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:
B. Full disclosure
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. Promissory note: an instrument in writing containing an unconditional undertaking signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six months the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the revenue.
22. Capital income: The term capital income means an income which does not grow out of or pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular business transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose of obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property. Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And loss account when shown on the assets side in the balance sheet.
30. Intangible Assets: Intangible assets mean the assets which is not having the physical appearance. And 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:
> 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:
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
(a)Issue of new shares
(b)Raising long term loans
(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:
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 invest only in securities that are issued by the GOVT. and therefore do 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 appoints 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
208. Net profit ratio: it indicates net margin on sales
Formula: Net profit
————— X 100
209. Return on share holders’ funds: it indicates measures earning power of equity capital.
Profits available for Equity shareholders
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to each equity share.
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
Dividend per share
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)
Earnings per share (EPS)
213. Current ratio: it measures short-term debt paying ability.
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
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
216. Quick Ratio: The ratio termed as ‘liquidity ratio’. The ratio is ascertained y comparing the liquid assets to 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
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
221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments in fixed assets contribute towards sales.
Formula: Net Sales
222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for paying dividend.
Formula: Dividend per Equity Share
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
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
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
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.
281. Difference between Funds flow and Cash flow statement: A Cash flow statement is concerned only with the change in cash position while a funds flow analysis is concerned with change in working capital position between two balance sheet dates. A cash flow statement is merely a record of cash receipts and disbursements. While studying the short-term solvency of a business one is interested not only in cash balance but also in the assets which are easily convertible into cash.
282. Difference between the Funds flow and Income statement:
A funds flow statement deals with the financial resource required for running the business activities. It explains how were the funds obtained and how were they used, whereas an income statement discloses the results of the business activities, i.e., how much has been earned and how it has been spent. A funds flow statement matches the “funds raised” and “funds applied” during a particular period. The source and application of funds may be of capital as well as of revenue nature. An income statement matches the incomes of a period with the expenditure of that period, which are both of a revenue nature.