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Accounting terms Accounting - process of identifying, measuring, and reporting financial information of an entity Accounting Equation - assets = liabilities

+ equity Accounts Payable - money owed to creditors, vendors, etc. Accounts Receivable - money owed to a business, i.e. credit sales Accrual Accounting - a method in which income is recorded when it is earned and expenses are recorded when they are incurred, all independent of cash flow Accruals - a list of expenses that have been incurred and expensed, but not paid or a list of sales that have been completed, but not yet billed Amortization gradual reduction of amounts in an account over time, either assets or liabilities Asset - property with a cash value that is owned by a business or individual Audit Trail a record of every transaction, when it was done, by whom and where, used by auditors when validating the financial statement Auditors third party accountants who review an entitys financial statements for accuracy and provide a statement to that effect Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity Bookkeeping - recording financial information Budgeting the process of assigning forecasted income and expenses to accounts, which amounts will be compared to actual income and expense for analysis of variances Capital Stock found in the equity portion of the balance sheet describing the number of shares sold to shareholders at a predetermined value per share, also called common stock or preferred stock Capital Surplus found in the equity portion of the balance sheet accounting for the amount shareholders paid that is greater or lesser than the capital stock amount Capitalized Expense expenses that are accumulated, not expensed as incurred, to be amortized over a period of time; i.e. the development cost of a new product Chart of Accounts - a listing of a company's accounts and their corresponding numbers Cash-Basis Accounting - a method in which income and expenses are recorded when they are paid. Cash Flow - a summary of cash received and disbursed showing the beginning and ending amounts

Closing the Books/Year End Closing the process of reversing the income and expense for a fiscal or calendar year and netting the amount into retained earnings Cost Accounting - a type of accounting that focuses on recording, defining, and reporting costs associated with specific operating functions Credit - an account entry with a negative value for assets, and positive value for liabilities and equity. Debit - an account entry with a positive value for assets, and negative value for liabilities and equity. Departmental Accounting separating operating divisions into their own sub entities on the income statement, showing individual income, expenses, and net profit by entity Depreciation - recognizing the decrease in the value of an asset due to age and use Dividends amounts paid to shareholders out of current or retained earnings Double-Entry Bookkeeping - system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits) Equity - money owed to the owner or owners of a company, also known as "owner's equity" Financial Accounting - accounting focused on reporting an entity's activities to an external party; ie: shareholders Financial Statement - a record containing the balance sheet and the income statement Fixed Asset - long-term tangible property; building, land, computers, etc. General Ledger - a record of all financial transactions within an entity Goodwill an intangible asset reflecting the value of an entity in excess of its tangible assets Income Statement - a summary of income and expenses Inventory merchandise purchased for resale at a profit Inventory Valuation the method to set the book value of unsold inventory: i.e. LIFO, last in, first out; FIFO, first in, first out; average, an average cost over a given period, last cost, the cost based on the last purchase; standard, a deemed amount related to but not tied to a specific purchase, serialized, based on a uniquely identifiable serial number or character of each inventory item Invoice the original billing from the seller to the buyer, outlining what was purchased and the terms of sale, payment, etc. Job Costing - system of tracking costs associated with a job or project (labor, equipment, etc) and comparing with forecasted costs Journal - a record where transactions are recorded, also known as an "account"

Liability - money owed to creditors, vendors, etc Liquid Asset - cash or other property that can be easily converted to cash Loan - money borrowed from a lender and usually repaid with interest Master Account an account on the general ledger that subtotals the subsidiary accounts assigned to it; i.e. Cash might be the master account for a list of depository accounts at banks Net Income - money remaining after all expenses and taxes have been paid Non Cash Expense - recognizing the decrease in the value of an asset; i.e. depreciation and amortization Non-operating Income - income generated from non-recurring transactions; ie: sale of an old building Note - a written agreement to repay borrowed money; sometimes used in place of "loan" Operating Income - income generated from regular business operations Other Income - income generated from other than regular business operations, i.e. interest, rents, etc. Payroll - a list of employees and their wages Posting the process of entering then permanently saving or archiving accounting data Profit - see "net income" Profit/Loss Statement - see "income statement" Reconciliation the process of matching one set of data to another; i.e. the bank statement to the check register, the accounts payable journal to the general ledger, etc. Retained Earnings the amount of net profit retained and not paid out to shareholders over the life of the business Revenue - total income before expenses. Shareholder Equity - the capital and retained earnings in an entity attributed to the shareholders Single-Entry Bookkeeping - system of accounting in which transactions are entered into one account Statement of Account - a summary of amounts owed to a vendor, lender, etc. Subsidiary Accounts the subaccounts that are totaled on the financial statement under master accounts; i.e. Cash-ABC Bank might be one of several subsidiary accounts that are subtotaled under Cash Supplies assets purchased to be consumed by the entity

Treasury Stock shares purchased by the entity from shareholders, reducing shareholder equity Write-down/Write-off an accounting entry that reduces the value of an asset due to an impairment of that asset; i.e. the account receivable from the bankrupt customerAccounting Conventions The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. The other conventions you will encounter in a set of accounts can be summarised as follows: Monetary measurement Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc. This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later if the customer has been granted some credit terms.

Separate Entity

Realisation

An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts. Accounting Concepts Materiality Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Consistency Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.

Prudence

Matching (or Income should be properly "matched" with the expenses of a given accounting period. "Accruals") Key Characteristics of Accounting Information There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Criteria What it means for the preparation of accounting information

Understandability This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities Relevance This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) This implies consistent treatment of similar items and application of accounting policies This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor). This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

Consistency Comparability

Reliability

Objectivity

Need for Depreciation: Learning Objectives: 1. Why does the need for calculating and charging depreciation arise. The Need for depreciation arises for the following reasons: Ascertainment of True Profit or Loss: Depreciation is a loss. So Unless it is considered like all other expenses and losses, true profit or loss cannot be ascertained. In other words, depreciation must be considered in order to into out true profit or loss of a business. Ascertainment of True Cost of Production:

Goods are produced with the help of plant and machinery which incurs depreciation in the process of production. This depreciation must be considered as a part of the cost of production of goods. Otherwise, the cost f production would be shown less than the true cost. Sales price is fixed normally on the basis of cost of production. So, if the cost of production is shown less by ignoring depreciation, the sale price will also be fixed at low level resulting in a loss to the business. True Valuation of Assets: Value of assets gradually decreases on account of depreciation, if depreciation is not taken into account, the value of asset will be shown in the books at a figure higher than its true value and hence the true financial position of the business will not be disclosed through balance sheet. Replacement of Assets: After sometime an asset will be completely exhausted on account of use. A new asset must then be purchased requiring a large sum of money. If the whole amount of profit is withdrawal from business each year without considering the loss on account of depreciation, necessary sum may not be available for buying the new asset. In such a case the required money is to be collected by introducing fresh capital or by obtaining loan or by selling some other assets. This is contrary to sound commerce policy. Keeping Capital Intact: Capital invested in buying an asset, gradually diminishes on account of depreciation. If loss on account of depreciation is not considered in determining profit or loss at the year end, profit will be shown more. If the excess profit is withdrawal, the working capital will gradually reduce, the business will become weak and its profit earning capacity will also fall.

The difference between Profit and loss account and Balance sheet are;

Balance sheet is a statement of assets and liabilities, whereas profit and loss is an account. Balance sheet discloses the financial position of the business on a particular date, whereas, profit and loss account discloses profits earned or losses suffered during an accounting period. Profit and loss account is prepared for the accounting period ending, whereas, Balance sheet is prepared as at the last day of accounting period. Accounts which are transferred to Balance sheet do not lose their identity and become the opening balances for next period, whereas, those accounts which are transferred to the profit loss account are closed and cease to exist. CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. (4.75%)

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved securities to liabilities (deposits) It regulates the credit growth in India. Some non bankers also wrongly (24%) Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate (8.5) Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.(7.5%)

What is Bank Rate ? (For Non Bankers) : Bank Rate in India is decided by RBI.
This is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that if bank rate is hiked, in all likelihood, banks will soon hikes their own lending rates to ensure that they continue to make (profit.9.5%)