Glossary of Accounting

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Glossary of Accounting

ABC: Activity Based Costing. It is a costing system that uses multiple cost drivers to assign indirect costs (Overhead) to products. This system recognizes the relationship of different activities to the cost drivers. ABC Analysis: It is a part of inventory management in which, the items included in the inventory are classified into different categories as items of higher value occupying lesser space, lower value occupying more space and others. Abnormal gain: Where in a repetitive process operation the process loss is lower than the normal loss, the resulting output will be more. The difference between normal loss and actual loss is referred to as Abnormal gain. Abnormal gain is the result of higher efficiency. Abnormal loss: Any loss of material/product in a repetitive process operation more than a loss that could be reasonably expected under normal working conditions is referred to as Abnormal loss. The resulting output will be lower than expected. Abnormal loss means/implies lower efficiency. Above the line items: This denotes expenses and revenue items that are considered directly for calculation of periodic net income, in contrast to below the line items that affect capital account directly and net income only indirectly. Absorption costing: A method of costing in which all manufacturing costs irrespective of whether they are fixed or variable are treated as cost of the product manufactured. All indirect expenses are added to the cost on the basis of a predetermined absorption rate. Accountant: One who is responsible for approving, recording and reviewing the financial transactions of an organization. His work includes planning, controlling and monitoring transactions too. Accounting: Recording, analyzing and reporting of financial transactions, also including maintenance of records to plan, control and monitor transactions. Accounting Assumptions: The preparation and presentation of accounts are based on certain accounting assumptions. The following have been generally accepted as fundamental accounting assumptions. 1. The enterprise is a going concern. 2. Accounting policies are consistently followed. 3. Revenues and costs are accrued. Accounting Estimates: Due to the inherent uncertainties involved in business activities, certain items appearing in the financial statements cannot be measured accurately. They can only be estimated. (e.g. Bad debts.). The use of reasonable estimates which involve judgments based on the latest information available is essential for preparation of financial statements. Accounting policies: Accounting policies refer to the accounting principles and methods of applying those principles which are generally accepted and adopted by different enterprises in the preparation and presentation of their financial statements. Because of the existence of diverse and complex situations, the choice of appropriate accounting principles and the methods of applying those principles, calls for considerable judgment by the management of the enterprises. Acceptance: Denotes a bill of exchange payable at sight, wherein the drawee (on whom the bill is drawn) has signed the bill indicating his acceptance to what is written in the bill. The term acceptance actually means the action of signing the document as a token of having accepted. It is the action of acceptance that effectively makes the bill a Negotiable Instrument and hence the

accepted sight bill is referred to as Acceptance. The drawee who accepts the bill is referred to as Acceptor. Account sales: Statement submitted by consignee addressed to the consignor containing details of the sales effected by him both in quantity and value, quantity of goods lying with him in stock, expenses incurred on behalf of consignor, commission due to him etc., showing therein the amount due to the consignor after adjusting all amounts due to him and any amount paid earlier. Based on this document consignor will record the relevant transactions in his books. Accrued expenses: Also known asOut-standing expenses. These are expenses incurred during an accounting period for which payment is not made. Payments for such expenses are made only in the next accounting period. Expenses already due for payment are referred to as accrued and due and expenses which are not yet due are referred to as accrued but not due". Accrued income: Also known as outstanding income. (i.e.) Income earned but not received. Earnings during an accounting period recognized as income but are not realized during the accounting period. They are expected to be realized only in the next accounting period. Income already earned and due to be received is referred to as accrued and due and Income earned but not due to be received is referred to as accrued but not due. Adjustment journal entry: An accounting entry made in the General journal to account for, outstanding expenses, income earned but not received, to write off losses (e.g. Bad debts), to make provisions (e.g. for Depreciation) and to rectify the accounting errors made earlier (e.g. Prepaid expenses treated wrongly as expenses.) Amortization: Reduction or liquidation of an amount gradually over a period of time according to a specified schedule. (e. g. Preliminary expenses incurred by a company is usually amortised over a period of initial five years). Annual Report: A Report given by a Company to its shareholders, usually before General body meeting, containing the audited Balance Sheet, its annexed Profit & loss Account, Auditors Report, Directors Report and other financial and business information to be transparent and to comply with relevant enactments. The Report is normally sent along with the Notice inviting the shareholders to the General body meeting. Asset: A probable future tangible or intangible economic benefit obtained or available from a particular entity as result of past transactions or events. Audit: A systematic collection of satisfactory evidences to form an opinion, to attest, and to make a report on, the financial statements or to evaluate whether the management has efficiently discharged its responsibilities. To carryout audit, the auditor obtains the evidences by inspection of documents, enquiries, observation and confirmation by third parties. Bad debt: A debt accounted as due to be received, as long as the possibility of collecting the amount is certain, is considered good. when all possible efforts to collect the amount, without any further loss, have failed, The debt is said to have become bad. A Bad debt represents loss and therefore, has to be written off. Balance Sheet: A financial statement that discloses the assets, liabilities and equities of an entity as on a particular date in conformity with the generally accepted accounting principles, and in compliance with relevant enactments made by the Government. Bill of Exchange: A Bill of Exchange is an instrument in writing containing an un conditional order or an under taking to pay a certain sum of money to a definite person named therein or to his order. A Bill of Exchange that contains an under taking or promise is called a Promissory

Note. In the case of On Demand Bill the amount noted therein is payable on demand. In the case of a Sight Bill, the bill has to be accepted by the drawee, and the amount becomes payable only on maturity. Break Even Point (BEP): Break Even Point is that level of sales at which there is neither profit nor loss. The aggregate contribution achieved on sales is just sufficient to meet the fixed expenses. BEP being a level of sales can be expressed both in quantity and value. Selling price per unit, variable cost per unit and total fixed expenses are the influencing factors. Any change in one or more of them will affect the Break Even Point. Business segments: Divisions of a business organization, authorized to operate within established limitations under the control of their own common management. Capital Asset: Assets not held for sale, conversion or consumption in the ordinary course of business. Capital Redemption Reserve: Capital Redemption Reserve is a reserve created out of revenue profits as required under sec.80 of the Indian Companies Act 1956, for the purpose of redemption of Preference Share Capital. No dividend can be declared out of this reserve. The reserve has to be used in paying up the unissued shares of the company to be issued to its members as fully paid bonus shares. Cash basis: A basis of accounting where by revenue is recognized only when actually received and expenses are recorded only when paid irrespective of the period in which they are earned / incurred. Cash flow statement: A statement that provides relevant information about the cash receipts (cash inflow) and cash payments (cash outflow), in an organization during a particular period. The cash flows resulting from different activities are categorized as from Operating Activities, Investing Activities and Financing Activities. Consistency: It is a fundamental accounting assumption by which it is assumed that the accounting policies followed are consistent from one period to another. Contingent liability: An item which may or may not become a liability depending upon the occurrence or non occurrence of an event on a future date. Occurrence of the event is the determining factor, after which the uncertainty vanishes. It is not necessary that a liability which was contingent earlier should become an actual liability. (e.g. Claims against a company not acknowledged as debt. A suit may be pending before a court. The liability of the company is contingent until a judgment is pronounced by the court.) Contribution: That part of sales proceeds left after meeting the variable cost in full is known as Contribution. Selling price and variable cost per unit are the influencing factors. The aggregate fixed expense of a period is to be met against the total contribution achieved in that period. Contribution remaining, after meeting fixed expenses in full, is profit. If fixed expenses are more than the contribution, the difference will remain as loss. Control account: An account in the General ledger containing the aggregate of all credit and debit postings of a number of related accounts which are maintained in Subsidiary ledgers.(e.g. Total debtors account appearing in general ledger). It is a control account. The control is achieved by comparing the balance in the Total debtors account on any date with the aggregate balance of all individual debtors account balances in the Subsidiary ledger (Debtors ledger) on that date.

Cost plus contract: It is a contract in which the contractor is paid as compensation an amount that includes all agreed and allowable cost incurred, by way of reimbursement, plus a percentage of those cost or a fixed sum for gain. Creditors: Personal accounts showing credit balances representing amounts payable for goods purchased or services availed. The term Accounts- Payable also denotes creditors. Current Assets: Resources that are available or can be readily made available to meet the cost of operations or pay current liabilities. Current Liabilities: Theses are obligations which are payable within a short period from current assets or from current resources. Current Ratio: This ratio is used to judge the short term solvency of a company and is worked out by dividing the aggregate Current Assets by its aggregate Current Liabilities. Cut off date: A selected date by which transactions are currently stopped to carry out certain activities to close the books of accounts for a specified period. (e.g. to take closing stock inventory.) Debtors: Personal accounts showing debit balances representing amounts receivable for goods supplied or services rendered. The term Accounts- Receivable also denotes debtors. Delcredre commission: A special commission over and above the ordinary commission offered by a consignor to the consignee to make him responsible for the bad debt loss. In such cases, if any bad debt loss occurs consignee will have to bear the loss himself. Depreciation: The portion of the cost of a capital asset representing the expiration of life of the asset attributable to wear and tear, deterioration and obsolescence which is written off during a particular period. The cost of the asset less the scrap value at the end of its useful life is the depreciable value of an asset which is written off proportionately over its life. There are different methods for calculating the depreciation, such as Straight line method, Written down value method etc. Discounted cash flow: Present value of future cash flows estimated to be generated. Earnings per share: It is a measure of performance of a company calculated by dividing the profits available to Equity share holders (profits remaining after, making provision for tax payable on income and taking in to account the dividend ,if any, payable on Preference shares) by the number of Equity shares. Economic Ordering Quantity (EOQ): It is the optimum quantity of goods for which if orders are placed, the aggregate order placing cost and the aggregate inventory carrying cost will be equal and economical. There will not be any loss by either way. For any item of goods, annual requirement in units, cost of placing one order, cost of carrying one unit in inventory for one year are the influencing factors. Any change in one or more of them will change the EOQ of that item. Entity: The basic unit upon which accounting and/ or financial reporting activities are focused. Extraordinary items: Events and transactions distinguished by their unusual nature and by the infrequency of their occurrence. They are reported separately in the financial statements. First in first out (FIFO): A method of valuation of inventory, by which the cost are allocated on the assumption that goods are consumed or sold in the order in which they are received and taken in to stock.

Fixed price contract: It is a contract in which the contractor agrees to a fixed contract price as compensation. In some cases, the contract is subject to cost escalation clause, which enables the contractor to claim additional amounts for any loss incurred due to increase in prices. General journal: A record of journal entries in which all entries not recorded in other Journal records such as Sales journal, Purchase journal etc., are recorded. General ledger: A ledger containing all Real, Personal and Nominal accounts item wise individually in detail and control accounts for those items for which the detailed individual accounts are maintained in Subsidiary ledgers. Going concern: It is a fundamental accounting assumption by which it is assumed that an enterprise has neither the intension nor the necessity of liquidation or of curtailing materially, the scale of operation. The chimney will continue to smoke; the grinding wheel will not come to a halt are the two phrases commonly used to refer a Going concern. Historical cost: Refers to Original cost of a fixed asset acquired long back. Internal audit: An appraisal activity, conducted by auditors, working for an organization, of controls within the organization to determine whether prescribed policies and procedures are followed; standards established are met; and all available resources are economically and efficiently used to achieve the objectives of the organization. Internal control: A management control system that provides reasonable assurance to achieve the organizational objectives. Internal rate of return: The Discount rate at which the present value of the future cash flows will exactly be equal to the investment outlay. Joint venture: A venture carried on jointly under a contractual arrangement by two or more venturers to share the gains. All the activities under the agreement will be subjected to joint control while the individual venturer is responsible for all separate and specific activities. Once the venture is over, the venturers after sharing the result as agreed will go apart. Joint venture is different from Partnership mainly because of the absence of continued carrying on of business and the lack of mutual agency relationship which are considered as essential elements of partnership. Key man insurance: An insurance policy taken out on the life of an executive or a senior employee of an organization whose death would cause significant loss to the organization. In the event of death, proceeds of the policy would be payable to the organization which took out the policy. Last in first out (LIFO): A method of valuation of inventory in which the cost are allocated on the assumption that goods are consumed or sold as and when they are purchased. Lease: A lease is a transfer by agreement of user rights of land, building, equipment or other assets by the owner to other person or entity for a specific period of time for a consideration generally known as Lease Rent. The owner of the asset is known as Lessor. The person or entity to which the user rights are transferred is known as Lessee. The terms and conditions on which transfer of user rights is made are known as Lease Terms. Letter of credit: A statement of written commitment issued by a bank to a third party on behalf of a customer on certain terms and conditions.

Liability: Probable future sacrifice of economic benefits arising as a result of past transactions or events. It is a present obligation to be met by transfer of goods, rendering service, or payment of money. Liquid assets: Generally all current assets excluding stock, are considered as Liquid Assets. Liquid Assets usually comprise of cash, cash equivalents and receivables. Liquidation: Winding up activity which involves settlement of debts due to outsiders and distribution of assets to the contributories in the order of priority. Margin of safety: Excess of actual sales over the Break even sales is known as Margin of safety. It can be expressed both in quantity and amount. Greater the Margin of safety better it is. Materiality: An item which might influence the decision of the user of a financial statement is a material item. All material items should be disclosed in financial statements. Operating cycle period: It is the period of time between the acquisition of goods and services, involved in manufacturing process and the final cash realization resulting from sale of finished product. Opportunity Cost: It is the benefit forgone (valued in terms of money) by not selecting the next best alternative use of a resource. In other words, it is the cost of an opportunity lost. Overhead: An element of cost incurred in the production of goods or services which are not directly identifiable with the products or services. They are referred to as Indirect cost. All indirect cost whether it be cost of material, cost of labour, or other expenses are referred to as Overheads. They are further classified as Factory overhead, Administration overhead and Selling and distribution overhead. Overheads can also be classified on the basis of their behaviour as Fixed overheads and Variable overheads. Partnership: A mutual agency relationship founded on agreement between two are more persons to carry on business, either by all or by any one of them acting for all and to share profits. Generally the liability of the partners to third parties in unlimited. (i.e.) The partners are personally liable to the debts of the common business. Their liability is joint and several. Petty cash: Cash set aside and held separately to pay small obligations (e.g. Coffee expenses). Where large number of small payments for sundry expenses have to be made, to avoid expensive documentation in accounting every time, and the risk involved in opening the main cash box frequently for each and every small payment, the system of Petty cash is found very much useful. In Imprest system of petty cash, a fixed amount will be advanced to the petty cashier once, and afterwards payments for petty cash are made as reimbursement of expenses, only on production of vouchers for the amount spent. Price Earnings Ratio (P/E Ratio): This ratio shows how much a companys shares are priced in relation to its earnings. It is worked out by dividing the current price of the companys share by its Earnings per share. Profit volume ratio (P.V. Ratio): Contribution expressed as a percentage on sales volume is known as Profit volume ratio. It is a measure of profitability. Higher the ratio better it is. Selling price per unit, and variable cost per unit are the influencing factors and any change in them will affect the P.V. Ratio. Quick Ratio: Similar to Current Ratio but more stringent. It is calculated by dividing the aggregate current assets excluding stock (i.e. Liquid Assets) by current liabilities. This ratio is popularly known as Acid Test. The ratio is used to judge the immediate solvency of a company. If

the companys Quick Ratio is more than 1, it is comfortable and the company would be able to pay its short term liabilities in time without much difficulty. Reconciliation: Process of correlating one set of records with another set of record or a physical inventory count that involves identifying, explaining and correcting differences. (e.g. Reconciliation of balance at bank as per books of accounts with the balance appearing in the statement of account as furnished by the bank. Reconciliation of profit as per Financial Profit & Loss account with profit as shown by Cost records. etc.) Relevant Costs: Relevant costs are those future costs that differ among the options. They are to be necessarily considered to decide among the options. Therefore, they play a vital role in decision making. Replacement cost: The amount of cash or other consideration that would be required today to replace an existing asset by the same or to acquire its equivalent. Reserve: Appropriation made out of earnings, receipts or other surpluses for a general or specific purpose, other than provision made for a known liability or for diminution in value of assets which are actually charge against profits. Reserves are broadly classified in to Capital Reserves and Revenue Reserves. Any amount classified as Capital Reserve is not available for distribution as dividend. Any Reserve other than a Capital Reserve is generally known as Revenue Reserve. Salvage value: An estimate of the amount that will be realized from the left over of an asset, on destruction by fire or other accidents, or at the end of its useful life. It is some times referred to as Scrap value. Sinking Fund: A fixed sum of money invested/deposited periodically, up to a certain period, allowing it to grow with interest, for the purpose of meeting a lump sum requirement of money, at the end of the period. Sinking Fund can be created either to redeem a liability or to replace an asset. Taxable income: It is the Adjusted Gross Total Income of an accounting year less deductions, if any, allowable under the Income tax Act. In other words, it is the income on which income tax is payable. Trial Balance: A list of account as on a particular date extracted from the ledger kept by double entry, showing debit and credit balances in different columns. It is used as a check measure. The aggregate of debit balances should tally with the aggregate of credit balances. If they do not tally, it is certain that the accounts contain one or more errors. One should note that, even if the Trial balance agrees, there may be errors in the ledger accounts. Under writer: An Under writer is one who guarantees for a commission, either in part or in full, in a public issue, that shares, debentures or bonds issued, will get subscribed. The effect is that in case of any deficit, the Under writer himself will subscribe for the shares etc. to make up the short fall. Unqualified Audit Report: A Report of an auditor, given without restricting the scope, containing no adverse comments on the accounts examined, with respect to any material departure from General Accounting Principles, applicable Accounting Standards and other mandatory compliance and disclosure requirements. Voucher: A document that evidences the authenticity of a transaction.

Working capital: Excess of Current Assets over Current Liabilities. It is also referred to as `Net Current Asset'. The operating activity changes all individual items that are grouped under Current Asset and Current Liabilities. Raw material gets converted to Work in progress, and again to Finished goods. On sales, Finished goods are converted to Receivables and again on collection, to cash or Bank balance, and so on. An increase in working capital is an Application of funds, and a decrease in working capital is a Source of fund. Working papers: Records kept by an auditor of the procedures adopted, the information obtained, the test performed, important conclusions reached etc. while carrying out an audit. Zero Coupon Bonds: Bonds the holder of which is entitled to receive the principal and the accumulated interest in one lump sum payment on maturity. No coupon or warrant will be issued for encashment in between and thus came to be called Zero Coupon Bonds.

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