchange-traded fund (ETF)

on a specific date or time. With both security types, the per-share amount of the fund is

based on the total value of all the securities in its portfolio, any liabilities the fund has and the

number of fund shares outstanding.

Ethics in Accounting for Corporate Governance:

Ethics, also called corporate or business ethics, is often referred to as a code of conduct or set

of beliefs that dictate what is right, wrong, fair, and unfair.

The accounting profession is based on morals and ethics. We as accountants and CPAs are

required to uphold strict ethical standards because most of the time we are fiduciaries to

third parties. Investors and creditors rely on the financial statements that we produce and

certify. Our judgments must be based on facts, reason, and ethical decisions.

Understanding ethical behavior in the context of corporate governance requires two levels of

analysis: the internal concerns of corporate agency and the emergent effects on social welfare.

Corporate agency is based on the premise that employees, managers, and directors (i.e.,

agents) should behave in the best interests of owners or shareholders (i.e., principals). Social

welfare is based on the premise that companies should engage in fair dealing with all of their

stakeholders—including customers, employees, suppliers, and communities, as well as

shareholders—in accordance with the expectations of the larger society in which they operate.
Short Notes 14
FASB:
The Financial Accounting Standards Board (FASB) is a seven-member independent board
consisting of accounting professionals who establish and communicate standards of financial
accounting and reporting in the United States. FASB standards, known as generally accepted
accounting principles (GAAP), govern the preparation of corporate financial reports and are
recognized as authoritative by the Securities and Exchange Commission (SEC).

Fixed Assets and Current Assets:

A fixed asset is a long-term tangible piece of property that a firm owns and uses in its
operations to generate income. Fixed assets are not expected to be consumed or converted
into cash within a year. Fixed assets are known as property, plant, and equipment (PP&E).
They are also referred to as capital assets.

Current asset is a balance sheet account that represents the value of all assets that can
reasonably expect to be converted into cash within one year. Current assets include cash and
cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and
other liquid assets that can be readily converted to cash.

Fixed cost and Variable cost:

A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that have to be paid by a
company, independent of any business activity. It is one of the two components of the total
cost of running a business, along with variable cost.

A variable cost is a corporate expense that changes in proportion with production output.
Variable costs increase or decrease depending on a company's production volume; they rise as
production increases and fall as production decreases.

FOB shipping point:

Free on board (FOB) is a trade term that indicates whether the seller or the buyer has
liability for goods that are damaged or destroyed during shipment between the two parties.
"FOB shipping point" (or origin) means that the buyer is at risk while the goods are shipped,
and "FOB destination" states that the seller retains the risk of loss until the goods reach the
buyer.

GAAP:
Generally accepted accounting principles (GAAP) are a common set of accounting principles,
standards and procedures that companies must follow when they compile their financial

Short Notes 15
statements. GAAP is a combination of authoritative standards (set by policy boards) and the
commonly accepted ways of recording and reporting accounting information. GAAP improves
the clarity of the communication of financial information.

Green Banking:

Green Banking means promoting environmental-friendly practices and reducing carbon

footprint from banking activities. This comes in many forms. Using online banking instead of
branch banking, Paying bills online instead of mailing them, Opening up CDs and money
market accounts at online banks, instead of large multi-branch banks Or finding the local
bank in area that is taking the biggest steps to support local green initiatives. Any
combination of the above personal banking practices can help the environment.

Green banking is like a normal bank, which considers all the social and environmental/
ecological factors with an aim to protect the environment and conserve natural resources. It
is also called as an ethical bank or a sustainable bank. They are controlled by the same
authorities but with an additional agenda toward taking care of the Earth's environment/
habitats/ resources.

Going Concern Assumption:

The going concern assumption or going concern principle is an accounting principle that
requires companies to be accounted for as if they will continue operating into the future. In
other words, we are not supposed to expect companies not to fail. Companies supposed to be
treated like they will stay out of bankruptcy and remain in business.

This is an important concept to financial accounting because many other accounting

principles are based on the assumption that companies will not cease to exist at the end of a
period. The going concern principle is what establishes the ability for companies to accrue
expenses and prepay asset.

If we automatically assumed that companies ended operations at the end of every period,
there would be no reason to accrue expenses. Companies wouldn’t have to pay for these
expenses next year because they wouldn’t exist.

Short Notes 16
IFRS:
International Financial Reporting Standards (IFRS) are a set of international accounting
standards stating how particular types of transactions and other events should be reported in
financial statements. IFRS are issued by the International Accounting Standards Board
(IASB), and they specify exactly how accountants must maintain and report their accounts.
IFRS were established in order to have a common accounting language, so business and
accounts can be understood from company to company and country to country.

IAS:
The international accounting standards (IAS) were an older set of standards stating how
particular types of transactions and other events should be reflected in financial statements.
In the past, international accounting standards were issued by the Board of the International
Accounting Standards Committee (IASC); since 2001, the new set of standards has been
known as the international financial reporting standards (IFRS) and has been issued by the
International Accounting Standards Board (IASB). Although IASC has no authority to require
compliance with its accounting standards, many countries require the financial statements of
publicly-traded companies to be prepared in accordance with IAS.

IFRIC:
IFRIC is a committee that assists the International Accounting Standards Board (IASB) by
providing guidance on the application and interpretation of International Financial Reporting
Standards. Its members are appointed by the trustees of the International Accounting
Standards Committee Foundation. The committee assists the IASB by working with similar
interpretative groups sponsored by national standard-setters. Before December 2001, the
Standard Interpretations Committee (SIC) was the IASB’s interpretative body.

Intangible Assets:
An intangible asset is an asset that is not physical in nature. Corporate intellectual property,
including items such as patents, trademarks, copyrights and business methodologies, are
intangible assets, as are goodwill and brand recognition. Intangible assets exist in opposition to
tangible assets which include land, vehicles, equipment, inventory, stocks, bonds and cash.

Invisible Transaction/Trade:
An invisible trade is a business transaction that occurs with no exchange of tangible goods. An
invisible trade involves the transfer of non-tangible goods and/or services, such as customer
service, intellectual property and patents. The items involved in an invisible trade are
associated with a value and can be exchanged for tangible goods.

Lapping:

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A lapping scheme is a fraudulent practice that involves altering accounts receivables to hide a
stolen receivables payment. The method involves taking a subsequent receivables payment and
using that to cover the cover the theft. The next receivable is then applied to the previous
unpaid receivable, and so on.

LIFO and FIFO:

Last in, first out (LIFO) is an asset management and valuation method that assumes assets
produced or acquired last are the ones used, sold or disposed of first; LIFO assumes an entity
sells, uses or disposes of its newest inventory first. If an asset is sold for less than it is
acquired, then the difference is considered a capital loss. If an asset is sold for more than it is
acquired, the difference is considered a capital gain.

First in, first out (FIFO) is an asset-management and valuation method in which the assets
produced or acquired first are sold, used or disposed of first and may be used by a individual
or a corporation. For taxation purposes, FIFO assumes that the assets that are remaining in
inventory are matched to the assets that are most recently purchased or produced.

Limitations of CVP analysis:

CVP is a short run, marginal analysis. The following are the limitations of Cost Volume Profit
Analysis:
1. Segregation of total costs into its fixed and variable components is always a daunting task
to do.
2. Fixed costs are unlikely to stay constant as output increases beyond a certain range of
activity.
3. The analysis is restricted to the relevant range specified and beyond that the results can
become unreliable.
4. Aside from volume, other elements like inflation, efficiency, capacity and technology
impact on costs
5. Impractical to assume sales mix remain constant since this depends on the changing
demand levels.
6. The assumption of linear property of total cost and total revenue relies on the assumption
that unit variable cost and selling price are always constant. In real life it is valid within
relevant range or period and likely to change.

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Matching Principles:

The matching principle states that expenses should be recognized and recorded when those
expenses can be matched with the revenues those expenses helped to generate. In other
words, expenses shouldn’t be recorded when they are paid. Expenses should be recorded as
the corresponding revenues are recorded. This matches the revenues and expenses in a period.
In this sense, the matching principle recognizes expenses as the revenue recognition principle
recognizes income.

In general, there are two types of costs: product and period costs. Product costs can be tied
directly to products and in turn revenues. Period costs, on the other hand, cannot. Period
costs do not have corresponding revenues. Administrative salaries, for example, cannot be
matched to any specific revenue stream. These expenses are recorded in the current period.
The matching principle also states that expenses should be recognized in a “rational and
systematic” manner. This is the key concept behind depreciation where an asset’s cost is
recognized over many periods.

In short, the matching principle states that where expenses can be matched with revenues,
we should do so because the benefits of an asset or revenue should be linked to the costs of
that asset or revenue.

Off Balance Sheet – OBS:

Off balance sheet (OBS) items refer to assets or liabilities that do not appear on a company's
balance sheet but that are nonetheless effectively assets or liabilities of the company. Assets or
liabilities designated off balance sheet are typically ones that a company is not the recognized
legal owner of, or in the case of a liability, does not have direct legal responsibility for. As an
example, although loans issued by a bank are ordinarily kept on the bank's balance sheet,
when some loans are securitized and sold off as investments, that securitized debt will be kept
off the bank's books, and an operating lease is one of the most common off-balance items.

Offsetting:

In trading an activity that exactly cancels the risks and benefits of another instrument in the
portfolio. An offsetting transaction is used when it is not possible to simply close the original
transaction as desired. This frequently occurs with options and other more complex financial
instruments. In this way, a trader does not have to agree to close the option contract with
the party on the other side of the options trade, but can simply cancel the net affect by
entering into an offsetting transaction.

Online Banking:

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Online banking allows a user to execute financial transactions via the internet. Online banking
is also known as "internet banking" or "web banking." An online bank offers customers just
about every service traditionally available through a local branch, including deposits, which is
done online or through the mail, and online bill payment.

Opportunity Cost:

Opportunity cost refers to a benefit that a person could have received, but gave up, to take
another course of action. Stated differently, an opportunity cost represents an alternative
given up when a decision is made. This cost is, therefore, most relevant for two mutually
exclusive events. In investing, it is the difference in return between a chosen investment and
one that is necessarily passed up.

Operating Vs Financing Activities:

Operating activities consist of principle activities that a company performs to earn income. In
other words, these are the primary business operations that a company performs to earn
revenue. This is what the company is in business to do.

Financing activities are transactions or business events that affect long-term liabilities and
equity. In other words, financing activities are transactions with creditors or investors used to
fund either company operations or expansions. These transactions are the third set of cash
activities displayed on the statement of cash flows.

Owners Equity:

Owner’s equity, often called net assets, is the owners’ claim to company assets after all of the
liabilities have been paid off. In other words, if the business assets were liquidated to pay off
creditors, the excess money left over would be considered owner’s equity. That is why it is
often referred to as net assets. According to the accounting equation, owner’s equity equals
total company assets minus total company liabilities.

Periodic Versus Perpetual Inventory:

Following are the main differences between perpetual and periodic inventory systems:

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 a) Inventory Account and Cost of Goods Sold Account is used in both systems but they
are updated continuously during the period in perpetual inventory system whereas in
periodic inventory system they are updated only at the end of the period.

b) Purchases Account and Purchase Returns and Allowances Account is only used in
periodic inventory system and is updated continuously. In perpetual inventory system
purchases are directly debited to inventory account and purchase returns are directly
credited to inventory account.

c) Sale Transaction is recorded via two journal entries in perpetual system. One of them
records the sale value of inventory whereas the other records cost of goods sold. In
periodic inventory system, only one entry is made.

d) Closing Entries are only required in periodic inventory system to update inventory and
cost of goods sold. Perpetual inventory system does not require closing entries for
inventory account.

Periodic versus accrual basis:

Periodic inventory is a system of inventory in which updates are made on a periodic basis.
This differs from perpetual inventory systems, where updates are made as seen fit. In a
periodic inventory system no effort is made to keep up-to-date records of either the
inventory or the cost of goods sold. Instead, these amounts are determined only periodically -
usually at the end of each year. This physical count determines the amount of inventory
appearing in the balance sheet. The cost of goods sold for the entire year then is determined
by a short computation.

The accrual basis of accounting is a system of recognizing revenues and expenses when they
are incurred instead of focusing on when they are paid or collected. This means that both
revenues and expenses are recognized and recorded in the accounting period when they occur
instead of when payments are actually made. GAAP requires businesses to use the accrual
method because it more accurately reflects the financial position of a company than the cash
basis.

Post closing trial balance:

A post closing trial balance is a list of permanent accounts and their balances after closing
entries have been journalized and recorded in the accounting system. These accounts will be
carried forward and become the opening balances for the next accounting period.

Rebate on Bills Discounted:

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Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired
Discount or, Discount Received but not earned. Its treatment is same as we do in the case of
Interest Received in Advance. Thus:

(i) If it is given only in the Trial Balance: — the same will be shown as a liability and will
appear in the liability side of the Balance Sheet.

(ii) If it is given in adjustment:— In that case, the same is deducted from the Income from
Interest and Discount in Profit and Loss Account and the same also will appear in the liability
side of the Balance Sheet.

Relevant cost:

Relevant cost is a managerial accounting term that describes avoidable costs that are incurred
when making business decisions. The concept of relevant cost is used to eliminate unnecessary
data that could complicate the decision-making process. As an example, relevant cost is used
to determine whether to sell or keep a business unit.

Revenue Recognition Principle:

Revenue recognition is an accounting principle under generally accepted accounting principles

(GAAP) that determines the specific conditions under which revenue is recognized or
accounted for. Generally, revenue is recognized only when a specific critical event has
occurred and the amount of revenue is measurable. However, there are several situations in
which exceptions may apply.

Reversing entry:

A reversing entry is an optional journal entry that is recorded at the beginning of an

accounting period to undo the prior period’s adjusting entries. In other words, these entries
cancel out or reverse the adjusting journal entries recorded at the end of the prior accounting
period.

Slip system of Accounting:

In this system, posting is made from slips prepared inside the organization itself or from slips
filled in by its customers. So entries are not made in the books of original entry or subsidiary
books, but posting of entries is done from slips. In a banking company, the main slips are
pay-in-slips, withdrawal slips and cheques and all these slips are filled in by clients of the

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bank. These slips serve the basis of entry in the ledgers and control accounts in the General
Ledger are prepared on the basis of analysis of these slips.

The main advantages of the slip system are:

(1) The bank saves a lot of clerical labor as most of the slips are filled in by its customers.

(2) Subsidiary books are avoided as posting is done from slips.

(3) Entries can be recorded with minimum delay as slips can easily pass from hand to hand
among clerks concerned.

Special Journal:

A special journal is any accounting journal in the general journal that is used to record and
post transactions of similar types. In other words, it’s a place where similar transactions can
be recorded and organized, so bookkeepers and accountants can keep track of different
business activities.

Stress Testing:

Stress testing is a simulation technique often used in the banking industry. It is also used on
asset and liability portfolios to determine their reactions to different financial situations.
Additionally, stress tests are used to gauge how certain stressors will affect a company,
industry or specific portfolio. Stress tests are usually computer-generated simulation models
that test hypothetical scenarios; however, highly customized stress testing methodology is also
often utilized.

Sunk Cost:

A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk
cost differs from future costs that a business may face, such as decisions about inventory
purchase costs or product pricing. Sunk costs (past costs) are excluded from future business
decisions, because the cost will be the same regardless of the outcome of a decision.

Suspense Account:

A suspense account is the section of a company's books where it records its unclassified debits
and credits. The suspense account temporarily holds these unclassified transactions while the

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company makes a decision about their classification. Transactions in the suspense account
continue to appear in the general ledger for the company.

Tangible Assets:

A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets,
such as machinery, buildings and land, and current assets, such as inventory. The opposite of
a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks,
copyrights, goodwill and brand recognition, are all examples of intangible assets.

Trend Analysis:

A trend analysis is an aspect of technical analysis that tries to predict the future movement
of a stock based on past data. Trend analysis is based on the idea that what has happened in
the past gives traders an idea of what will happen in the future. There are three main types
of trends: short-, intermediate- and long-term.

Trend Percentage Analysis:

Trend percentages are similar to horizontal analysis except that comparisons are made to a
selected base year or period. Trend percentages are useful for comparing financial statements
over several years because they disclose changes and trends occurring through time. Trend
percentages also referred to as index numbers, which help to compare financial information
over time to a base year or period. We can calculate trend percentages by:

a) Selecting a base year or period

b) Assigning a weight of 100% to the amounts appearing on the base-year financial

statements

c) Expressing the corresponding amounts on the other years’ financial statements as a

percentage of base-year or period amounts.

Unearned Revenue:

Short Notes 24
Unearned revenue, also called deferred revenue, is the liability or amount of money owed for
payment of goods or services by a customer before the goods or services have been delivered
to that customer. In other words, if a customer pays for a good or service before the
company delivers it, the company has to recognize that it owes the customer for that good or
service.

Vat income vs. Taxable income:

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever
value is added at a stage of production and at the point of retail sale. The amount of VAT
that the user pays is on the cost of the product, less any of the costs of materials used in the
product that have already been taxed.

Taxable income is the amount of income used to calculate how much tax an individual or a
company owes to the government in a given tax year. It is generally described as gross
income or adjusted gross income (which is minus any deductions or exemptions allowed in
that tax year). Taxable income includes wages, salaries, bonuses and tips, as well as
investment income and unearned income.

VAT Invoice:

A Value-Added Tax (VAT) invoice is a document issued by an accounting person setting out
the details of a taxable supply and all related information as prescribed by VAT law. A VAT
invoice must issue within fifteen days of the end of the month in which goods or services are
supplied. The information given on a VAT invoice is the basis for establishing your VAT
liability on the supply of goods or services.

Vertical Vs Horizontal Analysis:

Vertical analysis, also called common-size analysis, is a financial analysis tool that lists each
line item on the financial statements as a percentage of its total category. In other words, it’s
a method used to analyze financial statements by comparing individual entries as a
proportion of their total accounts like assets, liabilities, and equity.

Horizontal analysis, sometimes called trend analysis, is the process of comparing line items in
comparative financial statements or financial ratios across a number of years in an effort to
track the history and progress of a company’s performance. In other words, it’s a way for
analysts to compare accounts or performance metrics over time to see if the company is
improving or declining.

Wasting Assets:

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Wasting assets is an item that irreversibly declines in value, as a function of time. Wasting
assets include vehicles, machinery and other fixed assets. Accountants attempt to quantify the
amount that assets decrease in value over time, by assigning depreciation schedules to
wasting assets, therefore, recognizing the decrease in value each year.

Window Dressing:

Window dressing is a technique used by companies and financial managers to manipulate

financial statements and reports to show more favorable results for a period. Although
window dressing is illegal or fraudulent, it is slightly dishonest and is usually done to mislead
investors.

Working Capital:

Working capital, also called net working capital, is a liquidity ratio that measures a
company’s ability to pay off its current liabilities with its current assets. Working capital is
calculated by subtracting current liabilities from current assets.

Working Capital= Current Assets- Current Liabilities

Worksheet:

Worksheets are prepared at the end of an accounting period and usually include a list of
accounts, account balances, adjustments to each account, and each account’s adjusted balance
all sorted in financial statement order. As you can imagine, after a worksheet is completely
filled out, preparing financial statements manually is quite simple. Most of the preparation
work goes into drafting the worksheets.

Zero Interest Bearing Note:

Zero interest bearing note is a note that includes interest as part of its face amount instead
of stating it explicitly. Zero interest bearing notes is also called non-interest bearing notes.
Contrary to the name, noninterest-bearing notes do actually pay interest. The interest is
implied in the face value of the note.

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