BASICS Meaning of Accounting: According to American Accounting Association Accounting is the process of identifying, measuring and communicating information

to permit judgment and decisions by the users of accounts. Users of Accounts: Generally 2 types. 1. Internal management. 2. External users or Outsiders- Investors, Employees, Lenders, Customers, Government and other agencies, Public. Sub-fields of Accounting: Book-keeping: It covers procedural aspects of accounting work and embraces record keeping function. Financial accounting: It covers the preparation and interpretation of financial statements. Management accounting: It covers the generation of accounting information for management decisions. Social responsibility accounting: It covers the accounting of social costs incurred by the enterprise. Fundamental Accounting equation: Assets = Capital+ Liabilities. Capital = Assets - Liabilities. Accounting elements: The elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, Liabilities and Equity. The elements directly related to the measurements of performance in the profit & loss account are income and expenses. Four phases of accounting process: Journalisation of transactions Ledger positioning and balancing Preparation of trail balance Preparation of final accounts.

Book keeping: It is an activity, related to the recording of financial data, relating to business operations in an orderly manner. The main purpose of accounting for business is to as certain profit or loss for the accounting period. Accounting: It is an activity of analasis and interpretation of the book-keeping records. Journal: Recording each transaction of the business. Ledger: It is a book where similar transactions relating to a person or thing are recorded. Types: Debtors ledger Creditors ledger General ledger Concepts: Concepts are necessary assumptions and conditions upon which accounting is based. Business entity concept: In accounting, business is treated as separate entity from its owners.While recording the transactions in books, it should be noted that business and owners are separate entities.In the transactions of business, personal transactions of the owners should not be mixed. For example: - Insurance premium of the owner etc... Going concern concept: Accounts are recorded and assumed that the business will continue for a long time. It is useful for assessment of goodwill. Consistency concept: It means that same accounting policies are followed from one period to another. Accrual concept: It means that financial statements are prepared on merchantile system only. Types of Accounts: Basically accounts are three types, Personal account: Accounts which show transactions with persons are called personal account. It includes accounts in the name of persons, firms, companies. In this: Debit the reciver Credit the giver. For example: - Naresh a/c, Naresh&co a/c etc Real account: Accounts relating to assets is known as real accounts. A separate account is maintained for each asset owned by the business. 2

In this: Debit what comes in Credit what goes out For example: - Cash a/c, Machinary a/c etc Nominal account: Accounts relating to expenses, losses, incomes and gains are known as nominal account. In this: Debit expenses and loses Credit incomes and gains For example: - Wages a/c, Salaries a/c, commission recived a/c, etc. Accounting conventions: The term convention denotes customs or traditions which guide the accountant while preparing the accounting statements. Convention of consistency: Accounting rules, practices should not change from one year to another. For example: - If Depreciation on fixed assets is provided on straight line method. It should be done year after year. Convention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information which is important to assets, creditors, investors should be disclosued in account statements. Trail Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.The purpose of the trail balance is to establish accuracy of the books of accounts. Trading a/c: The first step of the preparation of final account is the preparation of trading account. It is prepared to know the gross margin or trading results of the business. Profit or loss a/c: It is prepared to know the net profit. The expenditure recording in this a/c is indirect nature. Balance sheet: It is a statement prepared with a view to measure the exact financial position of the firm or business on a fixed date. Outstanding Expenses: These expenses are related to the current year but they are not yet paid before the last date of the financial year.

Prepaid Expenses: There are several items of expenses which are paid in advance in the normal course of business operations. Income and expenditure a/c: In this only the current period incomes and expenditures are taken into consideration while preparing this a/c. Royalty: It is a periodical payment based on the output or sales for use of a certain asset. For example: - Mines, Copyrights, Patent. Hirepurchase: It is an agreement between two parties. The buyer acquires possession of the goods immediately and agrees to pay the total hire purchase price in instalments. Hire purchase price = Cash price + Interest. Lease: A contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments. Double entry: Every transaction consists of two aspects 1. The receving aspect 2. The giving aspect The recording of two aspect effort of each transaction is called double entry. The principle of double entry is, for every debit there must be an equal and a corresponding credit and vice versa. BRS: When the cash book and the passbook are compared, some times we found that the balances are not matching. BRS is preparaed to explain these differences. Capital Transactions: The transactions which provide benefits to the business unit for more than one year is known as capital Transactions. Revenue Transactions: The transactions which provide benefits to a business unit for one accounting period only are known as Revenue Transactions. Deffered Revenue Expenditure: The expenditure which is of revenue nature but its benefit will be for a very long period is called deffered revenue expenditure. Ex: Advertisement expences A part of such expenditure is shown in P&L a/c and remaining amount is shown on the assests side of B/S.

Capital Receipts: The receipts which rise not from the regular course of business are called Capital receipts. Revenue Receipts: All recurring incomes which a business earns during normal cource of its activities. Ex: Sale of good, Discount Received, Commission Received. Reserve Capital: It refers to that portion of uncalled share capital which shall not be able to call up except for the purpose of company being wound up. Fixed Assets: Fixed assets, also called noncurrent assets, are assets that are expected to produce benefits for more than one year. These assets may be tangible or intangible. Tangible fixed assets include items such as land, buildings, plant, machinery, etc Intangible fixed assets include items such as patents, copyrights, trademarks, and goodwill. Current Assets: Assets which normally get converted into cash during the operating cycle of the firm. Ex: Cash, inventory, receivables. Flictitious assets: They are not represented by anything tangible or concrete. Ex: Goodwill, deffered revenue expenditure, etc Contingent Assets: It is an existence whose value, ownership and existence will depend on occurance or non-occurance of specific act. Fixed Liabilities: These are those liabilities which are payable only on the termination of the business such as capital which is liability to the owner. Longterm Liabilities: These liabilities which are not payable with in the next accounting period but will be payable with in next 5 to 10 years are called longterm liabilities. Ex: Debentures. Current Liabilities: These liabilities which are payable out of current assets with in the accounting period. Ex: Creditors, bills payable, etc Contingent Liabilities: A contingent liability is one, which is not an actual liability but which will become an actual one on the happening of some event which is uncertain. These are staded on balance sheet by way of a note. Ex: Claims against company, Liability of a case pending in the court. Bad Debts: Some of the debtors do not pay their debts. Such debt if unrecoverable is called bad debt. Bad debt is a business expense and it is debited to P&L account.

Capital Gains/losses: Gains/losses arising from the sale of assets. Fixed Cost: These are the costs which remains constant at all levels of production. They do not tend to increase or decrease with the changes in volume of production. Variable Cost: These costs tend to vary with the volume of output. Any increase in the volume of production results in an increase in the variable cost and vice-versa. Semi-Variable Cost: These costs are partly fixed and partly variable in relation to output. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processess or products. This differs from marginal costing where fixed costs are excluded. Operating Costing: It is used in the case of concerns rendering services like transport. Ex: Supply of water, retail trade, etc... Costing: Cost accounting is the recording classifying the expenditure for the determination of the costs of products.For thepurpuses of control of the costs. Rectification of Errors: Errors that occur while preparing accounting statements are rectified by replacing it by the correct one. Errors like: Errors of posting, Errors of accounting etc Absorbtion: When a company purchases the business of another existing company that is called absorbtion. Mergers: A merger refers to a combination of two or more companies into one company. Variance Analasys: The deviations between standard costs, profits or sales and actual costs. Profits or sales are known as variances. Types of variances 1: Material Variances 2: Labour Variances 3: Cost Variances 4: Sales or ProfitVariances General Reserves: These reserves which are not created for any specific purpose and are available for any future contingency or expansion of the business.

SpecificReserves: These reserves which are created for a specific purpose and can be utilized only for that purpose. Ex: Dividend Equilisation Reserve Debenture Redemption Reserve Provisions: There are many risks and uncertainities in business. In order to protect from risks and uncertainities, it is necessary to provisions and reserves in every business. Reserve: Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment in the value of assets known to exist at the date of the B/S. Creation of the reserve is to increase the workingcapital in the business and strengthen its financial position. Some times it is invested to purchase out side securities then it is called reserve fund. Types: 1: Capital Reserve: It is created out of capital profits like premium on the issue of shares, profits and sale of assets, etcThis reserve is not available to distribute as dividend among shareholders. 2: Revenue Reserve: Provisions V/S Reserves: 1. Provisions are created for some specific object and it must be utilised for that object for which it is created. Reserve is created for any future liability or loss. 2. Provision is made because of legal necessity but creating a Reserve is a matter of financial strength. 3. Provision must be charged to profit and loss a/c before calculating the net profit or loss but Reserve can be made only when there is profit. 4. Provisions reduce the net profit and are not invested in outside securities Reserve amount can invested in outside securities. Any Reserve which is available for distribution as dividend to the shareholders is called Revenue Reserve.

Goodwill: It is the value of repetition of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. Methods: Average profits method Super profits method Capitalisatioin method Depreciation: It is a perminant continuing and gradual shrinkage in the book value of a fixed asset. Methods: 1. Fixed Instalment method or Stright line method Dep. = Cost price Scrap value/Estimated life of asset. 2. Diminishing Balance method: Under this metod, depreciation is calculated at a certain percentage each year on the balance of the asset, which is bought forward from the previous year. 3. Annuity method: Under this method amount spent on the purchase of an asset is regarded as an investment which is assumed to earn interest at a certain rate. Every year the asset a/c is debited with the amount of interest and credited with the amount of depreciation. EOQ: The quantity of material to be ordered at one time is known EOQ. It is fixed where minimum cost of ordering and carryiny stock. Key Factor: The factor which sets a limit to the activity is known as key factor which influence budgets. Key Factor = Contribution/Profitability Profitability =Contribution/Key Factor Sinking Fund: It is created to have ready money after a particular period either for the replacement of an asset or for the repayment of a liability. Every year some amount is charged from the P&L a/c and is invested in outside securities with the idea, that at the end of the stipulated period, money will be equal to the amount of an asset. Revaluation Account: It records the effect of revaluation of assets and liabilities. It is prepared to determine the net profit or loss on revaluation. It is prepared at the time of reconsititution of partnership or retirement or death of partner.

Realisation Account: It records the realisation of various assets and payments of various liabilities. It is prepared to determine the net P&L on realisation. Leverage: - It arises from the presence of fixed cost in a firm capitalstructure. Generally leverage refers to a relationship between two interrelated variables. These leverages are classified into three types. 1. Operating leverage 2. Financial Leverage. 3. Combined leverage or total leverage. 1. Operating Leverage: It arises from fixed operating costs (fixed costs other than the financing costs) such as depreciation, shares, advertising expenditures and property taxes. When a firm has fixed operatingcosts, a change in 1% in sales results in a change of more than 1% in EBIT %change in EBIT % change in sales The operaying leverage at any level of sales is called degree. Degree of operatingLeverage= Contribution/EBIT Significance: It tells the impact of changes in sales on operating income. If operating leverage is high it automatically means that the break- even point would also be reached at a highlevel of sales. 2. Financial Leverage: It arises from the use of fixed financing costs such as interest. When a firm has fixed cost financing. A change in 1% in E.B.I.T results in a change of more than 1% in earnings per share. F.L =% change in EPS / % change in EBIT Degree of Financial leverage= EBIT/ Profit before Tax (EBT)

Significance: It is double edged sword. A high F.L means high fixed financial costs and high financial risks. 3. Combined Leverage: It is useful for to know about the overall risk or total risk of the firm. i.e, operating risk as well as financial risk. C.L= O.L*F.L = %Change in EPS / % Change in Sales Degree of C.L =Contribution / EBT A high O.L and a high F.L combination is very risky. A high O.L and a low F.L indiacate that the management is careful since the higher amount of risk involved in high operating leverage has been sought to be balanced by low F.L A more preferable situation would be to have a low O.L and a F.L. Working Capital: There are two types of working capital: gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total of current assets and the total of current liabilities. Working Capital Cycle: It refers to the length of time between the firms paying cash for materials, etc.., entering into the production process/ stock and the inflow of cash from debtors (sales) Cash Raw meterials Labour overhead Debtors Capital Budgeting: Process of analyzing, appraising, deciding investment on long term projects is known as capital budgeting. Methods of Capital Budgeting: 1. Traditional Methods Payback period method Average rate of return (ARR) WIP Stock

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2. Discounted Cash Flow Methods or Sophisticated methods Net present value (NPV) Internal rate of return (IRR) Profitability index Pay back period: Required time to reach actual investment is known as payback period. = Investment / Cash flow ARR: It means the average annual yield on the project. = avg. income / avg. investment Or = (Sum of income / no. of years) / (Total investment + Scrap value) / 2) NPV: The best method for the evaluation of an investment proposal is the NPV or discounted cash flow technique. This metod takes into account the time value of money. The sum of the present values of all the cash inflows less the sum of the present value of all the cash outflows associated with the proposal. NPV = Sum of present value of future cash flows Investment IRR: It is that rate at which the sum total of cash inflows aftrer discounting equals to the discounted cash outflows. The internal rate of return of a project is the discount rate which makes net present value of the project equal to zero. Profitability Index: One of the methods comparing such proposals is to workout what is known as the Desirability Factor or Profitability Index. In general terms a project is acceptable if its profitability index value is greater than 1. Derivatives: A derivative is a security whose price ultimately depends on that of another asset. Derivative means a contact of an agreement. Types of Derivatives: 1. Forward Contracts 2. Futures 3. Options 4. Swaps.

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1. Forward Contracts: - It is a private contract between two parties. An agreement between two parties to exchange an asset for a price that is specified todays. These are settled at end of contract. 2. Future contracts: - It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. Futures will be traded in exchanges only.These is settled daily. Futures are four types: 1. Commodity Futures: Wheat, Soyo, Tea, Corn etc..,. 2. Financial Futures: Treasury bills, Debentures, Equity Shares, bonds, etc.., 3. Currency Futures: Major convertible Currencies like Dollars, Founds, Yens, and Euros. 4. Index Futures: Underline assets are famous stock market indicies. NewYork Stock Exchange. 3. Options: An option gives its Owner the right to buy or sell an Underlying asset on or before a given date at a fixed price. There can be as may different option contracts as the number of items to buy or sell they are, Stock options, Commodity options, Foreign exchange options and interest rate options are traded on and off organized exchanges across the globe. Options belong to a broader class of assets called Contingent claims. The option to buy is a call option.The option to sell is a PutOption. The option holder is the buyer of the option and the option writer is the seller of the option. The fixed price at which the option holder can buy or sell the underlying asset is called the exercise price or Striking price. A European option can be excercised only on the expiration date where as an American option can be excercised on or before the expiration date. Options traded on an exchange are called exchange traded option and options not traded on an exchange are called over-the-counter optios.

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When stock price (S1) <= Exercise price (E1) the call is said to be out of money and is worthless. When S1>E1 the call is said to be in the money and its value is S1-E1. 4. Swaps: Swaps are private agreements between two companies to exchange

casflows in the future according to a prearranged formula. So this can be regarded as portfolios of forward contracts. Types of swaps: 1: Interest rate Swaps 2: Currency Swaps. 1. Interest rate Swaps: The most common type of interest rate swap is Plain Venilla . Normal life of swap is 2 to 15 Years. It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments. 2. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage. Warrants: Options generally have lives of upto one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called warrants and are generally traded over- the- counter. American Depository Receipts (ADR): It is a dollar denominated negotiable instruments or certificate. It represents non-US companies publicly traded equity. It was devised into late 1920s. To help American investors to invest in overseas securities and to assist non US companies wishing to have their stock traded in the American markets. These are listed in American stock market or exchanges. Global DepositoryReceipts (GDR): GDRs are essentially those instruments which posseses the certain number of underline shares in the custodial domestic bank of the company i.e., GDR is a negotiable instrument in the form of depository receipt or

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certificate created by the overseas depository bank out side India and issued to nonresident investors against the issue of ordinary share or foreign currency convertible bonds of the issuing company. GDRs are entitled to dividends and voting rights since the date of its issue. Capital account and Current account: The capital account of international purchase or sale of assets. The assets include any form which wealth may be held. Money held as cash or in the form of bank deposits, shares, debentures, debt instruments, real estate, land, antiques, etc The current account records all income related flows. These flows could arise on account of trade in goods and services and transfer payment among countries. A net outflow after taking all entries in current account is a current account deficit. Govt. expenditure and tax revenues do not fall in the current account. Dividend Yield: It gives the relationship between the current price of a stock and the dividend paid by its issuing company during the last 12 months. It is caliculated by aggregating past years dividend and dividing it by the current stock price. Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is under priced, where as a low dividend yield is considered evidence that a stock is over priced. Bridge Financing: It refers to loans taken by a company normally from commercial banks for a short period, pending disbursement of loans sanctioned by financial institutions. Generally, the rate of interest on bridge finance is higher as compared with term loans. Shares and Mutual Funds Company: Sec.3 (1) of the Companys act, 1956 defines a company. Company means a company formed and registered under this Act or existing company. Public Company: A corporate body other than a private company. In the public company, there is no upperlimit on the number of share holders and no restriction on transfer of shares.

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Private Company: A corporate entity in which limits the number of its members to 50. Does not invite public to subscribe to its capital and restricts the members right to transfer shares. Liquidity: A firms liquidity refers to its ability to meet its obligations in the short run. An assets liquidity refers to how quickly it can he sold at a reasonable price. Cost of Capital: The minimum rate of the firm must earn on its investments in order to satisfy the expectations of investors who provide the funds to the firm. Capital Structure: The composition of a firms financing consisting of equity, preference, and debt. Annual Report: The report issued annually by a company to its shareholders. It primarily contains financial statements. In addition, it represents the managements view of the operations of the previous year and the prospects for future. Proxy: The authorization given by one person to another to vote on his behalf in the shareholders meeting. Joint Venture: It is a temporary partenership and comes to an end after the compleation of a particular venture. No limit in its. Insolvency: In case a debtor is not in a position to pay his debts in full, a petition can be filled by the debtor himself or by any creditors to get the debtor declared as an insolvent. Long Term Debt: The debt which is payable after one year is known as long term debt. Short Term Debt: The debt which is payable with in one year is known as short term debt. Amortisation: This term is used in two senses 1. Repayment of loan over a period of time 2.Write-off of an expenditure (like issue cost of shares) over a period of time. Arbitrage: A simultaneous purchase and sale of security or currency in different markets to derive benefit from price differential. Stock: The Stock of a company when fully paid they may be converted into stock. Share Premium: Excess of issue price over the face value is called as share premium. Equity Capital: It represents ownership capital, as equity shareholders collectively own the company. They enjoy the rewards and bear the risks of ownership. They will have the voting rights.

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Authorized Capital: The amount of capital that a company can potentially issue, as per its memorandum, represents the authorized capital. Issued Capital: The amount offered by the company to the investors. Subscribed capital: The part of issued capital which has been subscribed to by the investors Paid-up Capital: The actual amount paid up by the investors. Typically the issued, subscribed, paid-up capitals are the same. Par Value: The par value of an equity share is the value stated in the memorandum and written on the share scrip. The par value of equity share is generally Rs.10 or Rs.100. Issued price: It is the price at which the equity share is issued often, the issue price is higher than the Par Value Book Value: The book value of an equity share is = Paid up equity Capital + Reserve and Surplus / No. Of outstanding shares equity Market Value (M.V): The Market Value of an equity share is the price at which it is traded in the market. Preference Capital: It represents a hybrid form of financing it par takes some characteristics of equity and some attributes of debentures. It resembles equity in the following ways 1. Preference dividend is payable only out of distributable profits. 2. Preference dividend is not an obligatory payment. 3. Preference dividend is not a tax deductible payment. Preference capital is similar to debentures in several ways. 1. The dividend rate of Preference Capital is fixed. 2. Preference Capital is redeemable in nature. 3. Preference Shareholders do not normally enjoy the right to vote. Debenture: For large publicly traded firms. These are viable alternative to term loans. Skin to promissory note, debentures is instruments for raising long term debt. Debenture holders are creditors of company.

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Stock Split: The dividing of a companys existing stock into multiple stocks. When the Par Value of share is reduced and the number of share is increased. Calls-in-Arrears: It means that amount which is not yet been paid by share holders till the last day for the payment. Calls-in-advance: When a shareholder pays with an instalment in respect of call yet to make the amount so received is known as calls-in-advance. Calls-in-advance can be accepted by a company when it is authorized by the articles. Forfeiture of share: It means the cancellation or allotment of unpaid shareholders. Forfeiture and reissue of shares allotted on pro rata basis in case of over subscription. Prospectus: Inviting of the public for subscribing on shares or debentures of the company. It is issued by the public companies. The amount must be subscribed with in 120 days from the date of prospects. Simple Interest: It is the interest paid only on the principal amount borrowed. No interest is paid on the interest accured during the term of the loan. Compound Interest: It means that, the interest will include interest caliculated on interest. Time Value of Money: Money has time value. A rupee today is more valuable than a rupee a year hence. The relation between value of a rupee today and value of a rupee in future is known as Time Value of Money. NAV: Net Asset Value of the fund is the cumulative market value of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units out standing. Buying and Selling into funds is done on the basis of NAV related prices. The NAV of a mutual fund are required to be published in news papers. The NAV of an open end scheme should be disclosed ona daily basis and the NAV of a closed end scheme should be disclosed atleast on a weekly basis. Financial markets: The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt

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instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Primary Market: It provides the channel for sale of new securities. Primary Market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. Secondary Market: It refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Majority of the trading is done in the secondary market. It comprises of equity markets and the debt markets. Difference between the primary market and the secondary market: In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/preissued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Overthe-Counter (OTC) is a part of the dealer market. SEBI and its role: The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto. Portfolio: A portfolio is a combination of investment assets mixed and matched for the purpose of investors goal.

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Market Capitalisation: The market value of a quoted company, which is caliculated by multiplying its current share price (market price) by the number of shares in issue, is called as market capitalization. Book Building Process: It is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. Cut off Price: In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called Cut off price. This is decided by the issuer and LM after considering the book and investors appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price. Bluechip Stock: Stock of a recognized, well established and financially sound company. Penny Stock: Penny stocks are any stock that trades at very low prices, but subject to extremely high risk. Debentures: Companies raise substantial amount of longterm funds through the issue of debentures. The amount to be raised by way of loan from the public is divided into small units called debentures. Debenture may be defined as written instrument acknowledging a debt issued under the seal of company containing provisions regarding the payment of interest, repayment of principal sum, and charge on the assets of the company etc Large Cap / Big Cap: Companies having a large market capitalization For example, In US companies with market capitalization between $10 billion and $20 billion, and in the Indian context companies market capitalization of above Rs. 1000 crore are considered large caps. Mid Cap: Companies having a mid sized market capitalization, for example, In US companies with market capitalization between $2 billion and $10 billion, and in the

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Indian context companies market capitalization between Rs. 500 crore to Rs. 1000 crore are considered mid caps. Small Cap: Refers to stocks with a relatively small market capitalization, i.e. lessthan $2 billion in US or lessthan Rs.500 crore in India. Holding Company: A holding company is one which controls one or more companies either by holding shares in that company or companies are having power to appoint the directors of those company The company controlled by holding company is known as the Subsidary Company. Consolidated Balance Sheet: It is the b/s of the holding company and its subsidiary company taken together. Partnership act 1932: Partnership means an association between two or more persons who agree to carry the business and to share profits and losses arising from it. 20 members in ordinary trade and 10 in banking business IPO: First time when a company announces its shares to the public is called as an IPO. (Intial Public Offer) A Further public offering (FPO): It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. Rights Issue (RI): It is when a listed company which proposes to issue fresh securities to its shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. Preferential Issue: It is an issue of shares or of convertible securities by listed companies to a select group of persons under sec.81 of the Indian companies act, 1956 which is neither a rights issue nor a public issue.This is a faster way for a company to raise equity capital. Index: An index shows how specified portfolios of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price

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movement of the basket of securities indicates the index movement, whether upward or downwards. Dematerialisation: It is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investors account with his depository participant. Bull and Bear Market: Bull market is where the prices go up and Bear market where the prices come down. Exchange Rate: It is a rate at which the currencies are bought and sold. FOREX: The Foreign Exchange Market is the place where currencies are traded. The overall FOREX markets is the largest, most liquid market in the world with an average traded value that exceeds $ 1.9 trillion per day and includes all of the currencies in the world.It is open 24 hours a day, five days a week. Mutual Fund: A mutual fund is a pool of money, collected from investors, and invested according to certain investment objectives. Asset Management Company (AMC): A company set up under Indian companys act, 1956 primarily for performing as the investment manager of mutual funds. It makes investment decisions and manages mutual funds in accordance with the scheme objectives, deed of trust and provisions of the investment management agreement. Back-End Load: A kind of sales charge incurred when investors redeem or sell shares of a fund. Front-End Load: A kind of sales charge that is paid before any amount gets invested into the mutual fund. Off Shore Funds: The funds setup abroad to channalise foreign investment in the domestic capital markets. Under Writer: The organization that acts as the distributor of mutual funds share to broker or dealers and investors. Registrar: The institution that maintains a registry of shareholders of a fund and their share ownership. Normally the registrar also distributes dividends and provides periodic statements to shareholders. Trustee: A person or a group of persons having an overall supervisory authority over the fund managers.

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Bid (or Redemption) Price: In newspaper listings, the pre-share price that a fund will pay its shareholders when they sell back shares of a fund, usually the same as the net asset value of the fund. Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

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Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper

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and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Earning per share (EPS): It is a financial ratio that gives the information regarding earing available to each equity share. It is very important financial ratio for assessing the state of market price of share. The EPS statement is applicable to the enterprise whose equity shares are listed in stock exchange. Types of EPS: 1. Basic EPS ( with normal shares) 2. Diluted EPS (with normal shares and convertible shares)

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EPS Statement Sales Less: variable cost

: **** **** Contribution *** **** EBIT ***** *** EBT **** **** Earnimgs **** **** *****

Less: Fixed cost

Less: Interest Less: Tax Less: preference dividend Earnings available to equity Share holders (A) EPS=A/ No of outstanding Shares EBIT and Operating Income are same

The higher the EPS, the better is the performance of the company. Cash Flow Statement: It is a statement which shows inflows (receipts) and outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. According to the revised accounting standard 3, an enterprise prepares a cash flow statement and should present it for each period for which financial statements are presented. Funds Flow Statement: Fund means the net working capital. Funds flow statement is a statement which lists first all the sources of funds and then all the applications of funds that have taken place in a business enterprise during the particular period of time for which the statement has been prepared. The statement finally shows the net increase or net decrease in the working capital that has taken place over the period of time.

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Float: The difference between the available balance and the ledger balance is referred to as the float. Collection Float: The amount of cheque deposited by the firm in the bank but not cleared. Payment Float: The amount of cheques issued by the firm but not paid for by the bank. Operating Cycle: The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables. Marginal Costing: Sales VaribleCost=FixedCost Profit/Loss Contribution= Sales VaribleCost Contribution= FixedCost Profit/Loss P / V Ratio= (Contribution / Sales)*100 Per 1 unit information is given, P / V Ratio = (Contribution per Unit / Sales per Unit)*100 Two years information is given, P / V Ratio= (Change in Profit / Change in Sales) * 100 Through Sales, P / V Ratio Contribution =Sales * P / v Ratio Through P / V Ratio, Contribution Sales = Contribution / P / VRatio Break Even Point (B.E.P) IN Value = (Fixed Cost) / (P / v Ratio) OR (Fixed Cost / Contribution) * Sales In Units = Fixed Cost / Contribution OR Fixed Cost / (SalesPrice per Unit V.C per Unit) Margin of Safety = Total Sales Sales at B.E.P (OR) Profit / PV Ratio Sales at desired profit (in units) = FixedCost+ DesiredProfit / Contribution per Unit Sales at desired profit (in Value) = FixedCost+ DesiredProfit / PV ratio (OR) Contribution / PV Ratio

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RATIOANALYSIS A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways. Comparison of a firm its own performance in the past. Comparison of a firm with the another firm in the industry Comparison of a firm with the industry as a whole TYPES OF RATIOS Liquidity ratio Activity ratio Leverage ratio profitability ratio 1. Liquidity ratio: These are ratios which measure the short term financial position of a firm. i. Current ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its currnt liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities. i.e Current assets Current liabilities Ideal ratio is 2:1 ii. Quick or Acid test Ratio: It tells about the firms liquidity position. It is a fairly stringent measure of liquidity. =Quick assets/Current Liabilities Ideal ratio is 1:1 Quick Assets =Current Assets Stock - Prepaid Expenses iii. Absolute Liquid Ratio: A.L.A/C.L AL assets=Cash + Bank + Marketable Securities. 27

2. Activity Ratios or Current Assets management or Efficiency Ratios: These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of 8 is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly. = Cost of goods Sold/ Avg. Inventory Debtors Turnover Ratio: It expresses the relationship between debtors and sales. =Credit Sales /Average Debtors Creditors Turnover Ratio: It expresses the relationship between creditors and purchases. =Credit Purchases /Average Creditors Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal. = Net Sales / Fixed Assets Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firms funds. =CGS/Working Capital =W.C=C.A C.L. 3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company. Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners. = outsiders fund/Share holders fund Ideal ratios 2:1 Proprietary ratio or Equity ratio: It expresses the relationship between networth and total assets. A high proprietary ratio is indicativeof strong financial position of the business. =Share holders funds/Total Assets 28

= (Equity Capital +Preference capital +Reserves Fictitious assets) / Total Assets Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets. The ideal ratio is 0.67 =Fixed Assets (After Depreciation.)/Shareholder Fund 4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment. Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business. =PBIT /Capital Employed Return on Proprietors Fund / Earning Ratio: Earn on Net Worth =Net Profit (After tax)/Proprietors Fund Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment. =Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital

Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company. =MPS (Market Price per Share) / EPS Earning Price Ratio/ Earning Yield: = EPS / MPS EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares. Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share. = Dividend per share (DPS) / Market value per share 29

 Dividend pay-out ratio: It is the ratio of dividend per share to earning per share. = DPS / EPS DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of C.G.S=Sales- G.P G.P= Sales C.G.S G.P.Ratio =G.P/Net sales*100 Net Sales= Gross Sales Return inward- Cash discount allowed Net profit ratio=Net Profit/ Net Sales*100 Operating Profit ratio=O.P/Net Sales*100 Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as, EBIT/Capital employed. The return on capital employed should be more than the cost of capital employed. Capital employed =EquityCapital+Preference sharecapital+Reserves+Longterm loans and Debentures - Fictitious Assets Non OperatingAssets Accounting Glossary Above the line: This term can be applied to many aspects of accounting. It means transactions, assets etc., that are associated with the everyday running of a business. See below the line. Account: A section in a ledger devoted to a single aspect of a business (eg. a Bank account, Wages account, Office expenses account). ordinary shares

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Accounting cycle: This covers everything from opening the books at the start of the year to closing them at the end. In other words, everything you need to do in one accounting year accounting wise. Accounting equation: The formula used to prepare a balance sheet: assets=liability+equity. Accounts Payable: An account in the nominal ledger which contains the overall balance of the Purchase Ledger. Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger. Accounts Receivable: An account in the nominal ledger which contains the overall balance of the Sales Ledger. Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a business's customers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the sales ledger. Accretive: If a company acquires another and says the deal is 'accretive to earnings', it means that the resulting PE ratio (price/earnings) of the acquired company is less than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because company 'A' is effectively increasing its EPS (because it now has more shares and it paid less for them compared with its own share price). (see dilutive) Accruals: If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they 'accrue' or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.

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Accrual method of accounting: Most businesses use the accrual method of accounting (because it is usually required by law). When you issue an invoice on credit (ie. regardless of whether it is paid or not), it is treated as a taxable supply on the date it was issued for income tax purposes (or corporation tax for limited companies). The same applies to bills received from suppliers. (This does not mean you pay income tax immediately, just that it must be included in that year's profit and loss account). Accumulated Depreciation Account: This is an account held in the nominal ledger which holds the depreciation of a fixed asset until the end of the asset's useful life (either because it has been scrapped or sold). It is credited each year with that year's depreciation, hence the balance increases (ie. accumulates) over a period of time. Each fixed asset will have its own accumulated depreciation account. Advanced Corporation Tax (ACT - UK only - no longer in use): This is corporation tax paid in advance when a limited company issues a dividend. ACT is then deducted from the total corporation tax due when it has been calculated at year end. ACT was abolished in April 1999. See Corporation Tax. Amortization: The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed period of time. Example: if a loan of 12,000 is amortized over 1 year with no interest, the monthly payments would be 1000 a month. Annualize: To convert anything into a yearly figure. Eg. if profits are reported as running at 10k a quarter, then they would be 40k if annualized. If a credit card interest rate was quoted as 1% a month, it would be annualized as 12%. Appropriation Account: An account in the nominal ledger which shows how the net profits of a business (usually a partnership, limited company or corporation) have been used. Arrears: Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent. Assets: Assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business. Typical breakdown includes 'Fixed assets', 'Current assets' and 'non-current assets'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to cash,

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money in the bank, debtors etc. Non-current refers to any assets which do not easily fit into the previous categories (such as Deferred expenditure). At cost: The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the retail price. Audit: The process of checking every entry in a set of books to make sure they agree with the original paperwork (eg. checking a journal's entries against the original purchase and sales invoices). Audit Trail: A list of transactions in the order they occurred. Bad Debts Account: An account in the nominal ledger to record the value of unrecoverable debts from customers. Real bad debts or those that are likely to happen can be deducted as expenses against tax liability (provided they refer specifically to a customer). Bad Debts Reserve Account: An account used to record an estimate of bad debts for the year (usually as a percentage of sales). This cannot be deducted as an expense against tax liability. Balance Sheet: A summary of all the accounts of a business. Usually prepared at the end of each financial year. Balancing Charge: When a fixed asset is sold or disposed of, any loss or gain on the asset can be reclaimed against (or added to) any profits for income tax purposes. This is called a balancing charge. Bankrupt: If an individual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, bankrupt. In the case of a limited company or corporation in the same position, the term used is insolvent. Below the line: This term is applied to items within a business which would not normally be associated with the everyday running of a business. See above the line. Bill: A term typically used to describe a purchase invoice (eg. an invoice from a supplier). Bought Ledger: See Purchase Ledger.

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Burn Rate: The rate at which a company spends its money. Example: if a company had cash reserves of $120m and it was currently spending $10m a month, then you could say that at the current 'burn rate' the company will run out of cash in 1 year. CAGR: (Compound Annual Growth Rate) The year on year growth rate required to show the change in value (of an investment) from its initial value to its final value. If a $1 investment was worth $1.52 over three years, the CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15] Called-up Share capital: The value of unpaid (but issued shares) which a company has requested payment for. See Paid-up Share capital. Capital: An amount of money put into the business (often by way of a loan) as opposed to money earned by the business. Capital account: A term usually applied to the owners equity in the business. Capital Allowances (UK specific): The depreciation on a fixed asset is shown in the Profit and Loss account, but is added back again for income tax purposes. In order to be able to claim the depreciation against any profits the Inland Revenue allow a proportion of the value of fixed assets to be claimed before working out the tax bill. These proportions (usually calculated as a percentage of the value of the fixed assets) are called Capital Allowances. Capital Assets: See Fixed Assets. Capital Employed (CE): Gross CE=Total assets, Net CE=Fixed assets plus (current assets less current liabilities). Capital Gains Tax: When a fixed asset is sold at a profit, the profit may be liable to a tax called Capital Gains Tax. Calculating the tax can be a complicated affair (capital gains allowances, adjustments for inflation and different computations depending on the age of the asset are all considerations you will need to take on board). Cash Accounting: This term describes an accounting method whereby only invoices and bills which have been paid are accounted for. However, for most types of business in the UK, as far as the Inland Revenue are concerned as soon as you issue an invoice (paid or not), it is treated as revenue and must be accounted for. An exception is VAT: Customs & Excise normally require you to account for VAT on an accrual basis,

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however there is an option called 'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if most of your sales are on credit, you may benefit from this scheme - contact your local Customs & Excise office for the current rules and turnover limits). Cash Book: A journal where a business's cash sales and purchases are entered. A cash book can also be used to record the transactions of a bank account. The side of the cash book which refers to the cash or bank account can be used as a part of the nominal ledger (rather than posting the entries to cash or bank accounts held directly in the nominal ledger - see 'Three column cash book'). Cash Flow: A report which shows the flow of money in and out of the business over a period of time. Cash Flow Forecast: A report which estimates the cash flow in the future (usually required by a bank before it will lend you money, or take on your account). Cash in Hand: See Undeposited funds account. Charge Back: Refers to a credit card order which has been processed and is subsequently cancelled by the cardholder contacting the credit card company directly (rather than through the seller). This results in the amount being 'charged back' to the seller (often incurs a small penalty or administration fee to the seller). Chart of Accounts: A list of all the accounts held in the nominal ledger. CIF (Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of goods where the seller agrees to supply the goods, pay the insurance, and pay the freight charges until the goods reach the destination (usually a port - rather than the actual buyers address). After that point, the responsibility for the goods passes to the buyer. Circulating assets: The opposite to Fixed assets. Circulating assets describe those assets that turn from cash to goods and back again (hence the term circulating). Typically, you buy some raw materials, start to manufacture a product (the asset is called work in progress at this point), produce a product (it is now stock), sell it (it is now back to cash again). Closing the books: A term used to describe the journal entries necessary to close the sales and expense accounts of a business at year end by posting their balances to the

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profit and loss account, and ultimately to close the profit & loss account too by posting its balance to a capital or other account. Companies House (UK only): The title given to the government department which collects and stores information supplied by limited companies. A limited company must supply Companies House with a statement of its final accounts every year (eg. trading and profit and loss accounts, and balance sheet). Compensating error: A double-entry term applied to a mistake which has cancelled out another mistake. Compound interest: Apply interest on the capital plus all interest accrued to date. Eg. A loan with an annually applied rate of 10% for 1000 over two years would yield a gross total of 1210 at the end of the period (year 1 interest=100, year two interest=110). The same loan with simple interest applied would yield 1200 (interest on both years is 100 per year). Contra account: An account created to offset another account. Eg: a Sales contra account would be Sales Discounts. They are accounts included in the same section of a set of books, which when compared together, give the net balance. Example: Sales=10,000 Sales Discounts=1,000 therefore Net Sales=9,000. This example, affecting the revenue side of a business, is also referred to as Contra revenue. The telltale sign of a contra account is that it has the oposite balance to that expected for an account in that section (in the above example, the Sales Discounts balance would be shown in brackets - eg. it has a debit balance where Sales has a credit balance). Control Account: An account held in a ledger which summarises the balance of all the accounts in the same or another ledger. Typically each subsidiary ledger will have a control account which will be mirrored by another control account in the nominal ledger (see 'Self-balancing ledgers'). Cook the books: Falsify a set of accounts. See also creative accounting. Cost accounting: An area of management accounting which deals with the costs of a business in terms of enabling the management to manage the business more effectively. Cost-based pricing: Where a company bases its pricing policy solely on the costs of manufacturing rather than current market conditions.

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Cost-benefit: Calculating not only the financial costs of a project, but also the cost of the effects it will have from a social point of view. This is not easy to do since it requires valuations of intangible items like the cost of job losses or the effects on the environment. Genetically modified crops are a good example of where cost-benefits would be calculated - and also impossible to answer with any degree of certainty! Cost centre: Splitting up your expenses by department. Eg. rather than having one account to handle all power costs for a company, a power account would be opened for each depatrment. You can then analyse which department is using the most power, and hopefully find of way of reducing those costs. Cost of finished goods: The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance, and less any other overheads. This balance is subsequently transferred to the trading account. Cost of Goods Sold (COGS): A formula for working out the direct costs of your stock sold over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock. Cost of Sales: A formula for working out the direct costs of your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock. Also, see Cost of Goods Sold. Creative accounting: A questionable! means of making a companies figures appear more (or less) appealing to shareholders etc. An example is 'branding' where the 'value' of a brand name is added to intangible assets which increases shareholders funds (and therefore decreases the gearing). Capitalizing expenses is another method (ie. moving them to the assets section rather than declaring them in the Profit & Loss account). Credit: A column in a journal or ledger to record the 'From' side of a transaction (eg. if you buy some petrol using a cheque then the money is paid from the bank to the petrol account, you would therefore credit the bank when making the journal entry). Credit Note: A sales invoice in reverse. A typical example is where you issue an invoice for 100, the customer then returns 25 worth of the goods, so you issue the customer with a credit note to say that you owe the customer 25.

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Creditors: A list of suppliers to whom the business owes money. Creditors (control account): An account in the nominal ledger which contains the overall balance of the Purchase Ledger. Current Assets: These include money in the bank, petty cash, money received but not yet banked (see 'cash in hand'), money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale. They are termed 'current' because they are active accounts. Money flows in and out of them each financial year and we will need frequent reports of their balances if the business is to survive (eg. 'do we need more stock and have we got enough money in the bank to buy it?'). Current cost accounting: The valuing of assets, stock, raw materials etc. at current market value as opposed to its historical cost. Current Liabilities: These include bank overdrafts, short term loans (less than a year), and what the business owes its suppliers. They are termed 'current' for the same reasons outlined under 'current assets' in the previous paragraph. Customs and Excise: The government department usually responsible for collecting sales tax (eg. VAT in the UK). Days Sales Outstanding (DSO): How long on average it takes a company to collect the money owed to it. See: ratios.html (the first item in the list).

Debenture: This is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the company's assets so should the company fail, the debenture holder will have first call on any assets left after the company has been wound up. Debit: A column in a journal or ledger to record the 'To' side of a transaction (eg. if you are paying money into your bank account you would debit the bank when making the journal entry). Debtors: A list of customers who owe money to the business. Debtors (control account): An account in the nominal ledger which contains the overall balance of the Sales Ledger. Deferred expenditure: Expenses incurred which do not apply to the current accounting period. Instead, they are debited to a 'Deferred expenditure' account in the non-current

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assets area of your chart of accounts. When they become current, they can then be transferred to the profit and loss account as normal. Depreciation: The value of assets usually decreases as time goes by. The amount or percentage it decreases by is called depreciation. This is normally calculated at the end of every accounting period (usually a year) at a typical rate of 25% of its last value. It is shown in both the profit & loss account and balance sheet of a business. See straightline depreciation. Dilutive: If a company acquires another and says the deal is 'dilutive to earnings', it means that the resulting P/E (price/earnings) ratio of the acquired company is greater than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because company 'A' is effectively decreasing its EPS (because it now has more shares and it paid more for them in comparison with its own share price). (see Accretive) Dividends: These are payments to the shareholders of a limited company. Double-entry book-keeping: A system which accounts for every aspect of a transaction - where it came from and where it went to. This from and to aspect of a transaction (called crediting and debiting) is what the term double-entry means. Modern double-entry was first mentioned by G Cotrugli, then expanded upon by L Paccioli in the 15th century. Drawings: The money taken out of a business by its owner(s) for personal use. This is entirely different to wages paid to a business's employees or the wages or remuneration of a limited company's directors (see 'Wages').

EBIT: Earnings before interest and tax (profit before any interest or taxes have been deducted). EBITA: Earnings before interest, tax and amortization (profit before any interest, taxes or amortization have been deducted).

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EBITDA: Earnings before interest, tax, depreciation and amortization (profit before any interest, taxes, depreciation or amortization have been deducted). Encumbrance: A liability (eg. a mortgage is an encumbrance on a property). Also, any money set aside (ie. reserved) for any purpose. Entry: Part of a transaction recorded in a journal or posted to a ledger. Equity: The value of the business to the owner of the business (which is the difference between the business's assets and liabilities). Error of Commission: A double-entry term which means that one or both sides of a double-entry has been posted to the wrong account (but is within the same class of account). Example: Petrol expense posted to Vehicle maintenance expense. Error of Ommission: A double-entry term which means that a transaction has been ommitted from the books entirely. Error of Original Entry: A double-entry term which means that a transaction has been entered with the wrong amount. Error of Principle: A double-entry term which means that one or both sides of a double-entry has been posted to the wrong account (which is also a different class of account). Example: Petrol expense posted to Fixtures and Fittings. Expenses: Goods or services purchased directly for the running of the business. This does not include goods bought for re-sale or any items of a capital nature (see Stock and Fixed Assets). FIFO: First In First Out. A method of valuing stock. Fiscal year: The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (eg. 1st April 2001 to 31st March 2002). Fixed Assets: These consist of anything which a business owns or buys for use within the business and which still retains a value at year end. They usually consist of major items like land, buildings, equipment and vehicles but can include smaller items like tools. (see Depreciation) Fixtures & Fittings: This is a class of fixed asset which includes office furniture, filing cabinets, display cases, warehouse shelving and the like.

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Flash earnings: A news release issued by a company that shows its latest quarterly results. Flow of Funds: This is a report which shows how a balance sheet has changed from one period to the next. FOB: An abbreviation of Free On Board. It generally forms part of an export contract where the seller pays all the costs and insurance of sending the goods to the port of shipment. After that, the buyer then takes full responsibility. If the goods are to travel by train, it's called FOR (Free on Rail). Freight collect: The buyer pays the shipping costs. Gearing (AKA: leverage): The comparison of a company's long term fixed interest loans compared to its assets. In general two different methods are used: 1. Balance sheet gearing is calculated by dividing long term loans with the equity (or proprietor's net worth). 2. Profit and Loss gearing: Fixed interest payments for the period divided by the profit for the period. General Ledger: See Nominal Ledger. Goodwill: This is an extra value placed on a business if the owner of a business decides it is worth more than the value of its assets. It is usually included where the business is to be sold as a going concern. Gross loss: The balance of the trading account assuming it has a debit balance. Gross profit: The balance of the trading account assuming it has a credit balance. Growth and Acquisition (G&A): Describes a way a company can grow. Growth means expanding through its normal operations, Acquisition means growth through buying up other companies. Historical Cost: Assets, stock, raw materials etc. can be valued at what they originally cost (which is what the term 'historical cost' means), or what they would cost to replace at today's prices (see Price change accounting). Impersonal Accounts: These are accounts not held in the name of persons (ie. they do not relate directly to a business's customers and suppliers). There are two types, see Real and Nominal.

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Imprest System: A method of topping up petty cash. A fixed sum of petty cash is placed in the petty cash box. When the petty cash balance is nearing zero, it is topped up back to its original level again (known as 'restoring the Imprest'). Income: Money received by a business from its commercial activities. See 'Revenue'. Inland Revenue: The government department usually responsible for collecting your tax. Insolvent: A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only insolvent, but in the UK, is operating illegally (Insolvency act 1986). Intangible assets: Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples. See tangible assets. Integration Account: See Control Account. Inventory: A subsidiary ledger which is usually used to record the details of individual items of stock. Inventories can also be used to hold the details of other assets of a business. See Perpetual, Periodic. Invoice: A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice). Journal(s): A book or set of books where your transactions are first entered. Full details Journal entries: A term used to describe the transactions recorded in a journal. Journal Proper: A term used to describe the main or general journal where other journals specific to subsidiary ledgers are also used. K - no entries Landed Costs: The total costs involved when importing goods. They include buying, shipping, insuring and associated taxes. Ledger: A book in which entries posted from the journals are re-organised into accounts. Full details Leverage: See Gearing.

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Liabilities: This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of accounts which have a credit balance. LIFO: Last In Last Out. A method of valuing stock. Long term liabilities: These usually refer to long term loans (ie. a loan which lasts for more than one year such as a mortgage). Loss: See Net loss. Management accounting: Accounts and reports are tailor made for the use of the managers and directors of a business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for the Inland Revenue and any other parties not directly connected with the business. See Cost accounting. Manufacturing account: An account used to show what it cost to produce the finished goods made by a manufacturing business. Matching principle: A method of analysing the sales and expenses which make up those sales to a particular period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in building and selling the house to one period - usually in order to see how much profit was made). Maturity value: The (usually projected) value of an intangible asset on the date it becomes due. MD&A: Management Discussion and Analysis. Usually seen in a financial report. The information disclosed has deen derived from analysis and discussions held by the management (and is presented usually for the benefit of shareholders). Memo billing (aka memo invoicing): Goods ordered and invoiced on approval. There is no obligation to buy. Memorandum accounts: A name for the accounts held in a subsidiary ledger. Eg. the accounts in a sales ledger. Minority interest: A minority interest represents a minority of shares not held by the holding company of a subsidiary. It means that the subsidiary is not wholly owned by the holding company. The minority shareholdings are shown in the holding company accounts as long term liabilities.

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Moving average: A way of smoothing out (i.e. removing the highs and lows) of a series of figures (usually shown as a graph). If you have, say, 12 months of sales figures and you decide on a moving average period of 3 months, you would add three months together, divide that by three and end up with an average for each month of the three month period. You would then plot that single figure in place of the original monthly points on your graph. A moving average is useful for displaying trends. See Normalize. Multiple-step income statement (aka Multi-step): An income statement (aka Profit and Loss) which has had its revenue section split up into sub-sections in order to give a more detailed view of its sales operations. Example: a company sells services and goods. The statement could show revenue from services and associated costs of those revenues at the start of the revenue section, then show goods sold and cost of goods sold underneath. The two sections totals can then be amalgamted at the end to show overall sales (or gross profit). See Single-step income statement. Narrative: A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, where the other side of the entry went to (or came from). Net loss: The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss account shows a debit balance). Net of Tax: The price less any tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the 'net of tax' price would be $10 Net profit: The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss account shows a credit balance). Net worth: See Equity. Nominal Accounts: A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts (as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts. Nominal Ledger: A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the

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nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person). Full details Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business. This is usually done using a Moving average. Opening the books: Every time a business closes the books for a year, it opens a new set. The new set of books will be empty, therefore the balances from the last balance sheet must be copied into them (via journal entries) so that the business is ready to start the new year. Ordinary Share: This is a type of share issued by a limited company. It carries the highest risk but usually attracts the highest rewards. Original book of entry: A book which contains the details of the day to day transactions of a business (see Journal). Overheads: These are the costs involved in running a business. They consist entirely of expense accounts (eg. rent, insurance, petrol, staff wages etc.). Paid-up Share capital: The value of issued shares which have been paid for. See Called-up Share capital. P.A.Y.E (UK only): 'Pay as you earn'. The name given to the income tax system where an employee's tax and national insurance contributions are deducted before the wages are paid. Pareto optimum: An economic theory by Vilfredo Pareto. It states that the optimum allocation of a society's resources will not happen whilst at least one person thinks he is better off and where others perceive themselves to be no worse. Pay on delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them. Periodic inventory: A Periodic Inventory is one whose balance is updated on a periodic basis, ie. every week/month/year. See Inventory. PE ratio: An equation which gives you a very rough estimate as to how much confidence there is in a company's shares (the higher it is the more confidence). The

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equation is: current share price multiplied by earnings and divided by the number of shares. 'Earnings' means the last published net profit of the company. Perpetual inventory: A Perpetual Inventory is one whose balance is updated after each and every transaction. See Inventory. Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the Sales and Purchase Ledgers. Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a cheque or other form of payment is not suitable). Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher). Point of Sale (POS): The place where a sale of goods takes place, eg. a shop counter. Post Closing Trial Balance: This is a trial balance prepared after the balance sheet has been drawn up, and only includes balance sheet accounts. Posting: The copying of entries from the journals to the ledgers. Preference Shares: This is a type of share issued by a limited company. It carries a medium risk but has the advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but usually at a fixed rate). Pre-payments: One or more accounts set up to account for money paid in advance (eg. insurance, where part of the premium applies to the current financial year, and the remainder to the following year). Price change accounting: Accounting for the value of assets, stock, raw materials etc. by their current market value instead of the more traditional Historic Cost. Prime book of entry: See Original book of entry. Profit: See Gross profit, Net profit, and Profit and Loss Account. Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or loss of a business (ie. whether a business has earned more than it has spent in the current year). Full details Profit margin: The percentage difference between the costs of a product and the price you sell it for. Eg. if a product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as your 'mark-up'.

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Pro-forma accounts (pro-forma financial statements): A set of accounts prepared before the accounts have been officially audited. Often done for internal purposes or to brief shareholders or the press. Pro-forma invoice: An invoice sent that requires payment before any goods or services have been despatched. Provisions: One or more accounts set up to account for expected future payments (eg. where a business is expecting a bill, but hasn't yet received it). Purchase Invoice: See Invoice. Purchase Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger. Q no entries Raw Materials: This refers to the materials bought by a manufacturing business in order to manufacture its products. Real accounts: These are accounts which deal with money such as bank and cash accounts. They also include those dealing with property and investments. In the case of bank and cash accounts they can be held in the nominal ledger, or balanced in a journal (eg. the cash book) where they can then be looked upon as a part of the nominal ledger when compiling a balance sheet. Property and investments can be held in subsidiary ledgers (with associated control accounts if necessary) or directly in the nominal ledger itself. Realisation principle: The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, ie. its 'real' (or realised) value. Rebate: If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a rebate for the remaining 9 months) Receipt: A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately. Reconciling: The procedure of checking entries made in a business's books with those on a statement sent by a third person (eg. checking a bank statement against your own records).

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Refund: If you return some goods you have just bought (for whatever reason), the company you bought them from may give you your money back. This is called a 'refund'. Reserve accounts: Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts). A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends. Retail: A term usually applied to a shop which re-sells other people's goods. This type of business will require a trading account as well as a profit and loss account. Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of the profits. Retainer: A sum of money paid in order to ensure a person or company is available when required. Retention ratio: The proportion of the profits retained in a business after all the expenses (usually including tax and interest) are taken into account. The algorithm is retained profits divided by profits available for ordinary shareholders (or available for the proprietor/partners in the case of unincorporated companies). Revenue: The sales and any other taxable income of a business (eg. interest earned from money on deposit). Run Rate: A forecast for the year based on the current year to date figures. If a company's 1st quarter profits were, say, $25m, they may announce that the run rate for the year is $100m. Sales: Income received from selling goods or a service. See Revenue. Sales Invoice: See Invoice. Sales Ledger: A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

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Self Assessment (UK only): A new style of income tax return introduced for the 1996/1997 tax year. If you are self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to calculate your own income tax. Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger. Self-employed: The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company). Selling, General & Administrative expense (SG&A): The expenses involved in running a business. Service: A term usually applied to a business which sells a service rather than manufactures or sells goods (eg. an architect or a window cleaner). Shareholders: The owners of a limited company or corporation. Share premium: The extra paid above the face value of a share. Example: if a company issues its shares at $10 each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2 Shares: These are documents issued by a company to its owners (the shareholders) which state how many shares in the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be called 'Stock'. Shares issued (aka Shares outstanding): The number of shares a company has issued to shareholders. Simple interest: Interest applied to the original sum invested (as opposed to compound interest). Eg. 1000 invested over two years at 10% per year simple interest will yield a gross total of 1200 at the end of the period (10% of 1000=100 per year). Single-step income statement: An income statement where all the revenues are shown as a single total rather than being split up into different types of revenue (this is the most common format for very small businesses). See Profit and Loss, Multiple-step income statement.

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Sinking fund: An account set up to reduce another account to zero over time (using the principles of amortization or straight line depreciation). Once the sinking fund reaches the same value as the other account, both can be removed from the balance sheet. SME: Small and Medium Enterprises (ie. small and medium size businesses): The distinction between what is 'small' and what is 'medium' varies depending on where you are and who you talk to. Sole trader: See Sole-proprietor. Sole-proprietor: The self-employed owner of a business (see Self-employed). Source document: An original invoice, bill or receipt to which journal entries refer. Stock: This can refer to the shares of a limited company (see Shares) or goods manufactured or bought for re-sale by a business. Stock control account: An account held in the nominal ledger which holds the value of all the stock held in the inventory subsidiary ledger. Stockholders: See Shareholders. Stock Taking: Physically checking a business's stock for total quantities and value. Stock valuation: Valuing a stock of goods bought for manufacturing or re-sale. Straight-line depreciation: Depreciating something by the same (ie. fixed) amount every year rather than as a percentage of its previous value. Example: a vehicle initially costs $10,000. If you depreciate it at a rate of $2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation. Subordinated debt: If a company is liquidated (i.e. becomes insolvent), the secured creditors are paid first. If any money is left, the unsecured creditors are then paid. The amount of money owed to the unsecured creditors is termed the 'subordinated debt' of the company. Subsidiary ledgers: Ledgers opened in addition to a business's nominal ledger. They are used to keep sections of a business separate from each other (eg. a Sales ledger for the customers, and a Purchase ledger for the suppliers). (See Control Accounts) Suspense Account: A temporary account used to force a trial balance to balance if there is only a small discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account. Once the

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person knows what happened to the money, a transfer entry will be made in the journal to credit or debit the suspense account back to zero and debit or credit the correct account. T Account: A particular method of displaying an account where the debits and associated information are shown on the left, and credits and associated information on the right. Tangible assets: Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fittings. See Intangible assets. Three column cash book: A journal which deals with the day to day cash and bank transactions of a business. The side of a transaction which relates directly to the cash or bank account is usually balanced within the journal and used as a part of the nominal ledger when compiling a balance sheet (ie. only the side which details the sale or purchase needs to be posted to the nominal ledger). Total Cost of Ownership (TCO): The real amount an asset will cost. Example: An accounting application retails at $1000. Support - which is mandatory, costs a further $200 per annum. Assuming the software will be in use for 5 years, TCO will be $2000 (1000+5x200=2000). Trading account: An account which shows the gross profit of a manufacturing or retail business. Transaction: Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt. Trial Balance: A statement showing all the accounts used in a business and their balances. Full details Turnover: The income of a business over a period of time (usually a year). Undeposited Funds Account: An account used to show the current total of money received (ie. not yet banked or spent). The 'funds' can include money, cheques, credit card payments, bankers drafts etc. This type of account is also commonly referred to as a 'cash in hand' account. Value Added Tax (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a rate for fuel which is 5% (this refers

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to heating fuels like coal, electricity and gas and not 'road fuels' like petrol which is still rated at 17.5%). VAT is added to the price of goods so in the UK, an item that sells at 10 will be priced 11.75 when 17.5% VAT is added. Wages: Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings). Work in Progress: The value of partly finished (ie. partly manufactured) goods. Write-off: Depreciating an asset to zero in one go. X no entries Y no entries Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to zero as possible by transferring money between that account and, say, a deposit account. Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.

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