COMMERCE MATERIAL

CONCEPTS :

Business entity concept: - According to this concept, Business is treated as separated entity
distinct from its owners and others.

Going concern concept: - According to this concept, It is assumed that a business has a
reasonal expectation of continuing business at a profit for an indefinite period of time.

Cost concept: - According to this concept, an asset is recorded in the books at the price paid to
acquire it and this cost is the basis for all subsequent accounting for the asset.

Accounting period concept: - According to this concept, accounting records must be prepared
on a periodic basis, normally accounting period adopted is one year. More then this period
reduces the utility of accounting data.

Money measurement concept: - According to this concept, Accounting records only those
transactions which can be expressed in term of money only.

Realization concept: - According to this concept, Revenue is considered as being earned on the
date which its realized. That is on the date when the goods posses the buyer and he became
legally liable to pay.

Accrual concept: - The profit arises only when there is an increase in owners capital. Which is a
result of excess of revenue over expenses and losses.

Objective evidence concept: - According to this concept, every entry in accounting records
should be supported by some objective evidence. Evidence should be such which will be
minimize the possibility of error or fraud.

Matching concept: - the cost or expenses of a business is a particular period are compared with
the revenue of the same period in order to ascertain the net profit or loss.

Dual aspect concept: - According to this concept, in every transaction there will be two aspects.
The receiving concept and giving concept. Both are recorded by debiting one account and
crediting one account. This is also called double entry system.

Conventions

Convention of consistency: - It is essential that accounting polices and methods remain

unchanged from one accounting period to another accounting period.

Convention of full disclosure: - All accounting statements should be honestly prepared and to
that end full disclosure of all significant information will be made.

Convention of materiality:-It is a one of the accounting principle of, as per important information
will be taken and un important information will be ignored in the preparation of financial
statements.

Convention of conservatism:-According to this convention all possible or expected losses

should be provided for, but unearned or unrealized profit should be left out.
The idea behind the convention of conservation is that the financial
Posion of a firm should not be shown better then what it is.

Accounting polices: - Accounting polices are specific accounting principles and methods of
applying those principles adopted by an enterprises in the preparation and presentation of
financial statements.
TYPES OF ACCOUNTS

Single entry system: - The system which does not totally follow the principles of double entry
system is called single entry system. Under this system complete records are not mentioned
.under this method real and nominal accounts are not maintained. Transactions are recorded only
in cash book and personal accounts are maintained.

Double entry system:- It is a method of writing every transaction in two accounts is know as
double entry system. In every transaction there will be two aspects. The receiving aspect and the
giving aspect. Both are recorded by debiting one account and crediting another account. This is
called double entry system.

Principles of double entry system: - For every debit is corresponding credit of equal value.

Golden rules of accounting :Debit always equal credit.

Increase donot necessarily equal decrease.
Assets liabilities = Owners equity.

Journal :- It is book of original entry where in transactions are first recorded.

It is recorded in a chronological order of the business transactions. All
Business transaction can be recorded in a simple journal.

Ledger: - Ledger is a book where the various accounts pertaining to a particular person, thing or
service are grouped to gether in one place in the form of an account. Ledger may be defined as a
book which contains records of all transactions permanently in a summarized and classified form.
It is a book of final entry. Ledger is a main or principal or most important book of the business and
hence called king of books of accounts.

Trail balance:- At the end of the period the balances of account from ledger are extracted in a
sheet called Trailbalance.As each debit has equal credit , total of all debit balances must be equal
to total all credit balances . Incase they donot agree, there must be something wrong some
where.

Posting: - The process of transferring the transactions from journal to ledger is called posting.

Cash book:- in every business there will be large number of cash transaction. i.e. receipts and
payments of cash. So it is necessary to maintain a separate subsidiary book for recording the
cash transactions. The subsidiary book maintained for recording cash transactions is called cash
book.
Cash book is a book of prime or first entry, because all transaction are first recorded in
the cash book. It is also a book of final entry as a cash book itself serves as cash and bank account.
Separate cash account and bank account are not opened.
Classification of the Accounts ;-

Personal account :- Personal accounts are accounts of persons with whom a concern on
business . Personal a/c may be

1. A/c s of natural persons, such as Gopal, Ram.

2. A/c s of artificial persons , such as Andhra bank
3. Representative personal accounts ,such as outstanding salaries,wages,prepaid
insurance a/c etc

Accounting rules :-

1. Debit the a/c receiving the benefit

2. Credit the a/c giving the benefit.

Real account: - Accounts relating to properties or assets of a trader are know as real a/c s . IT
includes tangible assets such as Buildings , furniture, cash etc. And also intangible assets such
as goodwill, trademark, etc.

Accounting rules :1. Debit the a/c where in comes the benefit.
2. Credit the a/c where from the benefits goes out.

Nominal account: - Accounts dealing with expences, losses, gains and incomes are called
Nominal a/c. Salaries a/c, rent a/c,commission a/c

Accounting rules;1. Debit the expenses and losses a/c,

2. Credit the incomes and profits a/c.

Rules of accounting equitation

Incase of Assets:DrIncrease in an asset,

Cr---Decrease in an asset.

Incase of Liabilities:Drdecrease in an liabilities,

Cr--- Increase in an liabilities.

Incase of Capital:Dr--- Decrease in capital,

Cr--- Increase in capital.

Incase of Incomes and Gains:Dr--- Decrease in incomes and gains,

Cr--- Increase in incomes and gains.

Incase of Expenses and losses:Dr--- Increase in expenses and losess,

Cr--- decrease in expenses and losses.

Accounting Equations:Assets = Liabilities + capital.

Capital= Assets-- liabilities,
Liabilities=AssetsCapital.

Some important topics

Tangable assets:- Tangable assets have physical identity and include items which can be seen
and touched like Land and Buildings etc.
Intangible assets:-Assets which does not have a physically identity and
touched this assets. E.g.:-Goodwill, Copyright, Patents.

we cannot seen and

Wasting assets:- Wasting assets are exhausted in the course of working of business. E.g.:Mines, Quarries.
Fictitious assets:- Those the expenses which is incurred at the beginning of the business.
Eg: - The Dr Balance of the p/l statement, preliminary expenses, discount on issue of the shares
and debentures, differed revenue expenditure.

Preliminary expenses:- Expenditure relating to the formation of the business. There include
legal accounting and share issue expenses incurred for formation of the enterprises.
Differed revenue expenditure:- A heavy expenditure of revenue nature incurred for the getting
benefits over a period of years is called differed revenue expenditure.
It will be recorded under the head of the misalliances expenses on the
asset side of the B/S.
Eg:- preliminary expenses, heavy expenditures like heavy repairs and advertisement.
They are spread over aperiod of 3 to 5 years . every year , apart of such expenditure is charged
to P/L A/c.

Contingent liabilities:- Contingent liabilities refers to an obligation to pay on the happening or

non happening of an uncertain event. It is not an actual liability, there fore it is not recorded in
B/S. They appear as a foot note to the B/S.
E.g.:- Drawer of a bill is liable for bills discounted only when the bill is dishonored on the due date.

Capital employed:- The finance deployed by an enterprises in its net fixed

assets, investments and working capital.
Capital employed in an operation may however, exclude investments made outside
that operation.
Working capital:- The funds available for conducting day to day operation of an enterprises. Also
represented by the excess of current asset over current liabilities includes short term loans.

It is necessary to operate day to day transactions of an enterprise.

Like purchase of raw material, payments of salaries and wages etc.

Extra ordinary items:- The transactions which are not related to the business is treated as extra
ordinary items.
Eg: - P/L on the sale of fixed assets, Interest received from other
Company investments, P/L on foreign exchange, unexpected dividends received.

Reserves:- Reserves are retained profits. Reserves are created by transfer from P/L A/c by way
of appropriation. {Retained profits may, of course, remain in P/L A/C (or) P/L Appropriation A/C }
Reserves may be created for different purposes. Reserve is a part of surplus or profits.
E.g.:- Reserves for bad debts, Reserves for Depreciation, Reserve for Taxation, Stock Reserve
etc.

Provisions:- Provisions are charge agonist profit and denote estimated losses,
or estimated liabilities for the expenses.

General Reserve:- A Revenue reserve which is not and unmarked for a specific Purpose. It will
be recorded in B/S on the liabilities side.
.
Capital Reserve:-A Reserve of a carporate enterprise which is not available for Distribution as a
dividend. It will be recorded in B/S on the liabilities side.

Revenue expenditure:- Any item of expenditure whose benefit expires with in year is called
Revenue expenditure.
Eg;- Expenses incurred in the normal course of business such as expenses of administration.
Expenditure incurred in manufacturing and selling goods etc.

Capital Expenditure:- The benefits of an expenditure are expected to get for a long time is
called capital expenditure.

Revenue Receipts:- Amount realized on the sale of goods from the regular course of
business is called Revenue Receipts.

Capital Receipts:- Amount realized by way of loan, sale of perment or fixed assets are called
capital receipts or Capital Revenue.

Operating profit:- The net profit arising from the normal operating of an enterprises without
taking accounting of extraneous transactions and expenses of purely financial nature.

Deplication:- A measure of wasting assets represented by periodic write of cost another

substituted value
Eg;- Tangible assets like coal mines, oil Quarries.

Amortization:- The gradual and systematic writing off an asset or an account over an appropriate
period.

Depreciation:- The gradual and perment decrease in the value of an asset from any cause is
treated as depreciation.
(OR)
Depreciation is the reduction in usable value of fixed assets due to wear and
Tear, efflux ion of time and obsolescence. Wear and tear are the result of uses.

Depreciation accounting has two purposes:1.

Primary objective Is to recoup the cost of fixed assets over the working life from
the revenues earned and as such it is a part of production cost. If this is not charged against
sales or revenue. True and fair view of profit cannot be formed.
2.

Secondary objective Is to make provision for replacement of the assets.

Differences between Depreciation and Deplecation:Deprecation is calculated on the fixed assets expect land but deplication is calculated on the
resources of the land or coal mines and oil quarries.

How to calculated deprecation on the land?

There are no scopes to calculate deprecation on the land, but it is possible on the resource
of the land.

Accelerated deprecation:-Method of deprecation that writes off the value of an asset at a faster
rate then the normal straight line method so that longer amounts of deprecation are charged in
the earlier years of the assets life while smaller amounts are charged in the later year . there are
two comman approaches to accelerated deprecation namely , double declining balances and sum
of the years digits.

Sinking fund:- A fund created for the repayment of liability or replacement of an asset.

Good will:- good will is considered to be one of the larger intangible asset. The value of which
companies want to reflect correctly in there financial statements. Accounting for this assets
passes many challenges for accountants, as it is unidentified intangible asset can be defined two
approaches
1. Residum approach:- Under this method good will is taken to be the differences between
the purchase price and fair market value of an acquired company assets.
2. Excess profits approaches:- Under this method the present value of the projected future
excess earnings over normal earnings for similer business is recorded as good will . Due to
uncertaintyof future earnings.

Net realizable value:- Is the estimated selling price in the ordinary course of business; less the
estimated costs of completion and the estimated cost necessary to make the sale.

Closing stock:- it is the value of goods which remain unsold at the end of the year .closing stock
is valued at cost price or market price, whichever is less as per that is closing stock.

Account current:- Account current is a statement rendered by one party to another. When there
are continuous transactions in between them. Usually interest being taken into consideration. it is
a copy of the other party in the ledger of the party rendering statement.

Budget:-It is the monetary and quantities expression of business plans and policies to be
pursued in the future period of time.

Budgeting:- the term budgeting is used for presenting budgets and other producer for planning ,
co-ordanating and control of business enterprises.

Capital budgeting:-Capital budgeting may be defined as the decision making process by which
firms evaluate the purchase of major fixed assets, including building, machinery and equipment. It
also covers decisions to acquire other firms, either through the purchase of their common stock or
group s of assets that can be used to conduct an ongoing business.

Flexible budget:-A flexible budget is a budget, which by recognizing different cost behavior
patterns, is designed to change as volume of output changes.

Zero-based budget:-Amethod of budget review and evaluation that requires all projects and
programs, new and old to justifiey all resourses . each project starts the budget evaluation
process without commitment even it is an ongoing project . the main idea behind ZBB is to
challenge . the existence of every budgeting unit and every budget period.

Bridge financing:- Bridge financing is the finance made by a venture fund for a short period of 6
months to one year before the company goes to public.

Factoring:- Outright sale of the firms accounts receivable to another party called factor with or
without resource , who bears the risk of collection.

Financial stracture:- It is refers to all the financial resource marshaled by the firm short term as
well as long term and all forms of debt as well as equity.

Capital stracture:- It is refers to the kind of securities and the proportionate amount or the term.
Capital stracture is used to represent the proportionate relationship between debt and equity.

Annual repot:- The report issued annually by a company to its shareholders. It containing
financial statement like trading and p/l a/c and b/s.

Financial analysis: - The process interpreting the past, present and future financial condition of
a company.

Capital gearing: - The term capital gearing refers to the relationship between equity and long
term debt.

Capitalization: - capitalization is a quantative aspect off the financial planings of an enterprise. It

is refers to the total amount of securities issued by a company.

Under capitalization:- When a business is able to earn fair rate or over rate an its outstanding
securities . it is called undercapitalization.

Over capitalization:-When a business is unable to earn fair rate on its outstanding securities. It
is called over capitalization.

Securitization:-It is a method of imparting liquidity into the system by repackaging the future
cash flows of highly illiquidity assets into investors.

Shareholders net worth:Equity share capital + preference share capital + reserves +undistributed profits Fictious
assets.

Financial leverage:- Financial leverage is the tendency of the residual income to vary
disproportionately with operational profit. It indicates the change that has occurred in taxable
income as a result of a change in operating income by use of debt and fixed funds in the capital
structure of the company.
Financial Leverage =_Operating profit_
Profit before tax

Operating Leverage ;-This operating leverage may be defined as the tendency of operating
profit to vary disproportionately with sales. Its exists when the firm has to pay fixed costs regards
of the sales or output.
The firm is said to have a high degree of operating leverage if it employs greater
amount of fixed cost and small amount of variable cost. A firm is said to have low operating
leverage if it employs greater amount of variable cost and smaller amount of fixed cost. The
degree of operating leverage depends upon the amount of fixed element in the cost structure.

Financial risk:-This is the chance that the investment will not generate sufficient cash flows
either to cover the interest payments on money barrowed to finance it or principal repayments on
the debt or to provide profits to the firm falls short of its return goal, it may be able to cover
operating expenses but not the financing costs of the original investment.
Capital risk:-The risk associated with the capital of the business concern.
Systematic risk:- systematic risk refers to that portion of total variability of return caused by
factors affecting the prices of all securities. Economic, political and sociological changes are
sources of systematic risk.

Un systematic risk:- It is an unavoidable risk. Un systematic risk on the other hand is that is
unique or peculiar to a particular firm or industry. Factors such as management capacity,
consumer preferences, labour strikes etc, are the major causes of un systematic risk. This kind of
risk is avoidable.

Net lease: - A finance lease where the excutory costs incurred in relation to the leased asset
like insurance, repairs, maintance etc. are paid by the lessee.

Operating lease: - It is a short term, cancelable lease agreement. Where the lessor is
responsible for maintance, insurance and taxes. The lease period is usually less then the useful
life of the equipment and the lease is not fully amortized. Also called wet lease and service lease.

Financial lease;-It is an intermediate term to long term, non cancelable lease agreement,
where the lessee is responsible for maintance, insurance and taxes. The lease is fully amortized
during primary lease period, which is generally for 3years. The lessee usually has the option of
renewing the lease for further periods. Also called capital lease.

Primary market:-A market for new issues of shares, debentures and bonds, where the
investors apply directly to the issuer for allotment and pay application money to the issuers
account. It is different from secondary market. Where investors trade in shares in the stock
exchange through brokers.

Secondary market:-It is a place where securities already issued are treaded. It is different
from the primary market , where in the issuer sales securities directly to the investors.

Money market: - The market for short term (less then one year original maturity) government
and corporate debt securities. It also includes government securities originally with maturities of
more then one year but that now a year or less until maturity.

Private company:- A private company means a company which by its own articles.
1. Restricts the right to transfer its shares,
2. Limits the number of its numbers to 50 excluding past or present employees of the
company who are numbers of the company,
3. Prohibits any invitation to the public to subscribe for the any shares or debentures of
the company.

Public company: - Public company are those companies which are not private companies.

Holding company: - A company which holds the majority of the paid up capital of other company
with the intention of acquiring control over it is called Holding company.

Subsidiary company:- A company which helds more then 51% of paid capital by another
company it is called subsidiary company.

According to section 4 of the companies act a company is deemed to be subsidiary of

another company in any of the following three cases.
1. When the other company controls the composition of its board of directors.
2. When the other company holds more then half in the nominal value of its equity share
capital.
3. When it is a subsidiary of any company which itself is subsidiary of another company,
If B ltd is subsidiary of C ltd and C ltd is subsidiary of A ltd, then B ltd is deemed to be
the subsidiary of A ltd.

Equity shares:- An equity share is a share which is not a preference share., Equity share holders
do not have any right to get fixed rate of dividend. rate of dividend may vary from year to year.
Equity share holders will get dividend and repayment of capital after meeting the claims of
preference share holders.

Preference shares:- According to the companys act, Preference share is that part of the share
capital of the company which enjoys preferential rights as to
1.
Payment of dividend at a fixed rate.
2.
Return of capital on the winding up the company.

Debentures:- A formal document constituting acknowledgement of debt by an enterprises.

Usually given under its common seal and normally containing provisions regarding payments of
interest, repayment of principal and security it any. It is a transferable in the appropriate manner.

Capital:- The term capital refers to the total investment of a company in money, tangible and
intangible assets. It is the total wealth of company.

Sweat equity:-These are shares issued by the company to its directors and employees. The
shares are issued in accordance with regulation issued by SEBI in case of listed companies.

Bonus shares:- Shares allotted by capitalization of the reserves or surplus of a corporate

enterprises.

Right issue:- A method of using new shares of stock by first issuing rights to current share
holders.

Share premium:- The excess of issue the price of shares over their face value. It will be showed
with the allotment entry in the journal. It will adjusted in B/S on the liabilities side under the head
of reserves and surplus.

Share Buy back:- Share buyback is a companys plan to buyback its own shares from the
market place. Reducing the number of outstanding shares, and typically an indication that the
companies management thinks the shares are under valued. Generally firms buyback the shares
to increase the market value of the shares.
It increase the share price, which profits both the investors as well as the companies.

When does a company undertake a bonus issue?

A company may chose to capitalize its reserves by issuing bonus shares to existing. Share
holders in proportion to their holdings. Bonus shares are issued free of cost, but since the number
of shareholders remains the same and their proportionate holdings do not change, bonus shares
do not increase the share holders ownership of the company.

Stock split:- A stock split is a change in the number of outstanding shares of stock achieved
through a proportional reduction or increase in the par value of the stock.
Only the par value and number of outstanding shares are effected and retained
earnings accounts do not change.

Retained earnings:-retained earnings are undistributed profits and are represented by un

committed reserves and surpluses. The companies are not required to pay any dividend on
retained earnings.

Scrip dividend:- Scrip dividend means payment of dividend in scrip or promise notes.
Sometimes company needs cash generated by business earnings to meet business requirements
because of temporary shortage of cash. In such cases
the company may issue scrip or notes promising to pay dividend at a future date.
The scrip usually bears a define data of maturity or some times maturity date is
not stipulated and its payment is left to the dis creation of the board of directors.

Minority Interest:- when some of the shares of the subsidiary company are held by outsiders.
Their interest is known as minority interest in the subsidiary company is calculated and show on
the liabilities side of the B/S of the holding company. The shares of the outsiders in the subsidiary
company is called minority because they are having lees then 50%of shares of the subsidiary
company.

Prospectus:- Prospectus is the basis document for raising funds from the public.
Prospectus means any document described or issued as a prospectus inviting offers from
the public for subscription or purchase of any shares in, or debentures of the company.
Thus a prospectus is an general invitation to the public to subscribe to the capital of the
company on the conditions specified in the application form.
Private companies are prohibited from inviting any public subscription in shares or
debentures and as such they cannot issue any prospectus.

Articles of Association:-Articles are rules, regulations and by laws for the internal management
of the affairs of a company. A public company may have its own articles of association. If it does
not have its own articles, it may adopt table A given in schedule 1 of the act.

Memorandum of association:- A memorandum of association is a fundamental document. It

contains the fundamental conditions upon which, alone the company is allowed to be
incorporated.
It is also regulates the externals affairs of the company in relation to outsiders. Its
purpose is to enable shareholders and those who deal with the company to know what is the
permitted range of enterprises. It not only shows the object of the formation of a company but
also the utmost possible scope of it.

The purpose of memorandum is two fold. The prospective share holders shall know the
purpose for which there money is being used for and the outsiders dealing with the company shall
know with certainty as to what the objects of the company are.
Mortgage:- Mortgage is the transfer to interest in specific immovable property for the purpose of
securing an existing or a future debt or the performance of an engagement, which may give rise
to pecuniary liability.

Hedging approach:- it means financing the short term requirements of funds by short term funds
and long term requirements of funds by long term funds .

Forfeiting:- The selling without resource of medium to the long term export receivables to a
financial institution. The forfacter. A third party, usually a bank or governmental unit, guarantees
the financing.

Pooling of interest method:- A method of accounting treatment for a merger based on the net
book value of the required companys assets. The balance sheets of two companies are simply
combined.

Annuity:- A series of receipts or payments of a fixed amount for a specified number of years.
Alternatively, a pattern of cash flows that are equal in cash year that is equal annual cash flow.

Pay back period:- Pay back period is the period in which the original investment is recovered. It
is the length of time needed to regain original cash out lay from an investment proposal. The
calculation will be in rupee terms and not adjusted for time value of money. In other words it is a
traditional method of capital budgeting decision where the time value of money is ignored.

Du - Pont analysis:-A system of analysis showing the relationship between return on investment
assets turnover and the profit margin. The net profit margin is multiplied by the asset turn over to
arrive at the return on investment. (ROI).

Zero coupon bond:- A bond which does not pay any interest and is issued at a low discount from
its par value, which will be paid at maturity. The different between their face value and the issue
price represents the return to investors.

Treasury bill:- A short term government debt instrument with a maturity of one year or less. Bills
are sold at a discount to face value or par value with the interest earned being the difference
between face value received at maturity and the price paid.

Operating cycle:-working capital is required because of time gap between the sales and the
actual realization of cash. This time gap is technically termed as operating cycle.
In case of manufacturing companies the operating cycle is the length of time
necessary to complete the following cycle of events.
Conversion of cash into raw materials,
Conversion of raw material into work in progress,
Conversion of WIP into finished goods,
Conversion of finished goods into receivables,
Conversion of receivables into cash.

Business diversification:- A strategy for company growth by starting up or acquiring business

outside the companys current products and markets.

Cash flow statement: - The cash flow statement is a statement of changes in the financial position of
a firm on cash basis. It is very much similar to the funds flow statement. Except that the cash flow
statement lays emphasis cash changes only.
Funds flow statement: - The term funds normally means working capital. The fund flow statement
reveals the sources from which funds are received and the uses to which these have been put.
It is a valuable tool to analyze the changes in the financial condition of the business between two
periods and helps the management in policy and performance appraisal.

Difference between cash flow and funds flow statements: The cash flow statement is concerned with changes in cash position while the funds flow
statement is concerned with changes in working capital.

The cash flow statement is useful for short term financial planning where as the funds flow
statement is more useful for long term financial planning.

The cash flow statement is based on cash basis accounting while funds flow statement is
based on accrual basis of accounting.

Financial statements: - Financial statement is a collection of data organized

and consistent accounting procedure.

according to logical

Objects of financial statements:

The basis objective of financial statements is to furnish information required for decisionmaking.

To provide reliable financial information about the economic resources and obligation of an
enterprises.

To provide reliable information about changes in net sources of an enterprise that result
from the activities.

To provide financial information that assists in estimating the earning potential of the
enterprises.

To provide other relevant information about changes in the economic resources and
obligations.

To disclose, to the extent possible, other information related to the financial statements
relevant to the users of the statement.

Nature of financial statements: - financial statements are prepared for the purpose of presenting a
periodical review or report on progress by the management and deal with the status of investment in
the business and the results achieved during the period under review. They reflect a combination of
recorded facts, accounting principal and personal judgments.
Consolidates statements: - These are the financial statements reported by a holding company and
these statements include the financial performance of its subsidiaries.
Comparative income statement: - This statement discloses the net profit or loss resulting from the
operation of business such statement shows the operating results for a number of accounting
periods.
Common size or common measurement statement: - This statement includes the relationship of
various items with some common items.e.g. In the income statement the sales figure is taken as base
and all other figures are expressed as %of sales.

Bill market: - It is a market in which the short term loans are extended to the business community
and government banks, discount houses and brokers.
Call money market: - Call money market consists of overnight money and money at a short notice
for periods up to 14 days. It is meant to balance the short-term needs of the bank.
Commercial bill market: - It is a sub market in which the trade bills are handled. Commercial bill is a
bill drawn by one merchant firm on the other. The legitimate purpose of a commercial bill is to
reimburse the seller while the buyer deals payment.
Financial markets: - Financial markets are the centers or arrangements that provide facilities for
buying and selling of financial claims and services. The participants are institutions, agents, brokers,
borrowers, lenders, etc.
Financial instruments: - Financial instruments are the securities, claims, and assets that are floated
and traded in the primary and secondary markets. Financial instruments differ from each other is
respect of their financial character.
Financial system: - A financial system refers to a facilitate set up and comprises of institutions,
financial instruments and financial markets.
Financial institutions: - Financial institutions are the business organization that act as mobilizes and
depositors of savings. They also provide various financial sources to the community.
Government finance: - Relates to the demand and supply of funds to meet government expenditure.
Globalization: - Integration of the domestic market with the world economy. Both domestic market
and the world market govern the activities of the economy.
GDP: - measures the total value of final output of goods and services produced in the countrys
domestic economy by the residents and the nonresidents.
GNP: - GNP is comprised of the value of GDP plus factor income accruing to residents from abroad,
less the income earned in the domestic economy accruing to persons abroad.

NNP: - Net national product is equal to the difference between gross domestic product and
depreciation.
NDP: - NDP is the difference between gross domestic product and depreciation.
National income: - Is the money value of all goods and services that are produced in the country
during a particular year.
Book building: - Book building is a process whereby the company seeks bids from prospective
investors for its public offers. Based upon the bids received the offer price is fixed.
IPO: - IPO stands for initial public offering. The shares are issued for the first time to the public as
opposed to the secondary market.

ADR: - ADR is American Depository receipts. A non-US company issues ADR in US in order to raise
capital. An ADR will normally be in multiples of equity shares of that company.
GDR: - Any instrument in the form of a depository receipt or certificate by the overseas depository
bank outside India and issued to non-resident investors against the issue of ordinary shares or
foreign currency convertible bonds of issuing company.
ADS: - Each unit of ADR is called an American depository share.
Stock exchange: - It is also known as secondary market where already issued securities are
exchange or transfer.
SEBI: - Securities and exchange board of India was farmed to protect the invests of investors in
securities and to promote the development and to regulate securities market.
Jobber: - jobbers are security merchants dealing in shares, debentures as independent operators.
They buy and sell securities on their own behalf and try to earn through price changes. Jobbers
cannot deal on behalf of public and are barred from taking commission. They directly deal with
brokers who in turn make transactions on behalf of public.
Brokers: - Brokers are commission agents. Who act as intermediaries between buyers and sellers of
securities. They do not purchase and sell securities on their behalf. They bring together buyers and
sellers and help them in making a deal. Brokers charge commission from both parties for their
service.
Bull: - A bull or tejiwala is an operator who expects rise in prices of securities in the future. In
anticipation of price rise he makes purchases of shares and other securities with the intention of sell
at higher prices in future. He being a speculator has no intention of taking delivery of securities but
deals only in difference of prices.
Bear: - A bear or mandiwala speculator expects prices to fall in future and sell securities at present
with a view to purchase them at lower prices in future. A bear does not have securities at present but
sells them at higher prices in anticipation that he will supply them by purchasing at lower prices in
future.

A bear does not take delivery of securities but takes the difference if prices fall down. Incase
prices rise them he will have to pay the difference between the prices at which he purchased the
securities and the prevailing prices on the date of delivery.
Stag: - A stag is a cautious speculator in the stock exchange. He applies for shares in new
companies and expects to sell them at a premium if he gets on allotment. He selects those
companies whose shares are in more demand and likely to carry a premium. He sells the shares
before being called to pay the allotment money.
Lame duck: - When a bear finds difficult to full fill his commitment, he is called struggling like a lame
duck.
A bear speculator contacts to sell securities at a later date on the appointed terms, he is not
able to get securities as the holders are not willing to part with them.

SENSEX:- The equity shares of 30 companies from both specified and non specified groups have
been selected on the basis of market activity it due representation to the major industries.
Sensex is an index prepared by BSE with 30 companies is the leaders of the market. Those will be
selected from each industry.
NIFTY:-This is prepared by NSE with 50 listed companies.
Index:-Index is a parameter to measure the fluctuations in the market.
Bank rate:- Bank rate is the rate which the central bank gives loans to other banks.
Repo rate:- Repo rate is the financing rate for government securities sold against repurchase
agreements.
Dollar rate:- Dollar rate is the price at which dollar is brought and sold in terms of other company.
Euro bond:-A bond sold internationally outside the company in whose currency the bond is
denominated.
Stock option:- Stock option is an investment that carries a right to buy the under laying stock at
certain price during certain time frame. Normally issued to the employees of the companies to
motivate and retain them.
GDP: -Gross domestic product.
NNP: -Net national product.
GNP: -Gross national product.
IPR: - Industrial policy resolution. (1956)
SLR: -statutory liquidity ratio.
SCC: -Selective credit controls.

CAS: - Credit authorization scheme.

GAAP: - Generally accepted accounting principles.
AICPA: - American institute of certified public accountants.
ADR: - American depository receipts.
GDR: - Global depository receipts.
ADS: -American depository share.

Difference between Preference shares and equity shares:Preference shares

1. Preference dividend is paid before paying
any dividend on equity shares.

2. At the time of liquidation after payment of

creditors, preference shares are redeemed
before equity shares.

Equity shares

Equity shareholders will get dividend only after

paying dividend to preference
shareholders.
Equity shares are after repaid after full
repayment is made on preference
shares.

3. The rate of dividend is fixed

Rate of dividend is not fixed. It may vary from
year to year.

4. Incase of cumulative preference shares

arrears of dividends will accumulative.
5. Preference shares can be converted into
equity shares.

There is no question of accumulative of arrears

of dividend.
Equity shares cannot be converted into
preference shares.

6. Shares holders do not have voting rights

unless their rights are affected.

Equity shareholders have voting right.

7. Redeemable preference shares are

redeemable according to the provision of
section 80A of the companies act.

There is no provision for redemption of equity

shares.

Statutory company: - Statutory companies are formed by the special act passed by the parliament
or state assemblies. E.g. RBI, LIC etc.
Registered companies: - These are the companies formed and registered under the companies act.

Companies limited by shares:- Incase of such companies liability of each number is limited to the
extent of the face value of shares held by him.
Companies limited by guarantee:- Incase of such companies liability is limited to the extent of the
guarantee given to contribute to the assets of the company in the event of its wound up. If the
guarantee is given to addition to the shares then the total liability shall be equal to the unpaid amount
on shares and the amount of guarantee given.

Unlimited companies: - Incase of unlimited companies the liability of the members is unlimited and
members are personally liable to the creditors of the company for making up the deficiency. Such
companies are rarely formed these days.

Dividend: - A distribution to shareholding out of profits are reserves a variable for they purpose
Cumulative dividend: - A dividend payable as cumulative preference shares which it unpaid
cumulative as a claim against the earnings of a corporate enterprises, before any distribution is made
to the other shareholders.
Unpaid dividend: - Dividend, which has been declared by a corporate enterprises but has not been
paid in respect where of has not been dispatched with in the prescribed period.
Unclaimed dividend: - Dividend, which has been declared by a corporate enterprise and a warrant
or a cherub in respect where of has been dispatched but has not been enchased by the shareholders
concerned.
Dividend equalization reserve: - A reserve created to maintain the rate of dividend in future years.
Redemption:- Repayment as per given forms normally used in connection with preference share and
debenture.
Capital redemption reserve; - A reserve created on redemption of the average cost. The cost of an
item at a point of time as determined by applying average of the cost all items of the same nature
over a period. When eights are also applied in the composition it is termed as weighted average cost.
Debenture redemption reserve: - The companies act 2000 require every company to create
debenture redemption reserve for redemption of debentures out of appropriation of profits every year
until redemption. rpose of redemption cannot utilize this reserve.
Accounting: Accounting is the art of recording, classifying and summarisng in a significant manner
and in terms of money, transactions and events which are, in part at least, of a financial chacter and
interpreting the results thereof.
Business:It is an activity which involves exchange of goods/services with the itention of earning
income and profit.
Business transactions: It refers to any transaction, dealing or event which involves transfer of
money or moneys worth between two parties.

Cash transaction: When payment for business activiy is made immediately, it is called cash
transactions.
Credit transaction:When the payment is postponed to a future dte it is called credit transaction.
Drawings:It is the value of cash or goods withdrawn from the business by the owner for his personal
use.
Assets: The things which are gives a future benefit is called an assests.
Liabilities: The term liabilities refer to debts or amounts due from a business to others either for
money borrowed or for goods or assets purchased on credit or servces recived without making
immediate payment. Example:- bank loan o,d..
Equity: All claims against the assests of busines are called equity.

RATIO ANALYSIS
Liquidity or short term solvency ratios
Current ratio or working capital ratio: - Current ratio is a ratio of current Assets to current
liabilities.
= Current Assets
Current liabilities
A current ratio of 2:1 is usually considered as ideal. If current ratio is less then 2, it indicates that
the business does not enjoy adequate liquidity. How ever, a current ratio of more then 3 indicates that the
firm is having idle funds and has not invested them properly.
Quick ratio: - quick ratio is ratio quick assets to quick liabilities.
= Quick assets
Quick liabilities
A quick ratio of 1 is usually ideal. A quick ratio of less then 1 is indicative of inadequate liquidity of
business. A very high quick ratio is also not advisable, as funds can be more profitably employed.
Absolute liquid ratio or super quick ratio:-It is a ratio of absolute liquid assets to quick liabilities.
= Absolute liquid assets
Quick liabilities
Basic defensive interval ratio: - It examines the firms liquidity position in terms of its ability to meet
projected daily expenditure from operation.
=
Quick assets____________
Projected daily cash requirements
Leverage or capital structure ratios
Debt equity ratio:- It reflects the relative claim of creditors and share holders against the assets of
the business.
= Long term liabilities
Shareholders funds
A debt equity ratio of 2:1 is considered as ideal. A firm with a debt equity ratio of 2 or less exposes its
creditors to relatively lesser risks. A firm with a high debt equity ratio exposes its creditors to greater risk.

Proprietary ratio: - It expresses the relationship between net worth and total assets. A high proprietary
ratio is indicative of strong financial poison of business. The higher the ratio, the better it is.
= Net worth
Total assets
Net worth= equity share capital+ preference share capital + reserves+ undistributed profits fictitious
assets.
Fixed assets ratio: - The ratio indicates the mode of financing the fixed assets. It is calculated as,
= Fixed assets_____
Capital employed
A financially well-managed company will have its fixed assets financed by long-term funds. This ratio
should never be more than 1. A ratio of 0.67 is considered ideal.
Capital employed: - equity share capital + preference share capital + reserves +long term loansfictitious assets.

Capital gearing ratio:- the extent of gearing determines the financial structure of the business.
= Funds bearing fixed interest and fixed dividend
Equity shareholders funds
Or
=Debentures + term loans +preference share capital
Equity share capital + reserves- fictitious
A company that is highly geared will have to raise funds by issuing fresh equity shares. Where as a
lowly geared company would find it attractive to raise funds by way of term loans and debentures.
Interest coverage ratio or debt service ratio: - this ratio indicates whether a business is earning
sufficient profits to pay the interest charges. It is calculated as
= _____________PBIT______
Fixed assets charges
A debt coverage ratio of around 6 is normally considered ideal; the higher the ratio the better it is, as it
indicates a greater margin of safety to the lenders of long-term debt.
Dividend coverage ratio:- It indicates the ability of a business to pay and maintain the fixed preference
dividend to preference share holders. It is calculated as,
= _____Profit after tax______
Fixed preference dividend
The higher the ratio, the better it is perceived to be by financial analysts.
Debt service coverage ratio:- it indicates whether the business is earning sufficient profits to pay not
only the interest charges, but also the installments due on the principal amount. It is calculated as,
= ____________PBIT_____________
Interest +periodic loan installment
(1-rate of income tax)
The greater the debt service coverage ratio, the better is the servicing ability of organization.
Activity ratios or turn over ratios
Inventory turn over ratio or stock turn over ratio:- It indicates the no of times the stock has turned
over into sales in a year.

(Or)
It indicates to us the extent of stock required to be held in order to achieve a desired level of sales. It
is to be noted that the ratio is calculated in value terms to capture the efficiency of funds blocked in
stocks.
= Cost of goods sold
Average stock
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.
Debtors turn over ratio:- It express the relationship between debtors and sales. It is calculated as
=
Net credit sales__
Average debtors

Creditors turn over ratio: - It expresses the relationship between creditors and purchases. It is
calculated as,
= Net credit purchases
Average creditors
Operating ratio:- this ratio measures the relationship between operating cost and net sales.
The main object of computing this ratio is to determine the operational efficiency with which
production and purchases and selling operations are carried on.
= Operating cost x100
Net sales
Gross profit ratio: - this ratio measures the relationship between gross profit and sales.
The main objective of computing this ratio is to determine the efficiency with which production and
purchase operations are carried on.
= Gross profit x100
Net sales
Higher the ratio the more efficient the production or purchase management. Increasing sales or
decrease cost or both may increase this ratio.

Net profit ratio: - this ratio measures the relationship between net profit and sales.
The main objective of computing this ratio is to determine the overall profitability due to various
factors such as operational efficiency, trading on equity etc.
= Net profit x100
Net sales
Higher the ratio, greater is the capacity of the firm to with stand adverse economic conditions and
vice versa.
Operating profit ratio: - This ratio measures the relationship between operating profits and net
sales.

The main objective of computing this ratio is to determine the operational efficiency of the
management.
= Operating profits x100
Net sales
This ratio indicates an average operating margin earned on sales of 100rs,
Higher the ratio the more efficient is the operating management.
Overall profitability ratios

Return on capital employed ratio (or) Return on investment ratio: - this ratio
reveals the earning capacity of the capital employed in the business. It is
calculated as,
PBIT
x 100
Capital employed
The return on capital employed is a true measure of the firms ability to generate return for its
shareholders. The higher the ratio the better it is.
=

Return on net worth ratio: - it indicates the return, which share holders are earning on their
resources invested in the business. It is calculated as,
= Profit after tax
Net worth
The higher the ratio, the better it is for the shareholders.
Return on equity capital: - It expresses the return earned by the business, after adjusting for debt
and preference capital.
= Profit after tax- preference dividend
Paid up equity share capital
The higher the ratio, the better it is, inter-firm and intra firm comparisons must be made to
understand the ratio with its full implication.
Return on assets ratio: - It reflects the return earned by the firm for the share holders of the
business on the investment of all the financial resources committed to the business.
= Profit after tax
Total assets
Earning per share: - It is the earnings accruing to the equity shareholders on every one share held
by him.
= Profit after tax preference dividend
No of equity shares
The higher the EPS, the better is the performance of the co. the EPS is one of the driving factors in
investment analysis and perhaps the most widely calculated ratio amongst all ratios used for financial
analysis.
Dividends per share: - It is the amount of dividend payable to the holders of one equity share. It is
calculated as,
=
Dividend on equity share capital
No of equity shares
From the investors point of view the higher the D P S, The happier the investor.

Dividend payout ratio: - It is the ratio of dividend per share to earning per share. It is calculated as,
= DPS
EPS
Price earning ratio: - it expresses the relation ship between market price per share to earning per
share.
The higher the ratio the better the value of stock
= Market price of share
Earning per share
Dividend yield ratio: - It express the relationship between dividend earned per share and the market
price per share. In other words, It expresses the return investment by purchasing a share in the stock
market, without accounting for and capital appreciation. It is calculated as
=

Dividend per share

Market price per share

P/v ratio: - profit volume ratio establishes a relationship between the contribution and sales value.
The ratio can be shown in the form of a percentage also.
= Contribution
Sales
This ratio can also be known by comparing the change in contribution to change in sales on change
in profit due to change in sales.
Accounting rate of return: - it is also called as the average rate of return. It is calculated by initial
outlay of a project. A variant of this is presented by dividing the average income by average
investment.
Internal rate of return: - IRR is that rate at which the sum of discounted cash inflows equals the sum
of discounted cash outflows.
In other words, it is the rate of return, which equals the present value of cash inflows to the present
value of cash outflows.
I= __R__
1+r
I= cash outflows or initial investment
R= cash inflow
R= rate of return yield or IRR
Net present value: - Net present value method is one of the discounted cash inflow methods. It is
considered to be the most reliable method of capital budgeting decision.
Net present value is the difference between the present value of cash inflows and the present
value of cash outflows.
If the NPV is positive accept the proposal and if the NPV is negative reject the proposal.
Profitability index method: - It is the ratio of the present value of cash inflows to the present value of
cash out flows.
PI= present value of cash inflow
Present value of cash outflow

Incase of one proposal of the profitability index is greater then that proposal is accepted other wise
it is rejected.
Incase of more then one proposal select that proposal where profitability is index is greater then
one and highest.
BEP analysis: - Break even analysis is an analytical technique to study the relationship between
fixed assets, variable costs, profits and sales. The Break even point represents the level of sales at
which the operating income and operating costs are equal so that profit is Zero.
Pay back period: - Pay back period is the period in which the original investment is recorded. It is the
length of time needed to regain an original cash outlays from an investment proposal. The
calculations will be in rupee terms and not adjusted for time value of money. In other words it is a
traditional method of capital budgeting decision where the time value of money is ignored.
EOQ: - Economic ordering quantity represents the quantity of goods ordered which minimizes the
sum of inventory ordering costs and carrying costs.