Accounting and Finance Terms
01. Definition Of Accounting: “the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are, in part
at least of a financial character and interpreting the results there of”.
02. Book Keeping: It is mainly concerned with recording of financial data relating to the
business operations in a significant and orderly manner.
03. Concepts of accounting:
Separate entity concept
Going concern concept
Money measurement concept
Cost concept
Dual aspect concept
Accounting period concept
Periodic matching of costs and revenue concept
Realization concept.
04. Conventions Of Accounting
Conservatism
Full disclosure
Consistency
D materiality.
05. Systems of bookkeeping
Single entry system
Double entry system
06. Systems of accounting
Cash system accounting
Mercantile system of accounting.
07. Principles of accounting
Personal a/c: Debit the receiver
Credit the giver
Real a/c: Debit what comes in
Credit what goes out
Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
08. Meaning of journal: Journal means chronological record of transactions.
09. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the
business enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their
respective accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on
a particular date.
12. Credit note: The customer when returns the goods get credit for the value of the
goods returned. A credit note is sent to him intimating that his a/c has been credited
with the value of the goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him
indicating that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of
the cashbook is known as the contra entry.
15. Petty cash book: Petty Cash is maintained by business to record petty cash
expenses of the business, such as postage, cartage, stationery, etc.
16. Promissory Note: An instrument in writing containing an unconditional undertaking
Signed by the maker, to pay certain sum of money only to or to the order of a certain
person or to the barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six
months the cheque is not valid.
20. Bank Reconciliation Statement: It is a statement reconciling the balance as shown
by the bank passbook and the balance as shown by the Cash Book. Obj: to know the
difference & pass necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the
revenue.
22. Capital Income: The term capital income means an income which does not grow out
of or pertain to the running of the business proper.
23. Revenue Income: The income, which arises out of and in the course of the regular
business transactions of a concern.
24. Capital Expenditure: It means an expenditure, which has been incurred for the
purpose of obtaining a long-term advantage for the business.
25. Revenue Expenditure: An expenditure that incurred in the course of regular
business transactions of a concern.
26. Differed Revenue Expenditure: An expenditure, which is incurred during an
accounting period but is applicable further periods also. Eg: heavy advertisement.
27. Bad Debts: Bad debts denote the amount lost from debtors to whom the goods were
sold on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value
of asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious Assets: These are assets not represented by tangible possession or
property. Examples of preliminary expenses, discount on issue of shares, debit
balance in the profit and loss account when shown on the assets side in the balance
sheet.
30. Intangible Assets: Intangible assets mean the assets which is not having the
physical appearance. And its have the real value, it shown on the assets side of the
balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the
business during the accounting year but which has not yet been due and, therefore,
has not been received.
32. Out standing Income: Outstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
33. Suspense Account: the suspense account is an account to which the difference in
the trial balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as
extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property
during tenancy.
37. Capital Employed: The term capital employed means sum of total long-term funds
employed in the business. i.e.
(share capital+ reserves & surplus +long term loans –
(non business assets + fictitious assets)
38. Equity Shares: Those shares which are not having pref. rights are called equity
shares.
39. Pref.Shares: Those shares which are carrying the pref.rights is called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the even
of company winding up.
40. Leverage: It is a force applied at a particular point to get the desired result.
41. Operating leverage: The operating leverage takes place when a changes in revenue
greater changes in EBIT.
42. Financial leverage: It is nothing but a process of using debt capital to increase the
rate of return on equity
43. Combine leverage: it is used to measure of the total risk of the firm = operating risk
+ financial risk.
44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their
of an agreed ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share
the profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives
advances against its receivables, from a financial institutions (called factor)
47. Capital Reserve: The reserve which transferred from the capital gains is called
capital reserve.
48. General Reserve: The reserve which is transferred from normal profits of the firm is
called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like
surplus cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in
a subsidiary company.
51. Capital Receipts: capital receipts may be defined as “non-recurring receipts from the
owner of the business or lender of the money crating a liability to either of them.
52. Revenue Receipts: Revenue receipts may defined as “A recurring receipts against
sale of goods in the normal course of business and which generally the result of the
trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute
money or money’s worth to common stock and employs it for a common purpose.
The common stock so contributed is denoted in money and is the capital of the
company.
54. Types of a company:
Statutory companies
Government company
Foreign company
Registered companies:
Companies limited by shares
Companies limited by guarantee
Unlimited companies
D. Private company
E. Public company
55. Private company: A private co. is which by its AOA: Restricts the right of the
members to transfer of shares Limits the no. Of members 50. Prohibits any Invitation
to the public to subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain
the requisite restrictions to make it a private limited company, is called a public
company.
57. Characteristics of a company:
Voluntary association
Separate legal entity
Free transfer of shares
Limited liability
Common seal
Perpetual existence.
58. Formation of company:
Promotion
Incorporation
Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: it is the maximum amount of the share capital, which a
company can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the
public for subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the
public.
63. Called up capital: It has been portion of the subscribed capital, which has been called
up by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has
been received.
65. Debentures: Debenture is a certificate issued by a company under its seal
acknowledging a debt due by it to its holder.
66. Cash Profit: Cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
Having minimum share capital 5 lakhs
Accepting investments from the public
No restriction of the transferable of shares
No restriction of no. Of members.
Accepting deposits from the investors
68. Secret reserves: secret reserves are reserves the existence of which does not appear
on the face of balance sheet. In such a situation, net assets position of the business
is stronger than that disclosed by the balance sheet.
These reserves are crated by:
Excessive dep.of an asset, excessive over-valuation of a liability.
Complete elimination of an asset, or under valuation of an asset.
69. Provision: Provision usually means any amount written off or retained by way of
providing depreciation, renewals or diminutions in the value of assets or retained by
way of providing for any known liability of which the amount can not be determined
with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the
purpose it was originally made is also considered as reserve Provision is charge
against profits while reserves is an appropriation of profits Creation of reserve
increase proprietor’s fund while creation of provisions decreases his funds in the
business.
71. Reserve Fund: The term reserve fund means such reserve against which clearly
investment etc.
72. Undisclosed Reserves: Sometimes a reserve is created but its identity is merged
with some other a/c or group of accounts so that the existence of the reserve is not
known such reserve is called an undisclosed reserve.
73. Finance Management: financial management deals with procurement of funds and
their effective utilization in business.
74. Objectives Of Financial Management: Financial management having two
objectives that Is:
Profit maximization: The finance manager has to make his decisions in a
Wealth maximization: Wealth maximization means the objective of a firm should
manner so that the profits of the concern are maximized.
be to maximize its value or wealth, or value of a firm is represented by the
market price of its common stock.
75. Functions of financial manager:
Investment decision
Dividend decision
Finance decision
Cash management decisions
Performance evaluation
Market impact analysis
76. Time value of money: The time value of money means that worth of a rupee
received today is different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds
required in a business may be raised; in other words, it refers to the proportion of
debt, preference capital and equity capital.
78. Optimum capital structure: capital structure is optimum when the firm has a
combination of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of
capital computed by reference to the proportion of each component of capital as
weights.
80. Financial break-even point: it denotes the level at which a firm’s EBIT is just sufficient
to cover interest and preference dividend.
81. Capital budgeting: capital budgeting involves the process of decision making with
regard to investment in fixed assets. Or decision making with regard to investment of
money in long-term projects.
82. Pay back period: Payback period represents the time period required for complete
recovery of the initial investment in the project.
83. ARR: Accounting or average rate of return means the average annual yield on the
project.
84. NPV: The net present value of an investment proposal is defined as the sum of the
present values of all future cash in flows less the sum of the present values of all
cash out flows associated with the proposal.
85. Profitability Index: where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86. IRR: internal rate of return is the rate at which the sum total of discounted cash
inflows equals the discounted cash out flow.
87. Treasury Management: It means it is defined as the efficient management of
liquidity and financial risk in business.
88. Concentration Banking: It means identify locations or places where customers are
placed and open a local bank a/c in each of these locations and open local collection
canter.
89. Marketable Securities: Surplus cash can be invested in short term instruments in
order to earn interest.
90. Ageing Schedule: In a ageing schedule the receivables are classified according to
their age.
91. Maximum Permissible Bank Finance (MPBF): it is the maximum amount that
banks can lend a borrower towards his working capital requirements.
92. Commercial Paper: A cp is a short term promissory note issued by a company,
negotiable by endorsement and delivery, issued at a discount on face value as may
be determined by the issuing company.
93. Bridge Finance: It refers to the loans taken by the company normally from a
commercial banks for a short period pending disbursement of loans sanctioned by the
financial institutions.
94. Venture Capital: It refers to the financing of high-risk ventures promoted by new
qualified entrepreneurs who require funds to give shape to their ideas.
95. Debt Securitization: It is a mode of financing, where in securities are issued on the
basis of a package of assets (called asset pool).
96. Lease Financing: Leasing is a contract where one party (owner) purchases assets
and permits its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal
course of business.
98. Over Draft: Under this facility a fixed limit is granted within which the borrower
allowed to overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up
to certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by
any tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is
called share capital.
102. Funds Flow Statement: It is the statement deals with the financial resources for
running business activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds Internal sources and external
sources.
Internal source: Funds from operations is the only internal sources of funds and
some important points add to it they do not result in the outflow of funds Depreciation
on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources:
Funds from long-term loans
Sale of fixed assets
Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend
(c)Payment of tax liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For
example 6 months or less from another company which have surplus liquidity. Such
Deposits made by one company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit
receipt issued by banks there is no prescribed interest rate on such CDs it is based
on the prevailing market conditions.
107. Public deposits: It is very important source of short term and medium term finance.
The company can accept PD from members of the public and shareholders. It has
the maturity period of 6 months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock
Exchange. The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable
certificate, dominated in us dollars that represents a non-US company publicly traded
in local currency equity shares.
110. ADR (American depository receipts): Depository receipt issued by a company in
the USA are known as ADRs. Such receipts are to be issued in accordance with the
provisions stipulated by the securities Exchange commission (SEC) of USA like SEBI
in India.
111. Commercial banks: Commercial banks extend foreign currency loans for
international operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign
currency loans.
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc.
provide indirect assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the
IDBI for professionally or technically qualified entrepreneurs and persons possessing
relevant experience and skills and entrepreneur traits.
115. Unsecured loans: It constitutes a significant part of long-term finance available to
an enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one
period to another.
117. Sources of cash: Internal sources-
Depreciation
Amortization
Loss on sale of fixed assets
Gains from sale of fixed assets
Creation of reserves
External sources-
Issue of new shares
Raising long term loans
Short-term borrowings
Sale of fixed assets, investments
118. Application of cash:
Purchase of fixed assets
Payment of long-term loans
Decrease in deferred payment liabilities
Payment of tax, dividend
Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an
estimate prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which
all operations are forecasted and so for as possible planned ahead, and the actual
results compared with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow
over a specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the
purpose of presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of
the level of activity actually attained.
124. Zero-base-budgeting: It is a management tool which provides a systematic method
for evaluating all operations and programmes, current of new allows for budget
reductions and expansions in a rational manner and allows reallocation of source
from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and
balance shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the
causes of difference between the two balances and pass necessary correcting or
adjusting entries in the books of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating
the Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the
expense incurs and revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be
ascertained and used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing
costs for determination of costs of products or services planning, controlling and
reducing such costs and furnishing of information management for decision making.
133. Elements of cost:
Material
Labour
Expenses
Overheads
134. Components of total costs:
Prime cost
Factory cost
Total cost of production
Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also
known as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include
cost of indirect material indirect labour and indirect expenses incurred in factory. This
cost is also known as works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory
cost, office cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production
to get the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs
may be ascertained or expressed.
140. Methods of costing:
Job costing
Contract costing
Process costing
Operation costing
Operating costing
Unit costing
Batch costing.
141. Techniques of costing:
Marginal costing
Direct costing
Absorption costing
Uniform costing.
142. Standard costing: Standard costing is a system under which the cost of the product
is determined in advance on certain predetermined standards.
143. Marginal costing: It is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, i.e.,
materials, labour, direct expenses and variable overheads.
144. Derivative: Derivative is product whose value is derived from the value of one or
more basic variables of underlying asset.
145. Forwards: A forward contract is customized contracts between two entities were
settlement takes place on a specific date in the future at today’s pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Future contracts are
standardized exchange traded contracts.
147. Options: An option gives the holder of the option the right to do some thing. The
option holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an
asset by a certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset
by a certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option
seller. It is also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration
date.
152. European option: It is the option at exercised only on expiration date it self.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be
summarized in terms of what is known as cost of carry.
155. Initial Margin: The amount that must be deposited in the margin a/c at the time of
first entered into future contract is known as initial margin.
156 Maintenance Margin: This is some what lower than initial margin.
157. Mark to Market: In future market, at the end of the each trading day, the margin a/c
is adjusted to reflect the investors’ gains or loss depending upon the futures selling
price. This is called mark to market.
158. Baskets: Basket options are options on portfolio of underlying asset.
159. Swaps: Swaps are private agreements between two parties to exchange cash flows
in the future according to a pre agreed formula.
160. Impact cost: impact cost is cost it is measure of liquidity of the market. It reflects the
costs faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment
funds. It consists of two markets 1.primary market 2.secondary market.
274. Contingent Liability: An obligation to an existing condition or situation which may
arise in future depending on the occurrence of one or more uncertain future events.
275. Deficiency : The excess of liabilities over assets of an enterprise at a given date is
called deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes included as a separate section of the
profit and loss statement showing application of profits towards dividends, reserves.
279. Capital Redemption Reserve: A reserve created on redemption of the average
cost:- the cost of an item at a point of time as determined by applying an average of
the cost of all items of the same nature over a period. When weights are also applied
in the computation it is termed as weight average cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are
not attached to specific assets and are given as security against debt.
281. Difference between Funds flow and Cash flow statement:
A Cash flow statement is concerned only with the change in cash position while a
A cash flow statement is merely a record of cash receipts and disbursements.
funds flow analysis is concerned with change in working capital position between
two balance sheet dates.
While studying the short-term solvency of a business one is interested not only in
cash balance but also in the assets which are easily convertible into cash.
282. Difference Between the Funds flow and Income statement :
A funds flow statement deals with the financial resource required for running the
A funds flow statement matches the “funds raised” and “funds applied” during a
business activities. It explains how were the funds obtained and how were they
used, Where as an income statement discloses the results of the business
activities, i.e., how much has been earned and how it has been spent.
particular period. The source and application of funds may be of capital as well as
of revenue nature. An income statement matches the incomes of a period with
the expenditure of that period, which are both of a revenue nature.
283. FASB
. The Financial Accounting Standards Board (FASB) has been the designated
organization in the private sector for establishing standards of financial accounting that
govern the preparation of financial reports by nongovernmental entities. Those standards are
officially recognized as authoritative by the Securities and Exchange Commission (SEC)
(Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy
Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of
Professional Conduct, as amended May 1973 and May 1979). Such standards are important
to the efficient functioning of the economy because decisions about the allocation of
resources rely heavily on credible, concise, and understandable financial information
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