BASICS

Meaning of Accounting: According to American Accounting Association Accounting is the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts. Users of Accounts: Generally 2 types. 1. Internal management. 2. E ternal users or !utsiders" In#estors, Employees, $enders, %ustomers, Go#ernment and other agencies, &ublic. Sub-fields of Accounting: Book-keeping: It co#ers procedural aspects of accounting 'or( and embraces record (eeping function. Financial accounting: It co#ers the preparation and interpretation of financial statements. Management accounting: It co#ers the generation of accounting information for management decisions. Social responsibility accounting: It co#ers the accounting of social costs incurred by the enterprise. Fundamental Accounting equation: Assets ) %apital* $iabilities. %apital ) Assets " $iabilities. Accounting elements: +he elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, $iabilities and E,uity. +he elements directly related to the measurements of performance in the profit - loss account are income and e penses. Four p ases of accounting process: .ournalisation of transactions $edger positioning and balancing &reparation of trail balance &reparation of final accounts. Book keeping: It is an acti#ity, related to the recording of financial data, relating to business operations in an orderly manner. +he main purpose of accounting for business is to as certain profit or loss for the accounting period. Accounting: It is an acti#ity of analasis and interpretation of the boo("(eeping records. !ournal: /ecording each transaction of the business. "edger: It is a boo( 'here similar transactions relating to a person or thing are recorded. #ypes: 0ebtors ledger %reditor1s ledger General ledger Concepts: %oncepts are necessary assumptions and conditions upon 'hich accounting is based. Business entity concept: In accounting, business is treated as separate entity from its o'ners.2hile recording the transactions in boo(s, it should be noted that business and o'ners are separate entities.In the transactions of business, personal transactions of the o'ners should not be mi ed. 3or e ample4 " Insurance premium of the o'ner etc...

$oing concern concept: Accounts are recorded and assumed that the business 'ill continue for a long time. It is useful for assessment of good'ill. Consistency concept: It means that same accounting policies are follo'ed from one period to another. Accrual concept: It means that financial statements are prepared on merchantile system only.

Accrual concept
The effects of

cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
ILLUSTRATION NO.1 Company A has received cash of $40,000 from his customers. However, the company actually has done all work satisfactorily and the customers have acknowledged the work done which the company can illed for another $!0,000. "urthermore, the e#penses for the $!0,000 work$done has een taken up into the ooks of account. %uestion& 'hould the company (ust close their accounting book y presently its income as $40,000 for the cash received or should it e $40,000)$!0,000 *$+0,000 Answer& ,ased on this concept, the company has actually completed all work done, also, the work done have eing acknowledged y the customers, hence income of $+0,000 should e taken up and not (ust the cash received. ILLUSTRATION NO.2 Company A has illed customers for $100,000. -otal supplier ills paid was $.0,000 ut there are some suppliers ills not paid amounting to another $1.,000 %uestion& -he company/s income is undisputed y $100,000 ut what should its ook show for e#penses$ is it only $.0,000 eing invoices paid or is it all inclusive of the other $1.,000 Answer& As the total supplier ills should e $.0,000)$1.,000*$+.,000, the company should ased on this concept to accrue for the alance of the ills not eing paid.

transactions and other events are recognised when they occur (and not as

#ypes of Accounts: 5asically accounts are three types, %ersonal account: Accounts 'hich sho' transactions 'ith persons are called personal account. It includes accounts in the name of persons, firms, companies. In this4 0ebit the reci#er %redit the gi#er. 3or e ample4 " 6aresh a7c, 6aresh-co a7c etc8 &eal account: Accounts relating to assets is (no'n as real accounts. A separate account is maintained for each asset o'ned by the business. In this4 0ebit 'hat comes in %redit 'hat goes out 3or e ample4 " %ash a7c, 9achinary a7c etc8 'ominal account: Accounts relating to e penses, losses, incomes and gains are (no'n as nominal account.

In this4 0ebit e penses and loses %redit incomes and gains 3or e ample4 " 2ages a7c, :alaries a7c, commission reci#ed a7c, etc. Accounting con(entions: +he term con#ention denotes customs or traditions 'hich guide the accountant 'hile preparing the accounting statements. Con(ention of consistency: Accounting rules, practices should not change from one year to another. 3or e ample4 " If 0epreciation on fi ed assets is pro#ided on straight line method. It should be done year after year. Con(ention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information 'hich is important to assets, creditors, in#estors should be disclosued in account statements. #rail Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash boo( of a concern at any gi#en date.+he purpose of the trail balance is to establish accuracy of the boo(s of accounts. #rading a7c: +he first step of the preparation of final account is the preparation of trading account. It is prepared to (no' the gross margin or trading results of the business. %rofit or loss a)c: It is prepared to (no' the net profit. +he e penditure recording in this a7c is indirect nature. Balance s eet: It is a statement prepared 'ith a #ie' to measure the e act financial position of the firm or business on a fi ed date. *utstanding +,penses: +hese e penses are related to the current year but they are not yet paid before the last date of the financial year. %repaid +,penses: +here are se#eral items of e penses 'hich are paid in ad#ance in the normal course of business operations. Income and e,penditure a)c: In this only the current period incomes and e penditures are ta(en into consideration 'hile preparing this a7c. &oyalty: It is a periodical payment based on the output or sales for use of a certain asset. 3or e ample4 " 9ines, %opyrights, &atent. -irepurc ase: It is an agreement bet'een t'o parties. +he buyer ac,uires possession of the goods immediately and agrees to pay the total hire purchase price in instalments. ;ire purchase price ) %ash price * Interest. "ease4 A contractual arrangement 'hereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments. .ouble entry: E#ery transaction consists of t'o aspects +he rece#ing aspect +he gi#ing aspect +he recording of t'o aspect effort of each transaction is called <double entry1. +he principle of double entry is, for e#ery debit there must be an e,ual and a corresponding credit and #ice #ersa. B&S: 2hen the cash boo( and the passboo( are compared, some times 'e found that the balances are not matching. 5/: is preparaed to e plain these differences. Capital #ransactions: +he transactions 'hich pro#ide benefits to the business unit for more than one year is (no'n as capital +ransactions. &e(enue #ransactions: +he transactions 'hich pro#ide benefits to a business unit for one accounting period only are (no'n as /e#enue +ransactions. .effered &e(enue +,penditure: +he e penditure 'hich is of re#enue nature but its benefit 'ill be for a #ery long period is called deffered re#enue e penditure. E 4 Ad#ertisement e pences A part of such e penditure is sho'n in &-$ a7c and remaining amount is sho'n on the assests side of 57:. Capital &eceipts: +he receipts 'hich rise not from the regular course of business are called %apital receipts.

&e(enue &eceipts: All recurring incomes 'hich a business earns during normal cource of its acti#ities. E 4 :ale of good, 0iscount /ecei#ed, %ommission /ecei#ed. &eser(e Capital: It refers to that portion of uncalled share capital 'hich shall not be able to call up e cept for the purpose of company being 'ound up. Fi,ed Assets: 3i ed assets, also called noncurrent assets, are assets that are e pected to produce benefits for more than one year. +hese assets may be tangible or intangible. +angible fi ed assets include items such as land, buildings, plant, machinery, etc8 Intangible fi ed assets include items such as patents, copyrights, trademar(s, and good'ill. Current Assets: Assets 'hich normally get con#erted into cash during the operating cycle of the firm. E 4 %ash, in#entory, recei#ables. Flictitious assets: +hey are not represented by anything tangible or concrete. E 4 Good'ill, deffered re#enue e penditure, etc8 Contingent Assets: It is an e istence 'hose #alue, o'nership and e istence 'ill depend on occurance or non"occurance of specific act. Fi,ed "iabilities: +hese are those liabilities 'hich are payable only on the termination of the business such as capital 'hich is liability to the o'ner. "ongterm "iabilities: +hese liabilities 'hich are not payable 'ith in the ne t accounting period but 'ill be payable 'ith in ne t = to 1> years are called longterm liabilities. E 4 0ebentures. Current "iabilities: +hese liabilities 'hich are payable out of current assets 'ith in the accounting period. E 4 %reditors, bills payable, etc8 Contingent "iabilities: A contingent liability is one, 'hich is not an actual liability but 'hich 'ill become an actual one on the happening of some e#ent 'hich is uncertain. +hese are staded on balance sheet by 'ay of a note. E 4 %laims against company, $iability of a case pending in the court. Bad .ebts: :ome of the debtors do not pay their debts. :uch debt if unreco#erable is called bad debt. 5ad debt is a business e pense and it is debited to &-$ account. Capital $ains)losses: Gains7losses arising from the sale of assets. Fi,ed Cost: +hese are the costs 'hich remains constant at all le#els of production. +hey do not tend to increase or decrease 'ith the changes in #olume of production. /ariable Cost: +hese costs tend to #ary 'ith the #olume of output. Any increase in the #olume of production results in an increase in the #ariable cost and #ice"#ersa. Semi-/ariable Cost: +hese costs are partly fi ed and partly #ariable in relation to output. Absorption Costing: It is the practice of charging all costs, both #ariable and fi ed to operations, processess or products. +his differs from marginal costing 'here fi ed costs are e cluded. *perating Costing: It is used in the case of concerns rendering ser#ices li(e transport. E 4 :upply of 'ater, retail trade, etc... Costing: %ost accounting is the recording classifying the e penditure for the determination of the costs of products.3or thepurpuses of control of the costs. &ectification of +rrors: Errors that occur 'hile preparing accounting statements are rectified by replacing it by the correct one. Errors li(e4 Errors of posting, Errors of accounting etc8 Absorbtion: 2hen a company purchases the business of another e isting company that is called absorbtion. Mergers: A merger refers to a combination of t'o or more companies into one company. /ariance Analasys: +he de#iations bet'een standard costs, profits or sales and actual costs. &rofits or sales are (no'n as #ariances. +ypes of #ariances 9aterial ?ariances $abour ?ariances %ost ?ariances :ales or &rofit?ariances

$eneral &eser(es: +hese reser#es 'hich are not created for any specific purpose and are a#ailable for any future contingency or e pansion of the business. Specific&eser(es: +hese reser#es 'hich are created for a specific purpose and can be utili@ed only for that purpose. E 4 0i#idend E,uilisation /eser#e 0ebenture /edemption /eser#e %ro(isions: +here are many ris(s and uncertainities in business. In order to protect from ris(s and uncertainities, it is necessary to pro#isions and reser#es in e#ery business. &eser(e: /eser#es are amounts appropriated out of profits 'hich are not intended to meet any liability, contingency, commitment in the #alue of assets (no'n to e ist at the date of the 57:. %reation of the reser#e is to increase the 'or(ingcapital in the business and strengthen its financial position. :ome times it is in#ested to purchase out side securities then it is called reser#e fund. #ypes: Capital &eser(e: It is created out of capital profits li(e premium on the issue of shares, profits and sale of assets, etc8+his reser#e is not a#ailable to distribute as di#idend among shareholders. &e(enue &eser(e: Any /eser#e 'hich is a#ailable for distribution as di#idend to the shareholders is called /e#enue /eser#e. %ro(isions /)S &eser(es: &ro#isions are created for some specific object and it must be utilised for that object for 'hich it is created. /eser#e is created for any future liability or loss. &ro#ision is made because of legal necessity but creating a /eser#e is a matter of financial strength. &ro#ision must be charged to profit and loss a7c before calculating the net profit or loss but /eser#e can be made only 'hen there is profit. &ro#isions reduce the net profit and are not in#ested in outside securities /eser#e amount can in#ested in outside securities. $ood0ill: It is the #alue of repetition of a firm in respect of the profits e pected in future o#er and abo#e the normal profits earned by other similar firms belonging to the same industry. Met ods: A#erage profits method :uper profits method %apitalisatioin method .epreciation: It is a perminant continuing and gradual shrin(age in the boo( #alue of a fi ed asset. Met ods: Fi,ed Instalment met od or Strig t line met od 0ep. ) %ost price A :crap #alue7Estimated life of asset. .iminis ing Balance met od: Bnder this metod, depreciation is calculated at a certain percentage each year on the balance of the asset, 'hich is bought for'ard from the pre#ious year. Annuity met od: Bnder this method amount spent on the purchase of an asset is regarded as an in#estment 'hich is assumed to earn interest at a certain rate. E#ery year the asset a7c is debited 'ith the amount of interest and credited 'ith the amount of depreciation. +*1: +he ,uantity of material to be ordered at one time is (no'n E!C. It is fi ed 'here minimum cost of ordering and carryiny stoc(. 2ey Factor: +he factor 'hich sets a limit to the acti#ity is (no'n as (ey factor 'hich influence budgets.

Dey 3actor ) %ontribution7&rofitability &rofitability )%ontribution7Dey 3actor Sinking Fund: It is created to ha#e ready money after a particular period either for the replacement of an asset or for the repayment of a liability. E#ery year some amount is charged from the &-$ a7c and is in#ested in outside securities 'ith the idea, that at the end of the stipulated period, money 'ill be e,ual to the amount of an asset. &e(aluation Account: It records the effect of re#aluation of assets and liabilities. It is prepared to determine the net profit or loss on re#aluation. It is prepared at the time of reconsititution of partnership or retirement or death of partner. &ealisation Account: It records the realisation of #arious assets and payments of #arious liabilities. It is prepared to determine the net &-$ on realisation. "e(erage: - It arises from the presence of fi ed cost in a firm capitalstructure. Generally le#erage refers to a relationship bet'een t'o interrelated #ariables. +hese le#erages are classified into three types. !perating le#erage 3inancial $e#erage. %ombined le#erage or total le#erage. *perating "e(erage4 It arises from fi ed operating costs Efi ed costs other than the financing costsF such as depreciation, shares, ad#ertising e penditures and property ta es. 2hen a firm has fi ed operatingcosts, a change in 1G in sales results in a change of more than 1G in E5I+ 3c ange in +BI# 3 c ange in sales +he operaying le#erage at any le#el of sales is called degree. 0egree of operating$e#erage) %ontribution7E5I+ Significance4 It tells the impact of changes in sales on operating income. If operating le#erage is high it automatically means that the brea(" e#en point 'ould also be reached at a highle#el of sales. Financial "e(erage: It arises from the use of fi ed financing costs such as interest. 2hen a firm has fi ed cost financing. A change in 1G in E.5.I.+ results in a change of more than 1G in earnings per share. F4" 53 c ange in +%S ) 3 c ange in +BI# .egree of Financial le(erage5 +BI#) %rofit before #a, 6+B#7 Significance: It is double edged s'ord. A high 3.$ means high fi ed financial costs and high financial ris(s. Combined "e(erage: It is useful for to (no' about the o#erall ris( or total ris( of the firm. i.e, operating ris( as 'ell as financial ris(. C4"5 *4"8F4" 5 3C ange in +%S ) 3 C ange in Sales .egree of C4" 5Contribution ) +B# A high !.$ and a high 3.$ combination is #ery ris(y. A high !.$ and a lo' 3.$ indiacate that the management is careful since the higher amount of ris( in#ol#ed in high operating le#erage has been sought to be balanced by lo' 3.$ A more preferable situation 'ould be to ha#e a lo' !.$ and a 3.$. 9orking Capital: +here are t'o types of 'or(ing capital4 gross 'or(ing capital and net 'or(ing capital. Gross 'or(ing capital is the total of current assets. 6et 'or(ing capital is the difference bet'een the total of current assets and the total of current liabilities. 9orking Capital Cycle: It refers to the length of time bet'een the firms paying cash for materials, etc.., entering into the production process7 stoc( and the inflo' of cash from debtors EsalesF

%ash

/a' meterials $abour o#erhead

2I& 0ebtors

:toc(

Capital Budgeting: &rocess of analy@ing, appraising, deciding in#estment on long term projects is (no'n as capital budgeting. Met ods of Capital Budgeting: :4 ;4 #raditional Met ods &aybac( period method A#erage rate of return EA//F .iscounted Cas Flo0 Met ods or Sop isticated met ods 6et present #alue E6&?F Internal rate of return EI//F &rofitability inde

%ay back period: /e,uired time to reach actual in#estment is (no'n as paybac( period. 5 In(estment ) Cas flo0 A&&: It means the a#erage annual yield on the project. 5 a(g4 income ) a(g4 in(estment *r 5 6Sum of income ) no4 of years7 ) 6#otal in(estment < Scrap (alue7 ) ;7 '%/: +he best method for the e#aluation of an in#estment proposal is the 6&? or discounted cash flo' techni,ue. +his metod ta(es into account the time #alue of money. +he sum of the present #alues of all the cash inflo's less the sum of the present #alue of all the cash outflo's associated 'ith the proposal. '%/ 5 Sum of present (alue of future cas flo0s = In(estment I&&: It is that rate at 'hich the sum total of cash inflo's aftrer discounting e,uals to the discounted cash outflo's. +he internal rate of return of a project is the discount rate 'hich ma(es net present #alue of the project e,ual to @ero. %rofitability Inde,: !ne of the methods comparing such proposals is to 'or(out 'hat is (no'n as the <0esirability 3actor1 or <&rofitability Inde 1. In general terms a project is acceptable if its profitability inde #alue is greater than 1. .eri(ati(es4 A deri#ati#e is a security 'hose price ultimately depends on that of another asset. 0eri#ati#e means a contact of an agreement. +ypes of 0eri#ati#es4 3or'ard %ontracts 3utures !ptions :'aps. For0ard Contracts4 " It is a pri#ate contract bet'een t'o parties. An agreement bet'een t'o parties to e change an asset for a price that is specified todays. +hese are settled at end of contract. Future contracts4 " It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. 3utures 'ill be traded in e changes only.+hese is settled daily. 3utures are four types4 %ommodity 3utures4 2heat, :oyo, +ea, %orn etc..,. 3inancial 3utures4 +reasury bills, 0ebentures, E,uity :hares, bonds, etc.., %urrency 3utures4 9ajor con#ertible %urrencies li(e 0ollars, 3ounds, Hens, and Euros.

Inde 3utures4 Bnderline assets are famous stoc( mar(et indicies. 6e'Hor( :toc( E change.

*ptions: An option gi#es its !'ner the right to buy or sell an Bnderlying asset on or before a gi#en date at a fi ed price. +here can be as may different option contracts as the number of items to buy or sell they are, :toc( options, %ommodity options, 3oreign e change options and interest rate options are traded on and off organi@ed e changes across the globe. !ptions belong to a broader class of assets called %ontingent claims. +he option to buy is a call option.+he option to sell is a &ut!ption. +he option holder is the buyer of the option and the option 'riter is the seller of the option. +he fi ed price at 'hich the option holder can buy or sell the underlying asset is called the e ercise price or :tri(ing price. A European option can be e cercised only on the e piration date 'here as an American option can be e cercised on or before the e piration date. !ptions traded on an e change are called e change traded option and options not traded on an e change are called o#er"the"counter optios. 2hen stoc( price E:1F I) E ercise price EE1F the call is said to be out of money and is 'orthless. 2hen :1JE1 the call is said to be in the money and its #alue is :1"E1. S0aps: :'aps are pri#ate agreements bet'een t'o companies to e change casflo's in the future according to a prearranged formula. :o this can be regarded as portfolios of for'ard contracts. +ypes of s'aps4 Interest rate :'aps %urrency :'aps. Interest rate S0aps: +he most common type of interest rate s'ap is <&lain ?enilla <. 6ormal life of s'ap is 2 to 1= Hears. It is a transaction in#ol#ing an e change of one stream of interest obligations for another. +ypically, it results in an e change of ficed rate interest payments for floating rate interest payments. Currency S0aps: - Another type of :'ap is (no'n as %urrency as %urrency :'ap. +his in#ol#es e changing principal amount and fi ed rates interest payments on a loan in one currency for principal and fi ed rate interest payments on an appro imately e,ualant loan in another currency. $i(e interest rate s'aps currency s'ars can be moti#ated by comparati#e ad#antage. 9arrants: !ptions generally ha#e li#es of upto one year. +he majority of options traded on e changes ha#e ma imum maturity of nine months. $onger dated options are called 'arrants and are generally traded o#er" the" counter. American .epository &eceipts 6A.&7: It is a dollar denominated negotiable instruments or certificate. It represents non"B: companies publicly traded e,uity. It 'as de#ised into late 1K2>1s. +o help American in#estors to in#est in o#erseas securities and to assist non AB: companies 'ishing to ha#e their stoc( traded in the American mar(ets. +hese are listed in American stoc( mar(et or e changes. $lobal .epository&eceipts 6$.&7: G0/1s are essentially those instruments 'hich posseses the certain number of underline shares in the custodial domestic ban( of the company i.e., G0/ is a negotiable instrument in the form of depository receipt or certificate created by the o#erseas depository ban( out side India and issued to non"resident in#estors against the issue of ordinary share or foreign currency con#ertible bonds of the issuing company. G0/1s are entitled to di#idends and #oting rights since the date of its issue.

Capital account and Current account: +he capital account of international purchase or sale of assets. +he assets include any form 'hich 'ealth may be held. 9oney held as cash or in the form of ban( deposits, shares, debentures, debt instruments, real estate, land, anti,ues, etc8 +he current account records all income related flo's. +hese flo's could arise on account of trade in goods and ser#ices and transfer payment among countries. A net outflo' after ta(ing all entries in current account is a current account deficit. Go#t. e penditure and ta re#enues do not fall in the current account. .i(idend >ield: It gi#es the relationship bet'een the current price of a stoc( and the di#idend paid by its issuing company during the last 12 months. It is caliculated by aggregating past year1s di#idend and di#iding it by the current stoc( price. ;istorically, a higher di#idend yield has been considered to be desirable among in#estors. A high di#idend yield is considered to be e#idence that a stoc( is under priced, 'here as a lo' di#idend yield is considered e#idence that a stoc( is o#er priced. Bridge Financing: It refers to loans ta(en by a company normally from commercial ban(s for a short period, pending disbursement of loans sanctioned by financial institutions. Generally, the rate of interest on bridge finance is higher as compared 'ith term loans. S ares and Mutual Funds Company: :ec.L E1F of the %ompanys act, 1K=M defines a <company1. %ompany means a company formed and registered under this Act or e isting company. %ublic Company4 A corporate body other than a pri#ate company. In the public company, there is no upperlimit on the number of share holders and no restriction on transfer of shares. %ri(ate Company4 A corporate entity in 'hich limits the number of its members to =>. 0oes not in#ite public to subscribe to its capital and restricts the member1s right to transfer shares. "iquidity: A firm1s li,uidity refers to its ability to meet its obligations in the short run. An asset1s li,uidity refers to ho' ,uic(ly it can he sold at a reasonable price. Cost of Capital: +he minimum rate of the firm must earn on its in#estments in order to satisfy the e pectations of in#estors 'ho pro#ide the funds to the firm. %apital :tructure4 +he composition of a firm1s financing consisting of e,uity, preference, and debt. Annual &eport: +he report issued annually by a company to its shareholders. It primarily contains financial statements. In addition, it represents the management1s #ie' of the operations of the pre#ious year and the prospects for future. %ro,y: +he authori@ation gi#en by one person to another to #ote on his behalf in the shareholders meeting. !oint /enture: It is a temporary partenership and comes to an end after the compleation of a particular #enture. 6o limit in its. Insol(ency: In case a debtor is not in a position to pay his debts in full, a petition can be filled by the debtor himself or by any creditors to get the debtor declared as an insol#ent. "ong #erm .ebt: +he debt 'hich is payable after one year is (no'n as long term debt. S ort #erm .ebt: +he debt 'hich is payable 'ith in one year is (no'n as short term debt. Amortisation: +his term is used in t'o senses 1. /epayment of loan o#er a period of time 2.2rite"off of an e penditure Eli(e issue cost of sharesF o#er a period of time. Arbitrage: A simultaneous purchase and sale of security or currency in different mar(ets to deri#e benefit from price differential. Stock: +he :toc( of a company 'hen fully paid they may be con#erted into stoc(. S are %remium: E cess of issue price o#er the face #alue is called as share premium. +quity Capital: It represents o'nership capital, as e,uity shareholders collecti#ely o'n the company. +hey enjoy the re'ards and bear the ris(s of o'nership. +hey 'ill ha#e the #oting rights. Aut ori?ed Capital4 +he amount of capital that a company can potentially issue, as per its memorandum, represents the authori@ed capital. Issued Capital: +he amount offered by the company to the in#estors. Subscribed capital4 +he part of issued capital 'hich has been subscribed to by the in#estors

%aid-up Capital: +he actual amount paid up by the in#estors. +ypically the issued, subscribed, paid"up capitals are the same. %ar /alue4 +he par #alue of an e,uity share is the #alue stated in the memorandum and 'ritten on the share scrip. +he par #alue of e,uity share is generally /s.1> or /s.1>>. Issued price: It is the price at 'hich the e,uity share is issued often, the issue price is higher than the &ar ?alue Book /alue: +he boo( #alue of an e,uity share is ) &aid A up e,uity %apital * /eser#e and :urplus 7 6o. !f outstanding shares e,uity Market /alue 6M4/7: +he 9ar(et ?alue of an e,uity share is the price at 'hich it is traded in the mar(et. %reference Capital4 It represents a hybrid form of financing it par ta(es some characteristics of e,uity and some attributes of debentures. It resembles e,uity in the follo'ing 'ays &reference di#idend is payable only out of distributable profits. &reference di#idend is not an obligatory payment. &reference di#idend is not a ta Adeductible payment. %reference capital is similar to debentures in se(eral 0ays4 +he di#idend rate of &reference %apital is fi ed. &reference %apital is redeemable in nature. &reference :hareholders do not normally enjoy the right to #ote. .ebenture: 3or large publicly traded firms. +hese are #iable alternati#e to term loans. :(in to promissory note, debentures is instruments for raising long term debt. 0ebenture holders are creditors of company. Stock Split: +he di#iding of a company1s e isting stoc( into multiple stoc(s. 2hen the &ar ?alue of share is reduced and the number of share is increased. Calls-in-Arrears: It means that amount 'hich is not yet been paid by share holders till the last day for the payment. Calls-in-ad(ance: 2hen a shareholder pays 'ith an instalment in respect of call yet to ma(e the amount so recei#ed is (no'n as calls"in"ad#ance. %alls"in"ad#ance can be accepted by a company 'hen it is authori@ed by the articles. Forfeiture of s are: It means the cancellation or allotment of unpaid shareholders. 3orfeiture and reissue of shares allotted on pro A rata basis in case of o#er subscription. %rospectus: In#iting of the public for subscribing on shares or debentures of the company. It is issued by the public companies. +he amount must be subscribed 'ith in 12> days from the date of prospects. Simple Interest: It is the interest paid only on the principal amount borro'ed. 6o interest is paid on the interest accured during the term of the loan. Compound Interest: It means that, the interest 'ill include interest caliculated on interest. #ime /alue of Money: 9oney has time #alue. A rupee today is more #aluable than a rupee a year hence. +he relation bet'een #alue of a rupee today and #alue of a rupee in future is (no'n as +ime ?alue of 9oney. 'A/: 6et Asset ?alue of the fund is the cumulati#e mar(et #alue of the fund net of its liabilities. 6A? per unit is simply the net #alue of assets di#ided by the number of units out standing. 5uying and :elling into funds is done on the basis of 6A? related prices. +he 6A? of a mutual fund are re,uired to be published in ne's papers. +he 6A? of an open end scheme should be disclosed ona daily basis and the 6A? of a closed end scheme should be disclosed atleast on a 'ee(ly basis. Financial markets: +he financial mar(ets can broadly be di#ided into money and capital mar(et. Money Market: 9oney mar(et is a mar(et for debt securities that pay off in the short term usually less than one year, for e ample the mar(et for K>"days treasury bills. +his mar(et encompasses the trading and issuance of short term non e,uity debt instruments including treasury bills, commercial papers, ban(er1s acceptance, certificates of deposits, etc. Capital Market: %apital mar(et is a mar(et for long"term debt and e,uity shares. In this mar(et, the capital funds comprising of both e,uity and debt are issued and traded. +his

10

also includes pri#ate placement sources of debt and e,uity as 'ell as organi@ed mar(ets li(e stoc( e changes. %apital mar(et can be further di#ided into primary and secondary mar(ets. %rimary Market: It pro#ides the channel for sale of ne' securities. &rimary 9ar(et pro#ides opportunity to issuers of securitiesN Go#ernment as 'ell as corporate, to raise resources to meet their re,uirements of in#estment and7or discharge some obligation. +hey may issue the securities at face #alue, or at a discount7premium and these securities may ta(e a #ariety of forms such as e,uity, debt etc. +hey may issue the securities in domestic mar(et and7or international mar(et. Secondary Market: It refers to a mar(et 'here securities are traded after being initially offered to the public in the primary mar(et and7or listed on the stoc( e change. 9ajority of the trading is done in the secondary mar(et. It comprises of e,uity mar(ets and the debt mar(ets. .ifference bet0een t e primary market and t e secondary market: In the primary mar(et, securities are offered to public for subscription for the purpose of raising capital or fund. :econdary mar(et is an e,uity trading a#enue in 'hich already e isting7pre" issued securities are traded amongst in#estors. :econdary mar(et could be either auction or dealer mar(et. 2hile stoc( e change is the part of an auction mar(et, !#er" the"%ounter E!+%F is a part of the dealer mar(et. S+BI and its role: +he :E5I is the regulatory authority established under :ection L of :E5I Act 1KK2 to protect the interests of the in#estors in securities and to promote the de#elopment of, and to regulate, the securities mar(et and for matters connected there'ith and incidental thereto. %ortfolio: A portfolio is a combination of in#estment assets mi ed and matched for the purpose of in#estor1s goal. Market Capitalisation: +he mar(et #alue of a ,uoted company, 'hich is caliculated by multiplying its current share price Emar(et priceF by the number of shares in issue, is called as mar(et capitali@ation. Book Building %rocess: It is basically a process used in I&!s for efficient price disco#ery. It is a mechanism 'here, during the period for 'hich the I&! is open, bids are collected from in#estors at #arious prices, 'hich are abo#e or e,ual to the floor price. +he offer price is determined after the bid closing date. Cut off %rice: In 5oo( building issue, the issuer is re,uired to indicate either the price band or a floor price in the red herring prospectus. +he actual disco#ered issue price can be any price in the price band or any price abo#e the floor price. +his issue price is called %ut off price. +his is decided by the issuer and $9 after considering the boo( and in#estors1 appetite for the stoc(. :E5I E0I&F guidelines permit only retail indi#idual in#estors to ha#e an option of applying at cut off price. Bluec ip Stock: :toc( of a recogni@ed, 'ell established and financially sound company. %enny Stock: &enny stoc(s are any stoc( that trades at #ery lo' prices, but subject to e tremely high ris(. .ebentures: %ompanies raise substantial amount of longterm funds through the issue of debentures. +he amount to be raised by 'ay of loan from the public is di#ided into small units called debentures. 0ebenture may be defined as 'ritten instrument ac(no'ledging a debt issued under the seal of company containing pro#isions regarding the payment of interest, repayment of principal sum, and charge on the assets of the company etc8 "arge Cap ) Big Cap: %ompanies ha#ing a large mar(et capitali@ation 3or e ample, In B: companies 'ith mar(et capitali@ation bet'een O1> billion and O2> billion, and in the Indian conte t companies mar(et capitali@ation of abo#e /s. 1>>> crore are considered large caps. Mid Cap: %ompanies ha#ing a mid si@ed mar(et capitali@ation, for e ample, In B: companies 'ith mar(et capitali@ation bet'een O2 billion and O1> billion, and in the Indian conte t companies mar(et capitali@ation bet'een /s. =>> crore to /s. 1>>> crore are considered mid caps. Small Cap: /efers to stoc(s 'ith a relati#ely small mar(et capitali@ation, i.e. lessthan O2 billion in B: or lessthan /s.=>> crore in India. -olding Company: A holding company is one 'hich controls one or more companies either by holding shares in that company or companies are ha#ing po'er to appoint the directors of

11

those company. +he company controlled by holding company is (no'n as the Subsidary Company. Consolidated Balance S eet: It is the b7s of the holding company and its subsidiary company ta(en together. %artners ip act :@A;: &artnership means an association bet'een t'o or more persons 'ho agree to carry the business and to share profits and losses arising from it. 2> members in ordinary trade and 1> in ban(ing business I%*: 3irst time 'hen a company announces its shares to the public is called as an I&!. EIntial &ublic !fferF A Furt er public offering 6F%*7: It is 'hen an already listed company ma(es either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allo'ed only if it is made to satisfy listing or continuous listing obligations. &ig ts Issue 6&I7: It is 'hen a listed company 'hich proposes to issue fresh securities to its shareholders as on a record date. +he rights are normally offered in a particular ratio to the number of securities held prior to the issue. %referential Issue: It is an issue of shares or of con#ertible securities by listed companies to a select group of persons under sec.P1 of the Indian companies act, 1K=M 'hich is neither a rights issue nor a public issue.+his is a faster 'ay for a company to raise e,uity capital. Inde,: An inde sho's ho' specified portfolios of share prices are mo#ing in order to gi#e an indication of mar(et trends. It is a bas(et of securities and the a#erage price mo#ement of the bas(et of securities indicates the inde mo#ement, 'hether up'ard or do'n'ards. .ematerialisation: It is the process by 'hich physical certificates of an in#estor are con#erted to an e,ui#alent number of securities in electronic form and credited to the in#estor1s account 'ith his depository participant. Bull and Bear Market: 5ull mar(et is 'here the prices go up and 5ear mar(et 'here the prices come do'n. +,c ange &ate: It is a rate at 'hich the currencies are bought and sold. Fore,: +he 3oreign E change 9ar(et is the place 'here currencies are traded. +he o#erall 3!/EQ mar(ets is the largest, most li,uid mar(et in the 'orld 'ith an a#erage traded #alue that e ceeds O 1.K trillion per day and includes all of the currencies in the 'orld.It is open 2R hours a day, fi#e days a 'ee(. Mutual Fund: A mutual fund is a pool of money, collected from in#estors, and in#ested according to certain in#estment objecti#es. Asset Management Company 6AMC7: A company set up under Indian company1s act, 1K=M primarily for performing as the in#estment manager of mutual funds. It ma(es in#estment decisions and manages mutual funds in accordance 'ith the scheme objecti#es, deed of trust and pro#isions of the in#estment management agreement. Back-+nd "oad: A (ind of sales charge incurred 'hen in#estors redeem or sell shares of a fund. Front-+nd "oad: A (ind of sales charge that is paid before any amount gets in#ested into the mutual fund. *ff S ore Funds: +he funds setup abroad to channalise foreign in#estment in the domestic capital mar(ets. Under 9riter: +he organi@ation that acts as the distributor of mutual funds share to bro(er or dealers and in#estors. &egistrar: +he institution that maintains a registry of shareholders of a fund and their share o'nership. 6ormally the registrar also distributes di#idends and pro#ides periodic statements to shareholders. #rustee: A person or a group of persons ha#ing an o#erall super#isory authority o#er the fund managers. Bid 6or &edemption7 %rice: In ne'spaper listings, the pre"share price that a fund 'ill pay its shareholders 'hen they sell bac( shares of a fund, usually the same as the net asset #alue of the fund. Sc emes according to Maturity %eriod: A mutual fund scheme can be classified into open"ended scheme or close"ended scheme depending on its maturity period. *pen-ended Fund) Sc eme

1!

An open"ended fund or scheme is one that is a#ailable for subscription and repurchase on a continuous basis. +hese schemes do not ha#e a fi ed maturity period. In#estors can con#eniently buy and sell units at 6et Asset ?alue E6A?F related prices 'hich are declared on a daily basis. +he (ey feature of open"end schemes is li,uidity. Close-ended Fund) Sc eme A close"ended fund or scheme has a stipulated maturity period e.g. ="S years. +he fund is open for subscription only during a specified period at the time of launch of the scheme. In#estors can in#est in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stoc( e changes 'here the units are listed. In order to pro#ide an e it route to the in#estors, some close"ended funds gi#e an option of selling bac( the units to the mutual fund through periodic repurchase at 6A? related prices. :E5I /egulations stipulate that at least one of the t'o e it routes is pro#ided to the in#estor i.e. either repurchase facility or through listing on stoc( e changes. +hese mutual funds schemes disclose 6A? generally on 'ee(ly basis. Sc emes according to In(estment *bBecti(e: A scheme can also be classified as gro'th scheme, income scheme, or balanced scheme considering its in#estment objecti#e. :uch schemes may be open"ended or close"ended schemes as described earlier. :uch schemes may be classified mainly as follo's4 $ro0t ) +quity *riented Sc eme +he aim of gro'th funds is to pro#ide capital appreciation o#er the medium to long" term. :uch schemes normally in#est a major part of their corpus in e,uities. :uch funds ha#e comparati#ely high ris(s. +hese schemes pro#ide different options to the in#estors li(e di#idend option, capital appreciation, etc. and the in#estors may choose an option depending on their preferences. +he in#estors must indicate the option in the application form. +he mutual funds also allo' the in#estors to change the options at a later date. Gro'th schemes are good for in#estors ha#ing a long"term outloo( see(ing appreciation o#er a period of time. Income ) .ebt *riented Sc eme +he aim of income funds is to pro#ide regular and steady income to in#estors. :uch schemes generally in#est in fi ed income securities such as bonds, corporate debentures, Go#ernment securities and money mar(et instruments. :uch funds are less ris(y compared to e,uity schemes. +hese funds are not affected because of fluctuations in e,uity mar(ets. ;o'e#er, opportunities of capital appreciation are also limited in such funds. +he 6A?s of such funds are affected because of change in interest rates in the country. If the interest rates fall, 6A?s of such funds are li(ely to increase in the short run and #ice #ersa. ;o'e#er, long term in#estors may not bother about these fluctuations. Balanced Fund +he aim of balanced funds is to pro#ide both gro'th and regular income as such schemes in#est both in e,uities and fi ed income securities in the proportion indicated in their offer documents. +hese are appropriate for in#estors loo(ing for moderate gro'th. +hey generally in#est R>"M>G in e,uity and debt instruments. +hese funds are also affected because of fluctuations in share prices in the stoc( mar(ets. ;o'e#er, 6A?s of such funds are li(ely to be less #olatile compared to pure e,uity funds. Money Market or "iquid Fund +hese funds are also income funds and their aim is to pro#ide easy li,uidity, preser#ation of capital and moderate income. +hese schemes in#est e clusi#ely in safer short"term instruments such as treasury bills, certificates of deposit, commercial paper and inter"ban( call money, go#ernment securities, etc. /eturns on these schemes fluctuate much less compared to other funds. +hese funds are appropriate for corporate and indi#idual in#estors as a means to par( their surplus funds for short periods. $ilt Fund +hese funds in#est e clusi#ely in go#ernment securities. Go#ernment securities ha#e no default ris(. 6A?s of these schemes also fluctuate due to change in interest rates and other economic factors as is the case 'ith income or debt oriented schemes. Inde, Funds Inde 3unds replicate the portfolio of a particular inde such as the 5:E :ensiti#e inde , :-& 6:E => inde E6iftyF, etc these schemes in#est in the securities in the same 'eightage

10

comprising of an inde . 6A?s of such schemes 'ould rise or fall in accordance 'ith the rise or fall in the inde , though not e actly by the same percentage due to some factors (no'n as Ttrac(ing errorT in technical terms. 6ecessary disclosures in this regard are made in the offer document of the mutual fund scheme. +here are also e change traded inde funds launched by the mutual funds 'hich are traded on the stoc( e changes. +arning per s are 6+%S7: It is a financial ratio that gi#es the information regarding earing a#ailable to each e,uity share. It is #ery important financial ratio for assessing the state of mar(et price of share. +he E&: statement is applicable to the enterprise 'hose e,uity shares are listed in stoc( e change. #ypes of +%S: 5asic E&: E 'ith normal sharesF 0iluted E&: E'ith normal shares and con#ertible sharesF +%S Statement: :ales $ess4 #ariable cost $ess4 3i ed cost $ess4 Interest E5+ $ess4 +a Earnimgs $ess4 preference di#idend Earnings a#ailable to e,uity :hare holders EAF UUUU UUUU %ontribution UUU UUUU E5I+ UUUUU UUU UUUU UUUU UUUU UUUU UUUUU

E&:)A7 6o of outstanding :hares E5I+ and !perating Income are same +he higher the E&:, the better is the performance of the company. Cas Flo0 Statement: It is a statement 'hich sho's inflo's EreceiptsF and outflo's EpaymentsF of cash and its e,ui#alents in an enterprise during a specified period of time. According to the re#ised accounting standard L, an enterprise prepares a cash flo' statement and should present it for each period for 'hich financial statements are presented. Funds Flo0 Statement: 3und means the net 'or(ing capital. 3unds flo' statement is a statement 'hich lists first all the sources of funds and then all the applications of funds that ha#e ta(en place in a business enterprise during the particular period of time for 'hich the statement has been prepared. +he statement finally sho's the net increase or net decrease in the 'or(ing capital that has ta(en place o#er the period of time. Float: +he difference bet'een the a#ailable balance and the ledger balance is referred to as the float. Collection Float: +he amount of che,ue deposited by the firm in the ban( but not cleared. %ayment Float: +he amount of che,ues issued by the firm but not paid for by the ban(. *perating Cycle: +he operating cycle of a firm begins 'ith the ac,uisition of ra' material and ends 'ith the collection of recei#ables. Marginal Costing: :ales A ?arible%ost)3i ed%ost V &rofit7$oss %ontribution) :ales A?arible%ost %ontribution) 3i ed%ost V &rofit7$oss & 7 ? /atio) E%ontribution 7 :alesFU1>>

14

&er 1 unit information is gi#en, & 7 ? /atio ) E%ontribution per Bnit 7 :ales per BnitFU1>> +'o years information is gi#en, & 7 ? /atio) E%hange in &rofit 7 %hange in :alesF U 1>> +hrough :ales, & 7 ? /atio %ontribution ):ales U & 7 # /atio +hrough & 7 ? /atio, %ontribution :ales ) %ontribution 7 & 7 ?/atio Break +(en %oint 6B4+4%7 I6 ?alue ) E3i ed %ostF 7 E& 7 # /atioF !/ E3i ed %ost 7 %ontributionF U :ales In Bnits ) 3i ed %ost 7 %ontribution !/ 3i ed %ost 7 E:ales&rice per Bnit A ?.% per BnitF Margin of Safety ) +otal :ales A :ales at 5.E.& E!/F &rofit 7 &? /atio Sales at desired profit 6in units7 ) 3i ed%ost* 0esired&rofit 7 %ontribution per Bnit Sales at desired profit 6in /alue7 5 3i ed%ost* 0esired&rofit 7 &? ratio E!/F %ontribution 7 &? /atio &A#I* A'A">SIS: A ratio analysis is a mathematical e pression. It is the ,uantitati#e relation bet'een t'o. It is the techni,ue of interpretation of financial statements 'ith the help of meaningful ratios. /atios may be used for comparison in any of the follo'ing 'ays. %omparison of a firm its o'n performance in the past. %omparison of a firm 'ith the another firm in the industry %omparison of a firm 'ith the industry as a 'hole #ypes *f &atios $i,uidity ratio Acti#ity ratio $e#erage ratio profitability ratio :4 "iquidity ratio: +hese are ratios 'hich measure the short term financial position of a firm. i4 Current &atio: It is also called as 'or(ing capital ratio. +he current ratio measures the ability of the firm to meet its currnt liabilities"current assets get con#erted into cash during the operating cycle of the firm and pro#ide the funds needed to pay current liabilities. i.e %urrent assets %urrent liabilities Ideal ratio is 241 ii4 1uick or Acid test &atio: It tells about the firm1s li,uidity position. It is a fairly stringent measure of li,uidity. )Cuic( assets7%urrent $iabilities Ideal ratio is 141 Cuic( Assets )%urrent Assets A :toc( " &repaid E penses iii4 Absolute "iquid &atio: A.$.A7%.$ A$ assets)%ash * 5an( * 9ar(etable :ecurities. ;4 Acti(ity &atios or Current Assets management or +fficiency &atios: +hese ratios measure the efficiency or effecti#eness of the firm in managing its resources or assets :toc( or In#entory +urno#er /atio4 It indicates the number of times the stoc( has turned o#er into sales in a year. A stoc( turn o#er ratio of <P1 is considered ideal. A high stoc( turn o#er ratio indicates that the stoc(s are fast mo#ing and get con#erted into sales ,uic(ly. ) %ost of goods :old7 A#g. In#entory 0ebtors +urno#er /atio4 It e presses the relationship bet'een debtors and sales. )%redit :ales 7A#erage 0ebtors

1.

 %reditors +urno#er /atio4 It e presses the relationship bet'een creditors and purchases. )%redit &urchases 7A#erage %reditors 3i ed Assets +urno#er /atio4 A high fi ed asset turn o#er ratio indicates better utili@ation of the firm fi ed assets. A ratio of around = is considered ideal. ) 6et :ales 7 3i ed Assets 2or(ing %apital +urno#er /atio4 A high 'or(ing capital turn o#er ratio indicates efficiency utili@ation of the firm1s funds. )%G:72or(ing %apital )2.%)%.A A %.$. A4 "e(erage &atio: +hese ratios are mainly calculated to (no' the long term sol#ency position of the company. 0ebt E,uity /atio4 +he debt"e,uity ratio sho's the relati#e contributions of creditors and o'ners. ) outsiders fund7:hare holders fund Ideal ratios 241 &roprietary ratio or E,uity ratio4 It e presses the relationship bet'een net'orth and total assets. A high proprietary ratio is indicati#eof strong financial position of the business. ):hare holders funds7+otal Assets ) EE,uity %apital *&reference capital */eser#es A 3ictitious assetsF 7 +otal Assets 3i ed Assets to net 'orth /atio4 +his ratio indicates the mode of financing the fi ed assets. +he ideal ratio is >.MS )3i ed Assets EAfter 0epreciation.F7:hareholder 3und C4 %rofitability &atios: &rofitability ratios measure the profitability of a concern generally. +hey are calculated either in relation to sales or in relation to in#estment. /eturn on %apital Employed or /eturn on In#estment E/!IF4 +his ratio re#eals the earning capacity of the capital employed in the business. )&5I+ 7%apital Employed /eturn on &roprietors 3und 7 Earning /atio4 Earn on 6et 2orth )6et &rofit EAfter ta F7&roprietors 3und /eturn on !rdinary shareholders E,uity or /eturn on E,uity %apital4 It e presses the return earned by the e,uity shareholders on their in#estment. )6et &rofit after ta and 0i#idend 7 &roprietors fund or &aid up e,uity %apital &rice Earning /atio4 It e presses the relationship bet'een mar(etprice of share on a company and the earnings per share of that company. )9&: E9ar(et &rice per :hareF 7 E&: Earning &rice /atio7 Earning Hield4 ) E&: 7 9&: E&:) 6et &rofit EAfter ta and InterestF 7 6o. !f !utstanding :hares. 0i#idend Hield ratio4 It e presses the relationship bet'een di#idend earned per share to earnings per share. ) 0i#idend per share E0&:F 7 9ar(et #alue per share 0i#idend pay"out ratio4 It is the ratio of di#idend per share to earning per share. ) 0&: 7 E&: 0&:4 It is the amount of the di#idend payable to the holder of one e,uity share. )0i#idend paid to ordinary shareholders 7 6o. of ordinary shares %.G.:):ales" G.& G.&) :ales A %.G.: G.&./atio )G.&76et salesU1>>

1+

6et :ales) Gross :ales A /eturn in'ard" %ash discount allo'ed 6et profit ratio)6et &rofit7 6et :alesU1>> !perating &rofit ratio)!.&76et :alesU1>> Interest %o#erage /atio) 6et &rofit E5efore +a - InterestF 7 3i ed Interest %lasses &eturn on In(estment 6&*I7: It re#eals the earning capacity of the capital employed in the business. It is calculated as, E5I+7%apital employed. +he return on capital employed should be more than the cost of capital employed. %apital employed )E,uity%apital*&reference sharecapital*/eser#es*$ongterm loans and 0ebentures " 3ictitious Assets A 6on !peratingAssets

>1.

.efinition *f Accounting: the art of recording, classifying and summari@ing in a significant manner and in terms of money, transactions and e#ents 'hich are, in part at least of a financial character and interpreting the results there of. Book 2eeping: It is mainly concerned 'ith recording of financial data relating to the business operations in a significant and orderly manner. Concepts of accounting: :eparate entity concept Going concern concept 9oney measurement concept %ost concept 0ual aspect concept Accounting period concept &eriodic matching of costs and re#enue concept /eali@ation concept.

>2. >L.

11

>R.

Con(entions *f Accounting %onser#atism 3ull disclosure %onsistency 0 materiality. Systems of bookkeeping :ingle entry system 0ouble entry system Systems of accounting %ash system accounting 9ercantile system of accounting. %rinciples of accounting %ersonal a)c: 0ebit the recei#er %redit the gi#er &eal a)c: 'ominal a)c: 0ebit 'hat comes in %redit 'hat goes out 0ebit all e penses and losses %redit all gains and incomes

>=.

>M.

>S.

>P. >K. 1>. 11. 12.

Meaning of Bournal: .ournal means chronological record of transactions. Meaning of ledger: $edger is a set of accounts. It contains all accounts of the business enterprise 'hether real, nominal, personal. %osting: It means transferring the debit and credit items from the journal to their respecti#e accounts in the ledger. #rial balance: +rial balance is a statement containing the #arious ledger balances on a particular date. Credit note: +he customer 'hen returns the goods get credit for the #alue of the goods returned. A credit note is sent to him intimating that his a7c has been credited 'ith the #alue of the goods returned. .ebit note: 2hen the goods are returned to the supplier, a debit note is sent to him indicating that his a7c has been debited 'ith the amount mentioned in the debit note. Contra entry: 2hich accounting entry is recorded on both the debit and credit side of the cashboo( is (no'n as the contra entry. %etty cas book: &etty %ash is maintained by business to record petty cash e penses of the business, such as postage, cartage, stationery, etc. %romissory 'ote: An instrument in 'riting containing an unconditional underta(ing :igned by the ma(er, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument. 12

1L.

1R. 1=. 1M.

1S. C eque: A bill of e change dra'n on a specified ban(er and payable on demand. 1P. 2>. Stale C eque: A stale che,ue means not #alid of che,ue that means more than si months the che,ue is not #alid. Bank &econciliation Statement: It is a statement reconciling the balance as sho'n by the ban( passboo( and the balance as sho'n by the %ash 5oo(. !bj4 to (no' the difference - pass necessary correcting, adjusting entries in the boo(s. Matc ing concept: 9atching means re,uires proper matching of e pense 'ith the re#enue. Capital Income: +he term capital income means an income 'hich does not gro' out of or pertain to the running of the business proper. &e(enue Income: +he income, 'hich arises out of and in the course of the regular business transactions of a concern. Capital +,penditure: It means an e penditure, 'hich has been incurred for the purpose of obtaining a long"term ad#antage for the business. &e(enue +,penditure: An e penditure that incurred in the course of regular business transactions of a concern. .iffered &e(enue +,penditure: An e penditure, 'hich is incurred during an accounting period but is applicable further periods also. Eg4 hea#y ad#ertisement. Bad .ebts: 5ad debts denote the amount lost from debtors to 'hom the goods 'ere sold on credit. .epreciation: 0epreciation denotes gradually and permanent decrease in the #alue of asset due to 'ear and tear, technology changes, laps of time and accident. Fictitious Assets: +hese are assets not represented by tangible possession or property. E amples of preliminary e penses, discount on issue of shares, debit balance in the profit and loss account 'hen sho'n on the assets side in the balance sheet. Intangible Assets: Intangible assets mean the assets 'hich is not ha#ing the physical appearance. And its ha#e the real #alue, it sho'n on the assets side of the balance sheet. Accrued Income: Accrued income means income 'hich has been earned by the business during the accounting year but 'hich has not yet been due and, therefore, has not been recei#ed.

21. 22. 2L. 2R. 2=. 2M.

2S. 2P.

2K.

L>.

L1.

13

L2.

*ut standing Income: !utstanding Income means income 'hich has become due during the accounting year but 'hich has not so far been recei#ed by the firm. Suspense Account: the suspense account is an account to 'hich the difference in the trial balance has been put temporarily. .epletion: It implies remo#al of an a#ailable but not replaceable source, :uch as e tracting coal from a coal mine. +he process of 'riting of intangible assets is term as

LL. LR.

L=. Amorti?ation: amorti@ation. LM. LS.

.ilapidations: +he term dilapidations to damage done to a building or other property during tenancy. Capital +mployed: +he term capital employed means sum of total long"term funds employed in the business. i.e. Eshare capital* reser#es - surplus *long term loans A Enon business assets * fictitious assetsF +quity S ares: +hose shares 'hich are not ha#ing pref. rights are called e,uity shares.

LP.

LK. %ref4S ares: +hose shares 'hich are carrying the pref.rights is called pref. shares &ref.rights in respect of fi ed di#idend. &ref.right to repayment of capital in the e#en of company 'inding up. R>. R1. R2. RL. RR. "e(erage: It is a force applied at a particular point to get the desired result. *perating le(erage: +he operating le#erage ta(es place 'hen a changes in re#enue greater changes in E5I+. Financial le(erage: It is nothing but a process of using debt capital to increase the rate of return on e,uity Combine le(erage: it is used to measure of the total ris( of the firm ) operating ris( * financial ris(. !oint (enture: A joint #enture is an association of t'o or more the persons 'ho combined for the e ecution of a specific transaction and di#ide the profit or loss their of an agreed ratio. %artners ip: &artnership is the relation b7' the persons 'ho ha#e agreed to share the profits of business carried on by all or any of them acting for all. Factoring: It is an arrangement under 'hich a firm Ecalled borro'erF recei#es ad#ances against its recei#ables, from a financial institutions Ecalled factorF Capital &eser(e: +he reser#e 'hich transferred from the capital gains is called capital reser#e.

R=. RM. RS.

!0

RP. RK. =>. =1.

$eneral &eser(e: +he reser#e 'hich is transferred from normal profits of the firm is called general reser#e Free Cas : +he cash not for any specific purpose free from any encumbrance li(e surplus cash. Minority Interest: 9inority interest refers to the e,uity of the minority shareholders in a subsidiary company. Capital &eceipts: capital receipts may be defined as non"recurring receipts from the o'ner of the business or lender of the money crating a liability to either of them. &e(enue &eceipts: /e#enue receipts may defined as A recurring receipts against sale of goods in the normal course of business and 'hich generally the result of the trading acti#ities. Meaning of Company: A company is an association of many persons 'ho contribute money or money1s 'orth to common stoc( and employs it for a common purpose. +he common stoc( so contributed is denoted in money and is the capital of the company. #ypes of a company: :tatutory companies Go#ernment company 3oreign company /egistered companies4 %ompanies limited by shares %ompanies limited by guarantee Bnlimited companies 0. &ri#ate company E. &ublic company %ri(ate company: A pri#ate co. is 'hich by its A!A4 /estricts the right of the members to transfer of shares $imits the no. !f members =>. &rohibits any In#itation to the public to subscribe for its shares or debentures. %ublic company: A company, the articles of association of 'hich does not contain the re,uisite restrictions to ma(e it a pri#ate limited company, is called a public company. C aracteristics of a company: ?oluntary association :eparate legal entity 3ree transfer of shares $imited liability %ommon seal &erpetual e istence. &romotion !1

=2.

=L.

=R.

==.

=M.

=S.

=P.

Formation of company:


=K.

Incorporation %ommencement of business

+quity s are capital: +he total sum of e,uity shares is called e,uity share capital.

M>. M1. M2. ML. MR. M=. MM. MS.

Authori@ed share capital4 it is the ma imum amount of the share capital, 'hich a company can raise for the time being. Issued capital4 It is that part of the authori@ed capital, 'hich has been allotted to the public for subscriptions. :ubscribed capital4 it is the part of the issued capital, 'hich has been allotted to the public. %alled up capital4 It has been portion of the subscribed capital, 'hich has been called up by the company. &aid up capital4 It is the portion of the called up capital against 'hich payment has been recei#ed. .ebentures: 0ebenture is a certificate issued by a company under its seal ac(no'ledging a debt due by it to its holder. Cas %rofit: %ash profit is the profit it is occurred from the cash sales. 0eemed public $td. %ompany4 A pri#ate company is a subsidiary company to public company it satisfies the follo'ing terms7conditions :ec LE1FL4 ;a#ing minimum share capital = la(hs Accepting in#estments from the public 6o restriction of the transferable of shares 6o restriction of no. !f members. Accepting deposits from the in#estors :ecret reser#es4 secret reser#es are reser#es the e istence of 'hich 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. # ese reser(es are crated by: E cessi#e dep.of an asset, e cessi#e o#er"#aluation of a liability. %omplete elimination of an asset, or under #aluation of an asset. %ro(ision: &ro#ision usually means any amount 'ritten off or retained by 'ay of pro#iding depreciation, rene'als or diminutions in the #alue of assets or retained by 'ay of pro#iding for any (no'n liability of 'hich the amount can not be determined 'ith substantial accuracy. &eser(e: +he pro#ision in e cess of the amount considered necessary for the purpose it 'as originally made is also considered as reser#e &ro#ision is charge against profits 'hile reser#es is an appropriation of profits %reation of reser#e increase proprietor1s fund 'hile creation of pro#isions decreases his funds in the business.

MP.

MK.

S>.

!!

S1. S2.

&eser(e Fund: +he term reser#e fund means such reser#e against 'hich clearly in#estment etc. Undisclosed &eser(es: :ometimes a reser#e is created but its identity is merged 'ith some other a7c or group of accounts so that the e istence of the reser#e is not (no'n such reser#e is called an undisclosed reser#e. Finance Management: financial management deals 'ith procurement of funds and their effecti#e utili@ation in business. *bBecti(es *f Financial Management: 3inancial management ha#ing t'o objecti#es that Is4 %rofit ma,imi?ation: +he finance manager has to ma(e his decisions in a manner so that the profits of the concern are ma imi@ed. 9ealt ma,imi?ation: 2ealth ma imi@ation means the objecti#e of a firm should be to ma imi@e its #alue or 'ealth, or #alue of a firm is represented by the mar(et price of its common stoc(. Functions of financial manager: In#estment decision 0i#idend decision 3inance decision %ash management decisions &erformance e#aluation 9ar(et impact analysis #ime (alue of money: +he time #alue of money means that 'orth of a rupee recei#ed today is different from the 'orth of a rupee to be recei#ed in future. Capital structure: It refers to the mi of sources from 'here the long"term funds re,uired in a business may be raisedN in other 'ords, it refers to the proportion of debt, preference capital and e,uity capital. *ptimum capital structure: capital structure is optimum 'hen the firm has a combination of e,uity and debt so that the 'ealth of the firm is ma imum. 9acc: It denotes 'eighted a#erage cost of capital. It is defined as the o#erall cost of capital computed by reference to the proportion of each component of capital as 'eights. 3inancial brea("e#en point4 it denotes the le#el at 'hich a firm1s E5I+ is just sufficient to co#er interest and preference di#idend. Capital budgeting: capital budgeting in#ol#es the process of decision ma(ing 'ith regard to in#estment in fi ed assets. !r decision ma(ing 'ith regard to in#estment of money in long"term projects. %ay back period: &aybac( period represents the time period re,uired for complete reco#ery of the initial in#estment in the project. A&&: Accounting or a#erage rate of return means the a#erage annual yield on the project.

SL. SR.

S=.

SM. SS.

SP. SK.

P>. P1.

P2. PL.

!0

PR.

'%/: +he net present #alue of an in#estment proposal is defined as the sum of the present #alues of all future cash in flo's less the sum of the present #alues of all cash out flo's associated 'ith the proposal. %rofitability Inde,: 'here different in#estment proposal each in#ol#ing different initial in#estments and cash inflo's are to be compared. I&&: internal rate of return is the rate at 'hich the sum total of discounted cash inflo's e,uals the discounted cash out flo'. #reasury Management: It means it is defined as the efficient management of li,uidity and financial ris( in business. Concentration Banking: It means identify locations or places 'here customers are placed and open a local ban( a7c in each of these locations and open local collection canter. Marketable Securities: :urplus cash can be in#ested in short term instruments in order to earn interest. Ageing Sc edule: In a ageing schedule the recei#ables are classified according to their age. Ma,imum %ermissible Bank Finance 6M%BF7: it is the ma imum amount that ban(s can lend a borro'er to'ards his 'or(ing capital re,uirements. Commercial %aper: A cp is a short term promissory note issued by a company, negotiable by endorsement and deli#ery, issued at a discount on face #alue as may be determined by the issuing company. Bridge Finance: It refers to the loans ta(en by the company normally from a commercial ban(s for a short period pending disbursement of loans sanctioned by the financial institutions. /enture Capital: It refers to the financing of high"ris( #entures promoted by ne' ,ualified entrepreneurs 'ho re,uire funds to gi#e shape to their ideas. .ebt Securiti?ation: It is a mode of financing, 'here in securities are issued on the basis of a pac(age of assets Ecalled asset poolF. "ease Financing: $easing is a contract 'here one party Eo'nerF purchases assets and permits its #ie's by another party ElesseeF o#er a specified period #rade Credit: It represents credit granted by suppliers of goods, in the normal course of business. *(er .raft: Bnder this facility a fi ed limit is granted 'ithin 'hich the borro'er allo'ed to o#erdra' from his account. Cas credit: It is an arrangement under 'hich a customer is allo'ed an ad#ance up to certain limit against credit granted by ban(. Clean o(erdraft: It refers to an ad#ance by 'ay of o#erdraft facility, but not bac( by any tangible security. !4

P=. PM. PS. PP.

PK. K>. K1. K2.

KL.

KR. K=. KM. KS. KP. KK. 1>>.

1>1. 1>2.

S are capital: +he sum total of the nominal #alue of the shares of a company is called share capital. Funds Flo0 Statement: It is the statement deals 'ith the financial resources for running business acti#ities. It e plains ho' the funds obtained and ho' they used. Sources of funds: +here are t'o sources of funds Internal sources and e ternal sources. Internal source: 3unds from operations is the only internal sources of funds and some important points add to it they do not result in the outflo' of funds 0epreciation on fi ed assets EbF &reliminary e penses or good'ill 'ritten off, $oss on sale of fi ed assets 0educt the follo'ing items, as they do not increase the funds4 &rofit on sale of fi ed assets, profit on re#aluation !f fi ed assets +,ternal sources: 3unds from long"term loans :ale of fi ed assets 3unds from increase in share capital

1>L.

1>R. 1>=.

Application of funds: EaF &urchase of fi ed assets EbF &ayment of di#idend EcF&ayment of ta liability EdF &ayment of fi ed liability IC. 6Inter corporate deposits7: %ompanies can borro' funds for a short period. 3or e ample M months or less from another company 'hich ha#e surplus li,uidity. :uch 0eposits made by one company in another company are called I%0. Certificate of deposits: +he %0 is a document of title similar to a fi ed deposit receipt issued by ban(s there is no prescribed interest rate on such %0s it is based on the pre#ailing mar(et conditions. %ublic deposits: It is #ery important source of short term and medium term finance. +he company can accept &0 from members of the public and shareholders. It has the maturity period of M months to L years. +uro issues: +he euro issues means that the issue is listed on a European stoc( E change. +he subscription can come from any part of the 'orld e cept India. $.& 6$lobal depository receipts7: A depository receipt is basically a negotiable certificate, dominated in us dollars that represents a non"B: company publicly traded in local currency e,uity shares. A.& 6American depository receipts7: 0epository receipt issued by a company in the B:A are (no'n as A0/s. :uch receipts are to be issued in accordance 'ith the pro#isions stipulated by the securities E change commission E:E%F of B:A li(e :E5I in India.

1>M.

1>S.

1>P.

1>K. 11>.

!.

111.

Commercial banks: %ommercial ban(s e tend foreign currency loans for international operations, just li(e rupee loans. +he ban(s also pro#ided o#erdraft. .e(elopment banks: It offers long"term and medium term loans including foreign currency loans. International agencies: International agencies li(e the I3%,I5/0,A05,I93 etc. pro#ide indirect assistance for obtaining foreign currency.

112. 11L.

11R. Seed capital assistance: +he seed capital assistance scheme is desired by the I05I for professionally or technically ,ualified entrepreneurs and persons possessing rele#ant e perience and s(ills and entrepreneur traits. 11=. 11M. 11S. Unsecured loans: It constitutes a significant part of long"term finance a#ailable to an enterprise. Cas flo0 statement: It is a statement depicting change in cash position from one period to another. Sources of cas : Internal sources" 0epreciation Amorti@ation $oss on sale of fi ed assets Gains from sale of fi ed assets %reation of reser#es E ternal sources" Issue of ne' shares /aising long term loans :hort"term borro'ings :ale of fi ed assets, in#estments
Application of cas :

11P.

&urchase of fi ed assets &ayment of long"term loans 0ecrease in deferred payment liabilities &ayment of ta , di#idend 0ecrease in unsecured loans and deposits

11K. 12>.

Budget: It is a detailed plan of operations for some specific future period. It is an estimate prepared in ad#ance of the period to 'hich it applies. Budgetary control: It is the system of management control and accounting in 'hich all operations are forecasted and so for as possible planned ahead, and the actual results compared 'ith the forecasted and planned ones. Cas budget: It is a summary statement of firm1s e pected cash inflo' and outflo' o#er a specified time period. 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. !+

121. 122.

12L. 12R.

Fi,ed budget: It is a budget, 'hich is designed to remain unchanged irrespecti#e of the le#el of acti#ity actually attained. Dero-base-budgeting: It is a management tool 'hich pro#ides a systematic method for e#aluating all operations and programmes, current of ne' allo's for budget reductions and e pansions in a rational manner and allo's reallocation of source from lo' to high priority programs. $ood0ill: +he present #alue of firm1s anticipated e cess earnings. B&S: It is a statement reconciling the balance as sho'n by the ban( pass boo( and balance sho'n by the cash boo(. *bBecti(e of B&S: +he objecti#e of preparing such a statement is to (no' the causes of difference bet'een the t'o balances and pass necessary correcting or adjusting entries in the boo(s of the firm. &esponsibilities of accounting: It is a system of control by delegating and locating the /esponsibilities for costs. %rofit centre: A centre 'hose performance is measured in terms of both the e pense incurs and re#enue it earns. Cost centre: A location, person or item of e,uipment for 'hich cost may be ascertained and used for the purpose of cost control. Cost: +he amount of e penditure incurred on to a gi#en thing. Cost accounting: It is thus concerned 'ith recording, classifying, and summari@ing costs for determination of costs of products or ser#ices planning, controlling and reducing such costs and furnishing of information management for decision ma(ing. +lements of cost: 9aterial $abour E penses !#erheads Components of total costs: &rime cost 3actory cost +otal cost of production +otal c>st %rime cost: It consists of direct material direct labour and direct e penses. It is also (no'n as basic or first or flat cost. Factory cost: It comprises prime cost, in addition factory o#erheads 'hich include cost of indirect material indirect labour and indirect e penses incurred

12=. 12M. 12S.

12P. 12K. 1L>. 1L1. 1L2.

1LL.

1LR.

1L=. 1LM.

!1

in factory. +his cost is also (no'n as 'or(s cost or production cost or manufacturing cost. 1LS. 1LP. 1LK. 1R>. Cost of production: In office and administration o#erheads are added to factory cost, office cost is arri#ed at. #otal cost: :elling and distribution o#erheads are added to total cost of production to get the total cost or cost of sales. Cost unit: A unit of ,uantity of a product, ser#ice or time in relation to 'hich costs may be ascertained or e pressed. Met ods of costing: .ob costing %ontract costing &rocess costing !peration costing !perating costing Bnit costing 5atch costing. #ec niques of costing: 9arginal costing 0irect costing Absorption costing Bniform costing. Standard costing: :tandard costing is a system under 'hich the cost of the product is determined in ad#ance on certain predetermined standards. Marginal costing: It is a techni,ue of costing in 'hich allocation of e penditure to production is restricted to those e penses 'hich arise as a result of production, i.e., materials, labour, direct e penses and #ariable o#erheads. .eri(ati(e: 0eri#ati#e is product 'hose #alue is deri#ed from the #alue of one or more basic #ariables of underlying asset. For0ards: A for'ard contract is customi@ed contracts bet'een t'o entities 'ere settlement ta(es place on a specific date in the future at today1s pre agreed price. Futures: A future contract is an agreement bet'een t'o parties to buy or sell an asset at a certain time in the future at a certain price. 3uture contracts are standardi@ed e change traded contracts. *ptions: An option gi#es the holder of the option the right to do some thing. +he option holder option may e ercise or not. Call option: A call option gi#es the holder the right but not the obligation to buy an asset by a certain date for a certain price. !2

1R1.

1R2. 1RL.

1RR. 1R=.

1RM.

1RS. 1RP.

1RK. 1=>. 1=1. 1=2. 1=L. 1=R. 1==. 1=M 1=S.

%ut option: A put option gi#es the holder the right but not obligation to sell an asset by a certain date for a certain price. *ption price: !ption price is the price 'hich the option buyer pays to the option seller. It is also referred to as the option premium. +,piration date: +he date 'hich is specified in the option contract is called e piration date. +uropean option: It is the option at e ercised only on e piration date it self. Basis: 5asis means future price minus spot price. Cost of carry: +he relation bet'een future prices and spot prices can be summari@ed in terms of 'hat is (no'n as cost of carry. Initial Margin: +he amount that must be deposited in the margin a7c at the time of first entered into future contract is (no'n as initial margin. Maintenance Margin: +his is some 'hat lo'er than initial margin. Mark to Market: In future mar(et, at the end of the each trading day, the margin a7c is adjusted to reflect the in#estors1 gains or loss depending upon the futures selling price. +his is called mar( to mar(et. Baskets: 5as(et options are options on portfolio of underlying asset. S0aps: :'aps are pri#ate agreements bet'een t'o parties to e change cash flo's in the future according to a pre agreed formula. Impact cost: impact cost is cost it is measure of li,uidity of the mar(et. It reflects the costs faced 'hen actually trading in inde . -edging: ;edging means minimi@e the ris(. Capital market: %apital mar(et is the mar(et it deals 'ith the long term in#estment funds. It consists of t'o mar(ets 1.primary mar(et 2.secondary mar(et. %rimary market: +hose companies 'hich are issuing ne' shares in this mar(et. It is also called ne' issue mar(et. Secondary market: :econdary mar(et is the mar(et 'here shares buying and selling. In India secondary mar(et is called stoc( e change. Arbitrage: It means purchase and sale of securities in different mar(ets in order to profit from price discrepancies. In other 'ords arbitrage is a 'ay of reducing ris( of loss caused by price fluctuations of securities held in a portfolio. Meaning of ratio: /atios are relationships e pressed in mathematical terms bet'een figures 'hich are connected 'ith each other in same manner.

1=P. 1=K. 1M>. 1M1. 1M2.

1ML. 1MR. 1M=.

1MM.

!3

1MS. 1MP. 1MK.

Acti(ity ratio: It is a measure of the le#el of acti#ity attained o#er a period. Mutual Fund: A mutual fund is a pool of money, collected from in#estors, and is in#ested according to certain in#estment objecti#es. C aracteristics of Mutual Fund 4 !'nership of the 93 is in the hands of the of the in#estors 93 managed by in#estment professionals +he #alue of portfolio is updated e#ery day Ad(antage of MF to In(estors: &ortfolio di#ersification &rofessional management /eduction in ris( /eduction of transaction casts $i,uidity %on#enience and fle ibility 'et asset (alue: +he #alue of one unit of in#estment is called as the 6et Asset ?alue. *pen-+nded Fund: !pen ended funds means in#estors can buy and sell units of fund, at 6A? related prices at any time, directly from the fund this is called open ended fund. 3or e N unit MR Close +nded Funds: %lose ended funds means it is open for sale to in#estors for a specific period, after 'hich further sales are closed. Any further transaction for buying the units or repurchasing them, happen, in the secondary mar(ets. .i(idend *ption: In#estors, 'ho choose a di#idend on their in#estments, 'ill recei#e di#idends from the 93, as 'hen such di#idends are declared. $ro0t *ption: In#estors 'ho do not re,uire periodic income distributions can be choose the gro'th option. +quity Funds: E,uity funds are those that in#est pre"dominantly in e,uity shares of company. #ypes of +quity Funds: :imple e,uity funds &rimary mar(et funds :ectoral funds Inde funds Sectoral Funds: :ectoral funds choose to in#est in one or more chosen sectors of the e,uity mar(ets. Inde, Funds: +he fund manager ta(es a #ie' on companies that are e pected to perform 'ell, and in#ests in these companies .ebt Funds: +he debt funds are those that are pre"dominantly in#est in debt securities. "iquid Funds: +he debt funds in#est only in instruments 'ith maturities less than one year. $ilt Funds: Gilt funds in#ests only in securities that are issued by the G!?+. and therefore does not carry any credit ris(. Balanced Funds: 3unds that in#est both in debt and e,uity mar(ets are called balanced funds. 00

1S>.

1S1. 1S2.

1SL.

1SR. 1S=. 1SM. 1SS. 1SP. 1SK. 1P>. 1P1. 1P2. 1PL.

1PR. 1P=. 1PM. 1PS. 1PP. 1PK. 1K>. 1K2. 1KL. 1KR. 1K=.

Sponsor: :ponsor is the promoter of the 93 and appoints trustees, custodians and the A9% 'ith prior appro#al of :E5I . #rustee: +rustee is responsible to the in#estors in the 93 and appoint the A9% for managing the in#estment portfolio. AMC: +he A9% describes Asset 9anagement %ompany, it is the business face of the 93, as it manages all the affairs of the 93. & E # Agents: +he /-+ agents are responsible for the in#estor ser#icing functions, as they maintain the records of in#estors in 93. Custodians: %ustodians are responsible for the securities held in the mutual fund1s portfolio. Sc eme #ake *(er: If an e isting 93 scheme is ta(en o#er by the another A9%, it is called as scheme ta(e o#er. Meaning *f "oad: $oad is the factor that is applied to the 6A? of a scheme to arri#e at the price. Market Capitali?ation: 9ar(et capitali@ation means number of shares issued multiplied 'ith mar(et price per share. %rice +arning &atio : +he ratio bet'een the share price and the post ta earnings of company is called as price earning ratio. .i(idend >ield: +he di#idend paid out by the company, is usually a percentage of the face #alue of a share. Market &isk: It refers to the ris( 'hich the in#estor is e posed to as a result of ad#erse mo#ements in the interest rates. It also referred to as the interest rate ris(.

1KM. &e-in(estment risk: It the ris( 'hich an in#estor has to face as a result of a fall in the interest rates at the time of rein#esting the interest income flo's from the fi ed Income security. 1KS. Call &isk: %all ris( is associated 'ith bonds ha#e an embedded call option in them. +his option hi#es the issuer the right to call bac( the bonds prior to maturity. Credit &isk: %redit ris( refers to the probability that a borro'er could default on a commitment to repay debt or band loans Inflation &isk: Inflation ris( reflects the changes in the purchasing po'er of the cash flo's resulting from the fi ed income security. "iquid &isk: It is also called mar(et ris(, it refers to the ease 'ith 'hich bonds could be traded in the mar(et.

1KP. 1KK. 2>>.

01

2>1. 2>2.

.ra0ings: 0ra'ings denotes the money 'ithdra'n by the proprietor from the business for his personal use. *utstanding Income: !utstanding Income means income 'hich has become due during the accounting year but 'hich has not so far been recei#ed by the firm. *utstanding +,penses: !utstanding E penses refer to those e penses 'hich ha#e become due during the accounting period for 'hich the 3inal Accounts ha#e been prepared but ha#e not yet been paid. Closing Stock: +he term closing stoc( means goods lying unsold 'ith the businessman at the end of the accounting year. Met ods of depreciation:
Unirorm c arge met ods:

2>L.

2>R. 2>=.

*t

3i ed installment method 0epletion method 9achine hour rate method. 0iminishing balance method :um of years digits method 0ouble declining method er met ods : Group depreciation method In#entory system of depreciation Annuity method Insurance policy met od4

.eclining c arge met ods:

.epreciation fund met od

2>M.

Accrued Income: Accrued Income means income 'hich has been earned by the business during the accounting year but 'hich has not yet become due and, therefore, has not been recei#ed.

2>S. $ross profit ratio: It indicates the efficiency of the production7trading operations. 3ormula 4 Gross profit """""""""""""""""""Q1>> 6et sales 2>P. 'et profit ratio: it indicates net margin on sales 3ormula4 6et profit """"""""""""""" Q 1>> 6et sales &eturn *n S are -olders Funds : It indicates measures earning po'er of e,uity capital. Formula : profits a#ailable for E,uity shareholders """""""""""""""""""""""""""""""""""""""""""""""Q 1>> A#erage E,uity :hareholders 3unds

2>K.

0!

21>.

+arning per +quity s are 6+%S7: It sho's the amount of earnings attributable to each e,uity share. Formula : profits a#ailable for E,uity shareholders """""""""""""""""""""""""""""""""""""""""""""" 6umber of E,uity shares .i(idend >ield &atio: It sho's the rate of return to shareholders in the form of di#idends based in the mar(et price of the share 3ormula 4 0i#idend per share """""""""""""""""""""""""""" Q1>> 9ar(et price per share %rice +arning &atio: It a measure for determining the #alue of a share. 9ay also be used to measure the rate of return e pected by in#estors. 3ormula 4 9ar(et price of shareE9&:F """""""""""""""""""""""""""""""Q 1>> Earning per share EE&:F Current &atio: It measures short"term debt paying ability. 3ormula 4 %urrent Assets """""""""""""""""""""""" %urrent $iabilities .ebt-+quity &atio: It indicates the percentage of funds being financed through borro'ingsN a measure of the e tent of trading on e,uity. 3ormula 4 +otal $ong"term 0ebt """"""""""""""""""""""""""" :hareholders funds Fi,ed Assets &atio: +his ratio e plains 'hether the firm has raised adepuate long"term funds to meet its fi ed assets re,uirements. 3ormula 3i ed Assets """"""""""""""""""" $ong"term 3unds

211.

212.

21L.

21R.

21=.

21M . 1uick &atio: +he ratio termed as < li,uidity ratio1. +he ratio is ascertained y comparing the li,uid assets to current liabilities. 3ormula 4 $i,uid Assets """""""""""""""""""""""" %urrent $iabilities 21S. Stock turno(er &atio: +he ratio indicates 'hether in#estment in in#entory in efficiently used or not. It, therefore e plains 'hether in#estment in in#entory 'ithin proper limits or not. 3ormula4 cost of goods sold """""""""""""""""""""""" A#erage stoc( .ebtors #urno(er &atio: +he ratio the better it is, since it 'ould indicate that debts are being collected more promptly. +he ration helps in cash budgeting since the flo' of cash from customers can be 'or(ed out on the basis of sales. 00

21P.

3ormula4

%redit sales """"""""""""""""""" A#erage Accounts /ecei#able

21K.

Creditors #urno(er &atio: It indicates the speed 'ith 'hich the payments for credit purchases are made to the creditors. 3ormula4 %redit &urchases """"""""""""""""""""""" A#erage Accounts &ayable

22>.

9orking Capital #urno(er &atio: It is also (no'n as 2or(ing %apital $e#erage /atio. +his ratio Indicates 'hether or not 'or(ing capital has been effecti#ely utili@ed in ma(ing sales. 3ormula4 6et :ales """""""""""""""""""""""""""" 2or(ing %apital

221.

Fi,ed Assets #urno(er &atio: +his ratio indicates the e tent to 'hich the in#estments in fi ed assets contributes to'ards sales. 3ormula4 6et :ales """""""""""""""""""""""""" 3i ed Assets

222.

%ay-out &atio: +his ratio indicates 'hat proportion of earning per share has been used for paying di#idend. 3ormula4 0i#idend per E,uity :hare """"""""""""""""""""""""""""""""""""""""""""Q1>> Earning per E,uity share

22L.

*(erall %rofitability &atio: It is also called as /eturn on In#estment E/!IF or /eturn on %apital Employed E/!%EF . It indicates the percentage of return on the total capital employed in the business. 3ormula 4 !perating profit """"""""""""""""""""""""Q 1>> %apital employed +he term capital employed has been gi#en different meanings a.sum total of all assets 'hether fi ed or current b.sum total of fi ed assets, c.sum total of long"term funds employed in the business, i.e., share capital *reser#es -surplus *long term loans AEnon business assets * fictitious assetsF. !perating profit means <profit before interest and ta 1

22R.

Fi,ed Interest Co(er &atio: +he ratio is #ery important from the lender1s point of #ie'. It indicates 'hether the business 'ould earn sufficient profits to pay periodically the interest charges.

04

3ormula 4

Income before interest and +a """"""""""""""""""""""""""""""""""""""" Interest %harges

22=.

Fi,ed .i(idend Co(er &atio: +his ratio is important for preference shareholders entitled to get di#idend at a fi ed rate in priority to other shareholders. 3ormula 4 6et &rofit after Interest and +a """""""""""""""""""""""""""""""""""""""""" &reference 0i#idend

22M.

.ebt Ser(ice Co(erage ratio: +his ratio is e plained ability of a company to ma(e payment of principal amounts also on time. 3ormula 4 6et profit before interest and ta """""""""""""""""""""""""""""""""""""""" 1"+a rate Interest * &rincipal payment installment %roprietary &atio: It is a #ariant of debt"e,uity ratio . It establishes relationship bet'een the proprietor1s funds and the total tangible assets. 3ormula 4 :hareholders funds """""""""""""""""""""""""""" +otal tangible assets .ifference bet0een Boint (enture and partner s ip: In joint #enture the business is carried on 'ithout using a firm name, In the partnership, the business is carried on under a firm name. In the joint #enture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system. In the joint #enture, profit and loss is ascertained on completion of the #enture In the partner ship , profit and loss is ascertained at the end of each year. In the joint #enture, it is confined to a particular operation and it is temporary. In the partnership, it is confined to a particular operation and it is permanent. Meaning of 9orking Capital: +he funds a#ailable for conducting day to day operations of an enterprise. Also represented by the e cess of current assets o#er current liabilities. Concepts of accounting: Business entity concepts: According to this concept, the business is treated as a separate entity distinct from its o'ners and others. $oing concern concept: According to this concept, it is assumed that a business has a reasonable e pectation of continuing business at a profit for an indefinite period of time. Money measurement concept: +his concept says that the accounting records only those transactions 'hich can be e pressed in terms of money only. Cost concept: According to this concept, an asset is recorded in the boo(s at the price paid to ac,uire it and that this cost is the basis for all subse,uent accounting for the asset. 0.

22S.

22P.

22K.

2L>.

.ual aspect concept: In e#ery transaction, there 'ill be t'o aspects A the recei#ing aspect and the gi#ing aspectN both are recorded by debiting one accounts and crediting another account. +his is called double entry. Accounting period concept: It means the final accounts must be prepared on a periodic basis. 6ormally accounting period adopted is one year, more than this period reduces the utility of accounting data. &eali?ation concept: According to this concepts, re#enue is considered as being earned on the data 'hich it is reali@ed, i.e., the date 'hen the property in goods passes the buyer and he become legally liable to pay. Materiality concepts: It is a one of the accounting principle, as per only important information 'ill be ta(en, and un important information 'ill be ignored in the preparation of the financial statement. Matc ing concepts: +he cost or e penses of a business of a particular period are compared 'ith the re#enue of the period in order to ascertain the net profit and loss. Accrual concept: +he profit arises only 'hen there is an increase in o'ners capital, 'hich is a result of e cess of re#enue o#er e penses and loss.

2L1. 2L2. 2LL.

Financial analysis: +he process of interpreting the past, present, and future financial condition of a company. Income statement: An accounting statement 'hich sho's the le#el of re#enues, e penses and profit occurring for a gi#en accounting period. Annual report: +he report issued annually by a company, to its share holders. it containing financial statement li(e, trading and profit - lose account and balance sheet. Bankrupt : A statement in 'hich a firm is unable to meets its obligations and hence, it is assets are surrendered to court for administration "ease: $ease is a contract bet'een to parties under the contract, the o'ner of the asset gi#es the right to use the asset to the user o#er an agreed period of the time for a consideration *pportunity cost : +he cost associated 'ith not doing something. Budgeting : +he term budgeting is used for preparing budgets and other producer for planning, co"ordination, and control of business enterprise. Capital: +he term capital refers to the total in#estment of company in money, tangible and intangible assets. It is the total 'ealth of a company.

2LR. 2L=.

2LM. 2LS. 2LP.

2LK. Capitali?ation: It is the sum of the par #alue of stoc(s and bonds out standings. 2R>. 2R1. *(er capitali?ation: 2hen a business is unable to earn fair rate on its outstanding securities. Under Capitali?ation: 2hen a business is able to earn fair rate or o#er rate on it is outstanding securities.

0+

2R2.

Capital gearing: +he term capital gearing refers to the relationship bet'een e,uity and long term debt.

2RL. Cost of Capital: It means the minimum rate of return e pected by its in#estment. 2RR. 2R=. Cas .i(idend: +he payment of di#idend in cash .efine t e term accrual : /ecognition of re#enues and costs as they are earned or incurred. It includes recognition of transaction relating to assets and liabilities as they occur irrespecti#e of the actual receipts or payments. Accrued +,penses: An e pense 'hich has been incurred in an accounting period but for 'hich no enforceable claim has become due in 'hat period against the enterprises. Accrued &e(enue: /e#enue 'hich has been earned is an earned is an accounting period but in respect of 'hich no enforceable claim has become due to in that period by the enterprise. Accrued liability: A de#eloping but not yet enforceable claim by an another person 'hich accumulates 'ith the passage of time or the receipt of ser#ice or other'ise. it may rise from the purchase of ser#ices 'hich at the date of accounting ha#e been only partly performed and are not yet billable. Con(ention of Full disclosure: According to this con#ention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information 'ill be made. Con(ention of consistency: According to this con#ention it is essential that accounting practices and methods remain unchanged from one year to another. .efine t e term preliminary e,penses: E penditure relating to the formation of an enterprise. +here include legal accounting and share issue e penses incurred for formation of the enterprise. Meaning of C arge : %harge means it is a obligation to secure an indebt ness. It may be fi ed charge and floating charge. Appropriation : It is application of profit to'ards /eser#es and 0i#idends. Absorption costing: A method 'here by the cost is determine so as to include the appropriate share of both #ariable and fi ed costs. Marginal Cost: 9arginal cost is the additional cost to produce an additional unit of a product. It is also called #ariable cost. 9 at are t e e,-ordinary items in t e %E" a)c: +he transaction 'hich are not related to the business is termed as e "ordinary transactions or e " ordinary items. Egg4" profit or losses on the sale of fi ed assets, interest recei#ed from other company in#estments, profit or loss on foreign e change, une pected di#idend recei#ed. 01

2R=.

2RM.

2RS.

2RP.

2RK.

2=>.

2=1. 2=2. 2=L. 2=R. 2==.

2=M.

S are premium: +he e cess of issue of price of shares o#er their face #alue. It 'ill be sho'ed 'ith the allotment entry in the journal, it 'ill be adjusted in the balance sheet on the liabilities side under the head of reser#es surplus. Accumulated .epreciation: +he total to date of the periodic depreciation charges on depreciable assets. In(estment: E penditure on assets held to earn interest, income, profit or other benefits. Capital: Generally refers to the amount in#ested in an enterprise by its o'ner. E N paid up share capital in corporate enterprise. Capital 9ork In %rogress: E penditure on capital assets 'hich are in the process of construction as completion. Con(ertible .ebenture: A debenture 'hich gi#es the holder a right to con#ersion 'holly or partly in shares in accordance 'ith term of issues. &edeemable %reference S are: +he preference share that is repayable either after a fi ed EorF determinable period EorF at any time di#idend by the management. Cumulati(e %reference S ares : A class of preference shares entitled to payment of umulates di#idends. &reference shares are al'ays deemed to be cumulati#e unless they are e pressly made non"cumulati#e preference shares. .ebenture &edemption &eser(e : A reser#e created for the redemption of debentures at a future date. Cumulati(e .i(idend: A di#idend payable as cumulati#e preference shares 'hich it unpaid cumulates as a claim against the earnings of a corporate before any distribution is made to the other shareholders. .i(idend +quali?ation &eser(e: A reser#e created to maintain the rate of di#idend in future years. *pening Stock: +he term <opening stoc(1 means goods lying unsold 'ith the businessman in the beginning of the accounting year. +his is sho'n on the debit side of the trading account. Closing Stock: +he term <%losing :toc(1 includes goods lying unsold 'ith the businessman at the end of the accounting year. +he amount of closing stoc( is sho'n on the credit side of the trading account and as an asset in the balance sheet. /aluation *f Closing Stock: +he closing stoc( is #alued on the basis of %ost or 9ar(et price 'hiche#er is less principle.

2=S. 2=P. 2=K. 2M>. 2M1. 2M2.

2ML.

2MR. 2M=.

2MM. 2MS.

2MP.

2MK.

02

2S2.

Contingency: A condition EorF situation the ultimate out come of 'hich gain or loss 'ill be (no'n as determined only as the occurrence or non occurrence of one or more uncertain future e#ents. Contingent Asset: An asset the e istence o'nership or #alue of 'hich may be (no'n or determined only on the occurrence or non occurrence of one more uncertain future e#ents. Contingent "iability: An obligation to an e isting condition or situation 'hich may arise in future depending on the occurrence of one or more uncertain future e#ents. .eficiency : +he e cess of liabilities o#er assets of an enterprise at a gi#en date is called deficiency. .eficit: +he debit balance in the profit and loss a7c is called deficit. Surplus: %redit balance in the profit - loss statement after pro#iding for proposed appropriation - di#idend, reser#es. Appropriation Assets: An account sometimes included as a separate section of the profit and loss statement sho'ing application of profits to'ards di#idends, reser#es. Capital &edemption &eser(e: A reser#e created on redemption of the a#erage cost4" the cost of an item at a point of time as determined by applying an a#erage of the cost of all items of the same nature o#er a period. 2hen 'eights are also applied in the computation it is termed as 'eight a#erage cost. Floating C ange: Assume change on some or all assets of an enterprise 'hich are not attached to specific assets and are gi#en as security against debt. .ifference bet0een Funds flo0 and Cas flo0 statement: A %ash flo' statement is concerned only 'ith the change in cash position 'hile a funds flo' analysis is concerned 'ith change in 'or(ing capital position bet'een t'o balance sheet dates. A cash flo' statement is merely a record of cash receipts and disbursements. 2hile studying the short"term sol#ency of a business one is interested not only in cash balance but also in the assets 'hich are easily con#ertible into cash. .ifference Bet0een t e Funds flo0 and Income statement : A funds flo' statement deals 'ith the financial resource re,uired for running the business acti#ities. It e plains ho' 'ere the funds obtained and ho' 'ere they used, 2hereas an income statement discloses the results of the business acti#ities, i.e., ho' much has been earned and ho' it has been spent. A funds flo' statement matches the funds raised and funds applied during a particular period. +he source and application of funds may be of capital as 'ell as of re#enue nature. An income statement matches the 03

2SL.

2SR.

2S=. 2SM. 2SS. 2SP.

2SK.

2P>.

2P1.

2P2.

incomes of a period 'ith the e penditure of that period, 'hich are both of a re#enue nature.

Accounting $lossary
Abo(e t e line: +his term can be applied to many aspects of accounting. It means transactions, assets etc., that are associated 'ith the e#eryday running of a business. :ee belo' the line. Account: A section in a ledger de#oted to a single aspect of a business Eeg. a 5an( account, 2ages account, !ffice e penses accountF. Accounting cycle: +his co#ers e#erything from opening the boo(s at the start of the year to closing them at the end. In other 'ords, e#erything you need to do in one accounting year accounting 'ise. Accounting equation: assets)liability*e,uity. +he formula used to prepare a balance sheet4

Accounts %ayable: An account in the nominal ledger 'hich contains the o#erall balance of the &urchase $edger. Accounts %ayable "edger: A subsidiary ledger 'hich holds the accounts of a businessWs suppliers. A single control account is held in the nominal ledger 'hich sho's the total balance of all the accounts in the purchase ledger. Accounts &ecei(able: An account in the nominal ledger 'hich contains the o#erall balance of the :ales $edger. Accounts &ecei(able "edger: A subsidiary ledger 'hich holds the accounts of a businessWs customers. A single control account is held in the nominal ledger 'hich sho's the total balance of all the accounts in the sales ledger. Accreti(e: If a company ac,uires another and says the deal is Waccreti#e to earningsW, it means that the resulting &E ratio Eprice7earningsF of the ac,uired company is less than the ac,uiring company. E ample4 %ompany WAW has an earnings per share EE&:F of O1. +he current share price is O1>. +his gi#es a &7E ratio of 1> Ecurrent share price is 1> times the E&:F. %ompany W5W has made a net profit for the year of O2>,>>>. If company WAW #alues W5W at, say, O1P>,>>> E&7E ratio)K X1P>,>>> #aluation72>,>>> profitYF then the deal is accreti#e because company WAW is effecti#ely increasing its E&: Ebecause it no' has more shares and it paid less for them compared 'ith its o'n share priceF. Esee diluti#eF Accruals: If during the course of a business certain charges are incurred but no in#oice is recei#ed then these charges are referred to as accruals Ethey WaccrueW or increase in #alueF. A typical e ample is interest payable on a loan 'here you ha#e not yet recei#ed a ban( statement. +hese items Eor an estimate of their #alueF should still be included in the profit loss account. 2hen the real in#oice is recei#ed, an adjustment can be made to correct the estimate. Accruals can also apply to the income side. Accrual met od of accounting: 9ost businesses use the accrual method of accounting Ebecause it is usually re,uired by la'F. 2hen you issue an in#oice on credit Eie. regardless of 'hether it is paid or notF, it is treated as a ta able supply on the date it 'as issued for income ta purposes Eor corporation ta for limited companiesF. +he same applies to bills recei#ed from suppliers. E+his does not mean you pay income ta immediately, just that it must be included in that yearWs profit and loss accountF. Accumulated .epreciation Account: +his is an account held in the nominal ledger 'hich holds the depreciation of a fi ed asset until the end of the assetWs useful life Eeither because it has been scrapped or soldF. It is credited each year 'ith that yearWs depreciation, hence the balance increases Eie. accumulatesF o#er a period of time. Each fi ed asset 'ill ha#e its o'n accumulated depreciation account.

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Ad(anced Corporation #a, 6AC# - U2 only - no longer in use7: +his is corporation ta paid in ad#ance 'hen a limited company issues a di#idend. A%+ is then deducted from the total corporation ta due 'hen it has been calculated at year end. A%+ 'as abolished in April 1KKK. :ee %orporation +a . Amorti?ation: +he depreciation Eor repaymentF of an EusuallyF intangible asset Eeg. loan, mortgageF o#er a fi ed period of time. E ample4 if a loan of 12,>>> is amorti@ed o#er 1 year 'ith no interest, the monthly payments 'ould be 1>>> a month. Annuali?e: +o con#ert anything into a yearly figure. Eg. if profits are reported as running at Z1>( a ,uarter, then they 'ould be ZR>( if annuali@ed. If a credit card interest rate 'as ,uoted as 1G a month, it 'ould be annuali@ed as 12G. Appropriation Account: An account in the nominal ledger 'hich sho's ho' the net profits of a business Eusually a partnership, limited company or corporationF ha#e been used. Arrears: 5ills 'hich should ha#e been paid. 3or e ample, if you ha#e forgotten to pay your last L months rent, then you are said to be L months in arrears on your rent. Assets: Assets represent 'hat a business o'ns or is due. E,uipment, #ehicles, buildings, creditors, money in the ban(, cash are all e amples of the assets of a business. +ypical brea(do'n includes W3i ed assetsW, W%urrent assetsW and Wnon"current assetsW. 3i ed refers to e,uipment, buildings, plant, #ehicles etc. %urrent refers to cash, money in the ban(, debtors etc. 6on"current refers to any assets 'hich do not easily fit into the pre#ious categories Esuch as 0eferred e penditureF. At cost: +he Wat costW price usually refers to the price originally paid for something, as opposed to, say, the retail price. Audit: +he process of chec(ing e#ery entry in a set of boo(s to ma(e sure they agree 'ith the original paper'or( Eeg. chec(ing a journalWs entries against the original purchase and sales in#oicesF. Audit #rail: A list of transactions in the order they occurred. Bad .ebts Account: An account in the nominal ledger to record the #alue of un"reco#erable debts from customers. /eal bad debts or those that are li(ely to happen can be deducted as e penses against ta liability Epro#ided they refer specifically to a customerF. Bad .ebts &eser(e Account: An account used to record an estimate of bad debts for the year Eusually as a percentage of salesF. +his cannot be deducted as an e pense against ta liability. Balance S eet: A summary of all the accounts of a business. Bsually prepared at the end of each financial year. Balancing C arge: 2hen a fi ed asset is sold or disposed of, any loss or gain on the asset can be reclaimed against Eor added toF any profits for income ta purposes. +his is called a balancing charge. Bankrupt: If an indi#idual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, ban(rupt. In the case of a limited company or corporation in the same position, the term used is insol#ent. Belo0 t e line: +his term is applied to items 'ithin a business 'hich 'ould not normally be associated 'ith the e#eryday running of a business. :ee abo#e the line. Bill: A term typically used to describe a purchase in#oice Eeg. an in#oice from a supplierF. Boug t "edger: :ee &urchase $edger. Burn &ate: +he rate at 'hich a company spends its money. E ample4 if a company had cash reser#es of O12>m and it 'as currently spending O1>m a month, then you could say that at the current Wburn rateW the company 'ill run out of cash in 1 year.

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CA$&: 6Compound Annual $ro0t &ate7 +he year on year gro'th rate re,uired to sho' the change in #alue Eof an in#estmentF from its initial #alue to its final #alue. If a O1 in#estment 'as 'orth O1.=2 o#er three years, the %AG/ 'ould be 1=G XE1 1.1=F 1.1= 1.1=Y Called-up S are capital: +he #alue of unpaid Ebut issued sharesF 'hich a company has re,uested payment for. :ee &aid"up :hare capital. Capital: An amount of money put into the business Eoften by 'ay of a loanF as opposed to money earned by the business. Capital account: A term usually applied to the o'ner1s e,uity in the business. Capital Allo0ances 6U2 specific7: +he depreciation on a fi ed asset is sho'n in the &rofit and $oss account, but is added bac( again for income ta purposes. In order to be able to claim the depreciation against any profits the Inland /e#enue allo' a proportion of the #alue of fi ed assets to be claimed before 'or(ing out the ta bill. +hese proportions Eusually calculated as a percentage of the #alue of the fi ed assetsF are called %apital Allo'ances. Capital Assets: :ee 3i ed Assets. Capital +mployed 6C+7: Gross %E)+otal assets, 6et %E)3i ed assets plus Ecurrent assets less current liabilitiesF. Capital $ains #a,: 2hen a fi ed asset is sold at a profit, the profit may be liable to a ta called %apital Gains +a . %alculating the ta can be a complicated affair Ecapital gains allo'ances, adjustments for inflation and different computations depending on the age of the asset are all considerations you 'ill need to ta(e on boardF. Cas Accounting: +his term describes an accounting method 'hereby only in#oices and bills 'hich ha#e been paid are accounted for. ;o'e#er, for most types of business in the BD, as far as the Inland /e#enue are concerned as soon as you issue an in#oice Epaid or notF, it is treated as re#enue and must be accounted for. An e ception is ?A+4 %ustoms E cise normally re,uire you to account for ?A+ on an accrual basis, ho'e#er there is an option called W%ash AccountingW 'hereby only paid items are included as far as ?A+ is concerned Eeg. if most of your sales are on credit, you may benefit from this scheme " contact your local %ustoms - E cise office for the current rules and turno#er limitsF. Cas Book: A journal 'here a businessWs cash sales and purchases are entered. A cash boo( can also be used to record the transactions of a ban( account. +he side of the cash boo( 'hich refers to the cash or ban( account can be used as a part of the nominal ledger Erather than posting the entries to cash or ban( accounts held directly in the nominal ledger " see W+hree column cash boo(WF. Cas Flo0: A report 'hich sho's the flo' of money in and out of the business o#er a period of time. Cas Flo0 Forecast: A report 'hich estimates the cash flo' in the future Eusually re,uired by a ban( before it 'ill lend you money, or ta(e on your accountF. Cas in -and: :ee Bndeposited funds account. C arge Back: /efers to a credit card order 'hich has been processed and is subse,uently cancelled by the cardholder contacting the credit card company directly Erather than through the sellerF. +his results in the amount being Wcharged bac(W to the seller Eoften incurs a small penalty or administration fee to the sellerF. C art of Accounts: A list of all the accounts held in the nominal ledger. CIF 6CostF InsuranceF Freig t Gc4i4f4H7: A contract EinternationalF for the sale of goods 'here the seller agrees to supply the goods, pay the insurance, and pay the freight charges until the goods reach the destination Eusually a port " rather than the actual buyers addressF. After that point, the responsibility for the goods passes to the buyer.

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Circulating assets: +he opposite to 3i ed assets. %irculating assets describe those assets that turn from cash to goods and bac( again Ehence the term circulatingF. +ypically, you buy some ra' materials, start to manufacture a product Ethe asset is called 'or( in progress at this pointF, produce a product Eit is no' stoc(F, sell it Eit is no' bac( to cash againF. Closing t e books: A term used to describe the journal entries necessary to close the sales and e pense accounts of a business at year end by posting their balances to the profit and loss account, and ultimately to close the profit - loss account too by posting its balance to a capital or other account. Companies -ouse 6U2 only7: +he title gi#en to the go#ernment department 'hich collects and stores information supplied by limited companies. A limited company must supply %ompanies ;ouse 'ith a statement of its final accounts e#ery year Eeg. trading and profit and loss accounts, and balance sheetF. Compensating error: A double"entry term applied to a mista(e 'hich has cancelled out another mista(e. Compound interest: Apply interest on the capital plus all interest accrued to date. Eg. A loan 'ith an annually applied rate of 1>G for 1>>> o#er t'o years 'ould yield a gross total of 121> at the end of the period Eyear 1 interest)1>>, year t'o interest)11>F. +he same loan 'ith simple interest applied 'ould yield 12>> Einterest on both years is 1>> per yearF. Contra account: An account created to offset another account. Eg4 a :ales contra account 'ould be :ales 0iscounts. +hey are accounts included in the same section of a set of boo(s, 'hich 'hen compared together, gi#e the net balance. E ample4 :ales)1>,>>> :ales 0iscounts)1,>>> therefore 6et :ales)K,>>>. +his e ample, affecting the re#enue side of a business, is also referred to as %ontra re#enue. +he tell"tale sign of a contra account is that it has the oposite balance to that e pected for an account in that section Ein the abo#e e ample, the :ales 0iscounts balance 'ould be sho'n in brac(ets " eg. it has a debit balance 'here :ales has a credit balanceF. Control Account: An account held in a ledger 'hich summarises the balance of all the accounts in the same or another ledger. +ypically each subsidiary ledger 'ill ha#e a control account 'hich 'ill be mirrored by another control account in the nominal ledger Esee W:elf" balancing ledgersWF. Cook t e books: 3alsify a set of accounts. :ee also creati#e accounting. Corporation #a, 6C# - U2 only7: +he ta paid by a limited company on its profits. At present this is calculated at year end and due 'ithin K months of that date. 3rom April 1KKK Ad#anced %orporation +a 'as abolished and large EBDF companies no' pay %+ in instalments. :mall and medium"si@ed companies are e empted from the instalment plan. Cost accounting: An area of management accounting 'hich deals 'ith the costs of a business in terms of enabling the management to manage the business more effecti#ely. Cost-based pricing: 2here a company bases its pricing policy solely on the costs of manufacturing rather than current mar(et conditions. Cost-benefit: %alculating not only the financial costs of a project, but also the cost of the effects it 'ill ha#e from a social point of #ie'. +his is not easy to do since it re,uires #aluations of intangible items li(e the cost of job losses or the effects on the en#ironment. Genetically modified crops are a good e ample of 'here cost"benefits 'ould be calculated " and also impossible to ans'er 'ith any degree of certainty[ Cost centre: :plitting up your e penses by department. Eg. /ather than ha#ing one account to handle all po'er costs for a company, a po'er account 'ould be opened for each department. Hou can then analyse 'hich department is using the most po'er, and hopefully find of 'ay of reducing those costs. Cost of finis ed goods: +he #alue Eat costF of ne'ly manufactured goods sho'n in a businessWs manufacturing account. +he #aluation is based on the opening ra' materials balance, less direct costs in#ol#ed in manufacturing, less the closing ra' materials balance,

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and less any other o#erheads. +his balance is subse,uently transferred to the trading account. Cost of $oods Sold 6C*$S7: A formula for 'or(ing out the direct costs of your stoc( sold o#er a particular period. +he result represents the gross profit. +he formula is4 !pening stoc( * purchases " closing stoc(. Cost of Sales: A formula for 'or(ing out the direct costs of your sales Eincluding stoc(F o#er a particular period. +he result represents the gross profit. +he formula is4 !pening stoc( * purchases * direct e penses " closing stoc(. Also, see %ost of Goods :old. Creati(e accounting: A ,uestionable[ means of ma(ing a companies figures appear more Eor lessF appealing to shareholders etc. An e ample is WbrandingW 'here the W#alueW of a brand name is added to intangible assets 'hich increases shareholders funds Eand therefore decreases the gearingF. %apitali@ing e penses is another method Eie. mo#ing them to the assets section rather than declaring them in the &rofit - $oss accountF. Credit: A column in a journal or ledger to record the W3romW side of a transaction Eeg. if you buy some petrol using a che,ue then the money is paid from the ban( to the petrol account, you 'ould therefore credit the ban( 'hen ma(ing the journal entryF. Credit 'ote: A sales in#oice in re#erse. A typical e ample is 'here you issue an in#oice for Z1>>, the customer then returns Z2= 'orth of the goods, so you issue the customer 'ith a credit note to say that you o'e the customer Z2=. Creditors: A list of suppliers to 'hom the business o'es money. Creditors Econtrol accountF4 An account in the nominal ledger 'hich contains the o#erall balance of the &urchase $edger. Current Assets: +hese include money in the ban(, petty cash, money recei#ed but not yet ban(ed Esee Wcash in handWF, money o'ed to the business by its customers, ra' materials for manufacturing, and stoc( bought for re"sale. +hey are termed WcurrentW because they are acti#e accounts. 9oney flo's in and out of them each financial year and 'e 'ill need fre,uent reports of their balances if the business is to sur#i#e Eeg. Wdo 'e need more stoc( and ha#e 'e got enough money in the ban( to buy it\WF. Current cost accounting: +he #aluing of assets, stoc(, ra' materials etc. at current mar(et #alue as opposed to its historical cost. Current "iabilities: +hese include ban( o#erdrafts, short term loans Eless than a yearF, and 'hat the business o'es its suppliers. +hey are termed WcurrentW for the same reasons outlined under Wcurrent assetsW in the pre#ious paragraph. Customs and +,cise: +he go#ernment department usually responsible for collecting sales ta Eeg. ?A+ in the BDF. .ays Sales *utstanding 6.S*7: ;o' long on a#erage it ta(es a company to collect the money o'ed to it. :ee4 ratios.html Ethe first item in the listF. .ebenture: +his is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the companyWs assets so should the company fail, the debenture holder 'ill ha#e first call on any assets left after the company has been 'ound up. .ebit: A column in a journal or ledger to record the W+oW side of a transaction Eeg. if you are paying money into your ban( account you 'ould debit the ban( 'hen ma(ing the journal entryF. .ebtors: A list of customers 'ho o'e money to the business. .ebtors 6control account7: An account in the nominal ledger 'hich contains the o#erall balance of the :ales $edger. .eferred e,penditure: E penses incurred 'hich do not apply to the current accounting period. Instead, they are debited to a W0eferred e penditureW account in the non"current

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assets area of your chart of accounts. 2hen they become current, they can then be transferred to the profit and loss account as normal. .epreciation: +he #alue of assets usually decreases as time goes by. +he amount or percentage it decreases by is called depreciation. +his is normally calculated at the end of e#ery accounting period Eusually a yearF at a typical rate of 2=G of its last #alue. It is sho'n in both the profit - loss account and balance sheet of a business. :ee straight"line depreciation. .iluti(e: If a company ac,uires another and says the deal is Wdiluti#e to earningsW, it means that the resulting &7E Eprice7earningsF ratio of the ac,uired company is greater than the ac,uiring company. E ample4 %ompany WAW has an earnings per share EE&:F of O1. +he current share price is O1>. +his gi#es a &7E ratio of 1> Ecurrent share price is 1> times the E&:F. %ompany W5W has made a net profit for the year of O2>,>>>. If company WAW #alues W5W at, say, O22>,>>> E&7E ratio)11 X22>,>>> #aluation72>,>>> profitYF then the deal is diluti#e because company WAW is effecti#ely decreasing its E&: Ebecause it no' has more shares and it paid more for them in comparison 'ith its o'n share priceF. Esee Accreti#eF .i(idends: +hese are payments to the shareholders of a limited company. .ouble-entry book-keeping: A system 'hich accounts for e#ery aspect of a transaction " 'here it came from and 'here it 'ent to. +his from and to aspect of a transaction Ecalled crediting and debitingF is 'hat the term double"entry means. 9odern double"entry 'as first mentioned by G %otrugli, then e panded upon by $ &accioli in the 1=th century. .ra0ings: +he money ta(en out of a business by its o'nerEsF for personal use. +his is entirely different to 'ages paid to a businessWs employees or the 'ages or remuneration of a limited companyWs directors Esee W2agesWF. +BI#: Earnings before interest and ta deductedF. Eprofit before any interest or ta es ha#e been

+BI#A: Earnings before interest, ta and amorti@ation Eprofit before any interest, ta es or amorti@ation ha#e been deductedF. +BI#.A: Earnings before interest, ta , depreciation and amorti@ation Eprofit before any interest, ta es, depreciation or amorti@ation ha#e been deductedF. +ncumbrance: A liability Eeg. a mortgage is an encumbrance on a propertyF. Also, any money set aside Eie. reser#edF for any purpose. +ntry: &art of a transaction recorded in a journal or posted to a ledger. +quity: +he #alue of the business to the o'ner of the business E'hich is the difference bet'een the businessWs assets and liabilitiesF. +rror of Commission: A double"entry term 'hich means that one or both sides of a double" entry has been posted to the 'rong account Ebut is 'ithin the same class of accountF. E ample4 &etrol e pense posted to ?ehicle maintenance e pense. +rror of *mmission: A double"entry term 'hich means that a transaction has been ommitted from the boo(s entirely. +rror of *riginal +ntry: A double"entry term 'hich means that a transaction has been entered 'ith the 'rong amount. +rror of %rinciple: A double"entry term 'hich means that one or both sides of a double" entry has been posted to the 'rong account E'hich is also a different class of accountF. E ample4 &etrol e pense posted to 3i tures and 3ittings. +,penses: Goods or ser#ices purchased directly for the running of the business. +his does not include goods bought for re"sale or any items of a capital nature Esee :toc( and 3i ed AssetsF. FIF*: 3irst In 3irst !ut. A method of #aluing stoc(.

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Fiscal year: +he term used for a businessWs accounting year. +he period is usually t'el#e months 'hich can begin during any month of the calendar year Eeg. 1st April 2>>1 to L1st 9arch 2>>2F. Fi,ed Assets: +hese consist of anything 'hich a business o'ns or buys for use 'ithin the business and 'hich still retains a #alue at year end. +hey usually consist of major items li(e land, buildings, e,uipment and #ehicles but can include smaller items li(e tools. Esee 0epreciationF Fi,tures E Fittings: +his is a class of fi ed asset 'hich includes office furniture, filing cabinets, display cases, 'arehouse shel#ing and the li(e. Flas earnings: A ne's release issued by a company that sho's its latest ,uarterly results. Flo0 of Funds: +his is a report 'hich sho's ho' a balance sheet has changed from one period to the ne t. F*B: An abbre#iation of 3ree !n 5oard. It generally forms part of an e port contract 'here the seller pays all the costs and insurance of sending the goods to the port of shipment. After that, the buyer then ta(es full responsibility. If the goods are to tra#el by train, itWs called 3!/ E3ree on /ailF. Freig t collect: +he buyer pays the shipping costs. $earing 6A2A: le(erage7: +he comparison of a companyWs long term fi ed interest loans compared to its assets. In general t'o different methods are used4 1. 5alance sheet gearing is calculated by di#iding long term loans 'ith the e,uity Eor proprietorWs net 'orthF. 2. &rofit and $oss gearing4 3i ed interest payments for the period di#ided by the profit for the period. $eneral "edger: :ee 6ominal $edger. $ood0ill: +his is an e tra #alue placed on a business if the o'ner of a business decides it is 'orth more than the #alue of its assets. It is usually included 'here the business is to be sold as a going concern. $ross loss: +he balance of the trading account assuming it has a debit balance. $ross profit: +he balance of the trading account assuming it has a credit balance. $ro0t and Acquisition 6$EA7: 0escribes a 'ay a company can gro'. Gro'th means e panding through its normal operations, Ac,uisition means gro'th through buying up other companies. -istorical Cost: Assets, stoc(, ra' materials etc. can be #alued at 'hat they originally cost E'hich is 'hat the term Whistorical costW meansF, or 'hat they 'ould cost to replace at todayWs prices Esee &rice change accountingF. Impersonal Accounts: +hese are accounts not held in the name of persons Eie. they do not relate directly to a businessWs customers and suppliersF. +here are t'o types, see /eal and 6ominal. Imprest System: A method of topping up petty cash. A fi ed sum of petty cash is placed in the petty cash bo . 2hen the petty cash balance is nearing @ero, it is topped up bac( to its original le#el again E(no'n as Wrestoring the ImprestWF. Income: 9oney recei#ed by a business from its commercial acti#ities. :ee W/e#enueW. Inland &e(enue: +he go#ernment department usually responsible for collecting your ta . Insol(ent: A company is insol#ent if it has insufficient funds Eall of its assetsF to pay its debts Eall of its liabilitiesF. If a companyWs liabilities are greater than its assets and it continues to trade, it is not only insol#ent, but in the BD, is operating illegally EInsol#ency act 1KPMF. Intangible assets: Assets of a non"physical or financial nature. An asset such as a loan or an endo'ment policy are good e amples. :ee tangible assets. Integration Account: :ee %ontrol Account.

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In(entory: A subsidiary ledger 'hich is usually used to record the details of indi#idual items of stoc(. In#entories can also be used to hold the details of other assets of a business. :ee &erpetual, &eriodic. In(oice: A term describing an original document either issued by a business for the sale of goods on credit Ea sales in#oiceF or recei#ed by the business for goods bought Ea purchase in#oiceF. !ournal6s7: A boo( or set of boo(s 'here your transactions are first entered. 3ull details !ournal entries: A term used to describe the transactions recorded in a journal. !ournal %roper: A term used to describe the main or general journal 'here other journals specific to subsidiary ledgers are also used. 2 - no entries "anded Costs: +he total costs in#ol#ed 'hen importing goods. +hey include buying, shipping, insuring and associated ta es. "edger: A boo( in 'hich entries posted from the journals are re"organised into accounts. 3ull details "e(erage: :ee Gearing. "iabilities: +his includes ban( o#erdrafts, loans ta(en out for the business and money o'ed by the business to its suppliers. $iabilities are included on the right hand side of the balance sheet and normally consist of accounts 'hich ha#e a credit balance. "IF*: $ast In $ast !ut. A method of #aluing stoc(. "ong term liabilities: +hese usually refer to long term loans Eie. a loan 'hich lasts for more than one year such as a mortgageF. "oss: :ee 6et loss. Management accounting: Accounts and reports are tailor made for the use of the managers and directors of a business Ein any form they see fit " there are no rulesF as opposed to financial accounts 'hich are prepared for the Inland /e#enue and any other parties not directly connected 'ith the business. :ee %ost accounting. Manufacturing account: An account used to sho' 'hat it cost to produce the finished goods made by a manufacturing business. Matc ing principle: A method of analysing the sales and e penses 'hich ma(e up those sales to a particular period Eeg. if a builder sells a house then the builder 'ill tie in all the ra' materials and e penses incurred in building and selling the house to one period " usually in order to see ho' much profit 'as madeF. Maturity (alue: +he Eusually projectedF #alue of an intangible asset on the date it becomes due. M.EA: 9anagement 0iscussion and Analysis. Bsually seen in a financial report. +he information disclosed has deen deri#ed from analysis and discussions held by the management Eand is presented usually for the benefit of shareholdersF. Memo billing 6aka memo in(oicing7: Goods ordered and in#oiced on appro#al. +here is no obligation to buy. Memorandum accounts: A name for the accounts held in a subsidiary ledger. Eg. the accounts in a sales ledger. Minority interest: A minority interest represents a minority of shares not held by the holding company of a subsidiary. It means that the subsidiary is not 'holly o'ned by the holding company. +he minority shareholdings are sho'n in the holding company accounts as long term liabilities. Mo(ing a(erage: A 'ay of smoothing out Ei.e. remo#ing the highs and lo'sF of a series of figures Eusually sho'n as a graphF. If you ha#e, say, 12 months of sales figures and you

41

decide on a mo#ing a#erage period of L months, you 'ould add three months together, di#ide that by three and end up 'ith an a#erage for each month of the three month period. Hou 'ould then plot that single figure in place of the original monthly points on your graph. A mo#ing a#erage is useful for displaying trends. :ee 6ormali@e. Multiple-step income statement 6aka Multi-step7: An income statement Ea(a &rofit and $ossF 'hich has had its re#enue section split up into sub"sections in order to gi#e a more detailed #ie' of its sales operations. E ample4 a company sells ser#ices and goods. +he statement could sho' re#enue from ser#ices and associated costs of those re#enues at the start of the re#enue section, then sho' goods sold and cost of goods sold underneath. +he t'o sections totals can then be amalgamted at the end to sho' o#erall sales Eor gross profitF. :ee :ingle"step income statement. 'arrati(e: A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, 'here the other side of the entry 'ent to Eor came fromF. 'et loss: +he #alue of e penses less sales assuming that the e penses are greater Eie. if the profit and loss account sho's a debit balanceF. 'et of #a,: +he price less any ta . Eg. if you sold some goods for O12 inclusi#e of O2 sales ta , then the Wnet of ta W price 'ould be O1> 'et profit: +he #alue of sales less e penses assuming that the sales are greater Eie. if the profit and loss account sho's a credit balanceF. 'et 0ort : :ee E,uity. 'ominal Accounts: A set of accounts held in the nominal ledger. +hey are termed WnominalW because they donWt usually relate to an indi#idual person. +he accounts 'hich ma(e up a &rofit and $oss account are nominal accounts Eas is the &rofit and $oss account itselfF, 'hereas an account opened for a specific customer is usually held in a subsidiary ledger Ethe sales ledger in this caseF and these are referred to as personal accounts. 'ominal "edger: A ledger 'hich holds all the nominal accounts of a business. 2here the business uses a subsidiary ledger li(e the sales ledger to hold customer details, the nominal ledger 'ill usually include a control account to sho' the total balance of the subsidiary ledger Ea control account can be termed WnominalW because it doesnWt relate to a specific personF. 3ull details 'ormali?e: +his term can be applied to many aspects of accounting. It means to a#erage or smooth out a set of figures so they are more consistent 'ith the general trend of the business. +his is usually done using a 9o#ing a#erage. *pening t e books: E#ery time a business closes the boo(s for a year, it opens a ne' set. +he ne' set of boo(s 'ill be empty, therefore the balances from the last balance sheet must be copied into them E#ia journal entriesF so that the business is ready to start the ne' year. *rdinary S are: +his is a type of share issued by a limited company. It carries the highest ris( but usually attracts the highest re'ards. *riginal book of entry: A boo( 'hich contains the details of the day to day transactions of a business Esee .ournalF. *(er eads: +hese are the costs in#ol#ed in running a business. +hey consist entirely of e pense accounts Eeg. rent, insurance, petrol, staff 'ages etc.F. %aid-up S are capital: +he #alue of issued shares 'hich ha#e been paid for. :ee %alled"up :hare capital. %4A4>4+ 6U2 only7: W&ay as you earnW. +he name gi#en to the income ta system 'here an employeeWs ta and national insurance contributions are deducted before the 'ages are paid.

42

%areto optimum: An economic theory by ?ilfredo &areto. It states that the optimum allocation of a societyWs resources 'ill not happen 'hilst at least one person thin(s he is better off and 'here others percei#e themsel#es to be no 'orse. %ay on deli(ery: +he buyer pays the cost of the goods Eto the carrierF on receipt of them. %eriodic in(entory: A &eriodic In#entory is one 'hose balance is updated on a periodic basis, ie. e#ery 'ee(7month7year. :ee In#entory. %+ ratio: An e,uation 'hich gi#es you a #ery rough estimate as to ho' much confidence there is in a companyWs shares Ethe higher it is the more confidenceF. +he e,uation is4 current share price multiplied by earnings and di#ided by the number of shares. WEarningsW means the last published net profit of the company. %erpetual in(entory: A &erpetual In#entory is one 'hose balance is updated after each and e#ery transaction. :ee In#entory. %ersonal Accounts: +hese are the accounts of a businessWs customers and suppliers. +hey are usually held in the :ales and &urchase $edgers. %etty Cas : A small amount of money held in reser#e Enormally used to purchase items of small #alue 'here a che,ue or other form of payment is not suitableF. %etty Cas Slip: A document used to record petty cash payments 'here an original receipt 'as not obtained Esometimes called a petty cash #oucherF. %oint of Sale 6%*S7: +he place 'here a sale of goods ta(es place, eg. a shop counter. %ost Closing #rial Balance: +his is a trial balance prepared after the balance sheet has been dra'n up, and only includes balance sheet accounts. %osting: +he copying of entries from the journals to the ledgers. %reference S ares: +his is a type of share issued by a limited company. It carries a medium ris( but has the ad#antage o#er ordinary shares in that preference shareholders get the first slice of the di#idend WpieW Ebut usually at a fi ed rateF. %re-payments: !ne or more accounts set up to account for money paid in ad#ance Eeg. insurance, 'here part of the premium applies to the current financial year, and the remainder to the follo'ing yearF. %rice c ange accounting: Accounting for the #alue of assets, stoc(, ra' materials etc. by their current mar(et #alue instead of the more traditional ;istoric %ost. %rime book of entry: :ee !riginal boo( of entry. %rofit: :ee Gross profit, 6et profit, and &rofit and $oss Account. %rofit and "oss Account: An account made up of re#enue and e pense accounts 'hich sho's the current profit or loss of a business Eie. 'hether a business has earned more than it has spent in the current yearF. 3ull details %rofit margin: +he percentage difference bet'een the costs of a product and the price you sell it for. Eg. if a product costs you O1> to buy and you sell it for O2>, then you ha#e a 1>>G profit margin. +his is also (no'n as your Wmar("upW. %ro-forma accounts 6pro-forma financial statements7: A set of accounts prepared before the accounts ha#e been officially audited. !ften done for internal purposes or to brief shareholders or the press. %ro-forma in(oice: An in#oice sent that re,uires payment before any goods or ser#ices ha#e been despatched. %ro(isions: !ne or more accounts set up to account for e pected future payments Eeg. 'here a business is e pecting a bill, but hasnWt yet recei#ed itF. %urc ase In(oice: :ee In#oice.

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%urc ase "edger: A subsidiary ledger 'hich holds the accounts of a businessWs suppliers. A single control account is held in the nominal ledger 'hich sho's the total balance of all the accounts in the purchase ledger. 1 no entries &a0 Materials: +his refers to the materials bought by a manufacturing business in order to manufacture its products. &eal accounts: +hese are accounts 'hich deal 'ith money such as ban( and cash accounts. +hey also include those dealing 'ith property and in#estments. In the case of ban( and cash accounts they can be held in the nominal ledger, or balanced in a journal Eeg. the cash boo(F 'here they can then be loo(ed upon as a part of the nominal ledger 'hen compiling a balance sheet. &roperty and in#estments can be held in subsidiary ledgers E'ith associated control accounts if necessaryF or directly in the nominal ledger itself. &ealisation principle: +he principle 'hereby the #alue of an asset can only be determined 'hen it is sold or other'ise disposed of, ie. its WrealW Eor realisedF #alue. &ebate: If you pay for a ser#ice, then cancel it, you may recei#e a WrebateW. +hat is, you may be refunded some of the money you paid for the ser#ice. Eeg. if you cancel a 1 year insurance policy after L months, you may get a rebate for the remaining K monthsF &eceipt: A term typically used to describe confirmation of a payment " if you buy some petrol you 'ill normally as( for a receipt to pro#e that the money 'as spent legitimately. &econciling: +he procedure of chec(ing entries made in a businessWs boo(s 'ith those on a statement sent by a third person Eeg. chec(ing a ban( statement against your o'n recordsF. &efund: If you return some goods you ha#e just bought Efor 'hate#er reasonF, the company you bought them from may gi#e you your money bac(. +his is called a WrefundW. &eser(e accounts: /eser#e accounts are usually set up to ma(e a balance sheet clearer by reser#ing or apportioning some of a businessWs capital against future purchases or liabilities Esuch as the replacement of capital e,uipment or estimates of bad debtsF. A typical e ample is a company 'here they are used to hold the residue of any profit after all the di#idends ha#e been paid. +his balance is then carried for'ard to the follo'ing year to be considered, together 'ith the profits for that year, for any further di#idends. &etail: A term usually applied to a shop 'hich re"sells other peopleWs goods. +his type of business 'ill re,uire a trading account as 'ell as a profit and loss account. &etained earnings: +his is the amount of money held in a business after its o'nerEsF ha#e ta(en their share of the profits. &etainer: A sum of money paid in order to ensure a person or company is a#ailable 'hen re,uired. &etention ratio: +he proportion of the profits retained in a business after all the e penses Eusually including ta and interestF are ta(en into account. +he algorithm is retained profits di#ided by profits a#ailable for ordinary shareholders Eor a#ailable for the proprietor7partners in the case of unincorporated companiesF. &e(enue: +he sales and any other ta able income of a business Eeg. interest earned from money on depositF. &un &ate: A forecast for the year based on the current year to date figures. If a companyWs 1st ,uarter profits 'ere, say, O2=m, they may announce that the run rate for the year is O1>>m. Sales: Income recei#ed from selling goods or a ser#ice. :ee /e#enue. Sales In(oice: :ee In#oice. Sales "edger: A subsidiary ledger 'hich holds the accounts of a businessWs customers. A control account is held in the nominal ledger Eusually called a debtorsW control accountF 'hich sho's the total balance of all the accounts in the sales ledger.

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Self Assessment 6U2 only7: A ne' style of income ta return introduced for the 1KKM71KKS ta year. If you are self"employed, or recei#e an income 'hich is un"ta ed at source, you 'ill need to register 'ith the Inland /e#enue so that the rele#ant self assessment forms can be sent to you. +he idea of self assessment is to allo' you to calculate your o'n income ta . Self-balancing ledgers: A system 'hich ma(es use of control accounts so that each ledger 'ill balance on its o'n. A control account in a subsidiary ledger 'ill be mirrored 'ith a control account in the nominal ledger. Self-employed: +he o'ner Eor partnerF of a business 'ho is legally liable for all the debts of the business Eie. the o'nerEsF of a non"limited companyF. SellingF $eneral E Administrati(e e,pense 6S$EA7: +he e penses in#ol#ed in running a business. Ser(ice: A term usually applied to a business 'hich sells a ser#ice rather than manufactures or sells goods Eeg. an architect or a 'indo' cleanerF. S are olders: +he o'ners of a limited company or corporation. S are premium: +he e tra paid abo#e the face #alue of a share. E ample4 if a company issues its shares at O1> each, and later on you buy 1 share on the open mar(et at O12, you 'ill be paying a share premium of O2 S ares: +hese are documents issued by a company to its o'ners Ethe shareholdersF 'hich state ho' many shares in the company each shareholder has bought and 'hat percentage of the company the shareholder o'ns. :hares can also be called W:toc(W. S ares issued 6aka S ares outstanding7: +he number of shares a company has issued to shareholders. Simple interest: Interest applied to the original sum in#ested Eas opposed to compound interestF. Eg. 1>>> in#ested o#er t'o years at 1>G per year simple interest 'ill yield a gross total of 12>> at the end of the period E1>G of 1>>>)1>> per yearF. Single-step income statement: An income statement 'here all the re#enues are sho'n as a single total rather than being split up into different types of re#enue Ethis is the most common format for #ery small businessesF. :ee &rofit and $oss, 9ultiple"step income statement. Sinking fund: An account set up to reduce another account to @ero o#er time Eusing the principles of amorti@ation or straight line depreciationF. !nce the sin(ing fund reaches the same #alue as the other account, both can be remo#ed from the balance sheet. SM+: Small and Medium +nterprises 6ie4 small and medium si?e businesses7: +he distinction bet'een 'hat is WsmallW and 'hat is WmediumW #aries depending on 'here you are and 'ho you tal( to. Sole trader: :ee :ole"proprietor. Sole-proprietor: +he self"employed o'ner of a business Esee :elf"employedF. Source document: An original in#oice, bill or receipt to 'hich journal entries refer. Stock: +his can refer to the shares of a limited company Esee :haresF or goods manufactured or bought for re"sale by a business. Stock control account: An account held in the nominal ledger 'hich holds the #alue of all the stoc( held in the in#entory subsidiary ledger. Stock olders: :ee :hareholders. Stock #aking: &hysically chec(ing a businessWs stoc( for total ,uantities and #alue. Stock (aluation: ?aluing a stoc( of goods bought for manufacturing or re"sale. Straig t-line depreciation: 0epreciating something by the same Eie. fi edF amount e#ery year rather than as a percentage of its pre#ious #alue. E ample4 a #ehicle initially costs

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O1>,>>>. If you depreciate it at a rate of O2>>> a year, it 'ill depreciate to @ero in e actly = years. :ee 0epreciation. Subordinated debt: If a company is li,uidated Ei.e. becomes insol#entF, the secured creditors are paid first. If any money is left, the unsecured creditors are then paid. +he amount of money o'ed to the unsecured creditors is termed the Wsubordinated debtW of the company. Subsidiary ledgers: $edgers opened in addition to a businessWs nominal ledger. +hey are used to (eep sections of a business separate from each other Eeg. a :ales ledger for the customers, and a &urchase ledger for the suppliersF. E:ee %ontrol AccountsF Suspense Account: A temporary account used to force a trial balance to balance if there is only a small discrepancy Eor if an accountWs balance is simply 'rong, and you donWt (no' 'hyF. A typical e ample 'ould be a small error in petty cash. In this case a transfer 'ould be made to a suspense account to balance the cash account. !nce the person (no's 'hat happened to the money, a transfer entry 'ill be made in the journal to credit or debit the suspense account bac( to @ero and debit or credit the correct account. # Account: A particular method of displaying an account 'here the debits and associated information are sho'n on the left, and credits and associated information on the right. #angible assets: Assets of a physical nature. E amples include buildings, motor #ehicles, plant and e,uipment, fi tures and fittings. :ee Intangible assets. # ree column cas book: A journal 'hich deals 'ith the day to day cash and ban( transactions of a business. +he side of a transaction 'hich relates directly to the cash or ban( account is usually balanced 'ithin the journal and used as a part of the nominal ledger 'hen compiling a balance sheet Eie. only the side 'hich details the sale or purchase needs to be posted to the nominal ledgerF. #otal Cost of *0ners ip 6#C*7: +he real amount an asset 'ill cost. E ample4 An accounting application retails at O1>>>. :upport " 'hich is mandatory, costs a further O2>> per annum. Assuming the soft'are 'ill be in use for = years, +%! 'ill be O2>>> E1>>>*= 2>>)2>>>F. #rading account: An account 'hich sho's the gross profit of a manufacturing or retail business. #ransaction: +'o or more entries made in a journal 'hich 'hen loo(ed at together reflect an original document such as a sales in#oice or purchase receipt. #rial Balance: A statement sho'ing all the accounts used in a business and their balances. 3ull details #urno(er: +he income of a business o#er a period of time Eusually a yearF. Undeposited Funds Account: An account used to sho' the current total of money recei#ed Eie. not yet ban(ed or spentF. +he WfundsW can include money, che,ues, credit card payments, ban(ers drafts etc. +his type of account is also commonly referred to as a Wcash in handW account. /alue Added #a, 6/A# - applies to many countries7: ?alue Added +a , or ?A+ as it is usually called is a sales ta 'hich increases the price of goods. At the time of 'riting the BD ?A+ standard rate is 1S.=G, there is also a rate for fuel 'hich is =G Ethis refers to heating fuels li(e coal, electricity and gas and not Wroad fuelsW li(e petrol 'hich is still rated at 1S.=GF. ?A+ is added to the price of goods so in the BD, an item that sells at Z1> 'ill be priced Z11.S= 'hen 1S.=G ?A+ is added. 9ages: &ayments made to the employees of a business for their 'or( on behalf of the business. +hese are classed as e pense items and must not be confused 'ith Wdra'ingsW ta(en by sole"proprietors and partnerships Esee 0ra'ingsF. 9ork in %rogress: +he #alue of partly finished Eie. partly manufacturedF goods. 9rite-off: 0epreciating an asset to @ero in one go.

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I no entries > no entries Dero Based Account 6DBA7: Bsually applied to a personal account Echec(ingF 'here the balance is (ept as close to @ero as possible by transferring money bet'een that account and, say, a deposit account. Dero Based Budget 6DBB7: :tarting a budget at @ero and justifying e#ery cost that increases that budget.

1)Commercial paper: -hese are the short term o ligations issued y the corporation or a ank to meet the short term needs like 4r,accurued e#p. 2)Money market: -he money market is the financial market for short$term orrowing and lending, typically up to one year. -his contrasts with the capital market for longer$term funds. 5n the money markets, anks lend to and orrow from each other, short$term financial instruments such as certificates of deposit 3)Intan i!le a""e"t
:omething of #alue that cannot be physically touched, such as a brand, franchise, trademar(, or patent. opposite of tangible asset.

#)operatin a""et
Asset 'hich contributes to the regular income from a companyWs operations

$)%ictitio&" a""e"t 3I%+I+I!B: A::E+ is de it alance includes on alance sheets as assets that do not conform to the definition of an asset. ')%i(e) a""et "5678 A''7-' are those assets of a permanent nature re9uired for the normal conduct of a usiness, and which will not normally e converted into cash during the ensuring fiscal period. *)+a"tin a""et A fi#ed asset, such as a mine or an oil well, that diminishes in value over time ,)Contin ent lia!ility 5t is a type of lia ility the ultimate outcome of which depends upon the occurrence or non$ occurrence of some future event -).arnin " per "/are .0

7arnings availa le to the e9uity share holders divided y no of share 10)1oo) 2ill 5t is e#cess of consideration paid over net worth of the assets ac9uired 11)Capital e(pen)it&re Any e#penditure incurred for ac9uiring fi#ed asset, for reducing the cost of production and increasing the earning capacity of a usiness 12) Re3en&e e(pen)it&re Any e#penditure incurred for day to day running of the usiness and the maintaining the life of capital asset. 13) 4e5erre) re3en&e e(pen)it&re: 5t is asically a form of revenue e#penditure ut the enefit from it continues more than a year 1#) 6ol)in company A company is said to e the holding company of other if it holds more than .0: of the total voting power, controls the composition of oard of directors further for the su sidiary of su sidiary company 1$) 7&!lic company A company which has a minimum paid up share capital of ;' . lakhs and which is not a pvt company is called a pu lic company. "urther the su sidiary of a pu lic company is also a pu lic company even though it is incorporated as a pvt company 1') 7ri3ate company A company which has a minimum paid up share capital of ;' 1lakhs, which restricts the right to transfer the shares, which limits the num er of mem ers to .0,which prohi its from making an invitation for the acceptance of shares or de entures, 1*) Minority intere"t:
9inority interest in business is o'nership of a company that is less than =>G of outstanding shares. :J7 +arnings per s are %alculated by di#iding a company1s net profit by the number of common shares outstanding. E&: ) net profit after ta es A preferred di#idends 7 number of common shares outstanding.

:@7 .iluted +%S 0iluted E&: is a companyWs E&: figure as calculated using fully diluted shares outstanding

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20)c&rrent a""et
%ash and other assets that are capable of being con#erted into cash 'ithin a relati#ely short time period, usually one year or less.

21)co"t o5 capital
+he cost of capital for a firm is a 'eighted sum of the cost of e,uity and the cost of debt. ;;7reser(e: that portion of current earnings set aside to ta(e care of possible future losses or for other specified purposes.

23) ca"/ 5lo2 "tatement

a part of a companyWs financial reports that records the amounts of cash and e,ui#alents entering and lea#ing a company. ;C7 Deferred taxes Deferred taxes arise from temporary differences, due to differences between accounting methods for tax and financial statement purposes. ;K7Financial statement A report of basic accounting data that helps investors understand a firm's financial history and activities. 267Income statement 6statement of operations7 A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time. ;L7Balance s eet Also called the statement of financial condition, it is a summary of a company s assets, liabilities, and owners equity. ;J7+,planatory notes The explanatory notes communicate additional information regarding items included and excluded from the body of the statement. These normally include! "x!Accounting policies ,#etailed disclosure regarding individual elements ,$ommitments and contingencies ;@7Funds from opearations

A figure used y real estate investment trusts <;75-'= to define the cash flow from their operations. 5t is calculated y adding depreciation and amorti>ation e#penses to earnings, and sometimes 9uoted on a per share asis
AM7Under 0riter:

?ne that guarantees the purchase of a full issue of stocks or onds.

A:7%repaid e,penditure&

An asset that arises on a alance sheet ecause of the payment of something in advance 0!7Accured e,penses or outstanding e,p&
%osts that ha#e been incurred during an accounting period but ha#e not yet been paid.

AA7%rice earnings ratio:

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&7E /atio is calculated by di#iding the mar(et price of common stoc( by its annual earnings per share. p7e ratio ) mar(et #alue7earnings per share AC7Market price: +he actual reported price at 'hich the stoc( or bond is currently sold in the open mar(et AK7Market (alue: +he total #alue of a company1s outstanding shares, 'hich is computed by multiplying the mar(et price of the stoc( by the number of shares outstanding AN7*pportunity cost:

-he cost of an alternative that must e forgone in order to pursue a certain action. 3*)S&nk co"t: A cost that has een incurred and cannot e reversed. Also referred to as @stranded cost.@ 3,)S/are: A "/are is a unit of account for various financial instruments including stocks, mutual funds. 3-)M&t&al 5&n): #0)Or)inary re"ol&tion:
A resolution passed by a majority #ote by shareholders at a general meeting

#1)Special re"ol&tion:
A resolution passed by a majority of not less than three"fourths of members or share holders.

#2)8aria!le o3er/ea)": -hese are the e#penditures that changes according to the volume of production. #3)%i(e) e(p: -hese are the e#penditures that do not change according to the volume of production. ##)Semi3aria!le e(p: #$)Capital: Aoney or other assets owned or used in operating a usiness. #')A""et: Anything an individual or corporation owns is considered an asset. #*)Lia!ility: 0ebt o'ed by the company such as ban( loans or accounts payable.

#,)9&) et: An itemi@ed listing, usually prepared annually, of anticipated re#enue and projected
e penses.

#-)"en"e(:"en"iti3e in)e( $0)NCLT: national company la2 tri!&nal $1)CL9:Company la2 !oar) .+

$2)IR4A: in"&rance re &latory )e3elopment a&t/ority $3)NI%T;: $#)9S.:!om!ay "tock e(c/an e $$)NS.:national "tock e(c/an e $')preliminary e(pen)it&re: 7#penditure incurred efore the incorporation of a company $*)4e!ent&re:a document issued in acknowledgement of a de t. $,)LI9OR: Lon)on inter !ank o55er rate $-)MI9OR :M&m!ai inter !ank o55er rate '0)9ook 3al&e: -he value at which an asset is carried on a alance sheet. 5n other words, the cost of an asset minus accumulated depreciation. '1)Net:2ort/: Bet worth <sometimes @net assets@= is the total assets minus total lia ilities of an individual or company. "or a company, this is called shareholdersC e9uity or net assets. '2) A""et" < Lia!ilitie" = S/are/ol)er"> .?&ity '3) a""et" : lia!ilitie" < "/are/ol)er"> e?&ity '#)9ill" recei3a!le:
9oney 'hich is o'ed to a company by customers 'ho ha#e bought goods and ser#ices on credit. It is a current asset that 'ill repeatedly turn into cash as customers pay their bills. Also (no'n as recei#ables.

'$)9ill" paya!le:
+he money a company o'es for goods, ser#ices and supplies purchased for use in a company1s operations.

'')Note" paya!le: :hort"term obligations that are payable in a year or less.

1=Certificate re9uired for incorporation of a pvt company is C7;-5"5CA-7 ?" 5BC?;D?;A-5?B

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!=Certificate re9uired for incorporation of a pu lic company is C7;-5"5CA-7 ?" C?AA7BC7A7B?" ,E'5B7'' 0=Aa#imum num er of directors in a pvt ltd company is '7F7B 4=Aa#imum num er of directors in Du lic Gtd Company is B? G5A5.=-he persons who form the company are called D;?A?-7;' +=Article" o5 a""ociation: 5t is a document containing rules and regulations for internal management of a company. 1=7ro"pect&": Any document issued as a prospectus and includes any notice or advertisement inviting applications from pu lic for su scription of shares and de entures of a company.<chapter& + page no&1= 2)Re) /errin pro"pect&"& 5t is a prospectus issued efore the issue of final prospectus to test and finalise 5''E7 '5H7 and 5''E7 D;5C7. 3=9ook !&il)in : 5t is a process under which investor has given an option to choose the price from the given price and. 10=S/el5 pro"pect&": 5t means a prospectus issued y financial institution or ank for one or more issues of the securities mentioned in prospectus. 11=In5ormation memoran)&m<tell in your own words=& At the second and su se9uent stages of issue of securities the company will have to file information memorandum to e#plain the new charges created and to show the change in financial position. 1!=Allotment o5 "/are& Ihen a share application is accepted it is called allotment. 10=.?&ity "/are"& 79uity shares are those which are not preference shares. 14=7re5erence "/are": Dreference shares means the shares which has preference in respect of payment of dividends and repayment of share capital in case of winding up of a company. 1.=.?&ity "/are" 8S pre5erence "/are": 79uity shares have voting rights ut preference shares have no voting rights. Dreference shares are repaid after certain period ut e9uity shares are repaid at the time winding up .2

the company only. Dreference share holders are given priority in case of payment of dividend and repayment of capital. 1+=S2eat e?&ity "/are"& 79uity shares issued y the company to the employees or the directors at a discount or for a consideration other than cash. 11=Acco&ntin a""&mption"& a= going concern& as per this it is assumed that the company has no necessity or intention of closing the usiness in a near future. =consistency& as per this it is assumed that the accounting policies are followed consistently <with out any change= c=accrual&costs and revenues are recogni>ed when they are incurred or earned ut not when the money is received. 12=Re"er3e: 5t is the amount set aside from the current profits to meet any unforeseen contingencies. Bo amount is transferred to reserves incase the company is in losses. 13=7ro3i"ion: 5t is a charge against the profits to meet

of

!0=@&oram& Ainimum num er of persons re9uired to conduct a meeting. %uoram for Dvt Gtd Co is ! mem ers and for a pu lic company is . mem ers. !1= Ainimum num er of mem ers for a pvt ltd company is ! and for pu lic ltd company is 0. !!=Aa#imum num er of mem ers for a pvt ltd company is .0 and for pu lic ltd company there is no limit. !0=Ainimum num er of directors for a pvt ltd company is ! and for pu lic ltd company is 0. !4=Minim&m "&!"cription: 5t is minimum amount that must e raised through the issue of shares for meeting preliminary e#penses, underwriting commission, Iorking capital etc. !.=7ro(y: Dro#y refers to the person representing a mem er and also the form in which the person is appointed. !+=Min&te": .3

5t is official recording of the proceedings of the meeting. !1= Capital re"er3e& Capital reserve means any reserve other than the revenue reserve.76& premium on issue of shares,profit on redemption of de entures, Dremium on issue of de entures. !2=Re"er3e capital& 5t is the part of the uncalled capital of the company which can e called up in the event of winding up of the company. !3=Re3en&e re"er3e: A reserve which is availa le for distri ution as a dividend through profit and loss a4c. 00=Minority intere"t"& Ainority interest is the ownership in a company that is less than .0: of outstanding shares. Enderstand this line& revenue and e#penses from the minority interest is shown in the income statement. 01=4epriciation: 8ecrease in the value of an asset due to wear J tear, usage and passage of time. 0!=AmortiAation: Irite off of the intangi le assets. Materiality concept: -he term materiality means important. An item is considered material if it/s omission or mis$ statement will misrepresent the view given y the financial statement. Con"er3ati"m principle& Anticipate no profits ut anticipate every loss. 4e5erre) re3en&e e(pen)it&re: 8eferred revenue e#penditure is an e#penditure which is asically revenue in nature ut the enefit from it continues even after the e#piry of period in which it is incurred. -reatment& 5t should e written off over the period during which the enefit will araise. ii=7#ceptional losses suffered due to natural calamities, social distur ances etc. -reatment& carried forward and written off against future profits. 4epreciation: 8epreciation means decrease in the value of an asset due to wear J tear,o solescence and Dassage of time. 5t is related to fi#ed assets. 5t is a non$cash revenue e#penditure. 1eneral re"er3e: A reserve which is created out of revenue profits is a general reserve. 5t is appropriation of the profits. -herefore no transfer is made to this in the year of loss. ? (ectives& +0

-o strengthen the financial position of a company. -o meet any unknown e#penditure. "or the e#pansion of the usiness. Capital re"er3e: A reserve which is created out of capital profits is a capital reserve. 7#& premium received on issue of de entures and shares. 'ale of the fi#ed assets a ove the cost. Speci5ic re"er3e: A reserve which is created for meeting any specific need is called specific reserve. 7#&8e enture redemption reserve, usiness e#pansion reserve etc. Re"er3e 8S pro3i"ion: i= reserve is created y de iting profit J loss appropriation account whereas provision is created y de iting profit J loss a4c. ii=reserve is appropriation of profits where as provision is charge against profits. iii=Creations of the reserves depend up on the profits where as provision does not depend up on the profits. 'o provision must e created in the year of loss. iv=;eserves are shown under reserves and surplus head on the lia ility side of alance sheet where as the provisions are shown under current lia ilities. 8o&c/er: A voucher is defined as any documentary evidence in support of a transaction. Bon cash e#penditure&depreciation,amoti>ation. 'chedule vi contains the form of alance sheet. Contri ution*sales K varia le e#penditure ?; profit ) fi#ed e#penditure. Matc/in concept: 5ncome should e properly matched with the e#penses of a given accounting period. 9reak e3en point: -he point at which there are no profits or loss ?; value of the sales necessary to cover the fixed costs 4irect co"t": -he costs that are tracea le to a particular product. In)irect co"t": -he costs that are not tracea le to a particular product. Memoran)&m o5 a""ociation: 5t is constitutional document of a company that deals with the matters like company name, registered office, capital etc. Retaine) pro5it": ;etained profits are those profits that not have een paid as dividends ut retained for future investment of the company. +1

S&nk co"t: 'unk costs are those costs that are already incurred. +orkin capital cycle: Cash work in progress finished goods de tors cash Acco&ntin policie"&

Acco&ntin principle":

Ca"/ pro5it: 5t is the profit efore deducting non cash e#penditure such as depreciation,amortisation. Cash profit*net profit)non cash e#penditure ?; gross profit$cash e#penses. S/are premi&m: 5t is the e#cess of the consideration paid or paya le over the face value of the share. Ca"/ )i"co&nt:

Tra)e )i"co&nt& A discount on the list price granted y a manufacturer or wholesaler to uyers in the same trade.

Operatin income: -he profit realised from a usiness own operations.5t does not include income from things such as investments in other firms. 9a) )e!t": T/ree main type o5 acco&nt": Dersonal account&de it the receiver Credit the giver ;eal account&de it what comes in Credit what goes out Bominal account&e#penses Jlosses de it 5ncome J profits credit

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AS :: .isclosure of Accounting %olicies :7 +he Accounting policies refer to the :pecific accounting principles and the methods of applying those principles Accounting policies 'ill be adopted by the enterprise in the preparation and presentation of financial statements. ;7 +,amples of the areas in 'hich different accounting policies may be adopted by different enterprises. 9ethods of depreciation, depletion and amorti@ation +reatment of e penditure during construction %on#ersion or translation of foreign currency items ?aluation of in#entories +reatment of good'ill ?aluation of in#estments +reatment of retirement benefits /ecognition of profit on long"term contracts ?aluation of fi ed assets A7 Fundamental Accounting Assumptions %ertain fundamental accounting assumptions underlie the preparation and presentation of financial statements. +hey are usually not specifically stated because their acceptance and use are assumed. 0isclosure is necessary if they are not follo'ed. +he follo'ing ha#e been generally accepted as fundamental accounting assumptions4] a4 $oing Concern +he enterprise is normally #ie'ed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of li,uidation or of curtailing materially the scale of the operations. b4 Consistency It is assumed that accounting policies are consistent from one period to another. c4 Accrual /e#enues and costs are accrued, that is, recogni@ed as they are earned or incurred Eand not as money is recei#ed or paidF and recorded in the financial statements of the periods to 'hich they relate. E+he considerations affecting the process of matching costs 'ith re#enues under the accrual assumption are not dealt 'ith in this :tatement.F C7 MaBor considerations go(erning t e selection and application of accounting policies are:O a4 %rudence In #ie' of the uncertainty attached to future e#ents, profits are not anticipated but recognised only 'hen realised though not necessarily in cash. &ro#ision is made for all (no'n liabilities and losses e#en though the amount cannot be determined 'ith certainty and represents only a best estimate in the light of a#ailable information. b4 Substance o(er Form +he accounting treatment and presentation in financial statements of transactions and e#ents should be go#erned by their substance and not merely by the legal form. c4 Materiality 3inancial statements should disclose all TmaterialT items, i.e. items the (no'ledge of 'hich might influence the decisions of the user of the financial statements. K7 ACC*U'#I'$ S#A'.A&.

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a. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. b. +he disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. c. Any change in the accounting policies 'hich has a material effect in the current period or 'hich is reasonably e pected to ha#e a material effect in later periods should be disclosed. In the case of a change in accounting policies 'hich has a material effect in the current period, the amount by 'hich any item in the financial statements is affected by such change should also be disclosed to the e tent ascertainable. 2here such amount is not ascertainable, 'holly or in part, the fact should be indicated. d. If the fundamental accounting assumptions, #i@. Going %oncern, %onsistency and Accrual are follo'ed in financial statements, specific disclosure is not re,uired. If a fundamental accounting assumption is not follo'ed, the fact should be disclosed. AS- N : Accounting for .epreciation .epreciation is a measure of the loss of #alue of a depreciable asset arising from Bse Efflu ion of time !bsolescence through technology and mar(et changes. C ange of Met od of .epreciation: +he depreciation method selected should be applied consistently from period to period. A change from one method of pro#iding depreciation to another should be made only if, +he adoption of the ne' method is re,uired by statute or for compliance 'ith an accounting standard If it is considered that the change 'ould result in a more appropriate preparation or presentation of the financial statements of the enterprise. 2hen such a change in the method of depreciation is made, 0epreciation should be recalculated in accordance 'ith the ne' method from the date of the asset coming into use. +he deficiency or surplus arising from retrospecti#e recomputation of depreciation in accordance 'ith the ne' method should be adjusted in the accounts in the year in 'hich the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. :uch a change should be treated as a change in accounting policy and its effect should be ,uantified and disclosed.

:ome important concepts

1. definition of accounting4 the art of recording, classifying and summari@ing in a significant manner and in terms of money, transactions and e#ents 'hich are, in part at least of a financial character and interpreting the results there of. 2. boo( (eeping4 It is mainly concerned 'ith recording of financial data relating to the business operations in a significant and orderly manner. L. 5ranches of accounting a. financial accounting b. management accounting R. %oncepts of accounting4

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A. separate entity concept %. money measurement concept E. dual aspect concept G. periodic matching of costs and re#enue concept = %on#entions of accounting A. conser#atism 5. full disclosure %. consistency 0 materiality. M. :ystems of boo( (eeping4 A. single entry system 5. double entry system

5. going concern concept 0. cost concept 3. accounting period concept ;. reali@ation concept.

S. :ystems of accounting A. cash system accounting 5. mercantile system of accounting. " M= " P. &rinciples of accounting a. personal a7c 4 debit the recei#er %redit the gi#er b. real a7c 4 debit 'hat comes in %redit 'hat goes out c. nominal a7c 4 debit all e penses and losses credit all gains and incomes K. 9eaning of journal4 journal means chronological record of transactions. 1> 9eaning of ledger4 ledger is a set of accounts. It contains all accounts of the business enterprise 'hether real, nominal, personal. 11. &osting4 it means transferring the debit and credit items from the journal to their respecti#e accounts in the ledger. 12. +rial balance4 trial balance is a statement containing the #arious ledger balances on a particular date. 1L. %redit note4 the customer 'hen returns the goods get credit for the #alue of the goods returned. A credit note is sent to him intimating that his a7c has been credited 'ith the #alue of the goods returned. 1R. 0ebit note4 'hen the goods are returned to the supplier, a debit note is sent to him indicating that his a7c has been debited 'ith the amount mentioned in the debit note. 1=. %ontra entry4 'hich accounting entry is recorded on both the debit and credit side of the cash boo( is (no'n as the contra entry. 1M. &etty cash boo(4 petty cash is maintained by business to record petty cash e penses of the business, such as postage, cartage, stationery, etc. 1S.promisory note4 an instrument in 'riting containing an unconditional underta(ing signed by the ma(er, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument. 1P. %he,ue4 a bill of e change dra'n on a specified ban(er and payable on demand. 1K. :tale che,ue4 a stale che,ue means not #alid of che,ue that means more than si months the che,ue is not #alid. 2>. 5an( reconciliation statement4 it is a statement reconciling the balance as sho'n by the ban( pass boo( and the balance as sho'n by the %ash 5oo(. !bj4 to (no' the difference - pass necessary correcting, adjusting entries in the boo(s. 21. 9atching concept4 matching means re,uires proper matching of e pense 'ith the re#enue.

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22. %apital income4 the term capital income means an income 'hich does not gro' out of or pertain to the running of the business proper. 2L. /e#enue income4 the income 'hich arises out of and in the course of the regular business transactions of a concern. 2R. %apital e penditure4 it means an e penditure 'hich has been incurred for the purpose of obtaining a long term ad#antage for the business. 2=. /e#enue e penditure4 an e penditure that incurred in the course of regular business transactions of a concern. 2M. 0iffered re#enue e penditure4 an e penditure 'hich is incurred during an accounting period but is applicable further periods also. Eg4 hea#y ad#ertisement. 2S. 5ad debts4 bad debts denote the amount lost from debtors to 'hom the goods 'ere sold on credit. 2P. 0epreciation4 depreciation denotes gradually and permanent decrease in the #alue of asset due to 'ear and tear, technology changes, laps of time and accident. 2K. 3ictitious assets4 +hese are assets not represented by tangible possession or property. E amples of preliminary e penses, discount on issue of shares, debit balance in the profit and loss account 'hen sho'n on the assets side in the balance sheet. L>.Intanglbe Assets 4 Intangible assets means the assets 'hich is not ha#ing the physical appearance. And its ha#e the real #alue, it sho'n on the assets side of the balance sheet. L1. Accrued Income 4 Accrued income means income 'hich has been earned by the business during the accounting year but 'hich has not yet been due and, therefore, has not been recei#ed. L2. !ut standing Income 4 !utstanding Income means income 'hich has become due during the accounting year but 'hich has not so far been recei#ed by the firm. LL. :uspense account4 the suspense account is an account to 'hich the difference in the trial balance has been put temporarily. LR. 0epletion4 it implies remo#al of an a#ailable but not replaceable source, :uch as e tracting coal from a coal mine. L=. Amorti@ation4 the process of 'riting of intangible assets is term as amorti@ation. LM. 0ilapidations4 the term dilapidations to damage done to a building or other property during tenancy. LS. %apital employed4 the term capital employed means sum of total long term funds employed in the business. i.e. Eshare capital* reser#es - surplus *long term loans A Enon business assets * fictitious assetsF LP. E,uity shares4 those shares 'hich are not ha#ing pref. rights are called e,uity shares. LK. &ref.shares4 +hose shares 'hich are carrying the pref.rights is called pref. shares &ref.rights in respect of fi ed di#idend. &ref.right to repayment of capital in the e#en of company 'inding up. R>. $e#erage4 It is a force applied at a particular point to get the desired result. R1. !perating le#erage4 the operating le#erage ta(es place 'hen a changes changes in E5I+. R2. 3inancial le#erage 4 it is nothing but a process of using debt capital to of return on e,uity in re#enue greater increase the rate

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RL. %ombine le#erage4 it is used to measure of the total ris( of the firm ) operating ris( * financial ris(. RR. .oint #enture 4 A joint #enture is an association of t'o or more the persons 'ho combined for the e ecution of a specific transaction and di#ide the profit or loss their of an agreed ratio. R=. &artnership4 partnership is the relation b7' the persons 'ho ha#e agreed to share the profits of business carried on by all or any of them acting for all. RM. 3actoring4 It is an arrangement under 'hich a firm Ecalled borro'erF recei#es ad#ances against its recei#ables, from a financial institutions Ecalled factorF RS. %apital reser#e4 +he reser#e 'hich transferred from the capital gains is called capital reser#e. RP. General reser#e4 the reser#e 'hich is transferred from normal profits of the firm is called general reser#e RK. 3ree %ash4 +he cash not for any specific purpose free from any encumbrance li(e surplus cash. =>. 9inority Interest4 minority interest refers to the e,uity of the minority shareholders in a subsidiary company. =1. %apital receipts4 capital receipts may be defined as non"recurring receipts from the o'ner of the business or lender of the money crating a liability to either of them. =2. /e#enue receipts4 /e#enue receipts may defined as A recurring receipts against sale of goods in the normal course of business and 'hich generally the result of the trading acti#ities. =L. 9eaning of %ompany4 A company is an association of many persons 'ho contribute money or money1s 'orth to common stoc( and employs it for a common purpose. +he common stoc( so contributed is denoted in money and is the capital of the company. =R. +ypes of a company4 1. :tatutory companies 2. go#ernment company L. foreign company R. /egistered companies4 a. %ompanies limited by shares b. %ompanies limited by guarantee c. Bnlimited companies 0. pri#ate company E. public company ==. &ri#ate company4 A pri#ate co. is 'hich by its A!A4 /estricts the right of the members to transfer of shares $imits the no. of members =>. &rohibits any In#itation to the public to subscribe for its shares or debentures. =M. &ublic company4 A company, the articles of association of 'hich does not contain the re,uisite restrictions to ma(e it a pri#ate limited company, is called a public company.. =S. %haracteristics of a company4 ?oluntary association :eparate legal entity 3ree transfer of shares $imited liability %ommon seal &erpetual e istence. =P. 3ormation of company4 &romotion Incorporation %ommencement of business

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=K. E,uity share capital4 +he total sum of e,uity shares is called e,uity share capital. M>. Authori@ed share capital4 it is the ma imum amount of the share capital 'hich a company can raise for the time being. M1. Issued capital4 It is that part of the authori@ed capital 'hich has been allotted to the public for subscriptions. M2. :ubscribed capital4 it is the part of the issued capital 'hich has been allotted to the public ML. %alled up capital4 It has been portion of the subscribed capital 'hich has been called up by the company. MR. &aid up capital4 It is the portion of the called up capital against 'hich payment has been recei#ed. M=. 0ebentures4 0ebenture is a certificate issued by a company under its seal ac(no'ledging a debt due by it to its holder. MM. %ash profit4 cash profit is the profit it is occurred from the cash sales. MS. 0eemed public $td. %ompany4 A pri#ate company is a subsidiary company to public company it satisfies the follo'ing terms7conditions :ec LE1FL4 1. ha#ing minimum share capital = la(hs 2. accepting in#estments from the public L. no restriction of the transferable of shares R. 6o restriction of no. of members. =. accepting deposits from the in#estors MP. :ecret reser#es4 secret reser#es are reser#es the e istence of 'hich 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. +hese reser#es are crated by4 1. E cessi#e dep.of an asset, e cessi#e o#er"#aluation of a liability. 2. %omplete elimination of an asset, or under #aluation of an asset. MK. &ro#ision4 pro#ision usually means any amount 'ritten off or retained by 'ay of pro#iding depreciation, rene'als or diminutions in the #alue of assets or retained by 'ay of pro#iding for any (no'n liability of 'hich the amount can not be determined 'ith substantial accuracy. S>. /eser#e4 +he pro#ision in e cess of the amount considered necessary for the purpose it 'as originally made is also considered as reser#e &ro#ision is charge against profits 'hile reser#es is an appropriation of profits %reation of reser#e increase proprietor1s fund 'hile creation of pro#isions decreases his funds in the business. S1. /eser#e fund4 the term reser#e fund means such reser#e against 'hich clearly in#estment etc., S2. Bndisclosed reser#es4 :ometimes a reser#e is created but its identity is merged 'ith some other a7c or group of accounts so that the e istence of the reser#e is not (no'n such reser#e is called an undisclosed reser#e. SL. finance management4 financial management deals 'ith procurement of funds and their effecti#e utili@ation in business. SR. !bjecti#es of financial management4 financial management ha#ing t'o objecti#es that Is4 1. &rofit ma imi@ation4 the finance manager has to ma(e his decisions in a manner so that the profits of the concern are ma imi@ed. 2. 2ealth ma imi@ation4 'ealth ma imi@ation means the objecti#e of a firm should be to ma imi@e its #alue or 'ealth, or #alue of a firm is represented by the mar(et price of its common stoc(. S=. 3unctions of financial manager4 In#estment decision

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0i#idend decision 3inance decision %ash management decisions &erformance e#aluation 9ar(et impact analysis

SM. +ime #alue of money4 the time #alue of money means that 'orth of a rupee recei#ed today is different from the 'orth of a rupee to be recei#ed in future. SS. %apital structure4 it refers to the mi of sources from 'here the long"term funds re,uired in a business may be raisedN in other 'ords, it refers to the proportion of debt, preference capital and e,uity capital. SP. !ptimum capital structure4 capital structure is optimum 'hen the firm has a combination of e,uity and debt so that the 'ealth of the firm is ma imum. SK. 2acc4 it denotes 'eighted a#erage cost of capital. It is defined as the o#erall cost of capital computed by reference to the proportion of each component of capital as 'eights. P>. 3inancial brea( e#en point4 it denotes the le#el at 'hich a firm1s E5I+ is just sufficient to co#er interest and preference di#idend. P1. %apital budgeting4 capital budgeting in#ol#es the process of decision ma(ing 'ith regard to in#estment in fi ed assets. !r decision ma(ing 'ith regard to in#estment of money in long term projects. P2. &ay bac( period4 paybac( period represents the time period re,uired for complete reco#ery of the initial in#estment in the project. PL. A//4 accounting or a#erage rate of return means the a#erage annual yield on the project. PR. 6&?4 the net present #alue of an in#estment proposal is defined as the sum of the present #alues of all future cash in flo's less the sum of the present #alues of all cash out flo's associated 'ith the proposal. P=. &rofitability inde 4 'here different in#estment proposal each in#ol#ing different initial in#estments and cash inflo's are to be compared. PM. I//4 internal rate of return is the rate at 'hich the sum total of discounted cash inflo's e,uals the discounted cash out flo'. PS. +reasury management4 it means it is defined as the efficient management of li,uidity and financial ris( in business. PP. %oncentration ban(ing4 it means identify locations or places 'here customers are placed and open a local ban( a7c in each of these locations and open local collection centre. PK. 9ar(etable securities4 surplus cash can be in#ested in short term instruments in order to earn interest. K>. Ageing schedule4 in a ageing schedule the recei#ables are classified according to their age. K1. 9a imum permissible ban( finance E9&53F4 it is the ma imum amount that ban(s can lend a borro'er to'ards his 'or(ing capital re,uirements. K2. %ommercial paper4 a cp is a short term promissory note issued by a company, negotiable by endorsement and deli#ery, issued at a discount on face #alue as may be determined by the issuing company. KL. 5ridge finance4 It refers to the loans ta(en by the company normally from a commercial ban(s for a short period pending disbursement of loans sanctioned by the financial institutions.

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KR. ?enture capital4 It refers to the financing of high ris( #entures promoted by ne' ,ualified entrepreneurs 'ho re,uire funds to gi#e shape to their ideas. K=. 0ebt securiti@ation4 It is a mode of financing, 'here in securities are issued on the basis of a pac(age of assets Ecalled asset poolF. KM. $ease financing4 $easing is a contract 'here one party Eo'nerF purchases assets and permits its #ie's by another party ElesseeF o#er a specified period KS. +rade %redit4 It represents credit granted by suppliers of goods, in the normal course of business. KP. !#er draft4 Bnder this facility a fi ed limit is granted 'ithin 'hich the borro'er allo'ed to o#erdra' from his account. KK. %ash credit4 It is an arrangement under 'hich a customer is allo'ed an ad#ance up to certain limit against credit granted by ban(. 1>>. %lean o#erdraft4 It refers to an ad#ance by 'ay of o#erdraft facility, but not bac( by any tangible security. 1>1. :hare capital4 +he sum total of the nominal #alue of the shares of a company is called share capital. 1>2. 3unds flo' statement4 It is the statement deals 'ith the financial resources for running business acti#ities. It e plains ho' the funds obtained and ho' they used. 1>L. :ources of funds4 +here are t'o sources of funds Internal sources and e ternal sources. Internal source4 3unds from operations is the only internal sources of funds and some important points add to it they do not result in the outflo' of funds EaF0epreciation on fi ed assets EbF &reliminary e penses or good'ill 'ritten off, $oss on sale of fi ed assets 0educt the follo'ing items as they do not increase the funds4 &rofit on sale of fi ed assets, profit on re#aluation of fi ed assets E ternal sources4 EaF 3unds from long term loans EbF :ale of fi ed assets EcF 3unds from increase in share capital 1>R. Application of funds4 EaF &urchase of fi ed assets EbF &ayment of di#idend EcF&ayment of ta liability EdF &ayment of fi ed liability 1>=. I%0 EInter corporate depositsF4 %ompanies can borro' funds for a short period. 3or e ample M months or less from another company 'hich ha#e surplus li,uidity. :uch deposits made by one company in another company are called I%0. 1>M. %ertificate of deposits4 +he %0 is a document of title similar to a fi ed deposit receipt issued by ban(s there is no prescribed interest rate on such %0s it is based on the pre#ailing mar(et conditions. 1>S. &ublic deposits4 It is #ery important source of short term and medium term finance. +he company can accept &0 from members of the public and shareholders. It has the maturity period of M months to L years. 1>P.Euro issues4 +he euro issues means that the issues is listed on a European stoc( E change. +he subscription can come from any part of the 'orld e cept India. 1>K.G0/ EGlobal depository receiptsF4 A depository receipt is basically a negotiable certificate , dominated in us dollars that represents a non"B: company publicly traded in local currency e,uity shares. 11>. A0/ EAmerican depository receiptsF4 0epository receipt issued by a company in the B:A are (no'n as A0/s. :uch receipts are to be issued in accordance 'ith the pro#isions stipulated by the securities E change commission E:E%F of B:A li(e :E5I in India.

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111.%ommercial ban(s4 %ommercial ban(s e tend foreign currency loans for international operations, just li(e rupee loans. +he ban(s also pro#ided o#erdraft. 112.0e#elopment ban(s4 It offers long"term and medium term loans including foreign currency loans 11L.International agencies4 International agencies li(e the I3%,I5/0,A05,I93 etc. pro#ide indirect assistance for obtaining foreign currency. 11R. :eed capital assistance4 +he seed capital assistance scheme is desired by the I05I for professionally or technically ,ualified entrepreneurs and persons possessing rele#ant e perience and s(ills and entrepreneur traits. 11=. Bnsecured l>ans4 It constitutes a significant part of long"term finance a#ailable to an enterprise. 11M. %ash flo' statement4 It is a statement depicting change in cash position from one period to another. 11S.:ources of cash4 Internal sources"EaF0epreciation EbFAmorti@ation EcF$oss on sale of fi ed assets EdFGains from sale of fi ed assets EeF %reation of reser#es E ternal sources"EaFIssue of ne' shares EbF/aising long term loans EcF:hort"term borro'ings EdF:ale of fi ed assets, in#estments 11P. Application of cash4 EaF &urchase of fi ed assets EbF &ayment of long"term loans EcF 0ecrease in deferred payment liabilities EdF &ayment of ta , di#idend EeF 0ecrease in unsecured loans and deposits 11K. 5udget4 It is a detailed plan of operations for some specific future period. It is an estimate prepared in ad#ance of the period to 'hich it applies. 12>. 5udgetary control4 It is the system of management control and accounting in 'hich all operations are forecasted and so for as possible planned ahead, and the actual results compared 'ith the forecasted and planned ones. 121. %ash budget4 It is a summary statement of firm1s e pected cash inflo' and outflo' o#er a specified time period. 122. 9aster budget4 A summary of budget schedules in capsule form made for the purpose of presenting in one report the highlights of the budget forecast. 12L. 3i ed budget4 It is a budget 'hich is designed to remain unchanged irrespecti#e of the le#el of acti#ity actually attained. 12R. ^ero" base" budgeting4 It is a management tool 'hich pro#ides a systematic method for e#aluating all operations and programmes, current of ne' allo's for budget reductions and e pansions in a rational manner and allo's reallocation of source from lo' to high priority programs. 12=. Good'ill4 +he present #alue of firm1s anticipated e cess earnings. 12M. 5/:4 It is a statement reconciling the balance as sho'n by the ban( pass boo( and balance sho'n by the cash boo(. 12S. !bjecti#e of 5/:4 +he objecti#e of preparing such a statement is to (no' the causes of difference bet'een the t'o balances and pass necessary correcting or adjusting entries in the boo(s of the firm. 12P. /esponsibilities of accounting4 responsibilities for costs. It is a system of control by delegating and locating the

12K. &rofit centre4 A centre 'hose performance is measured in terms of both the e pense incurs and re#enue it earns. 1L>. %ost centre4 A location, person or item of e,uipment for 'hich cost may be ascertained and used for the purpose of cost control.

11

1L1. %ost4 +he amount of e penditure incurred on to a gi#en thing. 1L2. %ost accounting4 It is thus concerned 'ith recording, classifying, and summari@ing costs for determination of costs of products or ser#ices planning, controlling and reducing such costs and furnishing of information management for decision ma(ing. 1LL. Elements of cost4 EAF 9aterial E5F $abour E%F E penses E0F !#erheads 1LR. %omponents of total costs4 EAF &rime cost E5F 3actory cost E%F+otal cost of production E0F +otal c>st 1L=. &rime cost4 It consists of direct material direct labour and direct e penses. It is also (no'n as basic or first or flat cost. 1LM. 3actory cost4 It comprises prime cost, in addition factory o#erheads 'hich include cost of indirect material indirect labour and indirect e penses incurred in factory. +his cost is also (no'n as 'or(s cost or production cost or manufacturing cost. 1LS. %ost of production4 In office and administration o#erheads are added to factory cost, office cost is arri#ed at. 1LP. +otal cost4 :elling and distribution o#erheads are added to total cost of production to get the total cost or cost of sales. 1LK. %ost unit4 A unit of ,uantity of a product, ser#ice or time in relation to 'hich costs may be ascertained or e pressed. 1R>.9ethods of costing4 EAF.ob costing E5F%ontract costing E%F&rocess costing E0F!peration costing EEF!perating costing E3FBnit costing EGF5atch costing. 1R1. +echni,ues of costing4 EaF marginal costing EbF direct costing EcFabsorption costing EdF uniform costing. 1R2. :tandard costing4 standard costing is a system under 'hich the cost of the product is determined in ad#ance on certain predetermined standards. 1RL. 9arginal costing4 it is a techni,ue of costing in 'hich allocation of e penditure to production is restricted to those e penses 'hich arise as a result of production, i.e., materials, labour, direct e penses and #ariable o#erheads. 1RR. 0eri#ati#e4 deri#ati#e is product 'hose #alue is deri#ed from the #alue of one or more basic #ariables of underlying asset. 1R=. 3or'ards4 a for'ard contract is customi@ed contracts bet'een t'o entities 'ere settlement ta(es place on a specific date in the future at today1s pre agreed price. 1RM. 3utures4 a future contract is an agreement bet'een t'o parties to buy or sell an asset at a certain time in the future at a certain price. 3uture contracts are standardi@ed e change traded contracts. 1RS. !ptions4 an option gi#es the holder of the option the right to do some thing. +he option holder option may e ercise or not. 1RP. %all option4 a call option gi#es the holder the right but not the obligation to buy an asset by a certain date for a certain price. 1RK. &ut option4 a put option gi#es the holder the right but not obligation to sell an asset by a certain date for a certain price. 1=>. !ption price4 option price is the price 'hich the option buyer pays to the option seller. It is also referred to as the option premium. 1=1. E piration date4 the date 'hich is specified in the option contract is called e piration date.

1!

1=2. European option4 it is the option at e ercised only on e piration date it self. 1=L. 5asis4 basis means future price minus spot price. 1=R. %ost of carry4 the relation bet'een future prices and spot prices can be summari@ed in terms of 'hat is (no'n as cost of carry. 1==. Initial margin4 the amount that must be deposited in the margin a7c at the time of first entered into future contract is (no'n as initial margin. 1=M 9aintenance margin4 this is some 'hat lo'er than initial margin. 1=S. 9ar( to mar(et4 in future mar(et, at the end of the each trading day, the margin a7c is adjusted to reflect the in#estors1 gains or loss depending upon the futures selling price. +his is called mar( to mar(et. 1=P. 5as(ets 4 bas(et options are options on portfolio of underlying asset. 1=K. :'aps4 s'aps are pri#ate agreements bet'een t'o parties to e change cash flo's in the future according to a pre agreed formula. 1M>. Impact cost4 impact cost is cost it is measure of li,uidity of the mar(et. It reflects the costs faced 'hen actually trading in inde . 1M1. ;edging4 hedging means minimi@e the ris(. 1M2. %apital mar(et4 capital mar(et is the mar(et it deals 'ith the long term in#estment funds. It consists of t'o mar(ets 1.primary mar(et 2.secondary mar(et. 1ML. &rimary mar(et4 those companies 'hich are issuing ne' shares in this mar(et. It is also called ne' issue mar(et. 1MR. :econdary mar(et4 secondary mar(et is the mar(et 'here shares buying and selling. In India secondary mar(et is called stoc( e change. 1M=. Arbitrage4 it means purchase and sale of securities in different mar(ets in order to profit from price discrepancies. In other 'ords arbitrage is a 'ay of reducing ris( of loss caused by price fluctuations of securities held in a portfolio. 1MM. 9eaning of ratio4 /atios are relationships e pressed in mathematical terms bet'een figures 'hich are connected 'ith each other in same manner. 1MS. Acti#ity ratio4 it is a measure of the le#el of acti#ity attained o#er a period. 1MP. mutual fund 4 a mutual fund is a pool of money, collected from in#estors, and is in#ested according to certain in#estment objecti#es. 1MK. characteristics of mutual fund 4 !'nership of the 93 is in the hands of the of the in#estors 93 managed by in#estment professionals +he #alue of portfolio is updated e#ery day 1S>.ad#antage of 93 to in#estors 4 &ortfolio di#ersification &rofessional management /eduction in ris( /eduction of transaction casts $i,uidity %on#enience and fle ibility 1S1.net asset #alue 4 the #alue of one unit of in#estment is called as the 6et Asset ?alue

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1S2.open"ended fund 4 open ended funds means in#estors can buy and sell units of fund, at 6A? related prices at any time, directly from the fund this is called open ended fund. 3or e N unit MR 1SL.close ended funds 4 close ended funds means it is open for sale to in#estors for a specific period, after 'hich further sales are closed. Any further transaction for buying the units or repurchasing them, happen, in the secondary mar(ets. 1SR. di#idend option 4 in#estors 'ho choose a di#idend on their in#estments, 'ill recei#e di#idends from the 93, as 'hen such di#idends are declared. 1S=.gro'th option 4 in#estors 'ho do not re,uire periodic income distributions can be choose the gro'th option. 1SM.e,uity funds 4 e,uity funds are those that in#est pre"dominantly in e,uity shares of company. 1SS.types of e,uity funds 4 :imple e,uity funds &rimary mar(et funds :ectoral funds Inde funds 1SP. sectoral funds 4 sectoral funds choose to in#est in one or more chosen sectors of the e,uity mar(ets. 1SK.inde funds 4the fund manager ta(es a #ie' on companies that are e pected to perform 'ell, and in#ests in these companies . 1P>.debt funds 4 the debt funds are those that are pre"dominantly in#est in debt securities. 1P1. li,uid funds 4 the debt funds in#est only in instruments 'ith maturities less than one year. 1P2. gilt funds 4 gilt funds in#ests only in securities that are issued by the G!?+. and therefore does not carry any credit ris(. 1PL.balanced funds 4funds that in#est both in debt and e,uity mar(ets are called balanced funds. 1PR. sponsor 4 sponsor is the promoter of the 93 and appoints trustees, custodians and the A9% 'ith prior appro#al of :E5I . 1P=. trustee 4 trustee is responsible to the in#estors in the 93 and appoint the A9% for managing the in#estment portfolio. 1PM. A9% 4 the A9% describes Asset 9anagement %ompany, it is the business face of the 93, as it manages all the affairs of the 93. 1PS. / - + Agents 4 the /-+ agents are responsible for the in#estor ser#icing functions, as they maintain the records of in#estors in 93. 1PP. custodians 4 custodians are responsible for the securities held in the mutual fund1s portfolio. 1PK. scheme ta(e o#er 4 if an e isting 93 scheme is ta(en o#er by the another A9%, it is called as scheme ta(e o#er. 1K>.meaning of load4 load is the factor that is applied to the 6A? of a scheme to arri#e at the price. 1K2. mar(et capitali@ation 4 mar(et capitali@ation means number of shares issued multiplied 'ith mar(et price per share. 1KL.price earning ratio 4 the ratio bet'een the share price and the post ta earnings of company is called as price earning ratio.

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1KR. di#idend yield 4 the di#idend paid out by the company, is usually a percentage of the face #alue of a share. 1K=. mar(et ris( 4 it refers to the ris( 'hich the in#estor is e posed to as a result of ad#erse mo#ements in the interest rates. It also referred to as the interest rate ris(. 1KM. /e"in#estment ris( 4 it the ris( 'hich an in#estor has to face as a result of a fall in the interest rates at the time of rein#esting the interest income flo's from the fi ed income security. 1KS. call ris( 4 call ris( is associated 'ith bonds ha#e an embedded call option in them. +his option hi#es the issuer the right to call bac( the bonds prior to maturity. 1KP. credit ris( 4 credit ris( refers to the probability that a borro'er could default on a repay debt or band loans commitment to

1KK.inflation ris( 4 inflation ris( reflects the changes in the purchasing po'er of the cash flo's resulting from the fi ed income security. 2>>.li,uid ris( 4 it is also called mar(et ris(, it refers to the ease 'ith 'hich bonds could be traded in the mar(et. 2>1.dra'ings 4 dra'ings denotes the money 'ithdra'n by the proprietor from the business for his personal use. 2>2.outstanding Income 4 !utstanding Income means income 'hich has become due during the accounting year but 'hich has not so far been recei#ed by the firm. 2>L.!utstanding E penses 4 !utstanding E penses refer to those e penses 'hich ha#e become due during the accounting period for 'hich the 3inal Accounts ha#e been prepared but ha#e not yet been paid. 2>R.closing stoc( 4 +he term closing stoc( means goods lying unsold 'ith the businessman at the end of the accounting year. 2>=. 9ethods of depreciation 4 1.Bnirorm charge methods 4 a. 3i ed installment method b .0epletion method c. 9achine hour rate method. 2. 0eclining charge methods 4 a. 0iminishing balance method b.:um of years digits method c. 0ouble declining method L. !ther methods 4 a. Group depreciation method b. In#entory system of depreciation c. Annuity method d. 0epreciation fund method e. Insurance policy method. 2>M.Accrued Income 4 Accrued Income means income 'hich has been earned by the business during the accounting year but 'hich has not yet become due and, therefore, has not been recei#ed. 2>S.Gross profit ratio 4 it indicates the efficiency of the production7trading operations. 3ormula 4 Gross profit Q1>> 6et sales 2>P.6et profit ratio 4 it indicates net margin on sales 3ormula 4 6et profit Q 1>> 6et sales 2>K. return on share holders funds 4 it indicates measures earning po'er of e,uity capital. 3ormula 4 profits a#ailable for E,uity shareholders Q 1>>

1.

A#erage E,uity :hareholders 3unds 21>. Earning per E,uity share EE&:F share. 4 it sho's the amount of earnings attributable to each e,uity

3ormula 4 profits a#ailable for E,uity shareholders 6umber of E,uity shares 211.di#idend yield ratio 4 it sho's the rate of return to shareholders in the form of di#idends based in the mar(et price of the share 3ormula 4 0i#idend per share Q 1>> 9ar(et price per share

212. price earning ratio 4 it a measure for determining the #alue of a share. 9ay also be used to measure the rate of return e pected by in#estors. 3ormula 4 9ar(et price of share E9&:F Q 1>> Earning per share EE&:F 21L.%urrent ratio 4 it measures short"term debt paying ability. 3ormula 4 %urrent Assets %urrent $iabilities 21R. 0ebt"E,uity /atio 4 it indicates the percentage of funds being financed through borro'ingsN a measure of the e tent of trading on e,uity. 3ormula 4 +otal $ong"term 0ebt :hareholders funds 21=.3i ed Assets ratio 4 +his ratio e plains 'hether the firm has raised adepuate long"term funds to meet its fi ed assets re,uirements. 3ormula 3i ed Assets $ong"term 3unds

21M . Cuic( /atio 4 +he ratio termed as < li,uidity ratio1. +he ratio is ascertained y comparing the li,uid assets to current liabilities. 3ormula 4 $i,uid Assets %urrent $iabilities

21S. :toc( turno#er /atio 4 the ratio indicates 'hether in#estment in in#entory in efficiently used or not. It, therefore e plains 'hether in#estment in in#entory 'ithin proper limits or not. 3ormula 4 cost of goods sold A#erage stoc( 21P. 0ebtors +urno#er /atio 4 the ratio the better it is, since it 'ould indicate that debts are being collected more promptly. +he ration helps in cash budgeting since the flo' of cash from customers can be 'or(ed out on the basis of sales. 3ormula 4 %redit sales A#erage Accounts /ecei#able

21K.%reditors +urno#er /atio 4 it indicates the speed 'ith 'hich the payments for credit purchases are made to the creditors. 3ormula 4 %redit &urchases A#erage Accounts &ayable

22>. 2or(ing capital turno#er ratio 4 it is also (no'n as 2or(ing %apital $e#erage /atio. +his ratio indicates 'hether or not 'or(ing capital has been effecti#ely utili@ed in ma(ing sales.

1+

3ormula 4

6et :ales 2or(ing %apital

221.3i ed Assets +urno#er ratio 4 +his ratio indicates the e tent to 'hich the in#estments in fi ed assets contributes to'ards sales. 3ormula 4 6et :ales 3i ed Assets

222 .&ay"out /atio 4 +his ratio indicates 'hat proportion of earning per share has been used for paying di#idend. 3ormula 4 0i#idend per E,uity :hare Q 1>> Earning per E,uity share 22L.!#erall &rofitability /atio 4 It is also called as /eturn on In#estment E/!IF or /eturn on %apital Employed E/!%EF . It indicates the percentage of return on the total capital employed in the business. 3ormula 4 !perating profit Q 1>> %apital employed

+he term capital employed has been gi#en different meanings a. sum total of all assets 'hether fi ed or current b. sum total of fi ed assets, c. sum total of long"term funds employed in the business, i.e., share capital *reser#es -surplus *long term loans AEnon business assets * fictitious assetsF. !perating profit means <profit before interest and ta 1 22R . 3i ed Interest %o#er ratio 4 the ratio is #ery important from the lender1s point of #ie'. It indicates 'hether the business 'ould earn sufficient profits to pay periodically the interest charges. 3ormula 4 Income before interest and +a Interest %harges

22= . 3i ed 0i#idend %o#er ratio 4 +his ratio is important for preference shareholders entitled to get di#idend at a fi ed rate in priority to other shareholders. 3ormula 4 6et &rofit after Interest and +a &reference 0i#idend

22M. 0ebt :er#ice %o#erage ratio 4 +his ratio is e plained ability of a company to ma(e payment of principal amounts also on time. 3ormula 4 6et profit before interest and ta Interest * &rincipal payment installment 1" +a rate

22S. &roprietary ratio 4 It is a #ariant of debt"e,uity ratio . It establishes relationship bet'een the proprietor1s funds and the total tangible assets. 3ormula 4 :hareholders funds +otal tangible assets

22P.0ifference bet'een joint #enture and partner ship 4 In joint #enture the business is carried on 'ithout using a firm name, In the partnership, the business is carried on under a firm name. In the joint #enture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system.

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In the joint #enture, profit and loss is ascertained on completion of the #enture In the partner ship , profit and loss is ascertained at the end of each year. In the joint #enture, it is confined to a particular operation and it is temporary. In the partnership, it is confined to a particular operation and it is permanent

. 22K.9eaning of 2or(ing capital 4 +he funds a#ailable for conducting day to day operations of an enterprise. Also the e cess of current assets o#er current liabilities . 2L>.concepts of accounting 4

represented by

1. 5usiness entity concepts 4" According to this concept, the business is treated as a separate entity distinct from its o'ners and others. 2. Going concern concept 4" According to this concept, it is assumed that a business has a reasonable e pectation of continuing business at a profit for an indefinite period of time. L. 9oney measurement concept 4" +his concept says that the accounting records only those transactions 'hich can be e pressed in terms of money only. R. %ost concept 4"According to this concept, an asset is recorded in the boo(s at the price paid to ac,uire it and that this cost is the basis for all subse,uent accounting for the asset. =. 0ual aspect concept 4" In e#ery transaction, there 'ill be t'o aspects A the recei#ing aspect and the gi#ing aspectN both are recorded by debiting one accounts and crediting another account. +his is called double entry. M. Accounting period concept 4" It means the final accounts must be prepared on a periodic basis. 6ormally accounting period adopted is one year, more than this period reduces the utility of accounting data. S. /eali@ation concept 4" According to this concepts, re#enue is considered as being earned on the data 'hich it is reali@ed, i.e., the date 'hen the property in goods passes the buyer and he become legally liable to pay. P. 9ateriality concepts 4" It is a one of the accounting principle, as per only important information 'ill be ta(en, and un important information 'ill be ignored in the preparation of the financial statement. K. 9atching concepts 4" +he cost or e penses of a business of a particular period are compared 'ith the re#enue of the period in order to ascertain the net profit and loss. 1>. Accrual concept 4" +he profit arises only 'hen there is an increase in o'ners capital, 'hich is a result of e cess of re#enue o#er e penses and loss. 2L1. 3inancial analysis 4+he process of interpreting the past, present, and future financial condition of a company. 2L2. Income statement 4 An accounting statement 'hich sho's the le#el of re#enues, e penses and profit occurring for a gi#en accounting period. 2LL.Annual report 4 +he report issued annually by a company, to its share holders. it containing financial statement li(e, trading and profit - lose account and balance sheet. 2LR. 5an(rupt 4 A statement in 'hich a firm is unable to meets its obligations and hence, it is assets are surrendered to court for administration 2L= . $ease 4 $ease is a contract bet'een to parties under the contract, the o'ner of the asset gi#es the right to use the asset to the user o#er an agreed period of the time for a consideration

12

2LM.!pportunity cost 4 +he cost associated 'ith not doing something. 2LS. 5udgeting 4 +he term budgeting is used for preparing budgets and other producer for planning,co"ordination,and control of business enterprise . 2LP.%apital 4 +he term capital refers to the total in#estment of company in money, tangible and intangible assets. It is the total 'ealth of a company. 2LK.%apitali@ation 4 It is the sum of the par #alue of stoc(s and bonds out standings. 2R>. !#er capitali@ation 4 2hen a business is unable to earn fair rate on its outstanding securities. 2R1. Bnder capitali@ation 4 2hen a business is able to earn fair rate or o#er rate on it is outstanding securities. 2R2. %apital gearing 4 +he term capital gearing refers to the relationship bet'een e,uity and long term debt. 2RL.%ost of capital 4 It means the minimum rate of return e pected by its in#estment. 2RR.%ash di#idend 4 +he payment of di#idend in cash 2R=.0efine the term accrual 4 /ecognition of re#enues and costs as they are earned or incurred . it includes recognition of transaction relating to assets and liabilities as they occur irrespecti#e of the actual receipts or payments. 2R=. accrued e penses 4 An e pense 'hich has been incurred in an accounting period but for 'hich no enforceable claim has become due in 'hat period against the enterprises. 2RM.Accrued re#enue 4 /e#enue 'hich has been earned is an earned is an accounting period but in respect of 'hich no enforceable claim has become due to in that period by the enterprise. 2RS.Accrued liability 4 A de#eloping but not yet enforceable claim by an another person 'hich accumulates 'ith the passage of time or the receipt of ser#ice or other'ise. it may rise from the purchase of ser#ices 'hich at the date of accounting ha#e been only partly performed and are not yet billable. 2RP.%on#ention of 3ull disclosure 4 According to this con#ention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information 'ill be made. 2RK.%on#ention of consistency 4 According to this con#ention it is essential that accounting practices and methods remain unchanged from one year to another. 2=>.0efine the term preliminary e penses 4 E penditure relating to the formation of an enterprise. +here include legal accounting and share issue e penses incurred for formation of the enterprise. 2=1.9eaning of %harge 4 charge means it is a obligation to secure an indebt ness. It may be fi ed charge and floating charge. 2=2.Appropriation 4 It is application of profit to'ards /eser#es and 0i#idends. 2=L.Absorption costing 4 A method 'here by the cost is determine so as to include the appropriate share of both #ariable and fi ed costs. 2=R.9arginal %ost 4 9arginal cost is the additional cost to produce an additional unit of a product. It is also called #ariable cost. 2==. 2hat are the e "ordinary items in the &-$ a7c 4 +he transaction 'hich are not related to the business is termed as e "ordinary transactions or e "ordinary items. Egg4" profit or losses on the sale of fi ed assets, interest recei#ed from other company in#estments, profit or loss on foreign e change, une pected di#idend recei#ed.

13

2=M . :hare premium 4 +he e cess of issue of price of shares o#er their face #alue. It 'ill be sho'ed 'ith the allotment entry in the journal, it 'ill be adjusted in the balance sheet on the liabilities side under the head of reser#es - surplus. 2=S.Accumulated 0epreciation 4 +he total to date of the periodic depreciation charges on depreciable assets. 2=P.In#estment 4 E penditure on assets held to earn interest, income, profit or other benefits. 2=K.%apital 4 Generally refers to the amount in#ested in an enterprise by its o'ner. E N paid up share capital in corporate enterprise. 2M>. %apital 2or( In &rogress 4 E penditure on capital assets 'hich are in the process of construction as completion. 2M1. %on#ertible 0ebenture 4 A debenture 'hich gi#es the holder a right to con#ersion 'holly or partly in shares in accordance 'ith term of issues. 2M2./edeemable &reference :hare 4 +he preference share that is repayable either after a fi ed EorF determinable period EorF at any time di#idend by the management. 2ML. %umulati#e preference shares 4 A class of preference shares entitled to payment of cumulates di#idends. &reference shares are al'ays deemed to be cumulati#e unless they are e pressly made non"cumulati#e preference shares. 2MR.0ebenture redemption reser#e 4 A reser#e created for the redemption of debentures at a future date. 2M=. %umulati#e di#idend 4 A di#idend payable as cumulati#e preference shares 'hich it unpaid cumulates as a claim against the earnings of a corporate before any distribution is made to the other shareholders. 2MM. 0i#idend E,uali@ation reser#e 4 A reser#e created to maintain the rate of di#idend in future years. 2MS. !pening :toc( 4 +he term <opening stoc(1 means goods lying unsold 'ith the businessman in the beginning of the accounting year. +his is sho'n on the debit side of the trading account. 2MP.%losing :toc( 4 +he term <%losing :toc(1 includes goods lying unsold 'ith the businessman at the end of the accounting year. +he amount of closing stoc( is sho'n on the credit side of the trading account and as an asset in the balance sheet. 2MK.?aluation of closing stoc( 4 +he closing stoc( is #alued on the basis of %ost or 9ar(et price 'hiche#er is less principle. 2S2. %ontingency 4 A condition EorF situation the ultimate out come of 'hich gain or loss 'ill be (no'n as determined only as the occurrence or non occurrence of one or more uncertain future e#ents. 2SL.%ontingent Asset 4 An asset the e istence o'nership or #alue of 'hich may be (no'n or determined only on the occurrence or non occurrence of one more uncertain future e#ents. 2SR. %ontingent liability 4 An obligation to an e isting condition or situation 'hich may arise in future depending on the occurrence of one or more uncertain future e#ents. 2S=. 0eficiency 4 the e cess of liabilities o#er assets of an enterprise at a gi#en date is called deficiency. 2SM.0eficit 4 +he debit balance in the profit and loss a7c is called deficit. 2SS.:urplus 4 %redit balance in the profit - loss statement after pro#iding for proposed appropriation di#idend , reser#es. 2SP.Appropriation Assets 4 An account sometimes included as a separate section of the profit and loss statement sho'ing application of profits to'ards di#idends, reser#es.

20

2SK. %apital redemption reser#e 4 A reser#e created on redemption of the a#erage cost4" the cost of an item at a point of time as determined by applying an a#erage of the cost of all items of the same nature o#er a period. 2hen 'eights are also applied in the computation it is termed as 'eight a#erage cost. 2P>.3loating %hange 4 Assume change on some or all assets of an enterprise 'hich are not attached to specific assets and are gi#en as security against debt. 2P1. 0ifference bet'een 3unds flo' and %ash flo' statement 4 A %ash flo' statement is concerned only 'ith the change in cash position 'hile a funds flo' analysis is concerned 'ith change in 'or(ing capital position bet'een t'o balance sheet dates. A cash flo' statement is merely a record of cash receipts and disbursements. 2hile studying the short"term sol#ency of a business one is interested not only in cash balance but also in the assets 'hich are easily con#ertible into cash.

2P2. 0ifference 5et'een the 3unds flo' and Income statement 4 A funds flo' statement deals 'ith the financial resource re,uired for running the business acti#ities. It e plains ho' 'ere the funds obtained and ho' 'ere they used, 2hereas an income statement discloses the results of the business acti#ities, i.e., ho' much has been earned and ho' it has been spent. A funds flo' statement matches the funds raised and funds applied during a particular period. +he source and application of funds may be of capital as 'ell as of re#enue nature. An income statement matches the incomes of a period 'ith the e penditure of that period, 'hich are both of a re#enue nature

Mutual Funds
Mutual Fund A security that gives small investors access to a welldiversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. hares are issued and can be redeemed as needed. !he fund's net asset value "#A$% is determined each day. Each mutual fund portfolio is invested to match the ob&ective stated in the prospectus. 't has been shown in study after study that a ma&ority of mutual funds fail to beat the mar(et. Also, pic(ing mutual funds purely on the basis of past performance usually does not wor(.

21

Closed-End Investment )hen an investment company issues a fixed number of shares in an actively managed portfolio of securities. !he shares are traded in the mar(et &ust li(e common stoc(. *ost mutual funds are open-end funds, not closed-end. !he main difference with closed-end funds is that mar(et price of the shares is determined by supply and demand and not by net-asset value "#A$%. Also (nown as a +closed-end mutual fund+ or +closed-end fund+. Open-End Fund A mutual fund that continues to sell shares to investors, and will buy bac( shares when investors wish to sell. ,pen-end funds have no limit to the number of shares they can issue. !he ma&ority of mutual funds are open end. -nits are bought and sold at their current #A$.

NAV Funds & Investment

rusts

+#et asset value,+ or +#A$,+ of an investment company is the company.s total assets minus its total liabilities. /or example, if an investment company has securities and other assets worth 0122 million and has liabilities of 012 million, the investment company.s #A$ will be 032 million. 4ecause an investment company.s assets and liabilities change daily, #A$ will also change daily. #A$ might be 032 million one day, 0122 million the next, and 052 million the day after. *utual funds and -nit 'nvestment !rusts "-'!s% generally must calculate their #A$ at least once every business day, typically after the ma&or -. . exchanges close. A closed-end fund, whose shares generally are not +redeemable+6that is, not required to be repurchased by the fund6is not sub&ect to this requirement. An investment company calculates the #A$ of a single share "or the +per share #A$+% by dividing its #A$ by the number of shares that are outstanding. /or example, if a mutual fund has an #A$ of 0122 million, and investors own 12,222,222 of the fund.s shares, the fund.s per share #A$ will be 012. 4ecause per share #A$ is based on #A$, which changes daily, and on the number of shares held by investors, which also changes daily, per share #A$ also will change daily. *ost mutual funds publish their per share #A$s in the daily newspapers. !he share price of mutual funds and traditional -'!s is based on their #A$. !hat is, the price that investors pay to purchase mutual fund and most -'! shares is the approximate per share #A$, plus any fees that the fund imposes at purchase "such as sales loads or purchase fees%. !he price that investors receive on redemptions is the approximate per share #A$ at redemption, minus any fees that the fund deducts at that time "such as deferred sales loads or redemption fees%.

2!

/or the statutory and regulatory provisions relating to net asset value "#A$%, refer to the 'nvestment 7ompany Act of 1382 and the rules adopted under that Act, in particular ection 9"a%"81%, and :ules 9a-8 and 99c-1.

FINANCIA! " A EMEN "

/A 4 tatement of /inancial Accounting 7oncepts " /A7% #o. ; +:ecognition and *easurement in /inancial tatements of 4usiness Enterprises+ "tatement

op#$s A full set of f#nan$#al statements for a period should show< F#nan$#al pos#t#on at the end of the period Earn#n%s &net #n$ome% for the period 7omprehensive income "total nonowner changes in equity% for the period Cas' flo(s during the period 'nvestments by and distributions to owners during the period

/A7 #o.;

/A7 #o.;

Compre'ens#ve #n$ome is a broad measure of the effects of transactions and oth events on an equity, comprising all recogni=ed changes in equity "net assets% entity during a period from transactions and other events and circumstances ex those resulting from investments by owners and distributions to owners.

)r#mar* F#nan$#al "tatements

+alan$e "'eet< :eports the financial position at the end of the period. In$ome "tatement< :eports the results of operations for the period. "tatement of Cas' Flo(s< :eports cash inflows and outflows during the period. "tatement of "to$,'olders- E.u#t*< :eports the changes in stoc(holders' equity duri period.

Components of +alan$e "'eet

Assets< :epresents future economic benefits. !#a/#l#t#es< :epresents future economic sacrifices. "to$,'olders- E.u#t*< :epresents the residual portion of the assets after subtracti liabilities. " toc(holders' Equity > Assets - ?iabilities% A$$ount#n% E.uat#on Assets > ?iabilities @ toc(holders' Equity

Components of In$ome "tatement

0evenues Expenses Net In$ome 1 0evenues - Expenses

Components of t'e "tatement of Cas' Flo(s

7ash /lows from ,perating Activities 7ash /lows from 'nvesting Activities 7ash /lows from /inancing Activities

Components of t'e "tatement of "to$,'olders- E.u#t*

7ommon toc( Areferred toc( Additional Aaid-in 7apital "Aaid-in capital in excess of par value% :etained Earnings

+/at are 9a"ic .arnin " 7er S/areB

20

,asic 7arnings per share <,asic 7D'= tells an investor how much of the companyCs profit elongs to each share of stock. 5f company A,C reported earnings of $100 million dollars and had !0 million shares outstanding, the asic 7D' would e $. <$100 million earnings L !0 million shares outstanding * $. per share=. -he figure is important ecause it allows analysts to value the stock ased on the price to earnings ratio <or p%e ratio for short=.
&asic "'( are not as accurate as #iluted "'(.

What are Diluted Earnings Per Share? #iluted earnings per share (#iluted "'() takes the basic earnings per share figure one step further. &asic "'( only takes into account the number of shares outstanding at the time. #iluted "'(, on the other hand, estimates how many shares could theoretically exist after all stock options, warrants, preferred stock and % or convertible bonds have been exercised. The theory goes that because some or all of these investments could be converted or exercised, the number of shares outstanding could increase at any time. This reduces the amount of a company s earnings each share is entitled to. )n doing so, the price to earnings ratio becomes higher, and the stock appears more expensive. )n most cases, the diluted earnings*per*share figure is far more accurate estimation of the total earnings per share and receive special attention when valuing a company.

0at#os for F#nan$#al "tatement Anal*s#s

!#.u#d#t* Anal*s#s 0at#os
7urrent Assets 7urrent :atio > ---------------------------7urrent ?iabilities 2u#$, 0at#o Buic( :atio > Buic( Assets ----------------------------7urrent ?iabilities Current 0at#o

Buic( Assets > 7urrent Assets - 'nventories Net 3or,#n% Cap#tal 0at#o #et )or(ing 7apital #et )or(ing 7apital ------------------------------:atio > !otal Assets #et )or(ing 7apital > 7urrent Assets - 7urrent ?iabilities

)rof#ta/#l#t* Anal*s#s 0at#os

0eturn on Assets &0OA4 :eturn on Assets ":,A% > #et 'ncome

----------------------------------

24

Average !otal Assets Average !otal Assets > "4eginning !otal Assets @ Ending !otal Assets%C9 0eturn on E.u#t* &0OE4 :eturn on Equity ":,E% > #et 'ncome -------------------------------------------Average toc(holders' Equity toc(holders' Equity @ Ending

Average toc(holders' Equity > "4eginning toc(holders' Equity%C9

0eturn on Common E.u#t* &0OCE4 #et 'ncome :eturn on 7ommon ----------------------------------------------Equity ":,7E% > Average 7ommon toc(holders' Equity Average 7ommon toc(holders' Equity>"4eginning 7ommon toc(holders' Equity @ Ending 7ommon toc(holders' Equity%C9 )rof#t Mar%#n Arofit *argin > #et 'ncome -------------------ales

Earn#n%s )er "'are &E)"4 #et 'ncome Earnings Aer ---------------------------------------------------hare "EA % > )eighted Average #umber of 7ommon hares ,utstanding

A$t#v#t* Anal*s#s 0at#os

Assets urnover 0at#o ales ---------------------------------Average !otal Assets

Assets !urnover :atio >

Average !otal Assets > "4eginning !otal Assets @ Ending !otal Assets% C 9 urnover 0at#o ales Accounts :eceivable !urnover -----------------------------------:atio > -----Average Accounts :eceivable Average Accounts :eceivable> "4eginning Accounts :eceivable @ Ending Accounts :eceivable%C9 urnover 0at#o 7ost of Doods old 'nventory !urnover :atio -------------------------------> Average 'nventories Average 'nventories > "4eginning 'nventories @ Ending 'nventories%C9 Inventor* A$$ounts 0e$e#va/le

2.

Cap#tal "tru$ture Anal*s#s 0at#os

De/t to E.u#t* 0at#o Debt to Equity :atio > !otal ?iabilities ---------------------------------------!otal toc(holders' Equity

Interest Covera%e 0at#o 'ncome 4efore 'nterest and 'ncome !ax Expenses 'nterest 7overage ------------------------------------------------:atio > 'nterest Expense 'ncome 4efore 'nterest and 'ncome !ax Expenses> 'ncome 4efore 'ncome !axes @ 'nterest Expense

Cap#tal Mar,et Anal*s#s 0at#os

)r#$e Earn#n%s &)E4 0at#o *ar(et Arice of 7ommon toc( Aer hare Arice Earnings "AE% :atio ----------------------------------------> Earnings Aer hare Mar,et to +oo, 0at#o *ar(et Arice of 7ommon toc( Aer hare *ar(et to 4oo( ------------------------------------------------:atio > 4oo( $alue of Equity Aer 7ommon hare 4oo( $alue of Equity Aer 7ommon hare> 4oo( $alue of Equity for 7ommon toc(C#umber of 7ommon hares D#v#dend 5#eld Dividend Eield > Annual Dividends Aer 7ommon hare -----------------------------------------------*ar(et Arice of 7ommon toc( Aer hare

4oo( $alue of Equity Aer 7ommon hare> 4oo( $alue of Equity for 7ommon toc(C#umber of 7ommon hares D#v#dend )a*out 0at#o Dividend Aayout :atio > 7ash Dividends -------------------------#et 'ncome

0OA 1 )rof#t Mar%#n 6 Assets

urnover 0at#o

0OA 1 )rof#t Mar%#n 6 Assets urnover 0at#o #et 'ncome #et 'ncome ales ------------------ ------------------ -----------------:,A > ---------Average !otal Average !otal ales Assets Assets Arofit *argin > #et 'ncomeC ales Assets !urnover :atio > alesCAverages !otal Assets

2+

"to$, Indexes
toc( indices are benchmar(s that are used to gauge the performance of a group of stoc(s. !here are many different types of indices and each of them is unique in its own way. !his section will ta(e a loo( at the ma&or stoc( indices that investors use and why they use them. Do( 7ones Industr#al Avera%e !he Dow Fones 'ndustrial average is by far the most famous of all the stoc( indices. 't is composed of G2 widely traded blue chip stoc(s "large, well-established companies that are leaders in their respective industries%. !he G2 stoc(s are chosen by the editors of the )all treet Fournal "which is published by Dow Fones H 7ompany%, a practice that dates bac( to the beginning of the century. !he Dow was officially started by 7harles Dow in 153I, at which time it consisted of only 11 stoc(s. !he Dow is computed using a price-weighted indexing system. imply put, the editors at ) F add up the prices of all the stoc(s and then divide by the number of stoc(s in the index. "'n actuality, the divisor is much higher today in order to account for stoc( splits that have occurred in the past.% !he Dow is highly regarded for its simplicity and its history. Jowever, there are some disadvantages in using the Dow as a benchmar(. /irst of all, the Dow only includes prices for G2 stoc(s, yet there are thousands of publicly traded stoc(s on the mar(et. 7ritics of the Dow therefore question whether or not the Dow is a representative snapshot of the mar(et as a whole. Another problem with the Dow is that it is weighted by price, instead of mar(et capitali=ation. o, for example, a stoc( that trades at 0122 but has a mar(et cap of only 01 billion will receive more weight than a stoc( that trades at 0;2 but has a mar(et cap of 0; billion. *ost experts agree that mar(et capitali=ation-weighted indices better reflect the mar(et's performance than price-weighted indexes. Nasda. Compos#te #ot surprisingly, the #asdaq 7omposite trac(s all of the stoc(s listed on the #asdaq exchange. !he index dates bac( to 13K1, which is when the #asdaq exchange was first formali=ed. !he index is used mainly to trac( technology stoc(s, and thus it is not a good indicator of the mar(et as a whole. -nli(e the Dow, the #asdaq is mar(et capitali=ation-weighted, so it ta(es into account the total mar(et value of the companies it trac(s and not &ust their prices. ince the index trac(s all of the ;222@ stoc(s listed on the #asdaq, it includes more than &ust a representative sample of the technology industry. 21

7ritics charge, however, that the index trac(s too many small companies whose performance increases the index's volatility.

A/out #nd#$es
A stoc( mar(et index is a listing of stoc(s, and a statistic reflecting the composite value of its components. 't is used as a tool to represent the characteristics of its component stoc(s, all of which bear some commonality such as trading on the same stoc( mar(et exchange, belonging to the same industry, or having similar mar(et capitali=ations. *any indices compiled by news or financial services firms are used to benchmar( the performance of portfolios such as mutual funds. *pes of #nd#$es toc( mar(et indices may be classed in many ways. A broad-base index represents the performance of a whole stoc( mar(et6 and by proxy, reflects investor sentiment on the state of the economy. !he most regularly quoted mar(et indices are broadbase indices including the largest listed companies on a nation's largest stoc( exchange, such as the American Dow Fones 'ndustrial Average and HA ;22 'ndex, the 4ritish /! E 122, the /rench 7A7 82, the Derman DAL and the Fapanese #i((ei 99;. !he concept may be extended well beyond an exchange. !he Dow Fones )ilshire ;222 !otal toc( *ar(et 'ndex, as its name implies, represents the stoc(s of nearly every publicly traded company in the -nited tates, including all stoc(s traded on the #ew Eor( toc( Exchange and most traded on the #A DAB and American toc( Exchange. !he Europe, Australia, and /ar East 'ndex "EA/E%, published by *organ tanley 7apital 'nternational, is a listing of large companies in developed economies in the Eastern Jemisphere. *ore speciali=ed indices exist trac(ing the performance of specific sectors of the mar(et. !he *organ tanley 4iotech 'ndex, for example, consists of GI American firms in the biotechnology industry. ,ther indices may trac( companies of a certain si=e, a certain type of management, or even more speciali=ed criteria6 one index published by ?inux )ee(ly #ews trac(s stoc(s of companies that sell products and services based on the ?inux operating environment. 3e#%'t#n% An index may also be classified according to the method used to determine its price. 'n a Arice-weighted index such as the Dow Fones 'ndustrial Average, the price of each component 22

stoc( is the only consideration when determining the value of the index. !hus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, and moreover ignoring the relative si=e of the company as a whole. 'n contrast, a mar(et-value weighted or capitali=ation-weighted index such as the Jang eng 'ndex factors in the si=e of the company. !hus, a relatively small shift in the price of a large company will heavily influence the value of the index. 'n a mar(et-share weighted index, price is weighted relative to the number of shares, rather than their total value. !raditionally, capitali=ation- or share-weighted indices all had a full weighting i.e. all outstanding shares were included. :ecently, many of them have changed to a floatad&usted weighting which helps indexing. 'ndices and passive investment management !here has been an accelerating trend in recent decades to create passively managed mutual funds that are based on mar(et indices, (nown as index funds. Advocates claim that index funds routinely beat a large ma&ority of actively managed mutual fundsM one study claimed that over time, the average actively managed fund has returned 1.5N less than the HA ;22 index. ince index funds attempt to replicate the holdings of an index, they obviate the need for6 and thus many costs of6 the research entailed in active management, and have a lower +churn+ rate "the turnover of securities which lose favor and are sold, with the attendant cost of commissions and capital gains taxes%. 'ndices are also a common basis for a related type of investment, the exchange-traded fund or E!/. -nli(e an index fund, which is priced daily, an E!/ is priced continuously, is optionable, and can be sold short. Et'#$al sto$, mar,et #nd#$es A notable speciali=ed index type is those for ethical investing indices that include only those companies satisfying ecological or social criteria, e.g. those of !he 7alvert Droup, Domini, Dow Fones ustainability 'ndex and )ilderhill 7lean Energy 'ndex. Another important trend is strict mechanical criteria for inclusion and exclusion to prevent mar(et manipulation, e.g. as in 7anada when #ortel was permitted to rise to over ;2N of the ! E G22 index value. Ethical indices have a particular interest in mechanical criteria, see(ing to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stoc(s based on complex criteria. Another means of mechanical selection is mar(-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to 23

determine which stoc(s have become too ris(y to hold in the index of concern. 7ritics of such initiatives argue that many firms satisfy mechanical +ethical criteria+, e.g. regarding board composition or hiring practices, but fail to perform ethically with respect to shareholders, e.g. Enron. 'ndeed, the seeming +seal of approval+ of an ethical index may put investors more at ease, enabling scams. ,ne response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so +mar(et transparency+ and +disclosure+ are the only long-term-effective paths to fair mar(ets.

Investment +an, & Inst#tut#onal Investor

Investment +an, A financial intermediary that performs a variety of services. !his includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorgani=ations, and also acting as a bro(er for institutional clients. !he role of the investment ban( begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. Investment +an,er A person representing a financial institution that is in the business of raising capital for corporations and municipalities. An investment ban(er may not accept deposits or ma(e commercial loans. 'nvestment ban(ers are the people who do the grunt wor( for 'A,s and bond issues. Inst#tut#onal Investor A non-ban( person or organi=ation that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. 'nstitutional investors face less protective regulations because it is assumed that they are more (nowledgeable and better able to protect themselves. 30

)atching what the big money is buying can sometimes be a good indicator, as they "supposedly% (now what they are doing. ome examples of institutional investors are pension fund and life insurance companies.

)u/l#$ Offer#n%s
In#t#al )u/l#$ Offer#n% - I)O !he first sale of stoc( by a private company to the public. 'A,s are often issued by smaller, younger companies see(ing capital to expand, but can also be done by large privatelyowned companies loo(ing to become publicly traded. 'n an 'A,, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue "common or preferred%, best offering price and time to bring it to mar(et. Also referred to as a +public offering+. 'A,s can be a ris(y investment. /or the individual investor it is tough to predict what the stoc( will do on its initial day of trading and in the near future since there is often little historical data to analy=e the company with. Also, most 'A,s are of companies going through a transitory growth period and are therefore sub&ect to additional uncertainty regarding their future value. Follo(-On Offer#n% An offering of additional shares after a company has had an initial public offering. !his sometimes means the company is strapped for cash. o they need to issue more shares to pay bills or finance a new pro&ect. "e$ondar* Offer#n% A sale of securities in which one or more ma&or stoc(holders in a company sell all or a large portion of their holdings. !he underwriting proceeds are paid to the stoc(holders, rather than to the corporation. !ypically, such an offering occurs when the founder of a business "and perhaps some of the original financial bac(ers% determine that there is more to be gained by going public than 31

by staying private. !he offering does not increase the number of shares of stoc( outstanding. )rospe$tus 1. A formal legal document describing details of a corporation. !he prospectus is generally created for a proposed offering "usually an 'A,%, but they can still be obtained from existing businesses as well. !he prospectus includes company facts that are vitally important to potential investors. 9. 'n this case of mutual funds, a prospectus describes the fund's ob&ectives, history, manager bac(ground, and financial statements. !he prospectus is a document that ma(es investors aware of the ris(s of an investment. 8nder(r#t#n% 1. !he process by which investment ban(ers raise investment capital from investors on behalf of corporations and governments that are issuing securities "both equity and debt%. 9. !he process of issuing insurance policies. !he word +underwriter+ is said to have come from the practice of having each ris(-ta(er write his or her name under the total amount of ris( that he or she was willing to accept at a specified premium. 'n a way, this is still true today, as new issues are usually brought to mar(et by an underwriting syndicate in which each firm ta(es the responsibility "and ris(% of selling its specific allotment. 8nder(r#ter A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter wor(s closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution networ(. -nderwriters generally receive underwriting fees from their issuing clients, but they also usually earn profits when selling the underwritten shares to investors. Jowever, underwriters assume the responsibility of distributing a securities issue to the public. 'f they can't sell all of the securities at the specified offering price, they may be forced 3!

to sell the securities for less than they paid for them, or retain the securities themselves. ?ead managers and co-managers are those administer more than the other underwriters. 9reens'oe Opt#on An option that allows the underwriting of an 'A, to sell additional shares to the public if the demand is high. !he name comes from the fact that the Dreen the first to issue this type of option. Overallotment Opt#on !he option given to the underwriters to sell more securities than are available in an 'A,. 'nvestors "on a so-called waiting list% hope that some orders will not be confirmed so they can then get in. !o$,-8p A%reement A legally binding contract between the underwriters and insiders of a company prohibiting these individuals from selling any shares of stoc( for a specified period of time. ?oc(-up periods typically last 152 days "six months% but can on occasion last for as little as 192 days or as long as GI; days "one year%. -nderwriters will have company executives, managers, employees and venture capitalists sign loc(-up agreements to ensure an element of stability in the stoc('s price in the first few months of trading. )hen loc(-ups expire, restricted people are permitted to sell their stoc(, which sometimes "if these insiders are loo(ing to sell their stoc(% results in a drastic drop in share price due to the huge increase in supply of stoc(. !o$,-8p "'ares !he number of shares that are prohibited from any sale or exchange for a specified period of time
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34