Monday, 17 March 2014


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 Drawings: Drawings denotes the money withdrawn by the proprietor from the business for his personal use.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. Uniform 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
Net sales
208. Net profit ratio: it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders’ funds: it indicates measures earning power of equity capital.
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to each equity share.
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
---------------------------- X100
Market price per share
212. Price earnings ratio: it a measure for determining the value of a share. May also be used to measure the rate of return expected by investors.
Formula: Market price of share (MPS)
------------------------------------X 100
Earnings per share (EPS)
213. Current ratio: it measures short-term debt paying ability.
Current Assets
Current Liabilities
214. Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings; a measure of the extent of trading on equity.
Formula: Total Long-term Debt
Shareholders’ funds
215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate long-term funds to meet its fixed assets requirements.
Formula: Fixed Assets
Long-term Funds
216. Quick Ratio: The ratio termed as ‘liquidity ratio’. The ratio is ascertained y comparing the liquid assets to current liabilities.
Liquid Assets
Current Liabilities
217. Stock turnover Ratio: The ratio indicates whether investment in inventory in efficiently used or not. It, therefore explains whether investment in inventory within proper limits or not.
Formula: cost of goods sold
Average stock
218. Debtors Turnover Ratio: The ratio the better it is, since it would indicate that debts are being collected more promptly. The ration helps in cash budgeting since the flow of cash from customers can be worked out on the basis of sales.
Formula: Credit sales
Average Accounts Receivable
219. Creditors Turnover Ratio: It indicates the speed with which the payments for credit purchases are made to the creditors.
Formula: Credit Purchases
Average Accounts Payable
220. Working capital turnover ratio: It is also known as Working Capital Leverage Ratio. This ratio indicates whether or not working capital has been effectively utilized in making sales.
Formula: Net Sales
Working Capital
221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments in fixed assets contribute towards sales.
Formula: Net Sales
Fixed Assets
222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for paying dividend.
Formula: Dividend per Equity Share
Earning per Equity share
223. Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or Return on Capital Employed (ROCE). It indicates the percentage of return on the total capital employed in the business.
Formula: Operating profit
------------------------X 100
Capital employed
The term capital employed has been given different meanings a.sum total of all assets Whether fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In the business, i.e., share capital +reserves &surplus +long term loans – (non business assets + fictitious assets). Operating profit means ‘profit before interest and tax’
224. Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges.
Formula: Income before interest and Tax
Interest Charges
225. Fixed Dividend Cover ratio: This ratio is important for preference shareholders entitled to get dividend at a fixed rate in priority to other shareholders.
Formula: Net Profit after Interest and Tax
Preference Dividend
226. Debt Service Coverage ratio: This ratio is explained ability of a company to make payment of principal amounts also on time.
Formula: Net profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship between the proprietor’s funds and the total tangible assets.
Formula: Shareholders funds
Total tangible assets
228. Difference between joint venture and partnership: In joint venture the business is carried on without using a firm name, In the partnership, the business is carried on under a firm name. In the joint venture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system. In the joint venture, profit and loss is ascertained on completion of the venture In the partnership, profit and loss is ascertained at the end of each year. In the joint venture, it is confined to a particular operation and it is temporary. In the partnership, it is confined to a particular operation and it is permanent.
229. Meaning of Working capital: The funds available for conducting day to day operations of an enterprise. Also represented by the excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the business is treated as a separate entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is assumed that a business has a reasonable expectation of continuing business at a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the accounting records only those transactions which can be expressed in terms of money only.
4. Cost concept: - According to this concept, an asset is recorded in the books at the price paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be two aspects – the receiving aspect and the giving aspect; both are recorded by debiting one accounts and crediting another account. This is called double entry.
6. Accounting period concept: - It means the final accounts must be prepared on a periodic basis. Normally accounting period adopted is one year, more than this period reduces the utility of accounting data.
7. Realization concept: - According to this concepts, revenue is considered as being earned on the data which it is realized, i.e., the date when the property in goods passes the buyer and he become legally liable to pay.
8. Materiality concepts: - It is a one of the accounting principle, as per only important information will be taken, and UN important information will be ignored in the preparation of the financial statement.
9. Matching concepts: - The cost or expenses of a business of a particular period are compared with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an increase in owners capital, which is a result of excess of revenue over expenses and loss.
231. Financial analysis: The process of interpreting the past, present, and future financial condition of a company.
232. Income statement: An accounting statement which shows the level of revenues, expenses and profit occurring for a given accounting period.
233. Annual report: The report issued annually by a company, to its share holders. it containing financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the owner of the asset gives the right to use the asset to the user over an agreed period of the time for a consideration.
236. Opportunity cost: The cost associated with not doing something.
237. Budgeting: The term budgeting is used for preparing budgets and other producer for planning,co-ordination,and control of business enterprise.
238. Capital: The term capital refers to the total investment of company in money, tangible and intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization: When a business is unable to earn fair rate on its outstanding securities.
241. Under capitalization: When a business is able to earn fair rate or over rate on it is outstanding securities.
242. Capital gearing: The term capital gearing refers to the relationship between equity and long term debt.
243. Cost of capital: It means the minimum rate of return expected by its investment.
244. Cash dividend: The payment of dividend in cash
245. Define the term accrual: Recognition of revenues and costs as they are earned or incurred. it includes recognition of transaction relating to assets and liabilities as they occur irrespective of the actual receipts or payments.
245. Accrued expenses: An expense which has been incurred in an accounting period but for which no enforceable claim has become due in what period against the enterprises.
246. Accrued revenue: Revenue which has been earned is an earned is an accounting period but in respect of which no enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet enforceable claim by another person which accumulates with the passage of time or the receipt of service or otherwise. It may rise from the purchase of services which at the date of accounting have been only partly performed and are not yet billable.
248. Convention of Full disclosure: According to this convention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information will be made.
249. Convention of consistency: According to this convention it is essential that accounting practices and methods remain unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure relating to the formation of an enterprise. There include legal accounting and share issue expenses incurred for formation of the enterprise.
251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be fixed charge and floating charge.
252. Appropriation: It is application of profit towards Reserves and Dividends.
253. Absorption costing: A method where by the cost is determine so as to include the appropriate share of both variable and fixed costs.
254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a product. It is also called variable cost.
255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related to the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on the sale of fixed assets, interest received from other company investments, profit or loss on foreign exchange, unexpected dividend received.
256. Share premium: The excess of issue of price of shares over their face value. It will be showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the liabilities side under the head of “reserves & surplus”.
257. Accumulated Depreciation: The total to date of the periodic depreciation charges on depreciable assets.
258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.
259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid up share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital assets which are in the process of construction as completion.
261. Convertible Debenture: A debenture which gives the holder a right to conversion wholly or partly in shares in accordance with term of issues.
262. Redeemable Preference Share: The preference share that is repayable either after a fixed (or) determinable period (or) at any time dividend by the management.
263. Cumulative preference shares: A class of preference shares entitled to payment of emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly made non-cumulative preference shares.
264. Debenture redemption reserve: A reserve created for the redemption of debentures at a future date.
265. Cumulative dividend: A dividend payable as cumulative preference shares which it unpaid Emulates as a claim against the earnings of a corporate before any distribution is made to the other shareholders.
266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in future years.
267. Opening Stock: The term ‘opening stock’ means goods lying unsold with the businessman in the beginning of the accounting year. This is shown on the debit side of the trading account.
268. Closing Stock: The term ‘Closing Stock’ includes goods lying unsold with the businessman at the end of the accounting year. The amount of closing stock is shown on the credit side of the trading account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market prices whichever is less” principle.
272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss will be known as determined only as the occurrence or non occurrence of one or more uncertain future events.
273. Contingent Asset: An asset the existence ownership or value of which may be known or determined only on the occurrence or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an existing condition or situation which may arise in future depending on the occurrence of one or more uncertain future events.
275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes included as a separate section of the profit and loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on redemption of the average cost: - the cost of an item at a point of time as determined by applying an average of the cost of all items of the same nature over a period. When weights are also applied in the computation it is termed as weight average cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are not attached to specific assets and are given as security against debt.
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.


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