Forms of Accounting,

Accounting Cycle, Accounting

Terminologies
 Financial Accounting

 Financial accounting is a specific branch of accounting involving a process of

recording, summarizing, and reporting the myriad of transactions resulting
from business operations over a period of time. These transactions are
summarized in the preparation of financial statements, including the balance
sheet, income statement and cash flow statement, that record the company's
operating performance over a specified period.

 Work opportunities for a financial accountant can be found in both the public
and private sectors. A financial accountant's duties may differ from those of a
general accountant, who works for himself or herself rather than directly for a
company or organization.
 Financial accounting – its functioning
 Financial accounting utilizes a series of established accounting principles. The
selection of accounting principles to use during the course of financial
accounting depends on the regulatory and reporting requirements the business
faces.
 The financial statements used in financial accounting present the five main
classifications of financial data: revenues, expenses, assets, liabilities and
equity. Revenues and expenses are accounted for and reported on the income
statement. They can include everything from R&D to payroll.
 Financial accounting results in the determination of net income at the bottom of
the income statement. Assets, liabilities and equity accounts are reported on the
balance sheet. The balance sheet utilizes financial accounting to report
ownership of the company's future economic benefits.
 Basis of Financial Accounting or forms of Financial
Accounting
 There are two primary types of financial accounting: the accrual method and the cash method.
The primary difference between the two types of financial accounting is the timing in which
transactions are (or are not) recorded.
 Accrual Method
 The accrual method of financial accounting is a method of preparing financial statements that
records transactions independently of cash usage. Journal entries may be posted prior to an item
having to be paid for, and certain financial accounting principles recognize the impact of a
transaction over a period of time (as opposed to the entire impact being recorded in the period
the cash impact happened). 
 example of the accrual method of accounting is expenses that have not yet been paid. Imagine a
company received an invoice for $5,000 for July utility usage. Even though the company won’t
pay the bill until August, the accrual method of accounting calls for the company to record the
transaction in July. In addition to debiting Utility Expenses, the company records a credit to
accounts payable. When the invoice is paid, the credit is cleared.
 Accrued incomes(earned but not received yet) and accrued expenses (occurred but not paid yet)
Cash method

 Cash Method
 The cash method of financial accounting is an easier, less strict method of preparing
financial statements. Under the cash method, transactions are recorded only when cash is
involved. Revenue and expenses are only recorded when the transaction has been
completed via the facilitation of money.
Accrual Method vs. Cash Method

• Accrual Method • Cash Method

• Records transactions when benefit is received or
liability is incurred
• Records transactions when cash is
received or distributed
• Often a more accurate method of accounting that
depicts more realistic business operations • Often an easier method of accounting
• Required for larger, public companies as part of that simplifies a company down to what
external reporting has already actually occurred
• Cash Method Records transactions when cash is
received or distributed
• Primarily used by smaller, private
companies with low to no reporting
• Often an easier method of accounting that simplifies
a company down to what has already actually requirements
occurred
• Primarily used by smaller, private companies with
low to no reporting requirements
 Principles of Financial Accounting
 Financial accounting is dictated by five general and overarching principles. These principles guide how companies are
to prepare their financial statements and are the basis of all financial accounting technical guidance. These five
principles relate to the accrual method of accounting.
• The Revenue Recognition Principle states that revenue should be recognized when it has been earned. This principle
dictates how much revenue should be recorded, the timing of when that revenue is reported, and circumstances in
which revenue received should not be reflected within a set of financial statements. 
• The Cost Principle states the basis for which costs are recorded. This principle dictates how much expenses should
be recorded for (i.e. at transaction cost) in addition to properly recognizing expenses over time for appropriate
situations (i.e. a depreciable asset is expensed over its useful life). 
• The Matching Principle states that revenue and expenses should be recorded in the same period in which both are
incurred. This principle strives to avoid a company from recording revenue in one year with the associated cost of
generating that revenue in a different year. This principle dictates the timing in which transactions are recorded.
• The Full Disclosure Principle states that financial statements should be prepared using financial accounting guidance
that includes footnotes, schedules, or commentary that transparently report the financial position of a company. This
principle dictates the amount of information provided within financial statements.
• The Objectivity Principle states that while financial accounting has aspects of estimations and professional
judgment, a set of financial statements should be prepared objectively and free from personal bias. This principle
dictates the aspects where technical accounting should be used as opposed to personal opinion.
 Users of Financial Accounting/Financial
Statements
 In addition to management using financial accounting to gain information on operations, the following groups use financial
accounting reporting: 
• Investors. Before investing in a company, investors often seek financial reports prepared using financial accounting guidance
to understand how the company has been doing and to set expectations about the future of the company. 
• Auditors. Companies may be required to present their financial position to auditors. Auditors analyze the financial statements
to ensure that property financial accounting guidance has been used and the reports are free from material misstatements.
• Regulatory Agencies. Public companies are required to submit financial statements to governing bodies such as the
Securities and Exchange Commission. These financial statements must be prepared in accordance with financial accounting
rules, and companies face fines or exchange delisting if they do not comply with reporting requirements.
• Suppliers. Vendors or suppliers may ask for financial statements as part of their credit application process. Suppliers may
require a credit history or evidence of profitability before issuing a credit or increasing credit to a requested amount.
• Banks. Lenders and other similar financial institutions will almost always require financial statements as part of the business
loan process. Lenders will need to see verifiable proof via financial accounting that a company is in good operational health
prior to issuing a loan (or as part of determining what the cost, covenants, or interest rate of the loan will be).
Managerial Accounting

 Managerial accounting (also known as cost accounting or management accounting) is a

branch of accounting that is concerned with the identification, measurement, analysis, and
interpretation of accounting information so that it can be used to help managers make
informed operational decisions.
 Unlike financial accounting, which is primarily concentrated on the coordination and
reporting of the company’s financial transactions to outsiders (e.g., investors, and lenders),
managerial accounting is focused on internal reporting to aid decision-making.
 Managerial accountants need to analyze various events and
operational metrics in order to translate data into useful
information that can be leveraged by the company’s management
in their decision-making process. They aim to provide detailed
information regarding the company’s operations by analyzing
each individual line of products, operating activity, facility, etc.
3 Pillars of Managerial Accounting

 Managerial accounting is used for planning, decision-making, and controlling. These are
the three pillars of the field. In addition, forecasting and performance tracking are key
components.
 Objective of Managerial Accounting
 The main objective of managerial accounting is to assist the management of a company in efficiently performing its
functions: planning, organizing, directing, and controlling. Management accounting helps with these functions in the
following ways:
 1. Provides data: It serves as a vital source of data for planning. The historical data captured by managerial
accounting shows the growth of the business, which is useful in forecasting.
 2. Analyzes data: The accounting data is presented in a meaningful way by calculating ratios and projecting trends.
This information is then analyzed for planning and decision-making. For example, you can categorize purchases of
different items period-wise, supplier-wise and territory-wise.
 3. Aids meaningful discussions: Management accounting can be used as a means of communicating a course of
action throughout the organization. In the initial stages, it depicts the organizational feasibility and consistency of
various segments of a plan. Later, it tells about the progress of the plans and the roles of different parties to implement
it.
 4. Helps in achieving goals: It helps convert organizational strategies and objectives into feasible business goals.
These goals can be achieved by imposing budget control and standard costing, which are integral parts of management
accounting.
 5. Uses qualitative information: Management accounting does not restrict itself to quantitative information for
decision-making. It takes into account qualitative information which cannot be measured in terms of money. Industry
cycles, and strength of research and development are some of examples qualitative information that a business can
collect using special surveys.  
 Scope of managerial accounting
 The main objective of managerial accounting is to maximize profit and minimize losses. It is concerned
with the presentation of data to predict inconsistencies in finances that help managers make important
decisions. Its scope is quite vast and includes several business operations. The following points discuss
what management accounting can do to make a business run better. 
 1. Managerial accounting is a rearrangement of information on financial statements and depends on it for
making decisions. So the management cannot enforce the managerial decisions without referring to a
concrete financial accounting system.
 2. What you can infer from financial accounting is limited to numerical results like profit and loss, but in
management accounting, you can discuss the cause-and-effect relationships behind those results.
 3. Managerial accounting uses easy-to-understand techniques such as standard costing, marginal costing,
project appraisal, and control accounting.
 4. Using historical data as a reference, the management observes the current information to check the
impacts of business decisions.
 5. Management can use this type of accounting to set objectives, format plans to meet them, and compare
the performance of various departments.
 6. Managerial accounting is used for forecasting. It concentrates on supplying information that would ease
the effect of a problem rather than arriving at a final solution.
 Techniques in Managerial Accounting

 In order to achieve its goals, managerial accounting relies on a variety of different techniques, including the
following:
 1. Product Costing
 Product costing is the process of determining the total cost involved in the production of goods and services. It is
the process of tracking, recording, and studying every expense involved in the purchase and sale of goods and
services including the cost of goods manufactured (COGM). 
 These expenses span from the cost of raw materials to labor costs to factory overheads and the cost of delivering
goods to buyers or consumers. 
 Costs are broken down into four categories; fixed cost, variable cost, direct cost, and indirect cost. Product
costing aims at identifying and distinguishing expenses into these categories for better understanding and
analysis.
 Managerial accountants exercise product costing in several ways. Overhead charges are determined for each
product by dividing the whole expense by the number of goods or other factors like storage space.
 Proper product costing allows a company to accurately estimate the cost and value of products in different stages
of production. Product costing helps managers to implement pricing strategies that are beneficial to the company.
 2. Marginal Costing/Marginal Analysis

 Marginal Costing is another type of managerial accounting that deals with the cost of goods. It
involves determining the impact of adding one additional unit of a product to the purchase or
production order. This impact is then measured in relation to the overall cost of production.
 Making use of marginal costing is good for short-term business decisions. It helps to measure the
amount of contribution a product has to the overall cost and profit of a company. 
 For managerial accounting, marginal costing works closely with break-even analysis. Additional
products are added to determine the unit volume that makes the total sales revenue equal to the total
expenses. This gives companies enough information in determining the price points of products. 
 Marginal costing also helps businesses determine the best use of raw materials and the optimal sales
mix for products.
3. Cash Flow Analysis
 Cash flow refers to the different inflows of cash into a company and outflows of cash from a
company. Cash flow analysis is the examination of these inflows and outflows of cash during a
particular period under consideration.
 Managerial accountants engage in cash flow analysis to identify the impact of business decisions on
the cash flow of a company. This cash flow concerns activities surrounding outflowing operational
costs, outflowing investments, and in-flowing financing of a business.
 Financial information is usually recorded on an accrual basis. Accrual accounting provides the
financial position of a company at the end of a particular period. However, each transaction within
this period is not accounted for with accrual accounting alone.
 Cash flow analysis measures the impact of a particular transaction on the final financial position of
a company. The cash inflow and outflow resulting from a single transaction are recorded and
considered.
 Proper cash flow analysis gives managerial accountants and administrators a chance to optimize the
flow of cash within a company.
 Optimization of cash flow ensures that a company has enough liquid assets to cover immediate
expenses. Companies optimize cash flow so that they do not worry about future events and
insufficient finances to complete them.
4. Margin analysis
 Margin analysis is primarily concerned with the incremental benefits of optimizing production.
Margin analysis is one of the most fundamental and essential techniques in managerial accounting.
It includes the calculation of the breakeven point that determines the optimal sales mix for the
company’s products.

5. Constraint analysis
 Constraints are limitations or restrictions that prevent the proper functioning of a business process.
 Constraint analysis involves the identification and examination of possible bottleneck situations in
the whole production line or sales process.
 The analysis of the production lines of a business identifies principal bottlenecks, the inefficiencies
created by these bottlenecks, and their impact on the company’s ability to generate revenues and
profits.
6. Capital budgeting
 Capital budgeting is concerned with the analysis of information required to make the necessary
decisions related to capital expenditures. In capital budgeting analysis, managerial accountants
calculate the net present value (NPV) and the internal rate of return (IRR) to help managers to
decide on new capital budgeting decisions.
7. Inventory valuation and product costing
 Inventory valuation involves the identification and analysis of the actual costs associated with the
company’s products and inventory. The process generally implies the calculation and allocation of
overhead charges, as well as the assessment of the direct costs related to the cost of goods sold
(COGS).
8. Trend analysis and forecasting
 Trend analysis and forecasting are primarily concerned with the identification of patterns and trends
of product costs, as well as with the recognition of unusual variances from the forecasted values and
the reasons for such variances.
9. Account Receivables Management

 Account receivables are the invoices or credits which a company expects to be

remunerated by its debtors. The proper management of account receivables is an important
form of managerial accounting.

 Managing account receivable involves the process of ensuring that debtors pay their dues
on time. It helps to prevent a company from running out of working capital to keep the
business running.

 Account receivables management also helps a company avoid situations of harmfully

overdue payments or total non-payment of pending receivables.
financial accounting Vs. Managerial Accounting

 Past and Present Use

 The information created through financial accounting is entirely historical; financial
statements contain data for a defined period of time.
 Managerial accounting looks at past performance and creates business forecasts.
Business decisions should be informed by this type of accounting.(future outlook)
 Investors and creditors often use financial statements to create forecasts of their own. In
this way, financial accounting is not entirely backward-looking. Nevertheless, no
future forecasting is allowed in the statements.
 Regulation and Uniformity
 The biggest practical difference between financial accounting and managerial accounting relates
to their legal status. Reports generated through managerial accounting are only circulated
internally. Each company is free to create its own system and rules on managerial reports. This
means there is no centralized system regulating reports, and it can often take much longer to find
what you need.
 In contrast, financial accounting reports are highly regulated, especially the income statement,
balance sheet, and cash flow statement. Since this information is released for public consumption
and is highly anticipated by investors, companies must be very careful about how they make
calculations, how figures are reported, and in what order those reports are constructed.
 The Financial Accounting Standards Board (FASB), under the aegis of the Securities and
Exchange Commission (SEC), establishes financial accounting rules in the United States. The
sum of these rules is referred to as generally accepted accounting principles (GAAP).
 Through this uniformity, investors and lenders compare companies directly on the basis of their
financial statements. Moreover, financial statements are released on a regular schedule,
establishing consistency of external information flows.
 Reporting Details
 For a variety of reasons, financial accounting reports tend to be aggregated, concise,
and generalized. Information is simultaneously more transparent and less
revealing.
 This is not normally the case with managerial accounting as there are many reasons to
do things a specific way for each company. For example, you might want to internally
report lower bonuses so as to not anger mid-to-lower level employees who might want
to peruse the report.

 Managerial accounting reports are highly detailed, technical, specific, and often
experimental. Firms are always looking for a competitive advantage, so they examine a
multitude of information that could seem pedantic or confusing to outside parties.
 The Bottom Line (Intended users of Information)
 The key difference between managerial accounting and financial accounting relates to
the intended users of the information. Managerial accounting information is aimed at
helping managers within the organization make well-informed business decisions, while
financial accounting is aimed at providing financial information to parties outside the
organization.

 Financial accounting must conform to certain standards, in accordance with GAAP as a

requisite for maintaining their publicly traded status. Most other companies in the U.S.
conform to GAAP in order to meet debt covenants often required by financial
institutions offering lines of credit. Because managerial accounting is not for external
users, it can be modified to meet the needs of its intended users. This may vary
considerably by company or even by department within a company.
 Cost Accounting
 Cost accounting is a method of managerial accounting that aims to capture the total production cost of a
business by measuring the variable costs of each production phase as well as fixed costs, such as a lease
expense.
 A company's internal management department uses cost accounting to define both variable and fixed costs
associated with the manufacturing process. It will first individually calculate and report these costs, then
compare input costs with production results to assist in assessing financial performance and in making potential
business decisions.

 Cost accounting includes several forms of costs which are listed below.
 Fixed costs (rent, insurance, salaries, loan repayments)
 Operating costs (day to day expenses)
 Direct costs (associated with specified product)
 Variable costs (direct materials, direct labour)
 Indirect costs (expenses involved with maintaining and running a company)
Difference between Cost Accounting and Financial Accounting

 Cost accounting is sometimes used to assist decision-making by management within a business,

whereas financial accounting is usually used by outside investors or creditors.
 Financial accounting reveals the financial status and results of a corporation through financial
statements to external outlets, which provide information regarding its sales, expenditures,
assets, and liabilities.
 Cost accounting can be most useful in budgeting and setting up cost reduction systems as a
method for management, which will increase the company's net profits in the future.
 The key distinction between cost accounting and financial accounting is that while the costs
are categorized according to the type of transaction in financial accounting, cost accounting
classifies costs according to the management's information needs.
 Cost accounting, as it is used by management as an internal method, does not have to follow any
common requirements, such as commonly agreed accounting principles (GAAP), and, as a
result, differs in use from business to company or department to department.
Types of Cost Accounting

• Standard Costing: Standard costs are the costs that management estimates to occur
while producing goods. These costs are based either on the past reports/experience of
the firm or market research conducted by management. Standard costs involve product
costs involving direct material costs, direct labor costs, and manufacturing overhead
costs.
• Since managers have set the standard costs, they can then proceed with planning
and budgeting decisions.
• This will help them to project the net income based on the standard costs of
production. Any deviations from the set standards will be treated as variances that will
be taken care of by managers.
 Activity-Based Costing
 Activity-based costing is a costing method in which various activities in an organization,
typically a factory, are identified, and then costs are allocated to these activities. The costs
accumulated in these activities are further allocated to the products and services based on the
actual consumption by each product.
 Activity-based costing assigns costs to products and services based on:
 Activities that go into their production
 quantity of resources consumed by these activities
 Lean accounting
 Lean accounting has some principles and processes that provide numerical feedback for
manufacturers implementing lean manufacturing and lean inventory management practices.
Traditional accounting system recognizes inventory as an asset even if the inventory sits on
the shelf for a year and has holding costs associated with it. Lean accounting, however,
considers that more than necessary inventory at a time is bad for the company and has costs
associated with it in terms of holding costs, the opportunity cost of the cash blocked in
inventory, etc. Lean accounting considers this and defines efficiency, not in terms of
production in a month. Instead, it defines efficiency in terms of how much time processing an
order takes.

 Cost accounting is a very basic cost term. Read our detailed article – Costing Terms to learn
about various other terms.
 Note- lean manufacturing (shortens the time between receiving and delivering orders &
eliminates waste)
 Marginal Cost Accounting

 Marginal costing is the type of costing in which only variable costs are assigned to the
product while the fixed costs are considered as the costs for the period. This means
that the fixed costs, such as rent, electricity, etc., are directly a part of the income
statement as expenses and are not assigned to any particular product.

 The marginal cost of a product is its variable cost. This cost includes items such as
direct material costs, direct labor costs, and every such cost, which is variable,
whether of direct or indirect nature. As the volume of production changes, these costs
also change proportionately. On the other hand, fixed costs are costs that remain
unchanged regardless of the volume of production.
 ACCOUNTING CYCLE
 It is about recording and processing all the financial transactions of a company.
 It is a holistic approach begins with the occurrence of transaction, recording it in relevant
documents in a proper and systematic manner and closing the accounts with the end of the
accounting year.
 It ensures that no mistakes are made since recording of transactions and till the closing the
transactions in the books of accounts.
 Accounting Cycle

Transaction Journal
entries
Closing
the
books
Accounting Posting
cycle
Financial
statements

Trial
balance
Adjusting
the entries worksheets
Objectives of Accounting Cycle

 To systematically record all the transactions without missing any entry.

 To avoid common mistakes during the process of accounting.
-Omitting the recording of transaction.
- Posting in the wrong account.
-Posting on wrong side of the account.
-Posting wrong amount.
-Posting of transaction multiple times.
 Steps in accounting cycle:

1. Accounting Transaction: A business event having monetary impact on the financial

statements of the business.

 For ex: Cash sales to customer.( account receivables or assets)

Purchase of fixed assets from suppliers.

2. Journal Entries: It includes book of original entry. Entries made into a journal employ a

double-entry accounting system, where balancing debits and credits are used. The entries

also state the date, accounts impacted, and amounts, as well as an identifier for the source

document.
 Steps in accounting cycle
3. Posting in General Ledger: After doing the journal entries of the transaction, the
accountant posts entries to individual general ledger where one can summaries all the
transactions related to that account.

4. Trial Balance: At the end of the accounting period, the accountant prepares the trial
balance from the journal ledger which helps in calculating the total balance of an
individual account.

5. Worksheets: All the debit balances should tally with the credit balances. If it does not
tally than it is crucial to identify the errors and rectify them to tally the balances. So,
worksheets are prepared.
Cont.. Steps in accounting cycle

6. Adjusting Entries: After completing the worksheets, the

accountant posts adjusting entries for accruals and deferrals in the
accounts.

7. Financial Statements: The accounting person prepares the

financial statements like the income statement, cash flow
statements and balance sheet after the final correct balances.
 Accounting Terminologies
 Account
 This is the first term is the glossary of accounting terminology. An Account keeps the records in a classified
manner in the general ledger.

 Account Balance
 It is of two types: first a debit balance and second a credit balance. When the sum of debit entries is more than
the sum of credits then it is a debit balance and if the sum of debit entries is less than the sum of credits then it
is a credit balance.

 Accounting
 Accounting is everything about the process that helps to record, summarize, analyze, and report data that
concerns financial transactions. Besides that, it also takes care of the profits and loss issues in business.
 Cont….
 Accounting Standards: An accounting standard is a common set of principles, standards,
and procedures that define the basis of financial accounting policies and practices.
 An accounting standard is a set of practices and policies used to systematize bookkeeping
and other accounting functions across firms and over time.
 Accounting standards apply to the full breadth of an entity’s financial picture, including
assets, liabilities, revenue, expenses, and shareholders' equity.
 Banks, investors, and regulatory agencies count on accounting standards to ensure
information about a given entity is relevant and accurate.
 Indian Accounting Standards:
 Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted
by companies in India and issued under the supervision of the Accounting Standards
Board (ASB) which was constituted as a body in the year 1977. ASB is a committee
under the Institute of Chartered Accountants of India (ICAI) which consists of
representatives from a government department, academicians, and other professional
bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc. ICAI is an
independent body formed under an act of parliament.

 The Ind AS are named and numbered in the same way as the International Financial
Reporting Standards (IFRS). National Financial Reporting Authority (NFRA)
recommends these standards to the Ministry of Corporate Affairs (MCA).
 Accounting Principles
 Accounting principles are the rules and guidelines that companies and other bodies must follow
when reporting financial data. These rules make it easier to examine financial data by standardizing
the terms and methods that accountants must use.
 The International Financial Reporting Standards (IFRS) is the most widely used set of accounting
principles, with adoption in 167 jurisdictions. The United States uses a separate set of accounting
principles, known as generally accepted accounting principles (GAAP).
 Accounting standards are implemented to improve the quality of financial information reported by
companies.
 Internationally, the International Accounting Standards Board (IASB) issues International Financial
Reporting Standards (IFRS).
Journal

 A journal is a detailed account that records all the financial transactions of a business, to be
used for the future reconciling of accounts and the transfer of information to other official
accounting records, such as the general ledger. A journal states the date of a transaction,
which accounts were affected, and the amounts, usually in a double-entry bookkeeping
method.
 Accounts Payable
 These are the liabilities in a business or an organization that shows the money owed to others. For
example, money spent on pending bills and taxes.
 Accounts Receivable
 This is an asset that represents the money owed by the other to the business and the organization. For
example, money the debtors owe the organization or credit sales made by the organization.
 Accrual Basis
 This is an accounting method that performs many functions like recognizing the revenue when earned,
rather than when collected, and expensed that incurred rather than when they are paid. In other words,
Accrual basis records all the financial transfers when they occur, i.e. in the period in which they occur
rather.
 Asset
 It is a very important term in accounting terminology. It is a cash convertible property that one owns.
For example, land, buildings, cash in bank accounts are all assets. There are broadly two types of assets
– current asset and fixed asset.
 Audit
 The audit is a formal examination and evaluation of an organization’s records to ensure quality assurance,
check internal control, elimination of fraud, and to check the effectiveness of the policies.

 Balance Sheet
 It is the summary report on a specific date of the assets, liabilities and net assets of the business.

 Budget
 Budget is the total requirement of assets in the whole coming year.
 Credit
 It represents the reduction of an asset or in other words, the expenditure made or added to a
liability. Its entry is done on the right side of the balance sheet.

 Debit
 It represents the gain in the asset or the earnings made. The entry of debt is done on the left side of
a double-entry accounting system.

 Double-Entry Accounting
 Double-entry accounting records financial transactions in which each transaction is entered into
two or more accounts. Furthermore, it involves two-way, self-balancing posting. Total debits must
equal total credits.
 Expense
 An expense is funds paid by the organization or business. For example, paychecks to employees,
reimbursements to employees, payments to vendors for goods or services.

 FASB
 FASB stands for Financial accounting standards board. It is an independent, private, nongovernmental
authority that establishes the accounting principles in the United States.

 Financial Statements
 Financial statements are a series of reports showing a summary view of the various financial activities of the
business at a specific point in time. Also, each statement tells a different story about financial activity taking
place in the organization. The three main aspects of financial statements are Profit and Loss A/c, Balance
sheet, and Cash flow Statement.

 Fiscal Year
 A fiscal year is a period of 12 consecutive months chosen by an organization as its accounting period which
may or may not be a calendar year. The general fiscal year used in India is 1st April to 31st March.
 Cash Book
 A cash book is a financial journal that contains all cash receipts and disbursements,
including bank deposits and withdrawals. Entries in the cash book are then posted into the
general ledger.
 Drawings
 Drawings in accounting terms represent withdrawals taken by the owner. As such, it will
impact the company’s financial statement by showing a decrease in the assets equivalent to
the amount that is withdrawn.
 Fixed Asset
 A fixed asset is any real item with a useful life of more than one year and, i.e. it does not have
liquidity. For example, the building of a company and the equipment required.

 Fund Balance (Net Assets)

 Fund balance represents the net assets of the company. To arrive at this number take total assets
minus total liabilities. Also, Any excess revenue over expenses or cumulative appreciation or
depreciation on investments will become a net asset at the end of the fiscal year.

 GAAP
 GAAP is an abbreviation for Generally accepted accounting principles which includes conventions,
rules. In addition, the procedures that are necessary to define accepted accounting practice at a
particular time. Besides that, The highest levels of such principles are set by FASB.
 General Ledger
 The general ledger is the collection of all assets, liability, fund balance (net assets), revenue,
and expense accounts.

 Income Statement
 An Income statement is a summary report that shows revenues and expenses over a specific
period of time, such as a month, quarter, or fiscal year.
 Journal Entry
 A journal entry is a group of debit and credit transactions that are included in the general ledger.
Consequently, All entries in the journal must result in zero so debits must be equal to credits.

 Liability
 Liability is what the business organization owes to others. For example-loans, taxes, long-term
debt from a bond issue, and funds held by the college for a third party such as a student group.

 Net Income (loss)

 Net Income (loss) is the amount a department lost for a specific period of time. The arrival at this
number takes total revenues minus total expenses.
 Revenue
 Revenue is the funds collected by the business, it can also be called income. For example,
tuition, fees, etc.

 Subsidiary Ledger
 A subsidiary ledger is a group of accounts containing the detail of debit and credit entries. For
instance, detailed information is contained in Accounts Payable.
 Depreciation
 The term depreciation refers to an accounting method used to allocate the cost of a tangible
or physical asset over its useful life. Depreciation represents how much of an asset's value
has been used. It allows companies to earn revenue from the assets they own by paying for
them over a certain period of time.

 Because companies don't have to account for them entirely in the year the assets are
purchased, the immediate cost of ownership is significantly reduced. Not accounting for
depreciation can greatly affect a company's profits. Companies can also depreciate long-term
assets for both tax and accounting purposes.
 Depreciation can be compared with amortization, which accounts for the change in value
over time of intangible assets.
Amortization

 Amortization is the process of incrementally charging the cost of an asset

to expense over its expected period of use, which shifts the asset from the
balance sheet to the income statement. It essentially reflects the
consumption of an intangible asset over its useful life. Amortization is
most commonly used for the gradual write-down of the cost of those
intangible assets that have a specific useful life. Examples of intangible
assets are patents, copyrights, taxi licenses, and trademarks. The concept
also applies to such items as the discount on notes receivable and deferred
charges.