Introduction of Accounting

In 18th century ‘Luca Pacioli’ introduced the accounting system. Before 18th century the people use the
goods and services in this system is called Barter system.

Luca Pacioli is the father of accounts.

It is used to know the true financial position of an organization as well as financial performance of an
organization.

Definition:
The transaction which can be measured in terms of money in the books of accounts is called Accounting.

If the money related transactions recorded in the books of accounts is called Accounting.

Asset:
Property of the business is called Asset.

Ex: Land & building, plant and machinery.

Fixed Assets:
The assets which are used for the purpose of production are called fixed assets.

Current Assets:
The assets which can be converted into cash within one year is called current assets.

Ex: Sundry debtors.

Sundry debtors:
When a person receives goods from others on credit basis is called “Sundry debtors”.

Liability:
When a person borrows money from others is called “liability”.

Current liability:
The liability which can be repayable within one year is called ‘current liability’.

Long term liability:

The liability which can be repayable within one year is called “current liability”
Sundry creditors:
When one person supplied goods to other’s on credit basis is called ‘sundry creditors’.

Bills Payable:
It means payment able to the creditors.

Bills Receivable:
It means collecting money or debt from the debtors is called “Bills Receivable”.

Trial Balance:
It is a statement it contains debit and credit opening balances.

Balance sheet:
It is a statement it contains information about the Assets & liabilities of an organization.

[To know the true financial position of an organization]

Capital:
The money which is required for the conducting the business activities is called capital.

The capital is divided into two types

1. Fixed capital
2. Working Capital

Fixed Capital:
The capital which is used for the purpose of production of fixed assets is called Fixed Capital. It is called
as Capital expenditure.

Ex: plant and machinery, land and building.

Working capital:
The capital which is used for the purpose of production is called working capital.

Drawings:
When owner withdraws capital or money from the business for his personal use is called drawings.
Personal accounts:
It deals with persons, institutions.

Ex: Ravi A/c, IDBI A/c.

Real account:
It deals with property of business or business property.

Ex: land and building, plant and Machinery.

Nominal Account:
It deals with expenses, losses and incomes of an organization.

Ex: salaries, ages, rent A/c.

Journal:
It is a book in which the day to day business transactions are recorded in a systematic manner (or) in a
order.

Ledger:
It is a book it contains group of accounts is called ledger.

Trail Balance:
It is a statement it contains debit and credit opening balance only.

Final Accounts:
Trading A/c, profit and loss A/c, Balance sheet is called final accounts.

Trading accounts:
It is an account in this we have to record direct expenses of an organization.

Direct expenses:
The expenses which is incurred in manufacturing.

Ex: labor, wages.

Purpose of trading A/c:
Trading A/c gives the information about the manufacturing efficiency of an organization.

[To know the gross profit or gross loss]

Profit and loss Account.

It is an account in this account we record expenses as well as incomes of an organization.

Purpose of profit and loss accounts:

It gives the information about the financial performance of an organization.

Indirect expenses:
The expenses which are involved in administration of business.

Debit:
Giving aspect Debit.

Credit:
Receiving aspect credit.

Bad debts:
Bad debts are which recoverable form debtors are.

Fixed cost:
The cost which remain constant irrespective of the level of production.

Ex: Building Rent.

Variable cost:
The cost which is different with respect to the level of production is called variable cost.

Ex: current bill.

Solvent:
The person who is able to pay debts.
Insolvent:
The person who is unable to pay debts.

Capital Expenditure:
Capital Expenditure is the expenditure which is incurred to buy the fixed assets is called capital
expenditure. It is also called fixed capital.

Why Financial Management:

To maximize the share price.

Accounting Concepts
Concept means rule or condition.

Accounting concepts are classified into following ways.

 Business Entity concept

 Money measurement concept
 Cost concept
 Accounting period concept
 Going concern concept
 Dual Aspect concept

Business Entity Concept

According to this concept, business is separated and owner is separated. Because the reason is all the
business transactions are recorded in the name of the name of the company not in the name of owner,
so therefore here we are separating the business from the owner.

If the owner contribute capital to the business organization. Owner is treated as creditor. The one who
contributes the capital called creditor.

Money Measurement Concept

According to this concept, only money related transactions are recorded in the books of Accounts. Non
monetary transaction are ignored.

Ex: Rent, Commission are the examples of monetary transaction.

Employee honesty are the example of none monetary transaction.

Cost Concept

According to this concept original cost of assets are recorded in the books of accounts we have two
prices.

 Market price.
 Original Price.

Why original cost, why not a Market price ?

To know the true financial position of an organization because the reason is market values are
fluctuates. If we record the market price in the books of accounts we can’t find the true financial
position of the organization.

Ex: Machinery purchased for 1 lakh rupees.

Market value is 3,00,000 Rs, So among these two prices we have to record one lakh rupees in the books
of accounts.

Accounting Period Concept

For measuring the income of an organization the accountant converts 12 months period into 4 equal
quarters. Each quarter consists of 4 months.

Because to find the profits periodically.

Going concern concept

According to this concept business can be continued for a long period of time. Until it is
dissolve.

Dual aspect concept

According to this concept every transaction has two aspects one is debt and another is
credit.

Accounting Conventions:
Accounting conventions means traditions, formalities.

Convention of consistency:

According to this concept accounting policies (or) methods should be same for one accounting year
to another accounting year.
Convention of conservatism:

In the convention it should estimate future losses but not future gains (or) profit. Because if the
profits occur, it is good. But if the losses occur, so every organization has to maintain some Reserves
and surplus to meet the losses.

[Reserves and surplus = a portion of profit kept aside]

Convention of Materiality:

According to this concept, the accountant should attach importance to the material facts and he
ignores non material facts.

Here the accountant should record only the valued assets (or) heavy expense transaction.

But not like small expenses like purchase pens, Rubber are not record in the balance sheet.

Convention of Disclosure:

According to this convention the accountant should disclose (or ) publish reliable or true data to its
investors, creditors, Debtors, Government.

DIFFERENCE BETWEEN ACCOUNTING AND FINANCE:

The difference between Accounting and Finance are

1. Treatment of Funds.
2. Decision making.

In Accounting the treatment of funds is done based on accrual basis.

In Finance the treatment of funds is done based on cash basis.

Treatment of Funds.

Revenue or Income is recognized at the point of sale and not when it actually received.

In cash basis the Revenue is recognized only when it is received in cash.

Decision Making.

The functions of accountant is preparing accounting statements.(Trading A/c, profit/loss A/c, Balance
sheet)
The Function of Finance manager is based on accounting statement. The Financial Manager takes the
decision like the portion of profits is to be distributed to the shareholders. The portion of capital is to be
required to by the fixed assets.

Trademark:

Logo of the company is called trademark. The trademark should short and easy to pronounce.
Trademark does not include national flag, emblems of India. Duration of trademark is 5 to 7 years.

Copyright:

Copyright is an intellectual property right. It is a legal right given by the law to the produce, author, and
composer on his production. Duration of copyright is valid during the life of author.

Ex: Musical works.

Patents:

The person who have come with the new innovative product. The one who come with the innovative
ideas and thoughts those person will be given this patent right. Duration of patent is 17 years from the
patent is granted.

Carriage Inwards:

The transporting cost which is paid by the company that is goods receiving from supplier.

Trading A/c Dr

To Carriage Inwards.

Carriage Outwards:

The transporting cost which is paid by the company that is goods shipping (or) supplying to
customers.

Trade Discount:

When company purchase the bulk quantity of raw materials in such case supplier allow the
discount to the business organization that discount is called trade discount.

Cash Discount:

When the supplier supply the goods to the business organization in such case the supplier he fix the
credit period, if the business organization make the payment with the credit period, he may allow a
discount is cash discount.

(Or)
When the business organization promptly pay the amount to the supplier, then he may allow the
discount is called cash discount.

Share Capital:

Capital collected by the company by issue of shares is called share capital. Share is a part of capital.

Equity Shares:

The shares which are not having preferential rights are called equity shares.

1. The Shares are not having fixed of Rate dividend.

2. They don’t get repayment of capital at the time of liquidations.

3. Equity is a permanent capital because it can’t be repayable.

Preferential Shares:

The shares which are having preferential rights are called preferential shares.

They receive fixed rate of dividend.

They receive Repayment of capital at liquidation.

Types of Preferential shares:

1. Cumulative preference share:

Payment of previous year dividend is called cumulative preference share.

2. Non-cumulative preference share:

In this the companies no need to pay for the previous year dividend. It has to pay
only for only the current year.
3. Participatory:
The preferential share holders who are having right in get fixed rate of dividend,
share in the surplus profits.
4. Non- participatory:
The preferential shareholders who are having right in get fixed rate of dividend and
not having right in share in surplus profits is called non-participatory.
5. Convertible shares:
The preferential share which can be convertible into equity share is called
convertible shares.
6. Non- convertible shares:
The preferential shares cannot be convertible into equity shares is called non-convertible
preferential shares.
Debenture
Debenture is a debt capital, borrowed capital, leveraged capital. The person who purchases
the debenture capital is called debenture holder. The receive income in the form of interest.
They get the fixed rate of interest.

Types of Debenture:
1. Secured debenture:

The security of loan or security of a debenture capital. When a company provides

the security to the debenture holders capital. Those debentures will be called as
secured debenture.

Ex: If the company fails to make the payment of interest and repayment of capital at
the time of dissolution of a company in such case debenture holders they have a
right to sell the fixed assets. By selling the property of the business they recover
their loans.

2. Unsecured debenture:

There is no security for the debenture holders capital in case of failure in payment of
interest or payment of capital. These debenture holders have to right to sale the
property of the business.

3. Redeemable debenture:

When a company repay the debenture capital after a fixed period of time. Those
debenture will be called as Redeemable debenture.

4. Irredeemable debenture:

When a company repay the debenture capital at the time of dissolution of company
is called Irredeemable debenture.

5. Non-Convertible debenture:

The debenture which cannot be convertible into equity shares is called non-
convertible debenture.

6. Registered debenture:

The Name and address of the debenture holders are registered in the books of
company.
7. Bearer debenture:

The name and address of the debenture holders are not registered in the books of
company. While issuing the debenture to the debenture holder’s along with the
debenture, the company issues coupons to the debenture holders at the time of
payment of interest the debenture holders who are having coupons with them those
are eligible for receiving the interest.

Sweat Equity:
These shares are issued for the hardworking nature of employees. The shares are
issued to the employees by the company for the purpose of contributing efforts
towards the growth of a company. The employees become happy on the issue of
these types of shares. These types of shares are to be issued only the hardworking
nature of employees.

Debit Note:

When the purchaser returns the goods in such case purchaser sends one note to the
suppliers is called Debit note. This indicates goods have to be return to the supplier.

Credit Note:

When the supplier receives the goods from the purchaser in such case, the supplier
sends one note to the purchaser is called credit note. This indicates that goods have
been received from the purchaser.

Bonus share:
The shares which are issued to the existing shareholders (or) current shareholders
without any additional cost (or) fee of cost is called bonus share.

Why the business organization issues bonus shares to existing share holders.

If the company fails to earn sufficient profits in such case the shareholders who are
available in the organization. They feel dissatisfaction for removing the
dissatisfaction purpose the Business organization feel the bonus shares to the
existing shareholders without any cash.

Right Share:
Issuing the shares to the existing shareholders for the purpose of arrangement of
capital.
Why the business organization issue right share to existing share holders why
not to the new shareholders.

If the business organization issue the share to the new shareholders. They may
demand more percentage of profits in the organization.

When the company again issues the shares to the new shareholders automatically
then the company share price comes down

Financial Assets:

The Assets which provide returns to the investors is called Financial Assets.

Ex: Shares, debenture, bonds etc.

Why:

If we invest our money in shares, debenture, preferential shares we will get returns,
so this is the reason.

Physical Assets:
The Assets which are used for consumption (self usage)

Ex: House

(or)

The Assets which are not provide returns to investors.

Sometimes physical assets become financial assets:

If we want to have a room we have to pay the rent to the house owner. It is the
income in owner point of view, in our point of view it is expenditure. For owner
“The Building” is physical Assets but it becomes “Financial Asset”. Because the
building is providing money in the form of rent.

Differed shares:

The shares which are issued to the founders of the company.

Preliminary Expenses:

The expenses which are incurred before commencement of business are called
preliminary expenses.

Ex: Heavy advertisement expenses.

 Overheads (Indirect expenses)

Outstanding expenses:

The expenses which are yet to be paid but not at paid.

Expenses A/c Dr
To outstanding expenses.

Promissory note:

It is a debt document it contains the rules and regulations regarding borrowed

capital.

Bond:

Bond is a debt document. The maturity period is more than debenture.

Cheque:

It is a valuable paper where we can withdraw the money.

Warehouse:

It is a place where we can store the goods.

Consignment:

When we sale goods on commission basis is called consignment.

The one who supplies goods – consignor

The one who receives goods – consignee.

Cost of capital:

At which rate the company borrows the capital (or) money from the financial
institution is called cost of capital.

(or)

The minimum rate of return expected by investor on his investment is called cost of
capital.

It is used for taking decision on investment.

Sinking fund:

Gradual repayment of debt. By this liability will be decreased.

Suspense account:
While there are any difference between debit and credit that difference are
transferred to a temporary account is called suspense account.

Operating cost:

The expenses which incurred for the administration of business are called operative
expenses.

Ex: Payment of wages, salaries.

Non operating cost:

The Income which is generated by using the fixed assets of the company is called
operative income.

Ex: plant and machinery.

Financial Instruments:

The Instruments which provide income (or) returns (or) profits to the investors is
called Financial Instruments.

Ex: Shares, bonds, debenture

Non operating expenses:

The expenses which are incurred from the financial instruments are called non
operative expenses.

Ex: Payment of dividend, interest.

Cost of goods sold:

The expenses which incurred for selling goods is called cost of goods sold.

Outstanding expenses:

The expenses which are yet to be paid but not yet paid.

Outstanding Income:

The income which is yet to be received but not yet received.

Prepaid Expenses:

The expenses which are paid in advance.

Ex: Insurance

Prepaid Income:

The Income which is received in advance.

Nature of Debenture:

Long term debt.

Nature of preferential:

Medium term

Nature of Equity:

Permanent capital.

Nature of trade credit.

Short term debt.

Lease Financing.

Renting of a asset for a specific period of time is called lease financing.

(or)

Usage of assets on rental basis for a specific period of time.

(or)

In this lease financing there are two parties are involved that two parties name are
lesser and lessee.

Lesser:

The owner of the asset.

Lessee:

The user of the asset.

When the lesser transfer the asset to the lessee on rent basis for a specific period of
time. The lessee has to pay rental charges to the lesser because the lessee uses the
lesser asset.

The ownership remains with lesser and not with the lessee because the reason is
owner of asset is lesser.

After existing the lessee period the lessee has to handover the asset to the lesser.

Cost of capital:

We can define cost of capital in two types.

Organization point of view:

At which rate the business organization borrow the capital from the investors is
called cost of capital.

(or)

The cost which is incurred for raising the capital is called cost of capital.

For example:

When a business organization borrow the 1lakh @ 15 %. This 15 % is called cost of

capital in the organization point.

In Investor point of view:

The minimum rate of return expected by the investor on his investment is called
cost of capital.

Why cost of capital:

By using the cost of capital we can take the investment decisions either it is worthful
or worthless.

Ex:

If the cost of capital is 20 % and return is 40 %.

20 < 40 it is a worthful investment, because the reason is return is more than te cost
of capital.

Ex:2

If the cost of the capital is 20 % and return is 1%.

 20 >15.

It is a worthless investment, because the reason is return is less than investment.

Factoring:
Converting of credit sales into cash is called factoring. In this factoring [process
there are three parties are involved.

 Supplier
 Mediator
 Customer

The supplier supplies the goods to the customer on credit sales. For collecting the
amount from the customers, one mediator is appointed for collecting the money or
debt form the customer.

This mediator is called factor.

For this, mediator is paid 80 % of commission at first. Remaining commission is

received after collecting entire amount from the customer.

If the factor fails to collect money from the customer. ‘He is the responsible for the
debt. He has to pay the amount to the supplier.

Contra entry:

The transaction which is recorded both sides as well as debit and credit side of the
triple column cash book. It is called contra entry.

This situation will be raised in the following way.

When cash deposited into bank.

Bank A/c Dr

To cash A/c.

When cash withdrawn from bank.

Cash A/c Dr

To Bank A/c.
Capital structure:

The combination of equity capital and debenture and preferential is called capital
structure.

The purpose of this capital structure is to maximize the share price or wealth
maximization.

Optimal capital structure:

The capital structure which provides maximum and maximum profits to the
investor is called optimal capital structure.

CRR:

Cash reserve ratio.

When the commercial banks maintain certain amount of cash with the RBI is called
CRR.

If the CRR increases the availability of cash decreases in the hands of commercial
banks.

If the CRR decreases the availability of cash increases in the hands of commercial
banks.

To control the credit expansion.

If the CRR increases the availability of cash decreases in the hands of commercial
banks. So they have only limited amount of cash. They issues loans to the customers
on this money. If they issue loans to the customers’ then the banks collets higher
rate of interest on the loans.
SRR:

When the commercial banks maintain certain amount of gold or securities is called SKR.

The minimum is 20% and maximum is 40%.

REPO:

When RBI lend the money to the commercial banks is called repo.

Reverse repo:

When RBI borrow the money from the commercial bank is called reverse repo.

Face value:

When the shares issued at a price higher than the face value or par value is called share
premium.

Share discount:

When the shares issued at a price lower than the face value is called share discount.

Forfeiture:

Cancellation of ownership of shares is called forfeiture.

For example: If the shareholder pay the first and second calls and if unable to pay the final
call. Then the organization may cancel the shares.

Bank rate:

At which rate RBI lends or offer money to the commercial banks is called bank rate. For
meeting the short term requirements.

Company:

Company is a voluntary association of persons or group of persons according to the

companies act 1956.

Company is a artificial person. It is not a natural person like human being. It is created by
the law and it is dissolute by the law itself.

It doesn’t have any physical existence.

Being a artificial person it cannot do its operations on its own.

Types of company:
Private company:

When the management of the company is held in the hands of private persons is called
private company.

Ex: Reliance.

Public company:

When the management of the company is held in the hands of public persons is called
public company.

Ex: NTPC, BSNL

National company:

When a company is registered in one country and do its operations within the boundaries
of the country is called national company.

Foreign company:

When a company is registered in one country and do its operations in another country or
beyond the country is called foreign company.

Registered company:

When company which are registered under the companies act 1956 is called registered
company.

Statutory company:

The company which are created by passing a special act either in parliament or assembly is
called statutory company.

Portfolio:

Portfolio means combination of financial assets.

Financial assets: The assets which provides returns to the investors.

Capital Budgeting:

Planning of fixed assets is called capital budgeting.

Cash flow statement:

The statement shows the payment and receipts of the organization.

Purpose:

How the money has been spent.

Funds flow statement:

It is a statement it shows inflows and outflows of the organization.

Bank reconciliation statement:

It is a statement it reconciles the difference between passbook and cash book balances.

Causes:

Unaccredited cheques

Unpaid cheques

Dishonor of cheques.

Arbitrage:

Buying securities in one market at lower price and sell those securities in another market
at higher price.

Capital Market:

Capital market is a market it provides long term funds to the business organization.

It is divided into two types.

1. Primary market.
2. Secondary market.

Primary market:

Where the new company shares are issued.

Secondary market:

It is a market where the existing company shares are traded.

Money market:

It is a market it provides short term funds or below one year.

Consignment:

When the goods are sold on commission basis is called consignment.

In this consignment there are two parties involved that two parties are consignorand
consignee.

Consignor: The one who send the goods is called consignor.

Consignee:

The one who receives the goods is called consignee.

Over riding commission:

The commission which is given to consignee for the purpose of additional sales.

Delcrerary commission:

The commission which is given to the consignee for the purpose of responsible of bad dets.

Marginal cost:

Marginal cost is the additional cost which is incurred for producing additional units.

The cost which is incurred for the purpose of producing additional units.

Call option:

It is a right to purchase the securities.

Put option:

It is the right to sell the securities.

Negotiable instrument :

Transfer of debt from one person to another.

Types of negotiable:

Promissory note

Cheque

Time value of money:

The value of rupee received today is more than the value of money in future .
For example:

In 2004 we have 5 kgs of sugar @ 8 = 40

But we have got 1 kgs of sugar @ 40 = 40

Cost accounting:

The accounting which provides information regarding cost which is helpful to the management.

By using this accounting the management reduces the costs.

Debenture redemption reserve:

The reserve which is used for the purpose of making the debt capital.

Capital asset pricing Model:

This model is used to measure the risk and return of portfolio.

Capital market line.

Security market line.

Depreciation:

Fall in the value of the asset due to regular usage is called depreciation.

Purpose:

To know the true financial position.

Causes:

Wear and tear.

Accidents .

Obsolescence.

Effusion of time.

Types of depreciation.

Fixed installment method:

Under this method depreciation is charged on the asset every year throughout the
effectively life of the asset.

Diminishing Balance method:

Under this method depreciation is charged on the asset on book value every year.

Annuity method:

Under this method along with the interest the original cost of the asset is calculated.

Differed revenue expenditure.

The expenditure which is incurred in one accounting period but it benefits spreads over
number of years.

Ex: Heavy advertisement expenses

Leverage: Debenture

Purpose: wealth maximization

Operating leverage:

Either the business organization efficiently utilizing fixed cost in its operation or not.

Financial leverage:

Either the business organization efficiently manage fixed financial charges or not.

Systematic risk:

The risk which exists or prevails outside environment of an organization. It can be

controlled.

Unsystematic risk:

The risk which exists within the organization.

Financial risk:

The risk which is associated with debt.

.