ACCOUNTING BASICS AND INTERVIEW QUESTIONS ANSWERS
ACCOUNTING BASICS AND
INTERVIEW QUESTIONS ANSWERS
1. Definition of accounting: “the art of recording,
classifying and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least of a financial character and
interpreting the results there of”.
2. Book keeping: It is mainly concerned
with recording of financial data relating to the business operations in a
significant and orderly manner.
3. Concepts of accounting:
A.
Separate entity concept
B.
Going concern concept
C.
Money measurement concept
D.
Cost concept
E.
Dual aspect concept
F.
Accounting period concept
G.
Periodic matching of costs and revenue concept
H.
Realization concept.
4 Conventions of accounting:
A.
Conservatism
B.
Full disclosure
C.
Consistency
D.
Materiality
5. Systems of book keeping:
A.
single entry system
B.
double entry system
6.
Systems of accounting:
A.
Cash system accounting
B. Mercantile system of accounting.
7. Principles of accounting:
A.
Personal a/c: Debit the receiver
Credit
the giver
B. Real a/c: Debit what comes in
Credit
what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
8. Meaning of journal: Journal means
chronological record of transactions.
9. Meaning of ledger: Ledger is a set of
accounts. It contains all accounts of the business enterprise whether real,
nominal, personal.
10. Posting: It means transferring the debit and credit items from the
journal to their respective accounts in the ledger.
11. Trial balance: Trial balance is a
statement containing the various ledger balances on a particular date.
12. Credit note: The customer when returns
the goods get credit for the value of the goods returned. A credit note is sent
to him intimating that his a/c has been credited with the value of the goods
returned.
13. Debit note: When the goods are
returned to the supplier, a debit note is sent to him indicating that his a/c
has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is
recorded on both the debit and credit side of the cashbook is known as the
contra entry.
15. Petty cash book: Petty cash is maintained
by business to record petty cash expenses of the business, such as postage,
cartage, stationery, etc.
16. Promisory note: an instrument in writing
containing an unconditional undertaking signed by the maker, to pay certain sum
of money only to or to the order of a certain person or to the barer of the
instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on
demand.
18. Stale Cheque: A stale cheque means not
valid of cheque that means more than six months the cheque is not valid.
20. Bank reconciliation statement: It is a statement
reconciling the balance as shown by the bank passbook and the balance as shown
by the Cash Book. Obj: to know the difference & pass necessary correcting,
adjusting entries in the books.
21. Matching concept: Matching means requires
proper matching of expense with the revenue.
22. Capital income: The term capital income
means an income which does not grow out of or pertain to the running of the
business proper.
23. Revenue income: The income, which arises
out of and in the course of the regular business transactions of a concern.
24. Capital expenditure: It means an expenditure which
has been incurred for the purpose of obtaining a long term advantage for the
business.
25. Revenue expenditure: An expenditure that
incurred in the course of regular business transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is
incurred during an accounting period but is applicable further periods also.
Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods
were sold on credit.
28. Depreciation: Depreciation
denotes gradually and permanent decrease in the value of asset due to wear and
tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not
represented by tangible possession or property. Examples of preliminary
expenses, discount on issue of shares, debit balance in the profit And loss
account when shown on the assets side in the balance sheet.
30. Intanglbe Assets: Intangible assets mean
the assets which is not having the physical appearance. And it’s have the real
value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means
income which has been earned by the business during the accounting year but
which has not yet been due and, therefore, has not been received.
32. Outstanding Income: Outstanding Income means
income which has become due during the accounting year but which has not so far
been received by the firm.
33. Suspense account: The suspense account is
an account to which the difference in the trial balance has been put
temporarily.
34. Depletion: It implies removal of an available but not replaceable source,
Such as extracting coal from a coal mine.
35. Amortization: The process of writing of
intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to
damage done to a building or other property during tenancy.
37. Capital employed: The term capital employed
means sum of total long term funds employed in the business. i.e.
(Share capital+ reserves & surplus +long term loans – (non
business assets + fictitious assets)
38. Equity shares: Those shares which are
not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are
carrying the pref.rights are called pref. shares Pref.rights in respect of
fixed dividend. Pref.right to repayment of capital in the event of company
winding up.
40. Leverage: It is a force applied at a particular work to get the desired
result.
41. Operating leverage: the operating leverage
takes place when a changes in revenue greater changes in EBIT.
42. Financial leverage: it is nothing but a
process of using debt capital to increase the rate of return on equity
43. Combine leverage: It is used to measure of
the total risk of the firm = operating risk + financial risk.
44. Joint venture: A joint venture is an
association of two or more the persons who combined for the execution of a
specific transaction and divide the profit or loss their of an agreed ratio.
45. Partnership: Partnership is the
relation b/w the persons who have agreed to share the profits of business carried
on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower)
receives advances against its receivables, from financial institutions (called
factor)
47. Capital reserve: The reserve which
transferred from the capital gains is called capital reserve.
48. General reserve: the reserve which is
transferred from normal profits of the firm is called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance
like surplus cash.
50. Minority Interest: Minority interest refers
to the equity of the minority shareholders in a subsidiary company.
51. Capital receipts: Capital receipts may be defined as “non-recurring receipts from
the owner of the business or lender of the money crating a liability to either
of them.
52. Revenue receipts: Revenue receipts may
defined as “A recurring receipts against sale of goods in the normal course of
business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an
association of many persons who contribute money or money’s worth to common
stock and employs it for a common purpose. The common stock so contributed is
denoted in money and is the capital of the company.
54. Types of a company:
1. Statutory companies
2. Government company
3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company
55. Private company: A private co. is which by
its AOA: Restricts the right of the members to transfer of shares Limits the
no. Of members 50. Prohibits any Invitation to the public to subscribe for its
shares or debentures.
56. Public company: A company, the articles
of association of which does not contain the requisite restrictions to make it
a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.
58. Formation of company:
> Promotion
> Incorporation
> Commencement of business
59. Equity share capital: The total sum of equity
shares is called equity share capital.
60. Authorized share capital: It is the maximum amount
of the share capital, which a company can raise for the time being.
61. Issued capital: It is that part of the
authorized capital, which has been allotted to the public for subscriptions.
62. Subscribed capital: it is the part of the
issued capital, which has been allotted to the public
63. Called up capital: It has been portion of
the subscribed capital which has been called up by the company.
64. Paid up capital: It is the portion of the
called up capital against which payment has been received.
65. Debentures: Debenture is a certificate
issued by a company under its seal acknowledging a debt due by it to its
holder.
66. Cash profit: cash profit is the profit
it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a
subsidiary company to public company it satisfies the following
terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public
3. No restriction of the transferable of shares
4. No restriction of no. of members.
5. Accepting deposits from the investors
68. Secret reserves: Secret reserves are
reserves the existence of which does not appear on the face of balance sheet.
In such a situation, net assets position of the business is stronger than that
disclosed by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a
liability.
2. Complete elimination of an asset, or under valuation of an
asset.
69. Provision: provision usually means any amount written off or retained by
way of providing depreciation, renewals or diminutions in the value of assets
or retained by way of providing for any known liability of which the amount
cannot be determined with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the
purpose it was originally made is also considered as reserve Provision is
charge against profits while reserves is an appropriation of profits Creation
of reserve increase proprietor’s fund while creation of provisions decreases
his funds in the business.
71. Reserve fund: The term reserve fund
means such reserve against which clearly investment etc.,
72. Undisclosed reserves: Sometimes a reserve is
created but its identity is merged with some other a/c or group of accounts so
that the existence of the reserve is not known such reserve is called an
undisclosed reserve.
73. Finance management: Financial management
deals with procurement of funds and their effective utilization in business.
74. Objectives of financial management: financial
management having two objectives that Is:
1. Profit maximization: The finance manager has
to make his decisions in a manner so that the profits of the concern are
maximized.
2. Wealth maximization: Wealth maximization means
the objective of a firm should be to maximize its value or wealth, or value of
a firm is represented by the market price of its common stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis
76. Time value of money: The time value of money
means that worth of a rupee received today is different from the worth of a
rupee to be received in future.
77. Capital structure: It refers to the mix of
sources from where the long-term funds required in a business may be raised; in
other words, it refers to the proportion of debt, preference capital and equity
capital.
78. Optimum capital structure: Capital structure is
optimum when the firm has a combination of equity and debt so that the wealth
of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as
the overall cost of capital computed by reference to the proportion of each
component of capital as weights.
80. Financial break-even point: It denotes the level at
which a firm’s EBIT is just sufficient to cover interest and preference
dividend.
81. Capital budgeting: Capital budgeting
involves the process of decision making with regard to investment in fixed
assets. Or decision making with regard to investment of money in longterm
projects.
82. Payback period: Payback period represents
the time period required for complete recovery of the initial investment in the
project.
83. ARR: Accounting or average rates of return means the average annual
yield on the project.
84. NPV: The Net present value of
an investment proposal is defined as the sum of the present values of all
future cash inflows less the sum of the present values of all cash out flows
associated with the proposal.
85. Profitability index: Where different
investment proposal each involving different initial investments and cash
inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of
discounted cash inflows equals the discounted cash out flow.
87. Treasury management: It means it is defined as
the efficient management of liquidity and financial risk in business.
88. Concentration banking: It means identify
locations or places where customers are placed and open a local bank a/c in
each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be
invested in short term instruments in order to earn interest.
90. Ageing schedule: In an ageing schedule the
receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): It
is the maximum amount that banks can lend a borrower towards his working
capital requirements.
92. Commercial paper: A cp is a short term
promissory note issued by a company, negotiable by endorsement and delivery,
issued at a discount on face value as may be determined by the issuing company.
93. Bridge finance: It refers to the loans
taken by the company normally from commercial banks for a short period pending
disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the
financing of high-risk ventures promoted by new qualified ntrepreneurs who
require funds to give shape to their ideas.
95. Debt securitization: It is a mode of
financing, where in securities are issued on the basis of a package of assets
(called asset pool).
96. Lease financing: Leasing is a contract
where one party (owner) purchases assets and permits its views by another party
(lessee) over a specified period
97. Trade Credit: It represents credit
granted by suppliers of goods, in the normal course of business.
98. Over draft: Under this facility a
fixed limit is granted within which the borrower allowed to overdraw from his
account.
99. Cash credit: It is an arrangement
under which a customer is allowed an advance up to certain limit against credit
granted by bank.
100. Clean overdraft: It refers to an advance
by way of overdraft facility, but not back by any tangible security.
101. Share capital: The sum total of the
nominal value of the shares of a company is called share capital.
102. Funds flow statement: It is the statement deals
with the financial resources for running business activities. It explains how
the funds obtained and how they used.
103. Sources of funds: There are two sources of
funds internal sources and external sources. Internal source: Funds from
operations is the only internal sources of funds and some important points add
to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale
of fixed assets Deduct the following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed
assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed
assets (b) Payment of dividend (c)Payment of tax liability (d) Payment of fixed
liability
105. ICD (Inter corporate deposits): Companies can borrow
funds for a short period. For example 6 months or less from another company
which have surplus liquidity? Such deposits made by one company in another
company are called ICD.
106. Certificate of deposits: The CD is a document of
title similar to a fixed deposit receipt issued by banks there is no prescribed
interest rate on such CDs it is based on the prevailing market conditions.
107. Public deposits:
It is very important source of short term and medium term finance. The company
can accept PD from members of the public and shareholders. It has the maturity
period of 6 months to 3 years.
108. Euro issues: The euro issues means
that the issue is listed on a European stock Exchange. The subscription can
come from any part of the world except India.
109. GDR (Global depository receipts): A
depository receipt is basically a negotiable certificate, dominated in us
dollars that represents a non-US company publicly traded in local currency
equity shares.
110. ADR (American depository receipts): Depository
receipts issued by a company in the USA are known as ADRs. Such receipts are to
be issued in accordance with the provisions stipulated by the securities
Exchange commission (SEC) of USA like SEBI in India.
111. Commercial banks: Commercial banks extend
foreign currency loans for international operations, just like rupee loans. The
banks also provided overdraft.
112. Development banks: It offers long-term and
medium term loans including foreign currency loans
113. International agencies: International agencies
like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining
foreign currency.
114. Seed capital assistance: The seed capital
assistance scheme is desired by the IDBI for professionally or technically
qualified entrepreneurs and persons possessing relevantexperience and skills
and entrepreneur traits.
115. Unsecured loans: It constitutes a
significant part of long-term finance available to an enterprise.
116. Cash flow statement: It is a statement
depicting change in cash position from one period to another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future
period. It is an estimate prepared in advance of the period to which it
applies.
120. Budgetary control: It is the system of
management control and accounting in which all operations are forecasted and so
for as possible planned ahead, and the actual results compared with the
forecasted and planned ones.
121. Cash budget: It is a summary statement
of firm’s expected cash inflow and outflow over a specified time period.
122. Master budget: A summary of budget
schedules in capsule form made for the purpose of presenting in one report the
highlights of the budget forecast.
123. Fixed budget: It is a budget, which is
designed to remain unchanged irrespective of the level of activity actually
attained.
124. Zero- base- budgeting: It is a management tool
which provides a systematic method for evaluating all operations and
programmes, current of new allows for budget reductions and expansions in a
rational inner and allows reallocation of source from low to high priority
programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank
pass book and balance shown by the cash book.
127. Objective of BRS: The objective of
preparing such a statement is to know the causes of difference between the two
balances and pass necessary correcting or adjusting entries in the books of the
firm.
128. Responsibilities of accounting: It is a system of control
by delegating and locating the Responsibilities for costs.
129. Profit centre: A centre whose
performance is measured in terms of both the expense incurs and revenue it
earns.
130. Cost centre: A location, person or
item of equipment for which cost may be ascertained and used for the purpose of
cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with
recording, classifying, and summarizing costs for determination of costs of
products or services planning, controlling and reducing such costs and
furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B)
Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct
material direct labour and direct expenses. It is also known as basic or first
or flat cost.
136. Factory cost: It comprises prime cost,
in addition factory overheads which include cost of indirect material indirect
labour and indirect expenses incurred in factory. This cost is also known as
works cost or production cost or manufacturing cost.
137. Cost of production: In office and
administration overheads are added to factory cost, office cost is arrived at.
138. Total cost: Selling and distribution
overheads are added to total cost of production to get the total cost or cost
of sales.
139. Cost unit: A unit of quantity of a
product, service or time in relation to which costs may be ascertained or
expressed.
140.Methods of costing: (A)Job costing
(B)Contract costing (C)Process costing (D)Operation costing (E)Operating
costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b)
direct costing (c) absorption costing (d) uniform costing.
142. Standard costing: standard costing is a
system under which the cost of the product is determined in advance on certain
predetermined standards.
143. Marginal costing: it is a technique of
costing in which allocation of expenditure to production is restricted to those
expenses which arise as a result of production, i.e., materials, labour, direct
expenses and variable overheads.
144. Derivative: derivative is product
whose value is derived from the value of one or more basic variables of
underlying asset.
145. Forwards: a forward contract is customized contracts between two entities
were settlement takes place on a specific date in the future at today’s pre
agreed price.
146. Futures: A future contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Future
contracts are standardized exchange traded contracts.
147. Options: An option gives the holder of the option the right to do
something. The option holder option may exercise or not.
148. Call option: A call option gives the
holder the right but not the obligation to buy an asset by a certain date for a
certain price.
149. Put option: A put option gives the
holder the right but not obligation to sell an asset by a certain date for a
certain price.
150. Option price: Option price is the price
which the option buyer pays to the option seller. It is also referred to as the
option premium.
151. Expiration date: The date which is
specified in the option contract is called expiration date.
152. European option: It is the option at
exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between
future prices and spot prices can be summarized in terms of what is known as
cost of carry.
155. Initial margin: The amount that must be
deposited in the margin a/c at the time of first entered into future contract
is known as initial margin.
156 Maintenance margin: This
is somewhat lower than initial margin.
157. Mark to market: In future market, at the
end of the each trading day, the margin a/c is adjusted to reflect the
investors’ gains or loss depending upon the futures selling price. This is
called mark to market.
158. Baskets: basket options are
options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange
cash flows in the future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is
measure of liquidity of the market. It reflects the costs faced when actually
trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the
market it deals with the long term investment funds. It consists of two markets
1.primary market 2.secondary market.
163. Primary market: Those companies which are
issuing new shares in this market. It is also called new issue market.
164. Secondary market: Secondary
market is the market where shares buying and selling. In India secondary market
is called stock exchange.
165. Arbitrage: It means purchase and
sale of securities in different markets in order to profit from price
discrepancies. In other words arbitrage is a way of reducing risk of loss
caused by price fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships
expressed in mathematical terms between figures which are connected with each
other in same manner.
167. Activity ratio: It is a measure of the
level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool
of money, collected from investors, and is invested according to certain
investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in
the hands of the of the investors MF managed by investment professionals The
value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio
diversification Professional management Reduction in risk Reduction of
transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of
investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means
investors can buy and sell units of fund, at NAV related prices at any time,
directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means
it is open for sale to investors for a specific period, after which further
sales are closed. Any further transaction for buying the units or repurchasing
them, happen, in the secondary markets.
174. Dividend option: investors who choose a
dividend on their investments, will receive dividends from the MF, as when such
dividends are declared.
175. Growth option: investors who do not
require periodic income distributions can be choose the growth option.
176. Equity funds: equity funds are those
that invest pre-dominantly in equity shares of company.
177. Types of equity funds: Simple equity funds
Primary market funds Sectoral funds Index funds
178. Sectoral funds: Sectoral funds choose to
invest in one or more chosen sectors of the equity markets.
179. Index funds: The fund manager takes a
view on companies that are expected to perform well, and invests in these
companies
180. Debt funds: the debt funds are those
that are pre-dominantly invest in debt securities.
181. Liquid funds: the debt funds invest
only in instruments with maturities less than one year.
182. Gilt funds: gilt funds invests only
in securities that are issued by the GOVT. and therefore does not carry any
credit risk.
183. Balanced funds: Funds that invest both in
debt and equity markets are called balanced funds.
184. Sponsor: sponsor is the promoter
of the MF and appoints trustees, custodians and the AMC with prior approval of
SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint
the AMC for managing the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business
face of the MF, as it manages all the affairs of the MF.
187. R & T Agents: the R&T agents are
responsible for the investor servicing functions, as they maintain the records
of investors in MF.
188. Custodians: Custodians are
responsible for the securities held in the mutual fund’s portfolio.
189. Scheme takes over: if an existing MF scheme
is taken over by another AMC, it is called as scheme take over.
190. Meaning of load: Load is the factor that
is applied to the NAV of a scheme to arrive at the price.
192. Market capitalization: market capitalization
means number of shares issued multiplied with market price per share.
193. Price earnings ratio: The ratio between the
share price and the post tax earnings of company is called as price earnings
ratio.
194. Dividend yield: The dividend paid out by
the company, is usually a percentage of the face value of a share.
195. Market risk: It refers to the risk
which the investor is exposed to as a result of adverse movements in the
interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an
investor has to face as a result of a fall in the interest rates at the time of
reinvesting the interest income flows from the fixed income security.
197. Call risk: Call risk is associated
with bonds have an embedded call option in them. This option hives the issuer
the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the
probability that a borrower could default on a commitment to repay debt or band
loans
199. Inflation risk: Inflation risk reflects
the changes in the purchasing power of the cash flows resulting from the fixed
income security.
200. Liquid risk: It is also called market
risk, it refers to the ease with which bonds could be traded in the market.
201. Drawings: Drawings denotes the
money withdrawn by the proprietor from the business for his personal use.
202. Outstanding Income: Outstanding Income means
income which has become due during the accounting year but which has not so far
been received by the firm.
203. Outstanding Expenses: Outstanding Expenses
refer to those expenses which have become due during the accounting period for
which the Final Accounts have been prepared but have not yet been paid.
204. Closing stock: The term closing stock
means goods lying unsold with the businessman at the end of the accounting
year.
205. Methods of depreciation:
1. Unirorm charge methods:
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods:
a. Diminishing balance method
b. Sum of years digits method
c. Double declining method
3. Other methods:
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.
206. Accrued Income: Accrued Income means
income which has been earned by the business during the accounting year but
which has not yet become due and, therefore, has not been received.
207. Gross profit ratio: it indicates the
efficiency of the production/trading operations.
Formula
: Gross
profit
-------------------X100
Net
sales
208. Net profit ratio: it indicates net margin
on sales
Formula: Net
profit
---------------
X 100
Net
sales
209. Return on share holders’ funds: it indicates measures
earning power of equity capital.
Formula:
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of
earnings attributable to each equity share.
Formula:
Profits available for Equity shareholders
----------------------------------------------
Number of Equity shares
211. Dividend yield ratio: it shows the rate of
return to shareholders in the form of dividends based in the market price of the
share
Formula:
Dividend per share
---------------------------- X100
Market price per share
212. Price earnings ratio: it a measure for
determining the value of a share. May also be used to measure the rate of
return expected by investors.
Formula: Market
price of share (MPS)
------------------------------------X
100
Earnings
per share (EPS)
213. Current ratio: it measures short-term
debt paying ability.
Formula:
Current Assets
------------------------
Current Liabilities
214. Debt-Equity Ratio: it indicates the
percentage of funds being financed through borrowings; a measure of the extent
of trading on equity.
Formula: Total
Long-term Debt
---------------------------
Shareholders’
funds
215. Fixed Assets ratio: This ratio explains
whether the firm has raised adequate long-term funds to meet its fixed assets
requirements.
Formula: Fixed
Assets
-------------------
Long-term
Funds
216. Quick Ratio: The ratio termed as
‘liquidity ratio’. The ratio is ascertained y comparing the liquid assets to
current liabilities.
Formula:
Liquid Assets
------------------------
Current Liabilities
217. Stock turnover Ratio: The ratio indicates
whether investment in inventory in efficiently used or not. It, therefore
explains whether investment in inventory within proper limits or not.
Formula: cost
of goods sold
------------------------------
Average
stock
218. Debtors Turnover Ratio: The ratio the better it
is, since it would indicate that debts are being collected more promptly. The
ration helps in cash budgeting since the flow of cash from customers can be
worked out on the basis of sales.
Formula: Credit
sales
----------------------------
Average
Accounts Receivable
219. Creditors Turnover Ratio: It indicates the speed
with which the payments for credit purchases are made to the creditors.
Formula: Credit
Purchases
-----------------------
Average
Accounts Payable
220. Working capital turnover ratio: It is also known as
Working Capital Leverage Ratio. This ratio indicates whether or not working
capital has been effectively utilized in making sales.
Formula: Net
Sales
----------------------------
Working
Capital
221. Fixed Assets Turnover ratio: This ratio indicates the
extent to which the investments in fixed assets contribute towards sales.
Formula: Net
Sales
--------------------------
Fixed
Assets
222 .Pay-outs Ratio: This ratio indicates what
proportion of earning per share has been used for paying dividend.
Formula: Dividend
per Equity Share
--------------------------------------------X100
Earning
per Equity share
223. Overall Profitability Ratio: It is also called as
“Return on Investment” (ROI) or Return on Capital Employed (ROCE). It indicates
the percentage of return on the total capital employed in the business.
Formula: Operating
profit
------------------------X
100
Capital
employed
The term capital employed has been given different meanings
a.sum total of all assets Whether fixed or current b.sum total of fixed assets,
c.sum total of long-term funds employed In the business, i.e., share capital
+reserves &surplus +long term loans – (non business assets + fictitious
assets). Operating profit means ‘profit before interest and tax’
224. Fixed Interest Cover ratio: The ratio is very
important from the lender’s point of view. It indicates whether the business
would earn sufficient profits to pay periodically the interest charges.
Formula: Income
before interest and Tax
---------------------------------------
Interest
Charges
225. Fixed Dividend Cover ratio: This ratio is important
for preference shareholders entitled to get dividend at a fixed rate in
priority to other shareholders.
Formula: Net
Profit after Interest and Tax
------------------------------------------
Preference Dividend
226. Debt Service Coverage ratio: This ratio is explained
ability of a company to make payment of principal amounts also on time.
Formula: Net
profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of
debt-equity ratio . It establishes relationship between the proprietor’s funds
and the total tangible assets.
Formula: Shareholders
funds
------------------------------
Total tangible assets
228. Difference between joint venture and partnership: In
joint venture the business is carried on without using a firm name, In the partnership,
the business is carried on under a firm name. In the joint venture, the
business transactions are recorded under cash system In the partnership, the
business transactions are recorded under mercantile system. In the joint
venture, profit and loss is ascertained on completion of the venture In the
partnership, profit and loss is ascertained at the end of each year. In the
joint venture, 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.
229. Meaning of Working capital: The funds available for
conducting day to day operations of an enterprise. Also represented by the
excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the
business is treated as a separate entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is
assumed that a business has a reasonable expectation of continuing business at
a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the
accounting records only those transactions which can be expressed in terms of
money only.
4. Cost concept: - According to this concept, an asset is
recorded in the books at the price paid to acquire it and that this cost is the
basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be
two aspects – the receiving aspect and the giving aspect; both are recorded by
debiting one accounts and crediting another account. This is called double
entry.
6. Accounting period concept: - It means the final accounts must
be prepared on a periodic basis. Normally accounting period adopted is one
year, more than this period reduces the utility of accounting data.
7. Realization concept: - According to this concepts, revenue is
considered as being earned on the data which it is realized, i.e., the date
when the property in goods passes the buyer and he become legally liable to
pay.
8. Materiality concepts: - It is a one of the accounting
principle, as per only important information will be taken, and UN important
information will be ignored in the preparation of the financial statement.
9. Matching concepts: - The cost or expenses of a business of a
particular period are compared with the revenue of the period in order to
ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an
increase in owners capital, which is a result of excess of revenue over
expenses and loss.
231. Financial analysis: The process of
interpreting the past, present, and future financial condition of a company.
232. Income statement: An accounting statement
which shows the level of revenues, expenses and profit occurring for a given
accounting period.
233. Annual report: The report issued
annually by a company, to its share holders. it containing financial statement
like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations
and hence, it is assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the
owner of the asset gives the right to use the asset to the user over an agreed
period of the time for a consideration.
236. Opportunity cost: The cost associated with
not doing something.
237. Budgeting: The term budgeting is
used for preparing budgets and other producer for planning,co-ordination,and
control of business enterprise.
238. Capital: The term capital refers to the total investment of company in
money, tangible and intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par
value of stocks and bonds out standings.
240. Over capitalization: When a business is unable
to earn fair rate on its outstanding securities.
241. Under capitalization: When a business is able
to earn fair rate or over rate on it is outstanding securities.
242. Capital gearing: The term capital gearing
refers to the relationship between equity and long term debt.
243. Cost of capital: It means the minimum rate
of return expected by its investment.
244. Cash dividend: The payment of dividend
in cash
245. Define the term accrual: Recognition of revenues
and costs as they are earned or incurred. it includes recognition of
transaction relating to assets and liabilities as they occur irrespective of
the actual receipts or payments.
245. Accrued expenses: An expense which has been
incurred in an accounting period but for which no enforceable claim has become
due in what period against the enterprises.
246. Accrued revenue: Revenue which has been
earned is an earned is an accounting period but in respect of which no
enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet
enforceable claim by another person which accumulates with the passage of time
or the receipt of service or otherwise. It may rise from the purchase of
services which at the date of accounting have been only partly performed and
are not yet billable.
248. Convention of Full disclosure: According to this
convention, all accounting statements should be honestly prepared and to that
end full disclosure of all significant information will be made.
249. Convention of consistency: According to this
convention it is essential that accounting practices and methods remain
unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure
relating to the formation of an enterprise. There include legal accounting and
share issue expenses incurred for formation of the enterprise.
251. Meaning of Charge: charge means it is a
obligation to secure an indebt ness. It may be fixed charge and floating
charge.
252. Appropriation: It is application of
profit towards Reserves and Dividends.
253. Absorption costing: A method where by the
cost is determine so as to include the appropriate share of both variable and
fixed costs.
254. Marginal Cost: Marginal cost is the
additional cost to produce an additional unit of a product. It is also called
variable cost.
255. What are the ex-ordinary items in the P&L a/c: The
transaction which is not related to the business is termed as ex-ordinary
transactions or ex-ordinary items. Egg:- profit or losses on the sale of fixed
assets, interest received from other company investments, profit or loss on
foreign exchange, unexpected dividend received.
256. Share premium: The excess of issue of
price of shares over their face value. It will be showed with the allotment
entry in the journal; it will be adjusted in the balance sheet on the
liabilities side under the head of “reserves & surplus”.
257. Accumulated Depreciation: The total to date of the
periodic depreciation charges on depreciable assets.
258. Investment: Expenditure on assets
held to earn interest, income, profit or other benefits.
259. Capital: Generally refers to the amount invested in an enterprise by its
owner. Ex; paid up share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital
assets which are in the process of construction as completion.
261. Convertible Debenture: A debenture which gives
the holder a right to conversion wholly or partly in shares in accordance with
term of issues.
262. Redeemable Preference Share: The preference share that
is repayable either after a fixed (or) determinable period (or) at any time
dividend by the management.
263. Cumulative preference shares: A class of preference
shares entitled to payment of emulates dividends. Preference shares are always
deemed to be cumulative unless they are expressly made non-cumulative
preference shares.
264. Debenture redemption reserve: A reserve created for the
redemption of debentures at a future date.
265. Cumulative dividend: A dividend payable as
cumulative preference shares which it unpaid Emulates as a claim against the
earnings of a corporate before any distribution is made to the other
shareholders.
266. Dividend Equalization reserve: A reserve created to
maintain the rate of dividend in future years.
267. Opening Stock: The term ‘opening stock’
means goods lying unsold with the businessman in the beginning of the
accounting year. This is shown on the debit side of the trading account.
268. Closing Stock: The term ‘Closing Stock’
includes goods lying unsold with the businessman at the end of the accounting
year. The amount of closing stock is shown on the credit side of the trading
account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued
on the basis of “Cost or Market prices whichever is less” principle.
272. Contingency: A condition (or)
situation the ultimate out comes of which gain or loss will be known as
determined only as the occurrence or non occurrence of one or more uncertain
future events.
273. Contingent Asset: An asset the existence
ownership or value of which may be known or determined only on the occurrence
or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an
existing condition or situation which may arise in future depending on the
occurrence of one or more uncertain future events.
275. Deficiency: the excess of liabilities
over assets of an enterprise at a given date is called deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after
providing for proposed appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes
included as a separate section of the profit and loss statement showing
application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on
redemption of the average cost: - the cost of an item at a point of time as
determined by applying an average of the cost of all items of the same nature
over a period. When weights are also applied in the computation it is termed as
weight average cost.
280. Floating Change: Assume change on some or
all assets of an enterprise which are not attached to specific assets and are
given as security against debt.
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